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.”

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