Smarter People Own More Stocks

 
Business Times - 26 Jan 2012

Smarter people own more stocks, says study
It finds a direct link between IQ and market participation

( NEW YORK ) The smarter you are, the more stock you probably own, according to researchers who say they found a direct link between IQ and equity market participation.


Intelligence, as measured by tests given to 158,044 Finnish soldiers over 19 years, outweighed income in determining whether someone owns shares and how many companies he invests in. Among draftees scoring highest on the exams, the rate of ownership later in life was 21 percentage points above those who tested lowest, researchers found. The study, published in last month's Journal of Finance, ignored bonds and other investments.

Economists have debated for decades what they call the participation puzzle, trying to explain why more people don't take advantage of the higher returns stocks have historically paid on savings. As few as 51 per cent of American households own them, a 2009 study by the Federal Reserve found. Individual investors have pulled record cash out of US equity mutual funds in the last five years as shares suffered the worst bear market since the 1930s.

'It's what we see anecdotally: higher-IQ investors tend to be more willing to commit financial resources, to put skin in the game,' said Jason Hsu, chief investment officer at Research Affiliates. 'You can generalise a whole literature on this. It seems to suggest that whatever attributes are driving people to not participate in the stock market are related to the cost of processing financial information.'


Mark Grinblatt of the University of California , Los Angeles , Matti Keloharju of Aalto University in Espoo and Helsinki , Finland , and Juhani Linnainmaa at the University of Chicago compared results from intelligence tests given by the Finnish military between 1982 and 2001 to government records showing investments the draftees later held. They found the rate of stock ownership for people with the lowest scores trailed those with the highest even after adjusting for wealth, income, age and profession.

While intelligence influenced things that might naturally increase equity ownership such as wealth and income, the authors said IQ determined who owned the most stocks within those categories as well. Among the 10 per cent of individuals with the highest salary, 'IQ significantly predicts participation' in the stock market, they wrote.

For example, people in the highest-income ranking who scored lowest on the test had a rate of equity market participation that was 15.7 percentage points lower than those with the highest IQ.

'If you look at the significance of IQ related to other factors like income or wealth, certainly it plays a very large role,' Mr Keloharju, a finance professor at Aalto, said. 'It's very difficult to get around that problem, but the results are so strong here. We are playing with lots of different controls and lots of different specifications, and all the time things work really well.'


American economist Harry Markowitz won a Nobel Prize in 1990 for his theory that owning a larger variety of assets tended to maximise returns for a certain amount of risk. The 2009 study by the Fed found that 51.1 per cent of American families own stocks directly or indirectly, and of those who do, 36 per cent have shares in one company.

'It's difficult to justify why someone wouldn't invest in the stock market, knowing what a good deal it has been,' said Mr Linnainmaa, a co-author of the study from the University of Chicago's Booth School of Business. 'The classical explanations for non-participation have been participation costs. It's not just that it may be expensive to buy stocks and mutual funds, but people may not have enough knowledge about them.'

Finnish soldiers were an ideal sample because differences in race, schooling and market access are minimised, the authors said. Draftees were about 20 years old when they were given 120 questions in math, language and logic. The authors divided the results into rankings and compared them with stock ownership records. People who don't serve in the country's military such as women weren't in the sample.

'There is an older literature on whether SAT scores of an investment manager's college helps predict his or her success,' Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller home price index, said in an e-mail. 'This paper has a much better measure of intelligence,' and the 'results are therefore a significant advance', he wrote.

Finnish draftees aren't representative of typical investors, said Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds. IQ is a function of culture and shouldn't be generalised across borders, he said. The authors also failed to discuss whether the test given to the soldiers was a valid way to grade thinking.


Finland's lack of ethnic diversity 'invalidates it for extrapolating it to other cultures', he said. 'That makes it that much more inappropriate to draw inferences from it about other cultures.'

The study's authors said the findings have implications for social policy. Avoiding stock investments cuts returns and may widen income gaps, they said. Individuals scoring lowest on the tests who still owned equities earned as much as 33 basis points, or 0.33 percentage point, a year less than the highest scorers. One way governments could promote better savings might be with plans that let people opt out of stocks, like 401(k) plans, as opposed to opting in, said Mr Keloharju.

