Monday, January 19, 2009

Asian markets, including Malaysia, set to rebound in second half

Standard & Poor’s research sees 43% upside for equities by end-2009

PETALING JAYA: Asian markets, including Malaysia, should post healthier gains on anticipated economic recovery in the second half of this year, Standard & Poor’s (S&P) vice-president (equity research, Asia) Lorraine Tan said.

But she expects markets to consolidate and range-trade perhaps after the Chinese New Year.

“On the whole, we expect about 43% upside for Asian equities by end-2009,” she told StarBiz.

Tan said unfortunately the worst was not over and that risks might come from a poor forthcoming results season that might dent company expectations.

“The slowest growth for Asia is expected to occur in the first quarter, which could lead to further pressure on companies’ balance sheets and cash flows,” she said.

She said S&P economists anticipated the US economy to start recovering in the second half, although full-year 2009 would still show a contraction.

“Our US strategy team expects the S&P 500 to close 2009 at the 1,025 level, representing a 20% upside from the 2008 close. We believe Asian markets will see a sharper rebound,” she said.

Tan attributed the rebound mainly due to the severity of the market fall in Asia, despite having strong fundamentals, and expected the Asian financial system to remain intact.

She said while the US economy remained fragile, it should start to recover in the second half. as the subprime crisis bottomed out (which should remove the 1% drag on US growth). This will be aided by the over US$1 trillion stimulus packages combined with falling energy prices, which should benefit US consumers by over US$200mil.

She said the rebound was under the assumption that the November market low was indeed the bottom for the US market.

In the near term, Tan said default rates might rise in Asia, possibly a result of cyclical downturn as opposed to the US and parts of Europe where default rates were a direct result of the credit crisis.

She believed Asian banks and corporations needed limited restructuring, which should hasten the economic recovery process.

On the recent market rally, she said: “We believe the recent rally in the equity markets was warranted with many issues having fallen below reasonable fundamental levels due largely to deleveraging and redemptions by global investors.

“At current price levels, we believe values are more reflective of the economic climate and, given continued earnings uncertainty for some companies, we feel the downside risk for some may have risen.”

Overall, Tan expected a better year with equity markets generally ahead six months in advance of an actual economic recovery.

But Schroders (Malaysia) head of retail distribution Josephine Lip has a more conservative outlook on the recovery of the equity markets.

“We expect a modest recovery in 2010 despite the world’s governments and central banks’ efforts to breathe life into the ailing global economies,” she said.

So far, she said, actions taken by the monetary authorities, including significant interest rate cuts and huge injections of capital, had little material effect.

“But the efforts will pay dividends in time and, with inflation under control, and lower commodity prices, real incomes should receive a boost,” Lip said, adding that tax cuts could also provide additional income for households.

Lip said Schroders remained cautious given that monetary policy was still struggling for traction, thus limiting earnings visibility, presenting a hurdle for recovery in equities and risk assets in general.

“However, there is undoubtedly significant values to be found in equity markets, so we have moved to a ‘neutral’ position (from ‘underweight’), in the belief policy action should support markets in the months ahead,” she said.

Against this backdrop, Lip said Schroders was “positive” on bonds (against “neutral” for equities and cash), with a preference for investment grade, high yield and inflation-linked over conventional government bonds.

“Investment grade and high-yield valuations are looking attractive given that spreads are at historically wide levels and given reasons for thinking credit may lead in the current cycle with a recovery in credit markets a pre-requisite for a recovery in equities,” Lip noted.

She said although there was the risk of spreads widening further, Schroders believed the market had discounted most of the bad news.

Lip also said president-elect Barack Obama’s fiscal package, combined with ongoing efforts of central banks to boost growth, should provide scope for positive surprises.

“This is especially so given investors’ sentiment was already at extremely depressed levels, with the US market discounting a fall in earnings of 25% to 30% based on our estimates,” she said.

On Asian markets, Lip said the region did not face the same financial risks as the West as it had undergone its own deleveraging process after the Asian financial crisis.

“When risk appetites return, Asia should recover more quickly than the West due to its well-capitalised banking system and limited leverage problems,” she said.

Schroders recognised there was significant value to be unlocked in equities and that sentiment and economic outlook was currently very poor, she said, adding that it believed the unprecedented policy response from central banks and governments should eventually take effect and support markets in the months ahead.

“We are cognisant that any improvement in the performance of risk assets could turn out to be a bear market rally, so we remain vigilant should sentiment take a renewed turn for the worse.”

Source :

Tuesday, January 13, 2009

Don't Panic in the Midst of a Market Crash!

New investors often panic during the midst of a market crash. Suddenly you see your holdings fall drastically and you see that the hard earned money you have put into that sure-win investment evaporating. In those circumstances, there is a very strong urge to do something, anything, just so that you do not feel so helpless.

Thus, one of the biggest mistakes investors often make when the market crashes in to be emotionally driven to take wrong actions on their investments. Of course, there are different situations for every market crash. Some could be the start of a longer and overdue decline (remember the bursting of the Nasdaq bubble?), while others are just temporary and stocks would soon bounce back in time. But the key thing to remember is not to let panic take over.
Investors might do 4 possible things when they are faced with news that the market has just crashed. They might:
  1. sell off their investments,
  2. switch to other investments,
  3. hold on and just watch, or
  4. buy in further!

There is no absolutely correct decision, but we would discuss each of these responses to see when it is a good or bad time to perform them.

The first option, which many new investors are guilty of during a market crash, is to sell off everything. "I have lost 30% of my investments in a month! If this keeps up, I would lose all of it in two more month's time!" Scary as this thought is, it is as likely to happen as it is to snow in Malaysia! If you have thought long and hard before you bought your fund, and you have a reasonably diversified portfolio, you would know this cannot possibly happen. Even during some of the worst market crashes, markets never ever lost all their money. For that to happen, every single stock held by the fund manager must simultaneously go bankrupt!

