STI ended the year 2018 at 3068.76, a loss of 334.16 points or 9.82%. STI was not the only bourses that ended red for the year and in fact majority of the bourses ended in the red with China Shanghai Composite, SSE performed the worst with more than 20% drop.
Recap
2018 started brightly for global market as the rally continued from late 2017. However, it soon took a brake near end January when US announced tariff increased on China imported goods. This effectively started the US-China trade war (tariff war) when China refused to give in and doing a tit-for-tat tactic by increasing tariff on US imported goods. For rest of the year, global markets were enrolled in the US-China trade war as concerned should a full-blown one kicks in, a global recession will occur. As such, global markets practically spent the rest of 2018 in correction territory despite a brief spell of market hitting new high between the period of April to May. In fact the fresh high was part of the correction if one went by the definition of Elliott Wave correction pattern.
Apart from the US-China trade war, concern of US Fed rate hike also worried investors worldwide after US Fed did a 4 hikes for 2018. Concern was US Fed could be over tightening. To a limited concern (for UK and EU) was the Brexit deal in which UK supposed to come out before the March 2019 deadline. Near the end of 2018, finally some positive news appeared during the G20 Summit in which US and China finally agreed on talks to defuse the US-China trade war. Putting a halt on the ongoing tariff war until March 2019. That piece of news eventually became the event that took global markets (majority of it) out of correction phase.
The above pretty much summarized the key events in 2018 for global stock markets.
Looking Ahead
As a continuation, the events that occupied 2018 roll over to 2019 but with a different perspective. There is still ongoing talk between US and China to finally iron out differences and close the chapter of tariff war. However, this time situation is different than in 2018. Both nations economy were in one way or another impact by trade war. The statement that in a trade war, no one ends up winning is never wrong. China economy for 2018 slowed down to 6.6% while US companies were taken a hit due to the trade war (just look at Apple). So the moral of the story is don't be so egoistic in believing there will be winner in trade war or trade war is easy to win. That is totally a naive way of thinking. Despite the fact that both China and US came out in reporting the other party wanted a deal, the actual fact is both wanted a deal. The tariff war should end in 2019 BUT the dispute and differences between China and US will not stop there. Should it be as what was suggested the ongoing tariff war is just an excuse for US to stop China in technology advance, there will be other form of "trade war" in future between the 2 nations.
For the past decades, US being world number 1 superpower mainly owning to the 3 things :-
1. USD as global reserve currency
2. US technology
3. US military power
Once all those 3 are gone, US will no longer be the superpower as it is once known and its economy will be overtaken, losing the number 1 spot. It is not impossible for US to lose all those 3 items. Euro launched a decade ago was seen as an alternative or even challenge USD as global reserve currency but after the EU screwed up itself with the EU debt by Greece, Euro just lost the challenge. In term of US technology losing the edge, they just have themselves to blame. US technology companies shifting their operation overseas (eg China) for lower operating cost so as to increase their profit margin pretty much contribute to other countries advance in technology. As for the weakening of US military strength, part of the reason will have to come from US itself. The forever tussle between the 2 political parties just keep ballooning up US national debts and one day US will have a tight budget to spend on military allowing other nations to catch up or overtake it. Just count how many time US Government has to raise the debt ceiling from 2008 till now. How many time US Government has either entered total or partial shutdown since 2008. The latest happened in end 2018 lasted a record of 35 days. While US could be see taking action to stop China overtake them, US in fact has themselves to blame to accelerate the process for China to overtake them.
UK is also running out of time as till now they have yet to agree on a Brexit deal to EU by its Parliament before the March 2019 deadline. Should a no deal happen then, this will cause a majority disruption to its economy but maybe not so much impacting rest of the world.
US Fed hike should continue to be the talking point of 2019. However, based on the latest comment by US Fed, they could be putting a hold on further rate hike this year, perhaps doing just 1 or 2 instead of 4 in 2018. This probably is a better news for investors and companies globally.
While most could be feeling optimistic about global stock markets believing the bull run will resume but do take cautious that any bull run this year could be the last before the next financial crisis kicks in. Good things never last and just don't be naive enough to believe in SuperCycle bull run. Even SuperCycle will end one day.
For Singapore, 2019 is a bicentennial year as 200 years ago in 1819, Sir Stamford Raffles discovered the little fishing island Singapore. It will be no surprise Singapore Government will be spending to celebrate that. However, instead of celebrating that, a better perspective is not be complacent about what Singapore has achieved for that 200 years. It should be a time for self reflection of what has done wrong, what has gone wrong in particular those policies governing the nation. Spotting those issues and rectify in time will prevent accumulating further and one day goes out of control and collapse. Nothing is perfect in this world so don't ever believe all along policies are working fine. Should there be a need to change political party to govern the nation then it has to be done. Nothing more, nothing less.
The Recap & Looking Ahead series was started in 2011 (Recap 2010 & Looking Ahead 2011) and doing non-stop annual analysis since then. This will be the 9th of the series and could be the last. Been blogging for more than a decade already so feeling tired nowadays in blogging this type of lengthy analysis. In the event this is the last series and could be a swan song, the following is the additional analysis going forward.
Has mentioned this point in one of the Market Analysis last year about a shift in the macroeconomics long run equilibrium line globally. Looking at how global stock markets performed over the year since 2008 GFC, it is not difficult to see the validity of that point. US stock market is on the last leg of the SuperCycle uptrend while China stock market is on the last leg of the SuperCycle downtrend. A total opposite of each other. Rest of the bourses are split in between, some following US while other tracking China. A layman term is global stock markets are out of sync compared to prior to 2008 GFC. This suggests the world is divided into 2 parts or regions now. One is led by US and the other China. This is not a bad sign given that the global debt we are facing now is in term of trillion USD. You don't need a Nobel prize economists to tell you how dangerous that is. Even Singapore own very (to the power of infinity) over-paid ministers also can't earn that amount in his/her lifetime.
For those well versed in 三国演义 will know the story of 赤壁之战. 曹操in the advice of 庞统(assisting 周瑜and孙权), iron-chained all his vessels together to get stability so that soldiers can walk on the vessels without falling over due to the rocking of the vessels by sea water. However, he failed to realize should one of the vessel caught fire, the fire will spread fast and burn the rest of them as all are being chained up. This is the concept the world is facing now. Should we just have 1 leader to lead the world in term of economy (rest of the world economy depending on this leader), the world will end up like those iron-chained vessels. A blown up in the global debt will drag everyone down. Having multiple leaders each holding up a region/part of the world will be like just chaining vessels in group. Should one group in trouble, the rest not in trouble could still be functioning and saving the group in trouble. The 2008 GFC already taught us the lesson that the cause originated from US and how it drag the global economy down with talk of another possible Great Depression. Such a case can only be prevented if the world is divided into regions with lose inter-region connection just to ensure the global trade system is still functioning and benefiting all.
To be exact and provide that stability required to counter the trillion USD global debt, the world need 4 pillars (legs) to uphold. US and China being 2 of them. EU, the 3rd but before that they have to fully recover from the debt issue. The 4th pillar should be ASEAN, a combine population of more than 600 million, 3rd largest populated entity behind China and India. Unfortunately, there is still a lot of work to be done for ASEAN to finally become the 4th pillar. One main reason is the lack of quality leadership. Even with Singapore being the more advance nation among ASEAN, still can't produce that kind of leadership quality to fully unite it. That the reason why the ministers are being very (to the power of infinity) over-paid.
This is what of expect for the world going forward if not a blown out of the global debt, another Great Depression will occur.
Showing posts with label Annual Analysis. Show all posts
Showing posts with label Annual Analysis. Show all posts
Sunday, January 27, 2019
Sunday, January 7, 2018
Recap 2017 & Looking Ahead 2018
Global markets ended the year 2017 with a gain of almost 20% and FTSE STI was up 18.13% for the same period. It was nevertheless a very good year for global stock markets with many believe the bull market since 2009 recovery of the GFC was back and expecting more good years ahead.
Recap
As mentioned in Recap 2016 & Looking Ahead 2017, 2017 was all about execution and how markets react to those. US Fed did what was being projected to do in end of 2016 that was to hike rate 3 times so nothing surprise about it and markets reacted well for those execution. UK also manged to strike a deal with other EU nations on the Brexit. However, what US President and its lawmakers did were rather a little missing the expectation in term of expectation. The healthcare plan that supposed to replace the Obamacare was not well executed. The tax reform took the whole year to iron out while the threat of US Government shutdown still loom when the deal regarding its debt still in progress. China, the Asian growth engine (probably the global growth engine since 2008 GFC) embarked on its next growth phase with the One Belt One Road plan while Asian Pacific countries were trying to finalize the TPP (minus US).
The big problem in 2017 was none other than North Korea with its several testing of missiles. The range of its missiles as estimated could hit US which was frightening. The UN sanctions against North Korea of its nuke appeared to be ineffective given the frequency of its missiles testing. That was a big worry in term of execution by UN with regard to North Korea's nuke program.
Opec cutting of supply seemed to work as crude oil price recovered from the crisis some 3 years ago with price now around the US$60/barrel. That probably one bright spot for the future of oil industry.
Another bright spot for 2017 was none other than Cryptocurrency, the crazy run up resulting in bitcoin hitting as high as USD$20,000 despite warning from numerous Central Banks.
Singapore registered an advanced estimate of 3.5% GDP growth for 2017 thanks to the global recovery after hitting a low of around 2% in 2016, the lowest since 2009 recovery of GFC.
Looking Ahead
If 2017 is all about execution, then 2018 will be about execution and complacent. For 2017, global markets in general reacted positively for all the executions (be with above or below expectation) and this is where complacency starts to build up. US Fed is projected to do another 3 rate hike in 2018 while the pace of its inflation appears to be below its expectation. US President will have to work harder to push through more bills to reform its economy after struggling through the whole of 2017 in the healthcare and tax reform. For rest of the world aside from any unexpected events should see a better growth rate than 2017.
Will crude oil price continue to recover and more higher is a big question in 2018. The Opec cut in supply could be derailed by the increase from US shale gas.
North Korea with its nuke and missiles issued were not totally resolved in 2017 and should not be expecting that in 2018 either. Probably the only hope is for the situation not getting worse. That is probably one unforeseen risk in 2018.
Will the bubble of Cryptocurrency finally burst ? I do not rule out the possibility of that and will it cause another global financial crisis ? That will depend on how many of those financial institutes (those big name type) get involve in it. It kind of remind people of the 2008 subprime crisis and the bankruptcy of Lehman Brothers.
Will Singapore going to have a better year ? I would not be surprised if the answer is a NO. From my technical analysis (STI Analysis -- the next peak and trough ?), we have a high probability of seeing some significant events in the stock market or economy in 2018 - 2020. We could be seeing a new all-time high in STI either in 2018 or 2019 and then a recession and market trough in 2020. Should we have another heavy recession like those in 1998 (AFC) and 2008 (GFC) then the statistic will be looking very interesting. Singapore economy practically was on a downtrend since 2009, hitting a low in 2016 before the rebound in 2017. That is to say from 2009 till 2020 (potentially the next recession), for a period of 11 years we have 7 years of declining growth and only 3 or 4 years of improving growth. That is to say for about a decade, more than 50% of the time Singapore economy is not doing well. So should we be happy about the 3.5% GDP growth in 2017 ?
Singapore Government looks to form the 4G Government this year. If the present Government under the guidance of the 1st and 2nd generation of leaders (1st until LKY passing away in 2015) produced that kind of sluggish performance to our economy (and not to mention those many hot buttons local issue like SMRT, lift breakdowns, high cost of living, etc) in the past decade, what is the probability that the 4G Government, the one being groom by 3G Government can perform better ? Rather to believe in the 4G Government or have faith in them, it will be better and make more sense to take the opportunity in stock market to build up the wealth to provide that much needed cushion against the performance of the 4G Government.
To sum up, 2018 is all about execution and complacency and building of bubbles for the next crisis. While one probably expecting some good years in the short term, the one to watch for will be the next crisis and that could just happen in one of the year between 2018 to 2020.
Recap
As mentioned in Recap 2016 & Looking Ahead 2017, 2017 was all about execution and how markets react to those. US Fed did what was being projected to do in end of 2016 that was to hike rate 3 times so nothing surprise about it and markets reacted well for those execution. UK also manged to strike a deal with other EU nations on the Brexit. However, what US President and its lawmakers did were rather a little missing the expectation in term of expectation. The healthcare plan that supposed to replace the Obamacare was not well executed. The tax reform took the whole year to iron out while the threat of US Government shutdown still loom when the deal regarding its debt still in progress. China, the Asian growth engine (probably the global growth engine since 2008 GFC) embarked on its next growth phase with the One Belt One Road plan while Asian Pacific countries were trying to finalize the TPP (minus US).
The big problem in 2017 was none other than North Korea with its several testing of missiles. The range of its missiles as estimated could hit US which was frightening. The UN sanctions against North Korea of its nuke appeared to be ineffective given the frequency of its missiles testing. That was a big worry in term of execution by UN with regard to North Korea's nuke program.
Opec cutting of supply seemed to work as crude oil price recovered from the crisis some 3 years ago with price now around the US$60/barrel. That probably one bright spot for the future of oil industry.
Another bright spot for 2017 was none other than Cryptocurrency, the crazy run up resulting in bitcoin hitting as high as USD$20,000 despite warning from numerous Central Banks.
Singapore registered an advanced estimate of 3.5% GDP growth for 2017 thanks to the global recovery after hitting a low of around 2% in 2016, the lowest since 2009 recovery of GFC.
Looking Ahead
If 2017 is all about execution, then 2018 will be about execution and complacent. For 2017, global markets in general reacted positively for all the executions (be with above or below expectation) and this is where complacency starts to build up. US Fed is projected to do another 3 rate hike in 2018 while the pace of its inflation appears to be below its expectation. US President will have to work harder to push through more bills to reform its economy after struggling through the whole of 2017 in the healthcare and tax reform. For rest of the world aside from any unexpected events should see a better growth rate than 2017.
Will crude oil price continue to recover and more higher is a big question in 2018. The Opec cut in supply could be derailed by the increase from US shale gas.
North Korea with its nuke and missiles issued were not totally resolved in 2017 and should not be expecting that in 2018 either. Probably the only hope is for the situation not getting worse. That is probably one unforeseen risk in 2018.
