"The Year that Pollsters Got it Wrong." That sums up the many news headlines which tried to sum up the events of 2016 in one single sentence. The impact of the Brexit and Donald Trump winning the US Presidential Elections have changed the dynamics of the financial market, which results in a very uncertain 2017 for investing.
2016 was a challenging year for valuation based asset allocation and much of the market action is driven by sentiments and speculations. For example, the richly valued US stock market continues to out-perform the rest of the region while the cheaply valued European markets failed to perform as expected. Thrown into this mix are the Brexit and US presidential election and the result was a very speculative market driven by rumors and hearsay. A stock market correction at the start of the year and a weight-age on European equities has resulted in the portfolio losing as much as 7% during the month which UK voted to leave the European Union. I had to make the unfortunate decision of cutting our European positions to protect our capital as the position has breached my loss cutting point. Considering that a messy Brexit may lead to a catastrophic crash in the financial market, I feel that the decision was a prudent one as my priority in portfolio management is always to protect the capital. Unfortunately, the market rallied after the Brexit, after investors realized that the UK politicians are just too wimpy to actually pull the Brexit trigger. After the Brexit event, I tried to nurse our portfolio back to health with careful market positioning using a mix of US dollars, US equities and commodity stocks. The strategy worked and I managed to navigate the unexpected results of the US Presidential Election and recover most of the losses.
The portfolio ended with a 1.3% to 1.8% loss for 2016.
2016 was a challenging year for valuation based asset allocation and much of the market action is driven by sentiments and speculations. For example, the richly valued US stock market continues to out-perform the rest of the region while the cheaply valued European markets failed to perform as expected. Thrown into this mix are the Brexit and US presidential election and the result was a very speculative market driven by rumors and hearsay. A stock market correction at the start of the year and a weight-age on European equities has resulted in the portfolio losing as much as 7% during the month which UK voted to leave the European Union. I had to make the unfortunate decision of cutting our European positions to protect our capital as the position has breached my loss cutting point. Considering that a messy Brexit may lead to a catastrophic crash in the financial market, I feel that the decision was a prudent one as my priority in portfolio management is always to protect the capital. Unfortunately, the market rallied after the Brexit, after investors realized that the UK politicians are just too wimpy to actually pull the Brexit trigger. After the Brexit event, I tried to nurse our portfolio back to health with careful market positioning using a mix of US dollars, US equities and commodity stocks. The strategy worked and I managed to navigate the unexpected results of the US Presidential Election and recover most of the losses.
The portfolio ended with a 1.3% to 1.8% loss for 2016.
2017 will be the real test whether the recent Trump rally can hold its ground given much of the run-up is based on the good will that Donald Trump will hold his promise to unleash fiscal stimulant. Meanwhile, in other parts of the world, geopolitical risks are running high, with UK working to execute a Brexit and possible inroads made by anti-EU parties during the various elections that will be held in Europe. The strengthening USD and a more hawkish US central bank will be challenging for emerging market equities and should Trump do start a trade war with China, the repercussion on the global economy will be tremendous.
My investment strategy 2017 will be conservative as the stock market diverges in increasing scale from the fundamentals. A strengthening USD, rising interest rates and a potential trade war will widen the cracks of the financial markets and pull the brakes on speculative market rallies. As such, I prefers to keep my powder dry and wait for a more favorable position to enter the market, rather than chasing after the bull market which has been doing well ever since the 2008 crisis.
Investing is afterall about buying things that are cheap with a supportive future trend driving prices upwards.
Wishing you a Happy New Year and Good Health to you and the family!
Yours Sincerely
Lye Wen Song Xeo
The Recovery of Commodities
Oil price fell to its lowest point in Jan 2016 at $28 and gradually recovered to the $50 mark over the course of the year. Industrial metals also recovered from the January lows giving much respite to the battered economy of Latin America and Russia. Major OPEC oil producing countries banded together and finally pushed forward a series of oil production curbs aimed at stabilizing the price of oil in November.
China Vs USA
In 2016, the Chinese government faces an unprecedented outflow of money through legal and illegal means, leading to a downward pressure in the Chinese yuan. The Chinese government is trying to stem the outflow to prevent a disorderly rush of capital out of the country, endangering Chinese economy. The Chinese government put in all stops, from intervening in the currency market to pop up the yuan, to enforcing curbs on buying insurance and the use of Chinese credit card abroad. As the Chinese economy continues to restructure from an investment/export base economy to a domestic demand economy, the reform can be threatened by two factors. The first factor is an internal one, whereby the Chinese government somehow mismanaged the transition process and tipped the economy into a hard-landing. The second factor is an external one whereby the Trump administration decides to initiate a trade war with China. At this moment in time, it seems that the Trump administration is serious in implementing "punishment" towards China for unfair trade advantage. A heavy trade tariff slapped on Chinese goods may shove the stabilizing Chinese economy into a sharp decline.
