So, where next for stock markets? Emil Wolter, head of strategy for Asian equities at RBS clearly belongs to the bearish camp. “We expect the MSCI Asia-Pacific ex-Japan to fall 15–20% from current levels, to the 300–315 range,” Wolter predicts. The MSCI Asia-Pacific ex-Japan ended the week at 369. He is of the view that regional markets will continue to derate and “become at least one standard deviation cheap”.

 

When The Edge Singapore spoke to him in March, he was already sounding a note on caution on Asian equities. Save for a few defensive plays, he said most had little room for upside. In his latest report on May 21, Wolter now thinks he was too bullish.

 

“We have been too optimistic in our outlook for regional equities and are now putting that right. As we expect the market to eventually fall another 15–20% from current levels, we advise investors to use any forthcoming bounce to reposition themselves defensively,” he states in the report.

 

Moreover, Wolter doesn’t believe that Asian markets at present levels represent a good buying opportunity. “We see equities as a sideshow in the financial markets showdown; the main factors are sovereign debt and currencies, markets many times the size of global and Asian equity markets,” he adds.

 

But the bigger issue for Asian investors to consider now is what the world will look like next year because liquidity for financial assets may have dried up by then. The crunch, coupled with slowing growth, isn’t exactly a positive underpinning for the markets.

 

Hard landing in China

In true contrarian form, Wolter says investors should focus on the increasing probability of a hard landing in China rather than worry about problems in the Eurozone. “If the stock market really is a discounting mechanism, the outlook for the economy must be poor as the Shanghai composite is already down 21% year-to-date and 3% lower over the past year. This loosely suggests that Chinese GDP is currently on track for a deceleration from the current 11.9% real GDP growth to somewhere between 8–9% or even lower next year.”

 

Wolter reckons that analysts will start to downgrade Asian earnings soon. The upcoming technical rebound should be an opportunity to “reposition portfolios into utilities and telcos, rather than attempting to catch the proverbial falling knife in more cyclical investment ideas”, he says.

 

In the other camp, Shane Oliver, chief economist and investment strategist at AMP Capital Investors, is more sanguine about the markets. Having fallen so far so fast, shares are now very oversold and due for at least a bounce, he says.

 

He sees the current decline as part of a correction rather than the start of a new bear market. “The global recovery is likely to remain on track, the profit outlook is positive, monetary conditions are very easy, China is likely getting closer to easing up on its tightening measures with respect to property and shares are now very cheap again,” Oliver writes in a report dated May 21. He sees the bull market in shares resuming in the months ahead which will ultimately take them to much higher levels by year end, he adds.

 

Prudential PLC starts trading on May 25. The Singapore Exchange today said it has secured dedicated market makers for the trading of Pru shares The market makers will provide two-way bid/offer quotes to enhance liquidity. Pru shares will also be added to the Central Depository share borrowing facility, research on the insurance giant will be made available in Singapore, and Macquarie Bank will list a call warrant on Prudential shares listed on SGX.

 

Short term oversold pressures should trigger a rebound in the STI which ended the week at 2,701.20 after testing an intra-day low of 2,676. The 200-day moving average at 2,775 is likely to provide resistance for this rebound move. Overall though, the STI has formed a series of lower highs and lower lows, the dreaded downtrend. The developing downtrend has thrown up a couple of targets. The STI tested 2,778, rebounded to 2,904, then broke below 2,778. This break gave a target of 2,652. Separately, a break below 2,700–2,710 completes a top and indicates a target of 2,400.