Staying in equities will pay
By Mano Sabnani, Business and Financial Consultant
First published in TODAY
22-23 Mar 2003

So, what of the international markets? They have been like a pressed-down coiled spring for so long. We know full-well about the economic problems of Japan and the downturn in the United States. But a recovery is still due and the suspicion is that it has been held back by the international threat of terrorism and the drawn-out standoff on Iraq and North Korea. Short-sellers and hedge funds have, for many months, been forcing down equity prices everywhere, and pushing up gold and oil prices.

But now that the US is moving decisively to rid Iraq of Saddam Hussein and his cronies, the speculators are switching strategies. They are taking profits on long positions in gold and oil and covering their short equity positions. This has been going on since Tuesday morning, when the US issued its 48-hour ultimatum to Saddam and his sons to quit the country they rule. Hence, the sharp rebounds in the markets this week. There may be more uplegs in global equity markets as the present Iraqi regime collapses and the American-led forces march into Baghdad.

Overall, global indices could recover 15 per cent from their recent lows by the time the war is over. For the Straits Times Index, this means a rebound from the week-ago low around 1220 to the 1400 level. Now is certainly not the time to bail out of equities. At 1220, the Singapore market was close to its September 11, 2001 low and most of the bad news was in the prices. Currently, at around 1300, values are still attractive, especially for second liners, with dividend yields still substantially higher than bank deposit rates.

Indications are that the economic cycle in Southeast Asia is at a low end, with good prospects for an uptrend from here, after two downturns in five years. The United States will want to pump up its economy as well, after the war, and that will help Southeast Asia. Continued buoyancy in India and China will also be pluses for this region.

A short war on the Iraq issue means that the expected disruptions to the Global economy will be minimized. We may not see deep manifestations of threats such as sustained high oil prices, rising inflation and interest rates, disruption of transport/ logistics services and a lull in tourism and travel.

Instead, with the end of hostilities, the global economy could get a breath of fresh air and a chance to see what it can do in a peaceful environment. Activity could pick up from the second quarter onwards, especially in the US. And Singapore will be a beneficiary. With the first quarter flash estimate of 2.7 per cent, it should be feasible to score 3 per cent for the first half and the upper end of the 2 to 5 per cent expectation for the full year.

This is the more likely scenario to emerge from the war in Iraq. However, there are wild cards. One of the more worrying is the threat of chemical weapons being used on Kuwait and, possibly, Israel. There could also be devastating terrorist attacks in unexpected quarters. If there are hostages, then the markets could get nervous and pull back to major support levels. Uncertainty and fear could keep oil and commodity prices high and stock markets depressed as business activity slows down around the globe.