Wednesday, September 4, 2013

Market Analysis -- 4th Sep 13

Global markets endured another selling month in August in particular emerging markets due to the same old issue of fear of US Fed tapering again.  This saga was started in late May and till now the same old news still being used to sell down the markets.  STI fell 6% in the month of August but was considered resilient given that it was surrounded by emerging nations in ASEAN in which those nations fared much worse than STI.

Recap some of the events in the month of August.

1. US economic data continued to show improvement especially the closely watched unemployment rate which triggered the though of US Fed will start to scale back the monthly US$85b bond buying this month during the 17th - 18th FOMC meeting.  This was what most analysts believe US Fed will do.

2. The fear of US Fed tapering caused huge outflow of money from emerging countries causing India and Indonesia currency to plunge and some even mentioned the possibility of repeat of 97 Asian financial crisis.

3. US according to its Treasury Department that it will hit debt ceiling in mid October and if nothing is to done to address that, US will have to default in mid October.

4. Euro zone finally got out of recession in August and other countries such as China and Japan also showing sign of improvement in their economic data and this probably the bright spot in the month of August.

5. Report of Syria's Government possibility of using chemical weapon against the rebel which in turn caused deaths and injuries to civilians in later part of August added further woe to global markets as US is preparing to air strike Syria despite no confirmation from UN of the usage of chemical weapon detected and against vote from China and Russia.  UK a long time ally of US however failed to get the nod from its parliament on launching strike and that left probably US intention to act despite no common consensus from UN nations.

Coming to the month of September, it will be another eventful month

1. US Fed FOMC meeting will be held on 17th - 18th and this will have rest of the world focusing on will or will not the Fed start tapering.  

2. Germany will be holding its election this month.  Though Euro zone has finally emerged from recession but all along during the crisis, it was Germany that was supporting the Euro zone with its strong demanding on reform and bailout of those crisis nations.  Should current leader Chancellor Angela Merkel fails to get re-elected then Euro zone might throw into a possible panic situation as investors will be wondering what will happen to Euro zone.

3. The US debt ceiling due mid October issue could be in focus as to whether the Congress and the President will do something about it or as usual leave it till the 11th hour then come out a solution either to resolve or kick the can down the road again.  

4. Syria's issue, it is like almost 100% US will launch air strike on it given that even the leader of the Republican in the House also support the idea of the strike.  It is probably just a matter of when it will happen

Looking at all those events in August and September, it is not difficult to see mostly are negative bias events and it is no surprising global markets have been under selling pressure lately.  However, on the surface it is a selling market but thinking rationally and logically this is a different picture. 

1. US Fed monthly US$85b bond buying program in the first place was not suppose to be there and by tapering or eventually stop the program is basically removing something that was not suppose to be there.  Furthermore, the reason for tapering is due to US economy is improving and not anything else.  Thinking of that as negative is a very very short-sighted view.  If fear of no more cheap money that it is another totally irrational way of thinking.  Presently, Japan, Europe, Australia and UK are still under their Central Bank's stimulus program with interest rate staying low.  There is still other channels of getting cheap money apart from US.  There was also talk of funds outflow from emerging markets back to develop market (in particular US) but should one think logically, that should not be a good idea.  Asian nations still have growth though slow whereas Euro zone just came out of recession still have lot to do and US despite economic data showing sign of improvement, that doesn't relate to they are back to the good old days.  US still have the debt ceiling which first surfaced in 2011, they have yet to resolve that and by raising the limit to overcome the cap is never a good solution.  If the ceiling can be adjusted to higher to accommodate more debt than in the first place why you need a ceiling ?  Though US economy is improving but how much actually is the due to the US Fed stimulus program ? Central Bank can control the the flow of liquidity but they do not have the power to dictate how the liquidity to be used.  Should it really benefit US then why there is huge amount of money flowing to developing countries ? There are just more questions than answers if one think US is safer to invest in now.

2. The outflow of money from developing countries (emerging markets) caused a panic and some fear of a repeat of the 97 Asian financial crisis.  Should one need to compare present and 97, it must be on the same basis, that is apple compares with apple and not apple compares with orange.  In 97, most of the Asian countries were mostly having USD as foreign reserve but now it is different as most nations will adopt a basket of currency as foreign reserve, from USD, Euro, Pound, Yen to RMB (RMB was not even considered a dominant currency in 97).  Also most of Asia nations have a stronger foreign reserve now than in 97.  In 97, majority of the Asian nations were highly dependent on export as their main driver for economy growth but now it is of different situation as led by China most are moving towards a consumer and services based type of economic model.  When comparing something that is not of a common basis, there is no strong reason to believe it is true.

3.  Syria's issue probably is something that was unexpected and US looks very likely will air strike them, just a matter of time when it will be.  As for such, and should that occur, can expect a knee-jerk reaction from global markets but that will be short-term, really short-term.  This brings another question, US Government is currently under the across the board spending cut due to no solution to fiscal cliff last year and facing a debt ceiling next month, where do US Government find the money to spend on military to air strike Syria ? Should they have that money, shouldn't they use it to improve their economy ?

4.  China, well this is a general point which worth bring out.  Past months have seen China economic data especially the PMI flowing from expansion to contraction and back again.  That worried global investors as fear of China hard lending.  It is rather strange that the world still so focus on China PMI given that China since start of last year already planned out reform of their economic model to a more consumer and services based rather than the export based.  If that is the case, the PMI data is no longer have very significant meaning.  In fact China non-manufacturing PMI has been holding up well for past months, indicating the reform is working.  Something for investors to really seriously thinking, are we looking at the wrong thing and cause some unnecessary worries ?

In the beginning of the year, was pretty much biased towards that of not having a grand rally at the end of the year given that global markets were on an overly optimistic view, driving stock markets higher, stretching valuation and went way way ahead of fundamental.  However, the past 3 months of selling down gave me another alternate view looking ahead.  6 months ago when every analysts were screaming for buy buy buy when stock prices were high citing cheap as compared to valuation, that was not cheap !  Now present price level is consider cheap !  Why no screaming of buy buy buy from analysts when things are cheaper now ?  Back to the point, not expecting a grand rally at the end of the year for my alternate view but it will be something that next year when investors looked back they will be crying why didn't buy now when stock prices are cheap. This is the alternate view and a very highly possible case now. 

A bottom will hit by mid September and it is the time to slowly accumulate strong fundamental stocks.

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