A Calculated Game Plan
by Justin Yap, justinyap@theborneopost.com. Posted on June 17, 2012, Sunday
Against the backdrop of a slowing economy, weak corporate earnings growth momentum and rising market aversion ahead of the general election the risk appetite of investors on assets have fallen significantly of late. BizHive Weekly takes a look at what is in store for the second half of 2012.
Stay defensive and buy on dips to outperform the market
Lim Chee Sing, RHB Research Institute Sdn Bhd head of research
Against a backdrop of a slowing economy, weak corporate earnings growth momentum and rising market aversion ahead of the general election (GE), most analysts and industry leaders project that the local bourse will remain stuck in a range-bound trading pattern until re-rating catalysts emerge.
In the interim, it is susceptible to unfavourable external developments which include the threat of a looming Greece default and exit from the eurozone, fears of the Chinese and Indian economies crashing down to a hard landing and the risk of the US falling off the ‘fiscal cliff’.
“Indeed, the risk appetite of investors on risky assets has fallen significantly of late,” RHB Research Institute Sdn Bhd (RHB Research) head of research Lim Chee Sing said in an email response to BizHive Weekly.
According to him, the MSCI emerging market index of stocks had fallen by more than 10 per cent in the month of May.
Whilst the local bourse had been relatively resilient, foreign investors were believed to have turned net sellers in the local bourse in May, after seven straight months of net purchases of equities totalling RM9.5 billion.
On top of that, he further pointed out that the equity market performance would likely be news fl ow and event-driven this time around.
“While the focus of attention is still on the euro debt crisis, investors are increasingly worried about China and India where recent data releases are pointing to a sharper than expected economic slowdown,” he added.
As the US economy continued to limp along, all eyes were also glued to data releases in the US with increasing focus on the coming austerity programme to bring down its fiscal deficit and government debt level or ‘fiscal cliff’ as Bernake called it.
The fear was that if the US and the euro debt crisis interact and feed on one another, a global economic recession would become a real risk.
Domestically, the major event to watch was the impending GE that could also create volatility to the local bourse given the uncertain election outcome and rising risk aversion among investors, Lim highlighted.
“Consequently, we believe the market pullback that we have seen thus far may not be over and we do expect the market to remain in a correction and consolidation mode.
Under such circumstances, we believe investors will take a cautious view towards risky assets and as a consequence, equities are still vulnerable to a further correction,” he added.
Nevertheless, Lim believed that the market would eventually come back by the second half of 2012, premised on the European Central Bank (ECB) making a decisive move to monetise the debts of eurozone governments, China policymakers easing policies substantially and its economic growth reaccelerating, and US Congressional leaders cobbling together some deals to mitigate the impact from the ‘fiscal cliff’.
What’s critical for the market to come back, was the outcome of the euro debt crisis, Lim stressed.
“We believe any eurozone break-up could be limited and well managed and will unlikely jeopardise the global economic recovery.
Hence, beyond the near-term pullback, we expect market sentiments to gradually improve as global economic uncertainties clear out.”
Meanwhile global financial markets were still likely to be awash with liquidity as central banks in advance countries had pledged to maintain extremely loose monetary policies and could unveil more quantitative easing programmes to support economic growth should the situation warrant.
“With the re-emergence of significant external risk factors and the uncertain GE outcome locally, the risk of a further market pullback in the near term is still high.
As a result, we would still recommend investors to hold some defensive stocks that have strong cash fl ows to pay sustainable dividends,” Lim said.
“Nevertheless, we believe investors would still need to accumulate fundamentally robust stocks on weakness in order to outperform the market.
Whilst we are also positive on cyclical sectors that are poised for recovery, investors’ risk perceptions can still change very quickly should global situation turn out to be worse than expected,” he concluded.
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