Cautious on the outlook (ext: Edge)

. . . However, we are cautious on the outlook for equities. Whilst the global economy is undoubtedly on the mend, there remains a high degree of uncertainty as to the pace and sustainability of the recovery.
Shares on Bursa Malaysia are trading near or beyond the average fair values tagged by market analysts for 2010, in short, already fully pricing in next year’s earnings recovery. That could limit further upside gains for the broader market from hereon. To be sure, there is still value to be had in stocks but investors should select wisely and tread cautiously.


It also bears to note that economists are, on average, less bullish than market analysts when it comes to the strength of the recovery. There is a big gap between current forecasts for economic growth and corporate earnings growth for 2010.

The strong rebound in the second quarter of 2009 to the third quarter of 2009 (2Q09-3Q09) is being driven by massive government pump-priming efforts, including cash handouts, tax benefits and rebate programmes. But growing government fiscal deficits may limit the quantum of further stimulus measures, if required.

Industrial production was also bolstered by inventory replenishment after the sudden and sharp contraction in 4Q08-1Q09. The boost from stimulus packages and stock rebuilding will fade over the next year after which private spending has to pick up the slack. But that may not happen as smoothly.

Private spending, including business investment and consumer spending, has thus far shown no sign of improvement — hampered by excess capacity and rising unemployment rates around the world.

Jobless rate in the US rose to 9.7% in August, the highest since 1983, and is expected to top 10% by 2010. The US consumer is saving more and spending less to bring down record high debt levels. Consumer credit, which fuelled the last boom, is on the decline, exacerbated by more stringent bank lending requirements. Credit is still tight and most banks have not even begun to tackle their massive portfolio of bad loans.

At the same time, there are also concerns over the creation of new asset bubbles. At least part of the massive infusion of liquidity into the global financial system is believed to have gone into the equity, commodity and property markets, possibly driving prices beyond their underlying fundamentals.

For instance, crude oil prices have strengthened to above US$70 (RM244.30) per barrel — more than double from its low in February 2009 — despite falling consumption. Global oil demand is forecasted to shrink 2.2% this year before recovering some lost ground in 2010.

Indeed, some investors have started hedging their bets by buying gold, a traditional safe haven. Gold prices surged briefly past the US$1,000 an ounce mark last week, for the first time since February 2009, on worries of a weakening greenback and possible inflation.