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Is The Worst Really Over?
Perspective | 01 May 2008
By: Xavier Lim
Articles (51) Profile

During the Congressional testimony, Fed Chairman Ben Bernanke said that “a recession is possible.” He pointed out that real GDP might grow slightly in the first half of the year but conceded that it could also contract. According to the recent minutes, the Fed said that its staff is projecting only a slow rise in GDP in the second half of this year. It also said there is a risk that the economic slump could continue all the way into 2009 due to uncertainty in the battered housing and financial markets.

Fed members conceded that even with its policy of aggressive rate cuts, it might not be equipped to deal with more problems in these markets. The Fed cut its key federal funds rate by 75 basis points at its 18 March 2008 meeting, its 6th rate cut since September 2007.

To make things worse, the free fall of the US dollar could hit Asian exporters, especially PRC companies who derive much of their growth from exports. Moreover, the East Asian countries have accumulated foreign currency surpluses of nearly US$1 trillion, much of it held in US Treasury bonds. Therefore, the fall in value of US dollar has resulted in a depreciation in value of their reserves, as well as their yields on the US Treasury bonds. These may eventually force Asian governments and investors to sell many of their US dollar holdings to protect themselves, which will further weaken the US dollar. The Fed may have to stop cutting interest rates to protect the US dollar.

Before the Fed policymakers are scheduled to gather on 29 and 30 April 2008 to decide their latest move on rates, economists are expecting yet more gloomy news on both existing and new home sales. They also noted that rising gasoline prices and a weak labor market are contributing to the shaky U.S. economy and a key reading on consumer sentiment looks likely to remain low when it’s reported on 25 April 2008.

Recently Lehman Brothers, Goldman Sachs and Morgan Stanley’s chiefs told their shareholders that the credit market turmoil is nearly over. Many analysts have also predicted that the market will recover in 2nd half of the year. Shares Investment (Singapore) is not so optimistic on the current situation. We feel that the worst might be felt only in the 2nd half of the year due to the above discussion and one very important factor – rising US unemployment rate. In its recent report, the Labour Department figures pointed out that US employers have cut 80,000 jobs in March and the unemployment rate rose to 5.1%, the highest since September 2005.

The Government of Singapore Investment Corporation Deputy Chairman Tony Tan said in a staff meeting: “The financial contagion has now spread beyond U.S. shores, increasing the likelihood of a global financial crisis and recession,”. He further elaborates: “We could be facing a recession which is longer, deeper and wider than any recession we have encountered in the last 30 years.”

But Shares Investment (Singapore) believes that most of the current shares prices have already factored in most of the recession risk although there is downside risk of probably another 15% to 20%. So if you have invested into a fundamentally strong company, stay invested, because after the rain is sunshine.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

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