Friday August 2, 6:31 PM
INVESTMENT TIPS - AUGUST 2002
By Vasu Menon, Chief Editorial finatiQ
At this stage, most economists and analysts do not think that the US economy will slip into another recession, unless stock prices on Wall Street fall sharply and the greenback plunges from current levels.
The US economy should be able to hold its horses but recovery is likely to be modest and may come through at a slower pace.
Wall Street to stay volatile with some downside
Investors who are expecting a quick-fix to Wall Street's problems may be hoping for too much. It will take time for corporate America to restore its credibility.
The US Securities and Exchange Commission (SEC) had last month ordered the chief executive officers and chief financial officers of nearly 1,000 of the largest US public-listed companies to certify, by August 14, that their recent financial statements are true and accurate.
The move was intended at shoring up investor confidence in corporate America after the recent accounting scandals that rocked Wall Street.
The deadline will probably keep traders on Wall Street on the edge for the next few weeks.
There are concerns that companies whose books are not in order may decide to wash their dirty linen ahead of the deadline on August 14.
This may add to the volatility on Wall Street and even send stock prices lower in the near term.
Even if companies meet the August 14 deadline, not all of them will be out of the woods. This is because the SEC had said last December that it will conduct its own review of the annual reports of all companies in the Fortune 500 stable.
The review probably cannot be completed by August 14.
More earnings downgrades on Wall Street?
After a meagre 2 per cent earnings growth in the second quarter, stocks in the S&P 500 are expected to post much better earnings growth of about 14 per cent in the third quarter. But this is a downgrade from nearly 17 per cent a few weeks ago.
So while third quarter earnings prospects on Wall Street looks better then the second quarter, there is the risk that analysts on Wall Street may downgrade their earnings further in the months ahead.
According to First Call, more companies are telling analysts to lower forecasts for the third quarter. For each company that raised third quarter estimates as it reported second quarter results, 2.2 companies lowered them. That ratio was 1-to-1.3 in the first quarter.
Asian markets likely to outperform Wall Street
Some analysts and fund managers are predicting that Asian bourses will de-couple from Wall Street for the following reasons:
1. Valuations in Asia are more attractive than the US. Consequently, global fund managers are starting to shift money out of the US into Asia.
2. Asia went through a crisis five years ago, which forced the region to make changes aimed at tightening accounting standards and improving corporate governance and transparency. In fact, some Asian companies may have become too conservative with their accounting practices in making hefty provisions over the last few years.
3. While the US is seeing a re-emergence of its trade and budget deficits, Asia has enjoyed strong current account surpluses in the last five years. This has helped the region to triple its foreign reserves from US$300 billion to US$840 billion.
4. Unlike the US, spending in Asia has been suppressed for the last few years. Domestic savings have risen and personal borrowings have come off. So we are now seeing a pick-up in spending fuelled by savings. As Asian consumers become more comfortable about economic and employment prospects, bank borrowings will increase, giving domestic spending an additional boost.
Another chance to buy into Asia
The pull-back in Asian market (see table below) have made them even more attractive then before, although the possibility of another five to eight per cent down side from current levels cannot be discounted. So it is best to spread out your investments over the next few months and not invest a lump sum.
Which funds to buy?
Some Asian funds to consider include the Aberdeen Pacific Equity Fund, INVESCO GT Asia Enterprise Fund, Savers Korea Fund, Franklin Templeton Korea Fund, Schroder Singapore Trust, Aberdeen Singapore Equity Fund, Aberdeen China Opportunities Fund, HSBC Indian Growth Fund, Aberdeen Malaysia Equity Fund, Savers Malaysia Fund, Aberdeen Thailand Equity Fund, Savers Thailand Fund and AIG Acorns of Asia Balanced Fund.
Correction from recent high
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