'If you look at these people over time, people with higher IQ scores and stocks become wealthier and wealthier at a much faster rate than people with lower IQ scores,' said Mr Linnainmaa. 'It makes them worse off in the long run, even more so than the difference in income.'

Mr Hsu of Research Affiliates said an explanation for why draftees with lower test scores owned less stock is that they found it harder and more expensive to receive financial education. Getting people information on investing at a younger age may help limit the disparity, he said. -- Bloomberg

 

Farmers, Sex Workers, Religious Workers, Soldiers & Students Can Be Trusted Best

This has to be the article of the year, and from China's China Daily no less http://www.chinadaily.com.cn/opinion/2009-08/04/content_8515596.htm :

At a time when shamelessness is pervasive, we are often at loss as to who can be trusted. The five most trustworthy groups, according to a survey by the Research Center of the Xiaokang Magazine, are farmers, religious workers, sex workers, soldiers and students.

A list like this is at the same time surprising and embarrassing. The sex business is illegal and thus underground in this country. The sex workers’ unexpected prominence on this list of honor, based on an online poll of more than 3,000 people, is indeed unusual.

It took the pollsters aback that people like scientists and teachers were ranked way below, and government functionaries (i.e civil servants / politicians), too, scored hardly better. Yet given the constant feed of scandals involving the country’s elite, this is not bad at all. At least they have not slid into the least credible category, which consists of real estate developers, secretaries (this one is weird but I think it has to do with access to the bosses and/or philandering with the bosses), agents (that's right, anyone with a job title that has the word "agent" to it cannot be trusted), entertainers and directors.

Yet given the constant feed of scandals involving the country's elite, this is not bad at all. At least they have not slid into the least credible category, which consists of real estate developers, secretaries, agents, entertainers and directors.

What is more worrisome in the findings is the dramatic drop in government credibility ratings. Which happens in the context of what pollsters term as "mild improvement" in public perception of society's credit conditions.

Drain of credibility

In spite of a continuous, though very slow, tilt to the positive in the public's perception of society's credit records, researchers detected a converse trend when it came to the government.

More than 91 per cent of the respondents admitted that they would take government data with a pinch of salt. The same proportion was 79 per cent in 2007. The steep decline, pollsters concluded, reflects a "quite severe" drain of government credibility, which is obvious in recent "mass incidents". In most recent cases of mass protests, distrust of local authorities turned out to be a powerful amplifier of public indignation.

Multiple factors may be responsible for this. The Xiaokang Magazine Research Center named four - protectionism, unstable policies, dumb decisions, and lack of transparency. All of which has to do with the low-level bureaucracy's lack of respect for public concerns.

This may sound strange, because, geographically, local governments and their staff are closer to local realities; and, politically, they are there to take care of the citizens' day-to-day concerns.

But since local cadres report only to their superiors, and their appointment, promotion and removal has little, or nothing, to do with the community they are supposed to serve, it is only natural that they are preoccupied overwhelmingly with pleasing their bosses. In contrast to the people-friendly image of the central leadership, local cadres, as a collective, share a much less desirable reputation for their indifference to, if not disregard of, citizens.

Even for stability's sake, efforts must be made to restore the governments' credit record. The first step, however, is to put an end to public servants being alienated from public interest.

It is obvious that the survey yielded some angry responses, the general public would vent their inner frustrations indirectly by naming unlikely groups. But I tend to believe that there is more truth to the final verdict. It is the public absolute abhorrence of protectionism (against foreign influence, against the internet access), unstable policies, dumb decisions, and lack of transparency. May I remind the people in power in other Asian countries (hint-hint) to read between the lines as these very same sentiments seem to be applicable in varying degrees for most other Asian countries.

They have highlighted farmers, sex workers, students, soldiers, civil servants, teachers, secretaries, religious workers, scientists, teachers, real estate developers, entertainers and directors (I believe these are board of directors of listed companies and not film directors ok) ... let's add a few more and see where they rank in your country: ruling politicians, opposition politicians, lawyers, judges, police, army, architects, engineers, doctors, economists, remisiers, analysts, mamak stall owners ... etc.. I guess my final word on this is that each profession comes with it certain elements of integrity, expected professionalism and some element of serving the people's needs or rather putting the needs of the nation before yours - when these elements are eroded deliberately or otherwise, you lose the respect and dignity that come with those positions, ... at least the sex worker will do what he/she says he/she will, not overcharge, satisfaction (usually) guaranteed.

