Aug 11, 2015

5 Important Economic Hardtruths Which We Learn in July

The month of July has been extremely eventful for almost all the asset classes with commodities, currencies and bond markets in upheaval and there were so many things happening during July that I have to summarize them into a small article. However, the events of the past month barely made a dent on the global stock market and most of the financial damage caused by these events will start to spread and affect the equities market in the months to come. Without further ado, here are the 5 economic hard-truths which we learn, thanks to all these drama, during the month July.

China stock market is just like a casino

The July started with the Shanghai stock index falling 30% over percent within a short month. A slew of measures from the Chinese government including suspending 1400 over stock counters and throwing more than $1 trillon dollars trying to support the stock market managed to stem the fall by the end of the first week of July. In comparison, the US government set aside $700 billion on the TARP (Trouble Asset Relief Program) during the 2008 Global Financial Crisis. The Shanghai stock index rose more than 10% in the next two weeks, only to tank 8.5% in single day at the end of July. Analysts are divided on where the Chinese stock market will go from there, with experts on the Chinese stock market proclaiming that there is no bubble (Goldman Sachs, Societe Generale), to those who predicted Doom and Gloom (Thomas Schroeder). The point is, no conventional investment strategy will work here in a market which is governed by mass hysteria and extensive government interventions. This is similar to betting in a Casino whereby only luck will determine the fate of a bet. 

Lesson: You can go to a Macau casino or the China stock market if you feel the urge to have a gambling adrenaline rush.  

Commodities and Gold just keep falling

After the rout in commodity prices last year, the commodity markets went into a lull and slow recovery... before getting punched in the face in July.. again. Commodity prices across the board, agricultural, precious metals, industrial metals and energy all tumbled between 15% to 50% within a short span of weeks, coincidentally matching the period whereby the Chinese manufacturing indices indicated a slow down of the Chinese economy. Many analysts strongly believe that the Chinese economic data has been manipulated and one of the best indicator of the Chinese economy, which the China government cannot manipulate, are the prices of the global commodity market. The sharp fall in commodity prices is worrying given that the slow down in the Chinese economy may be worse than reported.

On the bright side, our public transport fees in Singapore are lowered 1.9%, thanks to a combination of SG50, elections and lower oil prices (-30%).

Lesson: Oil prices and public transport prices are not closely correlated. 

South East Asian's Economies are the next danger point

The economies of South East Asia are thrown into the limelight thanks to the falling commodity prices, weakening exports to China and a healthy dose of political saga. Malaysia Ringgit and Indonesia Rupiah fell to 17 years low with the SGD also dragged down along with the region. Even with their fiscal position healthier than the time during the 1997's Asian financial crisis, the region might fall into crisis again as the South East Asia nation's accumulation of cheap US debt have been building up in the past few years, resulting in a triple whammy of rising debt value, falling trade revenue and shrinking foreign reserves. With the fall of Yen and Euro in the past two years, export based emerging market economies are finding harder and harder to maintain their trade balance. It will not be long before hedge fund managers and financial big boys take the opportunity to push the weakest currencies towards the tipping point. I am extremely worried that Malaysia, with a mixture of economic and political woes, might be one of the prime candidate that may trigger off another region wide currency crisis.

Lesson: There are still governments that have not learn from the mistakes of the 1997 Asian currency crisis.

European and American companies are doing fine

After a brutal 2014 winter which hammered the profits of major western companies, the coming of spring and summer brought a new surge of profits for American and European companies. American and European economies (with the exception of Greece) continue their slow economic recovery with the American jobless claims falling to the lowest level since 1973. 

Lesson: The slow down in Asian economies may have a lesser impact on the Western economies than expected

Nobody really cares about Greece and it is still a mess

The Greek political drama gave newspapers around the world lots of materials to create sensational headlines, but the global financial markets pretty much hiccuped for a couple of days and life resumed normally for the rest of the world. The whole Greek saga became a side show as global investors were more interested in the state of the China economy and the plunge in the Shanghai Stock Index.Without the economic power to rock the markets, the stunts which the Greek Government tried to pull to swing the negotiating balance towards their way failed miserably. The President of Greece surrendered unconditionally with the Greek economy and the bailout package in worse state than before.

Lesson: Nobody cares about Greece anymore...

Portfolio Strategy

I was expecting a decent correction in US and Europe thanks to the China and Greece crisis but they never materialize. Nevertheless, our 50% exposure to USD and the US stock market resulted in a decent return for the month as the SGD weakened close to 2% against the USD. Emerging markets and commodities market were the main casualties for the month thanks to the volatility in the Chinese economy. Our extremely small exposure (10%) to the emerging markets allowed us to ride on the uptrend in the USD. As we enter the traditionally crash prone months of Aug - Oct, I will maintain our current conservative portfolio. With the potential rise in interest rates in September and continual weakness in the Chinese economy will ignite a new storm in the global financial markets.

We will take advantage of any weakness if the storm strikes with the ample cash which we have been hoarding for months.

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