After the events of 2008, one would be foolish to think that 2009 would be a “normal” year. In our 1st quarter FSM magazine, Sui Jau (FSM GM for Malaysia and Singapore; you can read his blog here) wrote that 2009 would be a “year of surprises”, and the first half of this year has already shown that to be an understatement. The bear market had been raging on for months on end, and the bearish depths of the market were reached in early March 2009 as global markets slumped on concerns over the health of financial institutions. Without a doubt, investor sentiment was in the pits.
Fast-forward a month and markets were in jubilation, rejoicing at every iota of better-than-expected economic data. The public-private investment programme was warmly received by the market, as were other bits of data which indicated that the global economy was stabilising. Out with the old (credit crunch, global slowdown etc.) and in with the new (green shoots, green shoots, and more green shoots). How quickly investor sentiment has changed and the huge jumps in various markets under our coverage reflect this (see Table 1).
|Table 1: Market Performance
||MSCI Emerging Markets
||MSCI Asia ex-Japan
||DJ Stoxx 600
|Source: Bloomberg, year-to-date returns in SGD terms with no dividends reinvested, as at 30 June 2009
Indonesia and India were the two biggest losers in 2008 (see “Scoreboard for Equity Markets in 2008”) with declines of 57.8% and 61.5% in SGD terms. However, these two markets have bounced back in a huge way in 2009, leading the pack with gains of 61.6% and 53.9% in the first half of 2009 alone. Most markets performed extremely well, but the developed markets of Japan, Europe and the US were the key laggards, following up on their poor performance in the first quarter of 2009.
The Best Performers
Indonesia (JCI; +61.6% in SGD terms)
Indonesia was the top performing market under our coverage for the first half of 2009 with a gain of 61.6%. The robust performance was mainly boosted the positive sentiment created by the presidential election (on 8th July 2009) as the market was anticipating a win for the incumbent president, Susilo Bambang Yudhoyono.
In addition, in terms of economic performance, Indonesia is one of the few countries which are well-insulated from the current global slowdown. The country posted year-on-year GDP growth of 4.4% in 1Q 2009, a positive figure which is a rarity under current economic conditions. Strong domestic demand has helped to maintain Indonesia’s GDP growth momentum. In past decades, the country’s growth has not been reliant on increasing exports, unlike many of its Asian peers. Exports only made up about 20% of its GDP in 2008; hence Indonesia’s economic growth has been hindered to a smaller extent by the global economic slowdown. In line with its neighbouring peers, latest economic indicators are indicating some improvement, despite the declining trend persisting. We are expecting gradual improvements in the second half of 2009.
While market participants await fresh leads to drive the market in the short-term, Indonesia remains an attractive market for long-term investment. A large population and strong domestic demand means Indonesia’s economy is well-poised to withstand the global slowdown, but high local bond yields means a larger discount must be factored into equity market valuations. The Indonesian equity market currently trades at estimated forward PE ratios of 17.6X and 15.2X for 2009 and 2010 respectively, based on estimated earnings growth of 11.8% and 15.7% in the two respective years (as at 30 June 2009). We have a 3.5 star “attractive” rating on the Indonesian equity market.
India (SENSEX; +53.9% in SGD terms)
India was the second-best performing market for the 1st half of 2009 with a gain of 53.9%. Like Indonesia, political issues have hurt the market in the past but when the veil of uncertainty is removed, the effect can be phenomenal. On a monumental day in Indian politics, the decisive and huge election victory of the Congress party and the United Progressive Alliance (UPA) in May 2009 caused the Indian stock market to skyrocket to such a huge extent that circuit breakers were triggered. The market rose by as much as 25% at one point before closing over 17% higher.
The Indian economy remains relatively shielded from the global economic crisis, with year-on-year growth of 6.7% in FY2008 (ended March 2009). The government also expects GDP growth of 7% to 7.5% in FY2009, one of the highest expected growth figures for any economy. Although the export sectors were hit in the current downturn, domestic consumption makes up a large part of GDP so India’s economy has held up relatively well.
As the worst performing market under our coverage in 2008, Indian stocks were hurt as many Foreign Institutional Investors (FIIs) cashed out of their investments in markets they perceived as higher-risk. The Satyam scandal in early 2009 did little to quell foreign investors’ fears, but more stability on the political front in recent months has led to greater buying interest by foreign investors. With its huge population base, India has the potential to expand domestic consumption which could sustain high levels of future growth. Improvements in infrastructure could minimise the infamous transportation bottlenecks which have dogged efficiency levels in India, which means that government-initiated plans in this area will be watched with a keen eye.
Earnings of Indian companies are expected to decline 6.5% in 2009, before rebounding by 15.6% in 2010. The estimated PE ratios for the two respective years are 17.2X and 14.5X (as at 30 June 2009). Like Indonesia, India’s high local government bond yields mean that the equity market excess earnings yield is slightly negative. Taking this into account, we have a 3.5 star “attractive” rating on the Indian equity market.