Brexit and Elections in EU
The drama of Brexit will continue into 2017 when the world watches how the new UK prime minister, Theresa May navigates UK out of the EU zone which she promised to execute in March. The rise of the populist parties and the backlash against immigration will threaten the election results of Germany, France and Netherlands, three other key members of the EU. The populist parties in these countries are looking to gain ground in the elections in order to force an exit referendum, similar to the UK Brexit referendum, which will further threaten the existence of EU. Although political watchers believe that the populist parties are too weak to gain any real political power in these nations, history has proven again and again that experts can be wrong. The geopolitical risk in Europe will be so high this year that investing in Europe will take plenty of guts.
President Donald Trump
Donald Trump is perhaps one of the biggest uncertainty in 2017. His unorthodox approach towards trade, economy and foreign policy will no doubt rock the global financial markets. Right after stepping into the White House, President Trump started firing off executive orders to fulfill his election pledges and it seems that he is serious in implementing what he promises. However, his unconventional approach will no doubt, step on many toes, leading to many obstructions by both Republicans and Democrats to prevent this political outsider from eroding their various power base. This will probably not derail the determination of President Trump as we have seen from his election campaign, which he does not fear to step on as many toes needed, in order to get to his goal. The question if his political opponents will be able to leverage on one of his potential mis-steps and to initiate a movement to impeach the President. There is almost no way for any investors to predict what Donald Trump will do and how the market will react and the best way to manage is to be flexible and to go with the flow.
Uncertain US Interest Rate Trend
The US interest rate movement is one of the most closely monitored data in the world as it has a great impact around the world. With only 2 small rate hikes in 2015 and 2016, there is a fear that the US Federal Reserve has fallen behind the curve and may need to accelerate the raising of the US interest rates. Recent data of rapidly rising US housing prices and full employment are signs that the US economy may be on the verge of breaking out and inflation may come back in full force. If President Trump decides to go big on government spending and dramatically lower the tax rate, the US Fed may be forced to raise interest rates quickly, bringing pressure to the emerging markets. Donald Trump will again be one of the key to how fast the US interest rate will rise.
Asia Ex China - At the Mercy of China and USA
When US and China sneezes, the rest of the world will catch a cold. When US and China goes to a trade war, the biggest collateral damage will no doubt be the countries most dependent on these two nations, which is probably the rest of Asia. Countries may be forced to choose a side in the event of a trade war and trade dependent countries such as Singapore, Taiwan and South Korea, will no doubt be badly affected as they cannot afford to pick any sides. Meanwhile, countries with a large domestic consumer market such as Indonesia and India will be least affected in the event of a trade war. However, both countries have their share of problems. India, which recently scrapped their most popular 500 and 1000 dollar notes have led to a shortage of liquidity within the nation, leading to a slow-down in growth. Indonesia, which is still plagued by relatively high US debt levels, will be badly affected should USD continues it upward trend as a result of a rising interest rate environment. Investors investing in Asia will have to place their bets carefully as the economic and political environment will change dynamically in 2017.
2017 is filled with landmines, especially with an uncertain global political scene. There will definitely be opportunities but these opportunities will need to be assessed with care and we have to be selective in sectors and countries to invest in.
As we approach the mature end of this economic cycle, I will be switching gear from a moderate risk taking approach of the past 3 years to a more defensive one.
The instrument of choice for our defensive play will still be limited to short duration bonds. In order to make more returns from bonds in a low interest environment, I will be taking calculated risk using currency gains to generate more returns. For example, buying into USD bonds as compared to a diversified bond fund allowed us to squeeze out another 0.6% return for 2016. In 2017, there has been talks that EU central bank may start tapering back on their quantitative easing and that might be a net positive for Euro Bond.
in the risk quadrant of the portfolio, US stock continues to be my favorite choice of country to invest in from a risk return perspective. An "American first" policy will benefit the local American enterprise, while disadvantaging the bigger MNC which have outsourced manufacturing in other parts of the world. Fiscal spending, rising property prices and a strengthening economy will be beneficial to the stock market even in the face of a potential rising interest rate environment. The USD will also benefit from the rising interest rates and fiscal spending which President Trump promised to unleash. I will be looking at US small and mid sized company stock which probably will benefit most from an improving domestic market, as well as the more defensive healthcare sector which has under-performed in 2016.
