Thursday, January 7, 2016

Recap 2015 & Looking Ahead 2016

Global markets were on a mixed and lacklustre performance for 2015 and below were a comparison from their respective 2014 performance.

                         2015  vs  2014
Dow Jones      -2.23% vs +7.52%
S&P500   -0.73% vs +11.39%
Nasdaq           +5.73% vs +13.40%
Nikkei225        +9.3% vs +7.12%
SSE                  +9.4% vs +52.87%
HSI                  -7.2% vs +1.28%
DAX                 +9.5% vs +2.65%
FTSE100        -4.90% vs -2.71%
CAC40              +8.5% vs -0.54%
FTSE STI     -14.34% vs +6.24%

Most of the bourses fared worse in 2015 with exception of Nikkei225, DAX and CAC40.  The biggest drop was SSE falling from +52.87% in 2014 to just +9.4% in 2015.  FTSE STI unfortunately was one of the worst performer in this region with a decline of 14.34% compared with a gain of 6.24% in 2014.  2015 was renowned for a year of great volatility partly due to the continuous worries and uncertainties.  A quick recap of those main events in 2014.

The whole of 2015 was focus on when US Fed will hike rate.  The guessing started from March to June to September and till December.  Finally, more than 1 year after US Fed officially withdrew QE3 it did a first rate hike since 2006 in December 2015 raising the Fed fund rate from 0% - 0.25% to 0.25% - 0.50%.  That eventually removed one big uncertainty from global stock markets.

Crude oil price failed to stabilize in 2015 and continued the plunge breaking the US$50/barrel and US$40/barrel level.  To make it worse, in the December OPEC meeting there was no agreement to cut supply to put a halt to the supply glut.  Technically speaking, the so-called low oil price should benefit net oil import nations boosting economy but that failed to materialize.  That factor added another worry to the already slowing down and sluggish global economy.

Euro started its QE earlier this year to curb deflation and economic growth.  While US Fed is talking about monetary tightening, EU on the other hand is ready to further expand the monetary easing.  The out-of-sync and total contrast action definitely weighed on investors' concern.  Euro was on the brink of a possible Greece exit when it defaulted on a 1.7b euro IMF payment in June.  It was after a Greek referendum vote to signal its intention to stay in Euro brought a new negotiation in granting new bailout deal to Greece preventing it from further default.  Though the Greek's saga was not something new which it happened every year since 2011, it still created some nervous to the global stock markets.

The game changer for global stock market was the June melt down in Shanghai stock market when the bubble burst.  That sent tremor and a downtrend to global market for 2H2015.  China economy also failed to meet the 7% GDP target for the year and with its PMI data fell into contraction from 2H2015 the worry just piled up.  Just when global stock markets seemed to stabilize from the June melt down, China PBoC suddenly devalued its yuan in August and that sent another sharp sell-off to global market.  To investors, the devaluation act signaled a "desperate act" by the Chinese Government to prevent a hard landing in China economy.

Japan, the world 3rd largest economy did not fare better despite Nikkei225 managed to register a better than 2014 performance.  Japan economy re-entered recession in the period of July to September and that was a big blow to the so-called Abenomics.  Not only that, BOJ's inflation target failed to meet either despite the ongoing QE.

Singapore economy narrowly avoided a technical recession in Q3 as the slow down from its biggest trading partner China bite into its export.  For 2015, advanced estimate of Singapore GDP was +2.1% thanks to a surprise spike in Q4.

There were still some bright spots in 2015.  The agreement of the Trans-Pacific Partnership (TPP) among 12 Pacific Rim nations (Brunei, Chile, New Zealand, Singapore, Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam and US) was finally reached in October.  Though it still require the approval from each of the 12 nations' Government, nevertheless it is a step forward in opening a new channel of global economy growth.  The aim for the TPP is to promote economic growth; support the creation and retention of jobs; enhance innovation, productivity and competitiveness; raising living standards; reduce poverty; and promote transparency, good governance, and enhanced labor and environmental protections.  With the potential of more nations like South Korea, Taiwan, the Philippines, Colombia, Thailand, Laos, Indonesia, Cambodia, Bangladesh and India showing interest to join, the outlook could not be worse.  Another bright spot in 2015 was the Asean Economic Community finally formed in December (refer).

