Saturday, December 19, 2015

Market Analysis -- 19th Dec 15

The last market analysis for 2015. 

Finally, US Fed did the long-awaited and overdue rate hike with a 25 basis point increment bring the US Fed fund rate from 0 - 0.25% to 0.25% - 0.50%.  The came after more than 1 year after US Fed completely withdrew the QE3 and also the first rate hike since 2006.  There should be no disagreement now on US Fed decision to start normalizing its interest rate despite the fact that it should have done so much early, probably 6-month earlier.  Then again there should be no fear of the next rate hike as US Fed pledged to a gradual increment and again it is data dependent.  That action from the 15th - 16th Dec 2015 FOMC meeting removed one of the uncertainties from global stock markets in which for most part of 2015 has been volatile due to uncertain of when US Fed will start to raise rate.  Looking forwards what's next ?

The rate hike signifies US Fed's confidence of US economy but don't get too carry away as global economy still out of sync with weakness still persist in the economy of EU, Japan, China and most part of the world.  On one hand US Fed normalizing rate, on the other hand other Central Bankers like ECB, BOJ and PBOC still on monetary easing.  Can US economy being isolated from what's happening to rest of the world ?  Maybe 20 years ago US economy is able to do that but not in the modern day internet era economy.  Moreover, the current slump in crude oil price due to the supply glut will in one way or another hit the shale gas industry of US economy.  With low crude oil price damaging the revenue of these companies and now the higher interest rate can easily mountain up the debt for these companies.  It will just take one default which in turn trigger another and US economy will take the hit again.  The strengthening of USD due to the rate hike will have a negative impact on US tech companies whose revenue comprising on exporting.  With higher interest rate money withdrawing from emerging market will lead to further weakness in emerging market economy and to completely say that will not affect US economy is too early.

There is also doom view on US rate hike to rest of the world as higher interest rate environment will lead to more difficult in getting loan for companies to grow their business given the current weak global economy state.  However, for most part of the world Central Bankers (ECB, BOJ, China, etc) still on monetary easing state and the cheap money will continue to flow.  US rate hike negative to rest of the world ?  Maybe not in current state.

In general, the US Fed rate hike is a neither here nor there type of situation.  Investors (probably not those in US) will still have to continue vested in stocks to get higher return comparing to putting money in banks or bonds.  This is especially so in Singapore despite higher interest rate can hit certain sectors like property and real estate investment trust (REITs).  On the other hand, banks in Singapore might not benefit much from higher interest rate environment as the slow economy couple with higher interest rate will defer companies from getting more loan from banks. 

Looking at the bigger picture and a long-term time frame, the negative on REITs due to higher interest rate should provide good opportunity for long-term investors.  The short-term fear that drives the price down will only present cheap bargain for long-term investor.  Many have overlooked that REITs have started taking precautions measures in the past months for a higher interest rate environment.  Some REITs started to give out scrip as distribution instead of cash so as to preserve cash and expecting more REITs will follow such policy going forwards.  Couple of them also started cash call (fund raising) through placement and rights and probably we might see more doing so next year.  Another important aspect is REITs could do organic growth to boost their revenue instead of the tradition means of acquisitions. 

To summarize, US Fed rate hike has little effect on Singapore long-term investors.  The higher interest rate from banks still far from enough for retirement and continue to invest in stocks with higher yield still a better option.

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