Market research from Internaxx September 2009

Friday, 28 August 2009 12:26

This section is brought to you by the Luxembourg based online broker Internaxx. Market analysis is provided by Fortis Investments, the asset management arm of the BNP Paribas / Fortis Investments group.

Recovery sustainability remains in question
Source: Fortis Investments

A number of voices are starting to suggest that the global recession is over. Although the US economy shrank again in the second quarter, growth accelerated in China, while a number of other Asian economies registered impressive growth figures after heavy declines in previous quarters. The eurozone economy shrank overall in the second quarter, but more encouraging was that the German and French economies grew slightly over this period.

Indeed, it does appear to be the case that the global recession has come to an end. However, although economic growth could make a return in the coming quarters, it is likely to be mostly due to temporary factors such as inventory rebuilding and government stimulus spending. The strength and sustainability of the recovery over the longer term remain a concern.

The National Bureau of Economic Research (NBER)-the US's official arbiter for deciding whether the economy is in recession-stated recently that it is too early to proclaim that the US recession is over as they need more evidence that the economy will not lapse back into recession after a short government- and inventory-driven rebound.

The end of the global recession?

Based solely on GDP figures, for several countries the recession ended in the second quarter, including Germany and France, while China and South Korea never entered recession in the first place.

Compared to earlier episodes, several leading indicators, such as the US ISM and German Ifo, are pointing towards a normal recovery. In that sense it looks justified to state that the global recession is over, as well as those in most individual countries.

However, there are some important caveats. Economic growth in the US in the second half of the year is likely to be driven primarily by temporary factors such as government stimulus spending and the rebuilding of low inventories. Over the longer term the economy will have to cope with weak growth in labour income, deleveraging consumers and huge government deficits.

If the economy falls back early next year, the NBER will not call an end to the recession for several quarters. Meanwhile, for the countries in the eurozone, the decomposition into GDP components such as consumption and investment is not yet available for the second quarter, so we do not know if this was just an inventory-driven rebound or a more sustainable improvement. Leading indicators are recovering in a normal manner, but from extremely low levels. It is therefore possible to argue that they should recover more strongly than normal.

Japanese equity rally in the offing
Source: Fortis Investments

Japanese equity markets have mirrored developments in US equities in recent months, as mounting optimism about the US and Chinese economies have fuelled hopes of an export-led recovery. Moreover, investor sentiment has improved on expectations of a quicker-than-expected recovery in corporate earnings and investment inflows into Asian markets.

Jun Kim, Fortis Investments' Investment Specialist for Japanese equities is less optimistic about corporate earnings. "Much like their US and European counterparts, Japanese companies have improved their results by cutting costs and rationalising processes. Sustainable growth, however, can only come from higher sales," he says.

Nor is Kim confident that the higher sales will be generated within Japan's domestic economy, "Consumers have tightened their purse strings, stronger sales can only come from increased exports, which is why Japanese equities have followed US and Chinese macroeconomic data lock-in-step," he explains. Japan is one of the most highly export-dependent economies among industrialised countries.

Nevertheless, he does expect that when a global recovery occurs, Japan will be a key beneficiary. The economy's disproportionate reliance on exports means that it will enjoy a rebound in exports that much more.

Another factor supporting Japanese equities of late are hopes that the Democratic Party of Japan will overthrow the Liberal Democratic Party in the 30 August elections. The incumbent has held power for most of the last fifty years, rendering the political scene in the country almost stagnant in what effectively became a single party democracy.

Indeed, expectations may be unrealistically high. Kim; "Even if the DPJ cannot solve all of the economy's structural problems, they are bringing in a fresh breath of new economic proposals, particularly for small and medium-sized businesses and to rejuvenate domestic consumption. After half a decade, the LDP has become stale and run out of ideas to stimulate the economy."

Though Kim is seeing strong inflows into Asia as a whole, he believes that many market participants may be caught off guard by the extent of the recovery in Japan's equity markets. "Japanese equities were depressed even before Lehman's collapse, and then fell in tandem with other equity markets. What was already undervalued is now excessively undervalued. Most investors have been underweighting Japan for so long, they no longer even look at the economy. When a rebound finally does occur, they may miss out," he says.

Internaxx Top Ten Buy and Sell - International Investors Activity Summary from Internaxx

The Top Ten Buy and Sell are measured as the total number of trades carried out in each stock by Internaxx clients over the previous month. This report is not a recommendation to buy or sell these stocks.

Top 10 August 2009

Top 10 Buy
1. Citigroup
2. Bank of America
3. CIT Group
4. General Electric
5. Rio Tinto
6. ArcelorMittal
7. Palm Inc
8. Lloyds
9. Total
10. Lafarge

Top 10 Sell
1. Bank of America
2. Citigroup
3. CIT Group
4. ArcelorMittal
5. Rio Tinto
6. Palm Inc
7. Allianz
8. Lafarge
9. Total
10. Barclays

DISCLAIMER This document has been prepared solely for informational purposes and is not an offer, or a solicitation of an offer, to buy or sell any security or financial instrument, or any investment advice. Prospective investors should conduct such investigations as deemed necessary and should seek their own legal, accounting and tax advice to determine independently the suitability and consequences of an investment.