Momentum and liquidity are still key

Published February 14, 2011

By R SIVANITHY
SENIOR CORRESPONDENT

IT IS a fact of life that when momentum shifts and liquidity drains from a market, no amount of talk about valuations still being cheap or earnings still being compelling, or fundamentals being unchanged, will get people to buy. Ah, for the good old days of 2009 and 2010 when such talk did in fact have its intended effect.
Things were a lot easier back then - all analysts and economists had to do was draw more-or-less straight-line projections on the charts, pick reasonable-sounding target prices (though many were not that reasonable, it has to be said), point to China as the holy grail of economic growth and leave momentum and liquidity to do the rest.
To be honest, there was plenty of justification for taking that easy route - the region was enjoying double-digit growth, liquidity was plentiful and interest rates were low.
Furthermore, the investment banks who brought about 2008's financial crisis were handed billions in US taxpayers' money to play with, so all were well-flushed with cash to pump into equities.

There needn't have been any fear of a crash thanks to explicit guarantees from the US Federal Reserve about billions more in rescue money, so all an international investor had to do was avoid buying Europe while riding the Asian momentum.
Little wonder then that 2010 was dubbed as the year in which it was hard to lose money.
This year though, is shaping up to be a different proposition, as the economic picture gets complicated by rising inflation and interest rates, and in some countries like Australia, with the spectre of stagflation (or stagnant growth amid rising inflation).
Asian central banks, it is now believed, are too far behind the curve in their fight against inflation and are still displaying a reluctance to act swiftly. It is this lack of urgency which is said to be behind much of the sudden disenchantment with emerging Asia.
'The only effective anti-inflation strategy entails aggressive monetary tightening that takes policy rates into the restrictive zone,' wrote Morgan Stanley's Stephen Roach last week.

'The longer this is deferred, the more wrenching the ultimate policy adjustment and its consequences for growth and employment. With inflation - both headline and core - now on an accelerating path, Asian central banks cannot afford to slip too far behind the curve. . . Given the tenuous post-crisis climate, with uncertain demand prospects in the major markets of the developed world, Asia finds itself in a classic policy trap, dragging its feet on monetary tightening.'
(To be honest, the same might well be argued of the US, where interest rates have been zero for about two years and furious money printing has finally managed to put the brakes on a backsliding economy).
In all fairness to Asian central banks, some have been raising interest rates these past months, most notably China, India, Indonesia and Australia, so it isn't as if they're all dithering behind the curve.

And if you were to really think about it, investors are being asked to subscribe to an odd argument that if rates are now quickly raised Asia-wide, this would reassure investors that monetary authorities know what they're doing and therefore bring the bull market back to stocks.
Meanwhile, what of the US, the current safe haven for the world's funds? Thanks to the explicit guarantees from the Fed and a momentum shift of money out of emerging markets back West, the 'cannot-lose' mentality is stronger than ever on Wall Street where stocks have gone up in a straight line over the past six months.
And with the momentum/liquidity shift has come a story being circulated now that after two years of relentless monetary greasing, the recovery is underway (even if the numbers are still inconclusive).

As pointed out in last week's column, this means Asian markets that once used to function as an advance indicator of movements in the West are now clearly decoupled from the US and Europe. The decoupling will probably continue this week, although a short-lived, technical, short-covering bounce can reasonably be expected.