In recent years, China has already paid a high price for the prevailing credibility crisis. The annual losses caused by bad debts have reportedly amounted to about 180 billion yuan, and the direct economic losses induced by contract fraud each year is also up to 5.5 billion yuan. Besides, shoddy and fake products contribute to another great loss involving at least 200 billion yuan. Generally, credibility crisis would cost China as much as 600 billion yuan every year. The shortage of credibility is not only seen in the market transactions, but in the officialdom as well. Corruption in any form is about to erode the faith of the general populace in authorities and officials at different levels.

Perhaps, the survey result can just give a restricted description on China’s credibility status, or people can take it with a grain of salt. But it did portray a picture of the spiritual outlook of today’s Chinese society, with money as the overriding motive. It is this that especially deserves attention.

If we were to do a survey in our country, wah-lau-eh ... (I am also sensing the PAPs shaking in their boots..).


p/s photos: Zhang Xin Yu (wanted to write "nice pussy" but thought that might be misinterpreted as rude or offensive)

Can China's Demand Strength Stir Global Demand?

# Signs that extensive government investment and credit extension are contributing to a soft landing for China are giving rise to hopes that Chinese demand might support other emerging economies. Chinese commodity imports, which have surged in volume terms, may be supporting commodity exporters in Latin America and Asia in particular, yet other imports continue to be weak.

What Countries Might Benefit From Chinese Demand?

# Singapore, Taiwan and South Korea have been more dependent on exports to China, while several South East Asian economies like Indonesia, Malaysia, the Philippines and Thailand have lower dependency.
# The composition of Chinese imports has also shifted. Fewer intermediate goods are being sourced for the processing trade given weak demand in the G3, the ultimate recipient of such goods. This shift, if persistent, could hurt traditional exporters in East Asia like South Korea, Taiwan, Singapore and Japan which have tended to be reliant on Chinese demand.
# China’s imports of commodities such as iron ore, coal and crude oil have been extraordinarily strong, increasing speculation that China is building strategic inventories of the most important commodities - boosting Latin America (especially Brazil and Chile) the ASEAN countries and Australia.
# With Latin American trade with China having increased, a Chinese slowdown would have a more significant role than one in the U.S. or the EU.
# While strong US retail sales previously pushed up exports from China, in turn boosting China’s imports, the engine for China’s economic recovery is now likely to be public works spending. Thus, China's imports from Japan may be lower than expected.

Will Chinese Recovery Lead to Import Growth?

# China seems to be sourcing an increased share of parts and intermediate goods domestically. Despite an increase in car sales, auto parts imports and autos have not increased. China has been implementing a Buy China policy for its stimulus projects which might continue to hold down China's goods and services imports.
# Over time, as China's growth shifts to more domestic sources, its demand will boost the rest of Asia. In the short-term, however, a sustainable recovery in developing Asia depends on positive developments in advanced economies. While Chinese government investment has boosted its outlook in the short-term, such efforts may provide little support in 2010 if global demand continues to be weak. A reduction in Chinese exports and export related capex could lead to weaker potential GDP over the next three to five years.
# Overall, Chinese imports continue to seem weaker than would be anticipated during an investment boom. Land purchases may account for a significant share of the reported Fixed asset increase.
# There is a risk that Chinese investment might be contributing to further overcapacities and domestic imbalances. If China (and other export economies) continue to export capacity rather than boost consumption in the face of global demand, it could weaken the prospects of global economic recovery.
# The rebound in China’s exports since early in 2009 has been weaker than in most other Asian countries, suggesting that China has been a major driver in Asian countries’ export recovery.
# China can lead but that will not be enough to save the world or the other Asian economies.
# China generates only 7% of global output, at market prices; moreover, real imports are likely to fall 5% in 2009 . China's net stimulus to the rest of the world will only be around 0.1% of global output.
# A slowdown to 6% or less in China’s growth rate would have significant impact on the already weak global economy.
# Even if it escapes a hard landing and achieves 7-8% growth, subpar GDP growth in China over the next two years at least will weigh on global growth.
# Income increases in East Asian countries and currency appreciation would cause large increases in consumption imports (those that are consumed at home). In 2006, in addition, U.S. consumption goods imports in 2006 equaled $430 billion while East Asian consumption goods imports equaled $220 billion.


p/s photos: Zhang Xin Yu

Pakistan's A Wild Card For The Future

While the media has been focusing on the political and economic upheavals of Pakistan in recent months, one should not be oblivious to the growing danger of Pakistan as a time bomb of sorts. Unless we engage Pakistan in a pragmatic manner, unless we have a 'democratically inclined and transparent' governance in the near future, Pakistan could prove to be "hot and trouble spot" of the future. Just to cite one factor - it has an unwieldy population now of 176m, which is slated to grow to 336m by 2030 and 446m by 2050. For such a large populous nation that is highly fragmented, it sure is a potent mix if Pakistan continues the way it has.

