Saturday, August 16, 2008

Worst may be over for some battered markets


Worst may be over for some battered markets

Despite the gloom seen in most economies, analysts are becoming more optimistic about the future of some of the battered markets in the region with recommendations that it may well be the right time to enter them.

Markets such as China, Vietnam, and India, which until just last year were the darlings of the global fund managers, have now become places to avoid. But the continued selling spree being witnessed over the past few months suggests to some analysts that these markets have been oversold.

JPMorgan Chase's Sriyan Pietersz, who is based in Bangkok but also covers Vietnam, is of the view that Vietnam's stock market and currency have stabilised with more benign data flows seen after a tumultuous first half of macroeconomic imbalances, currency depreciation, and banking and property crises.

However, he cautions that a potential sting in the tail may yet remain, in the form of a slowdown in economic growth, along with liquidity and solvency issues in the banking system that may begin to escalate from the final quarter of the year, as many real estate-related loans begin to mature.

"Nevertheless, at this point we believe these risks will be manageable and that the peak of market uncertainty is behind us," he said in a note to clients recently.

Supporting his viewpoint is the improvement of Vietnam's balance of payments on the trade side during the second half of the year.

He said the data released showed that the trade deficit was on a narrowing path and inflation was set to slow by year-end.

Both the trade and current account deficits narrowed in the second quarter, with the former showing particular improvement.

Assuming monthly trade balances remain near current levels, the third-quarter deficit should be much smaller than in the second, he said. The financial account has a healthy surplus, though it was down substantially from the first quarter.

Inflation, meanwhile, can be expected to be tamed during the latter part of the year although it may hit a new high before it starts easing.

According to JPMorgan's forecast, inflation could peak at 30% before easing in the last quarter of 2008.

Inflation rose 1.6% month-on-month in July to a lower-than-expected 27% year-on-year.

The monthly rise in July prices was the slowest since November, primarily due to a smaller rise in food prices relative to previous months.

A bigger concern at this point, though, is the credit and banking system. Recent comments by HSBC CEO Stephen Green warned of the credit impact of economic slowdowns in both Vietnam and India. Initial concerns focus on liquidity.

The problem in Vietnam, according to analysts, is that state banks raised their deposit rates to double digits over the past few months and that caused larger banks to recall interbank lines, leaving smaller banks with minimal branch networks strapped for liquidity to fund their relatively long duration (mismatched) assets.

All this leaves an opportunity for investors to start to look at countries such as Vietnam, but the recommendation is to avoid a rough ride, by focusing on non-financials.

"Overall, based on the (albeit modest) data available, we believe that the Vietnamese economy will be able to weather banking system stresses and continue on a stabilising path," Mr Pietersz wrote.

"From a market perspective, investors should focus on non-financials, as large listed blue chips are likely to be relatively resilient in the current tight credit environment, with solid balance sheets after having mobilised significant equity capital in 2006-07.

"Profit growth is likely to slow, however, as top-line revenue is hit by slower volume demand, and this may not yet be fully reflected in market earnings expectations."

A similar scenario exists in countries such as the Philippines, where falling oil prices and the possibility of a pickup in consumption are attracting some interest among brokers.

Merrill Lynch said in a recent report that the Philippine stock market was looking more attractive these days to bargain-hunting investors.

Merrill said the Philippines was in a better position to attract investors again than India, which has also suffered heavy stock market sell-offs because of surging oil prices.

It said that recent announcements by the central bank (Bangko Sentral ng Pilipinas) that it would rein in inflation were reassuring. The central bank only recently raised interest rates by 50 basis points against the market's expectation of a 25-point hike.

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