STI closed 2,835.51 on 30th Jun 2010, a drop of 2.14% for the first 6 months of 2010 after hitting a peak at 3,037 in April. During these periods, there were more bad news than good that caused not only STI but global markets to pull back. The major bad news were :-
1. Euro zone debt issue involve countries like Greece, Spain, Portugal and Italy. This caused the Euro to weaken to a low of below 1.20 as to the greenbag. Concern also whether Euro zone could be in for a double-dip recession.
2. Concern of China tightening in their measure might be overdone and potentially lead to a slower than expected growth in 2H2010.
3. US economy recovery still rocky with mixed of economic data. Unemployment rate still high at above 9%, private sector job creation is not as fast as expected, Euro zone issue could affect US growth in 2H2010.
In Singapore, the recent manufacturing data and a better than expected 1Q2010 GDP have shown strong indication that the Singapore economy is recovering well since the financial crisis. However, as Singapore is also relying in import/export business to countries like China, US and Europe, a slowing down from those regions will have an impact on Singapore growth.
The picture will not be rosy for 2H2010 with so much uncertainties in the global economy recovery and hence would expect the stock markets to be remained volatile for the remaining of the year. The followings are to be looked out for in the second half of the year.
1. Corporate earnings. The bigger companies have so far been recovering well in term of their earnings but the smaller sized companies still on the path to recovery. A peaking in earning might happen for the bigger companies in 1H2010 and a slower growth in earning in 2H2010. The focus on corporate earning should be on the smaller sized companies for 2H2010. Basically, the whole industry cannot be progressing without the smaller sized companies also doing well in their earnings. As such, the laggard and second or third liners stocks in the stock markets could be in focus for 2H2010 whereas upside for the blue chips might be limited.
2. Merger & Acquisition ( M&A ). The bigger and cash rich companies are looking for targets to acquire ( kill off competitors, expand business leadership, etc ). Note also M&A could also lead to rise in unemployment rate as after companies get acquired or merged, there will be redundancy in certain job function. Again, the smaller sized companies with good fundamental will be in focus for possibility of being acquired or merged by the bigger companies.
3.Euro zone crisis. The recovery of the Euro zone economy will be in focus for 2H2010. A slower growth in 2H2010 is expected and the question is whether the Euro zone can avoid a possible double-dip recession. At the moment, as long as Germany, France and Britain can buffer the Euro zone debt issue, that will not spread outoside of EU and hence affecting global recovery. Both the ECB and IMF have raise a sum of money to lend to EU countries that in need of the funds and that could providing some support for the EU economy from falling off the cliff. Weak Euro will be there for the time being as Euro zone is trying to recover. A weak Euro might not be a bad thing as this could attract more tourists into Europe. Tourists with their spending on "cheaper" luxury items ( branded fashion products, branded cars, etc ) might even fuel the recovery for Euro zone.
4. China economy. Since China has taken the role as the main driver for the global financial crisis recovery, a lot of attention has been given to the recovery of China economy. Chinese Government also constantly implementing tightening policies to prevent the economy from overheating and curbing potential inflation bubble. A recent economic data has shown that China economy might be cooling down and expecting a slower than expected growth in 2H2010. As such, Shanghai stock market also retreated more than 20% in the first 6 months of 2010. The focus will be on how much slower growth China will have in 2H2010 and how does that affect the rest of the world in recovery. Recently, China also removed peg locking their currency to the greenbag and with the Chinese RMB strengthening, the Chinese might have lot of spending power ( spend overseas ) to help global economy recover.
5. US economy. The recovery of US economy will still be in focus for 2H2010. US still facing high unemployment rate with private sector job creation is not at a rapid pace. The underlying for that would be US companies still very cautious in expanding their businesses which result in slower job creation. The loan income from the US banks could be a clue for investors to gauge the rate of job creation. At the moment, the loan income from the US banks has not been performing well despite the banks having their profit level up ( mainly due to investment profit ). If a company wants to expand its business and hiring more head counts, taking up loan from banks would be one alternative.
6. Stimulus. Since the financial crisis in 2008, Governments around the world has injected stimulus to support and recover the falling economy. Most stimulus should be waning off now and that will lead to slowing down of economy. For country like China if the Government continues to inject more stimulus, this could lead to overheating in the economy whereas for US, a withdrawing of the stimulus at the moment will not help its economy recovery. The timing of withdrawing the stimulus will be critical in supporting and recovering of the economy.
Stock markets for 2H2010 might have limited upside especially for the blue chips but downside could be also limited unless a sudden unexpected event occurs which will derail the global economy recovery. Long term investors might want to consider slowly accumulate stocks of fundamentally sound companies. Short-term investors should exercise cautious as market might be range bound most of the time. Sticking with stocks of fundamentally sound companies and avoiding speculative play would reduce a lot of risk in a volatile market.
