Last week I made a presentation to 200 lawyers from New York at the invitation of Ambassador Ong Keng Yong. My topic was on the Asian stock markets. Here is a summary of that presentation.
My view is that Asia learned its lesson from the Asian Financial Crisis and built stronger banks and stronger national balance sheets which enabled it to weather the Global financial storm well. With countries and Governments introducing fiscal stimulus plans at 2-5% of GDP and up to 10% of their reserves, its not surprising to see GDP growth rebound strongly - but consumption is still relatively weak.
With this back drop, the main question facing investors is when Governments will start raising short term interest rates from near zero levels or when will Governments start cutting back on fiscal stimulus packages which are already straining National balance sheets of OECD but not Asian countries. This is probably what is spooking stock markets now especially in the US and Europe.
Asia's fiscal response was:
a) China’s package was US$585bn against foreign reserves of Yuan $1.95 trillion. Bank credit expansion was about 20-30% of GDP
b) HK announced a stimulus budget of HK$39bn or US$5-6bn against its reserves of US$223.3bn.
c) Singapore announced a US$14.6bn resilience budget against its reserves of US$182bn
| |
2-Jan-08 |
31-Dec-08 |
9-Mar-09 |
23-Oct-09 |
| |
|
|
|
|
| Dow |
13043.96 |
8776.39 |
6547.05 |
9972.18 |
| Nikkei |
14691.41 |
8859.56 |
7086.03 |
10329.37 |
| HIS |
27519.69 |
14387.48 |
11344.58 |
22589.73 |
| STI |
3444.34 |
1761.56 |
1456.95 |
2715.34 |
| Shanghai |
5272.81 |
1820.82 |
2158.57 |
3107.85 |
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|
|
|
|
| |
|
Jan to Dec 08 |
Jan to Mar 09 |
Jan-Oct 09 |
| Dow |
|
-32.7% |
-25.4% |
13.6% |
| Nikkei |
|
-39.7% |
-20.0% |
16.6% |
| Hang Seng |
|
-47.7% |
-21.1% |
57.0% |
| STI |
|
-48.9% |
-17.3% |
54.1% |
| Shanghai |
|
-65.5% |
18.5% |
70.7% |
| |
|
|
|
|
| |
|
|
Jan 08 to Mar 09 |
Jan 08 to Oct 09 |
| Dow |
|
|
-49.8% |
-23.5% |
| Nikkei |
|
|
-51.8% |
-29.7% |
| Hang Seng |
|
|
-58.8% |
-17.9% |
| STI |
|
|
-57.7% |
-21.2% |
| Shanghai |
|
|
-59.1% |
-41.1% |
Despite their strong rises……50-70% some markets in particular China are still not looking expensive in PER terms because corporate earnings there are forecasted to rise by as much as 50% this year alone. So unlike 2008 when the Chinese market was trading at 60 times PER, China is today trading at 20 times forecasted earnings despite its markets having risen more than 70% this year.
HK and Singapore are looking at corporate earnings growth of about 30-35% in 2009….this is in sharp contrast to the -20% earnings growth in June 2009. But the PER of Singapore and Hong Kong is in the high teens on forecasted earnings which is toward the high end of its PER range.
So while Asian markets are still underpinned by improving corporate earnings….the risk has increased as analysts were previously too cautious in their forecasts – this allowed companies to beat estimates easily in the first half of 2009. In the second half of 2009, the outlook has changed….with stocks beginning to reflect the more bullish forecasts of analysts which companies must now try and meet if not beat more bullish forecasts which are already priced into stocks.
I also noticed that the quality of corporate earnings was not good:
a) a large portion of the growth in corporate earnings comes from depressed earnings in 2008 when companies used the poor markets to clean up their balance sheets
b) Top line or revenue for most companies is down by 15-30% but profits are higher due to cost cutting
c) Companies have poor visibility…..order visibility is only two to three months rolling at best
d) better than expected bank earnings should be viewed cautiously because with cost of funds near zero - banks are enjoying good spreads and with Government's guaranteeing new loans provisions both specific and general have remained low.
The million dollar question is when will rates tighten and fiscal stimulus end ? and what effect this will have on corporate earnings and GDP growth. Since October, Global stock markets have been in a volatile phase with some experiencing modest corrections of 5% but on very low volume. A hedge fund manager mentioned to me that many mutual funds had missed the rally and toward the end of Q2-2009 had to chase or buy performance. This gave markets that added flip and also prevented markets from having a meaningful correction. But this seems to have increased short term risk and the growing uncertainty seems to have pushed the VIX index pass the 30 level (see chart below) in recent weeks
Bottom line is that markets are likely to be range bound over the next few months as investors digest the quality of earnings and look for indications of rate tightening from Central Banks. There is unlikely to be any sell off on high volume as fund managers still need to find performance in 2009 especially those who have missed the boat and they are likely to offer stocks some support at least until the end of 2009. My strategy is to invest in value stocks, ie low PERs, decent earnings growth and strong balance sheets. These stocks are likely to weather the more volatile markets better.
