Published April 1, 2009

Equity rebound may not lead recovery

By OH BOON PING

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GLOBAL equity markets are unlikely to recover until investors see a sustained improvement in economic conditions, reversing the historical trend of stock performance as a leading indicator of economic activity, an analyst said yesterday.

Indices such as S&P 500 and Dow Jones could sink to fresh lows in June or July and any interim rally is expected to be short-lived. - Mr Laidi

'I expect the banks and financials to recover first, before the other sectors represented in the equity indices. And the economy may recover somewhere in between,' said CMC's chief market strategist Ashraf Laidi, adding that economic recovery should come just before an overall stockmarket rebound.

This is reminiscent of the 2002 downturn, when the stock market recovered only after economic conditions improved.

Mr Laidi was speaking to reporters about the outlook for various asset classes, giving his views on the major currency pairs, gold prices and equities.

He reckons recovery is unlikely before 2010, as the magnitude of today's turmoil is far greater than that of previous setbacks, such as the financial crisis more than a decade ago.

This is because the troubles this time around go beyond the housing market to include banking and financial services, among other things. Indeed, Mr Laidi said market indices such as S&P 500 and Dow Jones could sink to fresh lows in June or July and that any interim rally is expected to be short-lived.

Drawing on past experience, the interim rebounds tend to be bear market rallies typically characterised by an upswing of no more than 28 per cent from the trough.

According to him, what this means is that when stocks come under pressure a few months from now, 'we are likely to see strength in the US dollar and yen again'.

Gold could reach US$1,200-US$1,300 an ounce by the end of the third quarter, and he is bullish on the Australian dollar against the US and Canadian dollars.

'I also like the Norwegian kroner,' he said. 'It has a current account surplus. It exports oil and gas, while Australia is the second-largest exporter of copper.'

'So Australian dollar and Norwegian kroner are characterised by robust structural foundation and relatively hefty yields.'

Mr Laidi also touched on reports that China is pushing to make the yuan a settlement currency worldwide. However, he thinks the prospect of the yuan replacing the greenback is unlikely until the yuan is more freely available.

Also, China needs to diversify its exchange reserves away from the greenback towards other currencies such as the euro and yen, he added.