Last September, US President Trump blew his own trumpet by declaring victory in the trade war against China. Citing how the US stock market was outperforming the Chinese stock market, Trump ratcheted up the ante by threatening to impose 25 percent tariffs on all Chinese imports at the start of 2019.
The escalation did not sit well with investors as they knew that blanket tariffs on Chinese goods would also harm the US economy. As a result, Trump’s miscalculation sent the US stock market tumbling from record territory. Fortunately, Trump and his Chinese counterpart Xi Jinping managed to agree on a 90-day tariff truce to allow for negotiations when they met in December last year.
While the US has been in talks with China, every so often, Trump would quip about the good progress being made. The US stock market reacted positively and this clearly indicates that investors believe a protracted trade war is bound to hurt the US economy.
For the US economy and its stock market to continue firing on all cylinders, Trump knows that a resolution in trade disputes with China must quickly be reached. Judging by how Trump is “cheering” ongoing talks, we could be hearing some good news really soon.
On 18 January 2018, rumours of Trump cancelling some of the tariffs imposed on Chinese imports began surfacing. The US stock market surged on the speculation and is now just 8.3 percent away from its record level. If the rally extends, the US stock market could very well make a new record in one of the longest bull market in history.
News of a potential resolution in US-China trade dispute naturally bodes well for trade-dependent Singapore and Hong Kong.
The Singapore and Hong Kong stock markets stayed in correction territory for most of 2018. It took the People’s Bank of China’s move to slash the reserve requirement ratios on 4 January 2019 to finally spark off a rally.
Currently, many undecided investors are still watching from the sidelines due to the uncertainties. Others are taking the opportunity to exit their positions, only to regret when the stock markets climb higher. It seems like the big boys are out in droves to kill the bears now.
For China, domestic structural reforms and trade war pressures from the US have taken their tolls on the Chinese economy. In the year of 2018, China’s economy grew 6.6 percent to meet its official target of 6.5 percent. Despite that though, the growth rate was its slowest since 1990.
The period of slower growth would become a new norm for China. Rapid growth of seven to eight percent in the past decade would be difficult to replicate. Meanwhile, the Chinese government also has to balance between sustaining growth and managing risks.
Nonetheless, a 6.6 percent growth rate is still an impressive number. In absolute terms, China’s gross domestic product (GDP) surpassed Rmb90 trillion in 2018, more than doubled from Rmb40 trillion in 2010. When Xi first came to power in 2012, he set the goal of doubling China’s GDP by 2020.
At the current level, China has already exceeded that goal and likely to hit Rmb100 trillion by 2020. Compared to the US’ GDP of US$18 trillion, China’s GDP of Rmb90 trillion (the equivalent of US$13 trillion) is a difference of 28 percent. Assuming China manages to maintain a growth rate of four percent higher than the US, China would surpass the US economy by 2025.
On the same day when 2018 GDP figure was announced, Xi emphasized the importance of maintaining stability to party cadres in a special seminar. Xi reiterated that China’s development is now facing “profound and complicated” changes in both the international and domestic environment. In addition, he pointed out the challenges of promoting structural reforms, especially on the supply side. He implored to various regions and departments to take effective measures to stabilise “employment, financing, foreign trade, capital outflow, investments and expectations” to keep the economy running within a reasonable pace.
The six priorities laid out by Xi would form the framework of the central government’s policies. As such, I believe the Chinese government would do more to stimulate the economy and to find a resolution to the trade war with the US.
On 23 June 2016, the UK held a referendum on whether to leave or remain in the EU. Prior to the referendum, opinion polls found that the majority of Britons were not in favour of leaving the EU.
Back then, many Britons saw their jobs being displaced by foreign workers from other EU countries, leading to a rise of eurosceptism in the UK. Furthermore, these foreign workers also benefitted from the UK’s social welfare.
However, the then-Prime Minister David Cameron believed that most Britons would be rational enough to know that the benefits of being part of the EU far outweighs the cons. And as opinion polls also suggested likewise, Cameron hoped to pass the referendum to show UK voters that the majority of the people believed in staying in the EU.
However, the actual referendum showed that UK citizens voted in favour of exiting the EU instead. Despite a small margin, the UK had to follow the democratic decision, and “Brexit” became imminent.
The shock result caused the Pound Sterling to tank against other major currencies on that day. However, the UK stock market surged almost by the same magnitude! Some attributed it to the depreciation of the UK Pound, improving the competitiveness of UK goods – a similar phenomenon in Japan when the Japanese Yen depreciated significantly in 2012.
After the shocking referendum, Cameron immediately resigned and the current Prime Minister Theresa May took on the mantle. After 2.5 years of negotiations with the EU, May finally put up a Brexit plan to a vote in the UK parliament. However, May’s Brexit deal was overwhelmingly rejected by a 432-202 vote in the House of Commons. Many Conservative MPs have also voted against the plan, dealing a devastating defeat to their party leader.
Counting down to Brexit, the prospect of “No Deal” could force a second referendum. If the UK voters vote in favour of staying in the EU this time around, then it would be one of the biggest farces in the history of the EU. That said, investors should expect the UK Pound to appreciate significantly in such a scenario, thereby weighing down on its stock market.
Over in Singapore, former PAP MP Tan Cheng Bock has announced his plan to form a new political party. Tan, who ran for the 2011 Presidential Election, lost fractionally to former President Tony Tan. The Progress Singapore Party will also include some members from former cadres of the ruling PAP.
All along before 1982, the ruling PAP government faced little or no electoral contests from opposition parties on polling day. As a result, the PAP had held an absolute majority in parliament. To add token an “opposition voice” in the parliament, the PAP allowed its own backbenchers to play the role of opposition parties.
Dr. Tan Cheng Bock, who entered politics in 1980, was often heard voicing alternative opinions. He served in the Parliament for a total 26 years when he retired in 2006. As a well-regarded and distinguished former MP, Tan has won a strong base of supporters and hence could provide strong contest at the next general elections against the PAP.
The general election would likely be held this year. It would be paramount for the PAP to ensure that the Singapore economy remains robust in order to win more votes. Naturally, a strong economy is also a good thing for the local stock market.
Our favourite GURU, Dr. Chan Yan Chong Is BACK! Best known for forecasting the peaks and troughs in the stock market cycle, Dr. Chan will share his foresight on various stock markets’ performances for this year, at Shares Investment Conference 2019! Learn from The GURU himself and chart a smooth investment journey amidst this volatile time!
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