Published May 7, 2009

Markets surge on liquidity tide

Straits Times Index hits 6-month high; OCBC, UOB results power bank stocks

By VEN SREENIVASAN

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(SINGAPORE) Sell in May and go away? That was the old refrain. But with the market confounding sceptics and powering its way to new 6-month highs, perhaps the new mantra should be 'stay in May to enjoy the play'.

A slew of encouraging data, soothing words from the world's most powerful central banker, increasing confidence in the survival prospects of US banks and a huge inflow of liquidity sent Asian markets surging for the third consecutive day to new half-year highs yesterday.

Singapore's Straits Times Index leapt another 104.7 points or some 5 per cent to a new six-month high at 2,179.03 points - its highest point since Oct 6 last year.

This brings total gains in the first three days of this week alone to a whopping 259 points or some 13.4 per cent.

While the rally was largely led by a wave of liquidity finding its way to banks and blue chips, the fact that 3.8 billion shares changed hands suggested plenty of breadth in the buying.

It was a similar story in Hong Kong - the key market which inspires the local bourse - where a wave of liquidity sent the Hang Seng surging some 2.5 per cent or 405 points to a six- month high of 16,834.

'This is just insane,' exclaimed a broker. 'This is money chasing stocks.'

This came despite an overnight slide on Wall Street and weakish futures indices yesterday.

Analysts attributed the rally to a huge inflow of funds, who had previously sat on the sidelines.

'There is a lot of catching up going on, especially in the Singapore market,' said Lim Jit Soon, strategist at Nomura.

Indeed, foreigners have poured some US$6 billion into six major Asian markets since early March, according to BNP Paribas, helping to boost China, Taiwan and South Korean stocks by more than a third and making them the world's best performers.

Free liquidity - broadly defined as money supply growth minus industrial production growth - has risen sharply, noted Mr Lim.

Indeed, excess free liquidity has been a key driver of the Singapore stock market in the past.

But this time, there is also a calculation that valuations - after a six-month decline - are looking extremely attractive.

RBS Asia Securities noted that the Singapore market was trading at a 25.7 per cent discount to its long-term price-book multiple of 1.9 times, and 17.6 per cent below its long- term price-earnings multiple of 15.5 times. Meanwhile, the market's yield is 310 bp above that of long- term government bonds.

On a broader level, the appetite for equities seems to have been also whetted by a growing consensus that the worst of the global economic crisis could be over.

As Barton Biggs of Traxis Partners pointed out, there is an emerging consensus that the US, German and Asian economies are not just on the verge of bottoming out, but rebounding.

'Leading indicators, including new orders and the purchasing managers survey, are rising. New home sales - the best leading indicator of the price of existing homes - seems to be stabilising. Historically, the steeper the GDP decline, the stronger the rebound,' Mr Biggs said.

He added that most of the bad news 'on television and the front pages' has been discounted. Meanwhile, there is unparalleled cash on the sidelines which will eventually have to be invested, he added.

Mr Biggs' views seem to dovetail with those of Federal Reserve chairman Ben Bernanke, who told the Joint Economic Committee of the US Congress on Tuesday that the American economy would bottom out and start to rebound later this year, but the recovery process would be slow and choppy. Even today's scheduled US banks' stress test results are not stressing the market, despite reports that at least half of the 19 big banks under review by the US Treasury may need to boost their capital.

Analysts note that Asian equities in general, and Singapore equities in particular, are also underpinned by favourable policy, strong liquidity conditions and improving fundamentals.

Still, yesterday's rally here was driven largely by the banks, whose stocks went ballistic after OCBC Bank and UOB reported better-than-expected quarterly results.

So how long can this rally last? That's the billion- dollar question.

RBS argued that there are three catalysts that will drive the Singapore market higher.

'First, RBS economists expect GDP growth to recover to 6.3 per cent in Q409, with signs of stabilisation already evident. Second, we see no further cuts in consensus numbers (which have declined 30 per cent over the past year versus a 40 per cent drop in the STI). Third, liquidity will likely be very supportive.'

In short, the party may not be quite over yet.