Looking Ahead
While most will want to forget 2015 but 2016 failed to get on to a positive start.  Those same old worries still carry onto 2016.  China economy slowing down showed no sign of rebound after the latest economic data for December in which PMI still in contraction and the service PMI though in expansion but fell to a 17-month low.  On the first trading day in 2016, Shanghai stock market plunged almost 7% and the regulator has to halt the market for the rest of the afternoon and that negative sentiment soon sent global stock markets on a sell-down.  To make matter worse, the Saudi and Iran tension surfaced on the 2nd trading day of 2016 which again pressured the global stock markets.  Then on the 3rd trading day report of North Korea successfully tested a hydrogen bomb again caused investors to flight for safety.  Bad news continued on the 4th trading day as China again suddenly devalued its yuan and that triggered a plunge of 7% in the Shanghai stock market requiring a trading halt in the exchange and sell-off in global markets.  The great volatility in 2015 just continued into 2016.

Some of the key events to lookout for in 2016.

1. Crude oil price.
Where is the bottom of the plunge in crude oil price ? Will it further breakdown at the US$30/barrel level ?  Nobody know as the supply glut continue with no action for supply cut.  Already the Offshore/Marine and Oil&Gas sector is facing delaying of delivery, cancellation of contracts and cutting off expenditure.  The main concern is the debt (mostly bond) from these companies and it just take one bad default that triggers into the financial sector and the world could have a new global financial crisis next.

2. US Fed rate hike
Done with the first since 2006, the concern now is the pace of the rate hike.  With most expecting a gradual pace of 4 rate hikes this year, the uncertainty that comes with it might return to stock market going forward.  A note of cautious is US Fed cannot ignored whatever is happening outside US and go ahead the rate normalization just solely based on its own economic data.  The global economy is already out-of-sync and so does the global monetary measures by the Central Bankers.  A miscalculated step by the US Fed and US could yet again be the source of another GFC after the 2008 GFC (which was triggered by US).

3. China, Europe and Japan
Can the economy of China, Europe and Japan finally manage to rebound in 2016 ?  That should be the top wish list for everyone in 2016.  Already supported by monetary stimulus (QE for Euro and Japan and interest rate cut for China), should there be no improvement more monetary easing will kick in and that will surely further widen the out-of-sync gap between them and US.  Any further weakness from those countries will eventually drag down US economy rebound.

4. Geopolitical risk
Every year without fail there will always be a geopolitical issue happened regardless in Middle East, Europe, Asia or America.  Apart from the ongoing ISIS, 2016 started off with the tension between Saudi and Iran.  The immediate effect was another volatile in the crude oil price.  Initially, oil price spiked due to the as usual reason for Middle East tension but this time round the opposite happened.  This was due to Saudi and Iran might stop working together to support the falling oil price.  Normally, geopolitical issue just creates a short-term impact on global stock markets but it also depends on the nature of the risk.  Take the example if such risk pressured the already falling oil price then a bigger impact on the global economy might happen.

5. Growth channels
Coupled with the Asian Infrastructure Investment Bank (AIIB) which was formed in 2014, the TPP and AEC are currently the 3 potential channels to revive the global economy.  The "One Belt One Road" proposed by China linking Asia to Europe if able to make progress and materialize in 2016 will be the 4th bright spot in 2016.  However, for these to really revive the global economy, activities must take place and not just plain paper talk only.  This definitely is something investors will be watching out for.