Very often, by the time you read in the newspapers or hear that the market has plunged overnight, the crash has already happened. Only major crashes make the newspapers and headlines. So, by the time you make the decision to sell off everything, the markets are already down on account of whatever bad news resulted in the crash. When you look at the charts of market indices in hindsight, you often ask "if I could have bought into this market at the very bottom, I would have made so much money in 2 years!" However, if you have lived through those times invested in those markets, you would have realized that it is precisely then, when markets hit bottom, that most investors are selling off all their holdings. So, while selling off everything is the most common choice, it is also usually the worst option!

The only time when it might be a good choice to sell off your investments was if you had cleverly invested in a huge bull market and was riding the market all the way to the top! So, once you have crested it, and there is a market crash, it may signal the end of the huge bull run you have just experienced. In which case, getting out would actually be a smart move. However, this is not an easy thing to do as very often, in such circumstances, you would have been sitting on hefty profits and are wondering whether this is just a temporary dip before the market continues upwards again!

The second choice can also be dangerous and that is to switch to other investments. This is because you are effectively selling out from the current market you are invested in and moving to other investments, whether they are bond funds or other safer markets. In such situations, the urge would be strong to move to less risky pastures like bond funds, capital guaranteed funds and money market funds. But as we have stressed earlier, this is similar to selling out everything and holding cash because the underlying push is still to stop losing money based on something that has already happened! So, again, emotions might be causing a bad decision.

The third choice, which we suggest all investors do, at least at first, is to take a deep breath and hold on. Do so for 1 or 2 days. Like we said just now, with a well diversified portfolio, you can wait that one or two days until you sort out what is happening and calm yourself. While there is the strong urge to take action now, there is also a high possibility that you would be acting emotionally if you acted now! So, the best thing is to take one step back, clam yourself down, and think through everything rationally before you do anything at all! In a few days, everything might look overdone! (Market crashes very often are overdone as investors panic and drive markets lower than they should be!).

Note also that being calm and rational does not mean you sit back and start counting all the reason why you should sell off all your holdings! You should be asking questions like

"Why did I buy into this investment, are the reasons and factors still there?"

"Is this a temporary reaction from investors because of one event which would soon blow over?"

"If I did not have any investments, and had just cash instead, would I be looking to buy this investment because it is now cheap or would I be looking in some other place?"

These are the questions you should be asking yourself. What you should not be asking yourself is whether you need the money or how long you can afford to hold out before you must cash in your losses! These questions will only drive you to sell your holdings blindly. Whether or not you can afford the losses and how long you are prepared to hold the investments are questions you should be asking yourself before you buy any investment, not after you have already bought it!

Even if you do come to a decision to sell your holdings after calm and rational thought because good of and valid reasons, waiting can have its benefits. The markets usually calm themselves after a few days and there is a strong possibility or a slight rebound no matter how terrible the crash. As we saw in the month of October, and in November as well, many markets swung wildly, some within a single trading day as investors grappled with bad news from the ongoing US financial crisis. Just as markets could crash 5 to 8% within a day, they would go back up 8 to 10% the following day again.

The last choice, which is buy even more, is a brave one. Oddly enough, it often tends to be the best in hindsight. It is also the most difficult to do because your mind is screaming for you to sell! Of course, this also varies from situation to situation and some crashes have heralded a longer term decline. But generally, in most circumstances, markets are resilient and bounce back again from their crashes. Let's take a look at table 1.

Table 1

Source: Bloomberg, MSCI, all performance figures are in USD.

Table 1 shows all of the single negative years for the S&P 500 index (an index that is often used as a broad indicator of the US stock market) since the year 1929. And we include the Great depression in this analysis as well. In total, there were 26 years which were negative years, some, like in 1931 during the great depression, was were the index was down 47.1%. Since some of these were too mild to be considered a crash, we set a benchmark of down 20%. So, we look only at the years in which the market crashed by at least 20% or more within one single year. (Note that the US market has crashed 41.7% so far this year as at 25th Nov 08). When we look at only the 20% crashes, we note that there are only 5 of them.

For 3 out of 5 of these great crashes, the 1 year period following these crashes would be a positive one. In other words, there was a 60% chance after such a "crash" year that the following year would be a good one. If we extended this period to 3 years after the "crash" year, the percentage went up to 80%. The percentage fell back to 60% for a 5 year period. And we note that this long period covers all sorts of crisis from the great depression, to world war 2, to the 1st and 2nd oil shocks in the seventies. Indeed, during the great depression, in a year when the S&P 500 index crashed 47% in 1931, the index was up 111% five years later.

Thus, as we have shown. Statistically and historically, the decision to buy in more after a particularly terrible year may often, in hindsight be the best, but it is certainly one of the most difficult option to take.In conclusion, there is a strong urge for investors to panic and do something during a market crash. However, this is almost entirely emotionally driven. So, we advise that investors would often be better served holding on to their investments instead. In the aftermath of the crash, after things have settled down, the situation would then no longer look so dire. Things have crashed so much over the last two months that in many markets, all fundamentals are being ignored now. Stocks trading at a 2 times price to earnings ratio and 0.5 times price to book ratio are still rated a sell. Many Asian markets are trading at below ten times PE ratio and still the panic is present.

As we mentioned before, ask some of those hard questions and don't panic during a market crash! If the factors on why you bought the investment still stands, then all the more reason to hold on to those investments. This discipline and rational thinking will tide you over difficult volatile periods and serve most, in the long run, to make better returns for such investors.

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