Enter the mature bull - and higher volatility
But there's still room for equity prices to go higher
By TEH HOOI LING
SENIOR CORRESPONDENT
Email this article
Print article
Feedback
STOCK investors need pretty strong nerves to stay invested in the market of late. It is not uncommon to see the Straits Times Index (STI) open up 50 points but end the day at -50. And a 100-point plunge in one day may be followed by a similar jump the next.
This is a sign that investors are jittery. On the one hand, equities around the world have done spectacularly well in the last four-and-a-half years. During that time, the STI has more than tripled. That's a lot of profits to lock up. On the other hand, there are just as many compelling reasons to hold on to, as there are to quit, equities now.
The economic force that the emergence of China and India unleashes into the world, as hundreds of millions of new consumers flood the marketplace in the next few years or decades, is unimaginable. Meanwhile, the wealth accumulated thus far in these two countries is scouring the world for viable investments. That liquidity flow will continue to support asset prices globally.
On the flipside, the economy in the United States - still the world's biggest market today - is slowing down. The impact of the sub-prime mortgage crisis on consumer spending is still a big question mark. If US consumers tighten their purse-strings as they see their home prices fall, then many of the exporters around the world will be hit by declining profits. Demand from Asia may not yet be enough to make up for the shortfall. But increasingly, the market wisdom is that problems in the US are not severe enough to cause a recession there, and hence the impact on the global economy may not be as great as initially feared.
Still, the increased volatility is symptomatic of a maturing bull market.
Four-phase cycle
In a report this month, Citigroup Global Markets' equity research said that the global equity bull market that began in March 2003 is maturing, but not finished yet. We are now into the third phase of a four-phase market cycle, according to Citi.
The first phase is when the economy is emerging from a recession. It follows the bottom of the credit bear market. Spreads fall sharply as companies repair their balance sheets, often through deeply discounted share issues. This, along with continued pressure on profits, keeps equity prices falling.
Phase two begins as profitability turns and equity prices start to rally. Credit spreads fall even further as corporate cashflows rise strongly. This is an immature equity bull market. In the current cycle, this phase began in March 2003.
The third phase is when the credit bull market comes to an end. Spreads start to rise as investor appetite for leverage wanes. The equity market decouples from credit and continues to rise. 'We think that the market is entering this phase now. This is the mature equity bull market,' says Citi.
And after that, the market enters the bear phase, when equity and credit prices are falling together. This is usually associated with falling profits and worsening balance sheets. Insolvencies plague the credit market, and profit warnings plague the equity market. At this stage of the market, a defensive strategy is most appropriate - cash and government bonds are the best-performing asset classes.
Citi tries to identify the four phases in the last 20 years' market cycles. It found that the different phases are not equal in length. For credit market, phase one tends to be fast and furious. It lasted 18 months in 1991-92 and just five months in 2002-03. But the returns are significant - spreads collapsed by 29 basis points (bp) per month in 1991-92 and 50 bp per month in 2001-03.
Phase two tends to be longer. It lasted five years in the mid-1990s and just over four years in the early 2000s. Spreads fell by a more leisurely 3 bp a month in 1992-93 and 10 bp a month in 2001-03.
The credit bear market begins in phase three. Spreads rose by around 300 bp in 1988 and 1997-00. This time round, they have already risen by 120 bp since spreads bottomed on June 12, 2007.
Spreads keep rising in phase four as defaults increase and corporate profits fall. This tends to be the most painful period for credit investors, notes Citi. It lasted 30 months back in 2000-02.
While the credit investor makes money in phases one and two, an equity investor makes money in phases two and three. In phase three in 1988-90, global equities rose by 38 per cent despite a 317 bp increase in credit spreads. And in phase three in 1997-2000, equities rose by 57 per cent despite a 282 bp increase in credit spreads.
While equities perform well in phases two and three, phase two - the immature bull - lasts longer and is less volatile.
For example, the US Vix measure of implied volatility has averaged 15 in phase two and 22 in phase three. This is a key difference between a mature bull and an immature bull. 'The returns may be as good, but the quality of those returns is worse,' says Citi. 'Sharpe ratios and risk-adjusted returns deteriorate.' As for now, the Vix is 16 - having peaked at 30 in July. 'But we would expect the overall trend to be rising as the mature bull market develops.'
This suggests that while it is still right to be overweight equities in phase three, the overweight should not be as great as during phase two. And a leveraged strategy is less appropriate as volatility rises.
Among the sectors, Citi's analysis showed that travel and leisure, retail, media and industrial goods and services performed well in phase three of the last two cycles. Banks underperformed during this phase as credit spreads rose.
