Published October 31, 2008

Stocks soar, analysts preach caution

Rate cuts boost markets but the worst may not be over yet

By CONRAD TAN
Email this article
Print article
Feedback

(SINGAPORE) Markets in Asia and Europe surged yesterday after the US Federal Reserve slashed its benchmark interest-rate target to the lowest since 2004.

But analysts here warned that the market has not yet bottomed out, despite major indices in Asia and Europe extending gains into a third day since Tuesday.

'The market might have gotten overly panicked and the rebound might last for a few days, but I don't think this is it,' said Kenneth Ng, an analyst at CIMB.

'We have to live with reality, and that reality will come when earnings start falling.'

The Straits Times Index ended 130.71 points or 7.8 per cent higher at 1,801.91, after rising as much as 9.9 per cent earlier in the day.

Overnight, the US central bank cut its main interest-rate benchmark to just one per cent from 1.5 per cent. It also said it would provide up to US$30 billion in US-dollar liquidity to each of four countries - Singapore, Korea, Mexico and Brazil - through swap arrangements to ensure that the banking systems in each country had enough dollars to meet heavy demand for the US currency.



Separately, the International Monetary Fund on Wednesday offered up to US$100 billion in short- term loans to developing countries that have been hit badly by the financial crisis but are otherwise sound, with none of its usual conditions attached.

Still, major US indices ended Wednesday lower.

Elsewhere in Asia yesterday, Hong Kong and Taiwan also cut interest rates, sending shares soaring.

Hong Kong's Hang Seng Index ended 12.8 per cent higher, while Taiwan's Taiex index rose 6.3 per cent. In Korea, the Kospi stock benchmark gained 11.9 per cent.

'What's happening is a bit of relief because both the Fed and IMF have provided support with liquidity programmes,' said Citigroup economist Sim Moh Siong. 'That helps to lower the risk of contagion in the emerging markets.'

With the flood of new liquidity, 'countries are in a better position to cope with the deleveraging process that's contributed to money pulling out of emerging- market countries', he added.

'But this does not mean that the deleveraging process will end any time soon - it probably still has some way to go.'

A senior private banker here said that it was not yet time for investors to plunge back into stocks. 'If you look at the level of volatility in the market, that's a classic sign of a bear market.'

Tai Hui, regional head of economic research in South-east Asia at Standard Chartered Bank, said that investor sentiment 'remains highly fickle'.

'We have seen some degree of normalisation in the interbank markets - it seems that the liquidity shortage that we've seen in the past several weeks is easing somewhat.

'But the truth is the economic outlook for the US, Europe and even Asia remains very challenging.'

CIMB's Mr Ng said that banks and property firms here especially still have 'a lot of headwinds to fight'.

For the banks, 'you're likely to see big writedowns' on investment securities, he said.

'This Q3 earnings will be the most unpredictable earnings season ever.'