The following posting by Kevin Scully, executive chairman of NRA Capital, was published on his blog yesterday and is republished here with permission. Visit www.nracapital.com
First let me apologise for the sparse and intermittent postings on my Blog. A combination of work, school holiday break and most recently some minor health problems including a surgical procedure yesterday have limited my ability to write regularly. This should improve now that I am recovering and as we enter the Q2-2010 reporting season.
I have been bullish since the recent "correction" not double dip started with the problems in Europe. I saw the correction as being long overdue from the rally which started in March 2009.
The correction was also technical with many major indices cutting down through their 50, 100 and 200 moving averages. The VIX index also moved up sharply when the European credit crisis started and has since come down to a comfortable level in the mid-20s. Remember I highlighted that a sustained fall in the VIX below 30 would be a good signal to slowly consider coming back into the market. It’s now at 24.43.
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The STI Index has in recent weeks moved above its 50, 100 and 200 day moving averages and now looks set to test the 3000 level. The Dow remains below its 50, 100 and 200 day moving averages although some bottoming seems to be occurring and the current Q2-2010 reporting season should set the stage for a move in the Dow either way. Downside for the Dow seems to be the 9000 level.
Good news is that correction has been on low volume but this is set to change ??!!
I am very encouraged by the low market volumes since the EU crisis started - this was recently aggravated by the World Cup which just ended and we are also coming to the close of the Summer Holiday period and fund managers should be back and taking stock of their investment weightings into the last two weeks of July.
Another liquidity draining factor is the IPO of AgBank in China which is expected to raise about US$22bn in proceeds. I was told recently by a large global fund manager that this IPO was ten times subscribed - this means that more than US$200bn was extracted from the stock market. When this money flows back to the fund managers - some will be allocated to purchase the shares of AgBank in the secondary market (depending on allocation levels.
The balance will return into stock markets just as we enter the Q2-reporting season. The shares are expected to list this week and a strong debut (if the 10 times subscription is correct) will filter into demand for other banking issues and stocks in the region.
Even the slower than expected GDP growth from the US is positive for stocks because the FED and other Central Banks will be forced to keep interest rates low for an extended period of time into at least H1-2011. Stocks are also on very attractive PER valuations with many markets from the Dow, Hang Seng, Shanghai Composite and even our own STI Index at the historic low end of the PER range (BETWEEN 12 to 15 times PER). The Q2-2010 results will affirm these attractive valuations which I believe will trigger the resumption of the markets' uptrend.
However, don’t expect to see the same heady gains that we saw in 2009 where Asian markets were up by about 50-70%. Most markets are marginally down, flat or with modest gains. The worst being the markets in China by about 20% but the Chinese markets were the top gainers in 2009. The PER of the China markets is now between 13-15, compared to 30-60 in 2009 - so its only a matter of time before the Chinese markets rally again.
Compare Kevin's musings from about two months ago: KEVIN'S take on ... the sharp market correction