Meanwhile, the mature bull phases are also when major bubbles develop. In 1990, Japan rose to a 60 times trailing earnings multiple and accounted for 50 per cent of total global market cap. It now accounts for only 10 per cent. In 2000, technology, media and telecoms (TMT) also rose to 60 times PE and accounted for 40 per cent of global market cap. It now makes up 20 per cent of global market cap.
'These bubbles usually build on a theme that has already been performing strongly through phase two. Into phase three, easier monetary policy and rising capital inflows from other asset classes provide the fuel to drive prices to spectacular and ultimately unsustainable levels. This then bursts and proves a major downward force on global equities in the bear phase four,' says Citi.
Next equity bubble
The next equity bubble could be building in emerging market or commodity plays. 'These are stocks or markets which are perceived to be most positively exposed to a robust global economy, irrespective of the US slowdown.'
However, the Asia ex-Japan index, at 19 times PE, although a premium to the MSCI World's PE of 16 times, is still a long way off the 50-plus times multiple more typical of the peak in these mature bull market bubbles.
'The key point is that if the bubble for this cycle is to be created in the global growth trade, and the Asia Pacific/emerging markets indices in particular, then they could have a lot further to go.
'Investors who try to fight the current re-rating of these markets could suffer the same fate as those who tried to fight Japan in the 1980s and TMT in the 1990s. Probably the right call, but the timing could hit you,' says Citi.
According to Citi, signs of the end of the mature bull run include rate hikes and extended equity valuations. Both don't apply now.
So while the recent dislocation in financial markets suggests the end of the credit bull market, it is not the end of the equity bull market. We are entering the mature bull phase, which will still provide decent returns for equity investors. However, it is becoming increasingly unstable. This is the phase where a major speculative bubble typically develops in the global equity market. Perhaps this time round, it is in emerging markets and commodity plays. However investors should remember that these bubbles can go a lot further than anybody expects - it can prove fatal to bet against them too early, cautions Citi.
Saturday, October 27, 2007
Week of wild swings in market; warrants thrive - SGX
SGX Market Commentary
Published October 27, 2007
Week of wild swings in market; warrants thrive
By R SIVANITHY
SENIOR CORRESPONDENT
ANOTHER roller-coaster week - thanks to wild swings on Wall Street and Hong Kong - yesterday ended with the Straits Times Index (STI) surging 64.41 points to 3,771.55, thanks mainly to a large push on the banks.
The main trading strategy? Ride the momentum, whichever way it went.
Over the five days the index gained 24 points, but throughout the week performances were not wholly convincing, notwithstanding what the index might suggest.
On Monday, for example, the index plunged 105 points in response to a severe Oct 19 sell-off on Wall Street that briefly rekindled memories of Oct 19, 1987 - or Black Monday, as it became known.
Wall Street's avoidance of a follow-up plunge was instrumental in helping to stabilise prices around the world, and the seeming ease with which it took news of a huge Merrill Lynch sub-prime-related write-off in its stride also helped restore confidence.
In all sessions though, it was necessary to keep an eye firmly on Hong Kong's Hang Seng Index and/or the December futures contract on the Dow Jones Industrial Average. Sudden twitches in either or both had an immediate impact here and 100-point moves in the STI were common.
Volatility increased sharply, especially with the Hang Seng Index regularly undergoing 1,000-point movements in a single trading session.
Program trading, short-selling and short-covering were all very much in evidence throughout, the targets being mainly the large, liquid blue chips. The main trading strategy? Ride the momentum, whichever way it went.
Perhaps the single most interesting feature was the surge of interest in structured warrants. Yesterday's business in the instrument was $208 million, roughly 6 per cent of the $3.5 billion that was traded - a marked increase from the 4 per cent average for the first nine months of this year. Every day, warrants featured prominently in not just the top percentage gainers list but also absolute gainers. These were mainly warrants on the STI and Hang Seng.
Other than warrants, shipping and shipyards provided fertile hunting opportunities for investors. In particular, China shipyard Cosco Corp continued its upward climb following a mid-week announcement of yet more contracts that led to a fresh slew of broker 'buy' reports.
DBS Vickers, for instance, on Thursday said it has raised its target price for Cosco to $9.00 based on 12 times bulk shipping earnings, a 50 per cent rise in capital value of vessels since January, and 30 times FY09 shipyard earnings. Having started the week at $7.50, Cosco finished it at $7.70, a tad below its closing record of $7.80 achieved a week earlier.
The banks have always led the index throughout this year, and this week was no different. DBS's announcement yesterday that its provision for US sub-prime-related losses amounted to less than what was expected helped its shares rebound, with a 70-cent rise to $22 adding 11 points to the index. Sympathetic rises in UOB and OCBC added a further 17 points.
