Is the worst over for regional equities?
LAST week, Singapore's benchmark Straits Times Index enjoyed another week of gains.
It rose 61 points, or 2 per cent, to 3,099.93, joining other regional bourses in recovering from a recent wobble stirred by Wall Street's weakness.
This was a welcome change from the start of the year, when investors were shaken up over perceived stumbles in the United States and Chinese economies.
They had also been spooked by the US central bank's determination to stick to its schedule in turning off the liquidity that it had been supplying to the global financial system.
The big question now is whether last week's recovery in stock prices is sustainable.
While blue chips were up for the second straight week, many traders still perceived the recovery as a dead cat bounce - a mere temporary rebound in a prolonged decline - because of the thin trading volumes.
The fund flow data furnished by Citi Investment Research also suggests that foreign fund managers are still trimming their exposure to emerging market equities, albeit at a slower pace.
Last week, these sophisticated investors sold off another US$1.6 billion (S$2 billion) of emerging market funds.
This marked the 17th week in which they pared their exposure to emerging markets, as they retreated back to their home markets in the US and Europe.
Asian funds saw US$894 million in outflows, while emerging Asia and Latin American funds had outflows of US$250 million and US$227 million respectively, said Citi Investment Research.
China funds had a third week of outflows, at US$456 million.
However, it appears that while the overall trend is still bearish for emerging markets, fund managers are picking up some regional equities again.
Last week, they bought US$824 million of Taiwan equities and US$258 million of Indonesian equities.
Thus, some market strategists have expressed hope that the worst may be over for regional equities for now.
Bank of America Merrill Lynch's latest fund manager survey, which was released last week, showed that a net 43 per cent of the respondents to its survey believed that emerging market equities are undervalued.
This led the bank to believe "a contrarian rally may be approaching".
But in order for emerging markets to become attractive to investors again, it said, there must be an end to emerging market capital flight and a peaking in US bond yields.
Bank of America Merrill Lynch also noted that while five years ago, emerging market equities were regarded as "safe", now they are considered as the biggest risk to financial market stability.
And reflecting their caution on investing in equities, fund managers were holding more cash.
This formed 4.8 per cent of their assets last month, compared with 4.5 per cent in the previous month.
On the flip side, Bank of America Merrill Lynch noted that a record 69 per cent of its respondents were frustrated that companies were under-investing.
"Until companies reduce high cash levels, investors will run high cash levels and global equity corrections will be extremely limited," it added.
For investors tracking the local market, the biggest disappointment was that on Friday, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said it was too early to relax the Government's property market cooling measures, despite calls by industry players for some relief as housing prices softened.
Property counters were already among the stocks worst hit by the sell-off last month, and may well suffer another bout of weakness now as traders trim their exposure to the real estate sector.