My second pick will be the resource and commodity sector, which had hit a bottom on 2016 and is consolidating with a good room for upside. The 4 years price correction in the resource industry has weeded out many of the weaker players and the current price consolidation will help companies that survived to grow their market share and profitability.
In Asia, my top pick will probably be India. India is still suffering from the fallout of the cash withdrawal from its economy and its stock market has under-performed the rest of the rest of its peers during 2016, making its valuation relatively more attractive. A possible US China trade war will have probably the least effect on India, due to its large consumer base and well diversified trade partners. As one of the largest exporter of IT services in the world, it will probably be the least affected in the case of trade tariffs on manufactured goods.
In the case of Europe, it is a love hate relationship. I love it for its low valuation, loose monetary policies and its huge growth potential after a deep recession. However, the current unstable political climate can just turn the investing climate around, especially at the possibility of a disintegration of the EU, which is of course disastrous for the stock market. Given the unpredictability on how the political climate can go these days, I will prefer to invest into Europe only when there is a compelling story mixed with great valuation.
In the earlier part of the 2016, I have sounded out the possibility of investing in Brazil and Russia to some of my investors. A combination of weak commodity prices and economic sanctions have pushed Brazil and Russia into a recession, sending their stock markets into tailspin. However, the unfamiliarity of these countries have made my investors uncomfortable when I sounded out the option which led us to put these 2 countries on observation. On hindsight, we have missed out a great opportunity as Brazil and Russia are two of the best performing countries for 2016. Going forward, there will be similar episodes similar to Brazil and Russia which I will keep a look out for and keep an open mind to countries we are not used to invest in.
So to sum up our 2017 investment strategy in 4 words - Stay safe, stay nimble.
Wishing you a Happy New Year and Good Health to you and the family!
Yours Sincerely
Lye Wen Song Xeo
Economic Themes of 2016
China Stock Market Crash and Recovery
The global stock market saw a major stock market correction during January as a result of the concerns of the slowing China economy and the continued downward trend of oil prices. The Shanghai stock index lost another 30% on the first trading day of the year, causing widespread panic in the global stock markets. The Chinese government stepped in to intervene in the stock market and managed to stabilize the situation using a combination of regulations and direct purchases to prop up the stock market. The Chinese stock market stabilized in July above the "safety line" of 3000 points and the market has been moving sideways since than. Burnt by the stock market crash, Chinese investors redirect their investment monies to Chinese properties and the Chinese property market in tier one cities saw strong growth, reversing the falling trend in 2015.
UK votes to exit European Union
In July 2017, the citizens from UK went to the ballot box to vote on the decision whether United Kingdom should stay or leave the European Union. The prime minister of UK is trying to make use of the referendum to put down some of the dissenting populist factions within his party and he was certain that the voters would vote to stay within EU. Major polls conducted by reputable media and research firms also indicated that the "Stay" camp was almost certain to win. As the results of the referendum started to stream in, the world started to realize that the "Leave" camp was actually winning the referendum. Unsure if the politicians of UK will implement the break-away immediately as promised during the referendum campaign, the global stock markets were thrown into turmoil as investors desperately tried to figure out the economic repercussion of such a move. As the days went by, it became apparent that major political figures in UK who campaigned on both side of the divide were not willing to be the one to execute the will of the people. The UK central bank also acted quickly to soften the blow by pumping liquidity into the important UK banking system and news of stellar economic growth managed to put away the fear of another Lehman Brother event. The global stock market recovered when investors realized that nothing will be done until there is sufficient political will to push forward the Brexit plans.
US Federal Reserve: From Hawk to Dove
At the end of 2015, the US Federal Reserve raised the US interest rate by 0.25% for the first time since 2005 and many investors expected that the interest rates will be raised slowly and surely, for four times during 2016. The crash of the Chinese stock market and Brexit have led to fears that these event will lead to a slow-down in the US economy and the US Federal Reserve reacted by deciding to defer raising rates until the December of 2016 by another 0.25%. The realization that the US Federal Reserve will be slow in raising interest rates led to a major correction in US dollar and a renewed interest in the US stock market. It also encourage fund flows into emerging market as a low interest environment will benefit countries loaded with US dollar based debt.
