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Regional Markets Likely To Extend Bullish Momentum Into 2011
Perspective | 18 January 2011
By: Xavier Lim
Articles (51) Profile

The US indexes wound up 2010 with a double-digit percentage gain, as investors’ confidence was encouraged by several stimulus measures introduced by the Federal Reserve and the US government, coupled with positive signs of improvement in the economy. The US indexes advanced for the second year in a row with the Dow Jones Industrial Average and the S&P 500 Index up 11% and 12.8% respectively. While the heavily technology weighted index, Nasdaq Composite Index achieved a 16.9% gain for the whole of 2010.

Disappointing, yet not unexpected, the Shanghai Composite Index returned with a negative double-digit percentage of 14.3% for 2010 despite China’s surging economy during the year. This was attributed to the concerns over monetary tightening and the efforts to curb asset bubbles. Both the Nikkei Stock Average and S&P/ASX 200 Index follow suit and dived into the red, ending the year with negative 3% and 2.6% respectively.

Fortunately, the performance of other Asian markets was not dragged down by the world’s number 2 and 3 economies. Hang Seng Index was up 5.3% and the Taiwan Weighted Index closed 9.6% higher for 2010. Both the India’s Sensex and the KOSPI Composite Index also notched up 17.4% and 21.9% respectively. Notably, the Jakarta Composite Index emerged as the best performing index in the region after jumping to close up 46.2% for 2010. This was followed closely by the Thailand’s SET Index that saw a gain of 40.8%. Last but not least, our local bourse, the Straits Times Index (STI) ended the year with a 10% gain.

Outlook Does Look Much Better

Looking ahead, the recent improvement in December’s US Automatic Data Processing (ADP) employment data for the private sector and Institute for Supply Management (ISM) services, coupled with the unemployment rate falling to 9.4%, the lowest level in one and a half years, supports my view that the global economy will grow stronger in the coming months. In addition, global manufacturing Purchasing Manager Index was at its six-month high of 55 in Dec-10, suggesting a robust improvement in overall operating conditions.

China, which is expected to publish its 2010 gross domestic product data this week, is likely to achieve fairly solid growth after expanding 10.6% year-on-year in the first three quarters. According to Bank of China, China’s economy is expected to grow about 9.5% in 2011, even though the push from stimulus spending fades.

Yet all is not doom and gloom. The inflow of hot money into the Asian market arising from the quantitative easing (QE2) programme in the US has forced many Asian governments looking for ways to control it. However, if the governments are able to control it, and I believe they can, then this excess liquidity should lead to a positive performance for equities in 2011. Anyway, the intention of QE2 is to spur growth, prevent deflation or bring down unemployment in the world’s largest economy, right?!

Even if the governments are unable to control the hot money effectively, the outflow of this hot money is unlikely to happen this year given that Asia is expected to continue to grow strongly in 2011, according to the Asian Development Bank’s forecast.

As the world’s 2 largest economies continue to grow, this writer believes that most companies should benefit from the global recovery and will post stronger top-lines in 2011 despite the expected moderation in global economic growth.

Back home, as US and China are amongst the top contributors of Non-Oil Domestic Export Markets, Singapore’s economy and export should be able to gain from a stronger Renminbi and rising wages that will push China’s domestic consumption to increase gradually over the years. Investors may want to take note that currently the Straits Times Index is trading at a 2011 forward price-earnings ratio of 14 times, which is still about 15% below the 2007 peaks, while Indonesia, Malaysia and Thailand have breached their 2007 highs, according to Nomura’s research report.

It is understandable that investors are concerned that the slow economic recovery in the US, China’s monetary tightening, the Eurozone debt woes and the rise in global interest rates could dampen sentiment. Nevertheless, I believe that so long as companies’ growth holds out and earnings come through, equities will shrug off any weakness along the way to trend higher.

Technically Speaking

The technical picture as shown in the chart suggests that STI has hit a 2-year high of 3,313, which is slightly below the Fibonacci Retracement ratio of 76.4%, at around 3,328. The chart shows that STI is still in the uptrend channel and looks likely to continue the bullish momentum as it stayed above its 50-day moving average. With most economic indicators showing positive signs of recovery, STI should be able to break the Fibonacci Retracement ratio of 76.4%. A breakthrough of this ratio is likely to induce many investment professionals to wonder if STI can rebound back to its 2007 historical high.

View Full-sized Image
1-year chart for STI
1-year chart for STI

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

Please click here for more information about this author.

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