Yang Huiwen
3 May, 2008
The Straits Times
SUDDENLY, things are looking a lot brighter on the stock market, both at home and abroad.
Last month, the Straits Times Index (STI) posted its best gain since September last year - up 4.7 per cent.
And yesterday's dazzling 88-point, one-day gain just adds to a sense that all is well again, as though the credit crunch and market turbulence of recent months are now just a bad memory.
But is the worst really over? Or is this one of those notorious false dawns where hopes are raised only to be dashed soon after?
To get things in perspective, just remember that year-end targets for the STI set late last year ranged from 3,900 to 4,430 points.
This is a market that has fallen more than 12 per cent from six months ago, similar to other Asian markets.
There is growing talk, however, that the credit crisis, resulting from mass defaults in United States sub-prime mortgages, is nearing its end.
US Treasury Secretary Henry Paulson buoyed markets with comments that the credit crisis was probably more than half over.
Britain's central bank was also upbeat. Its deputy governor, Mr John Gieve, said 'the most likely path ahead is that confidence and risk appetite will return gradually in the coming months'.
Encouraging signs
Other developments have helped to ease investors' worst fears.
It turns out, for example, that the US avoided a recession in the first quarter, despite widespread fears. For Asia, including China, the world's largest economy is a vital export market.
Some stock market analysts are interpreting the STI's healthy recent rise as providing evidence that the worst is indeed over.
AmFraser Securities senior vice-president of research Najeeb Jarhom pointed to yesterday's significant breakout past the 3,200-
point level by the STI, which closed at 3,236.1 points.
Mr Najeeb believes the local benchmark will continue its rally to 3,400 to 3,500 points with minor pullbacks along the way. This target could be reached in the next week or two, he said.
Other analysts are almost as upbeat, expecting the STI to move towards the 3,300-point level and then later to the range of 3,428 to 3,470.
One leading indicator of market performance is the bourse operator itself, the Singapore Exchange (SGX). After all, the counter's fortunes rise and fall on the level of activity on the bourse.
The anticipated improvement in market sentiment drove the SGX's share price up more than 21 per cent since the beginning of last month to $9.30 yesterday.
Another significant development is that shares of banks are also being snapped up. They have rallied about 20 per cent from their troughs in February - a reflection that worries are dissipating.
Banking stocks around the globe were hammered as big losses associated with the sub-prime crisis began to emerge.
Another positive sign for the market is evidence that foreign fund managers are steering money back into the region.
In the week ended April 23, strong inflows to Asian funds resumed and reached US$1.5 billion (S$2.1 billion) - close to previous peaks that occurred in the market boom in the second half of last year, according to a Citigroup report.
This is a reversal of fortune from earlier this year, when a record total of US$10.7 billion was pulled out of Asia's stock markets in 10 weeks.
However, the report sounded a note of caution. Fund flows remain volatile and may even turn negative, as has happened in the months of May and June in the past two years.
Hold the bubbly
The idea that the credit crisis has bottomed out may be a hard sell to sceptics, who caution that temporary exuberance may lull people into thinking that the hard times are over.
'After January, everyone thought that was about the end of it. But JPMorgan's buying Bear Stearns in March led to more questions as to how much more exposure there was to the US sub-prime crisis,' said an industry expert, who declined to be named.
Yes, a repeat of the near collapse of US investment bank Bear Stearns may seem unlikely, but Mr Paulson, Mr Gieve and others who were upbeat following the recent turn of events may have been overly optimistic about other lending losses.
Credit cards, and car and business loans, for example, are the next ones in line to suffer from higher default rates stemming from a slowdown, some say.
As for Asian stock markets, they may have registered healthy growth over the past weeks, but there are a few caveats.
Low trading volume remains a concern and suggests that confidence is still fragile and with high levels of uncertainty just beneath the surface. Investors want to believe the good times are back. They are still inclined to err on the side of caution. Once bitten, twice shy, so to speak.
Average daily volume for April was 1.56 billion shares, almost half that of October's average daily volume of 3.06 billion. Low trading volumes also mean that relatively small total trading sums can result in a relatively large percentage change in the market.
There is also a disconnect between blue-chip stocks and second-liners. While investors are buying blue chips, the main constituents of the benchmark STI, it does not mean that money is flowing to small and medium cap players that form the vast majority of listed companies.
The FTSE ST Small Cap Index plunged more than 33 per cent, while the Mid Cap Index was down by more than 18 per cent from six months ago, starkly lower than the main index's 12 per cent fall.
Potential earnings downgrades may also continue to pressure markets, if indeed the US and global economy are slowing down significantly.
The recent US economic growth figures may have showed positive, albeit threadbare, first-quarter growth, but a credit crunch-induced recession is still on the cards, some analysts say.
In the days and weeks ahead, Singapore investors will have to make judgments about whether the worst is indeed over, and whether this is the time to jump into the stock market to pick up what may well prove with hindsight to be bargains.
It's no easy call - and even the experts are divided.
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