Current Market Readings & Strategy

Investors in equity globally seem to be in a state of inertia, with the exception for HK and China, I guess. As it stand, on this day October 25, here are my market readings, concerns and strategy:

a) US dollar well underway in a progressive and managed correction since beginning of the year. When a currency goes on a prolonged weaker spell, it automatically boost competitiveness for US companies - that is a necessary evil because the powers to be (Paulson and Bernanke) know that the trade deficit, a slowing economy, correcting property prices and credit crunch could send the US economy into a tailspin.

Since they cannot get the yuan to appreciate faster, they can try to engineer a weaker USD on their own. Central banks everywhere have been reducing their US Treasuries holdings progressively over the last 18 months. Instead, many of these countries have started their own sovereign fund (ala Khazanah and Temasek; Kuwait investment Authority, Abu Dhabi Investment Authority, China's CIC, Norway's Government Pension Fund-Global to name a few) as an excuse to NOT hold bare USD.

When the USD goes lower, the stocks in US markets will gain buying support (perceived relative cheapness with other foreign currencies). If the USD did not weaken the way it did for the last 6 months, I think the Dow would have collapsed to 11,000 easily.

b) A weaker USD will also result in inflationary pressures but that is negated by an overall weaker outlook for the US economy anyway - hence Bernanke will feel comfortable lowering rates further as this will further weaken the USD gradually and managed the US economy into a soft landing. In that sense, the American stock markets are being girded by two thing, a lower interest rates regime and a weakening USD.

c) The Malaysian market seems to be in a standstill. Bear in mind that institutional funds currently really don't see much "value" in holding 100% stocks - in most markets anyway. The one factor sustaining the market at 1,350-1,400 is the outlook for the ringgit.

Currently, the Bursa looks to be an asset play more than anything else, and that's thanks to a more liberal Bank Negara and a fantastic accumulation of reserves. Bearing in mind that for most of the 1990s the ringgit traded around 2.7 against the USD. Ceteris paribus, the Malaysian economy has more structure, better depth and the companies are more progressive and better run. Hence 3.0 against the USD should not dent the competitiveness for Malaysian companies that much (target for 2008).

Having said that, I see current foreign funds holding and buying Malaysian stocks to be persuaded mainly by the ringgit outlook. Because we do not have a deep ringgit bond market, stocks are the next best thing. In addition, Malaysia is one of the very few net beneficiaries of a US$100 per barrel of oil scenario. As long as the outlook is still good for the ringgit, the Bursa could push towards 1,400-1,450 over the next 3 months. Further out, its difficult to say as many things are still fluid - further potential fallout from subprime and the niggling oil prices. Having said that, the best exposure will still be oil & gas, which had a good pause for the last couple of months.

d) As high as the Hang Seng index is now, the outlook is actually the best for HK stocks (inclusive of H-shares). They will be strongly favoured by the weaker USD and lowering of rates by the Fed. Owing to the HKD peg, the HK's monetary policy is basically guided by the Fed's actions. I see 32,000 for the HSI by Chinese New Year. Property and banking stocks to lead from the front.