Since the rebound in June global markets again at crossroad junction facing uncertainties and slowly fear creeping back to investors. As usual, the 3 mega events that worried the world economy.
1. China, recent released of August PMI indicated contraction, the first since November last year. Worrisome of China slow growth and might even miss its forecast of 7.5% GDP for 2012 started to resurface again despite 2 interest rate cut and several RRR cut in the past 6 months. Before starting to jump into conclusion of hard landing in China, best to sit down calmly and analyze the whole situation. China has since beginning of this year signaled there will be a change in its economic model that is switching to consumer and services biased rather than heavily rely on export (which was been hurt by the Europe debt crisis). China is in its transition stage in economy and during this phrase one can only expect slow and flat economic growth until the transition is finally completed. Many investors and analysts are looking for more monetary easing for the Chinese Government and yes there will be but do not get over optimistic about it. Firstly, China is not trying to act as "superhero" to save the world as they have to look after their own citizens as priority. Failure to do so the social unrest resulting from it will be catastrophic. Secondly, any stimulus program China going to launch will be targeting specifically towards consumer and services based related and they won't get going for aggressive style like in 2008. Reason being the aggressive move in 2008 has caused big headache in inflation which they finally managed to bring it down this year. The potential of housing bubbles still remain at the moment. Thirdly, there will be the leadership change over every decade happening this year and it will be wise for the new leadership to lead the round of easing and shaping China towards the new economic growth model. Therefore, stimulus there will be but probably have to wait till the new leadership get into the office. Investing in consumer and services related stocks of Chinese companies or foreign based companies operating in China could be the proxy to ride the new consumer and services based economic model. An example (not inducing to buy) would be CapMallsAsia and CapitaRChina.
2. Europe, the debt crisis has been on its 3rd year already. First originated with Greece in 2010 then starting to spread causing Greece, Portugal and Ireland all required bailout. Now focus is on Italy and Spain (the 3rd and 4th largest economy nations among the 17 Euro bloc nations) and of course on and off Greece will be in the picture of more bailout. Greece news is no longer new and some even have factoring in possible of Greece default and leave the Euro, which is still possible in my opinion despite EU leaders all hand in hand wanting Greece to be still in Euro. Spain has been in focus very much lately with news of bailout. As such, talk of ECB going in to do bond buying started to surface since July. Past months also saw proposal of a Banking Union with ECB as the supervisor role and a new bailout fund ESM been created to work together with the current EFSF. Not to mention IMF also managed to raise funds from other nations to shore up the international bailout funds to tackle issue from Europe. All these are just solution for monetary issue in Europe but the fiscal issue still need to address and it is solving these fiscal issue that Europe can manage to resolve the debt crisis. Most of EU nations are on reform to cut their high level of debt through austerity. The austerity measures also along the way brought drop in economic growth and forcing EU back to recession. The issue of Austerity vs Growth first surfaced in the EU June Summit with a sum of money being proposal to put aside to boost growth in Europe. Investors should focus on this as it is the core to resolve EU debt crisis and not bond buying, interest rate cut or more bailout as those are short-term stopper for monetary issue. ECB will be having a meeting on 6th September 2012 and expectation is that detail of the bond buying, interest rate cut, detail on Banking Union, etc. While not ruling out those might happen but do bear in mind the different between monetary and fiscal issue and it is the urgent need for EU leaders to propose measures and policies to tackle the fiscal issues. Reform and continue reform is the way to go for Europe and at the same time they must provide measures to boost growth to prevent sinking into deep recession.
3. US, lot of focus has been on will US Fed launches QE3. 31st August 2012 Jackson Hole meeting among global Central Bankers have been closely watched with expectation of will US Fed hinting when will roll out QE3. Instead, US Fed just merely defended its past 2 QEs and at the same time singing the same old tune for past months that US Fed is ready to act if required. Before getting excited about QE it is better to switch to the effectiveness of the QE rather than will have or not. Though US Fed defended the past 2 QEs but result didn't really show so as the US unemployment rate still high. The concept of QE might be the correct one but what happened in between that is the excessive monies did they really propel to the right channel to help the economy to create jobs is something need to be studied at. US Fed can only have the power to print more money but they can't dictate the borrowers of how to use the monies. In August last year, US faced with deficit issue which required its to raise the deficit ceiling and for that US suffered first time a downgrade of its Government bond from AAA by rating agencies. Fiscal cliff is what US Fed Chief was saying for past months to could derail US economy and getting US back to recession and that is something one can't ignore. The Deficit Reduction Panel has failed to propose anything to reduce US deficit last year and if they still could not get something out this year then next January the auto-cut mechanism will kick in. This across the board cutting of spending will do not good to US economy when US Government need to spend to boost economy. US will also be having Presidential Election this November. That could be a wildcard for US economy. At the moment can't to see who will win but there are something interesting things investors might want to look at. The Republican candidate Mitt Romney's running mate Paul Ryan has some interesting economic proposals that might work for US. Furthermore, for past records, President Obama has been facing difficulty in passing his proposals ( job bills, Buffett tax bill, etc) through the Congress mainly due to the Lower House is controlled by the Republicans and having a Republican to be the next President might be a different story again. There are too many possibility in this area and shall not get into it as just an outsider to US economy but do keep option open that the Presidential election outcome could be a wildcard for the US economy. US managed to rebound from the collapse of Lehman Brothers in 2008 if one noticed was mainly due to the technology sector. The linchpin like Apple, Google, IBM, Intel and Microsoft have more or less providing the recovery for US economy. These companies are cash rich (imagine Apple cash reserve is even more than US Government) but they are not creating jobs for US. Something must be wrong somewhere. Apple has become the most valuable company in US based on market cap but if one looks closely, Apple main consumer is in China, manufacturing of Apple's products (iPhone and iPad) are also mainly based overseas. These companies might be world best companies but their role in helping US to recover the job market is questionable at the moment. US is facing two potential bubbles are the moment. Bond and tech bubbles. US bond rate is at record low and tech companies are "rushing" products to boost revenue. Technology is something quality matter and not quantity. Focus on the wrong role will result in bubbles.
Going forwards, October to December are the months to watch. Do keep option opens that market can hit another bottom during these period before another rebound (probably the last leg of the bull market which started in 2009). This time round, issue from US could cause the correction. Investors at the moment rather than start panicking to sell, should stay calm, identifying those fundamentally strong stocks and patiently wait for bargain hunting opportunity from October to December. Remember what is cheap is personal and not based on analysts' views (most of the time analysts' views are either wrong or laggard by the way). With holding power and patient that is the way to invest in cautiously optimistic economic condition.