From Nomura strategy piece on Pakistan: In the past few weeks (and most notably in his 4 June major policy speech in Cairo), President Obama has gradually been unveiling a strategy which appears to be aimed at enhancing prospects for peace and stability throughout the Middle East and which seems to involve parallel diplomatic tracks from Bombay to Beirut. That process now looks to be accelerating as we enter a period which some commentators see as pivotal in determining the future of the region as a whole and where we judge stabilising Pakistan to be one of a handful of key objectives. While the Pakistan army’s recent push against the Taliban in the Swat valley has been broadly welcomed, concerns remain about its tactics and the related civilian casualties and refugee problem which may serve to make the authorities in Islamabad even less popular than previously. Much may now depend on the ability of the civil authorities to deliver immediate aid (including significant contributions from international donors) to the civilian population and to follow this up with the sort of long-term economic development which economic experts believe is essential to counter Islamic militancy.

Some recent claims by some experts (including US Secretary of State Hillary Clinton) that the threat posed by the Taliban to the Pakistan state is “existential” (or that it is likely to result in nuclear weapons falling into the hands of Islamic extremists) could be misguided, the army’s efforts in Swat have certainly not neutralised the Taliban’s ability to carry out terrorist attacks throughout Pakistan, which now appears to be its preferred modus operandi. Nevertheless, the Pakistan military has been encouraged by its success in Swat and, in a marked change of approach by the government, is now looking to expand its operations into Taliban-controlled frontier areas of the country, with advanced strikes being launched in mid-June in Waziristan (the main stronghold of the militant group Tehrik-i-Taliban). However, military experts judge that the army is likely to face significantly greater challenges than it did in Swat as militants disperse to other parts of the country (and, possibly, abroad) and as further humanitarian problems come into play as a result of the new offensive.

For all that, Pakistan’s political and economic fragility seems to have been eased – at least temporarily – by renewed US support (and sensitivity over drone missile strikes against suspected Taliban/al Qa’ida targets in the Pakistan/Afghanistan border region) under the overall guidance of Special Envoy Richard Holbrooke who has publicly noted that stabilising Pakistan is essential to the achievement of US/Nato objectives in Afghanistan. Additionally, the US seems to be reconciled to the prospect of former prime minister Nawaz Sharif returning to public office (following a recent high court decision to lift the ban on him) and possibly even driving through constitutional changes which would allow him to run for a third term as prime minister. However, any such move looks likely to deepen the rift between Mr Sharif and President Asif Ali Zardari (who is already widely seen as weakened by recent events in Pakistan) and could lead to renewed political turbulence and weak governance.

One more factor which we believe is likely to come into play with a new Indian government in its renewed efforts to broker a long-term settlement over Kashmir between India and Pakistan. However, it remains to be seen whether a weak Pakistan government could deliver on its side of any agreement, especially if the widely held view is correct that influential elements in Pakistan would prefer the current impasse to continue. There is, therefore, a significant risk in our view that any real progress in negotiations could precipitate further terrorist attacks in India originating from within Pakistan’s borders, with consequent serious implications for
regional security.

