SECOND liners and penny stocks continued to soak up the bulk of the market's window-dressing energies yesterday as blue chips took a back seat for most of the session.

 

The Straits Times Index, which had risen 34 points in the previous two days and in local currency was up 63 per cent for the year to date, hovered within a narrow band before ending a nett 10 points higher at 2,879.76 on 2009's penultimate trading day.

 

As always, Hong Kong's Hang Seng Index was the prime source of direction for the STI, its falls and rises being mirrored exactly in the local index.

 

As for the second line, Genting Singapore and Oceanus were again popular, while China XLX Fertiliser, which traded for as high as 90 cents earlier this month when it dual-listed in Hong Kong but collapsed below 60 cents this week, enjoyed a bit of a respite when it rebounded 4 cents to 62.5 cents with 34 million traded yesterday.

 

As was the case on Tuesday, observers attributed the hectic rotational playing of many second liners to last-minute window-dressing. Turnover excluding foreign currency issues was 1.8 billion units worth $1.1 billion or an average of 61 cents per unit.

 

In its 2010 Global Economics outlook, Morgan Stanley said it expects central banks to start exiting their expansionary policies around mid-2010 but the withdrawal process could have unintended consequences, particularly for bond markets because of rising sovereign and inflation risks.

 

'The next crisis is likely to be a crisis of confidence in governments' and central banks' ability to shoulder the rising public sector debt burden without creating inflation,' said MS.

 

In its 2010 Global Equity Strategy, MS said it still likes equities but sees rising risks.

 

'Headwinds are rising but are not sufficient to kill the rally yet,' it said. 'We think the year will start strong - we see 10-15 per cent upside in equities from here - but think that markets have overshot fair value'.

Finally, in its 2010 US Equity Strategy, the broker said that it expects choppy waters ahead.

 

'We expect the S&P 500 to peak early in the year and trough sometime in Q2 or Q3 before staging a comeback towards year-end. If growth sustainability is established, the combination of rising asset allocation flows (out of fixed income) and greater retail participation could see the market trading up to . . . 1,300 early in 2010,' MS added.

 

'Alternatively, if fears of a double-dip reassert themselves through 2010, the market is likely to view the situation as broadly similar to Japan. The S&P would most likely then trade at sub-2x book (a 30 per cent discount to the average from 2001-2007 but above the 2008 low of 1.5x) and as low as 900,' said MS.

 

In its assessment of the US economy, research outfit Ideaglobal said weaker results from manufacturing were a drag on growth in H1 2009 (likely to post notable improvement into H1 2010).

 

'However, prices paid are beginning to pose a headwind, but this has largely been due to the recent run-up in commodities continuing over a longer period of time. Recent manufacturing data revealed notable improvement across most regions, boding well for the overall picture in the months ahead.

Nevertheless, troubles in the financial sector ultimately signal some difficulties ahead for everyone else (particularly sluggish sales), including manufacturing,' said Ideaglobal.