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(SINGAPORE) Is there a disconnect between corporate reality and the equity markets?
This question came to the fore as the Straits Times Index (STI) romped to a new 10-month high of 2,636 points even as 'big hitters' like Singapore Airlines and CapitaLand posted quarterly losses and warned of tough days ahead.
The world's second biggest airline by market capitalisation yesterday posted a loss of $307 million for the April-June quarter, no thanks to a combination of the global economic downturn, the outbreak of Influenza A and fuel hedging losses.
This is only the second time that the company has posted a quarterly loss. In April-June 2003, at the height of the Sars pandemic, it sank into the red to the tune of $312 million.
But this time, unlike in FY2003/04, the company warned that it could be in the red for the full year. If so, this would be its first loss-making year since the airline came into existence in 1972.
Meanwhile, South-east Asia's biggest property developer CapitaLand also posted its first quarterly loss since 2003, citing writedowns on investments.
And if a net loss of $156.9 million for the April-June period was not bad enough, CapitaLand painted a gloomy picture for the full year.
'Although some stability has been restored in the financial markets, the outlook for 2009 remains uncertain,' company chairman Richard Hu said in a statement.
Excluding revaluations and impairments, CapitaLand said, it made a net profit of $124 million for the quarter.
Next week, the three banks will be reporting their quarterly results. And they will be closely watched to see the levels of non-performing loans and fee-based income trends.
Others such as SembCorp will provide indications of the recent trend in global infrastructure spending. While the market seems to be pinning its hopes on the green shoots of recovery, forward indicators put out by major companies such as SIA and CapitaLand indicate otherwise.
In SIA's case, premium seat sales - an indicator of corporate travel - remains under pressure, though there are signs of slight sequential improvements. And premium seats account for 40 per cent of the airline's income.
The International Air Transport Association (Iata) expects the industry to post losses of some US$9 billion this year.
Asia-Pacific carriers suffered a 14.5 per cent year- on-year fall in passenger demand in June - double the global passenger traffic fall of 7.2 per cent.
As for the property sector, pent-up demand has unleashed a new frenzy of buying by upgraders and those still sitting on cash from en bloc sales done over the past two years. As a result, prices of new residential property have risen 5-7 per cent month-on- month.
No doubt, some developers will be enjoying the spoils of offloading inventory. But as CIMB noted, loosening of the credit market and strong household balance sheets have helped carry transactions so far.
The next leg of demand growth has to come from fundamental improvements in the economy. It remains to be seen whether incremental demand in 2010-2011 will be sufficient to absorb the supply poised to hit the market, the research house said.
Nevertheless, liquidity flowing into the Singapore market has boosted the ST Index by a whopping 81 per cent since March.
Although Singapore's weighting in the average institutional investor's Asia ex-Japan fund slipped to 7.16 last month, from 7.24 in May, overall ownership remained well above the February-April range of 6.5-6.9 per cent.
Much of the buying in Asia in general, and Singapore in particular, has come from growth-focused Asian and US-European boutique funds that find Europe too unexciting and the US too volatile.
So is there a disconnect between reality and hope?
Perhaps a bit.
But in the past, markets have had a tendency to read or lead the real economy by about six months.
If so, perhaps the likes of SIA and CapitaLand could have a better year ahead than they think.
The picture could become clearer next week after the banks and other 'big blues' announce results and make forward- looking statements.
But as Nouriel Roubini of New York University's Stern School of Business observed recently, some of the rise in global stock markets is justified because the world avoided the risk of a near depression.
'That was the risk we were facing in the first quarter. But markets have gone up too much, too soon, based on economic fundamentals,' he noted. 'If the recovery is going to be weaker, profits are not going to recover as fast. If you are still going to have weakness in the rest of the world, Europe, Japan, I think there will be downside risk for the stock market from this point on.'
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