• Stock market has gained 20.23% ytd from January to mid-June 2009. Yet it has been one of the worst performers in Asia. But it was fell by 58% in 2008.
• Weak domestic economy, security and political instability and military action in the Swat valley have led to a sell-off by investors. Capital flight has raised the need for additional external assistance to finance defense and reconstruction spending and external debt payments
• Valuations: With stock market rally in early 2009, P/E ratio has improved from the lowest level at 6.31 on January 2, 2009 to 10.89 on April 24 as improving current account balance based on strong remittances and aid from IMF and other countries enhanced market sentiment. However, with several risks to the stock market such as war in the Swat valley, widening trade deficit, portfolio outflows and deteriorating domestic consumption, the P/E ratio has slightly decreased to 9.54, the lowest level in Asia, in mid-June 2009
  
• Outflow of portfolio and other foreign investment: Domestic and foreign investors turned net sellers in FY 2009 and sold US$ 1.1billion during July 2008 to May 2009. They were net buyers in FY 2008 at US$ 87.2billion. Foreign investors have sold shares worth US$ 290million until mid-June in FY 2009
• Outlook for 2009: Easing monetary policy trend and low P/E ratio level relative to other Asian countries might be attractive. But ongoing risks such as political uncertainty, security risk, slowing GDP growth, weak manufacturing sector and tight budget conditions can hurt investor sentiment and lead further outflows of FIIs
• Too much reliance on foreign funds and lack of strong positive stimulus will limit gains in the stock market
• Terrorist attacks and outflows of foreign investment have made the stock market the cheapest in the region
• Progression of ongoing military action and political stability will be key factors for the stock market ahead
  
  Currency:
  
  
• In 2009, Pakistan rupee has been deprecated 2.9% from January to mid-June
  
• In 2008, Pakistan rupee depreciated 13.7% against U.S. dollar. It started to depreciate from March 2008 and sharply declined until October 2008 when IMF announced an assistance package. It was reflecting foreign investor’s concerns about political instability, weak economic conditions and high inflation
• Outlook for currency: Pakistan rupee is expected to remain weak. Sustainability of BOP is challenging amid declining FDI, risk of portfolio outflows and scarce forex reserves. Security risks due to ongoing war against Taliban,impact of contracting exports and slowing remittances on the current account, and weak economic growth will also have a negative impact on Pakistan rupee
  
  Bonds:
  
  
• Pakistan 10-year government bond price in 2009 increased by 26.6% from January 2009 to mid-June and yields decreased by 26.9% until mid-June
• Moderating Inflation has provided central bank room to cut interest rate by 1% in April 2009. Analysts expect central bank to cut interest rate further which will put pressure on bond yields ahead
• Narrowing balance of payments (BOP) deficit due to surplus of current account improved market sentiment. Successful payment of government debt in February 2009 (US$ 500 million Eurobond and US$ 17million on account of interest payment) reduced fears of Pakistan debt repayment capacity
• Ratings: S&P downgraded Pakistan’s credit rating to ‘CCC’, the lowest level in 10 years, from ‘CCC+’ in November 2008 due to deteriorating BOP and delay in securing external assistance. Moody’s rated Pakistan’s debt at ‘B3’ in 2008 due to political risks and falling forex reserves. “Ratings can downgrade further if government does not show secured external assistance”

p/s photos: Zhang Xin Yu

China's Growth Sustainable???

China has led the way by asking its banks to loosen the lending taps, and that has been reflected in the broader economy. China is an important export market for most of the smaller Asian countries. China's stimulus plan is a huge kicker, and the country has begun to stockpile a lot of soft and hard commodities. The black spot is that the easy credit has seen outstanding balances on credit cards more than doubled in the most recent quarter. Can China continue on its merry ways to lead the way to stimulate the rest of the world out of the recession?

• China's economy seems to have re-accelerated from the lows of Q4 2008 and Q1 2009 helped by significant government investment and credit extension. While exports continue to deteriorate, reducing the trade surplus, government investment has surged and consumption influenced by government investment is holding up, suggesting that that the Chinese economy may grow at a faster pace in Q2 and Q3 2009 than the 6% rate at the beginning of the year. However in the absence of new external demand and limitations on domestic demand, there is a risk of developing over capacities.
• In April 2009, many private sector analysts began scaling up 2009 estimates to the 7-8+% range from 6-7% range following the investment and lending surge and suggestions that the Chinese economy might be bottoming out. Now forecasters like the world bank are also doing so, if more cautiously.
• World Bank: very expansionary fiscal and monetary policies have kept the economy growing respectably with the country likely to experience a 7.2% growth rate for all of 2009. But China may not grow in the high double digits until the global economy recovers. Market based investment will lag, and despite resiliency, consumption will slow, meaning that the boost to growth may not carry through to 2010.
• In Q1, China's real GDP growth slowed to 6.1% y/y, the slowest in more than a decade and the seventh consecutive quarter of deceleration. Growth slowed to 6.8% in Q4 2008 from 9% for 2008. Several indicators (investment, stabilizing Manufacturing sector, robust consumption) began to show improvement by March 2009, indicating that the growth may accelerate in Q2-Q4 09 from the very weak pace and near stall of end 2008/early 2009.
• In Q1, Government stimulus boosted investment and consumption holding up despite a fall in real incomes. final consumption, investment and net exports contributed 4.3, 2.0, and -0.2 percentage points to GDP respectively.
• Goldman: More aggressive policy stimulus and stronger domestic demand response than previously expected suggests a growth will be 8.3% (previous estimate 6%) in 2009 and 10.9% in 2010 (9%) policymakers will eventually normalize and shift away from aggressive policy loosening, when they are more assured of a stabilization in domestic unemployment and external demand, giving additional insurance to the growth trajectory.
• The recent flood of credit-fuelled (and government-led) investment has staved off an economic collapse that might have sent unemployment surging and damaged the confidence in China's growth trajectory that is so important to its development prospects. However, it is a huge leap to go from this short-term success to declaring China to be out of trouble and back on the road to double-digit growth.
  
