Most global markets posted gain for 2014 with Dow Jones gaining 7.52%, S&P500 +11.39%, Nasdaq +13.40%, Nikkei +7.12%, SSE +52.87%, HSI +1.28% and DAX +2.65%. Those who failed to register gain were not too bad either with FTSE 100 -2.71% and CAC 40 -0.54%. FTSE STI did better than the previous year with a gain of 6.24%. While US markets continued another "bull" year (both DJ and S&P500 created numerous record high throughout with S&P500 recorded some 53 record closing, that was like on average 1 record closing per week), the biggest winner for 2014 was none other than China in which the SSE rallied a 52.87%. Those readings might have given a very positive impression for 2014 but in fact it was not so. 2014 was another of those very eventful year with great volatility throughout. A quick recap of those key events in 2014.
Recap
2014 began with US Fed started its QE3 tapering and by October it has completely withdrew its QE3. Markets though reacted positively with each tapering as investors saw that as positive news that US economy was strengthening days by days in 2014. US 3Q GDP grew 5% and present unemployment rate stood at 5.8%. What caused the volatile market was the question of when US Fed will start to hike interest rate. US Fed did not specifically detailed a date of when it will raise interest rate and instead using the phase "keeping interest rate low for considerable time" and linking the dependence of economic data (unemployment rate and inflation) to decision of rate hike. Each time the phase "considerable time" will keep investors guessing when the rate hike will be. However, in the last FOMC meeting for 2014, US Fed has a new phase instead, "patience with rate hike and will not do it in before April 2015". Though fresh idea but still keep investors guessing when it will be. General consensus is somewhere in 3Q2015.
Though SSE was the biggest winner in 2014 but China economy faced with slow down in 2014 with its GDP appeared to be missing the target of 7.5%. That has prompted Chinese Government to launch several mini stimuli, PBOC did some monetary easing and even saw the first rate cut since 2008 just to boost growth. Those steps coupled with the HKEx-SSE link in the later part of 2014 (linkage of Hong Kong Exchange and Shanghai Exchange which enables investors ability to buy into SSE listed A-shares through the HKEx proxy with a daily quota basis) really created a super bull run in SSE.
Japan, the biggest winner in 2013 (for its stock market) was not that lucky this time round with its economy despite Nikkei able to gain 7.12% for 2014. Japan slipped into recession again as the so-called Abenomic's effect worn off. Sales tax was hike from 5% to 8% in April to help to fight its decades long deflation but it drove away consumer spending thereby impacting its economy. BOJ like US Fed was and is still on its own version of QE and even expand it in later part of 2014 but still failed to prevent Japan economy slipped back into recession. The threat of deflation might not be there after the sales tax hike but still fall short of its inflation target.
Europe could not be better either as Eurozone economy basically stalled and the threat of deflation worried many to the extend ECB has to launch its own version of QE, ABS purchase program and maintained low interest rate. That probably reflected in the mixed performance of European markets in which DAX was able to close positive but not for FTSE 100 and CAC 40 in 2014.
Apart from the economy issues, there were also several others key events happened. Ebola spread outside Africa and caused a little panic moment for global stock markets. Geopolitical issue like in the past years happened. First it was the Russia-Ukraine issue on Crimea, resulting in Crimea voted to rejoin Russia, led to Western nations implementing economic sanctions on Russia. Next, was the ISIS in the Middle East. The most recent event and still ongoing is the plunge in oil price due to oversupply (from US shale production) in which OPEC refused to cut supply in their latest meeting. That has great impact on Russia's Ruble and potentially sending Russia economy into recession together with the impact from sanctions. In term of disaster, it was not a year for Malaysia as 1 airplane still missing (probably in the Indian Ocean), 1 was shot down over the sky in Ukraine and the last one was found crashed into the Java sea.
