By Goh Eng Yeow, Senior Correspondent

SO FAR, September this year has shaken off the month's traditional reputation for buffeting investors with rough sailing.

Instead, it has been decidedly smooth sailing, and a world away from the nightmare month of September last year.

Across the globe, stock indexes soared to their highest levels for this year last week as traders laid to rest the ghastly memory of the collapse of US investment bank Lehman Brothers last September. That event took the world's financial system to the brink of collapse, and eventually set off a global recession.

But the question now dogging investors even as they bask in the glow of the sizzling share price run-up of the past six months is: What dangers lie in wait?

Here, then, is a review of some of the major issues exercising the minds of top investors and policymakers.

One of the biggest challenges facing investors is what to make of the weakness in the greenback as it sinks to its lowest levels in over a year against other key currencies such as the euro and the yen, as well as regional units like the Singdollar.

Given its role as the world's reserve currency, everything from hard commodities such as crude oil and iron ore to edibles like wheat and soya beans is priced in US dollars.

This has spawned fears that runaway inflation may again rear its ugly head as producers of raw materials demand to be paid more in what they perceive to be a currency that is being debased rapidly - the US dollar.

A related question is how soon central bankers plan to drain the trillions of dollars worth of liquidity pumped into the global financial system since last year to douse the vast financial firestorm ignited by Lehman's collapse.

Signs are emerging that the US government is beginning to unwind some of the government loan and guarantee schemes it had used to shore up wobbly domestic lenders.

Next month, another measure, which is believed to be partly responsible for triggering the stock market rally, will be removed when the US central bank completes its planned purchase of US$300 billion (S$424 billion) of government bonds.

In order to purchase the bonds, the Federal Reserve had been printing money in the belief the bond sellers would use the money to increase spending and reduce their other borrowings - thus flooding the market with cash as a result.

Some of this money has found its way into the stock market, where it has propelled stock prices sharply higher.

But influential US strategists such as Ms Meredith Whitney have warned that the stock market might face a big test as the US government starts winding down its massive support programme.

There is simply too much bad news around - a weak US economy languishing under weak job growth and home sales - to move the stock market higher, so the argument goes.

Another source of worry is China, whose red-hot Shanghai bourse has been a powerful magnet drawing huge sums of foreign money into the region.

On the surface, China gives the appearance that its loose money policy will continue, as Premier Wen Jiabao warned last month that the 'foundations of recovery are not stable'.

But a subtle shift seems to be underway as its central bank takes liquidity out of the market. For example, Chinese lenders will have less money to pass out as they obey a new directive to hoist their reserves to 150 per cent of non-performing loans by the end of the year, from 134.8 per cent as of end-June.

Still, despite bearishness triggered by the liquidity draining measures taken by the United States and China, one other point which may be worth considering is the extremely low interest rate environment prevailing across the globe.

Even without the Fed printing more money, there will be tremendous amounts of cheap funds floating in global financial markets as central banks have kept interest rates at rock-bottom levels in order to ensure the global financial system fully heals from the wounds inflicted by Lehman's collapse.

This might initially propel stock prices higher in the next few months, even though the problems associated with rising inflation might inflict considerable damage on a company's balance sheet further down the road as runaway costs erode its profit margin.

One possible strategy for investors is to identify potential winners in the next leg up on stock markets before any correction is brought on by a build-up in inflationary pressure.

There is an intriguing close correlation between the level of economic development in a country and the performance of the local stock market since Lehman's collapse on Sept 15 last year.

The red-hot Shanghai market is clearly the runaway winner with a 53 per cent gain in the past year. Other markets such as Taipei, Seoul and Hong Kong have also made big gains as companies benefit from their close proximity to China and gain huge orders from exposure there.

But commodity-rich stock markets such as Jakarta and Kuala Lumpur have outperformed as well due to rising raw material prices.

The laggards are markets in developed countries such as Sydney and Tokyo, where stock prices have not bounced back to pre-Lehman levels. This is not surprising, given the big exposure of some of their biggest companies to the troubled US market, where the Dow Jones Industrial Average is still trading 12.4 per cent below its Sept 15, 2008 level.

As a relatively developed market itself, Singapore is also a laggard, with stock prices gaining only 7 per cent in the past 12 months.

Looking ahead, two scenarios might emerge: There is a chance the gains of outperformers such as Shanghai and Jakarta might be trimmed as investors switch to laggard markets such as Singapore or Sydney, which offer better upside potential.

The other scenario is that bourses around the globe will continue to soar, fuelled by investors taking advantage of even more cheap money flooding the world.

engyeow@sph.com.sg

This article was first published in The Straits Times.