Just three months ago, the general consensus about the global economy and the equity markets was that the worse was yet to come.

The atmosphere was gloomy as fears grew that the Great Depression of the 1930s might revisit the world. The slew of pay cuts, retrenchments and factories shutting down added to the pessimism.

Interestingly, the bull, which many seem to have forgotten, considering that it has been missing for a while, seems to be charging into the stock markets worldwide. The major indices have chalked up more than 10% gains since March. Given such strong rallies, it seems as though the “super bear” which has ruled the market since October last year has left suddenly.

“Economic data, especially in the US, seems to indicate that we are no longer in a free fall. We can at least say the pace of deterioration has slowed down, which means things are not getting worse,” Gerald Ambrose, Aberden Asset Management Sdn Bhd’s managing director, tells The Edge.

After the long absence of good news, the feel-good factor is creeping back into the market and investors are beginning to see light at the end of the tunnel.

Some, in fact, saw it much earlier and are staying firm on the view.

For instance, Tan Teng Boo, managing director of Capital Dynamics Asset Management Sdn Bhd, remained optimistic that the world would not go into a tailspin even in the darkest hour and is now even more certain about it.

“It is the beginning of a bull run. It is time to buy now. The pessimism has been irrational,” say Tan.

He believes the world is in recession but does not think it will slip into a depression. “It is very unlikely that we will be in a depression. All the measures that have been put in place by the US have started to show results.” 

He points out that consumer spending in the US has shown signs of recovery as reflected in the rise in personal consumption expenditure for two consecutive months since January. Meanwhile, the ISM Purchasing Manager Index (PMI) has improved for the third straight month to 36.3% in March from 35.6% in January.

Consumer spending in the US is being monitored closely because of its significance to the growth of the world’s largest economy. It accounts for 70% of US economic activity.

According to a poll conducted by Thomas Reuters, half of the 31 retailers reported better-than-anticipated same store sales in March. This is seen as an indicator of American consumers starting to loosen the purse strings after they had tightened them months ago. This fuels hope that economic recovery is on the way.

In addition, the Obama administration’s swift action to adopt a US$787 billion stimulus package to rejuvenate the ailing economy and clean up the toxic assets in the US banking system will stem an economic fallout.

“I am more optimistic,” Lim Chee Seng, RHB Research’s strategist and head of research, tells The Edge. Lim concurs with Tan’s view that the bull run has already started although negative news on the world economy might still surface.

He opines that the US economy has yet to bottom out, and anticipates that it will continue to contract in 1H2009 and start improving in 2H2009. “We expect a meaningful recovery in 1Q2010,” Lim adds.

“We invest in the future. Stock markets always run ahead of the fundamentals by at least three to six months. There is already an awful amount of pessimism. But I think all this has already been factored into the prices,” he comments.

Lim observes that there is already a shift in favour of equity. “Investors are positioning beyond the expectation of a sharp fall in corporate earnings and negative news,” he says. “The market can still be volatile but it is going to be an uptrend. We will see higher lows instead of lower lows.”

On the domestic front, Lim believes that the uncertainties on the political scene will subside after the change of guards in the country’s leadership last week.

He says the local stock market may lag behind the regional bourses in terms of pace of recovery. But that doesn’t mean investors should remain on the sidelines. “It is just that stock picking is important. You have to pick the right stock (in order to ride the recovery wave).”

Is the worst really behind us?
Certainly, there are many who beg to differ, doubting the sustainability of the current upward momentum. Looking at the movement of the Dow Jones Industrial Average (DJIA) since the beginning of 2008, some say Wall Street is probably experiencing its third bear-market rally. The past two rallies in March and December last year dragged the index down to new lows. If the trend is repeated by the bears as expected, it could mean the likelihood of the DJIA sinking below 6,000 points.

During the Great Depression, the DJIA plunged 60% in 1931 and the downward spiral continued the following year, with the index sliding 46% before the market stabilised. It took the DJIA nearly six years to recover to its level in 1931.

When it comes to analysing economic data, it is a case of whether the glass is half full or half empty. A fund manager points out that although US housing starts went up 22% month on month in February, they actually slid over 40% year on year. “Would you consider that a sign of recovery, with things still way below last year’s level?” the fund manager asks.

Lim Suet Ling, OSK-UOB Asset Management Sdn Bhd’s CEO, is less upbeat about the current rally. “I don’t think this is the start of a bull run. This is just a bear market rally mainly because the world economy has not bottomed out yet.”

Lim cautions that corporate earnings visibility is still low. She agrees that the economic data shows that the economy is stabilising. “But when things have stabilised and formed a base, it doesn’t mean that they would rebound immediately from the trough.”

In her view, stocks are not that cheap now given that earnings visibility is still poor. “There isn’t an urgent need to chase stocks if you are not in the market yet,” she comments, adding that investors should buy on dips when the market pulls back.

Is this a bear trap? Is it too late to enter the market? Did I miss the boat? These are some of the questions ringing in the ears of investors.

But with two diverging views on the current rally, even fund managers are hesitant to predict the strength of the current bullish sentiments.

“The risk of being too bullish or too bearish is actually bigger than saying I don’t know in this market,” Ambrose quips when asked how high the KLCI will go during the rally.

At this juncture, the markets are full of noises that make it difficult for investors to strategise their moves. Probably, risk tolerance will be a major consideration on top of your holding power and discipline.

This week, more economic data will be coming out of the US. Indicators such as housing starts, retail sales, mortage applications, capacity utilisation, jobless claims and industrial production numbers for March will be out. The data for February was encouraging. If this continues, the market will get a boost and convert the pessimist.


This article appeared in the Cover Story page, The Edge Malaysia, Issue 750, April 13-19, 2009.