| | The difference a month makes
Investors who jump on the bandwagon fuelling stock boom
Tuesday • October 2, 2007
Mohammed Hadi
Not that long ago, the global financial system was seizing up, the world's largest economy seemed headed for a recession, investment bankers were said to be circulating "who will you fire" memos, and stock investors weren't sticking around to find out how it would all end.
What a difference a month makes.
A newcomer to Asia's stock markets would find little evidence of the crisis that unfolded in August. In just a few weeks, some major bourses across the region have returned to record territory and Asia's lodestar — the United States market — seems poised to do the same.
All this despite the fact the jitters which sent the S&P/ASX 200 some 13 per cent below current levels, and the Straits Times Index 16 per cent below current levels, for example, haven't been resolved.
"The problem is we're not really done yet," said UBS chief Asian economist Jonathan Anderson. "We haven't seen a real US consumer slowdown yet, and we haven't seen the real impact of mortgage losses on balance sheets."
So what's driving the gains? Interest rate cuts, past and future, by the Federal Reserve, are giving investors the confidence to keep buying stocks.
But by driving shares up so far and so fast, stock investors have put themselves in a difficult, if not yet dangerous, spot.
"The difficulty is you know you've entered an irrational period but you just don't know how long it's going to last and how much the market is going to go up," said Citi Investment Research chief Asia strategist Markus Rosgen.
"You are not buying equities now because these things are cheap, you are not buying a value or an income stream. You are buying momentum." he said.
The problem is, momentum can turn at the drop of a hat.
Still, some likely have few options but to keep buying.
"As a fund manager, if you've got inflows, which many of them do, you've got no choice," Mr Rosgen said.
"They cannot afford to miss performance, they cannot afford to stay sidelined and watch the market rise, so they just close their eyes and throw their assets into this rally," said ABN Amro Private Bank head of Asia equity research Roger Groebli. "It's highly dangerous."
So what is an investor to do?
"What you don't want to do is look at the last four weeks and extrapolate that over the next 12 months," Mr Anderson said. "But that doesn't mean that everything is overpriced either."
"We're at the beginning of what is likely to be a longer period of growth slowdown as well as retrenchment, but the good news is we may not have anther credit lockup like we did."
And there is the view that stock investors are simply looking past the economic trouble ahead and positioning for a recovery on the other side.
Mr Groebli expects the upcoming corporate earnings season will provide a healthy dose of reality. "As an analyst it is a bit difficult to understand how the economic facts can be ignored by the market," he said.
"I would not be surprised if in the second week of October, we see some correction," Mr Groebli added.
Mr Rosgen offers a somewhat darker view, that the gains in stocks are being driven by the least qualified investor: Your mother-in-law.
Okay, not actually your mother-in-law, but retail investors. This crowd, he thinks, motivated by headlines and a desire not to miss out on the profits those headlines trumpet, is pouring money into funds and markets across Asia.
"The retail investor is normally the last to join the party," Mr Rosgen said.
The author is a news editor of market news at Dow Jones Newswires in Asia. He has seven years experience covering stock markets in the US and Asia. |