In the second line, penny stocks continued to flag - the UOB Sesdaq Index, for instance, yesterday dropped 0.26 of a point to 231.59. Favourites such as Ei-Nets and Memstar appear to have fallen off punters' radar screens, while Uni-Asia Finance started the week at $1.59, crashed to $1.04, and finished the week at $1.38. The stock has been the subject of some controversy lately after local broking firms placed trading curbs on it.
Conclusion - from the look of the events happening lately, all these point towards a market correction soon. The wild swings are mainly related to people playing the index stocks one way or the other. For the rest of the market, generally quiet and bias towards moving lower. Therefore unless one is very focus on daily trading of buy and sell....it is too dangerous to remain "long" in this type of situation.
Published October 27, 2007
Week of wild swings in market; warrants thrive
By R SIVANITHY
SENIOR CORRESPONDENT
ANOTHER roller-coaster week - thanks to wild swings on Wall Street and Hong Kong - yesterday ended with the Straits Times Index (STI) surging 64.41 points to 3,771.55, thanks mainly to a large push on the banks.
The main trading strategy? Ride the momentum, whichever way it went.
Over the five days the index gained 24 points, but throughout the week performances were not wholly convincing, notwithstanding what the index might suggest.
On Monday, for example, the index plunged 105 points in response to a severe Oct 19 sell-off on Wall Street that briefly rekindled memories of Oct 19, 1987 - or Black Monday, as it became known.
Wall Street's avoidance of a follow-up plunge was instrumental in helping to stabilise prices around the world, and the seeming ease with which it took news of a huge Merrill Lynch sub-prime-related write-off in its stride also helped restore confidence.
In all sessions though, it was necessary to keep an eye firmly on Hong Kong's Hang Seng Index and/or the December futures contract on the Dow Jones Industrial Average. Sudden twitches in either or both had an immediate impact here and 100-point moves in the STI were common.
Volatility increased sharply, especially with the Hang Seng Index regularly undergoing 1,000-point movements in a single trading session.
Program trading, short-selling and short-covering were all very much in evidence throughout, the targets being mainly the large, liquid blue chips. The main trading strategy? Ride the momentum, whichever way it went.
Perhaps the single most interesting feature was the surge of interest in structured warrants. Yesterday's business in the instrument was $208 million, roughly 6 per cent of the $3.5 billion that was traded - a marked increase from the 4 per cent average for the first nine months of this year. Every day, warrants featured prominently in not just the top percentage gainers list but also absolute gainers. These were mainly warrants on the STI and Hang Seng.
Other than warrants, shipping and shipyards provided fertile hunting opportunities for investors. In particular, China shipyard Cosco Corp continued its upward climb following a mid-week announcement of yet more contracts that led to a fresh slew of broker 'buy' reports.
DBS Vickers, for instance, on Thursday said it has raised its target price for Cosco to $9.00 based on 12 times bulk shipping earnings, a 50 per cent rise in capital value of vessels since January, and 30 times FY09 shipyard earnings. Having started the week at $7.50, Cosco finished it at $7.70, a tad below its closing record of $7.80 achieved a week earlier.
The banks have always led the index throughout this year, and this week was no different. DBS's announcement yesterday that its provision for US sub-prime-related losses amounted to less than what was expected helped its shares rebound, with a 70-cent rise to $22 adding 11 points to the index. Sympathetic rises in UOB and OCBC added a further 17 points.
In the second line, penny stocks continued to flag - the UOB Sesdaq Index, for instance, yesterday dropped 0.26 of a point to 231.59. Favourites such as Ei-Nets and Memstar appear to have fallen off punters' radar screens, while Uni-Asia Finance started the week at $1.59, crashed to $1.04, and finished the week at $1.38. The stock has been the subject of some controversy lately after local broking firms placed trading curbs on it.
Conclusion - from the look of the events happening lately, all these point towards a market correction soon. The wild swings are mainly related to people playing the index stocks one way or the other. For the rest of the market, generally quiet and bias towards moving lower. Therefore unless one is very focus on daily trading of buy and sell....it is too dangerous to remain "long" in this type of situation.
5 Secrets You Should Keep From Your Partner
It starts out simply enough: A man and woman get together, they share some wine, they go back to her place, their relationship grows, they laugh and they fight, and they become-tada!-a couple. And then something happens: They're supposed to share everything with each other. Their fears. Their dreams. Their thoughts. Their bills. Their medicine cabinets. And that's when this simple little romance starts to get complicated. in most relationships, there's such a thing as too much sharing-and I believe that a little discretion at the right time in the right situation is not only a good thing, but also could actually improve relationships. As long as you're not breaking the relationship rules-like playing tonsil hockey while the goalie isn't watching-then a little mystery can be a good thing. Here, five secrets you should keep to yourself-because not saying something will actually speak volumes. (And just so you don't think that I'm pushing to abolish the honesty policy, you'll read about the things you should never keep from your partner next time.)
