Wednesday, July 10, 2013

Market Analysis -- 10th Jul 13

FTSE STI closed at 3,150.44 for 1H2013, a drop of 16.64 points or 0.53% since the beginning of the year.  It was a rise in the first 5 months and a bang for the last month that did the damage.  The rise was attributed to overly optimism while the bang many put the blame on US Fed.  It was the late May US Fed Chairman's testimony in front of the congress that sounded a possibility of stimulus tapering and eventually halt in mid 2014.  That statement did the panic and fear selling to global markets.

US Fed's stance on stimulus policy has not changed since it launched.

US Fed will maintain low interest rate and do bond buying program of US$85b per month until unemployment rate drops to 6.5% and/or inflation hit 2.5%.  The tapering and halt on stimulus will start IF AND ONLY IF those economic conditions meet.

Absolutely nothing wrong with that statement given that should the economy shows improvement and able to self recover or self sustain without the help of life support, all form of monetary policies should withdraw as the risk that comes along with the monetary policies is nothing but another potential bubble.  However, global markets read the statement as

US Fed will maintain low interest rate and do bond buying program of US$85b per month until unemployment rate drops to 6.5% and/or inflation hit 2.5%.  The tapering and halt on stimulus will start and soon follow by interest rate hike.

See the big misunderstanding ?  This is one of the reason for the panic selling down.  The second reason is none other than investors went on the leverage with the cheap money, pump into stock and bond markets to chase for the yield thereby creating a price moving way over the fundamental valuation in which the economy is able to support.  To sum it up, consequences of greed.

Given the panic selling down, thing looks a little different now.  Prices have dropped below the fair valuation and starting to look relatively cheap with reference to the current economic condition.  There are some rather interesting questions investors should start to ask and finding out the correct answer might prove the chance to get the rewards from stock markets.

1. Should US Fed starts to taper (might even be as early as September, which should not be surprising) and follow the projection of eventually halt QE3 in mid 2014 isn't that good as that indicates US economy is able to stand on its own foot without the help of life support and since stock prices are leading indicator of economy, they will have more upside than downside based on current level, why sell below valuation ?

2. Much talk about funds outflow from emerging markets back to develop markets.  This primarily means money flowing out of stock markets in particular Asian and back to develop country in particular US.  On the surface it makes sense given that expectation of US economy will recover but think deeply is it really so ? US economy might be recovering but those mountain of problems like debt ceiling, high debt level, household balance sheet still weak, etc still the same as past years whereas Asian region mostly do not have such a problem.  US economy recovery could be attributed to its technology sector like Apple with its iPhone and iPad but if one notices US tech companies appear to be falling down the hill.  Technology is about quality and not quantity and recent events have pointed to US tech companies stepping over the fine line to chase for quantity rather than providing quality in their product.  This will eventually burst the technology bubbles.  US banks might be doing well especially the top 5 banks in term of their earning but those are banks with international exposure, do they do well due to domestic front or from international side ?  It is simple to say develop nation economy is doing well funds should flow back there but think deeply is it really so ?

3. China, the world number 2 economy has been doing limbo rock dance lately with its economic data.  The recent PBOC so-called credit squeeze also caused concern of slowing down the economy and might even fail to meet the 7.5% GDP target this year.  If one remembered from last year when it leader came out the blueprint for its economy for next 10 years, it was "quality and sustainable economy".  China is beginning to transform its economic model to more consumer and services based rather than previously the very much export oriented style.  The benchmark of double digit GDP growth will be no more and is the 7.5% GDP a high figure or fair figure if one should look from the "quality and sustainable economy" perspective.  A consumer and services based economy model will have a fairly low GDP figure and should not be surprised if that could bring China GDP to between 4% to 6%.  Take another perspective from PBOC's act of credit squeeze, it is actually cleaning up the bad apples in the finance sector, improve its quality.  In the process of this "cleaning up" there will be victim and will have impact on the economy and considering that, why should global stock markets felt the panic in such an act ? Most mindsets might not have tuned to the fact that China's quality and sustainable economic model will produce low GDP and that is not surprising given that human beings only realized what have changed after it has changed.

4. Japan, the in word now is Abenomic ! Well not a new english word and suppose it can't be found in dictionary too.  This is just a term that describes current PM Shinzo Abe's effort in bringing Japan back from recession and deflation.  The effort of that apart from fiscal policies is another US Fed style of monetary policy, aggressive bond buying program, aka printing money and that caused Japanese Yen to weaken sharply the past months, helping Japanese export to spur economic rebound.  Nothing new in those methods, will work ? Your guess is mine guess but what for sure is the side effect of that, when the time comes to withdraw the stimulus, another US Fed saga.  As investors pushed stock markets higher, the downside risk get bigger.  Sincerely hope Japanese economy can recover but also must warn against bubble bursting.

This is what happening globally now and how stock markets relate to that going forwards ?  If the global economy recovery works out what most expected, given the current relatively cheap stock prices all thanks to last month those panic and fear selling, from fundamental and valuation point of view, the upside is more than the downside.  On the other hand if the global economy does not work out as expected, for sure Central Bankers will not release their pedal in their effort on monetary policy, short term downside will have due to the weak economy but with the Central Bankers' life support act, the global economy will not crash either.  Global economy will only crash if and only if another bubble bursts.

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