BT: Is it really time to buy? (31 Jul 2006)

Business Times - 31 Jul 2006

Is it really time to buy?

By R SIVANITHY
SENIOR CORRESPONDENT

IN its July 28 Global Investment Strategy, BCA Research recommended investors start buying again. 'The time is right to begin slowly moving some cash into equities', said BCA Research. Meanwhile, US newspaper Barron's July 24 cover story was titled 'Time to Buy'. Said the article's sub-heading: 'With the bull getting the upper hand again, opportunities for investors abound around the globe'.

So there we have it. Two views from North America suggesting that the market's nervousness since early May has now been fully discounted, paving the way for more upside for the rest of the year.

Given that making money in the stock market depends a great deal on getting in before the rest of the herd, it seems like decent enough advice. But before everyone rushes off to pile into stocks, it makes sense to evaluate where the bull case comes from and its attendant risks because to be sure, there are still plenty.

BCA Research made its case this way: 'Our sense is that global equities in general and US stocks in particular have passed their corrective lows. Last week we may have seen a mid-sized selling climax in global equities and a mini double-bottom for the S&P 500'.

'Needless to say, many risks remain that could still spook the market and the outlook is still murky. We could be too early; nevertheless, investing is about buying risk, and in our judgment the overall risk-reward profile for equities is improving, not deteriorating.'

BCA Research points to falling bond yields, anticipated stability on the inflation front due to a rapid softening in global growth and hence demand, stable earnings and hopes that the Fed will soon stop raising interest rates.

Barron's assessment was based largely on two arguments - the large 'relief rally' which came after US Federal Reserve chief Ben Bernanke spoke to the Senate Banking Committee a week ago, which suggests pent-up demand for stocks, plus cheap valuations.

The relief rally was because the market read Mr Bernanke's statements as suggesting that the Fed may be done soon with its tightening moves while the valuation argument rests on the premise that the S&P 500 Index now trades at 15 times projected 2006 earnings, the London FTSE at 12 and Japan's Nikkei at 18 - all low by historical standards.

Overall, both sets of 'buy' calls also point to stocks historically rallying after the Fed calls a halt to its rate hikes - though there are a few exceptions, such as in 1987 when the market crashed and 2000 when the Nasdaq bubble burst and the US economy slid into recession.

So is it really time to buy? Probably yes, though with the Middle East in turmoil and volatility in oil prices still high, gains will most likely be more modest in the second half than in the first.

Most importantly, the market will eventually have to factor in rapidly slowing growth, something which it has ignored for the time being. Of course, the interesting thing about reports such as BCA's and Barron's is that they typically give more space and emphasis to 'buy' stories - neither have ever told readers when to sell - but that is perhaps to be expected given the environment they operate in.

What's interesting is that the original case for buying equities over the past two to three years was that global growth would be robust amid low oil prices, benign inflation and low interest rates. That was fairly logical because economies were recovering from the Iraq invasion, Sars and before that, the bursting of the tech bubble.

Now, it appears that stocks are still a buy even though global growth is slowing drastically (the US's second quarter growth of 2.5 per cent was much less than forecast), interest rates have risen 17 times, oil prices have more than doubled in three years, and inflation still threatens to pose a serious threat.

It's clearly a contradiction, but for the moment, everyone is buying into the story - and that's what counts.

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