Nearing the end of 2016, investors have speculated the prospect of a stock market rout in the year of 2017. After all, stock markets crashed in 1967, 1987, 1997 and 2007; all of which happened in the seventh year of every decade (except in 1977). However, this phenomenon is nothing but a mere coincidence that has no scientific support.

Don’t Be Superstitious In The Stock Market

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It was perhaps due to this “superstition” that led to investors cashing out of stocks before heading into 2017.Indeed, back in December last year, Hong Kong’s Hang Seng Index (HSI) recorded a 5-month low after falling consecutively for three months.

But came 2017, the HSI reversed its course to chalk up gains after rising for five straight months. The widely touted strategy of “sell in May and go away” did not even happen this year! As a result, investors who trimmed shareholdings or who took profits before the rebound must be feeling disappointed.

Going into mid-2017, many are now speculating that we would likely see a sell-down in June since a correction did not happen in May. In all my years of educating investors, I have not once given any short-term guidance nor would I encourage investors to predict the stock market’s short-term direction.

In reality, investors who that try to do so are more like gamblers than investors and hence I would not be placing any bets on whether there will be a stock market rout in 2017.

Observe For Tell-Tale Signs

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How should investors treat this “2017 market rout prophecy”? A simple way would be to observe if there are any signs of asset bubbles. Are stock prices rising on irrational optimism?

Flip back the pages of financial history and try to find out what caused the stock market to crash in 1997 and 2007. I will not discuss on the 1987 crisis as I was still new in Hong Kong. So my experience and knowledge on that matter are not insightful.

One common occurrence in 1997 and 2007 stock market rout was the irrational rise of “junk” stocks. Back then, a large number of investors jumped blindly onto the bandwagon to chase such stocks to extremely unsustainable levels. For now, I have yet to make similar observation this year, as prices of “junk” stocks were only driven up for a few days before they went into a major correction. I postulate that this is because retail investors are not chasing stocks at sky-high prices, which market makers pushed up.

Also in both 1997 and 2007, a handful of stock market “whiz-kids” appeared who garnered significant media coverage and attention. In addition, if you had walked along the streets of Hong Kong back then, you would have noticed that the top-sellers in Hong Kong book stores were purely on stocks and investments!

Rise of “Junk” stocks, emergence of young stock gurus and mounting sales of investment books are altogether a tell-tale sign of a stock market bubble. By being a little more observant and one would not need to speculate on when an impending rout would occur.

Since the beginning of 2017, the HSI has risen by about 18 percent and the local Straits Times Index has registered a gain of about 12 percent. Were the gains hysterical and irrational? If we were to compare that to the 60 percent gain which HSI recorded back in July 2007 to October 2007, the stark difference would tell you otherwise.

Despite that, many investors have attributed the rise in stock prices to low trading volume, which does not truly reflect a positive sentiment in the market. Many of these investors also did not believe that the stock market would hold steadfastly onto the gains post-rally which they have been proven wrong yet again.

My advice: be patient and wait for these tell-tale signs, which I mentioned above, to appear.

Markets To Hold Well To A Fed Hike 

Going forward, the global stock market will be closely monitoring the Federal Reserve’s (Fed) decision on interest rates. In December last year, stocks tumbled when the Fed announced the decision to hike rates.

But now, US stocks continue to break new highs even before the days of a Fed meeting that could potentially hike rates. This means that the pressure of any impending hike has been absorbed by the stock market and hence would have limited impact.

Simultaneously, bank stocks have been running higher as a potential rate hike would increase the interest rate spread and improve profitability for banks. For Singapore, investors can also pay attention to our local bank stocks (DBS, OCBC and UOB) which have delivered rather impressive performances.

On the other hand, Real Estate Investment Trusts’ (REITs) prices seemed somewhat unaffected by a potential rate hike. Conventionally, many investors perceived REITs with the same concept as corporate bonds. They think Fed rate hikes will make REITs and corporate bonds less attractive.

But that to me is fundamentally wrong. You get interest from bonds but the nominal interest never changes. On the other hand, REITs’ distribution can be adjusted according to their rental income. Assuming rental income increases faster than a bank’s interest income, then it suffices to say that REITs should have more room to run.

For Hong Kong, the worst is over for “gambling” stocks after Macau “braved through” China’s anti-corruption initiative. The same should apply for Singapore, so pay attention to Genting Singapore.

Infrastructure still remains the investment theme for the year: China is investing over Rmb1 trillion for its “One Belt, One Road” initiative while US President Trump had just revealed a US$1 trillion infrastructure plan! I believe infrastructure building is the best option to lift the slow economy and ST Engineering would be worth monitoring as well.

China Banks To Be Lifted By Renminbi’s Appreciation

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Recently, credit-rating house Moody’s downgraded Hong Kong sovereign debt rating from Aa2 to Aa1 but despite that, the Hong Kong stock market still continued to climb.

Some years back, Greece’s debt crisis was a result of these downgrades where its sovereign credit rating fell from A to junk grade. Currently, the top three credit rating agencies in the world are still US companies. Given Hong Kong’s close ties with China, we cannot rule out that the recent downgrade may have some political undertones.

Moody’s has downgraded China’s sovereign credit rating before moving on to Hong Kong. While the re-rating from Moody’s appeared to be systematic, I think it more as a self-destructive move. This is simply because the Chinese government is rather self-sufficient given its own mountain of reserves.

Nearing the end of 2016, the Chinese renminbi weakened to about US$1/Rmb7, raising concerns that the Chinese government would restrict the outflow of the Chinese currency. Since then, the renminbi have been growing stronger, by about two percent, to US$1/Rmb6.8.

Initially, the cause for the outflow of the renminbi can be attributed to two reasons: currency devaluation and diversification (especially for corrupted officials). Thus, the recent two percent strengthening of the renminbi is a huge thing as the outflow of the currency would ease.

The biggest beneficiary to renminbi’s appreciation would be none other than the Chinese banks and insurance companies themselves. Since they do not hold foreign debt and that their assets and reserves are renminbi-denominated, imagine how much this two percent appreciation would do to their books.