On 8 August 2017, the Dow Jones Industrial Average hit a new record high of 22,179 points before reversing to close lower. On days that followed, the US bellwether index went into correction before finding support around 21,600 points on 21 August 2017.
All sorts of analyses surfaced to explain the correction: Tensions in Korean Peninsula, the growing rift between the political left and right wings, departures of US President Trump’s closest aides and the breakup of the CEOs-dominated Advisory Councils.
For all the reasons cited, the impacts on the stock market were short-lived as each incident only caused a short-term pullback. But having said that, all the events that unfolded were underpinned by Trump’s blatant disregard of the political implications his words carry.
When Trump was first elected, the US stock market surged on hopes that Trump could implement tax cuts and boost infrastructure spending for the US economy. Now that both his party members and the corporate elites are distancing themselves away from Trump’s promises, the possibility of getting both landmark bills pushed through in Congress is getting increasingly minute.
Notwithstanding all the recent political upheavals that Trump has brought, the recent market correction was largely due to the fact that US stocks prices have risen too high and investors were simply taking the opportunity to take profit.
Nonetheless, Trump’s capricious nature is keeping traders on the edge as his unpredictable choice of words can potentially rattle the global stock market any given day. With the US still the world’s strongest superpower, its influence over the global financial markets – including Singapore – cannot be underestimated.
In face of this, investors should play defensive and stay side-lined for now as betting on a short-term rebound is tantamount to catching a falling knife. Local investors should also wait for the market to rally again before taking on new positions; after all, the Straits Times Index has only corrected slightly below its recent high.
While global markets were in correction mode, I noticed an interesting phenomenon where the Hong Kong market appeared to be leading the US in recovery. Due to time difference, the US market that opens later tended to follow Hong Kong’s lead to claw back losses.
The recent strong performance of Hong Kong stocks has been mainly influenced by positive corporate earnings surprises. In addition, bullish sentiments in the China A-shares might have also spilled over to the Hong Kong counterpart. On 28 August 2017, the Hang Seng Index (HSI) finally surged to a two-year high after briefly breaching the 28,000-point resistance. While bullish sentiments are abound, speculators searching for short-term gains can consider buying into Hong Kong stocks or China A-shares.
In the recent Jackson Hole symposium that gathered the world’s central bank leaders, both the US Federal Reserve (Fed) Chairwoman Janet Yellen and European Central Bank President Mario Draghi delivered a dovish message in their statements. In addition, central bank leaders widely view the global financial system as “safer now” and hence unlikely to hike interest rates except when inflation rears its ugly head.
In a large sense, Yellen has been one of the most successful Fed chairs and the US bull market has extended its longevity despite four rate hikes under her term thus far. Coupled with Trump’s tax reform bill on the agenda of the US Congress, investors should be hoping to see a stronger rebound in the stock market.
Previously, the three heavyweights – Tencent Holdings, HSBC Holdings and AIA Group – have spearheaded HSI’s rally. This time round the HSI’s unexpected surge towards 28,000 points on 25 August was powered by stocks of mainland’s financial institutions such as Industrial and Commercial Bank of China, China Construction Bank Corporation, Bank of China, Ping An Insurance and China Life Insurance. The broader Shanghai Securities Exchange (SSE) Composite Index also spiked up 1.8 percent to breach 3,300 points that day.
The exchange rate of the Renminbi greatly affects the prices of Chinese financial stocks. Since the beginning of the year, the Chinese currency has creeped up about five percent against the Hong Kong dollar and hence the books of these financial institutions would be revalued higher by the same quantum.
From 2006 to 2008, the Renminbi appreciated against the US Dollar before the financial crisis hit. A year after in 2009, the Renminbi resumed its ascend until 2014 when the Fed announced the end of US quantitative easing programme. As a result, the Renminbi began to depreciate against the US Dollar.
Leading up to August 2015, the Renminbi started to see dramatic devaluation and the western media quickly jumped in to feature China’s economic model as unsustainable and further predicted a hard-landing. In conjunction, the Chinese stock market bubble popped and the SSE Composite index went free-falling from the high of 5,200 points.
As Chinese stocks continued to tumble, securities regulators introduced circuit breaking systems in early 2016, but a series of trading halts sparked off a global sell-off of Chinese stocks. During the process, the SSE Composite index lost almost 50 percent after plunging to 2,600 points.
Nevertheless, the Chinese economy slowly recovered when the central government introduced supply side reforms to tighten excess capacity in December 2015. In retrospect, it all began when the government injected a Rmb4 trillion fiscal stimulus during the financial crisis. Even though the package spurred investments and capacity expansion to rapidly lift Chinese economy out from distress, it also created the long shadow of oversupply problems in various industries such as in coal and steel.
Commodities, like coal, saw prices tanking and Chinese financial markets suffered as domestic consumption weakened. Ironically, the Rmb4 trillion injection that was used to stimulate inflation and growth, has quickly become the source of growth slowdown for the Chinese economy.
Beginning from 2016, the Chinese economy’s over capacity problem was gradually being reined in and the cement, steel and coal industries also started to see a turnaround in financial performances. Savvy investors would have already scooped up these stocks, driving their share prices higher.
Almost a year later, in December 2016’s Economic Work Conference, the Chinese Communist Party (CCP) continued to uphold supply side reforms as a top priority for FY17. Apart from eliminating excess capacity, the CCP also introduced policies to align industries to higher environmental standards. For instance, cement and coal companies must meet emission and electrical standards in order to continue operating.
Stepping into 2018 and beyond, growth of the Chinese economy should accelerate as excess capacity becomes rebalanced. In the process, the CCP has increased investments to advance the country’s technology and position the economy towards a more productive and environmentally-friendly trajectory. Workers displaced by structural reforms were also able to quickly find re-employment in a more conducive environment.