Is the worst over yet?

WITH two days of gains behind them, investors are now wondering if this rebound is a bright new beginning or a bear trap waiting the unwary.

There was no obvious answer in the numbers yesterday, just a sign that nerves are still frayed after the bloodbath of the past week.

The Straits Times Index (STI) opened strongly enough, surging nearly 60 points to an intra-day high of 3,102.46. But the air of nervousness put the STI into reverse after both the Nikkei 225 Stock Average in Tokyo and Hong Kong's Hang Seng Index went into the red.

The Nikkei fell 0.7 per cent and the Hang Seng lost 0.5 per cent but the STI showed more resilience to close 22.63 points higher at 3,059.15.

While investors cheered the upswing - the STI has recovered about 2.6 per cent in the past two days - analysts believe a sharper fall may be looming. 'While markets in Asia have broadly stabilised, it is still not entirely clear if the worst is behind us,' said United Overseas Bank economist Jimmy Koh.

For the five trading days to Monday, the STI fell 328 points or 9.9 per cent. While it has recovered some ground, it is still 7.6 per cent lower than its record high of 3,310.44 on Feb 23.

Shifts in investor psychology are highly unpredictable, especially when the herd mentality grips investors and sends them rushing for the exits, Mr Koh said. Thus, the tendency for financial markets to overshoot suggests that the eventual magnitude of the downturn is anyone's guess.

OCBC Investment Research analyst Ritesh Menon expects further declines for the STI in the weeks ahead. 'For every correction that suffered a loss ranging from 9 per cent to 11 per cent within the first phase of any selldown, the index would resume its plunge after a muted attempt at recovery.'

The final phase of the correction could result in a loss of more than 18 per cent from its peak, he added.

Market watchers say the market will continue to be volatile as investors keep a close watch on the yen-dollar rate for an indicative direction for the equity markets.

'Investors are focused on the carry trade, and many have been swift to ascribe much of the recent movement in equity markets to the unwinding of positions funded by yen liabilities,' said Goldman Sachs analyst Timothy Moe in a research note.

He noted that the correlations of equity markets to the yen-dollar exchange rate have moved sharply negative in recent weeks.

Indeed, the yen's 4.3 per cent rise against the greenback since Feb 23 has coincided with a decline in other regional markets. This has been fuelled by concerns that loans taken out in yen by global investors to buy investments might unravel as the Japanese currency strengthens.

Some estimates say investors borrowed more than US$200 billion (S$305.9 billion) in yen at low Japanese interest rates to finance risky investments elsewhere.

In Singapore, gainers led losers by 388 to 385 with about 2.04 billion shares worth $2.27 billion traded.

Hongkong Land and its parent Jardine Matheson accounted for half of the STI's 22-point gain. It rose 30 US cents to US$4.48 after the firm posted a 31 per cent gain in underlying profit.

Star Cruises fell 12.5 per cent to 28 US cents on concerns that it must now solely finance a HK$3.5 billion (S$685.3 million) Macau casino after Genting International's withdrawal.

arthurp@sph.com.sg