Donald Trump Wins the US Presidential Election
US Federal Reserve: From Hawk to Dove
At the end of 2015, the US Federal Reserve raised the US interest rate by 0.25% for the first time since 2005 and many investors expected that the interest rates will be raised slowly and surely, for four times during 2016. The crash of the Chinese stock market and Brexit have led to fears that these event will lead to a slow-down in the US economy and the US Federal Reserve reacted by deciding to defer raising rates until the December of 2016 by another 0.25%. The realization that the US Federal Reserve will be slow in raising interest rates led to a major correction in US dollar and a renewed interest in the US stock market. It also encourage fund flows into emerging market as a low interest environment will benefit countries loaded with US dollar based debt.
Donald Trump Wins the US Presidential Election
The unexpected win of Donald Trump as the President of United States has lead to another shock to the global stock market. Initially, analysts predicted that a win by Donald Trump will lead to fear and chaos in the stock market, but instead, the stock market reacted by rallying strongly as investors focused on the pro-growth agenda of Donald Trump. Investors believe that Donald Trump will be able to push forward a series of fiscal stimulants which had been missing during the Obama administration as a result of the total control of the congress, senate and White House by the Republican Party. On the other hand, investors feared that additional fiscal stimulants on top of a strengthening US economy will lead to a much stronger inflation rate, leading to a potential faster increment in future interest rates. The bond market took a big hit as a result of that sentiment and lost $1 trillion dollars in value shortly after Donald Trump wins the presidency.
The Recovery of Commodities
Oil price fell to its lowest point in Jan 2016 at $28 and gradually recovered to the $50 mark over the course of the year. Industrial metals also recovered from the January lows giving much respite to the battered economy of Latin America and Russia. Major OPEC oil producing countries banded together and finally pushed forward a series of oil production curbs aimed at stabilizing the price of oil in November.
The Outlook & Strategy for 2017
There are many concerns and risks which I foresee in 2017 and here is a short list of some of the most important risks which I see will threaten the stability of the financial markets.China Vs USA
In 2016, the Chinese government faces an unprecedented outflow of money through legal and illegal means, leading to a downward pressure in the Chinese yuan. The Chinese government is trying to stem the outflow to prevent a disorderly rush of capital out of the country, endangering Chinese economy. The Chinese government put in all stops, from intervening in the currency market to pop up the yuan, to enforcing curbs on buying insurance and the use of Chinese credit card abroad. As the Chinese economy continues to restructure from an investment/export base economy to a domestic demand economy, the reform can be threatened by two factors. The first factor is an internal one, whereby the Chinese government somehow mismanaged the transition process and tipped the economy into a hard-landing. The second factor is an external one whereby the Trump administration decides to initiate a trade war with China. At this moment in time, it seems that the Trump administration is serious in implementing "punishment" towards China for unfair trade advantage. A heavy trade tariff slapped on Chinese goods may shove the stabilizing Chinese economy into a sharp decline.
Brexit and Elections in EU
The drama of Brexit will continue into 2017 when the world watches how the new UK prime minister, Theresa May navigates UK out of the EU zone which she promised to execute in March. The rise of the populist parties and the backlash against immigration will threaten the election results of Germany, France and Netherlands, three other key members of the EU. The populist parties in these countries are looking to gain ground in the elections in order to force an exit referendum, similar to the UK Brexit referendum, which will further threaten the existence of EU. Although political watchers believe that the populist parties are too weak to gain any real political power in these nations, history has proven again and again that experts can be wrong. The geopolitical risk in Europe will be so high this year that investing in Europe will take plenty of guts.
President Donald Trump
Donald Trump is perhaps one of the biggest uncertainty in 2017. His unorthodox approach towards trade, economy and foreign policy will no doubt rock the global financial markets. Right after stepping into the White House, President Trump started firing off executive orders to fulfill his election pledges and it seems that he is serious in implementing what he promises. However, his unconventional approach will no doubt, step on many toes, leading to many obstructions by both Republicans and Democrats to prevent this political outsider from eroding their various power base. This will probably not derail the determination of President Trump as we have seen from his election campaign, which he does not fear to step on as many toes needed, in order to get to his goal. The question if his political opponents will be able to leverage on one of his potential mis-steps and to initiate a movement to impeach the President. There is almost no way for any investors to predict what Donald Trump will do and how the market will react and the best way to manage is to be flexible and to go with the flow.
Uncertain US Interest Rate Trend
The US interest rate movement is one of the most closely monitored data in the world as it has a great impact around the world. With only 2 small rate hikes in 2015 and 2016, there is a fear that the US Federal Reserve has fallen behind the curve and may need to accelerate the raising of the US interest rates. Recent data of rapidly rising US housing prices and full employment are signs that the US economy may be on the verge of breaking out and inflation may come back in full force. If President Trump decides to go big on government spending and dramatically lower the tax rate, the US Fed may be forced to raise interest rates quickly, bringing pressure to the emerging markets. Donald Trump will again be one of the key to how fast the US interest rate will rise.
