Username
Password
Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,114.16 -11.98 -0.38%
Hang Seng 26,719.58 -128.91 -0.48%
Dow Jones 26,770.20 -255.68 -0.95%
Shanghai Composite 2,938.14 -39.19 -1.32%
Will February Prove To Be Too Difficult For The Bulls?
Perspective | 18 January 2013
By: Gabriel Gan
Articles (41) Profile

The major indices all enjoyed a superb start to the New Year after the US Congress reached a temporary truce with regards to the fiscal cliff. It seems that investors were not at all worried about the US economy falling off the cliff looking at the performance of the global indices prior to the agreement.

The Dow Jones Industrial Average (DJIA) surged about 930 points, or 7.3 percent, from mid-November to 16 January while the S&P 500, too, jumped 12 percent in the two months alone outperforming the DJIA by quite a mile. The DJIA now looks to retest the high set during September/October last year before trying for the all-time high at 14,198 in 2007.

Japan, which could easily be misunderstood as the land of the setting sun after being in economic doldrums for such a lengthy period of time, was easily the best-performing stock market from mid-November to mid-January rising from 8,661 points to 10,879 points – a whopping 25 percent gain within two months! Japan owes this solid performance to the return to power of the Liberal Democratic Party, which now advocates a weaker Yen to boost exports.

Meanwhile, the European markets are experiencing an euphoria despite all its problems that remain partially solved or even unresolved. Germany’s DAX is at a point surpassed only in 2000 and 2006/2007 before the index crashed immediately after. Will the same fate be repeated?

European Confidence
Germany’s economy is still nowhere at the peak of its prowess while the rest of Europe suffers from the debt crisis. Where is the money that will spur the economic growth so badly needed by the Europeans going to come from?
If the European officials are so confident of a recovery in the second-half of the year, then by how much can Europe grow with ongoing austerity measures as well as the high unemployment rate?

It baffles me as to why European markets can surge to such heights despite no signs of a promising recovery. Fine, one can argue that France’s CAC is not doing as well as the DAX but could the German stock market have overrun its fundamentals?
If Germany’s stock market has gone ahead of its fundamentals, then what about the rest of the world? Are we seeing a repeat of the gush of hot money printed by the government printers with no place to park their money but with the best among the worst?

But Stock Markets Look Six Months Ahead!
Fine, we can argue that stock markets are a leading indicator of how well the economy will perform some six months down the road, and that essentially means that the current state of the stock market is pricing in economic growth in the second-half of 2013!

Why not? Since the US economic indicators are mostly suggesting growth while China is already on the growth path, things can only be bright and rosy a few months down the road.

With the help of QE III, now tied to the unemployment rate, investors can expect the Fed to continue buying government debt until the unemployment rate falls to a more decent level. Nobody knows how decent is decent because Fed Chief Ben Bernanke gave no hints but I am suggesting that anything below 7 percent may trigger a change in the mindset of the Fed officials.

Why 7 percent and not 6 percent? When the financial crisis broke out in 2008, there was a huge jump in only unemployment rate 5.8 percent in July 2008 to 7.3 percent in December 2008, hence, anything below 7 percent will bring about a return to pre-crisis days although it is still nowhere near the 5-odd percent during the heydays.

China’s investors are playing a dangerous game by chasing the Shanghai Composite Index (SSE) up by more than 15 percent within 30 trading days. Apart from improving economic fundamentals, which had already started as early as October but had no positive effect on the stock market, the other reason could be the nearing of March whereby the new leaders will take over the helm from the old guard.

Come March, investors expect the government to cut interest rate, reduce reserve ratio and allow foreign investments in the stock market by up to ten folds after China Securities Regulatory Commission Chairman Guo spoke of such a possibility. However, is China still willing to cut interest rate and reserve ratio after the recovery has already taken off? Even if foreign funds are allowed to invest in China by up to ten times more, will foreigners be willing to accept that Chinese companies are less transparent while the banking system may face further bad loans? Will the Chinese government be willing to risk inflation and spark off a huge property bubble after fighting hard to contain it for two years?

Caveat Emptor!
If you have been making a killing trading in the stock market and hates this article, then please think twice because these are the potential pitfalls that could happen in 2013.

Yes, the sentiment is pretty much better than it was months ago and the global economy is seeing green shoots. By all means, follow the trend and make as much money as possible while we can because we never know what lies ahead of us as none of us can profess to own a crystal ball that can warn us of imminent dangers.

Be a cautious bull!

What Happens In February?
With the new measures that the Singapore government introduced to cool property prices, we have seen how fast property counters can fall – and rebound – almost immediately. Judging from the rebound in the share price of some property counters, we can assume that some of these stocks have been unfairly punished – especially those that are not entirely exposed to the residential segment in Singapore and/or those that are well-diversified in commercial, industrial and geographical segments.

Going forward, the impact of such measures will be known as soon as the next new launch takes place. The HDB and low-end condominium segments have been the red-hot ones while much of the other segments enjoy much lesser favour from buyers. Investors who are too exposed to the property sector may want to know that it is hard for prices to climb now that the government has shown even more conviction in controlling prices. Even if prices were to climb yet again, the risk of even more and harsher measures being introduced greatly outweighs the gains.

Debt ceiling, debt ceiling and debt ceiling? Is anyone even talking about it or has everyone forgotten about it? Debt ceiling will become another focal point when the date draws near, and the media will be hyping it all up by explaining how the end of the world will arrive should the issue remain unresolved. We have seen time and again how the US Congress works so let’s just buy when they first disagree before finally agreeing to raise the debt ceiling.

February also brings us to the most important event of the Lunar Calendar – the Chinese New Year! We bid farewell to the Dragon and welcome the Year of the Snake on 10 February, which excites me because I have not liked the stock market pre- and post-Chinese New Year for the past seven years apart from last year when the stock market surged for two good months!

Once again, be bullish but be cautious because the odds are still heavily stacked against a rally before and after the Chinese New Year based on the historical trend for the last seven years. With the Chinese New Year and the debt ceiling all arriving at or around the same date, it will be better to stay very nimble because of these “uncertainties”.

Despite all the warnings all over this article, I am still long-term bullish, short- and medium-term cautious. Have you noticed that the banks, property and commodities are not really moving higher? With rotational play among the penny stocks still heavy, do go in with your eyes wide open.


Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.