Wednesday, July 1, 2015

Market Analysis -- 1st Jul 15

Global markets have a good start in 2015 in particular China market but entered negative sentiment at the end of 1H 2015 despite most of the global stock markets were up as of YTD amid all the concerns of global economy slowing down, deflation threats and the latest Greece default and possibility of euro exit.  FTSE STI however ended 1H 2015 down 1.42% without any surprise and even the super bull run in SSE also dipped into technical correction mode.

US interest rate hike has been the talking point almost every month when there is a US Fed FOMC meeting.  Since the complete QE3 tapering last October, the debate on when will be the first rate hike has been shifted from March to June and now to September with some even suggesting could only happen in 2016.  US Fed kept on using "patient" and "considerable time" to delay the interest rate and keep it link with economic data.  To be precised, it looks like US Fed has driven itself into a dead corner regarding rate hike.  Apart from US, rest of the world is doing monetary easing ranging from Europe, Japan, Australia and China.  The monetary tightening move from US Fed is totally out of sync to the rest of the world and begins to wondering is the US Fed getting this correct this time round.  US Fed probably knows of the problem global economy is facing now (slowing down and deflation) and delaying the rate hike through the "patient" and "considerable time" comments to buy times for it.  Furthermore, it is not when will be the first rate hike that matters but rather the post rate hike, the pace of it.  This is the part that most focus on wrongly since day 1.  Even if US Fed going to start rate hike in 2H 2015, there should not be any panic (except probably US markets).  At the moment there are lot of believes that US economy will be good in 2H but do be careful with that believe.  Global economy is all linked up and the landscape of current economy is no longer the same as of 10 years ago due to the fundamental shift.  How can US economy standalone when rest of the world is facing slowdown and deflation ?

Economy slowdown and deflation have been the concern in 1H 2015 and led Europe, Japan, Australia, South Korea, China, etc into launching waves of monetary easing (interest rate cut, RRR cut and bond buying) and that will not be the end of it as in 2H 2015, the trend will continue.  Global markets entered into a bull run hitting new multi-years high after those waves of monetary easing.  However, the fundamental of the economy though improved slightly but still weak and this has created nothing but bubbles in the stock markets.  What global markets doing now and perhaps for the next 2 to 3 months will be bursting the bubbles so that the valuation of the stocks is in line with the fundamental.

The hot topics at the moment is about Greece.  Greece and its creditors (IMF and ECB namely) have failed to strike a deal for another bailout package sending Greece default on its payment to IMF on 30th June 2015 deadline.  Furthermore, the Greek Government calls for a referendum on 5th July 2015 on its citizen to vote whether they will accept the austerity conditions set by the creditors in order to get the bailout package.  A referendum after the payment deadline ?  Totally make no sense and this act just reinforce the case that the Greek Government is playing political game.  Should the referendum is a NO on 5th July, Greece exit of euro is going to happen.  That was what causing the volatility of global stock markets last week, this week and maybe next week after the outcome of the referendum.  Greece default and exit euro after all might not be a bad thing in the long run.  Greece's debt issue was first surfaced in 2011 and since then every year the issue resurfaced again and again along with possibility of Greece exit from euro.  In the early stage, the problem has spread to other nations like Italy, Spain, Portugal and Ireland with those nations all getting bailout and reformed their economy respectively.  4 years down the road, Italy, Spain, Portugal and Ireland more or less has recovered from the damage except Greece.  Should Greece granted bailout this time round, the same issue can be surfacing again and again in the future.  The failure of the Greek Government to reform their economy through austerity measures has become a laughing stock for euro as a whole and will continue to be a drag on EU economy.  On the surface Greece default and euro exit strikes a fear but that might not be the case as that should be pretty well contained.  Greece issue is not something new and has been going on for past 4 years, creditors lending money to Greece should be now know the risk and prepared or have contingency plans for the worst.  Should they not having one, afraid they deserve to lose money for it and only themselves to blame.  On the other hand, should Greece exit euro, they could devalue their own currency to mend their economy.  As a whole, whatever outcome from Greece's referendum should not be a big dent to the global economy.  The only one that suffer is none other than the innocent Greek citizens.

The setting up of AIIB (Asian Infrastructure Investment Bank) by China has finally taken shape and in line to take off this year.  That is a big boost to Asian economy as a whole as this can create a big buffer to shield or buffer Asian economy (the main driving force in global economy now) from external factors by the West (US and Europe).  In addition, that moves will see China accelerate its pace to outgrow US to be world number 1 economy, dilute US influence in Asia and concrete the fact that the fundamental of global economy has shifted.  US will not surrender its influence in Asia without a fight as it trying to get the TPP to be approved by its congress.  Even if the TPP deal is finalized, that might not help much for US in Asia.  Too late and too little !  Another event happening end of this year will be the integration of ASEAN Economic Community.  The rational of AEC is to transform ASEAN into a region (of more than 600m population, the third largest after China and India) with free movement of goods, services, investments, skilled labour and free flow of capital.  Simply put it, that is a buffer or shield created by ASEAN nations from any external risks.  A lesson learned from 1997 Asian Financial Crisis.  The AIIB and AEC will be a growth driver for Asian economy and opportunities for Asian investors.

Singapore economy has been in doldrums due to its open economic style in relying on export and furthermore, it is also facing deflation threat with latest inflation sink into negative region.  This should not be surprising given the state of the current global economy.  However, that should not be an excuse for it.  The problem can jolly well go down to the fact that current Government is running out of ideas to grow the economy.  Again this is not surprising at all given that the quality of those leaders (heli-drop from military and mostly academic scholars) and from every perspectives there are doubts on their abilities.  With the nation pension scheme (CPF) giving those 2.5% pa return and forever inflation in prices on basic things like housing, transport, education, foods and health care the big question will be how the citizen going to retire by just relying on CPF ?  Two solutions, either vote out the current Government in the next General Election or do something individually about it to ensure Singapore is still a place for retirement.  Two things to look at for investors in Singapore stock market in 2H 2015, property stocks and S-Reits.  It will be no surprise should Singapore Government starts to ease the property cooling measures in 2H (Property Market -- 11th Mar 15) as the the crashing of property market once US Fed rate hike and threat of deflation will send Singapore economy into recession.  Easing of property cooling measures will benefit property stocks as a whole.  As most are getting a bit the "nervous" for S-Reits going into 2H due to US Fed could hike rate.  Though the "higher" interest rate environment will do no good to S-Reits given that they are all leverage but that doesn't mean all bad for investors in S-Reits.  Let faces the fact that Singaporean can't retire based on purely CPF or invest in the risk-free Singapore Government bonds or those penny little interest from banks.  One needs long-term investment in particular those can provide consistent high-yield in dividend and that solely narrow down to S-Reits.  If you have the time frame and mindset that investing in S-Reits is for long-term, a period in which by purely collecting dividend over period of times is able to get back all the capital being initially invested (it is not impossible) then S-Reits will be the one to watch and invest when their stock prices get sell down due to US Fed interest rate hike.

To summarize, regardless what going to happen in 2H 2015 in global economy, one of the 3 scenario (Bull Marches On, Big Bear Strikes Back and The Lost Decade) will still be playing out and the best for any investors in stock market is to think of a strategy that is best suited to tackle all the 3 scenario.

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