Worst of market turmoil to come: Analysts

A pedestrian walking past an electronic stock board. PHOTO: BLOOMBERG
A pedestrian walking past an electronic stock board. PHOTO: BLOOMBERGPHOTO: BLOOMBERG

They say chaos will prevail for some time, and advise investors and bargain-hunters to take step back

"Breathe," was the advice from HSBC. "Brace," said DBS, there's probably worse to come.

When analysts start issuing Zen-like directives to clients struggling to get a sense of what is going on, you are in the middle of a frantic sell-off.

As blood continued pouring forth from Asian stock markets yesterday, the dominant message from investment strategists and economists was that chaos will reign for quite some time, so investors should take a step back and carefully consider their next moves.

CAUTION ADVISED

I think it takes a brave soul to enter the market at this moment. It would not be wise to catch a falling knife, especially if US and Chinese equities continue their freefall.

MR BERNARD AW, IG market strategist

It may look like the time is ripe to jump in and start bargain-hunting, given the sharp falls in markets all over the world, but this is not quite the case, they said.

The falls have been dramatic. The S&P500 is 11 per cent off its May high, Shanghai has plunged over 40 per cent from its June peak and Tokyo shares are at a six-month low. Singapore shares are almost 20 per cent down from their year-high in April.

Overall, a staggering US$5 trillion (S$7 trillion) has been wiped off global stock markets since China's surprise devaluation of the yuan two weeks ago, with about US$1 trillion of that vanishing on Monday alone.

"I think it takes a brave soul to enter the market at this moment," noted IG market strategist Bernard Aw. "It would not be wise to catch a falling knife, especially if US and Chinese equities continue their freefall."

Some regional markets rebounded yesterday - Singapore shares gained 1.5 per cent, Hong Kong rose 0.7 per cent, Sydney jumped 2.7 per cent and Seoul added 0.9 per cent, even as Tokyo retreated almost 4 per cent and Shanghai plummeted 7.6 per cent, extending its steepest fall since 2007.

To stem the tide of selling, China's central bank is cutting interest rates and reducing further reserve requirements for banks. After market close, the People's Bank of China said on its website that it would lower the one-year benchmark bank lending rate by 25 basis points to 4.6 per cent as well as trim the reserve requirement ratio for banks by 50 basis points to 18 per cent.

The Dow opened strongly, rising about 2 per cent. Europe stocks were in the black, with key markets in London, Frankfurt and Paris chalking up gains at midday.

But these are simply "technical rebounds", said DBS Bank chief investment officer Lim Say Boon.

If the highly anticipated Economic Policy Symposium this week ends with the United States Federal Reserve signalling that it will continue keeping interest rates low, the rebound could continue a bit longer, he added. "But regrettably, it does not look as if this is the beginning of a sustained recovery. Indeed, this would be a rebound to sell into. There are likely to be cheaper buying opportunities ahead."

On Monday, Mr Lim had already warned clients that there will likely be worse to come for emerging markets. "Our warning has been to brace, brace (yourselves) for more shocks from China. The warning is the same for developed markets - brace (yourselves)."

JP Morgan's South-east Asia head of investments, Mr Christophe Aba, said it is possible for investors to tune out the chaos and focus on companies with long-term growth prospects, but added that he would advise against emerging market stocks too.

"Rather than try and time the market, we think investors need to focus on those areas where we believe there is visibility on earnings and the current sell-off is creating an attractive entry level. We see value in certain US and European sectors and generally favour developed over emerging markets at this point."

Amid the turbulence, HSBC recommended that investors simply "breathe", although it conceded that that could be more easily said than done.

"After all, the recent turmoil has left even the most hardened trader gasping for air. And there's probably more to come," noted the bank's co-head of Asian Economic Research, Mr Frederic Neumann.

"The latest shake-out has hardly run its course. China's economy continues to slow and the Fed may still hike rates before the end of the year."

That puts further cracks into the two main growth pillars for the world economy of recent years - the Chinese demand for commodities and consumer goods, and easy money. Mr Neumann added: "Not pretty."

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A version of this article appeared in the print edition of The Straits Times on August 26, 2015, with the headline 'Worst of market turmoil to come: Analysts'. Print Edition | Subscribe