Sustained rally or dead cat bounce?

BILLION DOLLAR QUESTION: Investors check stock information at a brokerage in Shanghai. It may be hard to tell where stock prices in Asia will head from here, as major central banks look to end their ultra-loose monetary policies.


    Feb 17, 2014

    Sustained rally or dead cat bounce?

    MARKETS across the region regained their poise last week, as the wobble in stock prices triggered by fears over the health of the United States and Chinese economies, as well as the US central bank's decision to press ahead with monetary tightening, subsided.

    But one big question remains: Is the rally experienced by Asian markets a dead cat bounce which will result in share prices falling once more, after swinging higher?

    After all, even in a bear market, stock prices do not fall in a straight line. Instead, stocks are likely to experience long periods of decline which get punctuated by occasional price upswings.

    Fund-flow data furnished by Citi Investment Research shows that foreign fund managers continued to be net sellers in Asia, even though they resumed their purchases in other markets last week. The only saving grace seems to be that their selling efforts in the region appear to be slackening.

    Last week, they poured US$7.2 billion (S$9 billion) into funds investing in US equities. This enabled the widely watched S&P 500 Index to gain 2.3 per cent over the week, leaving it just 0.5 per cent below the record high it struck last month.

    But they took US$947 million out of Asian equity funds last week. Despite their pullout, however, there were enough bargain hunters to enable the Hang Seng in Hong Kong to gain 3.06 per cent and the Straits Times Index here to rise by 0.85 per cent.

    Even Japan's Nikkei-225 Index experienced a 1.85 per cent rise last week, albeit on low turnover, as it pared its loss for this year to 12.14 per cent.

    Still, it may be difficult to predict where stock prices in Asia will head from here, as the biggest unknown factor is the path charted by major central banks such as the US Federal Reserve, as they embark on the hazardous and lengthy exit from the ultra-loose monetary policies which they have been pursuing.

    Last year, the Fed set 6.5 per cent as the threshold that the US jobless rate has to fall to, before it contemplates raising interest rates.

    But as some market pundits have observed, new Fed chief Janet Yellen may find it difficult to keep faith with her predecessor's undertaking, as she has stressed to US lawmakers the importance of considering more than the unemployment rate when evaluating US labour market conditions.

    This was in view of the fact that the jobless rate in the US is falling faster than expected, due to record numbers of people dropping out of the workforce completely, and not even attempting to find work.

    In our own backyard, the big concern is how successful China will be in its efforts to shrink its credit bubble, following a decision late last month to keep a three billion yuan (S$620 million) investment product distributed by its largest bank, ICBC, from defaulting.

    With roughly four trillion yuan in similar products maturing this year, amid tight monetary conditions, the fear is that more repayment problems may surface if the borrowers are unable to roll over their debts.

    But for the three Singapore lenders which make up about 40 per cent of the STI, all these worries about monetary tightening and emerging market woes are just talk - all three lenders reported strong numbers when they released their fourth-quarter results on Friday.

    The only cloud on the horizon was the stark warning by DBS Bank chief executive Piyush Gupta that home prices might fall by 10 per cent to 15 per cent this year.

    Well, investors may have already taken such a possibility in their stride.

    During the recent stock market wobble, property counters dominated the list of stocks which hit a 52-week low. They included well-known names such as Keppel Land, City Developments and Wing Tai Holdings.