Saturday, May 24, 2014

Market Analysis -- 24th May 14

Global markets performed relatively strong so far for the first 5 months in 2014 with US markets hitting fresh high on several occasions, emerging markets that were fallen out last year made remarkable recovery and is trading around last year peak (before the sell down in May) presently.  This happened mainly due to the largely positive economic data from US despite US Fed started its QE3 tapering January this year.  As of now, the monthly bond buying program stands at US$45b from US$85b.  As according, the whole QE3 could eventually totally withdraw in September this year.  However, it is not the time to be overly optimistic or optimistic yet.  There are several issues that happening or might be happening for rest of the year.

For US, it is not all about economy finally recover or when US Fed will eventually raise rate.  It is about can the economy still sustain the growth without the life support of QE ?  It is also about what is the circumstances that US Fed decided to raise interest rate.  Then the question next will be without life support and normal interest rate environment, can those corporation still able to put in good earning and can the country economy really sustain the growth ?  Though for both of those conditions to happen might be middle of 2015, it is not the time presently to be overly optimistic or optimistic.

For China, nothing has changed.  It is still under going reform on its economy from heavily export oriented to focus on consumer and service based.  Current China is like moving 2 steps in front and backtrack 1 step as it moves along in reformation.  Positive data can bring cheer and optimism but a stint of bad data (probably due to rectifying those issues being surfaced during reform) will create some panic.  That was the reason China stock market still largely underperformed globally.  Investing in China need ultimate patience.

For Europe, recovering from recession due to the EU debts issue some 4 years ago has been on track but recently data seemed that it is losing steam on it.  Mixed of growth among the EU nations (Germany and UK still showing strength in recovery but France performed on the opposite).  There are still problems facing EU and if those do not tackle properly, they could derail those efforts being put in 4 years ago.  Deflation is the biggest concern for EU now.  While it has not happened but the threat of happening is high and as for such, ECB might consider to act next month (lower interest rate or pump in more stimulus).  As for any new actions by ECB could really stem out the problem, it is still too early to conclude.  Another problem is the still high unemployment rate in EU.  Without job, no income how consumer going to spend to spur the economy growth ?  No demand in spending will lead to no inflation which is causing the problem of potential deflation now.  Printing more money does not mean will increase consumer spending.  EU is something that must be cautiously optimistic about.

Japan economy also appeared to be losing some stem after the so-called Abenomic.  The recent sale tax hike from 5% to 8% could even have some short to mid-term impact on the downside of its economy as consumers chose to spend less now.  Like US and EU, Japan still under the so-called life supporting system (monetary easing) and should its economy manage to go back on track, it will face the problem of how and when to withdraw the stimulus and what impact will that have on the economy.  Japan stock market was one of the best performer last year but its performance this year is relatively flat and muted and might even biased towards more downside in the next few months when the impact of sale tax hike hit.

ASEAN nations were hit by the sell down last May as funds outflow due to fear of US Fed tapering.  Most managed to recover now and funds starting to flowing back.  However, the ever presence of political uncertainties in country like Thailand (the recent spat which eventually lead to Thai military coup), Indonesia will be going into President Election in July after the recent nationwide election and can the new Government overturn its deficit issue ?  These uncertainties will always cap the real potential of ASEAN.  ASEAN being the second highest consumer market just behind China (ASEAN population of more than 600m vs China of over 1b) has all the potentials to grow if all the 10 nations are able to co-operate, integrate smoothly and each individual nation is free from political uncertainties.  Any investment in ASEAN will always have to take those downside as risks and factor in for it.

Singapore, probably the least problem among ASEAN nations is not without its own problem too.  The over population which caused at times social issues (mainly due to foreigners unable to integrate into the society) and infrastructure problem (transportation and housing woes) led the Government to reduce the influx of foreigners.  The lack of foreigners has a hit on companies that relied on cheaper labor force to work and eventually hit on the country growth.  Furthermore, the very open economy model which is export oriented also taking a hit as US, Europe, Japan and China are not in their good old days anymore.  Though, the US recovery has many to believe Singapore economy will benefit but better be cautious and not overly optimistic about it due to the fundamental shift in global economy model.  With no or limited natural resources, Singapore will always be faced with inflation threat and should the income level is not growing fast enough in line with inflation, the little red dot will have problem.  The latest reading of inflation for April was +2.5% with core inflation at +2.3% (as compared with +2% in March). 

Majority has the believed that US economy recovery will benefit the rest of the world but is it really true ? The fundamental shift in global economy is Asia is the main focus of global economy and US has to rely on Asia to grow (no longer the other way round).  Imagine what is Apple without China market ? What will happen to Microsoft and Intel without Asia market ?  Hence, the recovery on US economy is good for globally but it is not something that should be overly optimistic about.  A dip in Asia economy will derail US economy and you will see US Fed (probably being addicted to monetary easing) coming back again; to print more money.

Lately, there has been increase in number of territorial spat (Japan-China, Japan-Taiwan, Japan-South Korea, China-Vietnam, Japan-Philippines, Russia-Ukraine) and believe this should not be taken lightly.  Should investigate the underlying of the spat.  This could be due to fighting of resources and if it is really true then it will have be something to do with economic growth.  This type of territorial spat if really due to fighting of resources could happen anywhere globally and definitely will be putting a dent in global economy growth as a whole.

"Sell in May and go away", this probably is what on most mind now.  Will that happen or will it not ?  With summer coming up next and the once in 4 years World Cup next month in Brazil, it will naturally mute the stock markets.  Stock markets should be having a last rally in the coming 1 or 2 weeks before everything tone downCorrection if some called it could happen in the range of between 3%-5% or 5%-10% depending on any particular downside events.  Global markets are either in fair value or over-stretched a little based on fundamental and hence a reasonable correction is not totally something that will surprise next.  For short-term traders or investors, the "Sell in May and go away" might resonate but for those with mid and long time frame, the next 1.5 to 2 months could be those bargain hunt opportunity again.

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