Tey Tze Ming, Saxo Capital Markets

Here’s my Q&A with Saxo Capital Market’s Asia Pacific Strategist, Tey Tze Ming.

He is mildly bearish in the short-term but sees things picking up in 2010 and stocks higher a year from now.

Q1. The latest quarterly reporting period is off to a strong start. Is there enough room for upward movement?

I would say it’s too early to judge at the moment. Next week might be a better time to ask as we’ll have a much clearer picture of how things are shaping up. Some noteworthy stocks reporting this week, JPM(Wed), Citi (Thurs) and BankofAmerica(Fri), the banks are usually a good gauge of how things are going.

As to whether there is enough room for upward movement, I think the problem is that we have rallied perhaps too much in the last quarter. 3 months back as we looked at Q2 earnings and saw ‘green shoots’ of a recovering economy, the stock market has ralled by 23% in these 3 months.

This sets the bar for earnings season this quarter extremely high, as we’ll need to see a corresponding increment in earnings to justify those valuations at the moment.

Q2. We continue to see small pullbacks followed by rallies on expanding volume. Are equity buyers still waiting on the sidelines to get on board the train?

It does seem that after a patch of bad news, equities seem to bounce right back. I think more and more investors are piling back in the market, not just your regular retail investor, but institutional money also seems to be on the rise. Of course, the liquidity and accomodative interest rate policies in place around the world is also helping to attract investment again, not to mention the demand generated from all these fiscal stimulus packages in the West.

Q3. The Dow hit a one year high last Friday. When do you expect a market pullback?

The main risk for downside that we need to be looking for is for poor sentiment arising from disappointing numbers this reporting season. Not disappointing in terms of suprising on the negative, but just projected earnings that are lower than expected could put equities lower from current rich valuation levels.

Q4. Will the US economy return to positive growth in the fourth quarter?

Yes, but barely. At Saxo, we reckon that the global and US economy has indeed bottomed out sometime during Q2, 2009

Q5. With US unemployment at 9.8% last month and the economy still losing jobs at an elevated pace. Are fears about a W-shaped economy, otherwise known as a double-dip recession, overblown?

The housing market and unemployment in the US continue to be a problem. I think a w-shape double whammy is unlikely to occur, as recent data is showing that the economy is turning around and the bad news we have seen is slightly negative data, but nothing major or catastrophic to put equities towards the March lows we have seen. A negative surprise in numbers this season might put the markets back 8-10% lower, but unlikely to see panic selling and equities at firesale prices again.

Q6. Are you anticipating the Fed to raise rates anytime soon and will such talks spook the stock market?

Our expectation is that the Fed will not move until March 2010 at the very earliest. They have a tough job of managing potential inflation problems along with an accommodative policy. I doubt that a Fed move will spook the market and in fact, could be viewed as further proof that the recovery is robust enough to take a rate hike, further improving sentiment.

Q7. Most indicators of economic activity are stabilising, but at very depressed levels. What’s the best investment strategy right now?

We expect the pace of economic recovery to be slow and gradual. Investors should be looking to buy on dips and be prepared to hold for some time. Risk factors to look out for would be inflation as well as choppy markets as investors grapple to gauge the pace of recovery.

With a investment horizon of 1 to 2 years out, equities definitely look like a winner here.