In the last month of February 2018, US investors were taken on a rollercoaster ride as volatility returned to the stock market.
On 2 February 2018, US stocks plunged on heightened fear of rising interest rates but quickly recovered on 9 February 2018 when US President Donald Trump lamented that the plunge was a “big mistake”. By 21 February 2018, the US Dow Jones Industrial Average (DJIA) had recovered to 25,268 points. All of a sudden, the bellwether index tumbled again when the Federal Reserve (Fed) released the meeting minutes of the Federal Open Market Committee (FOMC) for 31 January 2018.
The FOMC minutes revealed that the Fed executive officials acknowledged that the US economy is strengthening which is prompting the need for higher interest rate. In response, the US 10-year treasury yield shot up to 2.94 percent, the highest in four years.
Large securities firms and hedge funds took a step further by raising their outlook for interest rate hikes to four times – against the Fed’s guidance of three times – in 2018. However, just a day after the release of the FOMC minutes, some Fed officials said that they would not support a more aggressive pace of rate increases. This led to a rebound for the DJIA and pared the previous day’s loss by 70 percent.
However, the rally was short-lived. US stocks plunged once again when the new Fed Chair Jerome Powell gave his first congressional testimony, suggesting that the big players in Wall Street are constantly switching around their positions based on their interest rate policy outlook under the new Fed board. As such, it is highly expected that the US market will remain rocky, leading to the new Fed board’s first official meeting on 20 March 2018.
It is almost certain that the new Fed board will raise interest rate on 20 March 2018. But on the bright side, there should also be more clarity about the pace of interest rate hikes which would help to allay fears and uncertainties going forward.
Trump’s tax cut is expected to spur the US economy onto a faster growth trajectory but also there are also risks of overheating. As such, the Fed’s interest rate hikes will help to keep inflation in check and would not negatively impact the US economy. That said, frothy valuations in the stock market were the main reason behind the recent market correction.
On 1 March 2018, Trump announced his plan to slap tariffs of 25 percent on imported steel and 10 percent on imported aluminum, triggering another round of sell-off for US stocks. In mere four days, the DJIA tumbled by another 1,585 points and but subsequently rebounded to recover 65 percent of the losses.
During the same week, Trump – again – threatened to impose tariffs on European carmakers, renewing fears of an impending global trade war. As a result, the Dow futures plummeted on 5 March 2018 during Asian trading hours, and dragged on the Singapore and Hong Kong stock markets.
Trump holds the initiative to launch the US on a trade war and he has incessantly used the threat to intimidate other countries. As a businessman, Trump understands that a trade war is just but a game of bargaining and should be a mean for sealing a quick deal. Unfortunately for investors, the game has just started and hence the stock market will remain volatile for the time being.
Currently, the EU and Canada have said that they would consider imposing duties on US products. China, on the other hand, plays it cool and has not issued any retaliatory statements. Instead, the Chinese government conversely proposed to reduce its tariffs to encourage lower import prices and promote consumption.
On 5 March 2018, during the National People’s Congress of China, Premier Li Keqiang’s work report highlighted that the government had focused on driving the secondary industry of manufacturing in the past. In the future, Li has pledged to strengthen the fundamental role of consumption in driving economic growth in China.
By lowering import tariffs, China’s retail services sector would also benefit from higher consumer spending and hence create more job opportunities. Other nations will view China as an even more important export market and hence allowing China to grow its influence on international affairs. In similar fashion, that was how the US grew to become the world’s economic powerhouse when it opened up its economy many years ago.
In the past week, Hong Kong-listed stocks that bucked the downtrend were mainly dividend stocks. But in theory, prospect of faster interest rate hikes would in fact make dividend stocks relatively less attractive. So why did dividend stocks perform better? In my opinion, this is because dividend-paying companies’ earnings are relatively stable, exuding a “safe haven” effect on investors.
For long-term investors, one of the most important investment merits they look for is the ability for a company to pay dividends. Stable – and rising – dividend payouts are a manifestation of a solid business. But apart from dividend stocks, long-term investors should also consider high growth stocks.
Currently, the most exemplary growth stock in Hong Kong is none other than Tencent Holdings. But low yields and high valuations are typical for high growth companies. Eventually, growth would slow and high growth companies will see their price-to-earnings shrink when investors cash out and the share prices fall. As such, portfolio diversification is still crucial for achieving good stable returns over the long haul.
The magnitude of market volatility remains high and investors should keep a mindset of staying long and committed to their investments. Local investors should also not be too concerned with Trump’s trade war talk and US interest rate hikes. This is because Singapore’s interest rate is not tightly pegged to the US and our exports to the US are only a fraction to its Balance of Trade (BOT).
Ultimately, the US is not going to target Singapore but Mexico, Canada, EU, China and Japan to improve its BOT. The volatility in our local stock market is not due to fundamental changes in the economy, but is actually due to institutional funds flow making speculative bets. In 2018, the outlook for the Singapore economy is still rather healthy and hence investors should stay invested in companies that have reported decent earnings.
Apart from detailing the expenditure and revenue of the Singapore government in the current fiscal year, Budget 2018 was accompanied by a notice of an increase in the goods and service tax (GST) to nine percent between 2021 and 2025. Why the government did chose to announce the plan before 2021? After all, the next batch of government will be elected by then.
In my opinion, this might be a test for the Prime Minister candidate as the current Prime Minister Lee Hsien Loong has already made known his intention to step down after the next general election. Without a doubt, the opposition would angle their contention around “GST hike”. It would then be up to the Prime Minister candidate to lead fourth generation of leadership in the People’s Action Party to convince the Singapore populace that hiking the GST is necessary.