Back in December 2016, numerous media reports circulated predictions of a catastrophic year for stocks in year 2017. Despite the negativities, I encouraged investors not to be swayed by fear-mongering. As it turned out, 2017 was a year where global equities went on a meteoric rise.
The “prophecy” that stocks would plunge every 10 years arose from the fact that past stock market crises happened in 1987, 1997 and 2007. But on the standpoint of statistics, the phenomenon is nothing but a mere coincidence. Given the ever-changing fundamentals in the stock market, how could there be a fixed period or pattern for a crisis to happen?
A common question amongst new investors is: how long does the stock market take to complete one full cycle? Interestingly, there are some market experts that stake claims of four and five years while most believe it to be 10 years.
However, investors should recognise that extrapolating past data points is tantamount to gambling. In a game of “Big or Small”, gamblers feel that “Small” will surface after every three occurrences of “Big”. Coincidence or pure gambling?
In 1963, the late US President John F. Kennedy, who was elected in 1961, was assassinated during his term. Media outlets across the world then dubbed it a curse by the Red Indians who would cause its presidents to pass away during their term in every 20 years: Franklin D. Roosevelt died in 1945 during his fourth term which began in 1944; along with other late-US Presidents that were re-elected in 1901, 1881, 1861 and 1841.
But Bill Clinton and George W. Bush, who both assumed office during 1993 to 2009, are still very much alive. Whether it is the “stock market crisis in the year ending with seven” or the “20-year curse of US Presidents”, the world is filled with countless unexplained coincidences and we do not need attach a reason to them.
It is also logical that stock market cycles have different durations. On hindsight, many investors would have missed the opportunities for higher returns when they sold their stocks prematurely in December 2016.
Every year end, because of the longevity of the US stock market, some “experts” would again attempt to predict a stock market bubble burst in the following year. Yet, time and time again, these naysayers had to come up with some reasons to justify why their predictions failed to materialise.
Another more perplexing phenomenon is the Japanese stock market. At the end of 1989, Nikkei 225 index was at 38,957 points. After 28 years, why has the Japanese stock index yet to revisit its glorious heights?
To a less extent, Singapore, Hong Kong and China’s stock market performances were not that great either as all have yet to recover to levels prior to the 2007 subprime crisis. Furthermore, although Hong Kong and China stock markets recovered to the levels of 2015’s “Golden Rally”, only a handful of stocks registered enormous gains to lift the markets. Consequently, not many retail investors managed to make money in 2017.
No doubt, history always repeats itself but it would not be in its entirety. Every year, there are new and different elements affecting the stock market and hence we should learn the lessons from history and avoid making the same mistakes.
Having said all these, I hope investors realise that it is meaningless trying to time the market. This is because even in a bull run, there are still bound to be periodic episodes of negative events.
The same could be said for the current upcycle: After bottoming out in 2009, global stock markets were quickly confronted by the European debt crisis in 2010. Following which in 2013, stock markets worldwide was rattled by the US Federal Reserve announcing the end of the quantitative easing programme. Then in 2015, global stock markets also felt the effects when Hong Kong and China’s stock market bubble popped.
In most of December 2017, China A-shares stocks underwent a correction which spilled over to impact Hong Kong stocks’ performance negatively. Following the New Year holiday, stock markets reopened on 2 January 2018 and Hong Kong stocks opened substantially higher and lifted the Hang Seng index to a 10-year high! Not surprisingly, Chinese stocks also posted rather impressive performances on the first day of trading.
In 2017, many of these outperformers are Chinese companies listed on the Hong Kong stock exchange (HKEX) and some of them even registered gains of more than 200 percent. However, the probability for such stocks rising substantially further is inherently much lower and hence early investors should consider taking profits or reduce their positions to recover part of the invested capital.
From a contrarian perspective, Hong Kong developers should post a better performance in 2018 after lagging behind HKEX-listed mainland developers last year.
In 2017, Hong Kong property prices rose about 13 percent and total sales value amounted to a record-breaking HK$230 billion. Currently, most of the ongoing launches are still under developments and they sit on sites where developers acquired three to five years ago. As such, the development costs on these sites are significantly lower and these Hong Kong developers would likely make a handsome profit in the next two years.
Last year, the Hong Kong government increased land supply on all fronts. Developers paid a land premium (development charge) to convert farmlands into private residential lands which is slated to add another 10,000 homes. The figure far exceeded the original target of the special administrative region government which was the result of a switch in policy.
Previously, the Hong Kong government approach was to manage and curb demand but has since switched to one that encourages home buyers, as well as stronger partnership between the state and private developers. The rationale behind is that with more home buying interests, developers have stronger incentives to develop properties and hence would proactively increase supply by converting farmlands to residential lands.
Better sentiments in the property market are not limited to Hong Kong as Singapore’s property market is poised to stage a rebound. Singapore developers are aggressively growing its landbank and sky-high enbloc prices further suggest that the Singapore government has limited land to supply for private developments.
On the whole, investors should continue to be optimistic in 2018. In the US, President Trump’s tax cut should boost US stocks into new record territories. On the other hand, China’s determination to continue deleveraging would reduce the global financial risks and set the stage for the world’s second largest economy to embark on a more sustainable growth path.
Correspondingly, the ageing bull market should continue its upward trajectory.