Investing on hopes

Before the weekend, the investment community was fearful that the government of Spain might not be able to rescue its banks from bad debts. Spain did not have the cash or means to recapitalise its banks. The global equity markets suffered losses before the weekend.

Then on Saturday, Spain announced that it had reached a deal to get €100 billion from the European Union (EU) and International Monetary Fund (IMF) to prevent a contagion of bank failures in the nation.

The share markets in Asian region rallied today on news from Spain and positive trade data coming out of China during the same weekend. This was a relief rally from a badly affected equity markets the week before.

The real problem of bad loans held by some Spanish banks had not gone away. The recapitalising of bank capital is to help banks to tie over this period without a bank run. The banks will take several years to clean up their bad debts on their books. In a good scenario environment, it may take 2 to 3 years to recover to positive earnings path, like some American banks during the global financial crisis of 2007/09. In a worst case situation, it may take a decade to clean up the mess, much like the Japan in the 1990s, when the asset bubble burst.

It seems that investors move from gloom to hope and back to gloom as the stock markets reacted in accordance to news prevailing at the time. If investors react each time significant news was released, investors can be very busy moving in and out of the market. Investors appeared to decide on basis of hope of things will turn out well. This hope may not be reality. At the end of day, the economy will be the best gauge of how equity will move. Investors need to see through the smoke screens to see clearly beyond the smoke.

Copyright © 2012, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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