2018 is about to come to an end. In the year, stock markets around the world had made new records but it did not last long. For the Hong Kong stock market, the Hang Seng Index peaked out at the start of the year at 33,484 points. Our local stock market was more resilient as the Straits Times Index only turned south after touching 3,641 points in May 2018.
In terms of magnitude, based on the closing record of 21 December 2018, the HSI had retreated 23 percent from its peak. Fortunately, for local investors the STI fell a smaller degree, shedding only 16 percent to be barely away from bearish territory.
The US stock market shares a similar tale. The Dow Jones Industrial Average Index rose significantly till January 2018 before a major correction set in. Thereafter, the Dow managed to spark a recovery to hit a new record of 26,951 points in October 2018. US President Trump even took credit for the stock market’s exceptional performance, jesting that the poor performance in the Chinese stock market was a sign that the US had won the trade war against China.
Ironically, the US stock market started to nosedive since then. The Dow’s decline in the week before the Christmas Holidays was even its worst performance in 10 years. Adding more momentum to the sell-off, the Federal Reserve raised interest rate once more after its December meeting, taking the Dow to a 52-week new low.
In reality, the December interest rate hike was already within market expectation. Before the Fed’s meeting, market forecast was around 67 percent. However, what motivated the sell-off was the interest rate outlook in 2019. In the Fed’s latest minutes, it was revealed that the US central bank is looking to two interest rate hikes next year. Investors had hope for the Fed to take on a more dovish stance to hold off further hikes in 2019.
In the past, when a new US President is in the third year of office, the Fed typically holds off interest rate hikes to help ensure the US economy is in a good shape before the Presidential election in the fourth year. In a way, this is a tacit move to help the incumbent to be re-elected.
In 1995, when Alan Greenspan was the Fed Chief, he orchestrated a series of interest rate cuts to help Bill Lincoln win re-election in 1996. However, Trump is being too anxious as he has already grown critical of the Fed when he is only in his second year in office.
As the US central bank is an independent institution, Trump’s public criticism of the Fed may be counter-productive as it forces the central bank into a position of protecting its own autonomy. As a result, the Fed has signalled two more interest rate hikes next year, drawing Trump’s ire.
Yet, Trump continues to condemn the Fed with the US media speculating that Trump, along with his closest aides, is contemplating to replace current Fed Chief Jerome Powell.
However, such a move could potentially risk putting the US entire financial institution into an upheaval. Investors expect Trump would replace Powell with a Fed Chairperson that he can influence. Such a candidate would probably stop raising interest rates and might even cut interest rates to stimulate the US economy.
In the past two year, the US Dollar kept strengthening due to Fed’s continuing interest rate hikes. If Trump finds himself a dovish Fed Chairperson to replace Powell, the US Dollar’s exchange rate could depreciate significantly. This is also what Trump wants to see since it would help make US exports more competitive as well.
Thankfully, Hong Kong banks have yet to follow on the footsteps of its US counterparts to raise interest rates, much to the relief of Hong Kong homebuyers. Interestingly, interest-sensitive and income stocks in Hong Kong also did not react negatively to the news of another interest rate hike on 20 December 2018. Some stocks, like CLP Group and China Gas, even managed to buck the global sell-off to rise slightly higher.
Meanwhile, Hong Kong property counters did fell slightly, along with the broader market in December. However, it also recorded some gains in the month before.
Typically, dividend stocks tend to come under pressure when interest rate is rising. This is because banks also raise interest rates on time deposits, encouraging people to put more money in the banks instead. However, currently, this is not really the case as dividend stocks still manage to hold up well.
The phenomenon may be due to heightened trade tensions between the US and China. Investors, in search of safe havens, are rotating into dividend stocks. In face of trade uncertainties, dividend stocks generate steady streams of income for investors. However, on the flip side, the safe-haven value play on dividend stocks would become less attractive in the event of a moderation in US-China trade tensions.
In addition, when more and more investors are jumping into “safe haven” stocks, the value proposition diminishes. Stock prices could be driven higher by speculation, thereby making yields less attractive. The situation would eventually implode when investors take profits on the capital gains instead of holding on for dividends.
The Fed’s latest interest rate hike may be a silver lining in Trump’s trade war against China. After all, if negotiations fall through and Trump imposes tariffs on all Chinese goods, runaway inflation could risk throwing the US economy out of balance. This would then stifle Trump’s chances of winning his re-election in 2020.
Over in China, the Communist Party of China (CPC) has convened the high profile Central Economic Work Conference. In 2019, policymakers stuck to policy line of further tax cuts and reducing financial leverage. Nothing was out of the ordinary.
Nonetheless, 2019 is going to be a tough year for the CPC as it would be the 70th anniversary since the founding of the People’s Republic of China. To mark the milestone, the CPC would need to deliver a solid economy and healthy growth rates. As such, the Chinese government may also loosen monetary policies should the need arises.
Meanwhile, the Chinese government continues to encourage homebuyers not to speculate on properties. But notwithstanding that, property prices are bound to rise given that China’s urban population is expected to increase by another 100 million in the next few years. As such, China property companies are still good bets for the coming years. Similarly, Hong Kong property companies are also going to do well despite property prices coming down recently. This is because new developments in Hong Kong are still selling like hot cakes.
That said, weaknesses in the US market pose the most risks to the global stock market. After the Fed raised interest rates on 19 December, the US stock market has been plunging for days without any reprieve.
There is still hope for animal spirits to be reignited next year. After all, the Fed could still cut interest rate in 2019, given the recent dismal US economic data. On trade war, negotiations between US and China are underway and tensions could moderate. Trump, in his bid to win the re-election, may also want to compromise and not push his demands too far. Over in China, the Chinese government is also gradually granting greater foreign access while introducing further tax cuts next year.
On the local front, Singapore will also be celebrating its 200th anniversary since its founding in 1819. The parliamentary election could also happen next year and the controlling party may introduce some economic policies to stimulate the economy. Hopefully, investors too have something to cheer about.