Published December 10, 2008

Recent rally may not have legs to last

Stock markets have bounced off lows but watchers wary of calling the bottom

By TEH HOOI LING

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(SINGAPORE) On the back of hundreds of billions of dollars worth of stimulus packages, stock markets around the world have bounced off their lows of October and November - some by as much as a third.

But beware, say most market watchers. This is likely to be a bear market rally - its sustainability is questionable and it may retest previous lows again.

'It's hard to call it a bottom,' said Timothy Wong, head of regional equity research with DBS Vickers Securities. 'There's been a lot of selling the last couple of months. The market is oversold in terms of valuation. But there is still no clarity of the underlying economic fundamentals recovering.'

Terence Wong, head of research at DMG & Partners, shared this view. 'When news of more retrenchments and negative data comes out, prices are going to be hit again even though people say it's all been factored in.'

Meanwhile, a fund manager described what we have seen in the last few sessions as a 'relief rally'.

'Markets are relieved that governments around the world are pledging to spend billions to soften the worst economic downturn in our lifetime. However, there is no assurance that the problems we are in can be readily remedied by throwing money around,' he said.

Still, the rally - be it bear or bull - is much welcome. And some markets have enjoyed a much bigger surge than others. For example, Hong Kong's Hang Seng Index - despite shedding 2 per cent yesterday - is now a whopping 34 per cent off its low on Oct 28. China's CSI Index, which measures the 300 most representative A-shares on the Shanghai and Shenzhen stock exchanges, has rebounded by 25 per cent from its low on Nov 4.

At its Monday close, the US S&P 500 Index was 21 per cent above its Nov 20 low.

The Straits Times Index (STI), however, is a laggard. Following its strong 5.8 per cent surge yesterday, it is still only 9.6 per cent above its Oct 24 low of 1,600 points.

Bear market rallies can bounce as high as 50 per cent off their lows.

Norman Villamin, head of research and strategy, Citi Global Wealth Management Asia Pacific, has been expecting a bear rally.

'The backdrop today is very similar to what we saw in Japan in the 1990s,' he said. 'Prices have fallen significantly, down to book value everywhere except the US. What we are seeing now, which was missing in the past one year, is a sense of confidence that there will be some demand out there.'

US President-elect Barack Obama's details over the weekend of a stimulus plan to put 2.5 million people back to work in the next two years and talk of a second stimulus package from China give the market confidence that there will be some demand which can be counted on, said Mr Villamin.

But based on past experience - the most recent being the US$150 billion package announced by the US government in May - the effect of an injection on the markets lasts just 4-6 months.

'For a sustainable recovery, we need to see one or more of the following taking place,' said Mr Villamin.

One, in addition to the public sector spending, demand must also come from the private sector. And this will happen only when there are signs that the private sector's focus has moved away from deleveraging.

Two, the government stimulus package encourages US corporates to start investing again.

Three, government spending is able to create enough jobs to make up for all the lost positions in the private sector.

Four, there is aggressive debt relief for individuals and private sector balance sheets. But this is unlikely to be a top priority.

Adding to that, a fund manager said the market also needs to see US housing prices stop declining.

David Lee, managing director and chief investment officer of hedge fund Ferrell Asset Management, added two more negatives which need to subside for stocks to see meaningful rallies: banks need to start lending again, and refinancing rates need to decline - and credit spreads must fall as a result.

But he's seeing some positives already. Redemptions lately have been much smaller than anticipated, and money supply in the US is growing rapidly.

Further, Mr Obama's economic strategy and his new team are seen as having a lot of credibility. Meanwhile, exchange rates have been fairly stable, and 'market participants, especially analysts, are beginning to focus on fundamentals as doomsday scenarios are norm and are no more an unanticipated event', he said.

'This Christmas is early and if we do not see aggressive selling in the third week of December, the market should be looking brighter ahead!'

So what should investors do?

Take profit on trading positions, said Mr Wong of DMG.

For longer-term investors, here is some advice from Citi's Mr Villamin: 'Take the current rally to rebalance your portfolio. Relook your liquidity needs and take the opportunity to reallocate your assets so as to meet your long-term investment objectives. On a three- to five-year horizon, one can find value in the current market.'