Oct 25, 2015

Why Europe Is The Place To Invest In Till The End Of 2015

After the massive bloodshed in the past few months, the world financial markets saw some relief at last with policies makers around the world intervening to stabilize the financial markets.

The Chinese government pull out all guns by announcing a new raft of infrastructure investment projects and cutting interest rates to calm the jittery markets over its slowing economy. The US central bank cooperated by 'hinting" that they may not raise interest rates this year, due to uncertain "external factors" and a rapidly rising USD. Over at Europe, the Greek financial market normalized at last, recovering from the self-inflicted "Grexit" saga earlier in the year. Thanks to the Emerging market crisis, Euro appreciated rapidly in the past few months, prompting the EU central bank to announce a potential round of additional Quantitative Easing (QE) at the end of 2015.

With the financial markets in full rally mode, which region will pull ahead for the year end rally? Here is a break down of a simple analysis across the different regions:  

America - To Be Or Not To Be.. That's The Question

With a stronger USD which is crimping on the profitability of many major S&P500 listed companies due to a slow-down in emerging market economies, there are anxieties in the financial markets that corporate profits will slow, especially for big multinationals which have big exposure to emerging market economies On the other hand, domestic demand still continue to strengthened as indicated by the US online retail giant, Amazon, which announced surprise 2Q profits. Many analysts also believe that the US Central Bank will not raise interest rate this year which is a potential positive for the stock market. However, there is no absolute certainty that the interest rate will not be raised given how resolute the US Central Bank was in raising interest rates earlier in the year and an unexpected interest rate raise at the end of the year will wreck havoc in the global equity markets when most of the investors have expected it to be delayed until next year. To invest or not to invest... that is the big question which I have no clear answer on.

Asia - Toothache Temptation

The Asian equity market has recovered to a certain degree thanks to the stop-gap measures implemented by the Chinese government. However all these measures will actually inflate the current problem creating a bigger long term problem, while only solving the current short term problem. For example, the Chinese government is announcing a number of infrastructure projects, when China is already facing problems of ghost towns and roads to no-where. Lowering the interest rates and increasing the debt limit only pile on the existing mountain of domestic debt faced by domestic corporations without any meaningful restructuring. The series of blunders made by the Chinese government during the China stock market crash has destroyed the prevalent idea that the Chinese government is so rich and powerful that they can ignore market forces. Other emerging markets fare no better in curbing and restructuring their debt, especially those dependent on commodity export.      Even though the valuation of Asian equity is very compelling after the recent fall, I am hesitant to even take a short term position on Asia as I believe that the financial excesses of the Asian markets have not been purged yet, given that property prices and debt levels are still at an elevated level. It is a tempting sweet which can potentially give you a toothache some time down the road.

Europe - Guns Blazing All the Way

Thanks to a series of major and minor crisis ever since the 2008 financial crisis, the European stock markets have been comparatively depressed as compared to their peers in America and Asia. Recent positive development includes an announced expansion in the QE program by European Central Bank and the normalization of the Greek financial market. As compared to the hazey "may-or-may-not" stance adopted by the US central bank, the European Central Bank is much more certain in their commitment to an additional round of QE by the end of the year. Every single financial markets who have announced QE measures have seen their domestic stock market rally by more than 10% in the subsequent months. There is no doubt that the Euro will fall after the announcement, but given that emerging market currencies are falling faster than any potential fall in Euro, the currency losses due to the QE from a Singaporean point of view will be relatively mild. I am not sure about you but I have been moving aggressively into the European Markets ever since the stock market crash 2 months ago.

Given that we are at the tail end of the global equity market cycle, I am personally reluctant to move all out into the equity market unless there is a more substantial fall in equity prices. The recent correction, although is a welcome drop to the already expensive stock market, is still not enough, to garner a risky all out position into equities. The fundamental rules of investing still stands, you will need to have a potential return double that of your potential loss, in order to succeed as profitable long term investor.

I am not so optimistic about the return/risk potential of the global stock market at this moment in time.

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