Saturday, November 17, 2007

A Disconnect In Equity Markets

Even my aunt has been selling her share holdings!!!

Of late there has been a disconnect in global equity markets. Its like all were at a party dancing and talking, and somebody switched off the electricity. Everyone is mumbling among themselves that they are having such a fine and dandy time, maybe they should continue dancing and partying in the dark and without air-conditioning. Some decided to leave for home and rest cause they know it will take some time before electricity is restored.

Important Market Strategy Pointers

a) The only "safe" equity markets seem to be the US and Japan. Both for differing reasons. The US because of the devalued dollar, if the dollar decline over the last 4 weeks did not happen, the Dow Jones index probably will be trading at 11,000 now. The Nikkei is caught in a quandry with a stronger yen, but its probably the ONLY economy not having to deal with inflationary pressures - hence Japan is not in danger, in fact it may be the best performer for the remainder of 4Q2007.

b) The HK and China markets have been the most robust and active over the last 4 weeks. The huge Petrochina and listings have propelled momentum driven investors. Following the euphoria, the Shanghai and Shenzhen markets are going into a downtime. The markets there failed to maintain above the 150 day trendline despite trying a few times. That took some liquidity players away from the markets. When markets experience a downshift in liquidity, people go looking for reason, and the CPI / inflationary pressures were convenint (and real) excuses. Investors were spooked when the same excuses were repeated day in day out. Those were excuses for the markets there to deflate. To me, the shift down in China markets is more a technical thing rather than a fundamental exorcism. They will need to find their feet before rebuilding, so no hurry to bottom fish in China markets as these momentum driven markets will need to build a bse first before relaunching themselves, it won't be a V-spike back up. Take your time to see the base building.

c) The HK market is probably the BEST long market globally for the next two quarters. The disconnect in the currency owing to its USD peg created a downward pressure on its domestic interest rates (being at a a much higher level than the prevailing rates in the US). The weaker USD automatically boosted competitiveness in HK, a sort of reverse "post Asian financial crisis". Following the 97 crisis, all Asian currencies lost between 30%-50% of their value against the USD. HK kept their peg, and hence huge structural unemployment was hitting HK the worst. Large chunk of industries which can no longer compete with the "expensive peg" were forced out. Many moved to Shenzhen if they could. Now, we are seeing the reverse - the pain before, now the pleasure.

The HK market is now the BEST long market because it is a natural China play, without the frothy valuations. The HK market is also the most liquid Asian place to be. International investors have been converging there almost the same time the USD started to weaken dramatically. Funds have been redirecting capital to HK at the expense of smaller Asian markets - thats very clear over the last few weeks.

d) Smaller Asian bourses will be ignored. Following from the above pointer, smaller Asian bourses will be ignored. Coupled with the fact that there is a global inflationary problem rearing its head now from Argentina to Malaysia to China and Australia. While HK lso has that problem, the interest rate & currency shifts still favour HK equities.

e) Of all Asian bourses, Malaysia seems to be hardest hit over the last 2 months. Though the ringgit is at 3.35-3.39 against the USD. The ringgit actually gained the LEAST against USD when compared to all Asian currencies, including the NZD, AUD, pound and Euro. So, basically after a stellar currency strengthening in 2H2006 and 1Q2007, since then the ringgit has been a huge underperformer. I mean, the ringgit also underperformed the Thai baht over the last 12 months. What gives?

The government and Bank Negara are not saying anything but its a clear reflection on the highish valuations above 1,400 level and a gradual exit of foreign funds to HK. Foreign funds had a good run on the ringgit and the KLCI, and above 1,400 seems a touch iffy going forward. Recent political developments did not help matters. More crucially, foreign investors are a bit fed up with Malaysia's brilliant "power point presentations" on the various "corridors and big concept plans ... and the stigma on subpar execution and lack of transparency. The Port Klang thing probably scared off many real Gulf states big investors. Why does it take so long to push things from concept to reality?? We all know the answers, get the professionals, reward performers, punish the insiders trying to take care of themselves. No follow up on offenders, troublesome issues left on its own with authorities hoping the media and public will eventually forget them, or cause them to focus on some other diversion.

Corporate wise, the DIGI-Time deal left a very sour taste in the bigger picture players. Yes, DIGI climbed but its due to the removal of the uncertainty and that Telenor is still in control. But its so obvious that a company with the track record and success of DIGI cannot get the GGGGGG license on its own, but will only get it after "bailing out" another wasteful and mismanaged company - guys, if we mismanaged less companies, we won't have to rely on these "ingenious" corporate manouveres - and we should have learnt that over the last 15 years..., yes/no???

f) Research houses citing the upcoming elections as a big kicker for the KLCI have a bigger chance to be wrong in light of the above factors cited. Just look at the wonderful active volume in PN17 companies and third rate companies dominating the volume charts over the last few weeks - ah, yes, these are the "election counters" ... really? If those are election counters, its a wonderful reflection on the real economy.


simon_alibaba said...

maybe Ramunia & Eden can help change your fortunes

The Smart Investors said...

I'm especially interested in what you said in para E. I agree with the points you put forward as I myself had written about the Digi-TimedotCom 'alliance'. Its juz silly the stuff the goes around in Malaysia. It doesn't take a brilliant mind to know that they way things are around here isn't good for the economy.