One and a half month after the inauguration of Donald Trump as the President of United States of America, the world is still trying to figure out his stand in foreign affairs. The immediate concern of the financial market right now, is to see whether President Trump is able to pull off his promise of lowering the US tax rate and increasing government spending at the same time. With US budget discussion in full force, the financial markets are scrutinizing his every single move to see how the debate will lead to. It is the promise of a Trump fiscal push that lead to the current stock market rally, and the failure to deliver a huge government spending will probably lead to strong disappointment in the financial markets.
Other than the closely watched federal budget discussion, March is also filled with many major political milestones that will trigger a change in mood of the current market. Here are the list of other market moving events:
US Federal Open Market Committee Meeting
The market has generally expected that the US Federal Reserves will raise interest rates for 3 times this year and will only start to rise it by June. However, hawkish messages from members of the committee has increased the speculation that the interest rate will be raised in March, and probably be raised for than the expected 3 times. This event may potentially affect every single financial markets in the world, depending on how the meeting goes.
UK Triggering Article 50 for Brexit by End of March
UK Prime Minister Theresa May has promised to invoke article 50 by the end of March, which will formally start the procedure for UK to exit from the European Union. There is still the barrier of a Parliamentary approval before the cabinet can go ahead with invoking article 50. Scotland is threatening to hold their own referendum to break away from United Kingdom should article 50 is invoked. How this series of event pans out will have potential repercussion on the European markets.
Chinese National People Congress
China's National People Congress kicks off in early March, as the political leaders of China gather to make decisions on the direction of the country. So far, here are the important news we have gleaned from the congress:
- China will maintain growth at 6.5%
- Vows to rein back on heavy industry, to bring back the "Blue Skies"
- Reduce financial risk and maintain market stability
No drastic policy announcement is expected as the Chinese government will probably want to avoid rocking the boat, as China will see a transition in leadership later in this year whereby President Xi will probably be handed another 5 years tenure as the President.
Dutch Elections
As the populist movement swells around the world, watchers are most concern about their hold in Europe, whereby advancement in the populist movement will weaken the European Union project. The populist faction led by Geert Wilders is projected not to win, but than if history is by any guide, nobody puts absolute trust in polls these days.
With the US stock market at a relatively high valuation, it will not be surprising if an unexpected out-come will trigger a correction this year. The current bull market is the second longest in history and it is also the second most expensive stock market in history. The most highest valuation hit for the record holder is at year 2000, before the dot-com bubble crash at a P/E of 30 times. The current stock market is at 25 times. A bit of caution is good at this moment in time.
The global stock market made more advance during February, but the weakening USD essentially removed all that gain when translated into SGD terms. The resource fund also had a good run and pulled back momentarily for the month, and the portfolio lapsed into red this month with half of the portfolio losing money and the other half holding their ground.
With a large component of the portfolio now allocated into bonds, I have been designing and backtesting how to optimize the return of the bond portfolio in a rising interest rate environment. One of the opportunity which I have identified is to make use of higher yielding short duration bonds. A high yield bond are basically high interest paying bond, issued by corporations or countries which have a higher potential to default. For example, Indonesian government bond is considered as a form of high yield bond. The volatility of high yield bond can be as high as equities which makes it the more aggressive options to invest, in the bond universe. The risk of a bond can also be measured by the duration which the investor holds: The longer duration it is, the higher risk the bond is. For example, cash is a form of bond which is considered to be the safest form of bond, as it is lent to the bank with the premise that the maturity is immediate. A longer duration bond will also be more badly affected in a rising interest rate environment. So a balance approached to generate more calculated risk/return from a bond portfolio, is to make use of short duration high yield bond, whereby it can generate a decent return between that of the safest bond (which is at less than 1% now) and the highest risk bond (20% pa).
More explanations will follow when the switch is performed later this month.
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