The Straits Times Index’s performance was rather lackluster for the month of September 2017. Fortunately, stepping into October, stocks from major markets such as the US, Japan and Hong Kong saw a resurgence to help lift local sentiments.

Recently, major US indices extended further gains into record territory, Japan’s Nikkei index rose to new 52-week high while Hong Kong’s Hang Seng index (HSI) also climbed past 28,588 – the peak of the “Golden Rally” in 2015.

The sudden run-up came as a surprise and many retail investors did not manage to catch the rising tide early. For instance, Zhongan Online P&C Insurance’s shares only soared on the fourth day after its debut on the Hong Kong bourse. Despite the coincidence in timing, the US, Japan and Hong Kong stock markets rallied on varying reasons.

For the US, the rally came sooner than expected, considering that US stocks came under pressure only recently. Previously, US stocks were in correction mode amidst escalating tensions in North Korea, US interest rates hike and owing to the commencement of the central bank’s deleveraging process.

Overshadowing the myriad of uncertainties, the rally in US stocks can be attributed to the delivery of Trump’s tax reform bill to the US congress. Of course, the halt in provocative actions between the US and North Korea has also given investors reasons to cheer about.

Trump’s tax reform bill is merely a proposition to cut taxes which are beneficial to the stock market. In addition, recent positive economic data are also pointing to an accelerating US economy. That said, the tax bill is now under congressional review and investors will keep a keen eye on whether the bill can be passed with its core principles left intact. In the US’s tripartite government, the President does not wield absolute power and the congress has the discretion to review and amend bills.

In Hong Kong, the China central bank’s move to cut the country’s bank reserve ratio was the reason why investors turned bullish. Lower capital requirements inherently mean that banks can give out more loans and hence more money would flow in the economy.

This time, the People’s Bank of China dropped the effective bank reserve ratio to 1.5 percent which was much larger than 0.5 percent in the past. Taking effect from 2018, the policy is targeted to encourage Chinese lenders to allocate more capital to smaller and medium-sized enterprises, but there are strings attached.

For the Chinese commercial banks, the amount of capital requirement would depend on the loan makeup: A bank can enjoy a 0.5 percent reduction in its bank reserve ratio if small enterprises constitute 1.5 percent of total loan assets, while extending the makeup to 10 percent would then unlock the additional 1 percent cut.

Theoretically, cutting the cash reserve ratio is not equivalent to an interest rate cut but they have the similar effects of increasing money supply in the economy. Furthermore, with banks having less capital requirements, they will offer lower interest rates to stay competitive. In a way, the move is similar to the US’s previous quantitative easing programme during the 2008 financial crisis.

International institutions pushed up Hang Seng component stocks to propel the index above 28,000 points once again. On the other hand, retail investors are acting cautiously since this is the fifth time the HSI touched 28,000. Recent movements in the stocks of Hong Kong Exchanges and Clearing (HKex) are further proof of the current sentiments: At the time of writing, HKex stocks are still trading below the current year’s high of HK$233.2 and significantly lower than HK$300 during “Golden Rally 2015”.

The cautious sentiments are also due to fast movements in Hong Kong stocks this year which caused an inability for retail investors to timely enter or exit their positions. As such, the HSI needs to stabilise above the peak of 28,588 of 2015 in order for retail investors to believe that this is indeed a super-bull run. Notwithstanding that, retail investors that lost money buying junk stocks in 2015 will also shun such stocks this time round.

US major indices closed at records but the rally was tepid and mostly led by tech stocks. Similarly, tech stocks also led the rally in Hong Kong’s bourse recently. In addition, Hong Kong automobile counters were driven into new 52-week high after investors witnessed major congestion in Mainland China during the Golden Week holiday.

Though HSI is at a nine-year record, not many component stocks have reached or surpassed their highs of 2015. Furthermore, there are not many tech or automobile blue chips and retail investors are reluctant to chase stocks outside of the components at high prices. Consequently, recent trading volume was not huge despite the rally.

Thus, Hong Kong retail investors did not really benefit from the HSI’s recent sudden run-up, especially when there are not many laggard stocks to buy into. For most of 2017, only blue chips and some stocks in the secondary market have risen. Without a broad market rally, low transaction value was reflected in spite of HSI breaking a historical high. Back when HSI previously broke 28,000 in 2015, total transaction value amounted to HK$200 billion per day!

The Japan’s stock market recent rally can be attributed to the early election called by the current incumbent Prime Minister Shinzo Abe. Back in 2012’s election, I fervently encouraged investors to buy Japanese stocks. As it turned out, Abe’s Liberal Democratic Party (LDP) won and the Japanese Yen depreciated 25 percent against the US dollar and Nikkei index almost doubled from 8,000 to 16,000 within a year.

The Japanese stock market is highly correlated with the country’s currency. Currently, the Nikkei is capped around 20,000 as the Japanese Yen has stopped depreciating since it reached US$1/JPY120. If Abe turns up victorious again, the Japanese Yen may see another round of depreciation.

But, the call for an early election could be a big risk for Abe. While he might be hoping that the new opposition party has yet to find a stable footing, the popular support for Abe in 2012 has waned. It is possible, that even if Abe wins the election, the LDP might win fewer seats in the parliament – a similar outcome to the UK’s early election.

China’s nineteenth National Congress is about to commence and President Xi is likely to consolidate more political power. Concentrating power within the central government will be beneficial to the Chinese economy, provided that it is wielded by a capable leader. In the past year, Xi has restructured the Chinese economy to eliminate excess capacity, excess supply and inefficiencies.

In his early days, Xi also launched an aggressive anti-corruption campaign which dampened the Chinese consumption sentiments. However, the Chinese middle class is now booming and more than making up for the gap, indicating that Xi is a shrewd political and economic leader.

Our Prime Minister Lee Hsien Loong recently paid visit to China and was greeted with an official welcome, signaling an end to the previous episode of strained relations. During the two-day meeting, Chinese officials have indicated an interest in participating in KL-Singapore speed rail project. Likewise, Japan has made a bid for the project. Between the two, how should Singapore choose?

Dr Chan Yan Chong is a renowned investment expert with decades of experience in investing. He’s guided retail investors through the various financial crises and stock market corrections and crashes. Dr Chan is speaking at our upcoming Shares Investment Conference 2H2017《股林大会》(Chinese event) on 4 November 2016 along with Buck Tan Mu Kun, Goh Mou Lih and Liu Jin Shu, who are all regular 958fm guests. Click on the button below to learn more.


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This article was translated from Chinese to English by Chen Xushuang. Click here to read the original article.