The following text was posted on the blog of Kevin Scully, executive chairman of NRA Capital, this morning, and is reproduced here with permission. Visit www.nracapital.com
Last Saturday I was invited to give my brief views about the market outlook and then participated in a panel discussion on the same topic. The panelists included Tony Sagami (Harvest Advisors), Tan Teng Boo, MD & Fund Manager (Capital Dynamics), Vasu Menon, VP, OCBC Bank’s Wealth, Management Unit. Moderator: David Gerald and myself. A copy of the slides can be found at the bottom left hand side of our research website.
The key highlights of my presentation are as follows:
a) Global GDP growth forecasts in 2010 are better than 2009 with OECD growth now higher by 10% from 1.9% to 2.2% while Asian growth has increased from 6.8% to 8-8.5%.
b) problems in the EU will continue but unless France and Gernany falter - its unlikely to get worse although more smaller economies could have problems. Hungary which caused the sell off in the US markets last Friday on comments about its financial health has an annual GDP of US$127bn - compared to US$177bn for Singapore and is about half the size of Greece.
c) stock markets have all breaches that 100 and 200 day moving averages and are in a technical correction thankfully on low volumed) but this correction given the strong gains made in 2009 is a long overdule healthy correction and NOT a double dip
Underpinning my positivie view on stock markets included:
a) strong GDP growth in Asia and the US
b) better than expected coporate earnings growth
c) undemanding PERs for Singapore, US and even Shanghai - all three markets are trading at the bottom end of their historical PER range
d) subdued and low interest rates at least until the end of 2010
e) a recovery in the EU which will benefit significantly from the weak Euro in terms of services and exports
Investment or market strategy
I expect stock markets to remain volatile but move sideways until the end of Q3-2010. It took about six months for the US markets to bottom and notice that the fiscal responses from the Obama government were working. If you cannot stomach the volatility then you should remain sidelined. However, if you are prepared to take a six to twelve month view then you can start to nibble on the way down.
a) look at the VIX which rebounded above 40 when the Greek crisis surfaced and is now hovering between 30-35. A sustained fall below 30 is a good signal to come back into the market
b) stock selection even more important now - look at companies with strong balance sheets, undemanding PERs and who pay decent dividends (with dividend yields of about 5% as this will provide some relief while we wait for markets to resume their uptrend.
c) technology stocks and banks will be core holdings - no change in my Stock Picks for now. Shares trading in the mid single digit PERs (half the PER of the Singapore market and which are guiding for a strong 2010 will be good areas to look into.
Other panelists had similar views to me
Other panelists were of a similar view, ie markets were cheap and offered value for medium term investors. Traders should be sidelined because there is no volume.
But as we cannot pick the bottom nor the top, gradual and steady accumulation on any weakness would be appropriate - equities are still the best investments to be in especially when global interest rates are so low and PER valuations of stocks are also at the low end of the range.
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