US (S&P 500; +2.6% in SGD terms)
While the benchmark S&P 500 index has risen significantly off the lows in March, the US market remains the worst performer among markets we cover in the first half of 2009. Indictors we track to gauge the health of the US economy are showing signs of improvement, with the forward-looking ISM Purchasing Managers Indices (PMIs) both improving from their lows and the leading indicators gaining for the second straight month on a month-on-month basis. Existing home sales (which make up the majority of US home sales) appear to have bottomed, albeit at extremely low levels but lagging data based on the S&P/Case-Shiller Home Price index shows that prices continue to decline.
Among the various indicators, unemployment remains an issue. Non farm payrolls fell 467,000 in June, larger than the 350,000 losses expected. With the unemployment rate heading towards 10%, there could be further negative impact on consumption, which is a critical aspect of the US economy. While full-year GDP growth is widely expected to be negative, we could see positive quarter-on-quarter growth as early as in 3Q 2009 as consumption and investment both bottom out. Inventory drawdown has been a detractor to the final GDP figure in past quarters but this could reverse as restocking occurs and provides a boost to GDP in 3Q or 4Q 2009.
After a relatively resilient performance in 2008 (-38.6% in SGD terms), the US market has been a chief laggard in the first half of 2009 with a paltry 2.6% return. Much of the outperformance in 2008 could have been a result of investors choosing less risky developed markets like the US as opposed to the higher-risk emerging markets. This has worked against the US market in 2009 as the reverse has occurred, with investors choosing growth markets over the developed ones.
As at 30 June 2009, the US market trades at an estimated PE of 16.5X and 13.5X for 2009 and 2010 respectively. The US economy continues to dictate much of the global economy and we could see a slight rebound in 3Q 09 GDP, which has positive implications for the broader economy. With the dynamic nature of its economy and quick and aggressive policy responses, we expect the US economy to recover faster than other developed nations and we have a 4.0 star “very attractive” rating on the US market.
Europe (DJ Stoxx 600; +5.4% in SGD terms)
The European stock market (as represented by the DJ Stoxx 600) turned in a positive performance for the first half of 2009, but was still the second-worst performing market under our coverage. Developed markets have been poor performers in 2009, as the financial shock eases and economic growth becomes more of an issue. Growth drivers are few and far between in the European region, and the year-to-date performance of its stock market has reflected this.
GDP in the Euro-zone is expected to shrink by 4.8% in 2009 with zero growth in 2010, according to OECD estimates. The European Commission is less negative on the prospects of European economies, with an estimate of -1.9% for 2009. These figures are reflective of the harsh recession that the Euro-zone is undergoing, with its largest economy Germany undergoing four straight quarters of quarterly decline in GDP and the UK economy shrinking the most since 1974.
While most of Europe remains mired in recession, several indicators are indicative that things may get better in the medium term. The often-cited ZEW economic sentiment survey for the Euro-zone rose to the highest level since May 2006, indicative of brighter expectations for the region in the next few months. Industrial production in most major Euro-zone economies appears to be bottoming out, while inflationary pressures have all but disappeared, given that the year-on-year inflation is likely to turn negative due to higher oil prices in 2008. The benchmark Repo Rate has been cut to 1%, a record low, and this added liquidity should provide additional support for the weak economy.
Earnings for European companies are expected to decline 20% in 2009, but 2010 and 2011 should see growth of 20.1% and 16.7% respectively. Economic growth is likely to be lacklustre over the next two years, weighed down by conservative policies, declining property prices and subdued consumer demand. High dividend yields may provide some support, but with few potential drivers for growth, there are downside risks to earnings estimates. We expect Europe to recover less quickly than the US, and have a 3 star “attractive” rating on the European equity market.
Equity markets taking a breather, but the tide has turned
After the strong run-ups in most markets since early March 2009, most equity markets are now largely in consolidation phase. This is healthy as it allows for a resumption of an uptrend in markets at a more sustainable rate, as compared to the breakneck pace which we have seen so far in 2009.
Most economies have shown signs of bottoming, and we expect to see better economic data emerging in the second half of 2009, thus confirming that a recovery is firmly in place. While most market watchers are seeing light at the end of this long and dark recessionary tunnel, a small number of sceptics are still adamant that it belongs to an oncoming train. Only time will tell whether these claims will be vindicated, but it is more likely that improving economic data and corporate earnings will soon quell all doubts that a recovery is underway.
The returns which most markets have turned in so far this year (see Table 1) is a reflection of the huge gains which can result in early stages of a market recovery. Investors who invested in the depths of the crisis in both October 2008 and March 2009 have already seen massive gains on their holdings. Being in early stages of a recovery still, we believe that equity markets still possess much upside over the next few years as economies heal and corporate earnings rise. That being said, we look forward to reporting further positive figures in our next market performance update at the end of the 3rd quarter 2009.
10 Funds which gained more than 55% in 1H 2009!
Star Ratings: Attractive Markets despite some downgrades
Yudhoyono’s Victory boost Indonesia’s Growth Outlook
India's Budget of Gamble
FSM All-Equity Fund Index Up 24.5% At The Half-Year Mark
Most Equity markets higher in 1Q 2009, has the tide turned?