Until Wall St capitulates, best to stay nimble

Weekly Report by R SIVANITHY (7 Dec)

SINGAPORE - Last week's column advised investors to be careful buying into what was most probably yet another bear trap. As it turned out, the Straits Times Index, which clearly enjoys support from the thinly-traded Jardine group, gave up the 70 points it had gained the previous week through month-end window-dressing when it lost 73 last week.

Jardine's inclusion aside, the advice this week cannot be much different, notwithstanding Friday's rise on Wall Street which was founded on the perverse logic that because the November jobs report was so awful, the automakers will surely have to be bailed out by a government who cannot risk making things worse by not doing anything.

In other words, as long as the economic data is terrible, this increases the chances of a government bailout and so the market must go up. This means that the worse the economic figures the better the market will react - a warped way of thinking indicative of a desperately sinking Wall Street seeking any straw to clutch to stay afloat but knowing at the back of its mind that it is only delaying the inevitable.

There is a growing realisation among investors that the downturn may be worse and more prolonged than previously thought and that markets have not yet displayed the necessary capitulation that could signal a trough.

This is a point made several times before in this column but bears repeating - the US market is still too overly optimistic and overvalued relative to its economic and earnings prospects, even with massive government help.

Investors - those with pockets deep enough to do any meaningful buying during these difficult times - would do well to take note of this.

In its Asia Insights titled 'Cautious but looking for ideas', HSBC said it spent two weeks recently visiting more than 60 investment institutions in eight cities, a trip that gave it a reasonably good feel for the range of opinions among fund managers, most of whom were bearish.

'But, while few investors are convinced that Asian markets have definitely bottomed, we found less ultra-bearishness than we expected. Most investors feel that the monetary and fiscal stimulus dealt out by national authorities everywhere will cause growth to pick up in H2 2009, and that the bail-out of Citigroup means that all the large troubled US banks have now been rescued.'

'On China, there is a particularly widespread consensus that growth will be strong again by the second half of next year. Consequently, we found many investors keen to discuss where to invest next year: deep value stocks versus blue-chips, China or Korea, deep cyclicals or financials, how about Thailand, is it too early for small caps?

We have some sympathy with these views but, since sentiment has not yet reached capitulation (or indifference) point, we suspect that the worst may not be over.'

To this we'd like to add that there is growing irrational optimism that China will come good after all its problems in 2008 and that this turnaround will fuel Asian growth and cause Asian economies to decouple from the US.

Like the perverse Wall St logic earlier, this is a highly dubious line of reasoning from a battered investment community desperately seeking to redeem itself after a year of failure by rehashing an old, disproven theme that should by now have outlived its usefulness.

Not all is gloom however and there is some hope later next year - in its Dec 4 Asian Market Strategy for example, Credit Suisse said it believes Asian markets have already priced in a long and deep recession and that its Six Factor Valuation Indicator shows Asian markets to be 50 per cent undervalued.

However, it called an 'underweight' on Singapore saying 'driven by expected declines in consumer and corporate spending, domestic demand which has held up well is expected to weaken going into 2009. Credit Suisse said banks were its biggest underweight while it is overweight telcos and transport.

In the meantime, investors with poor timing skills should dismiss urgings to buy now because markets are 'oversold' since the word had no precise meaning in the investment vocabulary and is not a viable basis on which to make an investment. Best to wait until Wall St capitulates before doing anything - and that could be weeks or months away yet.

-Weekly Report by R SIVANITHY (7 Dec)