Looking Ahead
2015 is not to be expected to be a peaceful year either despite some optimism in global economy. Notable events that could cause volatility to the markets are :-
1. Ongoing oil price plunge in which the impact should reflect to those small and medium oil exploration or producer companies (no contracts and/or cancellation of contracts lead to lower revenue which affecting their high leverage debt level) and exporting nations in 2015. Eyes will be on middle of the year to see whether OPEC will move to cut supply or not. Cutting supply should be a global effort for both OPEC and non-OPEC nations and trying to second guess where oil price will land is nothing but extremely negative view.
2. When will US Fed start to raise interest rate ? Technically speaking, US Fed will start hike interest rate this year but the focus should be not on when and by how much but rather the pace in which it will be doing so. USD has already strengthen before rate hike and could further strengthen if really rate is hike and that should have some impact on others' currency especially those in the emerging or developing nations.
3. US debts. In the past 2 years in which it led to its debt rating being downgraded from AAA+ for the first time in history, a temporary Government shutdown and a near default case will be back in focus in 2015 again. In the past this issue has caused some nervousness in the stock markets and better prepared for one this year. It always ended it was resolved at the last minute of the deadline and will not be surprised it is deja vu again.
4. Disinflation or deflation or low inflation was a topic for Europe and Japan last year. With current plunge in oil price, that will not help in fighting threat of deflation. Central Bankers have been "printing money" and keeping interest rate low to fight deflation and they could even do more (on monetary easing) should the deflation situation does not improve.
5. Economy of China, Europe and Japan will be on focus. China's economic growth has been slowed more than expected resulting in Chinese Government started monetary easing last year. Europe has not actually fully recovered from the Eurozone debt saga in 2011 and apart from the usual stall in economy growth, threat of deflation is another main concern. Will not be surprised if condition does not improved, ECB could follow the US Fed style of QE. For Japan, whether the so-called Abenomic is working or not still divided. They might have moved away from their decades long issue of deflation but its economy is again back to recession. All eyes will be on what's the next step from PM Shinzo Abe.
6. ASEAN Integration, that should be the positive note for the 10-nations group (Singapore, Thailand, Malaysia, Indonesia, the Philippines, Mynmar, Vietnam, Brunei, Laos and Cambodia). That should help the group to attract foreign investment and building up a defensive buffer among themselves from external shocks and will not be surprised is the next theme play after BRICS.
7. Geopolitical risk, it has been in the past, it is ongoing now (with the ISIS) and it will still be there in the future. Each time whenever it happens, it will have impact on global stock markets.
8. Disasters. It is best not to have but then earthquakes, tsunami, flood, typhoon, aviation disaster, etc all happened in the past (on average one per year) so it is better to be mentally prepared for it though we do not know which one will come up next.
There will be 3 scenarios in which 1 of those will play out in 2015 and investors must get prepare for it. The 3 scenarios are Bull Marches On, Big Bear Strikes Back and The Lost Decade.
Bull Marches On
Like what the title said expecting another bull run in 2015 and that should make most very happy about it. The general consensus to justify that will be the continuous improving US economy which could take over the driving force in 2015, the further monetary easing from Europe, Japan and China providing that excessive liquidity that best at inflating stock markets.
Big Bear Strikes Back
Need not explain further what that mean. There is no shortage of candidate that will send global economy to another recession and crashing the stock markets.
1. Bond Bubble
Due to the excessive monetary stimuli being launched, all the money pumping into bonds (Government and corporate bonds) resulting in depressed bond yield (Germany 2-year bond hitting a real negative return). A default, which is not impossible as the Greece's case already served as advance warning, could just spiral out of control and did the damage.
2. Tech Bubble
Mobile smart devices, mobile apps and internet domain are getting very hot nowadays. It is like anything used in daily lifestyle could just convert into a mobile smart devices or replace with some mobile apps. Low barrier of entry has caused mobile apps, social media, online shopping, audio/video live streaming just popping up one after another. For everything that were created or developed there will be money invested in it and all these are just like whenever there is a nectar source, all the bees will fly to it. It will eventually lead to imbalance of demand and supply and what follows will be self-correction.
