Published June 17, 2009

Stocks in for a dip despite liquidity rush

In just 14 weeks, half the funds that exited Asia in the 16 months to March are back

By TEH HOOI LING

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(SINGAPORE) Here's a mind-boggling statistic: Over the past 14 weeks, half the funds that deserted the Asian markets during the 16-month period up to March this year have returned, according to EPFR Global.

New money going into all Asian equity funds tracked by the firm exceeded US$1.5 billion for the second week of June. If the current strength of inflows into Asian funds is sustained, it will take only eight more weeks to see all the money that was withdrawn between November 2007 and early March 2009 back in the region.

With such a huge deluge of liquidity, it is no wonder that equity prices have gone up in almost a straight line since March - that is until now. With the rapid run-up in prices - some 65 per cent in three months for the Straits Times Index (STI) - Asian equities have become less attractive to some investors, noted Citigroup.

Such huge inflow of funds had occurred once before, at the market low during the Sars period. Then the price-to-book of Asian equities moved from 1.2 times to 1.4 times in three months. Now, it has moved from 1.2 times to 1.8 times.

'Hence, despite continuous strong inflows, there are heavy sellers out there as well,' noted Citigroup. Prices are not making any headway upwards, instead there appears to be pressure on the downside with the STI now into its second day of decline.

But there is no need to panic, analysts told BT. The current softness is a buying opportunity for long-term investors. 'The correction was long in coming,' said CIMB-GK head of equities research Kenneth Ng. 'Two weeks back, we issued a note urging caution. The market has been driven by liquidity and has become a little exuberant.'

Mr Ng noted that the Singapore market is now trading at historical mean valuation. 'It's unjustifiable for investors to buy beyond mean valuation given that we are still in a recession,' he said.

However, Mr Ng thinks that the correction will not be a sustained one, and we are not about to enter another bear market. 'The market may correct by 8 to 10 per cent tops,' he reckoned. By then, there will be investors willing to come in.

On the fundamentals front, he doesn't see any big cap stocks missing their earnings forecasts in a big way. In most sectors, with the exception of those saddled with excess capacity like container shipping and airlines, things are on the mend. This could lead to further earnings upgrades.

So for those who are already invested in the market, Mr Ng's advice is to stay in the market. For those not in yet, look for opportunities to get back into the market.

Kevin Scully, executive chairman of NRA Capital, and one who is almost never overly exuberant about the market, also shares similar views. 'The market has been over-stretched, over-bought,' he said.

Aggregating all analysts' forecasts and target prices for STI component stocks, Mr Scully arrived at a price level of 2,440 points for the STI. 'We are already pricing in the most optimistic of forecasts.'

He thinks the correction may bring the STI to 2,100 and if lower, to 1,900. 'But the good thing is, the volume is not there. There's no panic, so this is a healthy correction.'

Asked what investors should be doing now, he said: 'Long-term investors should be looking to add more. A lot of them missed out a large part of the rally because they were unconvinced in the initial stages.'

Investors, he said, should buy companies with strong balance sheets, low price-earnings multiple based on conservative earnings estimates, and better still those that come with decent dividend yield. Speculative counters deemed as momentum laggards should be avoided.

Meanwhile Citigroup, in its strategy focus report this week, noted that the large caps have been the laggards in the last three months' rally.

They screened for large caps that have lagged and would benefit from US dollar strength or weakness, and those that are underowned and came up with names like Samsung Electronics, TSMC, SingTel, Hutchison Whampoa, Cheung Kong and China Construction Bank.