Monday, April 7, 2014

Market Analysis -- 7th Apr 14

Like in past quarters, 2014 1Q passed with events and a volatile market.  Events ranging from US Fed continued its stimulus tapering which stands at US$55b/mth now, US economy strengthening in particular the job market despite the weak weather weather, China continued to slow down in its economic growth resulting in Chinese Government unveiled a measured stimulus lately (spending in infrastructure), Japan economy appears to be weakening probably due to the wearing down effect of the stimulus, Europe still facing the threat of deflation to the Ukraine saga which led to Crimea being annexed by Russia resulting in US and Europe fired off sanctions against it.  For stock markets, US stock markets hitting record high lately while emerging markets, the target of selling down last year have rebounded with latest indication that funds are flowing back there.  Looking ahead there could only be one thing.  The smart one will put money into Asia, the average one will be in US and Europe markets doing nothing but chasing wind and the not smart one will be those selling off Asia now.

Why the smart one will put money into Asia despite the ongoing US Fed tapering on its stimulus and a potential interest rate hike next year ? To be exact, it is "selected Asia".  China still undergoing the reform and during these periods you can expect one or two issues being popped up along the way which in one way will have impact on its economic growth when those are being rectified.  The problem with China now is not those being popped up issue but rather the general mindset of investors on China.  Most still cannot accept China will be heading to a slower and sustainable growth vs the double-digit growth in the past and "China will save the rest of the world" type of mentality.  China is currently moving in a "2-steps forwards and 1-step back" and those funds consistently moving funds in and out of China because of the change in economic data (good economy funds inflow, bad data funds outflow) do nothing but disrupt China reform only.  Investors should just leave China alone to its reform and if investing in China must have a long time-frame to cater for the reformation.  Japan recently economic data are taking a pause or probably feeling the effect of a worn off effect of its stimulus.  The recent sale tax hike (from 5% to 8%) though on its intention is good to eventually bring its inflation to the 2% target but for short and mid-term it will have impact on its economic growth as consumer holding back the spending so prepare for more weakness in its economic data in the short to mid term.  One important thing is Japan is till surviving under a life-support system (monetary stimulus).  China and Japan are probably the less attractive one in North Asia.  For South East Asia, the domestic issues with Thailand and Indonesia are having a drag on their economy without any doubt but as a collective zone (which includes all the 10 ASEAN nations), the condition of investing is much attractive than those in China and Japan.  As a whole, Asia economy growth is still the main engine for the world.  This is the why smart one will put money into (selected) Asia.

US economy showing sign of firm recovery with US stock markets hitting record high lately while Europe debt crisis is over apart from the closely monitor deflation at the moment.  Majority of the consensus is very positive on the economy in US and Europe but despite all this, putting money in US and Europe is nothing but chasing the wind only.  On the surface everything look great but should one take a deeper analysis down, it will all be a different picture.  US jobless rate in coming down to the 6.5% target but has the real unemployment rate really improving ? Have all those jobs lost in the 2008 crisis finally recovered ? The debt ceiling issue some 2 years ago still largely remain unresolved though the increase in it has avert a default crisis but should fiscal policy being unveiled to cut the debt ceiling rather than increase its further ? Having more debt is good or less is good ? US still under monetary stimulus despite the tapering, can US economy really able to stand on its own without any monetary stimulus and what will be the potential threat of rising interest rate next ?  Though withdrawing monetary stimulus and hiking interest rate is to "remove something that were not supposed to be there initially" or is restoring everything back to its long-run equilibrium norm, the problem is the lack of fiscal policies mean there will always be a problem with or without monetary stimulus.  For all we know, monetary stimulus might even be back after interest rate hike next (with Central Bank is like being addicted to monetary stimulus now, they can be a quick fix to economy crisis but is definitely not a solid long term solution).  As for Europe, probably the debt issue is finally over but still couple of questions remained.  Eurozone unemployment rate still high, the low inflation despite with existing monetary stimulus by ECB is a threat with Eurozone potentially could fall into deflation.  The timing of ECB action to counter deflation is very critical now.  To unveil measures now meaning deflation has finally become reality and to sit back to wait could be get caught by acting too late.  These are the questions that were the same last year and still remain the same and unresolved now.  Stock markets have been hitting record high is merely due to overly optimistic and funds feeling the pressure to under-perform as compared to the benchmark pushing them further up.  Current underlying fundamental definitely does not justify that.  This is why the average one will be putting money in US and Europe doing nothing but chasing the wind only.

The not so smart one will be those who sell Asia now.  They will have tonnes of reasons to justify that ranging from US economy is recovering, stock valuation is not cheap (given the prospect of better days ahead), US interest rate hike will be next and will not benefit much to Asia (given that most of Asian nations are classified under the emerging market) to pointing finger at China recent weak economic data.  All the above are just the on the surface analysis.  The underlying fundamental of Asia economy has largely being ignored (or in a way they fail to analyze correctly) which resulting them in selling off Asia now.

Investors might be tempted to invest now given the bull market sentiment globally but from a retail investor's perspective, especially in Singapore, there is no strong reason to invest now unless it is for the reason of hedging against inflation.  Singapore is a small island with limited or no natural resources, the cost of living will forever be rising.  Though recently inflation data do not indicate a high level of inflation, that doesn't mean in the long run it will remain the same.  Inflation and income are always in a cycle process, a self feedback mechanism (people will higher income will tend to willing to spend much driving up prices due to increase in demand, the rise in revenue will feed back to higher income and to overcome the higher expense, cost will pass to consumer further drive up the price again and the cycle just go on).  However, if somewhere along the way the cycle depart from its normal path, problem will arise with income level being insufficient to overcome the rising cost.  Relying on bank saving is one of the way to hedge inflation but unfortunately that will never work in Singapore even if US Fed will be hiking rate soon.  In Singapore bank saving is never or able to hedge against the forever rising costs.  That is why should one decide to invest now must be due to hedging of inflation for the long run (willing to part the money to ride to any storm or bear market in the future).  If that is not the reason, current global market is just a trader market. 

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