State Of
Global Economic Cycle (May 2012)
Recession – Recovery – Growth/Expansion – Boom – Burst
Investment Strategy (May 2012):
Defensive Neutral Aggressive (Domestic News-Flow From May 2012 onwards and
Election Theme Play Amid Uncertainties Ahead – Europe’s Sovereign
Debt Crisis, High Oil Prices & Inflationary Pressure, Slow US Growth
Momentum While China Grapples With Inflationary Pressures and Slow Growth
– Have Given Rise To Fears That Global Economy May Stall.
Sectors/Theme To Focus On (21 May
– 25 May 2012): News Flow Related and Political Linked Companies.
Stock Market Leading Performance
Indicator (21 May 2012 – 25 May 2012)
4 (0-3-Bearish
4-6-Neutral 7-10-Bullish)
The Risks
1. The Global
Economic Recovery Is Precarious (Vulnerable To The Risk Of More Financial
Shocks);
2. Divergent Growth Path of
The Two Regions -
A Slowdown In Advanced Economies And The Robust Growth In Emerging Markets
– Is Posing A Dilemma For Macroeconomic
Policymakers In Asia;
3. Threats Of Asset Bubbles
In Asia (Huge Foreign Capital Inflow Of
Liquidity);
4. Volatile Foreign Exchange Market (Currency War)
– Competitive Devaluations & US Dollar/Yen Carry Trade (Destabilizing
The Global Financial System & Trading Relationships);
5.
Rising Commodities Prices & Threats Of Commodity
Inflation;
6. Inflation Threat In Emerging
Ex-Japan Economies;
7.
Fear Of Double-Dip Recession In The US & Eurozone
Economies;
8. Deflation & Stagflation Threat
In Developed Economies;
9.
Fear Of A US Dollar Crisis;
10. Unwinding Of US Dollar/Yen Carry Trade When US Starts To Normalise Rates (Destabilizing
The Global Financial System & The Global Economy);
11. Global Imbalances, Threat Of Trade & Currency War
and Protectionism (Destabilizing The Global Economy);
12. Contagion Effects Of Eurozone Debts Crisis on Other European Sovereign
Debt;
13. US & Europe Debt Crisis: Further
Downgrade Of Credit Rating By Rating Agencies
Black Swan Events Or (Unpredictable)
Risks/Surprises
1. Terrorist
Attack -
2. Oil
Supply Disruptions -
3. A
Pandemic Disease -
4. Geomagnetic
Storms -
5. Major
Social And Geopolitical Upheaval
6. Financial Shock
– Eurozone Debt Crisis & Disintegrwtion Of EU Bloc Countries
Market Commentaries
It is external factors now (May 2012) driving the market down. Compared
to our regional peers, the FBM KLCI has been holding well until recently. So
this drop is actually expected, just that Malaysia has a delayed reaction.
Shares on Bursa Malaysia are likely to dip further
amid persistent worries over the global economy. Also expect more local
bearishness on the weakening ringgit and commodities.
However ample local liquidity and positive local themes such as the
upcoming mega flotation exercises like Felda Global Ventures Bhd and impending
project news flow such as RM15 billion North Malay
Basin will cushion market
decline in the near term.
Greece
is set to hold fresh elections on June 17, 2012 after voters rejected austerity
measures imposed on it by the EU and the IMF, stirring fears that the country
would not stick to the austerity measures earlier agreed upon with the European
Central Bank and the IMF. The country has put in place a caretaker government
but concerns that it will exit the eurozone. Opinion polls show that anti-bailout parties will
perform strongly in a new vote next month.
The 13th
GE is another dampener on the Malaysian stocks and does not think the market
has priced in (May 2012) a negative outcome for the ruling coalition BN.
Meanwhile the easing of interest rates trend will continue in 2012. In
an environment of slowing global growth and easing inflationary pressure,
emerging markets tend to revert their attention to stimulating economic growth.
Governments will also need to formulate appropriate policies to generate
employment and address income inequality.
In this slightly uncertain environment, expects Malaysia to under perform even as
macroeconomic risks diminish. Thus, the Malaysian stock market may lag its
regional peers due to perceived heightened political risks from the imminent
general election.
The bearish
sentiment was also attributed to growing fears over the eurozone breakup,
following the new European politics with anti-austerity parties forming
post-election governments.
In US
equities market, normally a big decline would set up Wall Street for a
technical rebound. But that may not be the case this coming week, even after
the market posted its worst weekly loss for the year and the S&P fell for
six straight sessions.
With the corporate earnings season drawing to an end and recent U.S.
economic data raising doubts about the pace of growth, the S&P 500, which
is down 7.3 percent so far in till 18 May 2012, could decline further coming week as concerns about the
financial health of Europe persist.
Weighing on
sentiment is a growing sense among investors that the euro zone debt crisis
is nearing new heights, fueled by fears of the potential for a Greek euro exit
and the deteriorating health of the Spanish banking system.
