Thursday, October 17, 2013

Market Analysis -- 17th Oct 13

Will US default ? That the question worried globally for the past weeks and the issue was not helped by US Government being partially shutdown since 1st October 2013 till now.  All this will not have happened if the political parties (Democrat and Republican) are able to compromise and put the nation interest ahead of politic.  Unfortunately, the effect if US default will have impact globally as ranging from funds, banks, institution to countries are all holding US Government bonds.  The impact is negative but nobody could give a precise measure of the effect of that.  Theoretically, a global financial crisis could result leading to another global recession since 2008 but in reality this might not be that serious.

For past weeks, global leaders and organization like IMF have been pressurizing US lawmakers to strike a deal to resolve the US debt ceiling issue so as to advert a default.  This is not something new as similar situation just happened 2 years ago with US lawmakers after much gridlock finally struck a deal to raise the debt ceiling then.  2 years later, the same situation happens again.  A sense of deja vu indeed and the ending to this current saga probably will be the same as that in 2011, a last minute deal between the 2 parties and kicking the can down the road again in which perhaps months or years later the same issue will resurface again.

As of latest, US Senate came out a short-term resolution in which to extend the US debt ceiling till 7th February 2014 and funds the Government till 15th January 2014, US Government will reopen on 17th Oct 2013.  This short-term solution was agreed by the House and President Obama eventually sign the bill to avoid perhaps the first default in US history.  Do not get overly optimistic about that, this solution is just kicking the can down the road and some 4 months later, we might be seeing the same drama again.  From this saga, there are several questions that any investors should ponder about.

1. What's the rational behind of having a debt ceiling ? If that can be easily raise then why need a debt ceiling in the first place.  A raise debt ceiling will be leading to ability to borrow more, incurring more debt for a nation and in the long run that can never be a good thing.

2. 2011 debt ceiling, 2012 fiscal cliff and now 2013 debt ceiling again, US lawmakers were doing the same thing over and over again, putting political party interest ahead of the nation, wait till last minute then compromise on a solution (short-term solution) which effectively still do not solve the issue but rather just kicking the can down the road.  To put it bluntly, it is like taking rest of the world for a ride with their actions.  Serious thoughts especially by global leaders must be made to create a cushion to buffer any external shock originated from US as the Americans just simply could not learn (or do not bother in) learning the lessons and keep repeating the same thing again.  Why should rest of the world be taken ransom by US when the US lawmakers rather look after own interest as priority ?

On paper, current situation looks rather pessimistic globally as all are simply looking at US, should US sneeze, rest of the world will catch the cold.  However, there is light to the tunnel, the fundamental of global economy is shifting as countries are more focus on consumer/services based type of economy model to create a domestic cushion to buffer external factor that could damage their own economy.  Not many could see this change but those selective who spotted it are putting their money in the correct place for big return next time.  Should this fundamental of global economy successfully shifted (how long will that take, probably a decade or two), a similar US saga then will not be as serious as it is now to rest of the world as by then US might not be the world number 1 economy already.  This is something anyone must bare in mind.

Asia countries at the moment are forming trade zone among themselves (ASEAN, China-ASEAN, Japan-ASEAN, etc) and the purpose is very obvious to create cushion to buffer from any external shock (from EU since the Euro crisis and US).  These zones will have a very large population (China with more than 1 billion of people and ASEAN with more than 500 million) and will be a very good consumer/services based sector to work in.  Moreover, Asian countries are nation mostly with nett surplus and not nett deficit like those in the West.

Singapore, being a member of ASEAN and located in Asia will benefit from all these measures in the long run.  Most of Singapore companies are either operating domestically or within Asia and that will make these companies benefit from those measures.  As such, the current US saga which caused panic selling in Singapore stock markets will result in bargain valuation in the stock prices of those companies and this only meant opportunity to get them cheap when an investor has a long term investing time frame.

Some (Asia) have learned their lesson from the 1997 financial crisis and yet some (US) just could not even learn the mistake just happened 2 years ago.  Should US being displaced from world number 1 economy status and should not be surprised if they do, they just have themselves to blame.

No comments:

Post a Comment