• Morgan Stanley: On a seasonally adjusted basis, the economy experienced a 5% rebound in Q109, after the first qoq contraction (-0.5%) in almost eight years. The aggressive policy stimulus should bring about further recovery in H209, making China among the first to emerge from the global downturn. The recovery should be relatively ‘job-rich’ but ‘profit-deficient’, especially in H109, with those exposed to government-supported capex programs likely benefiting most.
• BNP: In Q1, GDP rebounded as a result of the fiscal stimulus and the most expansionary monetary stance since 1997. Household demand for property and autos is rebounding while the credit surge is boosting fixed asset investment meaning China will achieve GDP growth of 7.7% in 2009.
• Citi: After seasonal adjustment GDP growth actually rebounded to 5.3% annualized in Q1, compared to 0.9% growth in Q408. The aggressive expansion in credit and investment seem to bank on a substantial rebound in final demand, or run the risk of greatly increasing overcapacity.
• HS: Given the prevailing external environment, it would still be a severe challenge for mainland China to achieve its 8% growth target this year and officials need to have exit strategies to prevent credit and money supply from expanding too rapidly to jeopardise future macro-economic stability.
• Even with the stimulus, China’s overall economic growth is likely to decline to around 5% in 2009. Although the country could potentially sustain higher growth, the poor outlook for exports over the next two years severely limits any quick recovery.
  
• ADB: Little evidence that China is rebalancing away from investment-led growth, but it is shifting investment sectors. Risk of entrenched inflation and overheating in some sectors

p/s photos: Zhang Xin Yu

Can Asian Markets Continue To Outperform The Rest

Asian equity markets have outperformed mature markets in 2009 thanks to continuous FII inflows amid diminishing risk-aversion among global investors and some signs of green shoots in Asia. As of June 3 2009, MSCI Asia (ex Japan) gained 35.9% ytd with India and China as the best performers, and Pakistan and Malaysia as the worst performers. Despite impressive improvements, downside risks remain due to bleak corporate earnings outlook, worries over the real economy and revival of any global risk aversion

* 2009 MSCI Asia (ex Japan) performance in USD terms: 35.9% ytd as of June 3, 2009, up 64.6% during March 2-June 3

* Best performers (ytd as of June 3, 2009): India: 55.6% | China: 51.9% | Indonesia: 49.9% | Taiwan: 47.8% | Viet Nam: 45.2% | Sri Lanka: 42.3%

* Worst performers (ytd as of June 3, 2009): Singapore: 34.1% | Philippines: 33.2% | Thailand: 31.9% | Hong Kong: 28.6% | Korea: 22.6% | Malaysia: 21.4% | Pakistan: 17.3%

* In 2009: Asia's equity market (ex Japan) have outperformed mature markets, up 35.9% ytd as of June 3 2009, while the U.S. Dow Jones Industrial Average and the S&P 500 Index fell 3.98% and 0.01% respectively during the same period.

Also, as of end April 2009, market capitalization of Asian Pacific markets ($10.2tn) has come ahead of that of European markets ($9.3tn, including Africa and the Middle East) as Asian stock prices sour at a faster pace than European ones.