Will the bubble of Cryptocurrency finally burst ? I do not rule out the possibility of that and will it cause another global financial crisis ? That will depend on how many of those financial institutes (those big name type) get involve in it. It kind of remind people of the 2008 subprime crisis and the bankruptcy of Lehman Brothers.
Will Singapore going to have a better year ? I would not be surprised if the answer is a NO. From my technical analysis (STI Analysis -- the next peak and trough ?), we have a high probability of seeing some significant events in the stock market or economy in 2018 - 2020. We could be seeing a new all-time high in STI either in 2018 or 2019 and then a recession and market trough in 2020. Should we have another heavy recession like those in 1998 (AFC) and 2008 (GFC) then the statistic will be looking very interesting. Singapore economy practically was on a downtrend since 2009, hitting a low in 2016 before the rebound in 2017. That is to say from 2009 till 2020 (potentially the next recession), for a period of 11 years we have 7 years of declining growth and only 3 or 4 years of improving growth. That is to say for about a decade, more than 50% of the time Singapore economy is not doing well. So should we be happy about the 3.5% GDP growth in 2017 ?
Singapore Government looks to form the 4G Government this year. If the present Government under the guidance of the 1st and 2nd generation of leaders (1st until LKY passing away in 2015) produced that kind of sluggish performance to our economy (and not to mention those many hot buttons local issue like SMRT, lift breakdowns, high cost of living, etc) in the past decade, what is the probability that the 4G Government, the one being groom by 3G Government can perform better ? Rather to believe in the 4G Government or have faith in them, it will be better and make more sense to take the opportunity in stock market to build up the wealth to provide that much needed cushion against the performance of the 4G Government.
To sum up, 2018 is all about execution and complacency and building of bubbles for the next crisis. While one probably expecting some good years in the short term, the one to watch for will be the next crisis and that could just happen in one of the year between 2018 to 2020.
Sunday, January 22, 2017
Recap 2016 & Looking Ahead 2017
Global markets were on a roller coaster ride in 2016 starting in really bad shape with market crash shouting all over the places but ending 2016 with a bang (for most markets in particular US). FTSE STI however was flat for the year despite all the roller coaster ride and great volatility, ending with a dip of 0.068%.
Recap
Global markets suffered major sell off in January 2016 due to fear that China currency, the renminbi could be devalued further and FTSE STI fell below 2,600 before bottoming in February. On the road to recovery, ECB provided further support in March when it maintained its low interest rate policy and expanded its QE. Then came the shocker event in June when British voted for an exit from EU, triggering another global markets sell off thereafter. However, the sell off was short-lived as markets rebounded strongly until September after investors digested the impact of Brexit and realized it might not be as bad as it was initially thought. Following that was another uncertainty that hit global stock markets, the US Presidential Election in November. As the election date getting closer and with news that both Democratic candidate Hilary Clinton and Republican candidate Donald Trump were in a neck to neck race, global markets suffered another sell off from September till November. The outcome of Donald Trump defeating Hilary Clinton to win the Presidential Election created another short-lived selling off before the grand rebound to finish 2016 on a high note especially US stock market. Crude oil price finally move above US$55/barrel after OPEC and non-OPEC nations agreed to a output cut in December 2016. The move is nevertheless a relief to the oil crisis the lasted for the past 2 years. The move was a welcome one but could be too late for some (in the case of Singapore O&G companies already taken the hit with some have to default on their bonds). The last event for 2016 was US Fed finally hike rate in December which was pretty much expected.
To many, Brexit was a surprise and shocking event perhaps due the influence of most global leaders that spoke of the economic impact should Brexit happen. That was not the case for me as personally I have witnessed in UK the general discomfort and unpleasant feeling for average British citizens almost 20 years ago due to the sudden influx of EU citizens to UK (to study and work). The Brexit was just a big bubble that has built up almost 2 decades awaiting to be burst. UK out of EU might not be a bad thing (for UK) given the state of EU and Euro currently facing (the Greece debt since 2011). UK after getting out of EU should be able to renegotiate better trade terms with China, US, Japan and its ally, commonwealth nations that benefit more to the nation than while it was still in EU.
Donald Trump winning the Presidential Election did not come as a surprise or shock to me either despite major world leaders either directly or indirectly voicing the disadvantages Trump could bring to the global economy should he win. Some even indirectly voicing out the concern should Trump win using TPP as the talking point. A very unwise and immature political strategy as ended up have to send congratulatory note and even resort to send invitation for Trump to visit the nation to mend the bridges. Does nothing useful except providing entertainment by making a fool out of himself !
There should be no surprised by the outcome of Brexit and Donald Trump winning the President Election. Everything in this world have both sides, positive and negative or pros and cons with only a fine line dividing the 2 sides. Majority blamed populism as a backlash against globalization as the root cause for the 2 events to happen. Is that really the case ? The concept of globalization for a better global economy might have started on the positive side but due to complacency, lack of awareness, only focus on result and ignorance, that just shifted across the dividing line into the negative side. Instead of pointing fingers at populism, self reflection must be done before being hit with further damage. The 2 events are now serving as a stern warning to those who still refuse to acknowledge they are actually the one to blame for shifting it to the negative side.
Looking Ahead
2017 is never going to be smooth and rosy all the way despite all the optimism in global stock markets towards end of 2016 extending into first week of 2017. There isn't lack of events in 2017 to make the stock market as volatile as in 2016. If news were the main cause of volatility in 2016 then execution will be the one to continue the trend in 2017. Brexit, US Presidential Election, etc were news (shocking news to some) then execution on those will be the one to watch in 2017.
Britain needs to trigger Article 50 to leave EU bloc and also need to propose a good plan for a clean break so that both parties (Britain and EU) can emerge in a win-win situation. In addition to that, deals (trade) with non-EU nations will need to renegotiate so that they can provide boost to the economy.
US under Donald Trump will be all about execution too in 2017. Could he execute those fiscal policies that he promised during his campaign ? He might look like a mismatch for a US President but on the other hand he could be what US needed since 2008 to bring the nation economy forward. Since the 2008 GFC, US economy hasn't been really fully recovered despite 3 round of QEs, this was mainly due to weak fiscal policies and heavily relying on Fed's monetary policies. As a businessman, Trump's mindset is nevertheless different from that of a typical politician in particular knowing the basic of economy in depth. However, that is only a short-term solution to US economy. Running a country is like running an enterprise but in both vertical and horizontal dimension. Trump or even Hilary Clinton (if she was elected then) unfortunately only possess one of those dimension. Furthermore, the confrontation with China in particular trades will do no good for US or even global economy in the long run. This is the the other dimension that he is lacking. A trade war will lead to currency war and that will be very volatile for stock markets in general. Russia (Putin lead Russia in specific) could be the key to smoothen the tension between US and China.
US Fed is posed to hike interest rate 3 times this year accordingly. This could weigh in on global stock markets. Given rest of the world still in loose monetary policies, the quicker pace (thrice in a year) could further diverge or out-of-sync US with others and is never an ideal scenario. US Fed would need to monitor the situation carefully before execution to avoid causing unnecessary uncertainty in the perspective of over-tightening or lag behind the curve. In 2015, US Fed expected to hike rate twice in 2016 but ended up only once. In 2017 can the Fed execute what they have forecast in 2016 ?
There will be couple of major election in EU this year and fear that the so-called populism could enact the Brexit scenario. With EU finally showing sign of recovery of the bloc economy, any further Brexit event will do no good for the recovery.
With OPEC and non-OPEC (less US) agreed on output cut, the oil market should be stabilized but unfortunately O&G companies would need to do damage repair before everything will be back on track. Moreover, with the crude oil price above US$55/barrel, we can't guarantee that US shale gas producers won't over pump to destabilize the effort put in by OPEC led output cut.
In execution, we will be facing with execution risk that any outcome will fall short of expectation and that could really drive the stock markets in one way or the other going forward.
Singapore
Singapore advance estimate 2016 GDP came in at 1.8%, the lowest since 2010 when the nation recovered from 2008 GFC. That is to say from 2010 till now the nation economy is practically moving along a negative slope. Most would cite global headwinds as the main reason for it and going forward, there isn't lack of those.
The latest news of new port intended to be developed at Carey Island, Malaysia does raise concern how it will affect Singapore in the long run despite authority rubs off the threat. If there is no benefit to Malaysia (and disadvantage to others) why RM200 billion is being invested into it ? Too much money and no place to spend ?. If that does not raise concern, then the Thai's Kra Canal (do a google search for detail) news definitely will be a threat to Singapore if it really happen. With the technology we are having now, that project is not difficult to execute.
Other notable headwinds include the much talk about TPP which President Donald Trump going to tear it off. The China One Belt, One Road project in what way Singapore can benefit from it and that ultimately will depend on how China going to share the pie with rest of the world (how well one maintain the relationship with China effectively and are Singapore doing right in that direction ?).
The Committee for Future Economy will reveal the detail proposal after CNY. Let put it straight, don't be too optimistic with the proposal. We have a similar one few years ago with the focus on increasing productivity and few years later, no sign of productivity improvement and the nation economy continues on the negative slope. Hasn't stock market taught you the lesson of don't start counting the chicken before they are hatched ?
Many expecting the nation to focus on FinTech given the recent push from the Government but this raise more questions than answers going forward. Firstly, do we have sufficient people with that specialize skills in that domain now ? If we don't by the time we trained up the people for it will FinTech be already out of flavor ? China has been in FinTech domain for the past 3 to 4 years already (myself also ventured into that in 2013 developing some programs to aid me in investing) and we only just starting to get into it. Shanghai definitely has the intention to become Asia financial hub overtaking the like of Hong Kong and Singapore (isn't that obvious when they are trying so hard to get into MSCI and China's Yuan get the nod to be inside IMF reserve currencies last year). Should that happen even with FinTech what will happen to Singapore ?
After all these years or decades, Singapore has been searching for that particular domain that could bring Singapore forward but most of those suggestions or proposals only serve short-term impact. This all boil down to the fact that we do not have people with that kind of quality at the top. Like mentioned running a country is like running an enterprise but in both vertical and horizontal dimension. Trying to nurture so-called leader from a defined system (handpicked the elite, let them rose to the rank like having a star or 2 on the shoulder in the age when they should move horizontally to gain more life experiences and knowledge) is never going to work (them only be able to excel in one dimension). The end product of lacking in think out-of-the box ability (politely they called it group think) can only at best produce an Administrator (only know how to mend cracks along the wall) and not Leader. Though in recent years we have won numerous accreditation in our academic with Singapore having the highest number of pupils scoring the perfect IB score but what's the point when for the past 50 years we can only produce one Sim Wong Hoo ?
In strategy, attack is not the only way to move forward, one need defense too. Instead of hunting for the next in thing, one should also focus on strengthening domestically. With the technology we are having today, it is possible to leverage on it in health care and agriculture. Using technology to solve the lacking of manpower in health care and using technology to bring back the agriculture (The New Economic Pillar -- Indoor Farming, written in 2014) could provide our economy a solid flooring if not we are like going to have a bottomless pit. The 2 sectors are known to be defensive as regardless of economic conditions, economic activities will always be there. Moreover, it is a good chance to make that as uniquely Singapore and provide that much needed cushion to the fast changing world economy (and headwinds) and a much sustainable economic growth model.
There is another concern which I have been doubting since 2 years ago. That is the present MAS policy of tweaking the SGD against other currencies to curb inflation and at the same time serve as monetary booster. This model has served us well in the past but with Central Bankers around the world (functioning on the traditional model of using interest rate) getting into uncharted terrain with negative interest rate or QEs (printing money), is that model still as effective as in the past ? The authority will definitely denied that it has lost its shine but I still have doubt after all a $1 coffee and a $1.10 coffee make a lot of difference to most of us. As a consumer who spend our income mostly on daily necessities (which unfortunately mostly imported), we are in a better position to detect the problem early than the authority. Do think of solution to protect yourself before it is too late (when they finally realized the model is no longer effective).
Are we going to have or resume the bull run in 2017 ? If the 10 years financial cycle still hold then good luck as global economy peaked in 2007. Despite all the optimism we have going forward, global economy unfortunately still in "The Lost Decade" scenario that I have been talking in 2015 (refer here). 2017 is the Year of Rooster, in Chinese we have one phase regarding rooster, 金鸡独立. If is going to perfectly describe what's going to happen in the Year of Rooster, good luck then as only one nation will stand out and the rest will be.................
Lastly, rounding up with one sentence that all should remember by hard.
The one and only big mistake politicians made is always think they are right and they only realize that mistake at their dying moment but too late to do anything.
Recap
Global markets suffered major sell off in January 2016 due to fear that China currency, the renminbi could be devalued further and FTSE STI fell below 2,600 before bottoming in February. On the road to recovery, ECB provided further support in March when it maintained its low interest rate policy and expanded its QE. Then came the shocker event in June when British voted for an exit from EU, triggering another global markets sell off thereafter. However, the sell off was short-lived as markets rebounded strongly until September after investors digested the impact of Brexit and realized it might not be as bad as it was initially thought. Following that was another uncertainty that hit global stock markets, the US Presidential Election in November. As the election date getting closer and with news that both Democratic candidate Hilary Clinton and Republican candidate Donald Trump were in a neck to neck race, global markets suffered another sell off from September till November. The outcome of Donald Trump defeating Hilary Clinton to win the Presidential Election created another short-lived selling off before the grand rebound to finish 2016 on a high note especially US stock market. Crude oil price finally move above US$55/barrel after OPEC and non-OPEC nations agreed to a output cut in December 2016. The move is nevertheless a relief to the oil crisis the lasted for the past 2 years. The move was a welcome one but could be too late for some (in the case of Singapore O&G companies already taken the hit with some have to default on their bonds). The last event for 2016 was US Fed finally hike rate in December which was pretty much expected.
To many, Brexit was a surprise and shocking event perhaps due the influence of most global leaders that spoke of the economic impact should Brexit happen. That was not the case for me as personally I have witnessed in UK the general discomfort and unpleasant feeling for average British citizens almost 20 years ago due to the sudden influx of EU citizens to UK (to study and work). The Brexit was just a big bubble that has built up almost 2 decades awaiting to be burst. UK out of EU might not be a bad thing (for UK) given the state of EU and Euro currently facing (the Greece debt since 2011). UK after getting out of EU should be able to renegotiate better trade terms with China, US, Japan and its ally, commonwealth nations that benefit more to the nation than while it was still in EU.
