BT: Markets likely to stay bullish for a while (27 Jun 2007)

Markets likely to stay bullish for a while

According to Deutsche Bank's analysis, the global economy has never looked as solid, reports R SIVANITHY

Equity market investors would have by now heard the refrain 'this time, it's different' either as a inducement to buy, or to keep buying, or to stay invested throughout any dips and volatility in the markets. But is this time really different? Or it just another bubble in a different guise?

According to Deutsche Bank's Marshall Gittler, chief Asian strategist for Private Wealth Management, the answer is an unqualified yes, this time really is different.

'Usually, when someone tells you to buy because this time is different, you sell! But this time, we think things are really different because there are things going on which we've never seen before,' said Mr Gittler in a BT interview.

'For example, despite a record US trade deficit and widespread expectations of a collapse in the dollar, it has remained relatively firm. Despite rising interest rates last year, the US economy grew 5 per cent. So things are different, and the reason is the re-integration of China, India and the emerging markets into the world economy.'

According to Deutsche's analysis, the global economy has never looked as solid. In a June 14 seminar on the outlook for capital markets, the foreign house said the favourable supply-side backdrop - sometimes called the 'brave new world' or the 'great moderation' - has been driven by various factors including globalisation, the advent of emerging markets and the revolution in information technology. This has made economies more resilient to commodity shocks and a decoupling from the US.

In addition, emerging markets particularly in Asia are leading the way for world growth. This year, three-quarters of world economic growth will come from emerging markets, while half of the growth will come from emerging Asia, said Deutsche. 'Many of these markets have actually already emerged and have great fundamentals,' said MrGittler. 'For instance, by next year, we expect the average Latin American country to be investment-grade.'

Of course, like any period in the investment cycle, risks abound. One could be China, where there is still lingering fear that the bursting of the equity bubble could have disastrous consequences for markets everywhere. 'I'm not so sure China is a bubble,' said Mr Gittler. 'People forget that before this bull run, the market there went down for four years in a row.

'The biggest bubble of all was in Korea, where the market went up 14 times in a few years - and fell 50 per cent twice - so there's still plenty of room for China to go.

'People also forget that corporate profits there are soaring. True, there are bubble-like qualities to the way people are investing their money, but remember that people in China cannot buy stocks outside China so it's natural for domestic prices to be high, given the country's high savings rate.'

One potential source of trouble could be US interest rates. As it stands now, the market expects rates to be held steady for the rest of the year, although there are simmering fears that if inflation is a problem rates may have to go up.

Deutsche, however, expects just one rate cut within the next 12 months because it believes that inflation is well under control. 'There is of course, the risk that the Fed stays on hold longer than people think, or they could overplay it and choke off growth,' said Mr Gittler.

'Another risk is an area which many people seem to have ignored, which is the possibility of trade frictions between the US and China,' said Mr Gittler. 'If the US introduces tariffs on Chinese goods, it would be a very significant event for markets, which people appear to be complacent about.

'Despite these risks however, the longer-term trend is likely to swamp the cycle. Asia's demographics are excellent, and foreign reserves of Asian countries are much better than ten years ago. We're positive on the region for the next seven, maybe even ten years.'

In the near-term, however, Deutsche thinks the Singapore market could come under pressure. 'In recent days, people have been switching out of Singapore into regional laggards, so I'm not sure if Singapore can outperform over the next few months. But the market here has plenty going for it - the best corporate governance, a diversified economy and stable growth.'



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