Markets are rebounding!

Last week confirmed the trend that markets are now rebounding from their lows caused by the uncertainty over the Greek debt crisis amongst other things. As the Greeks pushed through with their austerity measures, IMF agreed to the additional loans to Greece. This alone was a strong stabaliser to the markets.

I said two weeks back that either way, they will sort this problem out, or the markets will force them to. And now that Greece at least as enough funding to last it until the end of the year, markets will move on. Positive data from US manufacturing also helped boost last week’s sentiment. The decisive victory by the opposition party in the Thai elections has also brought much needed stability to the Thailand political landscape and with the military saying they will not step in, things are also looking up for Thailand.

I am confident that the second half of 2011 will see a strong rebound by markets. We may already be seeing it starting to happen now already. But basically, despite worries about Europe, about the US economy, and China tightening, plus Japan being hit by the tsunami, Asian markets held up alright. Some were down just marginally since the start of the year, while others were flat. The key reason why I believe there wasn’t that much downside was because markets were already cheap to begin with.

Rarely have we ever seen markets which are seeing such strong earnings growth being priced so cheaply. Rarely have we seen such strong economic growth numbers tempered by such caution and even outright pessimism. Looking at the performance of the Singapore market as an example, would you have believed that our economy just did 15% growth last year, and that even this year we are looking at 4 to 6% growth? The kind of breathtaking economic performance of Asia’s many countries should have seen markets in Asia hit all time highs by now, but most Asian market is off their all time high some as much as 20 to 30% off.

Thus, I was not so worried even when the worries in May and June brought some corrections in markets. Fundamentally, I felt that the US economy was just hitting a soft patch and the latest economic data appears to reaffirm that. Europe’s debt crisis will take a long time to sort out, but the key thing to remember is that Europe’s corporate health is very different from the fiscal health of its governments, and even there, there are key differences. Greece’s economic health cannot not be compared to Germany’s economic health. Also, not every single European company is drowning in high levels of debt and facing high interest rates to roll over those debts.

Markets are outright cheap at this point in time. Even developed markets are trading at PE levels of 9 to 12 times forward PE for next year. And Asian markets, even with their substantially higher growth and strong balance sheets are trading at only slightly higher valuations.

Another key thing which has me confident that the best is yet to come is that oil prices are moderating. At the earlier part of the year, we were looking at oil prices of above $110 USD per barrel at one point. But since then, they have fallen to below 100 USD per barrel. This is significant because very high prices are the one thing that can potentially derail Asian economies which I worry about. This is because Asia’s strong growth has already caused inflation to become a worry, and high oil prices will only fuel inflation further.

Thus, I viewed the recent drop in oil prices with no small amount of relief as this reaffirmed my view that Asia’s economic growth would be sustainable. In fact, the many measures taken by the various Asian governments against rising inflation would have the long term effect of allowing the upcoming economic growth period to be a much more sustainable as opposed to one driven to a short but dizzy height due to asset bubbles forming, only to see it crashing down soon after.

The next upcoming 3 years at least will be good ones for Asia. The shift of economic centre from the west to Asia will only hasten. Amidst all this, it is a matter of time before stock markets in Asia also rise to take into account the growing importance of Asia’s markets. Amidst all this, one just needs to be patient. When the rebound in markets come, as what we are seeing now, I fully expect it to be a significant one. Asia’s markets have been depressed for too long taking into account its very strong fundamentals and cheap valuations. The west may have reason to be cautious, but Asia should not.

As long as one is well diversified, you can be quite confident entering markets at this point in time. A lot of the fears and concerns are old news already and well priced into the market. Just don’t leave out bond funds from the equation when investing and you should be able to handle any of the relatively short and small corrections which will occur every now and then in the coming 2 to 3 years. Asian and emerging market bonds will be very interesting as well in the coming 3 years. If the growth of Asia’s economies makes Asian equity markets look attractive, then the weakness of the west’s public finances make Asia and emerging market debt look like “must buys” when ranked up against western debt.

It may take a while, but in time to come, the markets will price all this in. Asian markets should cumulatively be of a much bigger market capitalization than they are today. In a similar vein, it is unbelievable that some western countries can still have their debt being priced and treated as AAA grade and some of Asia’s debt is still being viewed as “emerging market” and hence being assigned a lower credit rating. Whether by the continued long term inflows of money into Asia, and the appreciating currencies, stock markets, or bond markets, the markets will eventually correct this disparity. And as they do, the investor who is positioned correctly will gain from this.