* From March 2009: Asian equity markets have witnessed a rally following a surge in U.S. markets and began to benefit from the widening valuation gap on the back of relatively resilient macroeconomic fundamentals. During the March 2- June 3 period, MSCI Asia (ex Japan) rose by 64.6%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 32.9% and 28.3% respectively

* Valuations: Taiwanese shares are the most expensive in the region, 63.7 times reported earnings, followed by Korea (29.2x) and China (28.0x for A-shares). On the other hand, Singapore (12.5x) and Pakistan (9.3x) are cheapest when compared to their regional peers. Given China's aggressive fiscal and monetary policies to stimulate domestic economy, A-shares are valued more than B-shares (20.5x)

* 2008 Review: The peak-to-trough decline in Asian equities in 2008 (more than 70% for some markets) surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took total net redemptions in Jan-Oct 2008 to a record high such that all money that flowed in during 2007 flowed out

* 2009 Outlook: Asia markets will need to offer more attractive growth and valuations than the rest of the world in order to attract fund flows into the region. Asia valuations, however cheap by its own historical standards and cheaper than the U.S., are still more expensive than the 8.6x median of 46 countries (DBS). Nonetheless, given decreasing inflationary pressures and relatively healthy fiscal positions, further fiscal and monetary stimulus policies by Asian govts will able to boost the region's equity markets in H2 2009

* Upsides: AXJ region is now attractively valued, and buying into most of the region's equity markets seems a better bet than bonds amid increasing bond issuance. Continuous FII inflows to Asian equity markets since early March have taken ytd net flows to a positive US$1.9bn in mid-May 2009, the most sustained inflows since November 2007

* Downsides: gloomy earnings forecasts, worries over the U.S. economy, exit by local investors and also FIIs alarmed at greater than expected impact of global slowdown on Asia's growth, exports, fiscal deficits, slowing consumer spending and investment may have negative impacts. Investors may move money to bond markets from equity markets in an anticipation of slower global economy's recovery due to the spread of swine flu. High (external) debt exposure of corporate sector in some countries and risks of real estate correction and bank profitability are additional risks

* Market Integration: there is a noticeable upward trend in the Asia-U.S. correlation with the correlation parameter picking up sharply in H2 2008 (peaking during mid-Oct 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with the US markets

* Government intervention: Several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, directing govt funds to buy shares

p/s photo: Zhang Xin Yu

Where Are We In This Stock Market Rebound? - Deflation Or Reflation Trades

The key historical lesson from past U.S. recessions and severe bear markets is that the stock market tends to bottom out three to six months before the economic contraction reaches its maximum. From the recent economic figures, it is plausible that the U.S. stock market is possibly at a stage where the recession is passing its worst phase. If history is any guide, the stock market should have entered a bottoming process a few weeks back.

Cyclically-sensitive sectors and markets have outperformed as shown in my recent posts, which further signals that reflation trades could soon make a comeback. For instance, emerging markets have continued to outperform the global average. Early cyclicals, such as consumer discretionary and technology sectors, are also beginning to outperform the broad benchmark
equity index.

Finally, it seems that some segments of global financial markets are repositioning themselves for reflation trades. Commodity currencies have experienced a sharp rebound in tandem with the broad commodity price index as well as the crude oil market. In recent history, these moves have been a harbinger of a more broad-based return of the reflation trades.

The key point here is that the decline in stock prices has been the worst since the Great Depression, and has gone a long way to discounting a severe economic recession and financial fallout. Of course, at previous major bear market lows, valuations have been much better than today’s level so it is open to debate whether the worst is discounted – but we should not ignore that reflation this time around is much bigger than ever before, so P/E multiples may not need to go significantly lower than where they stand today. Monetary authorities and governments around the world are getting increasingly aggressive in combating the financial and economic hurricane, all of which means that deflation trades are very late.

The risk-reward tradeoff suggests that going forward, deflation trades are unlikely to reward investors and they should raise their exposure to stocks at the expense of bonds. All that points to a more stable market DESPITE the recent run up. It looks more solid than what I thought it was a few weeks back. A few weeks back, I tended to think it was a bull run with a chance for a 10% correction. But I have shied away from that conclusion, I do think there will be bouts of soft selling which will then attract fresh funds to reposition before launching up the next level. I see the Dow testing 9,300 sometime this year and holding. For KLCI I think 1,140 is possible.


p/s photos: Zhang Xin Yu