INFLATIONARY FEARS CONTINUE to stalk markets this week. Already, Hong Kong is rolling out drastic measures to curb the inflow of “hot money” and property speculation. The SAR has already announced that a 15% stamp duty will be imposed for property bought and sold within six months starting from Nov 20, while downpayment for properties costing more than HK$12 million ($2 million) will rise to 50% from 40%. Further announcements are likely to be made during the weekend. Will Singapore follow suit? The government has already announced measures to keep public housing affordable through a series of curbs and has allowed the SGD to appreciate against its trade-weighted basket.

Clearly, fear of further measures weighed heavily on the markets. The Hang Seng Index lost a further 31 points to end the week at 23,605 after something of a roller coaster ride. The STI shed 17 points to close at 3,197.

 

Meanwhile, on the Mainland, analysts are expecting the Chinese government to announce draconian measures to curb inflation, including price controls, subsidies and a possible rise in interest rates. “Prices for food were up 10.1% in October but remained relatively stable for most other items,” observed Kim Eng Research in a Nov 20 report. “This rise is partially attributable to a sharp jump in commodity prices. While no specifics have been given as yet, sources say authorities were considering price caps, subsidies and stricter punishments for hoarding or speculation in corn, cotton and other products.” 

 

China last imposed curbs on cooking oil prices in January 2008, and abolished them within six months. Kim Eng reckons that Wilmar International is likely to feel the impact more than other commodity stocks. In 2008, Wilmar was required to get official approval for any price hikes. But the curbs did not adversely affect Wilmar’s profitability significantly as it managed to sustain its margins. But the current measures could have a negative impact on Wilmar, Kim Eng states. “Also consider that its margins are already under pressure, as evidenced in its last quarterly reporting,” it adds.

 

On the flip side, DBS Vickers believes China Minzhong Food Corp is likely to escape largely unscathed. “Caps on producers’ prices may cause some margin pressure,” the local broker stated in a Nov 20 report. “However, Minzhong’s attractive overall gross margins (FY10 around 40% overall, 56% for fresh produce) would help buffer lower average selling prices.”

 

Some analysts remain clearly bullish though. Standard Chartered Research for instance believes that the world economy is in something it calls a super-cycle. “In 2000, the world economy was US$32 trillion ($41.5 trillion) in size. Now, following the global recession and financial crisis, the world economy is almost twice the size a decade ago. Next year, based on conservative growth assumptions, this could rise to US$64.7 trillion,” it estimates.

 

Citi Research thinks that markets have further to rise. Since the bull market of 2002-2007 saw emerging markets rise by 425%, Citi reasons that this bull market has much further to go. “Talk of a bubble in emerging market valuations at this stage of the bull market is premature although leaving extremely accommodative monetary policy conditions for long enough would, of course, eventually increase the risk of a bubble forming,” the report states. “We are strongly of the belief that markets are not in bubble territory. In coming months, given strong growth prospects, there will be sufficient investor appetite and ‘room’ in valuations for the emerging market benchmark to break out to new highs.”

 

In the short term, medium-term momentum indicators have turned down for both the Hang Seng Index and the STI. For the latter, the rising 50-day moving average at 3,158 should provide support for any further retreat. Of greater concern though is the possible breakout at 21.75 by the VIX, a measure of market volatility and whose trend is inversely proportional to equity markets. It is at the neckline of a base formation and the breakout level is at 23.50.