US Federal Reserve (Fed)’s latest minutes in June revealed that Fed officials were divided on the timetable of future interest rate hikes and balance sheet runoff, suggesting that future rate hikes and deleveraging of Fed’s balance sheet may not take place anytime soon.
Dovish Yellen Lifts The Markets
Theoretically speaking, the current purpose of rate hikes and balance sheet reduction is just to normalise interest rate level so that “hot money” does not build up into speculative bubbles. In the long run, however, further tightening of money supply would be necessary for curbing inflationary woes. In reality though, at present, the US has no worrying inflation to speak off. So what good would it bring to tighten money supply just for the sake of normalising interest rates?
Following the release of the minutes, Fed Chairwoman Janet Yellen gave her testimony before the US Congress and Senate. Interestingly, right before she presented her statements, rumours surfaced that Trump would not retain Yellen after her tenure.
As a result, market participants were speculating that this was the reason why her message on 12 July appeared dovish. In her speech, Yellen emphasised that rate hikes will be gradual and dependant on the overall strength of the US economy. She also cited concerns over short-term downside risks to the US inflation outlook. Through the two-day hearing, the US stock market cheered, with the Dow hitting record territories while the positive sentiments from the US also spilled over to Singapore and Hong Kong. On the whole, global stocks have performed rather well since the start of the year.
Brace Yourself And Ride Out Uncertainty
However, while the local stock market has seen a splendid run so far, Singapore’s economic outlook is getting hazier. In June 2017, the local Purchasing Manager Index (PMI) fell for the second consecutive month to 50.7. A reading below 50 would represent a contraction in the manufacturing sector, so investors should pay close attention to this index going forward.
Looking deeper into the local barometer Straits Times Index (STI), we could see that constituents of STI have moved to two opposite camps. “Strong” stocks showed strong positive upward momentum and vice versa. Amidst the upward trending market but with narrow gyrations in prices, many investors have cashed out on these “strong” stocks and missed out on the opportunity to make even more profits.
Many of these investors thought the market would go into a major correction or even turned into a downtrend after the impressive run in 1H17. I, on the other hand, am optimistic that the outlook would be getting brighter and would advise investors to hold on to their stocks and ride out the uncertainty.
Singapore-China Relations Reaffirmed
Singapore is not a member country of the Group of Twenty (G20) but our Prime Minister Lee Hsien Loong was invited by host country Germany to attend the highly-watched summit.
During the summit, PM Lee met with Chinese President Xi Jinping and both reaffirmed the strong bilateral relationship that China and Singapore share. In a sign of warming ties, both also agreed to engage in more frequent high-level exchanges. It seems that the previous episode of tense relations with China have finally found a closure. Previously, Singapore was facing tremendous pressure to “pick a side” between US and China.
Due to PM Lee’s conspicuous exclusion from the high-profile “One Belt One Road” summit, many Chinese and Singaporean businessmen held a negative view with regards to bilateral ties which ultimately created an overhand over our stock market.
On Lee Family Feud
Thereafter, the hot topic for Singaporeans then turned towards the Lee family feud which arose due to disagreements between PM Lee and his siblings (Lee Hsien Yang and Lee Weiling), over founding-father Lee Kuan Yew’s wish to demolish the family home at 38 Oxley Road. Many Singaporeans had raised concerns that the public spat would eventually lead to dire consequences.
In response, PM Lee held a two-day parliamentary session to debate about the matter and concluded that he is willing to seek a resolution with his siblings privately. Responding to PM Lee, his siblings also agreed to take the family matter private instead of via their Facebook posts.
In my opinion, Singapore is facing many challenges today and PM Lee and his parliament should not waste too much time trying to preserve the family home into a heritage building. This is because a century-old building has weak foundations and could not be kept standing forever despite the best preservation efforts. Many heritage buildings that we see in foreign countries today are in fact reconstructed.
Even more so, the family home of a political figure will also have to face the test of political changes in the future. For example, see how Taiwan’s Chiang Kai-Shek’s Memorial Hall has turned into a free-roaming area today?
New Hong Kong Government To Focus On Economic Challenges
On 1 July 2017, Chinese President Xi attended the swearing-in ceremony of the fifth Government of Hong Kong Special Administration Region (SAR). In the ceremony, Xi delivered a tough message to the new government that the sovereignty of the mainland cannot be challenged.
In the past, Xi’s messages were always cordial but the dynamics have changed and this is the first time Xi warned of a “red line”. He also highlighted economic challenges that Hong Kong is facing which arose after its return to Chinese rule.
Today, many young people in Hong Kong are displeased with the SAR government due to their predicament culminated by an oversupply of university graduates and undersupply of housing properties. Wage conditions in Hong Kong are worsening yet property prices in Hong Kong continue its upward climb. Most of these young graduates can no longer afford their own homes which ultimately fueled anti-government sentiments. Nonetheless, the new SAR government’s key objective to stimulate and restructure the Hong Kong economy should bode well for its stock market.
Time To Relook At Shipping Industry
Recently, China state-owned Cosco Shipping (Cosco) successfully took over Hong Kong-listed Orient Overseas (Orient) (International). Some have perceived that the takeover valuation was way too high and could be China’s way of giving the first SAR Chief Executive Tung Chee-hwa his “retirement pension”.
If Cosco had overpaid for Orient, its share price should have plunged yet, on the contrary, the shares of Cosco surged 5.4 percent following the offer made on 10 July.
Currently, the global shipping industry is now undergoing a recovery. Cosco has already revealed that it would return to profitability in its latest guidance and I believe Orient would also deliver better upcoming results.
In addition, mergers would expand the economies of scale and improve the competitiveness of a company. With the shipping industry consolidating as a whole, shares of takeover companies and target companies should thus rise in tandem.