25 January 2010

US and China updates Jan2010

Investors are being carried away by a surprise Government’s Policies measures planned. Although the intention of US and China governments are good as the words goes-by, share markets could not stand it that way.

What was being implemented in China?
· Issuing government bonds with higher yield, this is to reduce the liquidity in the market, by encouraging money flowing back to the government’s war chest.
· Increasing the minimum down-payment for property purchases from 20% to 40%.
· Increased bank reserve requirement by 0.5% to 16% for big banks, and 14% for smaller banks.

What was being planned in US?
Obama’s bank plan composing two main elements:
1. Limitation of bank’s size.
2. Limitation of products and services offered, which is deem lucrative for banks.

As such, US and China market have corrected by 5.1% and 4.4% respectively. The percentage was no big deal, given the bull-run since March 2009. However, investors just can’t take it anymore, and this kind of policy changes gave them a very good excuse to take-profit now. Also, China was going to celebrate their long festive holiday next month, with many investors expected to stay side-lined instead.

Many analysts saying that investors are waiting for more clarifications in terms of China’s policy, inflation and interest rate movements. With Q4 GDP growth of 10%, China was expected to hike interest rate by 50 basis points by 2H10. Remember, this kind of measures is normal and it only happens when the situation was permitted.
Ask yourself, "I want an over-heating, or under-recovery economy?"

Meanwhile, Obama popular moves signaled a more restricted banking industry, which had gone through its worst years after some best years. These best years witnessed some good earnings, resulting from some innovating – complicated and hard to understand – products. However, those worst years was fuelled by excessive borrowings without proper risk management policies in place.

Now, Obama is doing some rectification works, but, seems that he didn’t get the backing of investment communities, whom still enjoying the spectacular bull-run. I think the market was oversold, given the not-yet-approved Obama’s plan, and minimal impacts on the earnings growth of US banks.

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