Wednesday, December 10, 2008

2009 looking a bit more optimistic

Business Times - 10 Dec 2008

Year-end rally expected but markets could probably re-test the lows early next year, reports GENEVIEVE CUA

EQUITY markets appear to be gearing up for a widely expected year-end rally, but some strategists and analysts expect another downdraft in the first quarter that could retest the lows of this year.

Amid the widespread risk aversion, fund managers are on the sidelines watching closely for early signals that the massive stimulus packages from central banks and governments are beginning to take effect in terms of reflating economies.

Still, the outlook for 2009 appears to have become a tad more optimistic, based on reports from fund management firms and banks, laced, however, with caveats.

UBS strategist David Bianco, for instance, sees 'signs of dawn' for 2009. He has a year-end target of 1300 for the S&P 500, a 43 per cent gain from the current level of 909. 'What strikes us most ... is how certain investors have become in their pessimism for both the near and even the longer term.

'We believe 2009 will bring signs of a dawn in confidence with the first faint light appearing earlier than most investors expect. We see this as an opportunity to buy the leading big-cap growth stocks of the S&P500.'

In the short term, the expectation is growing of a year-end rally. But brace yourselves that it may be relatively short-lived. AMP Capital Investors head of investment strategy Shane Oliver told reporters last week that markets could rise by 30 per cent over the next few weeks.

'You could call it a bear market rally; shares are very oversold. I would say the bear market isn't over. Markets could probably re-test the lows early next year. I think there is still a case to hold off investing until markets bottom.'

Technical analyst David Bensimon is expecting the S&P500 to stage a 'fabulous' recovery from October lows to about 1060 or even higher to 1180 or 1200. 'But it is more likely that when you get to 1060 or 1140, the market will relapse in the first quarter of 2009 because the world economy is slower; there will be bad news and lingering problems in credit markets.

'... And then we could fall all the way down to a new low below 840, ideally at 800. From that point, the market can resume a major uptrend at a larger scale.'

Mr Bensimon studies proportionalities and symmetries in markets, which he sees as a function of 'phi', expressed in the number 1.618 and its inverse 0.618.

He expects the STI to follow a similar pattern. The index could bounce to about 2200 over the next few weeks - about 25 per cent from yesterday's close of 1754. But there is a chance that it could subsequently fall to a low of 1250 in the first quarter.

'We have further gains till Christmas. It's an opportunity to gain good value from a range of stocks ... But we should recognise that we get up to those levels, even if the momentum feels like the worst is past, you have to be cautious because the structure needs to be confirmed. The market must confirm that the worst is past by exceeding certain trigger points.'

He adds: 'That's not to say that the (STI) must fall but it's a potential window that would be invoked by the failure to get past 2,200. Once you get past that, it reduces the need to go down to 1,250. The market needs to confirm or reject, invoke or trigger the next level.'

The coast isn't clear yet, says Fidelity asset allocation director Trevor Greetham, whose balanced funds are as much as 62 per cent invested in cash and government bonds. Speaking to Asian reporters at a conference call yesterday, he says: 'Going into 2009, we're starting from a point where expectations are extremely low. But we should not be asking the question - what could go wrong in 2009. We should be asking - what could go right?

'We're watching closely for signs of a growth recovery. That will be a great opportunity to move aggressively into equity markets ... We hope the recovery will start in 2009.' The signposts that Mr Greetham is watching for include signs that banks are rebuilding their balance sheets and a stabilisation of property markets.

His preference is for large cap US stocks, and at the moment he is defensively positioned in healthcare and consumer stocks in his equity allocation.

AMP's Mr Oliver says his base case scenario is for the US economy to bottom out next year. 'Shares typically move six months ahead of an economic recovery. If you have signs of a recovery in September, shares should bottom in March and gradually rise though the year.'

The worst case scenario is that of a debt deflation spiral. He puts a 5 per cent probability on the prospect of a Great Depression re-run.

Yet another scenario is that of a long drawn US recession up to 2010. 'I'd say the risk of that is 35 per cent. It's a close call, and a risk that you cannot ignore.'

Stocks, he reckons, have priced in the prospect of a recession until mid-2009, but have not fully priced in recession until 2010. Bond markets, however, have already priced in a severe downturn - almost a depression.

'You will see a point where markets will say we can see a recovery coming and start to rally on a more sustained basis. It's too early to say that now.'

In his latest market commentary, Mr Oliver said balanced growth investments - a mixture of stocks, bonds, real estate - should see a 'welcome return to positive returns through 2009 as a whole although the first few months may remain rough'.

'It's time to get out of the bunker mentality. You want to be looking at stocks...and you want to get out of this funk that too many investors have been in for the last three or four months.'

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