Ze Obama Rally Clarified

Back to the yen rate as a guide for risk aversion, the rate has literally jumped from 91 to be back above 93 in just a couple of days. We are headed in the right direction. The fact that many more still are more than willing to watch from the sidelines will mean there is some more legs to this bear market rally.

This is what I would term as an Obama rally. What we are dealing with is a market that is risk averse and a confidence crisis. The persistent tackling of the crisis by many governments is still not trickling through as banks are hoarding, companies are still guarded and cost cutting. You cannot undo something that is so intangible as risk aversion and confidence lacking with fundamental measures alone. The goodwill surrounding Obama is precisely the catalyst the markets need. You need to fight intangibles with intangibles - as nutty as that sounds, we all know that is what is happening.

My thesis on the oncoming mother of all bull markets will take time to play out. What we are seeing now is just a bear market rally, probably running for the first quarter. I see a flattish market for the second and third quarters. The genuine bull run will probably come about sometime in the fourth quarter. Hence it may be easy to dismiss this bear market rally, it is still a rally albeit a short term bull run at best.

My belief in this bear market rally is based on the fact that markets do tend to overshoot on the downside during a major correction. The bear market rally basically tries to establish a firmer platform, closer to logical valuation levels, bringing the market to a saner levels while waiting for the economy to improve.

Stockmarkets and the real economy normally would not jive together. Stockmarkets are forward discounting models. The carnage over the last 3 months was basically a reflection that the real economy would be in a difficult period for the 8-12 months down the road. So make no mistake that I am implying things are looking better over the next few months. The next few months will still see difficult periods. Markets always bottom 6-12 months before the economy bottoms out. By appreciating this, we may better embrace the notion that a genuine bull run would probably occur towards the final quarter of 2009.

In line with the yen rate surging past 93, investors has added $1bn to emerging market equity funds in the second week of December. The biggest positive jump over the last 5 months. Of course for the whole of 2008, the total amount of fund being pulled out of emerging market funds totaled was a bit more than $40bn. The willingness to put money back to work in December is thus even more significant in light of the risk aversion scenario enveloping all markets over the last 3 months.

p/s photo: Fiona Xie