Over the last fortnight, Prime Minister Lee Hsien Loong raised the topic on increasing taxes during the People’s Action Party Convention. Some years back, Lee had also mentioned about the need to implement higher taxes in Singapore.
Lee explained that there are rising expectations of the Singapore government to do more for the needy and those who have fallen through the cracks. Naturally, higher social spending requires an increase in government revenue.
Unlike Singapore, the US government is less prudent about its government coffers. It would simply issue debt to the central bank to fund its spending needs, resulting in the pile up of its national debt. In spite of this, the US still recently pushed through an unprecedented tax cut in American history.
Tax reform was one of Trump’s signature campaign promises when he ran for the US Presidency. His recent legislative success to push through the bill was the main driving force behind surging US stocks, as US major indices continued to make new highs.
On 2 December 2017, the US Senate voted 51 to 49 in favour of Trump’s tax reform bill. Meanwhile, the US Congress has also passed their own version of the bill just a few days before. Now, both bills are headed for the conference committee and all that is left is for Republicans in the House and Senate to reconcile the key differences between the two bills.
While there are obstacles and uncertainties ahead, a definitive bill looks set to be approved and passed into law. Even Trump has promised Americans a “huge tax cut for Christmas”.
The transformative policy is likely to make the US an attractive destination for investments and investors will be keeping a keen eye on whether it materialises. Investors will stay bullish on US stocks and some of these positive sentiments would spill over to keep the local stock market buoyant as well.
To begin with, the US used to be at the top of the spectrum when it comes to corporate tax rates. Over the decades, many US enterprises have been stashing their overseas profits in foreign countries in order to avoid the high American tax rates. But with a massive tax cut now in sight, global funds are starting to flow back into the US.
Notwithstanding that, the world will see foreign direct investments swell in US which will directly reduce investments into China. As a result, the latter has accused the US of setting in motion a global race to slash taxes.
A year ago, many people had suggested that 2017 would be the year for a major stock market correction; past crises occurred in 1987, 1997 and 2007. Many investors had prematurely sold their stocks, but 2017 turned out to be a good year for global equities. Previously, I had explained that for a stock market rout to occur, we must first see signs of euphoria.
In honesty, most of us (if not all) do not possess the ability to foretell how much a stock would rise or fall nor are we able to predict when the next crash would be. Trying to time the market would simply tantamount to gambling.
Yet, there is still a key difference between the stock market and the casino: The option to hold on to a stock that is not making money.
In the casino, there is no chance that money lost will return and the only way to recoup is to up your bets. This is the reason why I never add on to any losing position whenever I invest in a stock.
Recently, numerous tech stocks in US and Hong Kong have begun to fall from record territories. Especially in Hong Kong, tech stocks have declined by a larger magnitude and retail investors are becoming increasingly insecure.
Till now, I am still not bearish on the US or Hong Kong stock market. After all, the degree of correction was precipitated by a huge and rapid run-up in stock prices. When the correction is done, valuations would become healthier and stocks will return to their upward trajectory.
As correction ensued, Hong Kong’s most valuable tech counter, Tencent Holdings (Tencent), saw its share price tumble from the high of HK$439.60. The stock’s volatility has also increased tremendously. However, investors of Tencent should remain steadfast and not be overly concerned especially since the stock has been a blowout for most of the year.
Apart from that, many other Hong Kong insurers are also experiencing similar fate in their share price. Notwithstanding that, I believe that this correction would not be lasting.
On the broader market, the US is outperforming that of Hong Kong, as Dow Jones Industrial Average (Dow) index has been making huge gains. The bullish sentiment will likely filter through to lift Hong Kong stocks and China A-shares. As far as China and US are concerned, both stock markets will not be depressed for too long.
Amidst the stock market correction, Hong Kong investors in general are not showing much signs of fear and many have even taken the opportunity to bet on a rebound or accumulate at lower prices. Seemingly, the optimism which lifted the Hang Seng index above 30,000 has not waned. These speculators and investors believe that it is only a technical correction going on.
In my opinion, “betting on a rebound” and “accumulate at lower prices” are two very different concepts. Speculators place fast bets on a rebound while investors accumulate stocks for the medium to long haul. To make money, speculators aim to make a few pips from the gyration of stock prices. On the other hand, investors need more patience to wait for stock prices to fall lower.
To cite an example, consider Tencent: The stock has yet to shed its gains when it surged more than 25 percent last month. Shares of Tencent are still trading above HK$350, which was its price price prior the surge. As such, buying into Tencent now cannot be considered as accumulating at a lower price.
When stocks are in corrective mode, investors tend to cut losses rather unnecessarily as most retail investors have the habit of jumping onto the bandwagon when prices are high.
Not knowing how long the correction would last, these investors can face tremendous pressure to cut losses. However, if investors were faced with such a situation whereby the stock had hit a new 52-week high only very recently, holding onto the stock and wait patiently for a recovery is the suggested strategy.
The Fed will soon convene its final meeting for 2017 and market watchers are expecting the Fed to hike interest rate by 25 basis points (b.p). The impact on the stock market will likely be limited since 25 b.p is not a significant increase. On the other hand, bank stocks will even benefit from widening interest rate spreads.
Apart from that, some are also placing their bets on the prospect of bank deregulation. In the aftermath of 2008 subprime crisis, the Fed tightened supervision of banks which ultimately weighed on their profitability.
Trump has chosen to replace Janet Yellen with Jerome Powell as the new Fed Chair and one of the reasons could be to due Powell’s desire to “tailor” and ease up regulatory burdens on banks. The direct implication of that is definitely good for bank stocks.