Bounce or bottom?

Saturday, 21 March 2009 23:11
THE STRAITS TIMES Index ended the week 1.2% higher, its second consecutive week of gains. But, volumes are still thin as the debate heats up on whether this is the long-awaited bottom.
Supporting the uptrend has been a rally in banks, particularly in the US. But, Goldman Sachs is doubtful of the recovery as fundamental data on consumer credit is not improving. The brokerage believes recent bank profitability has been driven partly by oneoff factors such as mortgage origination fees. Meanwhile, results of the stress tests on US banks may be released next month. Banks that fail could be forced to raise capital, while those that pass may issue equity to repay the government. Either way, significant equity issuance is expected.

Tham Mun Hon, an analyst at Daiwa, is advising clients against increasing equity exposure ahead of firmer signs of stabilisation. “Equities may be oversold from a technical perspective, but we believe that the fundamentals still do not justify a sustained rally. In fact, the latter have deteriorated further, prompting us to expect a retest of the October 2008 lows, and a probable break below,” he says. Tham recommends investors stick to defensive sectors such as infrastructure, telecoms and utilities.

But, HSBC strategist Garry Evans points to evidence from the biggest banking crises in the past, which show that as soon as the last troubled bank is rescued and monetary policy is eased aggressively, the stock market recovers strongly. “Even if this turns out to be only a bear market rally, it could go on for a while,” he says. “There is probably no point in being excessively bearish just now.”

Meanwhile, Credit Suisse notes that US mortgage applications have risen 131% from the lows in October. The bank says that of the nine global leading indicators it watches, six seem to be bottoming: US mortgages, China’s purchasing managers’ index (PMI), US Institute for Supply Management, German IFO business expectations, Chicago’s PMI and the Baltic Dry Index. It suggests investors play the theme of a bottoming in indicators via cyclicals such as Taiwan Semiconductor Manufacturing Co, BHP Billiton, China Shenhua Energy Co and Posco.
WHAT TO LOOK OUT FOR?Expect the fever of rights anxiety to continue a little longer.

The latest victim was Sembcorp Industries, which had to issue a statement clarifying that the shareholder approval it is seeking for a share issue mandate is mere routine. A recent note by Kim Eng, however, does not rule out the possibility of a cash call in the near future as the company could need money to fund a water-and-power project in Oman. The company reportedly had trouble securing financing for the project. Kim Eng also cites concern over low margins as sources suggest Sembcorp dropped its tariff pricing to clinch the deal.
DMG & Partners Securities says United Overseas Bank, Suntec REIT and Swiber Holdings are also possible candidates for rights issues.