Monday, July 2, 2012

Market Analysis -- 2nd Jul 12

FTSE STI closed 2.878.45, up 232.1 points or +8.77% for 1H2012.

Near end of 1H2012, EU Summit produced another positive step towards resolving the 3 years old crisis when EU leaders agreed on a 120b Euro growth package and further surprises on allowing the EU bailout funds to inject into banks and Government bonds as a short-term step to contain the issue spreading to Spain and Italy.  It also made a first step in forming a banking union allowing ECB to act as supervising role for the banks.  Those news gave confidence to investors and caused global markets to on a rally but lack detail in the implementation ( probably the next EU Summit more detail will be provided).  News were good but the underlying of the EU debt crisis still remain the same and not to mention the rest of the world issue still remain the same.

1. US still facing slow in economy recovery and stubborn high unemployment rate which could derail Obama's re-election chances.  The problem in US is not so much of monetary easing could resolve but rather as what Fed's Chief mentioned of fiscal cliff, something the lawmakers need to work together putting nation interest ahead instead of political interest to solve the most important jobs creation.  US Fed on last month FOMC meeting extended the Operation Twist for another 6 months till end of the year instead of rolling out another QE3 as what most would like.  Can QE3 solve the problem US is having now ? Be remind that both QE1 and QE2 all failed and what so special about QE3 if there should be one ?  As long as US lawmakers couldn't come out fiscal measures to stimulate economic growth or jobs creation, no matter how many QEs US Fed going to roll out the result with be the same and US will continue to survive on life support.  Another worry part is the high debt ceiling US is facing.  The designated panel failed to come out plan to reduce the debt level of US last year and they will be trying to do so before 1st January when an auto mechanism will kick in to cut budget to reduce the debt and that will not be the optimal way to reduce the debt level.  More worrying is those auto mechanism might even hamper any growth prospect.

2. China's economy still slowing down based on recent data and could be in the bottoming process as China just did a rate cut ( first since 2008 ) and 3 times lowered the bank reserve ratio in hope to stimulate growth.  More such measures will be expected in 2H2012 without any doubt.  China cannot afford to let its economy goes into tailspin as the social unrest which could result is more damaging than any effects due to external factors ( EU and US ).  Mentioned before, China has the priority of looking after themselves first rather than trying to be "superhero" to save the rest of the world.  As such many are anticipating a stimulus package from China could cause global stock markets to rally.  Don't be so optimistic on that.  China has shifted their growth model from export based to consumer service based and hence any monetary easing would be targeted specifically towards the consumer/service sector only.  Reason being after the 2008 4 trillion yuan stimulus package, it brought China an unexpected enemy in high inflation and the Chinese Government will not want to en-act those stages again.

3. Europe as mentioned earlier the problem and positive development but the underlying problem still there and will not go away as there will be no quick fix or one-fix-all solution.  EU nations still need to maintain austerity measures to cut debt level and at the same time stimulate growth to prevent the economy going deeper into recession as a result of the austerity.  Steps by steps the EU leaders will muddle through the crisis and will not be surprise some months down the road market will focus back to EU problem again following by another positive steps from EU leaders towards the debt crisis.

As a whole, still maintain what was mentioned earlier this year, stay cautiously optimistic and not be overly optimistic or pessimistic about global economy.  Whenever there is problem surfaced market will react badly to it by selling down and at some points political leaders will come out solution to put a stopper to the problem as everyone know that should problems not get contain, it will spiral to systematic risk which if serious enough could cause another great depression to the world.  With that in mind, investors should not chasing the market when it rallies and not selling off at the lowest when market become overly pessimistic.

The first event to look after to in 2H2012 will be earning season which will be starting in 2 weeks time.  With the EU debt issue now temporary off the mind of investors after the EU Summit, there is chance that stock prices will be played up before earning result out and hence to chase those stock prices after the outcome will have a high risk.  Focus on the corporates with resilient earning for past 2 quarters and only buy when there is a dip prior to the outcome of the earning.  Also note that do not try to compare 2Q12 earning with 2Q11 earning as 2Q11 corporates' earning were hit by the Japan natural disaster which result in global supply chain disruption and hence will not be surprised if 2Q12 earning is far better than 2Q11.  instead focus on quarter to quarter basis to determine whether the company's earning still resilient.  After earning season, market should go into consolidation phase and hence for those who chase the price, make sure do not get caught, know when to exit.

While the current sentiment is kind of relief but you never know there could be another event few months later that cause panic selling, correction to the stock market and only bottoming out in December 2012.  Short-term investors do not be greedy and know when to exit ( when everywhere become overly optimistic ) and long term investors just have to wait in patience for opportunity and it will arrive.

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