6. Volatility
Do not rule out the possibility that volatility will be the new norm in stock market.  In the internet era where news (good or bad) can be access instantly by almost everyone in this world, stock market reaction is practically instantly also.  With billion of people on the stock market daily, different people will react differently to news resulting in different action.  The lack of time for people to digest the news thus result in the volatility in the stock market.  Volatility should be here to stay in 2016 again.

7. Singapore
Anything happen in Singapore might not have any impact to the rest of the world but for local investors will be a different story.  Firstly, the economy situation in Singapore as mentioned before (Singapore Economy -- Looking Ahead) will remain a big concern in 2016.  The outdated economic model that is overdue for a reform must get it done.  Though the committee to restructure Singapore economy was already formed, what needed is realized where went wrong, dare and bold to restructure even if it requires discarding the existing model.  Singapore does not need a Government who could not think out of the box but only know how to patch up cracks appearing here and there.  Another focus point for Singapore in 2016 is the property market.  No easing of property cooling measures took place last year and most are expecting it to do so this year.  Though property price has been falling but yet to reach the 2008 GFC price level.  Property industry is part of Singapore economy and if just focus on getting down the price level and ignoring the negative impact it has on the economy as a whole, we could ended up a hard landing for the Singapore economy.  Another question is can the property price drop to the 2008 level ?  Singapore is targeted to have a population of 6.9m and to cater for that size of population in a land limited island, housing and infrastructure demand is a very pull factor for the rising property price.  Can those property cooling measures overweight the big pull factor to press down the price eventually ?  That is something one need to seriously ponder about.  Singapore Government should not be acting like the US Fed in 2015 being indecisive the act on first rate hike, delaying ad postponing till end of the year.  The timing and not the price level should be the one to look at when come to easing the cooling measures.

Stock Market
Like usual, there is a divided camp of analysts on the global stock markets performance for 2016.  Those optimistic will believe things will be getting better and the bull run will resume.  Given the current global economy those pessimistic will have more than enough reason to warn of a possible GFC.  Why bother to predict what will happen to the stock market in 2016 ?  There can only be 3 scenarios (Bull Marches On, Big Bear Strikes Back and The Lost Decade) which was mentioned in Recap 2014 & Looking Ahead 2015.  Instead of trying to predict what will happen might as well think of appropriate strategy to cater for all the 3 scenarios.

In Romance of The Three Kingdoms (三国演义), Pang Tong (庞统) presented 3 plans (upper, middle and lower -- 上中下) to Liu Bei (刘备) to capture Hanzhong (汉中) from Liu Zhang (刘璋).  The upper plan will immediately allow him to take control of Hanzhong but in the expense of damaging his reputation of being a virtue person.  The lower plan has the risk of him never able to take control of Hanzhong and might even lose out to Cao Cao (曹操).  He chose the middle plan which still allow him to take control of Hanzhong but in the expense of losing Pang Tong, have to recall Zhuge Liang (诸葛亮) from Jingzhou (荆州) to assist.  That however indirectly led to losing Jingzhou later to Sun Quan (孙权) and also the lost of his sworn brother Guan Yu (关羽).  

Similarly, if we have a strategy that cater for all 3 market scenarios that will be the upper plan.  If we have a separate strategy for each of the scenario then that will be the middle plan.  If we just try to predict the market outlook then that will surely be the lower plan.  So in conclusion, why try to predict the market direction ?

Since volatility can be a new norm in stock market, perhaps it is time for value and fundamental investors to rethink the method/strategy to invest.  In the past, daily price fluctuation can be considered as noise and largely ignored but with volatility it can be a different story.  The volatility can affect individual emotionally and psychologically and hence decision making ability.  Warren Buffett's IBM share can suffer an overnight US$2b paper loss due to volatility, can a typical retail investor regard that as market noise and stomach that huge swing without emotionally and psychologically affected ?  The conventional investing method might still work in the long run but definitely in need of a tweak to cater for the new norm, volatility.

Stock market is like a war zone, you can't win the war without a proper strategy !!!


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