Donald Trump winning the Presidential Election did not come as a surprise or shock to me either despite major world leaders either directly or indirectly voicing the disadvantages Trump could bring to the global economy should he win. Some even indirectly voicing out the concern should Trump win using TPP as the talking point. A very unwise and immature political strategy as ended up have to send congratulatory note and even resort to send invitation for Trump to visit the nation to mend the bridges. Does nothing useful except providing entertainment by making a fool out of himself !
There should be no surprised by the outcome of Brexit and Donald Trump winning the President Election. Everything in this world have both sides, positive and negative or pros and cons with only a fine line dividing the 2 sides. Majority blamed populism as a backlash against globalization as the root cause for the 2 events to happen. Is that really the case ? The concept of globalization for a better global economy might have started on the positive side but due to complacency, lack of awareness, only focus on result and ignorance, that just shifted across the dividing line into the negative side. Instead of pointing fingers at populism, self reflection must be done before being hit with further damage. The 2 events are now serving as a stern warning to those who still refuse to acknowledge they are actually the one to blame for shifting it to the negative side.
Looking Ahead
2017 is never going to be smooth and rosy all the way despite all the optimism in global stock markets towards end of 2016 extending into first week of 2017. There isn't lack of events in 2017 to make the stock market as volatile as in 2016. If news were the main cause of volatility in 2016 then execution will be the one to continue the trend in 2017. Brexit, US Presidential Election, etc were news (shocking news to some) then execution on those will be the one to watch in 2017.
Britain needs to trigger Article 50 to leave EU bloc and also need to propose a good plan for a clean break so that both parties (Britain and EU) can emerge in a win-win situation. In addition to that, deals (trade) with non-EU nations will need to renegotiate so that they can provide boost to the economy.
US under Donald Trump will be all about execution too in 2017. Could he execute those fiscal policies that he promised during his campaign ? He might look like a mismatch for a US President but on the other hand he could be what US needed since 2008 to bring the nation economy forward. Since the 2008 GFC, US economy hasn't been really fully recovered despite 3 round of QEs, this was mainly due to weak fiscal policies and heavily relying on Fed's monetary policies. As a businessman, Trump's mindset is nevertheless different from that of a typical politician in particular knowing the basic of economy in depth. However, that is only a short-term solution to US economy. Running a country is like running an enterprise but in both vertical and horizontal dimension. Trump or even Hilary Clinton (if she was elected then) unfortunately only possess one of those dimension. Furthermore, the confrontation with China in particular trades will do no good for US or even global economy in the long run. This is the the other dimension that he is lacking. A trade war will lead to currency war and that will be very volatile for stock markets in general. Russia (Putin lead Russia in specific) could be the key to smoothen the tension between US and China.
US Fed is posed to hike interest rate 3 times this year accordingly. This could weigh in on global stock markets. Given rest of the world still in loose monetary policies, the quicker pace (thrice in a year) could further diverge or out-of-sync US with others and is never an ideal scenario. US Fed would need to monitor the situation carefully before execution to avoid causing unnecessary uncertainty in the perspective of over-tightening or lag behind the curve. In 2015, US Fed expected to hike rate twice in 2016 but ended up only once. In 2017 can the Fed execute what they have forecast in 2016 ?
There will be couple of major election in EU this year and fear that the so-called populism could enact the Brexit scenario. With EU finally showing sign of recovery of the bloc economy, any further Brexit event will do no good for the recovery.
With OPEC and non-OPEC (less US) agreed on output cut, the oil market should be stabilized but unfortunately O&G companies would need to do damage repair before everything will be back on track. Moreover, with the crude oil price above US$55/barrel, we can't guarantee that US shale gas producers won't over pump to destabilize the effort put in by OPEC led output cut.
In execution, we will be facing with execution risk that any outcome will fall short of expectation and that could really drive the stock markets in one way or the other going forward.
Singapore
Singapore advance estimate 2016 GDP came in at 1.8%, the lowest since 2010 when the nation recovered from 2008 GFC. That is to say from 2010 till now the nation economy is practically moving along a negative slope. Most would cite global headwinds as the main reason for it and going forward, there isn't lack of those.
The latest news of new port intended to be developed at Carey Island, Malaysia does raise concern how it will affect Singapore in the long run despite authority rubs off the threat. If there is no benefit to Malaysia (and disadvantage to others) why RM200 billion is being invested into it ? Too much money and no place to spend ?. If that does not raise concern, then the Thai's Kra Canal (do a google search for detail) news definitely will be a threat to Singapore if it really happen. With the technology we are having now, that project is not difficult to execute.
Other notable headwinds include the much talk about TPP which President Donald Trump going to tear it off. The China One Belt, One Road project in what way Singapore can benefit from it and that ultimately will depend on how China going to share the pie with rest of the world (how well one maintain the relationship with China effectively and are Singapore doing right in that direction ?).
The Committee for Future Economy will reveal the detail proposal after CNY. Let put it straight, don't be too optimistic with the proposal. We have a similar one few years ago with the focus on increasing productivity and few years later, no sign of productivity improvement and the nation economy continues on the negative slope. Hasn't stock market taught you the lesson of don't start counting the chicken before they are hatched ?
Many expecting the nation to focus on FinTech given the recent push from the Government but this raise more questions than answers going forward. Firstly, do we have sufficient people with that specialize skills in that domain now ? If we don't by the time we trained up the people for it will FinTech be already out of flavor ? China has been in FinTech domain for the past 3 to 4 years already (myself also ventured into that in 2013 developing some programs to aid me in investing) and we only just starting to get into it. Shanghai definitely has the intention to become Asia financial hub overtaking the like of Hong Kong and Singapore (isn't that obvious when they are trying so hard to get into MSCI and China's Yuan get the nod to be inside IMF reserve currencies last year). Should that happen even with FinTech what will happen to Singapore ?
After all these years or decades, Singapore has been searching for that particular domain that could bring Singapore forward but most of those suggestions or proposals only serve short-term impact. This all boil down to the fact that we do not have people with that kind of quality at the top. Like mentioned running a country is like running an enterprise but in both vertical and horizontal dimension. Trying to nurture so-called leader from a defined system (handpicked the elite, let them rose to the rank like having a star or 2 on the shoulder in the age when they should move horizontally to gain more life experiences and knowledge) is never going to work (them only be able to excel in one dimension). The end product of lacking in think out-of-the box ability (politely they called it group think) can only at best produce an Administrator (only know how to mend cracks along the wall) and not Leader. Though in recent years we have won numerous accreditation in our academic with Singapore having the highest number of pupils scoring the perfect IB score but what's the point when for the past 50 years we can only produce one Sim Wong Hoo ?
In strategy, attack is not the only way to move forward, one need defense too. Instead of hunting for the next in thing, one should also focus on strengthening domestically. With the technology we are having today, it is possible to leverage on it in health care and agriculture. Using technology to solve the lacking of manpower in health care and using technology to bring back the agriculture (The New Economic Pillar -- Indoor Farming, written in 2014) could provide our economy a solid flooring if not we are like going to have a bottomless pit. The 2 sectors are known to be defensive as regardless of economic conditions, economic activities will always be there. Moreover, it is a good chance to make that as uniquely Singapore and provide that much needed cushion to the fast changing world economy (and headwinds) and a much sustainable economic growth model.
There is another concern which I have been doubting since 2 years ago. That is the present MAS policy of tweaking the SGD against other currencies to curb inflation and at the same time serve as monetary booster. This model has served us well in the past but with Central Bankers around the world (functioning on the traditional model of using interest rate) getting into uncharted terrain with negative interest rate or QEs (printing money), is that model still as effective as in the past ? The authority will definitely denied that it has lost its shine but I still have doubt after all a $1 coffee and a $1.10 coffee make a lot of difference to most of us. As a consumer who spend our income mostly on daily necessities (which unfortunately mostly imported), we are in a better position to detect the problem early than the authority. Do think of solution to protect yourself before it is too late (when they finally realized the model is no longer effective).
Are we going to have or resume the bull run in 2017 ? If the 10 years financial cycle still hold then good luck as global economy peaked in 2007. Despite all the optimism we have going forward, global economy unfortunately still in "The Lost Decade" scenario that I have been talking in 2015 (refer here). 2017 is the Year of Rooster, in Chinese we have one phase regarding rooster, 金鸡独立. If is going to perfectly describe what's going to happen in the Year of Rooster, good luck then as only one nation will stand out and the rest will be.................
Lastly, rounding up with one sentence that all should remember by hard.
The one and only big mistake politicians made is always think they are right and they only realize that mistake at their dying moment but too late to do anything.
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.
Recap
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 !!!
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.
Recap
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 !!!
Monday, January 5, 2015
Recap 2014 & Looking Ahead 2015
Most global markets posted gain for 2014 with Dow Jones gaining 7.52%, S&P500 +11.39%, Nasdaq +13.40%, Nikkei +7.12%, SSE +52.87%, HSI +1.28% and DAX +2.65%. Those who failed to register gain were not too bad either with FTSE 100 -2.71% and CAC 40 -0.54%. FTSE STI did better than the previous year with a gain of 6.24%. While US markets continued another "bull" year (both DJ and S&P500 created numerous record high throughout with S&P500 recorded some 53 record closing, that was like on average 1 record closing per week), the biggest winner for 2014 was none other than China in which the SSE rallied a 52.87%. Those readings might have given a very positive impression for 2014 but in fact it was not so. 2014 was another of those very eventful year with great volatility throughout. A quick recap of those key events in 2014.
Recap
2014 began with US Fed started its QE3 tapering and by October it has completely withdrew its QE3. Markets though reacted positively with each tapering as investors saw that as positive news that US economy was strengthening days by days in 2014. US 3Q GDP grew 5% and present unemployment rate stood at 5.8%. What caused the volatile market was the question of when US Fed will start to hike interest rate. US Fed did not specifically detailed a date of when it will raise interest rate and instead using the phase "keeping interest rate low for considerable time" and linking the dependence of economic data (unemployment rate and inflation) to decision of rate hike. Each time the phase "considerable time" will keep investors guessing when the rate hike will be. However, in the last FOMC meeting for 2014, US Fed has a new phase instead, "patience with rate hike and will not do it in before April 2015". Though fresh idea but still keep investors guessing when it will be. General consensus is somewhere in 3Q2015.
Though SSE was the biggest winner in 2014 but China economy faced with slow down in 2014 with its GDP appeared to be missing the target of 7.5%. That has prompted Chinese Government to launch several mini stimuli, PBOC did some monetary easing and even saw the first rate cut since 2008 just to boost growth. Those steps coupled with the HKEx-SSE link in the later part of 2014 (linkage of Hong Kong Exchange and Shanghai Exchange which enables investors ability to buy into SSE listed A-shares through the HKEx proxy with a daily quota basis) really created a super bull run in SSE.
Japan, the biggest winner in 2013 (for its stock market) was not that lucky this time round with its economy despite Nikkei able to gain 7.12% for 2014. Japan slipped into recession again as the so-called Abenomic's effect worn off. Sales tax was hike from 5% to 8% in April to help to fight its decades long deflation but it drove away consumer spending thereby impacting its economy. BOJ like US Fed was and is still on its own version of QE and even expand it in later part of 2014 but still failed to prevent Japan economy slipped back into recession. The threat of deflation might not be there after the sales tax hike but still fall short of its inflation target.
Europe could not be better either as Eurozone economy basically stalled and the threat of deflation worried many to the extend ECB has to launch its own version of QE, ABS purchase program and maintained low interest rate. That probably reflected in the mixed performance of European markets in which DAX was able to close positive but not for FTSE 100 and CAC 40 in 2014.
Apart from the economy issues, there were also several others key events happened. Ebola spread outside Africa and caused a little panic moment for global stock markets. Geopolitical issue like in the past years happened. First it was the Russia-Ukraine issue on Crimea, resulting in Crimea voted to rejoin Russia, led to Western nations implementing economic sanctions on Russia. Next, was the ISIS in the Middle East. The most recent event and still ongoing is the plunge in oil price due to oversupply (from US shale production) in which OPEC refused to cut supply in their latest meeting. That has great impact on Russia's Ruble and potentially sending Russia economy into recession together with the impact from sanctions. In term of disaster, it was not a year for Malaysia as 1 airplane still missing (probably in the Indian Ocean), 1 was shot down over the sky in Ukraine and the last one was found crashed into the Java sea.
Looking Ahead
2015 is not to be expected to be a peaceful year either despite some optimism in global economy. Notable events that could cause volatility to the markets are :-
1. Ongoing oil price plunge in which the impact should reflect to those small and medium oil exploration or producer companies (no contracts and/or cancellation of contracts lead to lower revenue which affecting their high leverage debt level) and exporting nations in 2015. Eyes will be on middle of the year to see whether OPEC will move to cut supply or not. Cutting supply should be a global effort for both OPEC and non-OPEC nations and trying to second guess where oil price will land is nothing but extremely negative view.
2. When will US Fed start to raise interest rate ? Technically speaking, US Fed will start hike interest rate this year but the focus should be not on when and by how much but rather the pace in which it will be doing so. USD has already strengthen before rate hike and could further strengthen if really rate is hike and that should have some impact on others' currency especially those in the emerging or developing nations.
3. US debts. In the past 2 years in which it led to its debt rating being downgraded from AAA+ for the first time in history, a temporary Government shutdown and a near default case will be back in focus in 2015 again. In the past this issue has caused some nervousness in the stock markets and better prepared for one this year. It always ended it was resolved at the last minute of the deadline and will not be surprised it is deja vu again.
4. Disinflation or deflation or low inflation was a topic for Europe and Japan last year. With current plunge in oil price, that will not help in fighting threat of deflation. Central Bankers have been "printing money" and keeping interest rate low to fight deflation and they could even do more (on monetary easing) should the deflation situation does not improve.
5. Economy of China, Europe and Japan will be on focus. China's economic growth has been slowed more than expected resulting in Chinese Government started monetary easing last year. Europe has not actually fully recovered from the Eurozone debt saga in 2011 and apart from the usual stall in economy growth, threat of deflation is another main concern. Will not be surprised if condition does not improved, ECB could follow the US Fed style of QE. For Japan, whether the so-called Abenomic is working or not still divided. They might have moved away from their decades long issue of deflation but its economy is again back to recession. All eyes will be on what's the next step from PM Shinzo Abe.
