Mar 17, 2014

    China and Ukraine to dominate trading

    UNCERTAINTIES over China's economic outlook and concerns over the political tension in Ukraine are likely to keep the lid on any gains that may be stirred up this week by the recent merger and acquisition deals happening on the local bourse.

    Last week, Temasek Holdings led a consortium to bid for the rest of Olam International in a deal that values the agri-business trader at a princely $5.45 billion.

    In the past, such a huge deal would have stirred up plenty of interest in other potential takeover targets, especially since it is taking place in the wake of other buyout efforts.

    Recently, for example, United Industrial Corporation made an offer to take Singapore Land private.

    But as the news of Temasek's bid broke on Friday, traders refused to be lured from the sidelines and trading stayed lacklustre.

    Data from Citi Investment Research shows that about US$2.5 billion (S$3.2 billion) was withdrawn from funds investing in emerging markets last week.

    This marks the 20th week in which foreign fund managers pared down their exposure to emerging market stocks.

    It said: "Asian funds had US$1.4 billion of outflow while China funds saw an outflow for the sixth week as US$878 million was taken out."

    There is also a flight to safety as investors' appetite for fixed-income assets grew - there was an inflow of US$3.5 billion into bond funds.

    Chief among investors' worries is the string of weak economic figures and worrying news coming out of China, which have heightened concerns about a growth slowdown.

    Take the latest loan default in China. Although it involves a fairly small company - Haixin Steel - it belies the Achilles' heel in the Chinese banking system.

    Chinese lenders have been giving steel-makers plenty of cheap loans to expand capacity beyond market demand.

    Access to such loans had been keeping much of the sector afloat.

    Now, the Chinese government's efforts to curb credit growth have forced a shakeout of the weaker steel-makers and that, in turn, is causing Chinese lenders to feel the jitters.

    The upshot is the wild price swings encountered in the commodities market, with industrial metals such as iron ore and copper coming under heavy selling pressure.

    Copper, for example, lost 4.7 per cent last week as it fell to its lowest level in four years on fears that Beijing's attempts to rein in credit might trigger widespread liquidation of copper inventories, which are used as a form of collateral by Chinese firms for trade financing loans.

    Then there is the escalating tension in Ukraine, which has caused Russian firms to pull billions out of Western banks, fearful that any sanctions imposed by the United States might cause a freeze on their assets.

    This was in the wake of a referendum over the weekend in Crimea, a small peninsula abutting the Black Sea belonging to Ukraine, on whether to join Russia - the latest twist in an international political crisis triggered by the recent toppling of Ukraine's Moscow-backed president.

    Given the worries over the various emerging markets, it is not surprising to find investors sidelined, as they wait for a clearer picture to emerge.

    Meanwhile, regional lenders may be expected to bear the brunt of any sell-off, given the collateral fallout that may hurt financial institutions due to loan defaults in China and the billions pulled out by Russian firms.

    However, hopes abound that despite the greater volatility encountered in stock prices, the broad market trend will stay positive, as companies may report better earnings on the back of improved economic growth.

    For dealers suffering a big drop in their business as trading activities slow down considerably, the key is to have staying power until better times arrive.

    "The lacklustre market condition is like the current dry-weather spell. It will rain eventually. The question is when," said dealer Jack Choo.