Just two days ago, the FED raised the interest rate by 25 basis points to 2.5%. Going into year 2019, it is expected that there will be another two more hikes. In a scenario when global stock markets have already been battered for some time in the last few months, this certainly drove the final nail into the coffin. Stock markets all over the world tanked further. Even the apparently strong Dow Jones (DJ) also succumbed to selling pressure. For the week, from 17 December and 21 December, the DJ fell more than 1600 points or close to 7%.
As of today, it appears that there are more uncertainties compared to, say, 6 months ago. Most of the major economic blocks are, in one way or another, entangled in some kind of political and economic tussles. Amidst the impending interest rate hikes, there are at 5 issues that are still in a limbo and they appeared to have higher propensity of tilting the balance negatively than it would positively.
The growth of the US economy
Although the US economy is still showing signs of growth and low employment figures that are enough to trigger FED to increase the interest rate, and even signalling another two further hikes in 2019 to achieve its long-term sustainable target, there are concerns that the accelerated pace may tip the US economy into a recession. This can happen very quickly. The Dow Jones stock market reacted just that, declining more than 1,600 points for the week. Perhaps, the low experienced this week may not be the lowest for now. The sentiment can remain weak for some time.
The trade war between the US and China
Many of us probably have under-estimated the impact of this trade war when it first started. When two largest economies are at logger-heads, the other smaller economies suffer. The initial tit-for-tat tariff war imposed by the US and China seemed to have gone a step further, involving the detention of important key personnel and the race to attain 5G network capability. As the trade war starts to widen in its extensiveness and depth, an easy resolution is not going to be come by so easily. On paper, or at least in the short term, US appears to be at the upper-hand due to the significant trade imbalance between the two countries. But this may not be so in the longer term. For one, the next administration may not hold the same view as the current one, but the Xi-administration in China may be a long eternal one. In the meantime, perhaps China is adopting a ‘buy-time strategy’, awaiting an internal implosion to happen. In fact, it appears to be so, given the number of departures in the Trump administration. In the meantime, China is extending its reach to fill up the voids left out by the US in the Trans-Pacific Partnership (TPP) and the ‘one-belt-one-road’ initiative. These have longer impact for putting China to become the centre of influence in years to come. But, of course, in the short term, it is still a question of who will enter the ‘threshold of pain’ first. Still, whether the balance is going to tilt towards China or US, it would not be favourable for the trade-dependent economies and the global stock markets. In all likelihood, most of the smaller economies have direct exposures to the two economies.
Comparatively, our exposure with UK is relatively small, but still it is one of the major economies in the world. The more worrisome situation would be the contagion effect that can trigger any one of the 27 countries to move out of the EU. In fact, there was a precedent in 2011. Greece was literally bankrupt and, in a way, appeared to almost bring other economies, such as Portugal, Italy, Ireland and Spain along with it. The STI at that time retreated around 15%.
Denuclearisation in North Korea
While some efforts are being carried out, the full nuclearization at the Korean peninsula appears to be still a far-off reality. In fact, just recently North Korea threatened to re-start the nuclear programme unless US lifts off the sanctions (ST 4 November 2018). While US wanted a full nuclearization before lifting the sanctions, North Korean insisted the lifting be in lock-steps with the denuclearisation effort. It could be a deadlock situation that takes a long time to resolve. Although we have practically no exposure to the North Korea economy, we cannot fully eliminate the fact that other surrounding countries such as Japan, China and South Korea may get involved in this long-drawn tussle as well.
The recent spat between Singapore and Malaysia
While most of the people on both sides of the causeway wanted issues to be resolved amicably, there will always be some discomfort among investors whenever border issues were brought up. So long as there are these teething problems remaining unresolved, it would not be good for the stock market, whether it is SGX or Bursa Malaysia.
In fact, there are more, such as the on-going tension in the middle east and the over-lapping claims among many countries around the South-China Sea. In the midst of climbing interest rates, liquidity can evaporate very quickly, and that is when we start to experience huge falls in the stock indices as seen in the Asian financial crisis and the global financial crisis.
While I may have unconsciously painted a dark picture for the stock markets, I personally believe we should not completely extricate ourselves from the stocks. I am not saying that sentiment would turn for the better soon. In fact, I believe it will possibly continue to get worse going into the next year (please take this as a personal opinion) or, at best, remains the same. Right now, there are no apparent catalysts to trigger huge purchases. The tough investing market, in the last few months, have elbowed out many marginal players out from the world stock markets, leading to an approximate fall of 20% fall from their respective peak positions.
As of today, stock prices have come down to a more comfortable level to nimble. Unless there is a huge dividend cut across the board going forward, especially among the blue-chip counters, dividend yield has reached a fairly attractive level. From my personal experience, stocks are one of the best inflation hedge instruments if we take a long-term view. That said, it is also not the time to go in a big-way as if there is no tomorrow. Amidst the increasing interest rates, liquidity could evaporate very quickly and stock prices can fall off the cliff in a free-fall fashion. So, the key is to take a long-term view and nimble slowly if you believe that stocks have reached a reasonable level for purchase.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.