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Wonderful End 2012, Great Start To 2013, But Another Uncertainty Looms!!
Perspective | 04 January 2013
By: Gabriel Gan
Articles (41) Profile

Singapore equities ended 2012 short of reaching 3,200 but investors know that it is only a matter of time before the Straits Times Index (STI) obliges. We can mark 16 November 2012 as the watershed day for the STI, which ended a one-and-a-half month correction that started in early October. Since the watershed day, it has been a one-way traffic for the index with almost no correction along the way and, thus, this current rally is almost two months old matched by similar rallies in January 2012 and June 2012.

The previous two rallies in January and June of 2012 lasted two months before trading sideways for another two months which was then followed by corrections. All in all, the STI gained a total of 520.73 points, or 19.67 percent, rallying from 2,646.35 on the last trading day of 2011 to 3,167.08 – the final trading day of 2012.

At the end of 2012, however, the STI did not manage to move into bull territory if we were to apply the 20 percent gain rule that qualifies the index to have moved into a bull market. Still, the STI finally did so on the first trading day of 2013 by crossing 3,200 points with relative ease.

For most parts of 2012, the expectations of a solution to the European debt crisis and the introduction of QE III helped to propel stock markets higher while the moves by the European Central Bank and the US Fed to embark on an aggressive bond-buyback sparked off the climb towards bull market territory for European and Asian markets.

The catalyst that sparked off the huge rally in the US and the 600-point gain in Hong Kong was none other than the single-most haunting factor that plagued for months – the fiscal cliff. Despite lingering fears that the US politicians would take the US economy over the cliff, stock markets continued to rally even when the deadline was so near and there were no signs that the Republicans would seek detente with President Obama over a deal. Perhaps investors, having learnt a lesson from the debt ceiling debacle in 2011, have got used to the political bantering so much so that almost everyone believed that the politicians would not have the courage to try harm the US economy. Everybody was right.

Although a deal was struck at the eleventh hour, avoiding the so-called fiscal cliff, the agreement essentially served only to kick the can down the road for yet another showdown in February.

What’s The Deal?

The deal struck between the nemesis – the Democrats and the Republicans – was nothing of the grand scale that was initially talked about as much of the bargaining chips and tools were thrown out of the window. The final agreement was, at best, a hastily patched up package designed to avoid going over the cliff.

In a nutshell, the fiscal bill solved the problem of an all-round tax increase for Americans and higher taxes for the top-earners. However, the US economy may suffer as a consequence of the expiration of the payroll tax cut, which may take some US$125 billion out of the consumers’ wallets as the tax will now rise to 6.2 percent from 4.2 percent a year ago.

This expiration of the payroll tax cut may take some wind out of the sails of the economic recovery, which can be avoided if the politicians had not traded national interest for partisan politics. Now that they have successfully kicked the can down the road, the next battle will now be on the US$16.4 trillion debt ceiling that is set to expire at the end of February 2013.

Round Two, FIGHT!

A repeat of the 2011 debt ceiling debacle may be on the cards now that the grand showdown is all about trading spending cuts for raising the debt ceiling. From the point of view of the Republicans, they would want to achieve higher spending cuts in exchange for raising the debt ceiling while President Obama is adamant that spending cuts and raising the debt ceiling should be balanced and not tilted to either side.

Now that the boxing ring has been set, President Obama must be willing to concede some space in cutting spending as Congress must act as early as mid-February to prevent a default with another downgrade of US credit rating to follow should a default take place.

Now that the stock markets are still in rally mode, happily celebrating the removal of an uncertainty and bolstered by better-than-expected economic data coming out of China and the US, not many investors are thinking about the February showdown just yet. When the euphoria has died down and technical indicators look stretched, it is very likely that investors will start to worry about the events in February and probably take a breather.

Of course, we can say that the debt ceiling, just like the fiscal cliff and also the 2011 debt ceiling debate, will be a non-event. It will once again be marred by disagreements, bargaining, and more delays, but the forthcoming debt ceiling will be resolved when it is time to do so.

I am inclined to believe in the latter because the Congress will not allow a default to happen and the Congress cannot risk having the US credit rating downgraded by yet another foolish act.

Be Bullish, But Watch Out For February

With current sentiments remaining firm, it will be wise for investors to stay bullish and buy on dips when a near-term correction arrives.

While the Dow Jones Industrial Average does not look anywhere near overbought on the daily charts, we cannot rule out a correction that may arise out of fears of the February debt ceiling fight. On the other hand, the Hang Send Index and the Shanghai Composite Index looks very overbought and may pull back slightly.

The Straits Times Index, however, is neither overbought nor oversold so we can expect a lot of volatility going forward with major global markets continuing to dictate the direction of our market. Meanwhile, penny stocks and micro-caps have greatly outperformed the blue chips and mid-cap stocks, hence, we can expect speculative play to continue but selectively.

There are plenty of “undervalued stocks” in the market especially among the oil & gas as well as offshore marine plays. These stocks have suffered as a result of weaker oil prices, hence, the chance of these stocks playing catch up is pretty good.

However, with the reporting season coming thick and fast, it will be wise for investors to look out for companies that have reported strong earnings for the past few quarters as these companies are likely to be the winners in January and a precarious February.

Happy New Year and hope all readers reap bountiful profits in 2013!

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