Market sits at the crossroads

The nation’s domestic economy is displaying healthy signs this month which bodes well for investors The market in July will be affected by three main factors.

These are the financial performance of listed companies in the second quarter, the macroeconomic environment expected to be more supportive with a loosened monetary policy and the global financial market, which is anticipated to present many short-term risks.

Global economic growth is likely to be slower than forecast due to the economic recession in the United States and Europe. While the international and domestic macroeconomic factors tend to be mutually supportive, microeconomic factors (companies’ news) tend to lead the market. However, if the macroeconomy does not prosper, companies’ news will not be enough to support the market in the short-term.

July’s domestic economy is positive

The State Bank is now more confident in the money loosening policy after June’s reasonable inflation number (0.22 per cent). Thus, the third quarter is expected to see a much stronger credit growth due to the following reasons:

(i) Credit growth in the first six months was approximately 10.5 per cent, meaning that in the next six months there is still room for 14.5 per cent credit growth to bump money into the economy, 50 per cent higher than the first and second quarters. The challenge is that the last months of the year are more sensitive to inflation, so the third quarter is the best time to bump money into the economy.

(ii) The GDP in the second quarter was 6.4 per cent year-on-year or 6.16 per cent in the first half of this year. If the third quarter’s credit is not stirred, the chance of achieving high GDP growth in 2010 is not high.

At the end of June, the State Bank made some positive moves for the monetary market in the third quarter, demonstrated through the resolution to lower deposit rates from 12 to 10 per cent and lower loan rates to stimulate production. Our worry is how the State Bank can implement this policy.

Bumping money through the open market is unlikely to have a quick and strong impact in the short term, thus we expect other more innovative approaches. When the loan rate is still higher than 12 per cent (the psychological hurdle rate for companies), credit will not be boosted despite a likely scenario that the money supply in July will peak during the year to date.

Besides, July is normally the month of low spending, hence will not put pressure on the inflation and exchange rates. Inflation is likely to be maintained at 0.3 per cent, equivalent to that of June.

The global economy conceals many risks

Compared to May and June, the global economy in July is predicted to be much brighter, although it is still not stable, evidenced by the following reasons. Recently, the US government reduced economic growth expectations in 2010 due to concerns about the speed of the economic recovery.

The Chinese economy is also showing signs of a slowdown after a long period of hot growth. This is also a desire of the Chinese government in its strategy for sustainable development. However, it is likely to negatively impact on the global economy in the short term.

European countries which are not directly affected by the debt crisis are gradually reducing their public debt, causing a negative impact on the area’s economic growth.

China is planning to appreciate the yuan and this policy is expected to have a positive impact on net export economies into China such as US, Western Europe and Japan. But, it is not beneficial to China’s export sector which is China’s advantage at the moment. In short-term, this may exert negative impacts on China’s domestic production, thus will affect the global merchandise structure.

The global stock market is awaiting the financial performance of companies in the US and Europe released for the second quarter to testify the impact of the European debt crisis micro level.

Second quarter performances play a key role

Although the second quarter is not a period that investors have big expectations for companies’ performances, this information is most valuable for investors to surf the market. Here are our views:

(i) The overall financial performance of companies in the second quarter will not be a surprise and could be lower than that of 2009’s second quarter which was marked by a loosened monetary policy. However, we could see a slight increase compared to 2010’s first quarter in conjunction with credit interest rate growth.

(ii) There will be large difference in quality of growth among industries. The construction material industries (except for steel) and real estate industries (especially companies with big projects in the north) are likely to demonstrate the strongest growth while the banking, IT and steel industries may not reach expected results.

The market is short of information for investors to surf the market and the second quarter’s financial performance is an important benchmark for investors to make decisions. Compared to big companies, small companies do not generate big headlines but are capable of managing their performance results, thus penny stocks are still in high demand in July.

With the above analysis, according to fundamental analysis, the market in July will be strongly segmented, which supports market surfing in the short term. Liquidity in July could be improved and become even better in the latter half of this month when the financial statements of listed companies are released.

After a period of adjustment, the chance that the stock market indices plunge in July is not as high as it was in May and June. However, under the current global environment, the likelihood of a market hike is fairly low. Thus, we recommend investors to restructure portfolios, pick up stocks of companies which displayed good second quarter results and take profits within narrow margins.