Asia Ex China - At the Mercy of China and USA
When US and China sneezes, the rest of the world will catch a cold. When US and China goes to a trade war, the biggest collateral damage will no doubt be the countries most dependent on these two nations, which is probably the rest of Asia. Countries may be forced to choose a side in the event of a trade war and trade dependent countries such as Singapore, Taiwan and South Korea, will no doubt be badly affected as they cannot afford to pick any sides. Meanwhile, countries with a large domestic consumer market such as Indonesia and India will be least affected in the event of a trade war. However, both countries have their share of problems. India, which recently scrapped their most popular 500 and 1000 dollar notes have led to a shortage of liquidity within the nation, leading to a slow-down in growth. Indonesia, which is still plagued by relatively high US debt levels, will be badly affected should USD continues it upward trend as a result of a rising interest rate environment. Investors investing in Asia will have to place their bets carefully as the economic and political environment will change dynamically in 2017.
Continuing Consolidation of Commodity Prices
Commodity prices should continue to recover and consolidate after 4 years of down trend. A stronger US economy will be able to pick up the slack as a result of a slowing Chinese economy and allow the commodity market to maintain at a comfortable equilibrium for 2017. The commodity market will probably be quiet in 2017 and stability is one appealing factor which investors will want to look out for in a world threatened by geopolitical risk.
Commodity prices should continue to recover and consolidate after 4 years of down trend. A stronger US economy will be able to pick up the slack as a result of a slowing Chinese economy and allow the commodity market to maintain at a comfortable equilibrium for 2017. The commodity market will probably be quiet in 2017 and stability is one appealing factor which investors will want to look out for in a world threatened by geopolitical risk.
Investment Strategy for 2017
2017 is filled with landmines, especially with an uncertain global political scene. There will definitely be opportunities but these opportunities will need to be assessed with care and we have to be selective in sectors and countries to invest in.
As we approach the mature end of this economic cycle, I will be switching gear from a moderate risk taking approach of the past 3 years to a more defensive one.
in the risk quadrant of the portfolio, US stock continues to be my favorite choice of country to invest in from a risk return perspective. An "American first" policy will benefit the local American enterprise, while disadvantaging the bigger MNC which have outsourced manufacturing in other parts of the world. Fiscal spending, rising property prices and a strengthening economy will be beneficial to the stock market even in the face of a potential rising interest rate environment. The USD will also benefit from the rising interest rates and fiscal spending which President Trump promised to unleash. I will be looking at US small and mid sized company stock which probably will benefit most from an improving domestic market, as well as the more defensive healthcare sector which has under-performed in 2016.
My second pick will be the resource and commodity sector, which had hit a bottom on 2016 and is consolidating with a good room for upside. The 4 years price correction in the resource industry has weeded out many of the weaker players and the current price consolidation will help companies that survived to grow their market share and profitability.
In Asia, my top pick will probably be India. India is still suffering from the fallout of the cash withdrawal from its economy and its stock market has under-performed the rest of the rest of its peers during 2016, making its valuation relatively more attractive. A possible US China trade war will have probably the least effect on India, due to its large consumer base and well diversified trade partners. As one of the largest exporter of IT services in the world, it will probably be the least affected in the case of trade tariffs on manufactured goods.
In the case of Europe, it is a love hate relationship. I love it for its low valuation, loose monetary policies and its huge growth potential after a deep recession. However, the current unstable political climate can just turn the investing climate around, especially at the possibility of a disintegration of the EU, which is of course disastrous for the stock market. Given the unpredictability on how the political climate can go these days, I will prefer to invest into Europe only when there is a compelling story mixed with great valuation.
In the earlier part of the 2016, I have sounded out the possibility of investing in Brazil and Russia to some of my investors. A combination of weak commodity prices and economic sanctions have pushed Brazil and Russia into a recession, sending their stock markets into tailspin. However, the unfamiliarity of these countries have made my investors uncomfortable when I sounded out the option which led us to put these 2 countries on observation. On hindsight, we have missed out a great opportunity as Brazil and Russia are two of the best performing countries for 2016. Going forward, there will be similar episodes similar to Brazil and Russia which I will keep a look out for and keep an open mind to countries we are not used to invest in.
So to sum up our 2017 investment strategy in 4 words - Stay safe, stay nimble.
No comments:
Post a Comment