You Don't Turn Me on Right Now
Granted, there will be days when your partner walks into the room and everything sparkles-moments like these make us count our blessings. But there are going to be other moments when your woman looks less like Cindy Crawford and more like Broderick Crawford, and when your guy is less Hugh Grant than Lou Grant. But when the occasional fashion faux pas or haircut from Edward Scissorshands comes around, swallow your tongue. If you want him or her to wear certain styles, compliment what you like, and ignore what you don't. Eventually, they'll get the message-but without the hurt feelings.
I Flirt With Others at Work
The stats don't lie: About 40 percent of men and 35 percent of women have lusted after a co-worker-without ever making a move. Even if you have no intention of taking it anywhere, nobody wants to think of their significant others spending 8, 10, 12 hours a day around flirtatious and attractive co-workers, especially when they look, smell and behave at their very best. Want to share sexual secrets? Confess your attraction to Hollywood celebs, not the co-workers in the adjacent cube.
I Can't Stand Your Friends
Your partner's circle of friends probably come in three different categories: a perfect package, nice enough, and how the hell can the two of you be friends? In that last category, there are all kinds of crazies-maybe she's too controlling, or maybe he's a bad influence. Whatever the case, know your audience. You may not like the friends, but your partner has more history with them than with you. So while they may not rank high on your personal list, keep it to yourself. Boxing out a man's friends is a relationship deal breaker, according to 83 percent of men we surveyed. And 62 percent of women would end a relationship if a guy doesn't get along with her friends.
I Still Think About My Ex
While it's natural to think about your ex, the Internet has increasingly made exes a bigger threat than ever before. The phenomenon of searching online for one's ex, which the majority of Americans admit to, can really make your partner jealous and fearful-especially since the phenomenon of people reuniting with very old flames has recently exploded (again, because of the Internet). You put your exes in the past; do the same with any conversation about them.
I Can't Live Without You
Why? Number one, it's not true; you can live without them. And number two, the key to a successful long-term relationship is to ensure that you've got your own life. You can say I love you, I enjoy you, I desire you, I appreciate you. You don't say I can't live without you. A partner should never feel trapped. He or she should be making a choice every day to be with you. And you, with them.
Conclusion - Guess all the above made sense esp if you still love your partner and don't want to rock the boat.
You Don't Turn Me on Right Now
Granted, there will be days when your partner walks into the room and everything sparkles-moments like these make us count our blessings. But there are going to be other moments when your woman looks less like Cindy Crawford and more like Broderick Crawford, and when your guy is less Hugh Grant than Lou Grant. But when the occasional fashion faux pas or haircut from Edward Scissorshands comes around, swallow your tongue. If you want him or her to wear certain styles, compliment what you like, and ignore what you don't. Eventually, they'll get the message-but without the hurt feelings.
I Flirt With Others at Work
The stats don't lie: About 40 percent of men and 35 percent of women have lusted after a co-worker-without ever making a move. Even if you have no intention of taking it anywhere, nobody wants to think of their significant others spending 8, 10, 12 hours a day around flirtatious and attractive co-workers, especially when they look, smell and behave at their very best. Want to share sexual secrets? Confess your attraction to Hollywood celebs, not the co-workers in the adjacent cube.
I Can't Stand Your Friends
Your partner's circle of friends probably come in three different categories: a perfect package, nice enough, and how the hell can the two of you be friends? In that last category, there are all kinds of crazies-maybe she's too controlling, or maybe he's a bad influence. Whatever the case, know your audience. You may not like the friends, but your partner has more history with them than with you. So while they may not rank high on your personal list, keep it to yourself. Boxing out a man's friends is a relationship deal breaker, according to 83 percent of men we surveyed. And 62 percent of women would end a relationship if a guy doesn't get along with her friends.
I Still Think About My Ex
While it's natural to think about your ex, the Internet has increasingly made exes a bigger threat than ever before. The phenomenon of searching online for one's ex, which the majority of Americans admit to, can really make your partner jealous and fearful-especially since the phenomenon of people reuniting with very old flames has recently exploded (again, because of the Internet). You put your exes in the past; do the same with any conversation about them.
I Can't Live Without You
Why? Number one, it's not true; you can live without them. And number two, the key to a successful long-term relationship is to ensure that you've got your own life. You can say I love you, I enjoy you, I desire you, I appreciate you. You don't say I can't live without you. A partner should never feel trapped. He or she should be making a choice every day to be with you. And you, with them.
Conclusion - Guess all the above made sense esp if you still love your partner and don't want to rock the boat.
Subscribe to:
Posts (Atom)