Solid corporate earnings and upbeat U.S.
economic indicators had fueled the rally in U.S.
stocks, offsetting jitters over Europe. But with earnings almost out of the
way and data starting to disappoint, investors have shifted their focus back to
headlines out of Europe.
Chartist said that the market is extremely oversold now (18 May 2012).
Nonetheless, all major indicators of US market remain on sell signals.
The market remains uncertain on concern that Europe's debt crisis was
deepening with the European Central Bank's (ECB) decision to halt lending to Greece banks and Spain following Moody's ratings
downgrade of 16 Spanish banks.
With Greece
set to run out of money as early as June 2012 and no new government in place to
negotiate the next aid installment, investors have begun betting that a chaotic
Greek default and euro exit will happen sooner rather than later.
Investors remained fearful that a Greek exit from the euro will
increase contagion across the continent's financial system.
However Global
central banks stand ready to launch a monetary stimulus package if conditions
warrant it as well as further intervention by the ECB to calm markets. Any news
by the ECB to engage in direct and large-scale quantitative easing to stem the
euro crisis is likely to push the market higher.
Already the ECB had warned Greece that it will not receive any
more financial aid if ot does not stick to the agreed bailout deal. The ECB had
also gave no indication of intervening in the bond market again any time soon,
but it said it was still too early to withdraw the bank’s emergency
support measures. The ECB has hardly use of its bond purchase programme since
Nov 2011.
Europe remains a key risk factor in
influencing global trade amid the danger of a
deeper-than-expected recession and the spillover effects to the rest of the
world.
European politics will also be ontinued to command the spotlight with
more elections looming in several countries. This would result in new
leadership changes just as the European continent continue to struggle to
resolve the sovereign debt crisis.
Germany’s next federal election
is expected to take place between Sept 2013 and Oct 2013. A decline in the
eurozone’s fortunes would not augur well for US president Barack Obama’s
administration either given the impact it could have on the US economy and US banks holding European debt
papers. Obama who is also up for re election for a second and final term as
president come Nov 2012, could also win points if his administration helps
create more jobs.
The question is how
the eurozone debt crisis is going to be and how this would impact Asia
especially when the US
economy still faces an uncertain recovery.
For US the April 2012 employment report came in weaker than expected,
showing that only 115,000 jobs were created during the month. Investors are worried about a repeat
of the last two years (2010 – 2011) when stocks peaked in the spring.
The unemployment rate ticked down to 8.1%, but that was because
prospective workers dropped out of the job hunt, not because meaningful job
growth put people back to work. The April 2012 report marks the third
consecutive month of declining job growth. The sad reality is that the jobs market is in for a longer
recovery, because the cycle of getting more people employed will be pushed out
further until the United
States can reach the ideal level of
structural unemployment.
And it has more to do with the Fed and the notion that things get bad
and Bernanke has said
the Fed will be more accommodative. The Fed may come in with the
June 2012 meeting maybe and offer the market more accommodation.
Meanwhile investors have been pouting over a U.S. economy that is “not hot
enough for a sustained recovery and not cold enough to prompt Bernanke to
institute a [third round of quantitative easing].
Amidst the climate of economic uncertainty, there is hope that Asia's
emerging markets would escape the worst of the fallout from the troubles
affecting Europe and perhaps even the choppy US economic recovery despite recent
data showing some improvement.
The hope is that
domestic demand driven by a combination of private consumption and fiscal
pump-priming by governments would help avert a bumpier ride this year or until
the pressures emanating from the end-markets in the developed economies ease
off.
Technical Analysis
Bursa Malaysias consolidation process
changed for the worse the past week, as external uncertainty came back to haunt
investors. In the wake of liquidation, the FBM KLCI dived to a low of 1,526.60
during intra-day session last Friday, resulting in all the gains posted
year-to-date being wiped out.
Meanwhile, the
selloff had dragged the key index below the 100-day simple moving average
(SMA), the first time since mid-December 2011, and also brought about the third
dead cross on the chart.
Combined with the growing signs of
instability among Spanish banks, the political turmoil in Greece, heightening
concerns about a slowdown in China and the latest weak US data adding to the
list of risk factors and denting sentiment, it really does not bode well for
the market in the immediate term.
Going forward, the
200-day SMA of 1,510 is in great danger. A slip below the 1,500-point
psychological level would further damage the mid-term landscape of the local
bourse.
Lower support floors are anticipated at 1,480 points, followed by the
1,448 to 1,450-point band and the next, at 1,420-1,424 points range.
Technically, most of the indicators are frail, implying range-bound
pattern at best. This may also mean that any rebound is likely to be
short-lived, at least for now.
Initial resistance is seen at 1,560 points. The next upper hurdle is
resting at the 1,591-point level.