6. ASEAN Integration, that should be the positive note for the 10-nations group (Singapore, Thailand, Malaysia, Indonesia, the Philippines, Mynmar, Vietnam, Brunei, Laos and Cambodia). That should help the group to attract foreign investment and building up a defensive buffer among themselves from external shocks and will not be surprised is the next theme play after BRICS.
7. Geopolitical risk, it has been in the past, it is ongoing now (with the ISIS) and it will still be there in the future. Each time whenever it happens, it will have impact on global stock markets.
8. Disasters. It is best not to have but then earthquakes, tsunami, flood, typhoon, aviation disaster, etc all happened in the past (on average one per year) so it is better to be mentally prepared for it though we do not know which one will come up next.
There will be 3 scenarios in which 1 of those will play out in 2015 and investors must get prepare for it. The 3 scenarios are Bull Marches On, Big Bear Strikes Back and The Lost Decade.
Bull Marches On
Like what the title said expecting another bull run in 2015 and that should make most very happy about it. The general consensus to justify that will be the continuous improving US economy which could take over the driving force in 2015, the further monetary easing from Europe, Japan and China providing that excessive liquidity that best at inflating stock markets.
Big Bear Strikes Back
Need not explain further what that mean. There is no shortage of candidate that will send global economy to another recession and crashing the stock markets.
1. Bond Bubble
Due to the excessive monetary stimuli being launched, all the money pumping into bonds (Government and corporate bonds) resulting in depressed bond yield (Germany 2-year bond hitting a real negative return). A default, which is not impossible as the Greece's case already served as advance warning, could just spiral out of control and did the damage.
2. Tech Bubble
Mobile smart devices, mobile apps and internet domain are getting very hot nowadays. It is like anything used in daily lifestyle could just convert into a mobile smart devices or replace with some mobile apps. Low barrier of entry has caused mobile apps, social media, online shopping, audio/video live streaming just popping up one after another. For everything that were created or developed there will be money invested in it and all these are just like whenever there is a nectar source, all the bees will fly to it. It will eventually lead to imbalance of demand and supply and what follows will be self-correction.
3. Geopolitical Risk
In the past almost every year will see at least one geopolitical risk being played out. Each time when it happened global stock markets just went into correction mode. Though so far none of those have caused a global economy recession but that doesn't mean it will never in the future. It just take a real bad one and everything will explode.
4. Deadly Virus
We have experienced that in 2003 SARS when global economy went into recession. Since then, almost each year a new deadly virus will surface or discover like the recent Ebola. It just take another nasty one to create an epidemic, striking fear and panic to human beings and it will be like in 2003 situation again.
The Lost Decade
Sound rather abstract but if thinks in the direction of what happen to Japanese economy due to the deflation issue it will not be difficult to understand. Signs have been there for the past 2 to 3 years that this scenario is playing out now. In this case global economy will just ding-dong between recession (shallow one and restricted to certain nations) and slow growth. When economy is weak, stimulus will be launched to boost growth. Upon withdrawal of stimulus or the effect wears off the economy will slump back again. This is because the fundamental is not strong enough to carry on the growth. This scenario happens when the shift in fundamental is not detected, that is the long-run macroeconomics equilibrium has been shifted to a new position. When economy is weak meaning the long-run macroeconomics line has been move off its equilibrium position. Monetary and/or fiscal policies will have to be applied to move that line back to its equilibrium position. Without realizing the new equilibrium position no matter how much monetary and/or fiscal policies being used can never bring the line back to the actual long-run macroeconomics equilibrium and thereby creating the ding-dong effect. This process is painful one as could take years or even decades for the people to realize the shift and apply the correct measures to restore everything back to normal.
The above 3 scenarios will have different impact on the downside risk for investment in stock market. Big Bear Strikes Back is the one with least risk. This is so because you are anticipating and expecting for such a scenario to occur and will have the appropriate measures in mind to prevent or minimize the downside risk. The moderate risk will be Bull Marches On. Optimism level will be high but never know when and what will cause the music to stop and when it does most will be the one standing and not sitting on a chair. As such, the lack of preemptive measures will incur more downside risk. The high risk case will be The Lost Decade. As mentioned before, this scenario could last years or even decades and will produce numerous false signals of doom and boom. These false signals cause confusion and misjudgement in investment thereby making unnecessary losses and missed opportunities. When things looking positive, the fear of being left out will lead to chasing the market but in the end get caught at the high end. When things looking negative, the fear and panic will cause most to sideline and miss the bargain opportunity. Downside risk and time frame are the unknown for this case.
Appropriate strategy must be pen out for each of the 3 scenarios to protect any investment so as to minimize the downside risk.
Singapore
2 issues to highlight for Singapore in 2015, economy growth and general election. Doubts started to surface in 2011 about whether Singapore Government has run out of ideas to grow the nation. Economic data since 2011 have failed to invalidate the doubts, annual economic growth failed to better than 2011, Non-Oil Domestic Export slumps for past 2 years and core inflation remains above 2% despite global facing low inflation. Excuse was given Singapore open economy model which relies on export, the sluggish data were expected due to the weakness in global economy. Good thing never last forever and if there is a problem solution must be found immediately and not making excuse. To make excuse is just to signal running out of ideas. If China is able to realize and reform from its export based model to consumers and services based model in order to achieve sustainable and quality growth, why a more developed nation like Singapore is not able to ?
Many are anticipating whether Singapore will hold a General Election in 2015 and if so how many opposition will get nominated or will the ruling party able to maintain their ruling power. Unfortunately, majority are focusing on the wrong thing. The main point shall be on who can provide new and fresh ideas to grow the economy of Singapore and even if it requires a coalition Government or another political party to form the next Government, just have to accept and vote for it. Selfish act like die-hard supporter style or still living in the pasts type of voting in the expense of Singapore future must not be allowed. If it needs to have a change the a change must be made ! Rises from ashes to dominate to decline happen repeatedly in thousand years of human history, no need to panic and fear should the current ruling part is being disposed in the next election.
Global money as supply, global spending as demand, excessive money printed by Central Bankers created an oversupply in which the demand is not able to catch up. Deflation is the result but the real evil is not knowing the problem.
Recap
2014 began with US Fed started its QE3 tapering and by October it has completely withdrew its QE3. Markets though reacted positively with each tapering as investors saw that as positive news that US economy was strengthening days by days in 2014. US 3Q GDP grew 5% and present unemployment rate stood at 5.8%. What caused the volatile market was the question of when US Fed will start to hike interest rate. US Fed did not specifically detailed a date of when it will raise interest rate and instead using the phase "keeping interest rate low for considerable time" and linking the dependence of economic data (unemployment rate and inflation) to decision of rate hike. Each time the phase "considerable time" will keep investors guessing when the rate hike will be. However, in the last FOMC meeting for 2014, US Fed has a new phase instead, "patience with rate hike and will not do it in before April 2015". Though fresh idea but still keep investors guessing when it will be. General consensus is somewhere in 3Q2015.
Though SSE was the biggest winner in 2014 but China economy faced with slow down in 2014 with its GDP appeared to be missing the target of 7.5%. That has prompted Chinese Government to launch several mini stimuli, PBOC did some monetary easing and even saw the first rate cut since 2008 just to boost growth. Those steps coupled with the HKEx-SSE link in the later part of 2014 (linkage of Hong Kong Exchange and Shanghai Exchange which enables investors ability to buy into SSE listed A-shares through the HKEx proxy with a daily quota basis) really created a super bull run in SSE.
Japan, the biggest winner in 2013 (for its stock market) was not that lucky this time round with its economy despite Nikkei able to gain 7.12% for 2014. Japan slipped into recession again as the so-called Abenomic's effect worn off. Sales tax was hike from 5% to 8% in April to help to fight its decades long deflation but it drove away consumer spending thereby impacting its economy. BOJ like US Fed was and is still on its own version of QE and even expand it in later part of 2014 but still failed to prevent Japan economy slipped back into recession. The threat of deflation might not be there after the sales tax hike but still fall short of its inflation target.
Europe could not be better either as Eurozone economy basically stalled and the threat of deflation worried many to the extend ECB has to launch its own version of QE, ABS purchase program and maintained low interest rate. That probably reflected in the mixed performance of European markets in which DAX was able to close positive but not for FTSE 100 and CAC 40 in 2014.
Apart from the economy issues, there were also several others key events happened. Ebola spread outside Africa and caused a little panic moment for global stock markets. Geopolitical issue like in the past years happened. First it was the Russia-Ukraine issue on Crimea, resulting in Crimea voted to rejoin Russia, led to Western nations implementing economic sanctions on Russia. Next, was the ISIS in the Middle East. The most recent event and still ongoing is the plunge in oil price due to oversupply (from US shale production) in which OPEC refused to cut supply in their latest meeting. That has great impact on Russia's Ruble and potentially sending Russia economy into recession together with the impact from sanctions. In term of disaster, it was not a year for Malaysia as 1 airplane still missing (probably in the Indian Ocean), 1 was shot down over the sky in Ukraine and the last one was found crashed into the Java sea.
Looking Ahead
2015 is not to be expected to be a peaceful year either despite some optimism in global economy. Notable events that could cause volatility to the markets are :-
1. Ongoing oil price plunge in which the impact should reflect to those small and medium oil exploration or producer companies (no contracts and/or cancellation of contracts lead to lower revenue which affecting their high leverage debt level) and exporting nations in 2015. Eyes will be on middle of the year to see whether OPEC will move to cut supply or not. Cutting supply should be a global effort for both OPEC and non-OPEC nations and trying to second guess where oil price will land is nothing but extremely negative view.
2. When will US Fed start to raise interest rate ? Technically speaking, US Fed will start hike interest rate this year but the focus should be not on when and by how much but rather the pace in which it will be doing so. USD has already strengthen before rate hike and could further strengthen if really rate is hike and that should have some impact on others' currency especially those in the emerging or developing nations.
3. US debts. In the past 2 years in which it led to its debt rating being downgraded from AAA+ for the first time in history, a temporary Government shutdown and a near default case will be back in focus in 2015 again. In the past this issue has caused some nervousness in the stock markets and better prepared for one this year. It always ended it was resolved at the last minute of the deadline and will not be surprised it is deja vu again.
4. Disinflation or deflation or low inflation was a topic for Europe and Japan last year. With current plunge in oil price, that will not help in fighting threat of deflation. Central Bankers have been "printing money" and keeping interest rate low to fight deflation and they could even do more (on monetary easing) should the deflation situation does not improve.
5. Economy of China, Europe and Japan will be on focus. China's economic growth has been slowed more than expected resulting in Chinese Government started monetary easing last year. Europe has not actually fully recovered from the Eurozone debt saga in 2011 and apart from the usual stall in economy growth, threat of deflation is another main concern. Will not be surprised if condition does not improved, ECB could follow the US Fed style of QE. For Japan, whether the so-called Abenomic is working or not still divided. They might have moved away from their decades long issue of deflation but its economy is again back to recession. All eyes will be on what's the next step from PM Shinzo Abe.
6. ASEAN Integration, that should be the positive note for the 10-nations group (Singapore, Thailand, Malaysia, Indonesia, the Philippines, Mynmar, Vietnam, Brunei, Laos and Cambodia). That should help the group to attract foreign investment and building up a defensive buffer among themselves from external shocks and will not be surprised is the next theme play after BRICS.
7. Geopolitical risk, it has been in the past, it is ongoing now (with the ISIS) and it will still be there in the future. Each time whenever it happens, it will have impact on global stock markets.
8. Disasters. It is best not to have but then earthquakes, tsunami, flood, typhoon, aviation disaster, etc all happened in the past (on average one per year) so it is better to be mentally prepared for it though we do not know which one will come up next.
There will be 3 scenarios in which 1 of those will play out in 2015 and investors must get prepare for it. The 3 scenarios are Bull Marches On, Big Bear Strikes Back and The Lost Decade.
Bull Marches On
Like what the title said expecting another bull run in 2015 and that should make most very happy about it. The general consensus to justify that will be the continuous improving US economy which could take over the driving force in 2015, the further monetary easing from Europe, Japan and China providing that excessive liquidity that best at inflating stock markets.
Big Bear Strikes Back
Need not explain further what that mean. There is no shortage of candidate that will send global economy to another recession and crashing the stock markets.
1. Bond Bubble
Due to the excessive monetary stimuli being launched, all the money pumping into bonds (Government and corporate bonds) resulting in depressed bond yield (Germany 2-year bond hitting a real negative return). A default, which is not impossible as the Greece's case already served as advance warning, could just spiral out of control and did the damage.
2. Tech Bubble
Mobile smart devices, mobile apps and internet domain are getting very hot nowadays. It is like anything used in daily lifestyle could just convert into a mobile smart devices or replace with some mobile apps. Low barrier of entry has caused mobile apps, social media, online shopping, audio/video live streaming just popping up one after another. For everything that were created or developed there will be money invested in it and all these are just like whenever there is a nectar source, all the bees will fly to it. It will eventually lead to imbalance of demand and supply and what follows will be self-correction.
3. Geopolitical Risk
In the past almost every year will see at least one geopolitical risk being played out. Each time when it happened global stock markets just went into correction mode. Though so far none of those have caused a global economy recession but that doesn't mean it will never in the future. It just take a real bad one and everything will explode.
4. Deadly Virus
We have experienced that in 2003 SARS when global economy went into recession. Since then, almost each year a new deadly virus will surface or discover like the recent Ebola. It just take another nasty one to create an epidemic, striking fear and panic to human beings and it will be like in 2003 situation again.
The Lost Decade
Sound rather abstract but if thinks in the direction of what happen to Japanese economy due to the deflation issue it will not be difficult to understand. Signs have been there for the past 2 to 3 years that this scenario is playing out now. In this case global economy will just ding-dong between recession (shallow one and restricted to certain nations) and slow growth. When economy is weak, stimulus will be launched to boost growth. Upon withdrawal of stimulus or the effect wears off the economy will slump back again. This is because the fundamental is not strong enough to carry on the growth. This scenario happens when the shift in fundamental is not detected, that is the long-run macroeconomics equilibrium has been shifted to a new position. When economy is weak meaning the long-run macroeconomics line has been move off its equilibrium position. Monetary and/or fiscal policies will have to be applied to move that line back to its equilibrium position. Without realizing the new equilibrium position no matter how much monetary and/or fiscal policies being used can never bring the line back to the actual long-run macroeconomics equilibrium and thereby creating the ding-dong effect. This process is painful one as could take years or even decades for the people to realize the shift and apply the correct measures to restore everything back to normal.
