On 19 October 2017, Hong Kong stocks turned sharply lower and the Hang Seng Index (HSI) shed 2.2 percent for the day. Following the biggest tumble this year, the HSI continued to advance, but slumped again at the open on 6 November 2017.
However, Hong Kong’s stock market darling ,Tencent Holdings (Tencent), led the recovery to claw back most of the day’s losses when it surged by HK$9 per share. Shares of another HK-listed tech company, Aac Technologies Holdings, rode even higher on a 10-percent gain.
Following the rekindled spirits in the Hong Kong market, Singapore’s stock market also opened sharply higher on 7 November 2017, to set a new 52-week record high.
Currently, Hong Kong and US tech stocks are in the spotlight, with some big tech companies choosing to list during this period. Amongst major tech news, Broadcom announced a surprise US$130 billion bid to acquire Qualcomm. The offer price of US$70 per share represents about 28 percent premium to its last traded price.
Over the past fortnight, international oil prices also rallied to a two-year record high, fuelling bullish sentiments for oil stocks. Brent crude and New York oil futures rose to the high of US$62.8 and US$56.3 per barrel respectively.
On 1 November, the US Federal Reserve (Fed) kept interest rate unchanged, but guided to a hike in December. On the following day, US President Trump named Jerome Powell as his candidate for the new Fed Chair, effectively signalling the end of the incumbent tenure, after Janet Yellen steps down next February.
US investors cheered on both occasions, driving the three US major indices into record territory, implying that US investors are not too concerned with a December hike but rather more concerned about the outlook for interest rate next year.
During most of her time as the Fed Chairwoman, people generally viewed Yellen as a “dove”. Unfortunately, she has never been a trusted aide of Trump and hence why she was not reappointed. The Fed Chair is extremely powerful and can directly impact the US economy, which is why Trump wants to entrust the position to someone he can “influence”.
The scenario is just like when former president Obama replaced former Fed Chairman Ben Bernanke with Yellen. Bernanke was often credited as the mastermind of the Quantitative Easing (QE) program that lifted the US economy out of recession. However, in 2013, Bernanke abruptly backed down from the resolve to stick to the ambitious QE program and proposed to raise interest rate. The move ultimately cost Bernanke his second term.
This year, Yellen has already hiked interest rate twice and indicated one more round in December, further guiding to three more hikes in 2018.
However, Trump-nominated Powell would be the one directing the Fed’s policies next year. With his trusted aide as new Fed Chair, Trump could effectively control US interest rate and hence the strength of the US dollar.
During Yellen’s tenure, the Fed has already raised US interest rate four times, at 0.25 percent each round. Including the upcoming hike in December, the US interest rate would be raised to 1.25 percent.
Meanwhile, Powell is rated “neutral” on monetary policy. But whether “hawkish” or “dovish”, those are just media-dubbed terms. Although the Fed is supposedly an independent institution, Fed officials are nominated by the President and hence essentially influenced by him.
Since taking office last November, Trump made clear that it was not his intention to see the US dollar strengthen. However, under Yellen’s lead, the Fed has already hiked interest rates three times. Unlike during Obama’s term, Yellen only hiked interest rate once while Bernanke’s role had been to cut interest rates.
Clearly, in Trump’s eyes, Yellen seems hard to rein in. Fortunately, the US economy remains to be accelerating and the US stock market continues to climb higher. Meanwhile, the US dollar also did not strengthen significantly despite the interest rate hikes.
Does it mean that interest rates would not be raised next year after Yellen steps down? That would probably not be the case because, for Trump to win a second term, the US economy must be in a robust shape in 2020. If interest rates remain unchanged till then, risks of the economy overheating will emerge.
Back in 1993, Bill Clinton became the then US president when the US economy was beginning to recover. But in 1994, the Fed surprisingly raised interest rate, cooling the shaky economy, only to cut interest rate again the following year. As a result, Clinton secured his second term in 1996.
Decades later, retired Fed official Alan Greenspan (then Fed Chairman) wrote a memoir after his retirement. In the memoir, Greenspan explained that the 1994-hike was essentially meant to preset the conditions for interest rate cuts in 1995, since interest rate was already extremely low in 1993. Through this, we can see the significant political implications of the Fed’s monetary policy!
Recently, the Bank Of Japan (BOJ) chief Haruhiko Kuroda announced that the central bank will maintain its ultra-loose monetary policy to stoke inflation. At the moment, Japan’s inflation rate is still far below the BOJ’s two-percent target. Following his announcement, the Japanese Yen plummeted against the US dollar to reach a seven-month low while the Japanese stock market cheered.
During the closure of China’s nineteenth annual congress, the China Communist Party (CCP) enshrined “Xi Jinping’s Thought On Socialism With Chinese Characteristics For A New Era” into the party’s constitution, elevating Xi into the same pantheon as the party’s legendary leaders Mao Zedong and Deng Xiaoping.
What is China’s role in the “new era” as Xi envisages? At Beijing’s Great Hall of the People, where the high profile summit was held, a banner hung high to remind the Chinese of the sacrifices made during the revolution.
To Xi, this means that China must achieve these seven aspirations: the young must be nourished, youths must be educated, remunerations must be equitable, the sick receives treatment, the living has a roof, the needy gets help and the old are taken care of.
Riding on the theme of “taking care of the old”, shares of HK-listed China Life Insurance Company soared seven percent to notch a new 52-week high, while its shares on the Shanghai Stock Exchange surged even higher. Nevertheless, investors should bear in mind that Xi’s seven standards are long-term aspirations. As such, returns over the long term would be substantially greater.
Currently, China’s supplementary pension Social Security Fund, like Hong Kong Mandatory Provident Fund, stipulates a lower contribution rate compared to Singapore’s Central Provident Fund. This means that the SSF’s pension payout in China is significantly lower and cannot fund for decent retirement. To improve the situation, the CCP decided to encourage citizens to purchase life insurance and save for their retirement.
There are numerous insurance companies offering products in China. Personal life insurers are normally more active and hence tend to have better profitability. Their stocks also generally do well.
China Life Insurance is legitimately an undisputed state-owned enterprise (SOE) in China. With China putting more emphasis on socialism and Chinese characteristics, SOEs will play an even greater role in Chinese society.