Another Surge in Markets Will Start Soon (24 Sep 2010)

I am currently very bullish about stock markets. If we look at two things, it would seem to be telling us very opposite things. Investors looking at daily news, and economic updates from the US will be forgiven for thinking another recession is just around the corner. A ton of concerns in the US about double dip recession, and while the latest economic numbers are not exactly horrible (they are still showing some growth in the US economy), they do show that it is taking a breather, and hitting a soft patch. On the other side, investors who are looking at broad earnings for Asia markets, and even the US companies in the US market would be hard pressed not to feel excited. These are either at record levels this year, or if not, will be at all time highs within 2 years already.

The last time we saw such strong earnings at record high levels was back in 2007, when markets were hitting all time highs. Valuations then were more expensive. Today, we are in a situation where not only are earnings going to all time high levels, but valuations are outright cheap! This is precisely because investors are cautious. The cloudy economic outlook from the US, and other concerns have kept market sentiment very cautious, and valuations reflect the low confidence level of investors.

Yet, we must remember that market sentiment and investor confidence can and do change very quickly. Within a few months, the US economy doesn’t fall off cliff, people stop talking about double dip recessions, earnings continue to improve, and as various concerns die away, we can easily see sentiment shift to become bullish, especially when investors realise just how well companies in general are doing. That kind of re-rating plus earnings at a record level could easily mean a substantial surge in stock markets.

I remain very bullish on Asia equities, I see Asian markets having a potential upside of up to 37% over the next two years. Within Asia, 6 markets, including Taiwan, South Korea, China, India, Malaysia and Indonesia will already see record earnings levels this year in 2010 already. And I remain convinced that the Technology Theme will play out over the next two years as well and hence, South Korea, Taiwan, and Tech related funds will benefit from this. Finally, if blue chips are already showing such kind of results, the small caps look even more amazing. Investors still prefer the safety of blue chips at this point in time, and within small to mid caps, we are seeing not only record earnings, but PE levels which are ridiculously low, at single digit levels in various cases. This is why, I just shifted another $10,000 from the Aberdeen Pacific Equity fund to the Aberdeen Asia Smaller Cap fund (and it is already my second latest holding after Aberdeen Pacific Equity fund). The Asia story is exciting, and within it, when risk aversion subsides, and investors turn bullish in a big way, the small caps will really fly.