The above 3 scenarios will have different impact on the downside risk for investment in stock market. Big Bear Strikes Back is the one with least risk. This is so because you are anticipating and expecting for such a scenario to occur and will have the appropriate measures in mind to prevent or minimize the downside risk. The moderate risk will be Bull Marches On. Optimism level will be high but never know when and what will cause the music to stop and when it does most will be the one standing and not sitting on a chair. As such, the lack of preemptive measures will incur more downside risk. The high risk case will be The Lost Decade. As mentioned before, this scenario could last years or even decades and will produce numerous false signals of doom and boom. These false signals cause confusion and misjudgement in investment thereby making unnecessary losses and missed opportunities. When things looking positive, the fear of being left out will lead to chasing the market but in the end get caught at the high end. When things looking negative, the fear and panic will cause most to sideline and miss the bargain opportunity. Downside risk and time frame are the unknown for this case.
Appropriate strategy must be pen out for each of the 3 scenarios to protect any investment so as to minimize the downside risk.
Singapore
2 issues to highlight for Singapore in 2015, economy growth and general election. Doubts started to surface in 2011 about whether Singapore Government has run out of ideas to grow the nation. Economic data since 2011 have failed to invalidate the doubts, annual economic growth failed to better than 2011, Non-Oil Domestic Export slumps for past 2 years and core inflation remains above 2% despite global facing low inflation. Excuse was given Singapore open economy model which relies on export, the sluggish data were expected due to the weakness in global economy. Good thing never last forever and if there is a problem solution must be found immediately and not making excuse. To make excuse is just to signal running out of ideas. If China is able to realize and reform from its export based model to consumers and services based model in order to achieve sustainable and quality growth, why a more developed nation like Singapore is not able to ?
Many are anticipating whether Singapore will hold a General Election in 2015 and if so how many opposition will get nominated or will the ruling party able to maintain their ruling power. Unfortunately, majority are focusing on the wrong thing. The main point shall be on who can provide new and fresh ideas to grow the economy of Singapore and even if it requires a coalition Government or another political party to form the next Government, just have to accept and vote for it. Selfish act like die-hard supporter style or still living in the pasts type of voting in the expense of Singapore future must not be allowed. If it needs to have a change the a change must be made ! Rises from ashes to dominate to decline happen repeatedly in thousand years of human history, no need to panic and fear should the current ruling part is being disposed in the next election.
Global money as supply, global spending as demand, excessive money printed by Central Bankers created an oversupply in which the demand is not able to catch up. Deflation is the result but the real evil is not knowing the problem.
Sunday, January 5, 2014
Recap 2013 & Looking Ahead 2014
In last year report (Recap 2012 & Looking Ahead 2013), I cited 2013 to be remained cautiously optimistic, pointed out one of the event of the year, US Fed withdrawing stimulus, and that turned out to be true as apart from US and Japanese market, rest of the stock markets were either ended 2013 in red or just flat. FTSE STI closed 3,167.43 on 31st Dec 2013, just clocking a +0.01% for the year. HSI was slightly better with 2%+ gain for the year while SSE and others were mostly in the red. Nikkei was the better performance coming in strong at more than 50% while US markets recorded at least 25%.
Recap 2013
Global markets started off the year with a bang after US Government did a last minute stance to avoid the fiscal cliff (but pushing the debt ceiling issue later down the year to resolve). Sentiment was very positive with rally after rally until May. S-Reits stock prices were hitting never seen before high for most of them compressing the dividend yield to miserable level as everyone were chasing for dividend return given that S-Reits did a stunning performance in 2012. US economy as indicated by its data were improving, unemployment rate slowly drifting down, Japan with its Abenomic stimulus program was also fighting its way out of recession, Europe finally emerged from recession with the help of ECB keeping its stimulus program and low interest rate. Money (cheap and easily money to be exact) were flowing into emerging markets leading them to having inflation problem later on. The only weak spot then was probably China as when it undergoing reform in its economic model, measures being taken in the past has hit the acceleration of its growth. However, good things never last when in late May US Fed Chairman Ben Bernanke first sounded a possible of US Fed to start tapering of its QE. That piece of news rocked global markets since them as fear and panic by investors or "no more easy money" caused global stock markets to correct. There were lot of twist and turn since then as investors and analysts trying hard to second guess when will US Fed exactly start tapering. Whenever strong economic data emerged most were suggested tapering would be soon and markets were being sold down and whenever any of the US Fed members appeared to calm the market on QE tapering, markets rebounded. Great volatility exhibited during those periods. While every eyes were focus on when tapering will commence, China has meanwhile quietly mastered a turnaround in its slowing down in economy as it finally stabilized and rebounded in the second half of the year.
Then came another event in September that shocked everyone, the 2 political parties in US failed to agree on anything even at the last minute with respect to the debt ceiling issue (first started in 2011) and caused US Government to be partial shutdown for the first half of October causing job losses along the way. While most agreed on that will have impact on US economy recovery but some were "delighted" in a way that event will lead to US Fed delaying in tapering. Eventually, a compromise was made (delaying the issue to January 2014) and US Government was able to reopen in the middle of the month. Thereafter, it was all the guessing game again on when US Fed will start taper, November or December or 2014. That continued to dictate the volatility of global markets in particular emerging markets seeing mass outflow of funds as investors preparing for tapering. Funds were flown back to US as the tapering signified strong recovery of US economy. Finally, in the December FOMC meeting, Ben Bernanke for the last time holding the meeting as Chairman before stepping down this January announced US Fed will officially start tapering in January 2014, reducing the monthly bond buying amount from US$85b to US$75b. That piece of news overall was well received by global investors as US markets rallied to close at least 25% for the day while some emerging markets initially saw knee-jerk reaction but soon stabilize later. That decision confirmed the consensus that US economy was indeed on recovery which brought optimism to global investors. In December, the 2 political parties in US also managed to cut a deal on the budget to prevent another possible default or shutdown in January but that did not address the issue of whether the debt ceiling will be raised or not.
Japan, on the other hand, probably was on another planet in 2013 as the Abenomic and BOJ even more aggressive stimulus program than US Fed, pulled Japan out of recession and moving towards the targeted inflation, moving away from the decades long deflation issue. As a result of that, Nikkei showed one of the best performance in global markets with at least 56% gain for the year. China though in the later half managed to halt the slowing down of its economy but was not enough to allow SSE to close positive for the day. Europe also fared better this year will bourses ended in positive region. 2013 probably was one of the quieter year for EU as not much was focus on its debt issue, allowing them to work their way out of recession. Asia (less China and Japan) was having a roller-coaster ride for 2013 due to the US Fed tapering. South East Asia market was probably the worst hit as money outflow coupling with Indonesia rising inflation, political unstable in Thailand (still is at this point of time), typhoon disaster hitting The Philippines, and the control measures taking effect in Singapore in term of property and foreign labour inflow. With no surprise, SE Asia markets registered one of those worst performance for 2013. Despite, all those events, global markets still manage to close positive for the last day of trading in 2013.
Fundamental Shift in Global Economy
Before going into analysis for 2014, there is a point that need to be emphasized again which I have been mentioned since 2012. Global economy is undergoing a fundamental shift and when completed, the economy model then will no longer be the same as in now or in the past and that will have great impact on global stock markets as a whole. Years ago, the global economic model was BRICS (Brazil, Russia, India, China and South Africa) in which analysts and investors singled out the 5 emerging markets as the leading factor for global economy growth. BRICS bubble has burst, that is a true hard fact now and with China having a 10 years reformed plan in 2012 (changing its economic model to consumer and services based) and being a world number 2 economy, it will have impact on how global economy will be shaped in the future. There are couple of factors that pointing towards this fundamental shift in global economy.
1. China and Japan are aggressively trying to venture trades partnership with SE Asia.
2. Europe is "courting" China in economic link
3. China Yuan is gaining momentum as one of the world recognized currency
4. Inflation was seen rising in Asia but in general not the commodity prices (this is very abnormal)
5. China and Japan though still in political differences (in particular the disrupt of the isle) very well knew the fact that forging good economic link is the priority
6. Japan planning to legalize casino
This fundamental shift in global economy will result in nations building up buffer for themselves against any external shock (like the US subprime crisis) and hence relying less on US economy. US will still be world number 1 as long as the USD has not become banana note and its supreme in military strength is not challenged. By knowing this fact, one can then determine or decide where to find the next gem to investment in.
Looking Ahead 2014
What to expect in 2014 ? Those positive views need not to be further elaborate as most can be found on analysts' reports, newspaper, etc. The general consensus was 2014 will be a year for developed market in particular US as US economy is recovering finally (especially the unemployment situation) following US Fed decision to start tapering in January. EU will continue its recovery from recession, most believed North Asia (China, Japan, South Korea and Taiwan) will benefit most from US economy while SE Asia market might have another muted year in 2014 as funds are focusing on the developed market. Whether that will be true or not, it is too early to tell but there are couples of unanswered questions that made me beg to be differ from those consensus views.
US, Strong economic data pointing to recovery but still under "life support" system (US Fed QE) despite the reduction of bond buying by US$10b. Furthermore, US still in virtually 0% interest rate environment and there will come a time interest rate will hike and how that will impact its economy. Can US economy really back to its past glory days when without any QE supporting it and in the norm interest rate environment ? As long as that question cannot get any answer, there is no reason to be overly optimistic in US economy. Apple, probably the world number 1 brand internationally now, last month announced deal with China Mobile to break into China market. Why China market is so important to Apple ? Apple without China market could be just an ordinary apple !. Even an US company is placing focus not on its home soil that spells something already. That is another cue to the fundamental shift in global economy. If that is so true, then US economy recovery will have impact on global economy but the impact will no longer be the same as in the past. While in last October when US was fighting internally to resolve the debt issue, President Obama has to skip the SE Asia summit then and that could prove vital as US missed out the opportunity to countries like China and Japan to forge deeper trade partnership with SE Asia (SE Asia has a population of more than 600M, the second highest from China of more than 1B). The new consumer and services based economic model need population and that was the reason why China and SE Asia were key markets for it. Secondly, though US Government has no worry about its debt problem until 2015 (with the last month budget deal), the unanswered question will be what happen to the debt ceiling ? They have raised it in 2011 and now do nothing about it. Technically, the latest budget deal allows US Government to cut spending to avoid hitting the debt ceiling again but that does not address the debt ceiling. What is the real purpose of having a debt ceiling when it can only raise and not reduce ? As long as US debt ceiling is not reduced, there is every single opportunity that US debt will getting bigger and bigger. Lastly, US still a nett deficit nation despite all those recovery talks ! Having more questions than answers definitely bring no overly optimism and as long as those questions remained unanswered, every rally in the US stock markets will create nothing but bubbles and increase the risks.
China, though managed to stabilize its slowing economy in the second half of 2013 but can expect to be occasionally volatile in its stock market as long as it is still undergoing reform in its economic model. China GDP for 2013 was targeted to be 7.5% and should China successfully reformed its economic model to the consumer and services based, its economy should be in the range of between 2.5% to 4.5%. If every year due to progress in reformation, its targeted economy shrink by 0.5%, that will probably take another 6 years to reach 4.5% and 9 years to reach 2.5%. During these periods, one can expect cans of worms slowly one by one popping out (like the property overheating, shadow banking, rising local Government debts, corruption, pollution, etc) and with the Chinese Government putting in measures to resolve those issues, one can expect its economy to be on a "move 2 steps, retract 1 step" type of movement. This will result in volatile stock market as funds moving in and out. Investing in China will need to have that extra high tolerant to stomach those risks while waiting for China to successfully reform its economic model. China is a big country (in term of land space) with huge population (over 1B of people) and it is never easy to govern such a large scale nation even with its one-party system. There could be problems that remain unsolved due to no solution or problems appear to be resolve but later on side-effect kicks in. China could overtake US to be world number 1 economy decade later and the very bright prospect by analysts on China is definitely not something without any risks (unknown risks to be exact). It is again not something to be overly optimistic either.
Japan, the Abenomic is working as Japan emerged out of recent recession and decades long of deflation. Prospect is good leading some analysts to be very very positive in Nikkei. Should Japan really manage to finally emerge from its lost decades it will be very good to Japanese and global as a whole but again there still remain couples of unanswered questions. Japan is currently under the BOJ (more aggressive than US Fed) stimulus program, what will happen will BOJ decide to taper or withdraw stimulus like US Fed ? Japan has one of the highest debt to GDP ratio in the world (unlike EU nations, its debt is owing to its people) and what will happen if the debt bubble burst like those in Greece, Spain and Italy ? That damage is definitely not something one can be imagined of, it is a time bomb to be exact. Japan economy has a strong reliant on its export (Toyota, Honda, Sony, Panasonic, etc) and weak Japanese Yen will help those companies but can the Japanese Yen be forever weak ? This is something to ponder about. Hence, as in the case of US, there should not be overly optimistic in Japan either.
Europe, pretty much quiet in 2013 as investors left the EU nations to restructure their debts and economy. EU finally managed to emerge from recession with the help of tight fiscal policies and ECB's stimulus program (again low interest rate environment) but if one followed closely, EU inflation is heading towards deflation level. This is something very worrying as if it really developed into deflation level, it will become another Japan in its lost decades and that is definitely no good for EU as a whole. This is something probably the priority task for ECB in 2014, to ensure EU will not go into deflation stage. This is something any investors in EU must monitor closely. Spain, Greece and Eurozone as a whole still have high unemployment due to the restructuring of their economy in the past years and that still remain a hard issue for EU as a whole to tackle even if they are out of recession and that is another event that must closely watch in 2014. Should EU economy finally be strong enough to allow ECB to taper or withdraw its stimulus (or even raise interest rate) what will happen to the stock markets and how that will impact rest of the world ?
