World equity markets continued to rally strongly in May, in most instances reversing the losses in the early part of the year. Investor sentiment improved notably and investors moved to increase exposure to risk assets including equities. Aggressive fiscal stimulus measures and moves to help stabilise financial markets underpinned this shift in investor confidence. The US stress test helped to remove the fear of the ‘unknown’, as most banks were reported to have more moderate capital needs than previously feared. While the economy faces continued challenges, there are some signs that business conditions are improving with leading indicators bouncing from lows. We are now in the midst of a relief rally that is re-pricing assets from being at risk of failure to being considered going concerns. While this rally may persist for a period, we are nonetheless remaining more defensive in our positioning, given the lack of clarity over end demand. The timing and shape of a recovery will be heavily influenced by the evolving economic backdrop and corporate earnings. The next major signpost that will influence investor behavior is the mid-year earnings reports and subsequent guidance for 2009 performance. We anticipate a mixed picture, with continued challenges and continued differentiation becoming increasingly evident. 2009 and perhaps even 2010 will likely be a stock picker’s market.
Asian equity markets surged in May supported by favourable economic data such as improvement in regional exports growth, global Purchasing Managers Index (PMI) and housing volume. Expectations for a recovery were raised when the US banks’ stress test results came in without any surprises. Asian economies recorded a sharp economic slowdown in the first quarter and the near-term economic outlook will continue to remain weak. However, the implementation of large stimulus measures in various Asian countries has increased the prospects for economic conditions to improve in the second half of the year.
TOPIX rose for the third consecutive month. The Japan market was buoyed by easing financial concerns and growing prospects of a bottoming in domestic and overseas economies. Results of the stress test for US banks were not as bad as expected and lent weight to the view that the worst problems for the financial system are over.
