Published November 27, 2008

What might 2009 hold for stocks?

By R SIVANITHY

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IT'S almost year-end and it is customary at this time to try to forecast what next year might hold for the stock market. In the past, this was usually done in the final week of December but given the huge uncertainty which confronts economies everywhere, it's safe to say that a view given today isn't going to be substantially different from a view delivered in five weeks' time.

Before attempting any crystal ball-gazing, though, it's best to state that the biggest lesson to note from 2008 is one which we repeatedly highlighted in this column over the past 12 months: the tendency among analysts and supposedly independent researchers to understate risks while overestimating their powers of analysis.

Many assumed the crisis would quickly blow over - one house kept repeating the mistaken view that this is a normal cyclical slowdown and that the US economy would prove resilient to any shocks - and so relied on historical comparisons and/or traditional price- earnings or PE-based calculations to urge clients to buy, only for those clients to find out painfully that not only are earnings or the 'E' almost completely unknown, but that the worst of the crisis may not yet be over.

The bailout of Citigroup this week, the still-uncertain fate that awaits General Motors and lingering worry over some of the other large US banks should be proof enough that there could still be more problems ahead for the market to navigate.

Second, forget the decoupling story that was popular this time last year. The interconnectedness of global finance and the dependence of markets on Wall Street have rubbished the popular theory that some experts had bandied about regarding Asia decoupling from the US and forging ahead on its own. If anything, the fact that Asian markets have collapsed by more than the US one should lay to rest this piece of misplaced wisdom for good.

Having said that and bearing in mind that risk is still a big factor, it's also probable that the huge cash injections by the US and European governments will eventually help reverse the economic slide. In other words, the interconnectedness that dragged markets down in 2008 should work in their favour when recovery kicks in. The crucial question, of course, is when.

Most experts agree that a recovery, if it occurs in 2009, will take hold only in the second half. We could quite easily question the wisdom of experts these days given their spectacular failures in 2008, but this time you'll find no argument here with this view. The US government will cut interest rates to zero and keep its printing presses running at full steam even at the risk of inflating yet more bubbles. One observer not so long ago wrote that the proper way out of this mess is to raise interest rates, encourage savings and stop the never-ending inflating of bubbles but given government shortsightedness, such a course of action is unlikely - so, sooner or later, the weight of money being thrown at the problem economy will have an effect.

However, because it is unlikely that a bubble that was seven years in the making can be unravelled in just one year, our guess is that at the very earliest, it will be the third quarter of 2009 before the pump-priming has an effect.

Now, assuming that this downturn does not drag out too long, the best time to invest in stocks would therefore be some time before the end of the first half next year, though it has to be said that investors should not expect a quick return to the heady days of 2005-2007. At best, returns over 2009 would be single-digit and the more investors recognise this, the better.

We'd also place China stocks high on the list of what to avoid. There's good reason why these counters have lost 70-80 per cent in 2008 and it isn't just earnings worries that will continue to plague the sector, but also credibility, governance and survival issues.

We'd also recommend avoiding property stocks for the first six months at least. Like China, the sector benefited from overblown expectations, lax analyst recommendations, easy credit and insufficient consideration of risk. Moreover, the physical market has not even begun to correct meaningfully yet and it could be years before prices find a bottom.

Finally, between banks and conglomerates, the latter are probably better positioned to ride out the global downturn. Local banks have been too reliant on the domestic property market for their loans and lack a diversified revenue base within the region, let alone further afield. Their numbers can only worsen with time and so it would be best to avoid the sector for now.

Government-linked conglomerates offer much better exposure to an overseas upturn, so these stocks would be worth keeping an eye on. For now, though, it would be wise to keep in mind that cash is king and patience is a virtue - at least for the next 5-6 months.