Tuesday, July 1, 2014

Market Analysis -- 1st Jul 14

FTSE STI ended 1H2014 with a 2.79% gain, a better performer compared to regional bourses like HSI, SSE and Nikkei which registered a drop for the first 6 month of the year.  While US markets kept breaking new high recently, S&P500 only just managed a 6.05% gain for 1H2014, not very impressive given that it has been hitting fresh high on numerous occasions this year.

For 1H2014, there were mixed bags of positive and negative events which resulted in the mixed performance for global markets.  The major positive events were :-

1. US economy is recovering, unemployment rate hitting below 6.5% and managed to recover all those jobs lost during the 2008 sub-prime crisis while US Fed continued its tapering to now being US$35b/month on bond buying.
2. China economy after consecutive contraction in its manufacturing activities for past 6 to 8 months finally back to the expansion mode.
3. Japan after the sales tax hike in April finally moved out of deflation; its primarily objective for the so-called Abenomic.
4. Euro zone economy though recovering but faced with the threat of deflation and during the June ECB meeting, series of measures include rate cut were unveiled to prevent deflation.

On the other hands, several of major negative events that could derail the global economy if not contained properly were also appeared in 1H2014 :-

1. Ukraine tension which eventually led to Crimea voted to rejoin Russia and that issue has created tension between Europe/US and Russia leading to several economic sanctions on Russia that will put a dent to their economy.  Ukraine has a new President but at the latest, it back out from ceasefire and attempt to attack the rebel in the country.  Should that situation escalate to more serious level, it will have impact on Europe and Russia economy (primarily linked).
2. Iraq violence in which the militants attacked and occupied on several of the Iraqi city which caused some concern of global oil output driving up crude oil price up.  So far the situation has not being totally resolved even if US is pondering on whether to carry out air strike.  Should the violence prolong, crude oil price continue to move up, that will have impact on global economy.

Looking ahead though many painted rosy picture for global economy, it might not turn out to be as there are still many questions that remained unanswered.

1. According to the pace of US Fed tapering, its stimulus program should be able to fully withdraw probably by October this year earliest though it is targeted to be end of 2014.  The question will remain can US economy really be able to sustain on its own without any "life support" ?  Furthermore, from US Fed latest guidance of interest rate in which it sees a 1.13% by end of 2015, US Fed could start raising rate in 1Q of 2015.  Consider each interest rate hike is 0.25% and it will take about 4.5 times in 2015 to achieve the year end target of 1.13% and that will translate to perhaps each hike per quarter.  Again question will be how US economy going to sustain when it moves back to the days of norm interest rate.  All those at the moment are uncertainties and unknown.  As such, when US markets kept making new high recently, questions will be have they really factor in those conditions ?  For US markets to be making new high lately, it has more becoming of overly optimism rather than fundamental supported.  As known, US markets in 2013 surprised many and caused many funds being under-performed when benchmark against it.  Now for the funds in order to under-perform the benchmark again this year, all will be injecting the money into the US markets taking the "US economy is recovering" theme as a reason to back it.  With mostly vested in the stock markets, supporting it, it is understandable why they can hitting new high.  It will just need an event to trigger for the funds to rush for the exit door together will see US markets going for a deep correction.  That event could be the end of QE later this year to the first interest rate hike from US Fed.  After all, keep option opens that investors are not mentally prepared for end of QE and first rate hike on the economy as a whole.

2. Euro zone might not be in deflation stage now but whether the recent measures to tackle that by ECB will be effective or too late to act still remain unknown.  Should it be effective, Europe will escape deflation but has to refocus on boosting its economy as recent activities has shown slow down.  If it was a too late to act attempt, it can create panic in the financial markets and questions will be what other tools ECB will have ?  Should put that on cautious mode now rather than "everything are ok now".  Euro zone still have high unemployment, with that very few consumption activities will occur and hence will be a barrier to boost its economy growth and not to mention to fend off deflation.  Political leaders in EU should put the unemployment issue as top priority.

3. China might have shown sign of economy rebound recently thanks to its mini stimulus but that not end of the story.  As China continues to reform on its economy, one can expect other issues that could derail the economy (like the shadow banking) to surface resulting in a "move 2 steps ahead and make 1 step back" type of economy progress.  As China is world number 2 economy, it will have impact on global economy.  This is also the primarily reason why China stock markets has been under-performed for past years as investors will not know what issues will be up next that could derail the economy and many rather stay on the cautious and wait and see side.

4. Japan, the world number 3 economy might have achieved its target of moving out from past decades of deflation but the economy recovery under the so-called Abenomic policies seem to be wearing off lately.  While BOJ might be tempting to start its own version of stimulus tapering given that deflation is no longer a threat, questions will be what other fiscal policies can Shino Abe comes out next to tackle the recent slow down.

5. ASEAN will be in full integration next year and providing an alternate to global economy given that ASEAN has a population of more than 600m, second largest consumer market to China (over 1 billion of population), it is however not smooth sailing either.  The 10-nations ASEAN bloc does have its own issue individually.  Political uncertainties in Thailand and Indonesia are always there and perhaps will never go away in the future.  Thailand now is under the Junta rule (election schedule to be next year) while Indonesia will be holding Presidential election in a week time and questions will be can the new leader be able to boost their respective economy given all those troubles created lately.  Myanmar is the latest hottest thing in ASEAN but when everyone are rushing in, it will eventually create a bubble and what will happen when the bubble burst ? (similar situation to Vietnam before the 2008 global financial crisis).  Singapore, probably the most stable nation among the bloc is not problem free either.  Looking around the several social issues we are having now (housing, transportation, healthcare, population to even CPF) one should really have to start to wonder is the Government running out of ideas to grow the nation.  So much so for the past years or decades of growth it created widening of income gap (Singapore has one of the lowest Gini coefficient among the developed nations) and should it continue to be so, it will do no good to the nation eventually.  So much so for all those problems, investors should not discard the potential of the ASEAN market.  10 years ago it might be too early to talk about ASEAN potential, now it is not too late either as in fact it is at the correct stage.  However, those problems mentioned above by individual nations will have to be factored in as systemic risk, something that one has to live with it and no way to getting rid of it.

In general, many are bullish and optimistic on second half of 2014, but behind those bullishness and optimism, one should always carry the cautiousness with it.  Globally, it is not in a state of trouble free and any events if escalated and not able to contain properly will start the next financial crisis.

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