Wednesday, March 25, 2009

>Asia Insights (HSBC)

Bounce - or bottom?

■ History shows that bear markets end when monetary policy is eased aggressively and the banking system is sorted

■ The former has now happened; the latter may soon

■ There seems more upside than downside risk for stocks

“A week is a long time in politics”, former British Prime Minister Harold Wilson famously said. It can be a long time in stock markets too. It was only Monday last week that the S&P500 hit a new cycle low, 57% off its October 2007 peak. In the seven trading days since, it has risen 17%. Asia ex Japan didn’t quite make a new low last week (though Japan, India and Singapore did) but it has bounced 12% in the past seven days too.

Of course, strong rallies are a typical characteristic of bear markets. We have already had four of 10% or more in Asia during the current episode (Chart 1). But could this bounce be something bigger and continue for some time? Remember that during the 1997-98 Asian Financial Crisis, there was one rally of 50% (Chart 2). Or, even, could last week prove to be the bottom for the market?

History can provide some lessons. As Mark Twain said: “History doesn’t repeat itself, but it does rhyme.” Similar episodes in the past – the 1930s in the US, Sweden’s 1992 banking crisis, Japan in the 1990s – give some pointers. Most clearly, when recession is caused by a financial crisis, stocks tend to bottom when the last troubled bank is rescued – even if the economy remains weak for some time after. Second, when stocks do bottom, the rebound can be huge: the Dow rose 371% in the five years after it bottomed in 1932.

With further positive surprises possible (US Treasury Secretary Geithner can hardly disappoint the markets any more with his bank bail-out plan) and quantitative easing beginning, there seems more risk on the upside than on the downside for markets now.

To see full report: ASIA INSIGHTS