South East Asia, the beaten one in second half of 2013 and with many expect another muted year, that might not be true. Like mentioned before, SE Asia is the second largest consumer market after China, that is not something one can easily ignored. Japan Prime Minister Shinzo Abe when elected in 2012 made his first overseas trip to SE Asia, why ? China leaders have been frequently doing trade talks with SE Asia, why ? Myanmar thought short-term wise might be overheating (might even need a burst in the bubble) but still have lot of room to expand. Vietnam, the previous hot market after bubble bursting seems to be getting the attention back again. For Indonesia (rising inflation, deficit issue), Thailand (political stability) and Malaysia (sign of overheating in its property market), they need to sort out their own domestic issue immediately in order to re-attract back all the foreign investment. Singapore though in the better shape than rest of SE Asia is not free of problems and worries too. A nation with limited land space, no natural resources all along relying on foreign influx has to put up measures to slow that down due to great dissatisfaction from the citizens. Furthermore, the several cooling measures placed on property market are showing effect presently and all these will have impact on its economic growth. As a whole, from the surface as long as SE Asia nations do not iron out their respective domestic issues, it will difficult to attract foreign investment in the short-term and this is where the stock markets are showing now. However, there is no all doom and gloom as most have overlooked the fact that US will be playing catch up in term of trade partnership with SE Asia and for US economy continues to sustain the growth, they have to do it if not they will be fallen behind China and Japan. This is where when SE Asia was beaten down in 2013, cheap bargain can be found.
Singapore, faring better than other SE Asia nations in 2013 and with mixed forecast from analysts in 2014; some believe like other SE Asia it will be another muted and uninteresting year and the other half believe as a safer heaven (compared with other SE Asia nations) and due to its open economy model it will benefit from US economy recovery should perform better in 2014. There is no right or wrong from each view. Should most still believe in pouring money into developed nations, no matter how safe heaven Singapore is, it will still unable to perform (funds only target a year of return and not long-term basis). For those who stick to the negative view will not be getting right either. Singapore, one of the better developed nation among SE Asia could be seen as a "center" for business opportunity in SE Asia and with countries like US, China, Japan and maybe even Europe all eying a pie in SE Asia consumer market, how can it not benefit from it. Early last year Singapore Government released a white paper on its population stating a projected population size of 6.9m in 2030 (which caused a stir in the nation but eventually the white paper was passed in parliament). That population size is it just plainly to resolve the low fertility issue or it meant something more ? Keep an option open that the decision could be part of change in Singapore economic model in the future (a shift to rely more on consumer and services based, in line with what China is doing and slowly moving away to the very much export oriented model). There is this point need to bring up in 2014. S-Reit, most still very negative on it given that fact that now that US Fed tapering has started and interest rate could be up next, the business prospect of S-Reits will get hit. This is because S-Reits in general do not have much retained earning as 90% or more of their earning are distributed back to unitholders as dividend to get tax exemption. As such, in order to growth they need acquisition which in turn need cash. Without much retained earning, most borrow from banks and with potential rising interest rate, that will hurt their earning as a whole. There is to certain degree true to that but not totally true. The main priority of S-Reits is to sustain and maintain their current earning and it is not mandatory that they must make acquisition. There is no absolute that even with higher interest rate environment they are not able to maintain their present earning. Singapore inflation is at 2% latest, bank interest on average 0.1%, CPF special account (risk-free) interest is at 4% and S-Reits at present average dividend yield is 6.5%. Inflation will be going up in 2014, even if bank raise interest rate (due to US Fed doing a hike), do you think it will still able to hedge against inflation ? S-Reits is having a premium of about 2.5% over CPF special account (it is cater for long-term hedge against inflation, if they don't nobody would want to allow the Government to take away portion of their hard-earn money and place it there and the Government will risk of being voted out next), if that is not consider a good hedge to inflation, what is then ? Trying to be negative or even to the extreme of negative without looking at the bigger picture is never ever a wise move.
Summary
General consensus is developed nations will have a better 2014 than emerging markets but think of all those unanswered questions listed above, that might not be true after all. Most of the developed nations (US, Japan and Europe) are still under "life supporting" system (ie stimulus program and low interest rate environment), can they really back to their old glory days without any stimulus and normal interest rate environment ? There is a chance that they can't and they will have to forever rely on stimulus to sustain their growth, so it is a 50-50 thing at the moment. When having this 50-50 case, there is no reason to really get very optimistic about it and should stock markets over-react and when reality hit, they will have much to fall and that risk will be more than one can imagine. Emerging market (in particular SE Asia) might be losing flavourism in 2014 as they have been badly sold down in 2013 but that doesn't mean they will continue to be so in 2014. Most of them are still fundamentally sound (nett surplus at least) and with prices already being sold down, the risk has already been minimized, will be no surprise if they are the better bargain you can get in 2014. One of the thing one need to look out for in 2014 is :-
Inflation (deflation for the case of Europe unfortunately). With most Central Banks having low interest rate, they will not be stingy to hike interest rate to curb inflation. Rising inflation or rising interest rate will have impact on economy and in turn stock markets.
For 2014, unless the intention is to invest to hedge against inflation else there is no reason for one to really pour money into the stock market unnecessary. On the other hand, for those who still holding investment from 2009, consider slowly to unwind their positions as markets rally up. Investment should just keep to those which can hedge against inflation and at most only 50% of the capital to be in stocks. Holding the remaining 50% cash and wait in patience to bargain hunt in bear market.
Never ever have views that go to the extreme (positive or negative) as from Newton's Third Law of Motion (For every action, there is an equal and opposite reaction), taking a stand at the extreme will always end up at the wrong ends. If most of the views are correct (in stock markets) then there will be no poor people in this world.
Recap 2013
Global markets started off the year with a bang after US Government did a last minute stance to avoid the fiscal cliff (but pushing the debt ceiling issue later down the year to resolve). Sentiment was very positive with rally after rally until May. S-Reits stock prices were hitting never seen before high for most of them compressing the dividend yield to miserable level as everyone were chasing for dividend return given that S-Reits did a stunning performance in 2012. US economy as indicated by its data were improving, unemployment rate slowly drifting down, Japan with its Abenomic stimulus program was also fighting its way out of recession, Europe finally emerged from recession with the help of ECB keeping its stimulus program and low interest rate. Money (cheap and easily money to be exact) were flowing into emerging markets leading them to having inflation problem later on. The only weak spot then was probably China as when it undergoing reform in its economic model, measures being taken in the past has hit the acceleration of its growth. However, good things never last when in late May US Fed Chairman Ben Bernanke first sounded a possible of US Fed to start tapering of its QE. That piece of news rocked global markets since them as fear and panic by investors or "no more easy money" caused global stock markets to correct. There were lot of twist and turn since then as investors and analysts trying hard to second guess when will US Fed exactly start tapering. Whenever strong economic data emerged most were suggested tapering would be soon and markets were being sold down and whenever any of the US Fed members appeared to calm the market on QE tapering, markets rebounded. Great volatility exhibited during those periods. While every eyes were focus on when tapering will commence, China has meanwhile quietly mastered a turnaround in its slowing down in economy as it finally stabilized and rebounded in the second half of the year.
Then came another event in September that shocked everyone, the 2 political parties in US failed to agree on anything even at the last minute with respect to the debt ceiling issue (first started in 2011) and caused US Government to be partial shutdown for the first half of October causing job losses along the way. While most agreed on that will have impact on US economy recovery but some were "delighted" in a way that event will lead to US Fed delaying in tapering. Eventually, a compromise was made (delaying the issue to January 2014) and US Government was able to reopen in the middle of the month. Thereafter, it was all the guessing game again on when US Fed will start taper, November or December or 2014. That continued to dictate the volatility of global markets in particular emerging markets seeing mass outflow of funds as investors preparing for tapering. Funds were flown back to US as the tapering signified strong recovery of US economy. Finally, in the December FOMC meeting, Ben Bernanke for the last time holding the meeting as Chairman before stepping down this January announced US Fed will officially start tapering in January 2014, reducing the monthly bond buying amount from US$85b to US$75b. That piece of news overall was well received by global investors as US markets rallied to close at least 25% for the day while some emerging markets initially saw knee-jerk reaction but soon stabilize later. That decision confirmed the consensus that US economy was indeed on recovery which brought optimism to global investors. In December, the 2 political parties in US also managed to cut a deal on the budget to prevent another possible default or shutdown in January but that did not address the issue of whether the debt ceiling will be raised or not.
Japan, on the other hand, probably was on another planet in 2013 as the Abenomic and BOJ even more aggressive stimulus program than US Fed, pulled Japan out of recession and moving towards the targeted inflation, moving away from the decades long deflation issue. As a result of that, Nikkei showed one of the best performance in global markets with at least 56% gain for the year. China though in the later half managed to halt the slowing down of its economy but was not enough to allow SSE to close positive for the day. Europe also fared better this year will bourses ended in positive region. 2013 probably was one of the quieter year for EU as not much was focus on its debt issue, allowing them to work their way out of recession. Asia (less China and Japan) was having a roller-coaster ride for 2013 due to the US Fed tapering. South East Asia market was probably the worst hit as money outflow coupling with Indonesia rising inflation, political unstable in Thailand (still is at this point of time), typhoon disaster hitting The Philippines, and the control measures taking effect in Singapore in term of property and foreign labour inflow. With no surprise, SE Asia markets registered one of those worst performance for 2013. Despite, all those events, global markets still manage to close positive for the last day of trading in 2013.
Fundamental Shift in Global Economy
Before going into analysis for 2014, there is a point that need to be emphasized again which I have been mentioned since 2012. Global economy is undergoing a fundamental shift and when completed, the economy model then will no longer be the same as in now or in the past and that will have great impact on global stock markets as a whole. Years ago, the global economic model was BRICS (Brazil, Russia, India, China and South Africa) in which analysts and investors singled out the 5 emerging markets as the leading factor for global economy growth. BRICS bubble has burst, that is a true hard fact now and with China having a 10 years reformed plan in 2012 (changing its economic model to consumer and services based) and being a world number 2 economy, it will have impact on how global economy will be shaped in the future. There are couple of factors that pointing towards this fundamental shift in global economy.
1. China and Japan are aggressively trying to venture trades partnership with SE Asia.
2. Europe is "courting" China in economic link
3. China Yuan is gaining momentum as one of the world recognized currency
4. Inflation was seen rising in Asia but in general not the commodity prices (this is very abnormal)
5. China and Japan though still in political differences (in particular the disrupt of the isle) very well knew the fact that forging good economic link is the priority
6. Japan planning to legalize casino
This fundamental shift in global economy will result in nations building up buffer for themselves against any external shock (like the US subprime crisis) and hence relying less on US economy. US will still be world number 1 as long as the USD has not become banana note and its supreme in military strength is not challenged. By knowing this fact, one can then determine or decide where to find the next gem to investment in.
Looking Ahead 2014
What to expect in 2014 ? Those positive views need not to be further elaborate as most can be found on analysts' reports, newspaper, etc. The general consensus was 2014 will be a year for developed market in particular US as US economy is recovering finally (especially the unemployment situation) following US Fed decision to start tapering in January. EU will continue its recovery from recession, most believed North Asia (China, Japan, South Korea and Taiwan) will benefit most from US economy while SE Asia market might have another muted year in 2014 as funds are focusing on the developed market. Whether that will be true or not, it is too early to tell but there are couples of unanswered questions that made me beg to be differ from those consensus views.
US, Strong economic data pointing to recovery but still under "life support" system (US Fed QE) despite the reduction of bond buying by US$10b. Furthermore, US still in virtually 0% interest rate environment and there will come a time interest rate will hike and how that will impact its economy. Can US economy really back to its past glory days when without any QE supporting it and in the norm interest rate environment ? As long as that question cannot get any answer, there is no reason to be overly optimistic in US economy. Apple, probably the world number 1 brand internationally now, last month announced deal with China Mobile to break into China market. Why China market is so important to Apple ? Apple without China market could be just an ordinary apple !. Even an US company is placing focus not on its home soil that spells something already. That is another cue to the fundamental shift in global economy. If that is so true, then US economy recovery will have impact on global economy but the impact will no longer be the same as in the past. While in last October when US was fighting internally to resolve the debt issue, President Obama has to skip the SE Asia summit then and that could prove vital as US missed out the opportunity to countries like China and Japan to forge deeper trade partnership with SE Asia (SE Asia has a population of more than 600M, the second highest from China of more than 1B). The new consumer and services based economic model need population and that was the reason why China and SE Asia were key markets for it. Secondly, though US Government has no worry about its debt problem until 2015 (with the last month budget deal), the unanswered question will be what happen to the debt ceiling ? They have raised it in 2011 and now do nothing about it. Technically, the latest budget deal allows US Government to cut spending to avoid hitting the debt ceiling again but that does not address the debt ceiling. What is the real purpose of having a debt ceiling when it can only raise and not reduce ? As long as US debt ceiling is not reduced, there is every single opportunity that US debt will getting bigger and bigger. Lastly, US still a nett deficit nation despite all those recovery talks ! Having more questions than answers definitely bring no overly optimism and as long as those questions remained unanswered, every rally in the US stock markets will create nothing but bubbles and increase the risks.
China, though managed to stabilize its slowing economy in the second half of 2013 but can expect to be occasionally volatile in its stock market as long as it is still undergoing reform in its economic model. China GDP for 2013 was targeted to be 7.5% and should China successfully reformed its economic model to the consumer and services based, its economy should be in the range of between 2.5% to 4.5%. If every year due to progress in reformation, its targeted economy shrink by 0.5%, that will probably take another 6 years to reach 4.5% and 9 years to reach 2.5%. During these periods, one can expect cans of worms slowly one by one popping out (like the property overheating, shadow banking, rising local Government debts, corruption, pollution, etc) and with the Chinese Government putting in measures to resolve those issues, one can expect its economy to be on a "move 2 steps, retract 1 step" type of movement. This will result in volatile stock market as funds moving in and out. Investing in China will need to have that extra high tolerant to stomach those risks while waiting for China to successfully reform its economic model. China is a big country (in term of land space) with huge population (over 1B of people) and it is never easy to govern such a large scale nation even with its one-party system. There could be problems that remain unsolved due to no solution or problems appear to be resolve but later on side-effect kicks in. China could overtake US to be world number 1 economy decade later and the very bright prospect by analysts on China is definitely not something without any risks (unknown risks to be exact). It is again not something to be overly optimistic either.
