Published May 5, 2009

Markets buy into recovery story and fly

Buoyant Asian investors bet big on green shoots as caution takes a backseat

By OH BOON PING

	Email this article
	Print article
	Feedback

(SINGAPORE) Asian stocks surged to a seven-month high yesterday, powered by last Friday's US market rally and the growing confidence that the global economy is recovering faster than expected.

The Straits Times Index (STI) soared 108 points to 2,028.71, gaining 5.65 per cent in the course of the day. It mirrored the tide of exuberance washing across Asia amid mounting evidence that global trade is starting to pick up.

For example, the Hang Seng Index rose 5.54 per cent to 16,381.05 points, while the Shanghai Composite went up 3.32 per cent to 2,559.911. Taiwan Weighted gained 5.64 per cent, while Sensex 30 rose 6.41 per cent.

Investors have largely brushed aside worries that the global H1N1 flu outbreak could turn into a serious pandemic, as the Mexican health ministry announced over the weekend that the worst was over and experts said the virus might be no more severe than normal flu.

'Investors chose to see the glass as half-full rather than half-empty,' said CIMB economist Song Seng Wun. 'There is so much good news on the macro front that many are afraid that they may be left behind in the rush.'

For example, China's PMI manufacturing reading hit a one-year high of 53.5 in April, while the MNI China Business Survey reported last week that its headline overall business conditions index jumped to 61.51 in April from 54.20 in March - its highest level since March last year.

'It looks like the green shoots of recovery have already bloomed into a fruiting tree - at least in China,' said Mr Song.'

NRA Capital's Kevin Scully felt that the stock rally resulted from the flood of liquidity in the market, as central banks around the world have pumped money into the system.

However, he pointed out that there is still no indication of demand recovery and that investors should wait for more earnings visibility before entering the market.

Last Friday, the Dow Jones Industrial Average gained 44.29 points to 8,212.41 points, while the Standard & Poor's 500 Index rose 4.71 points to 877.52. The Nasdaq Composite Index edged up 1.90 points to 1,719.20 points.

Data last week in Asia showed South Korean exports and industrial production both improving more quickly than expected - an indication that regional exporters are needing to step up activity after having aggressively slashed inventories of goods.

The US Institute for Supply Management's factory survey last Friday also showed a jump in the new orders index, an important leading indicator adding to the evidence of a recovery taking shape.

'The global manufacturing cycle appears to be gaining momentum.' - Societe Generale economists

'Investors chose to see the glass as half-full rather than half-empty. There is so much good news on the macro front that many are afraid that they may be left behind in the rush.' - CIMB economist Song Seng Wun

'The global manufacturing cycle appears to be gaining momentum,' said economists at Societe Generale in a note to clients.

Investors are also feeling more confident that the US financial system has already suffered the worst of its crisis and is getting healthier, just before the government releases the results of bank stress tests later this week.

The MSCI index of Asia-Pacific shares outside Japan was up 4.6 per cent yesterday, its highest level since mid-October last year and taking its two-month rally to 45 per cent from the low hit in early March. Financial and technology shares powered the rise.

Foreign investors have seized on the rally as an opportunity to allocate more funds to Asia. Fund tracker EPFR Global said that Asia ex-Japan equity funds were the main emerging markets money magnet during the week ending last Wednesday.

Trading was active even with Japanese financial markets closed yesterday for the first of three straight holidays, part of the country's Golden Week break. Many other markets in the region reopened after the Labour Day holidays.

US crude oil inched up 25 US cents to US$53.45 a barrel, while gold was up US$8 an ounce at US$893.80.

Government bond yields and swap rates rose further as investors feared missing out on the equity rally and shifted funds away from safe-haven holdings.

In South Korea, government bond futures shed 0.55 point to 111.01, the biggest drop in six weeks, as the equity rally and signs of economic improvement offset hopes that the country may soon be included in the Citigroup World Government Bond Index.

Last week, South Korean lawmakers approved a plan that would give tax advantages to foreign investors in local currency bonds - a step that could pave the wave for it to be included in the Citigroup index tracked by investors managing some US$1 trillion in debt.

Benchmark five-year Korean bond yields were up 16 basis points at 4.33 per cent and taking the two-day rise to 26 basis points. Korean swap rates jumped even more quickly, causing swap curves to steepen.