06 June 2010

Reality Check: Sustainable?

After experiencing a strong rally of more than a year, it’s time for us to take a step back, and figure out what is actually pushing the share market up to current level.

One year ago, Governments globally lowering down interest rate, pumping liquidity, were rolling out billions of economy stimulus packages. The purpose is to prevent our economy to down deep into depression. Well, these measures seem to be effective thus far. However, reality kicks in while more and more people are jumping into share market hoping it was not too late. Now, it was time for us to do some reality checks on our economy.

Perception 1:
The market is up because investors have confidence in the economy?

Reality check:
At first, they think is cheap and low interest rate environment (mega-sales).
Then, they scared losing the opportunity while others are investing (kia-su).
Then, they invest because others are investing (herd-mentality).

Are all of them really investing based on economy? Definitely NOT

Perception 2:
Manufacturing sector is recovering with double-digit growth?

Reality check:
Manufactures are producing just to boost up their stocks level (re-fill), after months of decreasing demands and lower production last year. This is not demand-induced. This is to bring the stocks level back to normal, hoping to cater for better demand in the future. Anyway, the demand still not kicks-in and a lot of them already are facing higher prices of raw materials now. Clear example will be in electronics industry.

Perception 3:
GDP growth is above expectations this year?

Reality check:
GDP of a country is based on four main factors, namely government spending (G), domestic consumptions (D), export-import (E-X), and tangible investment activities (I).

G is activated due to stimulus packages.
D is activated due to incentives given.
E-X is activated due to the above reason (perception 2).
I is activated due to history low interest rate environment, and excellent share market performances too.

In fact, the effect of stimulus packages takes years to show the result. Incentives given are stopped now. Interest rate is inching up again.

In my opinion, the sustainable of our world economy need to count on the basic rule – demand and supply. We are producing now without a really strong demand. And, we need a better employment rate and business sentiments to create this demand. Sounds easy though, but many efforts are needed.

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