Japan, the Abenomic is working as Japan emerged out of recent recession and decades long of deflation. Prospect is good leading some analysts to be very very positive in Nikkei. Should Japan really manage to finally emerge from its lost decades it will be very good to Japanese and global as a whole but again there still remain couples of unanswered questions. Japan is currently under the BOJ (more aggressive than US Fed) stimulus program, what will happen will BOJ decide to taper or withdraw stimulus like US Fed ? Japan has one of the highest debt to GDP ratio in the world (unlike EU nations, its debt is owing to its people) and what will happen if the debt bubble burst like those in Greece, Spain and Italy ? That damage is definitely not something one can be imagined of, it is a time bomb to be exact. Japan economy has a strong reliant on its export (Toyota, Honda, Sony, Panasonic, etc) and weak Japanese Yen will help those companies but can the Japanese Yen be forever weak ? This is something to ponder about. Hence, as in the case of US, there should not be overly optimistic in Japan either.
Europe, pretty much quiet in 2013 as investors left the EU nations to restructure their debts and economy. EU finally managed to emerge from recession with the help of tight fiscal policies and ECB's stimulus program (again low interest rate environment) but if one followed closely, EU inflation is heading towards deflation level. This is something very worrying as if it really developed into deflation level, it will become another Japan in its lost decades and that is definitely no good for EU as a whole. This is something probably the priority task for ECB in 2014, to ensure EU will not go into deflation stage. This is something any investors in EU must monitor closely. Spain, Greece and Eurozone as a whole still have high unemployment due to the restructuring of their economy in the past years and that still remain a hard issue for EU as a whole to tackle even if they are out of recession and that is another event that must closely watch in 2014. Should EU economy finally be strong enough to allow ECB to taper or withdraw its stimulus (or even raise interest rate) what will happen to the stock markets and how that will impact rest of the world ?
South East Asia, the beaten one in second half of 2013 and with many expect another muted year, that might not be true. Like mentioned before, SE Asia is the second largest consumer market after China, that is not something one can easily ignored. Japan Prime Minister Shinzo Abe when elected in 2012 made his first overseas trip to SE Asia, why ? China leaders have been frequently doing trade talks with SE Asia, why ? Myanmar thought short-term wise might be overheating (might even need a burst in the bubble) but still have lot of room to expand. Vietnam, the previous hot market after bubble bursting seems to be getting the attention back again. For Indonesia (rising inflation, deficit issue), Thailand (political stability) and Malaysia (sign of overheating in its property market), they need to sort out their own domestic issue immediately in order to re-attract back all the foreign investment. Singapore though in the better shape than rest of SE Asia is not free of problems and worries too. A nation with limited land space, no natural resources all along relying on foreign influx has to put up measures to slow that down due to great dissatisfaction from the citizens. Furthermore, the several cooling measures placed on property market are showing effect presently and all these will have impact on its economic growth. As a whole, from the surface as long as SE Asia nations do not iron out their respective domestic issues, it will difficult to attract foreign investment in the short-term and this is where the stock markets are showing now. However, there is no all doom and gloom as most have overlooked the fact that US will be playing catch up in term of trade partnership with SE Asia and for US economy continues to sustain the growth, they have to do it if not they will be fallen behind China and Japan. This is where when SE Asia was beaten down in 2013, cheap bargain can be found.
Singapore, faring better than other SE Asia nations in 2013 and with mixed forecast from analysts in 2014; some believe like other SE Asia it will be another muted and uninteresting year and the other half believe as a safer heaven (compared with other SE Asia nations) and due to its open economy model it will benefit from US economy recovery should perform better in 2014. There is no right or wrong from each view. Should most still believe in pouring money into developed nations, no matter how safe heaven Singapore is, it will still unable to perform (funds only target a year of return and not long-term basis). For those who stick to the negative view will not be getting right either. Singapore, one of the better developed nation among SE Asia could be seen as a "center" for business opportunity in SE Asia and with countries like US, China, Japan and maybe even Europe all eying a pie in SE Asia consumer market, how can it not benefit from it. Early last year Singapore Government released a white paper on its population stating a projected population size of 6.9m in 2030 (which caused a stir in the nation but eventually the white paper was passed in parliament). That population size is it just plainly to resolve the low fertility issue or it meant something more ? Keep an option open that the decision could be part of change in Singapore economic model in the future (a shift to rely more on consumer and services based, in line with what China is doing and slowly moving away to the very much export oriented model). There is this point need to bring up in 2014. S-Reit, most still very negative on it given that fact that now that US Fed tapering has started and interest rate could be up next, the business prospect of S-Reits will get hit. This is because S-Reits in general do not have much retained earning as 90% or more of their earning are distributed back to unitholders as dividend to get tax exemption. As such, in order to growth they need acquisition which in turn need cash. Without much retained earning, most borrow from banks and with potential rising interest rate, that will hurt their earning as a whole. There is to certain degree true to that but not totally true. The main priority of S-Reits is to sustain and maintain their current earning and it is not mandatory that they must make acquisition. There is no absolute that even with higher interest rate environment they are not able to maintain their present earning. Singapore inflation is at 2% latest, bank interest on average 0.1%, CPF special account (risk-free) interest is at 4% and S-Reits at present average dividend yield is 6.5%. Inflation will be going up in 2014, even if bank raise interest rate (due to US Fed doing a hike), do you think it will still able to hedge against inflation ? S-Reits is having a premium of about 2.5% over CPF special account (it is cater for long-term hedge against inflation, if they don't nobody would want to allow the Government to take away portion of their hard-earn money and place it there and the Government will risk of being voted out next), if that is not consider a good hedge to inflation, what is then ? Trying to be negative or even to the extreme of negative without looking at the bigger picture is never ever a wise move.
Summary
General consensus is developed nations will have a better 2014 than emerging markets but think of all those unanswered questions listed above, that might not be true after all. Most of the developed nations (US, Japan and Europe) are still under "life supporting" system (ie stimulus program and low interest rate environment), can they really back to their old glory days without any stimulus and normal interest rate environment ? There is a chance that they can't and they will have to forever rely on stimulus to sustain their growth, so it is a 50-50 thing at the moment. When having this 50-50 case, there is no reason to really get very optimistic about it and should stock markets over-react and when reality hit, they will have much to fall and that risk will be more than one can imagine. Emerging market (in particular SE Asia) might be losing flavourism in 2014 as they have been badly sold down in 2013 but that doesn't mean they will continue to be so in 2014. Most of them are still fundamentally sound (nett surplus at least) and with prices already being sold down, the risk has already been minimized, will be no surprise if they are the better bargain you can get in 2014. One of the thing one need to look out for in 2014 is :-
Inflation (deflation for the case of Europe unfortunately). With most Central Banks having low interest rate, they will not be stingy to hike interest rate to curb inflation. Rising inflation or rising interest rate will have impact on economy and in turn stock markets.
For 2014, unless the intention is to invest to hedge against inflation else there is no reason for one to really pour money into the stock market unnecessary. On the other hand, for those who still holding investment from 2009, consider slowly to unwind their positions as markets rally up. Investment should just keep to those which can hedge against inflation and at most only 50% of the capital to be in stocks. Holding the remaining 50% cash and wait in patience to bargain hunt in bear market.
Never ever have views that go to the extreme (positive or negative) as from Newton's Third Law of Motion (For every action, there is an equal and opposite reaction), taking a stand at the extreme will always end up at the wrong ends. If most of the views are correct (in stock markets) then there will be no poor people in this world.
Friday, January 4, 2013
Recap 2012 & Looking Ahead 2013
I started off 2012 citing cautiously optimistic year in the Recap 2011 & Looking Ahead 2012 analysis and without any doubt it turned out to be true for 2012. For the year 2012, FTSE STI rose 19.68% producing one of the best return year since 2009. However, it was not a smooth ride to the gain along the years as couple of important global events did cause a sharp pull back in the market before staging a strong rebound in the second-half of 2012. A recap of those several important global events in 2012.
1. China stock market was the worst performer for 2012 as its economy felt the burnt of the effect of monetary tightening to curb rising inflation and also a reform in its economic model (transform to customer and services oriented instead of the heavily export oriented) in which leading to investors wonder is China going for a soft or hard lending. The rising inflation managed to cool down in 1Q2012 and that has allowed Chinese Government some room to play in doing interest rate and RRR cut to stimulate the economic growth. The Chinese Government also rolled out stimulus in infrastructure spending to boost growth. That stimulus was not as aggressive as the one in 2008 as they still worried on inflation coming back. With those monetary easing and selective stimulus package, China economy finally managed to rebound in 4Q2012. In November, China held the once-a-decade change of leadership in which President Hu Jintao and Premier Wen Jiabao will be replaced by Xi Jinping and Le Keqiang respectively in March this year. The new leadership will usher China in its new economic model into the next decade without any doubt.
2. Another eventful year for Europe but was not as bad as in October 2011. Election for France and Greece in April brought some worries to investors. Hollande oust Sarkozy in the French Presidential Election and he was pretty much anti-austerity fellow which worried investors whether can he worked with German leader Angela Merkel to iron out EU debt problem. Greece has a roller-coaster ride in its election. The outcome of the election will determine Greece will continue its austerity measures to get the next bailout and after the first election in April, no majority party emerged as winner which later failed to form a coalition government. A re-election was scheduled in June in which caused some stock markets correction in fear of Greece can be default. At that time, rest of the world were preparing for emergency measures in case Greece default. Eventually, Greece managed to form a coalition government this time round led by the pro-austerity group, Greece adopted the EU austerity requirements and managed to get the bailout. In June EU Summit, EU leaders also pledged 120b euro growth package to stimulate the already in recession EU. Still EU nations in debt have to continue austerity measures to reduce debt level. Spain and Italy were also on the radar for getting bailout. Spain was on the brink of getting one when ECB stepped in after approval from EU leaders to use the EU bailout funds to perform unlimited Government bond purchase. That move put a stopper to the credit crunch risk but did not solve the fiscal debt issue. In December, EU leaders finally approved on the EU Banking Union policy with ECB as the supervisor. The main thing for EU to fully resolve the debt crisis still on austerity vs growth policies.
3. US, the culprit for the 2008 global financial crisis still facing headwinds in its economy recovery. The persistent high unemployment rate and stalled economy growth despite 2 QEs eventually led US Fed to launch QE3 in September, continued to maintain low interest rate and extended bond buying in December (after Operation Twist expired). In a bold move by the US Fed, all the above measures will have no time frame and tied to conditions of unemployment rate drops below 6.5% or inflation rises above 2.5%. In another word, aggressive printing of money continued. In November, Barack Obama managed to get re-elected defeating Republican Mitt Romney in the Presidential Election. Soon after the election, global stock markets experienced selling down as investors focus to the US fiscal cliff in which should no measures being proposed, come 1st January 2013, tax hike for all and across-the board spending cut. In a scenario in which US need to create jobs to stimulate economy growth, the fiscal cliff if not averted together with its massive debt hitting the already raise debt ceiling will bring US back to recession.
4. Japan, the world number 3 economy failing to fully recover from the March 2011 tsunami and together with global economy weakness, an island dispute with China eventually led Japan fell back to recession. That caused a Election in December in which the LDP led by former PM Shinzo Abe took back the control of the Government. The leading to and outcome of the election has caused Japanese stock market to rally to new 52-week high as investors anticipating aggressive stimulus will be launched should Abe won the election.
5. For rest of the world, it was pretty much the same issue. In the west, countries struggling with debts while countries in the East facing slow down.
In short, global stock markets performed strongly in the second-half of 2012 was mainly contributed by the excessive liquidity around in a low interest rate environment when investors chasing for return.
Looking ahead of 2013, most analysts are pretty bullish in both global economy and stock markets in general. Could not disagree with that but still need to maintain cautiously optimistic as global headwinds still exists. On top of the cautiously optimistic view, 2013 could be jolly well the last leg of the bull markets which started in 2009. Value/fundamental investment would have to be selective and in general it will be a trader market. After 2014, there is a high chance global economy will enter into recession again.
1. China with its reformed economic model should continue to rebound but like what the new President Xi Jinping was saying China will be looking at quality and sustainable growth, the days of having double-digit GDP growth will be gone. With focus on consumer and services based, even if there is any chance of monetary easing, it will be targeted to selective sectors only. The Chinese Government still maintain its curbing measures in property sector. The Chinese Government will definitely monitoring closely growth and inflation this time round and applies appropriate measures so that either of the two will not get out of hand. Selective sectors should be performing well in 2013 for China and hence expecting a better performance from the Chinese stock market as compared with 2012.
2. EU in mild recession in 2012 and hope will be it can get out of recession in 2013. German leader Angel Merkel started 2013 with a warning that EU debt crisis is far from over. Unfortunately, that is a reality and true fact as headwinds in EU are still there. EU leaders will have to continue to work hard in the austerity vs growth section to bring down the debt level and stimulate growth. Germany and Italy will be having election this year and the one in Germany should be closely monitored as that will decide whether Angela Merkel can get re-elected and continued to fight on the EU debt. The on-and-off Greece debt and bailout might resurface again as Greece has until 2022 to meet the debt-to-GDP ratio (an extend of 2 years by EU leaders in 2012). In general, so far those measures being implemented in EU (especially ECB) are merely a stopper to any downside risk for credit crunch, the work to fully resolve the debt crisis might even take a decade to do so and investors just have to get used to any EU debt issue being pop up along the way and muddled through.
3. Officially, US Congress failed to put up any fiscal cliff deal to avert that. However, a deal with only rising tax for individual of over US$400k, couple over US$450k and delay the across-the-board spending cut by 2 months was patched-up in the early days of January (which could back-dated to 1st January) and temporary advert the fiscal cliff. However, US Treasury Department is current on "extraordinary measures" as officially US has hit its debt ceiling as of 31st December 2012. Should nothing to be done on the debt ceiling, come end February or March, US will have to default on its financial obligation. The across-the-board spending cut and debt ceiling will be in focus for debate in the Congress again 2 months later and global stock markets with a strong rally in early 2013 might correct in reaction to that. Expectation will be somehow and somewhat US Government is able to resolve those 2 issues just a matter whether it is the full or another kicking the can down the road type of solution. The political gridlock in resolving critical issue by the Democrats and Republicans have been there in the past, it is happening now again and will not be surprised still there in the future. Apart from this issue, the concern of creating jobs to bring down high unemployment and stimulate growth will always in focus for 2013. It will definitely not be a smooth ride in the stock markets will all these problems hanging around. Do also keep option opens of what happen when US Fed withdraws the stimulus due to conditions meet (unemployment rate drops to below 6.5% or inflation hit more than 2.5% in which US Fed has to hike interest rate) and how that will affect stock markets.
