Just 4 more trading days to go for 3Q2012. During 3Q2012 the much focus event globally was none other than action by Central Bankers to roll out stimulus. Without any disappointment Central Bankers from Europe, US, Japan and China all did that to salvage the global slowing economy.
In Europe, ECB finally committed to bond buying program as German court ruled in favor of the ESM but with conditions that is capping Germany liability to that. The action by ECB no doubt provided a stopper of the credit crunch feared in Europe especially Spain and Italy. Now it is up to Spain whether it will request a bailout so that ECB could action to it. The much talk about Banking Union in Europe also taking some light as the debt still ongoing as to whether when it will implement with Germany in its latest attempt doesn't seem to be in a hurry to do it. Greece after meeting with the Torika has agreed to most of the austerity targets in order to get the bailout funds before it goes bankrupt. Greece on its part has to lease out 40 islands to cut its sky high depth. There was also news that Greek Parliament still divided in agreeing to all the austerity targets being set for.
In China, the economy growth slowing down continued being hit by weak export due to US and Europe. The latest HSBC flash PMI indicated consecutive 11 months of contraction. China in its latest attempt to support the slowing down roll out stimulus program on infrastructure in particular building more railways. China also facing changing of leadership in the coming months and without any doubts there is still more room for stimulus like bank RRR and interest rate cut. However, one area to be specific is its property market in which it will maintain its cooling measures. The latest dispute of the island between Japan also hurting the trade revenues between the 2 nations. The impact is there but the actual still unknown at the moment.
Japan, BOJ following the footsteps of its counterpart just last week expanded its stimulus program as it still struggling to recover not helping with a stronger yen and the recent China dispute over the island.
US, the most watchable globally as US Fed as most anticipated roll out QE3. Unlike the previous 2 QEs, this one is no timeframe tags to it and it will spend every month US$40b on asset purchase (mortgage bond purchase) until the unemployment rate meets its target or the inflation rises above 3%. In laymen term, printing money like nobody business until certain conditions are met. The effectiveness of QE3 still debatable despite US Fed defended its past 2 QEs while economic data after the 2 QEs still sluggish in particular unemployment still sky high. Fiscal cliff is another issue US will be facing comes next January as the auto budget cut mechanism across the board kicks in and this is mainly due to the Deficit Reduction Panel failed to propose measures to cut US Government debt.
Looking ahead for the last quarter of 2012, couple of events still in focus.
Europe will be having a EU Summit from 18th - 19th October 2012. The austerity vs growth issue in which EU nations are facing now should be up for discussion and following up during the Summit. In June Summit, the EU leaders has proposed a 120b Euro package to stimulate growth and to follow that up, more details should reveal during the coming Summit. Europe is facing fiscal issue more than credit crunch issue now. The latest action by ECB more or less put a stopper to the credit crunch but not resolving the fiscal issue like no growth and high debts. The only way to tackle fiscal issue is none other than fiscal policies (austerity vs growth measures). Euro consists of 17 nations en-bloc together to use the common currency and to resolve current EU debt crisis is not so simple as it involves the 17 nations bounded together plus another 10 European nations which are not part of Euro. Hence, the EU debt crisis will be still ongoing and would not be surprised it might even take a decade or more to finally solve it. Meanwhile, EU just have to muddle through and so as rest of the global when dealing with EU debt crisis. There is no quick fix solution and will only resolve when all the debt nations finally cut their debts. No matter how much money printing will not solve the fiscal issue.
China latest economic data were not promising but should be able to meet its growth forecast of 7.5% for 2012 as the Chinese Government still have rooms to accommodate for more stimulus. Note also, China has indicated a shift in its economic model to consumer/service based and they are in transition phase now. With that in mind, investors should not expect doubt digit growth in China economy and during the transition phase, the growth would be relatively flat. In the longer term and bigger picture, it is good for China to shift its growth model to less dependent on export given that the problem facing by the West could take decades to finally resolve. Another point worth noting is regarding China stimulus. China has its priority on looking after its citizen first than become a superhero to save the rest of the world. A social unrest in the country is definitely more deadly than feeling the effect of Western nations recession. Hence, China stimulus should not be like in 2008 that cause the world stock markets to rally but rather the stimulus will only benefit specific sectors. Remember China has just managed to curb its stubborn high inflation and will not want to revisit that stage again.
US will be having its Presidential Election this November. Who will win is still too early to say. However, the outcome of the Presidential Election could be a wildcard for the US stalling economy. US is facing with high unemployment, consumers not spending and companies are holding up cash reserve and not investing on it. The "make you feel good" QE3 which was just rolled out couldn't see it do much help to solve its current problem. On the other hands, QE3 has a higher risk than the previous 2 due to its open-ended nature. US facing with fiscal cliff, high Government debt and high unemployment, the only way to resolve is via fiscal policies that is for the lawmakers to act and not pure printing money. In the past, the often political deadlock by the Democrates and Republicans have more or less blocked fiscal policies from being carried out. The 2 political parties need to put nation interest first and work together. Should the 2 political parties can act together, that will be the game changer for US.
Singapore with its open economic model is facing slow growth due to headwinds from the West. Recent economic data might even point to a technical recession. However, there is some bright spot if and only if ASEAN leaders could act together. ASEAN (10 nations in total) as a whole is a big consumer market and with Myanmar starting to open up, it will be a good opportunity for ASEAN nations to work together to help Myanmar builds up and at the same time create an ASEAN consumer market. This ASEAN consumer market is use to cushion any external shock from rest of the work and eventually protect ASEAN nations (like the 1997 Asia financial crisis). Like China which has to shift its focus to consumer/service based, ASEAN nations should follow suit. This ASEAN consumer market if agreeable to ASEAN leaders and decide to pursue will be a prolong period projects but it will give lot of opportunities for Singapore companies to growth. Value and fundamental investors might want to focus on this aspect.
In the beginning of this year, I stated my stance of cautiously optimistic about the stock markets and that remain valid. With the recent stimulus roll out especially by US Fed, it will not be a surprised that that could be the trigger for the last leg of the bull market which started since 2009. Investors are advised to keep that option open and the possibility is there given the higher risk posed by QE3. When that fails and bubbles burst, US economy will be in recession and that will no doubt drag in rest of the world. How long that last leg could last, probably 2 years.
Investors with holding of high yield stocks should continue to hold to collect dividend given global interest rate will be low till mid 2015 (all thanks to US Fed). Though prices of the high-yield stocks have shot up for past months and with analysts suggesting limited price upside (hey, some 6 to 9 months ago when those high-yield stocks were relatively cheaper with dividend yield of at least 1.5% to 2% higher than now, how come no analysts shouting to buy ? you think about it). Price upside might be limited but if you have bought in some 6 to 9 months ago, should not be worried and in no hurry to cash out also. Just collect the dividend and don't consumer away. Wait till the next recession cycle, use the collected dividend to reinvest back to the same stocks. This will be like compounding your investment for the long term. For those who thinking of jumping into high-yield stocks now, dividend yield is no doubt less attractive as compared with 6 to 9 months ago but to hedge against low interest rate and high inflation in Singapore, I suppose you do not have a choice. Might just invest a small sum to collect dividend and wait till next recession cycle to invest or reinvest the rest. That strategy would be more wiser.
Lastly, we might be getting into last leg of the bull market but still need to maintain cautious as global headwinds still there and won't go away overnight. Cautiously optimistic is the key now.
