Is it time to trade or invest when the market is at an all-time high?

Is it time to trade or invest when the market is at an all-time high?
By FINTAN NG

IS this the time to enter the equity markets or is this the time to get out? This is the question that is always asked when equity markets are on a roll or when markets are rallying.

For the cautious types, this is the time to sell or to wait but risk-takers and optimists feel that markets can still go higher despite the fact that much of the performance of stock markets in emerging Asia, analysts point out, is largely due to the liquidity sloshing around in the system chasing higher returns that may not necessarily be based on fundamentals.

Cooler heads will point to the current disconnect between the macroeconomic outlook and the equity markets.

Long-term and cautious investors question how long will the “party” brought on by the funds entering emerging market equities will last.

Already World Bank managing director Sri Mulyani Indrawati has warned that quantitative easing may potentially create bubbles in assets such as equities, currencies and property.

She says Asian governments may need to turn to capital controls although these curbs should be targeted, temporary and tailored to address specific problems.

Morgan Stanley Research analyst Gerard Minack says in a Nov 5 report that markets are disconnecting from the macroeconomic fundamentals and the US Federal Reserve’s RM600bil quantitative easing programme may not be enough to significantly reduce recession risk, which is concentrated in the next couple of quarters.

“The other issue, however, is how long the markets can run on the quantitative easing without confirmation from macro data that things are improving,” he asks.

Minack says quantitative easing has pushed developed-world equities through the ranges seen over the past year and will not be able to defy the macro outlook for long.

“Before I turn cautious, however, I want to see that risk assets are starting to respond in a more normal fashion to incoming macro news,” he says, adding that the reaction to news have been reverse to what usually happens.

“It’ll be important when markets return to a good-news-is-good/bad-is-bad behavior,” Minack notes.

He says although the rest of the world outside the developed economies look fine with purchasing manager sentiment looking solid and with little risk of another global recession, there are hints of slowdown in Asia.

“For countries that produce monthly purchasing manager indices (PMIs), the four weakest – all below 50 – are in Asia: South Korea, Japan, Taiwan and Australia,” Minack says, although China, India and Indonesia remain strong. A reading below 50 for the PMI gauge denotes a contraction.

Although the pace of growth has slowed in the Asian emerging markets and will continue to slow at least into the first-half of 2011, stock markets have continued to surge.

The FBM KLCI, for example, has risen nearly 20% from a year ago and is now at historical highs.

If the market always anticipates the economy, than this time around investors may have gotten it wrong as growth next year, at least by Government estimates, will be lower at 6% compared to the expected 7% for 2010.

However, stock-market movements cannot rely on the amount of liquidity alone going forward, says Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias in an email reply to StarBizweek.

“Fundamental factors will have to support the overall trend. Should there be a moderation in global economic growth following the persistent weaknesses in major economies, regional markets (including Malaysia) will experience some degree of correction,” he points out.

Nor Zahidi says Asian economies, despite seeing more intra-regional trade these days, still have to rely on the G3 (United States, European Union and Japan) economies as the final destinations of their products.

He says right now, the rising stock market hints at the trend of economic growth in the next three to six months and is reflective of investors’ confidence in efforts by the Government over the past year to enhance efficiency thruogh the Government Transformation Programme and the Economic Transformation Programme.

“These have, to some extent, given positive vibes to foreign investors who, in turn, have increased their exposure to the Malaysian market,” Nor Zahidi says.

He adds that 0ther positive attributes of the Malaysian economy include the relatively stable growth prospects in the next few years following an expected steady improvement in private investment as well as resilient private consumption.

Nor Zahidi says among the signs of improving investor sentiment was the 9.4% surge in total investment in the first-half of the year compared to same period last year.

“The bond market is accordingly benefiting from investors who prefer debt instruments in Asian economies rather than those of the developed countries. This is reflected in the foreign holdings of Malaysian Government Securities which surged to 26.8% in September,” he adds.

Meanwhile, the World Bank which recently released this year’s Malaysia Economic Monitor, expects the country to achieve growth of 4.8% next year compared to 7.4% this year.

In the developed economies, despite risks of another downturn and sovereign debt concerns, markets have also risen with the S&P 500 and the Stoxx Europe 600 Index at its highest since September 2008.

For those who say that markets, at least in this part of the world, have some way to go before tanking, the arguments are that fundamentals such as positive demographics, youthful populations, urbanisation and rising middle classes will continue to drive domestic demand.

This is the view of HwangDBS Investment Management Bhd chief investment officer David Ng, who says conditions are ripe for the local bourse to experience a bullrun similar to what happened in the nineties.

Furthermore, these optimists argue that opportunities abound in the emerging markets of Asia, where governments have embarked on large infrastructure projects to boost their economies and ensure long-term growth.

They counter that as the outlook is still gloomy and with low household consumption in the developed economies, where else better to place their money than in the emerging economies?

Their views are backed by the weak US dollar, brought about by low interest rates and now facing more headwinds from the Fed’s programme to purchase US Treasury bills over an 8-month period.

The jobs outlook seems to be in favour of these group of investors too as unemployment in the United States stands at 9.6% while in the 16-member European Union, it now stands at 10.1%.

The data further supports these optimists, who point to the fact that deep public-sector spending cuts in the European Union over the next few years may crimp demand.

fr:biz.thestar.com.my/news/story.asp?file=/2010/11/13/business/7397848&sec=business