4. Japan with its new leader and stimulus package, hopefully can emerge out of recession in 2013 and that is probably the minimum expectation for it. The deflation and huge public debt issue after so many years still exist unfortunately.
5. For rest of the world, how the respective economy will fare will depend on how strong US, China, Europe and Japan rebound from their weak economy.
For Singapore, it recorded a GDP growth of 1.2% in 2012 (preliminary estimation) below the forecast of 1.5% and in 2013 projected growth will be between 1% to 3%. The weakness in Singapore growth mainly due to the manufacturing sector in which the weakness in US and Europe impacted it. The very open economy model of Singapore will continue to face headwind and slow growth in 2013 from drag by manufacturing sector if US and Europe could not rebound strongly. This is the reason why Singapore Government should co-operate with ASEAN nations to create the ASEAN consumer based region in which through consumer and services activities among ASEAN could potentially provide a cushion to ASEAN economy against the external shock from relying in export activities. China has more than 1 billion in population and it has the size to create its own consumer market whereas the combine population of ASEAN is about half of China and should be enough to create a secondary consumer market.
2012 has seen property and REIT sectors being the strongest performer in the stock markets and potentially that could roll over to 2013. However, the upside might not be comparable to that in 2012. The rising property prices could potentially lead to more curbing by Singapore Government in 2013. The price appreciation of S-Reits has rendered their dividend yield to an average 5.5%. However, with global low interest rate environment and Singapore inflation still on the high, investors would still be attracted to putting money into S-Reit to get the yield return to hedge against inflation (after all leaving the money in saving bank, getting peanut interest merely destroy the value of the money). As such, investors thinking of investing for dividend yield can still consider selectively on the S-Reits but for those looking for capital appreciation, do not have high expectation. Shipping and aviation sectors were the laggard and weakest in 2012. Thing might change in 2013 should global economies do a strong rebound and those could potentially be the biggest gainer for 2013. Offshore/Marine sector has been very robust mainly due to the rising crude oil prices and more oil-rig related contracts rolling in. However, investors have to take note of the profit margin from these companies even with rising order books. Strengthening in SGD (weakness in USD) and rising cost (labor, admin and logistic expenses) could just erode into the profit margin. Hence, getting more orders doesn't mean good sign for the companies. Commodity sector has been had a bear market in 2011 when global inflation was peaked. Sign of rebounding is there but with Central Bankers (especially in the East) are keeping a close eye on inflation to ensure it will not spike up again, might still be having a muted performance in 2013. Finance sector probably would be another neutral performer in 2013. To the West of the globe is full of debt while to the East is on surplus, nett off either we have 0 or still slight deficit globally though.
Since 2009 till now, global economy able to rebound from the 2008 crisis was mainly due to excessive liquidity ie printing money. Like the Chinese saying 水能載舟亦能覆舟 (water can transport a boat but also can capsize it), the excessive monies can stimulate economic growth but also cause rising inflation which eventually will be the cause of economy downturn. Bond and Tech bubbles are the other possible trigger that could sink the global economy into recession too. With all these threats, there is strong reason to believe stock markets are having the last leg of bull market now, still maintain cautiously optimistic, value/fundamental investing has to be selective, must know the downside risk and it is a trader market.
From value/fundamental investing perspective, prices ain't cheap, any investing has to be extremely selective and aware of the potential downside risk of global economy can go into recession next.
For trader or short to mid-term investor, 2013 could be your year with the last leg of bull market. Remember also to maintain strict cut loss policy if not when the music stops, you will not be the one still standing and not having a seat.
Stocks trading at deeply discounted NAV with strong cash flow (Cash in Hand per share) and most important of all a business model that is not complicated would be the one that could bring you the biggest return for the year.
1. China stock market was the worst performer for 2012 as its economy felt the burnt of the effect of monetary tightening to curb rising inflation and also a reform in its economic model (transform to customer and services oriented instead of the heavily export oriented) in which leading to investors wonder is China going for a soft or hard lending. The rising inflation managed to cool down in 1Q2012 and that has allowed Chinese Government some room to play in doing interest rate and RRR cut to stimulate the economic growth. The Chinese Government also rolled out stimulus in infrastructure spending to boost growth. That stimulus was not as aggressive as the one in 2008 as they still worried on inflation coming back. With those monetary easing and selective stimulus package, China economy finally managed to rebound in 4Q2012. In November, China held the once-a-decade change of leadership in which President Hu Jintao and Premier Wen Jiabao will be replaced by Xi Jinping and Le Keqiang respectively in March this year. The new leadership will usher China in its new economic model into the next decade without any doubt.
2. Another eventful year for Europe but was not as bad as in October 2011. Election for France and Greece in April brought some worries to investors. Hollande oust Sarkozy in the French Presidential Election and he was pretty much anti-austerity fellow which worried investors whether can he worked with German leader Angela Merkel to iron out EU debt problem. Greece has a roller-coaster ride in its election. The outcome of the election will determine Greece will continue its austerity measures to get the next bailout and after the first election in April, no majority party emerged as winner which later failed to form a coalition government. A re-election was scheduled in June in which caused some stock markets correction in fear of Greece can be default. At that time, rest of the world were preparing for emergency measures in case Greece default. Eventually, Greece managed to form a coalition government this time round led by the pro-austerity group, Greece adopted the EU austerity requirements and managed to get the bailout. In June EU Summit, EU leaders also pledged 120b euro growth package to stimulate the already in recession EU. Still EU nations in debt have to continue austerity measures to reduce debt level. Spain and Italy were also on the radar for getting bailout. Spain was on the brink of getting one when ECB stepped in after approval from EU leaders to use the EU bailout funds to perform unlimited Government bond purchase. That move put a stopper to the credit crunch risk but did not solve the fiscal debt issue. In December, EU leaders finally approved on the EU Banking Union policy with ECB as the supervisor. The main thing for EU to fully resolve the debt crisis still on austerity vs growth policies.
3. US, the culprit for the 2008 global financial crisis still facing headwinds in its economy recovery. The persistent high unemployment rate and stalled economy growth despite 2 QEs eventually led US Fed to launch QE3 in September, continued to maintain low interest rate and extended bond buying in December (after Operation Twist expired). In a bold move by the US Fed, all the above measures will have no time frame and tied to conditions of unemployment rate drops below 6.5% or inflation rises above 2.5%. In another word, aggressive printing of money continued. In November, Barack Obama managed to get re-elected defeating Republican Mitt Romney in the Presidential Election. Soon after the election, global stock markets experienced selling down as investors focus to the US fiscal cliff in which should no measures being proposed, come 1st January 2013, tax hike for all and across-the board spending cut. In a scenario in which US need to create jobs to stimulate economy growth, the fiscal cliff if not averted together with its massive debt hitting the already raise debt ceiling will bring US back to recession.
4. Japan, the world number 3 economy failing to fully recover from the March 2011 tsunami and together with global economy weakness, an island dispute with China eventually led Japan fell back to recession. That caused a Election in December in which the LDP led by former PM Shinzo Abe took back the control of the Government. The leading to and outcome of the election has caused Japanese stock market to rally to new 52-week high as investors anticipating aggressive stimulus will be launched should Abe won the election.
5. For rest of the world, it was pretty much the same issue. In the west, countries struggling with debts while countries in the East facing slow down.
In short, global stock markets performed strongly in the second-half of 2012 was mainly contributed by the excessive liquidity around in a low interest rate environment when investors chasing for return.
Looking ahead of 2013, most analysts are pretty bullish in both global economy and stock markets in general. Could not disagree with that but still need to maintain cautiously optimistic as global headwinds still exists. On top of the cautiously optimistic view, 2013 could be jolly well the last leg of the bull markets which started in 2009. Value/fundamental investment would have to be selective and in general it will be a trader market. After 2014, there is a high chance global economy will enter into recession again.
1. China with its reformed economic model should continue to rebound but like what the new President Xi Jinping was saying China will be looking at quality and sustainable growth, the days of having double-digit GDP growth will be gone. With focus on consumer and services based, even if there is any chance of monetary easing, it will be targeted to selective sectors only. The Chinese Government still maintain its curbing measures in property sector. The Chinese Government will definitely monitoring closely growth and inflation this time round and applies appropriate measures so that either of the two will not get out of hand. Selective sectors should be performing well in 2013 for China and hence expecting a better performance from the Chinese stock market as compared with 2012.
2. EU in mild recession in 2012 and hope will be it can get out of recession in 2013. German leader Angel Merkel started 2013 with a warning that EU debt crisis is far from over. Unfortunately, that is a reality and true fact as headwinds in EU are still there. EU leaders will have to continue to work hard in the austerity vs growth section to bring down the debt level and stimulate growth. Germany and Italy will be having election this year and the one in Germany should be closely monitored as that will decide whether Angela Merkel can get re-elected and continued to fight on the EU debt. The on-and-off Greece debt and bailout might resurface again as Greece has until 2022 to meet the debt-to-GDP ratio (an extend of 2 years by EU leaders in 2012). In general, so far those measures being implemented in EU (especially ECB) are merely a stopper to any downside risk for credit crunch, the work to fully resolve the debt crisis might even take a decade to do so and investors just have to get used to any EU debt issue being pop up along the way and muddled through.
3. Officially, US Congress failed to put up any fiscal cliff deal to avert that. However, a deal with only rising tax for individual of over US$400k, couple over US$450k and delay the across-the-board spending cut by 2 months was patched-up in the early days of January (which could back-dated to 1st January) and temporary advert the fiscal cliff. However, US Treasury Department is current on "extraordinary measures" as officially US has hit its debt ceiling as of 31st December 2012. Should nothing to be done on the debt ceiling, come end February or March, US will have to default on its financial obligation. The across-the-board spending cut and debt ceiling will be in focus for debate in the Congress again 2 months later and global stock markets with a strong rally in early 2013 might correct in reaction to that. Expectation will be somehow and somewhat US Government is able to resolve those 2 issues just a matter whether it is the full or another kicking the can down the road type of solution. The political gridlock in resolving critical issue by the Democrats and Republicans have been there in the past, it is happening now again and will not be surprised still there in the future. Apart from this issue, the concern of creating jobs to bring down high unemployment and stimulate growth will always in focus for 2013. It will definitely not be a smooth ride in the stock markets will all these problems hanging around. Do also keep option opens of what happen when US Fed withdraws the stimulus due to conditions meet (unemployment rate drops to below 6.5% or inflation hit more than 2.5% in which US Fed has to hike interest rate) and how that will affect stock markets.
4. Japan with its new leader and stimulus package, hopefully can emerge out of recession in 2013 and that is probably the minimum expectation for it. The deflation and huge public debt issue after so many years still exist unfortunately.
5. For rest of the world, how the respective economy will fare will depend on how strong US, China, Europe and Japan rebound from their weak economy.
For Singapore, it recorded a GDP growth of 1.2% in 2012 (preliminary estimation) below the forecast of 1.5% and in 2013 projected growth will be between 1% to 3%. The weakness in Singapore growth mainly due to the manufacturing sector in which the weakness in US and Europe impacted it. The very open economy model of Singapore will continue to face headwind and slow growth in 2013 from drag by manufacturing sector if US and Europe could not rebound strongly. This is the reason why Singapore Government should co-operate with ASEAN nations to create the ASEAN consumer based region in which through consumer and services activities among ASEAN could potentially provide a cushion to ASEAN economy against the external shock from relying in export activities. China has more than 1 billion in population and it has the size to create its own consumer market whereas the combine population of ASEAN is about half of China and should be enough to create a secondary consumer market.
2012 has seen property and REIT sectors being the strongest performer in the stock markets and potentially that could roll over to 2013. However, the upside might not be comparable to that in 2012. The rising property prices could potentially lead to more curbing by Singapore Government in 2013. The price appreciation of S-Reits has rendered their dividend yield to an average 5.5%. However, with global low interest rate environment and Singapore inflation still on the high, investors would still be attracted to putting money into S-Reit to get the yield return to hedge against inflation (after all leaving the money in saving bank, getting peanut interest merely destroy the value of the money). As such, investors thinking of investing for dividend yield can still consider selectively on the S-Reits but for those looking for capital appreciation, do not have high expectation. Shipping and aviation sectors were the laggard and weakest in 2012. Thing might change in 2013 should global economies do a strong rebound and those could potentially be the biggest gainer for 2013. Offshore/Marine sector has been very robust mainly due to the rising crude oil prices and more oil-rig related contracts rolling in. However, investors have to take note of the profit margin from these companies even with rising order books. Strengthening in SGD (weakness in USD) and rising cost (labor, admin and logistic expenses) could just erode into the profit margin. Hence, getting more orders doesn't mean good sign for the companies. Commodity sector has been had a bear market in 2011 when global inflation was peaked. Sign of rebounding is there but with Central Bankers (especially in the East) are keeping a close eye on inflation to ensure it will not spike up again, might still be having a muted performance in 2013. Finance sector probably would be another neutral performer in 2013. To the West of the globe is full of debt while to the East is on surplus, nett off either we have 0 or still slight deficit globally though.
Since 2009 till now, global economy able to rebound from the 2008 crisis was mainly due to excessive liquidity ie printing money. Like the Chinese saying 水能載舟亦能覆舟 (water can transport a boat but also can capsize it), the excessive monies can stimulate economic growth but also cause rising inflation which eventually will be the cause of economy downturn. Bond and Tech bubbles are the other possible trigger that could sink the global economy into recession too. With all these threats, there is strong reason to believe stock markets are having the last leg of bull market now, still maintain cautiously optimistic, value/fundamental investing has to be selective, must know the downside risk and it is a trader market.
From value/fundamental investing perspective, prices ain't cheap, any investing has to be extremely selective and aware of the potential downside risk of global economy can go into recession next.
For trader or short to mid-term investor, 2013 could be your year with the last leg of bull market. Remember also to maintain strict cut loss policy if not when the music stops, you will not be the one still standing and not having a seat.
Stocks trading at deeply discounted NAV with strong cash flow (Cash in Hand per share) and most important of all a business model that is not complicated would be the one that could bring you the biggest return for the year.
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