3. Geopolitical Risk
In the past almost every year will see at least one geopolitical risk being played out. Each time when it happened global stock markets just went into correction mode. Though so far none of those have caused a global economy recession but that doesn't mean it will never in the future. It just take a real bad one and everything will explode.
4. Deadly Virus
We have experienced that in 2003 SARS when global economy went into recession. Since then, almost each year a new deadly virus will surface or discover like the recent Ebola. It just take another nasty one to create an epidemic, striking fear and panic to human beings and it will be like in 2003 situation again.
The Lost Decade
Sound rather abstract but if thinks in the direction of what happen to Japanese economy due to the deflation issue it will not be difficult to understand. Signs have been there for the past 2 to 3 years that this scenario is playing out now. In this case global economy will just ding-dong between recession (shallow one and restricted to certain nations) and slow growth. When economy is weak, stimulus will be launched to boost growth. Upon withdrawal of stimulus or the effect wears off the economy will slump back again. This is because the fundamental is not strong enough to carry on the growth. This scenario happens when the shift in fundamental is not detected, that is the long-run macroeconomics equilibrium has been shifted to a new position. When economy is weak meaning the long-run macroeconomics line has been move off its equilibrium position. Monetary and/or fiscal policies will have to be applied to move that line back to its equilibrium position. Without realizing the new equilibrium position no matter how much monetary and/or fiscal policies being used can never bring the line back to the actual long-run macroeconomics equilibrium and thereby creating the ding-dong effect. This process is painful one as could take years or even decades for the people to realize the shift and apply the correct measures to restore everything back to normal.
The above 3 scenarios will have different impact on the downside risk for investment in stock market. Big Bear Strikes Back is the one with least risk. This is so because you are anticipating and expecting for such a scenario to occur and will have the appropriate measures in mind to prevent or minimize the downside risk. The moderate risk will be Bull Marches On. Optimism level will be high but never know when and what will cause the music to stop and when it does most will be the one standing and not sitting on a chair. As such, the lack of preemptive measures will incur more downside risk. The high risk case will be The Lost Decade. As mentioned before, this scenario could last years or even decades and will produce numerous false signals of doom and boom. These false signals cause confusion and misjudgement in investment thereby making unnecessary losses and missed opportunities. When things looking positive, the fear of being left out will lead to chasing the market but in the end get caught at the high end. When things looking negative, the fear and panic will cause most to sideline and miss the bargain opportunity. Downside risk and time frame are the unknown for this case.
Appropriate strategy must be pen out for each of the 3 scenarios to protect any investment so as to minimize the downside risk.
Singapore
2 issues to highlight for Singapore in 2015, economy growth and general election. Doubts started to surface in 2011 about whether Singapore Government has run out of ideas to grow the nation. Economic data since 2011 have failed to invalidate the doubts, annual economic growth failed to better than 2011, Non-Oil Domestic Export slumps for past 2 years and core inflation remains above 2% despite global facing low inflation. Excuse was given Singapore open economy model which relies on export, the sluggish data were expected due to the weakness in global economy. Good thing never last forever and if there is a problem solution must be found immediately and not making excuse. To make excuse is just to signal running out of ideas. If China is able to realize and reform from its export based model to consumers and services based model in order to achieve sustainable and quality growth, why a more developed nation like Singapore is not able to ?
Many are anticipating whether Singapore will hold a General Election in 2015 and if so how many opposition will get nominated or will the ruling party able to maintain their ruling power. Unfortunately, majority are focusing on the wrong thing. The main point shall be on who can provide new and fresh ideas to grow the economy of Singapore and even if it requires a coalition Government or another political party to form the next Government, just have to accept and vote for it. Selfish act like die-hard supporter style or still living in the pasts type of voting in the expense of Singapore future must not be allowed. If it needs to have a change the a change must be made ! Rises from ashes to dominate to decline happen repeatedly in thousand years of human history, no need to panic and fear should the current ruling part is being disposed in the next election.
Global money as supply, global spending as demand, excessive money printed by Central Bankers created an oversupply in which the
demand is not able to catch up. Deflation is the result but the real evil is not knowing the problem.
