A Turbulent First Quarter

Contrary to some Fengshui Masters who use Chinese horoscope and geomancy to predict the behaviour of the stock market, the "calm" Rabbit year started the year rather turbulently. For the past two months, we have seen unrelated events, cascading to result in a mini crisis. In late January, there was a huge continuous selldown of Asian markets by large fund managers for 3 weeks. Before it ended, there was Middle East crisis heating up when Libya's unrest unwinding into a civil war. Crude oil prices shot past 2-year high and that caused great concerns to the recovery pace of the world economy. About when the oil prices eased a little with OPEC members' commitment to top up supply from Libya's shortfall, there was then a sudden Mother Nature's savage of a wrenching earthquake and treacherous tsunami that destroyed many parts of Japan, the 3rd largest world economy. All three unprecedented events sent the STI index to a double bottom of a 6-month low of 2921 points. I guess that's bad enough for many investors who got caught in a false confidence at the beginning of the new year when everything was painted all so rosy.

For those who held faith in the market, or who had capitalized on bargain hunting, the market always proves to be merciful. It did a spectacular recovery of more than 260 points in a short 3-week span. You would be helping your heart if you had hibernated out of the market for the last 3 months and opening to see your screen now, saving yourself the treacherous ride of the market; now that the STI has come close to last year's end closing of 3190 points. Phew! It was a 5-digit roller-coaster ticket price for me.

Now looking at the global economy, fundamentally is still unchanged. Broad-based economics still show an uptrend in a global recovery. US is still reporting improving sales and employment figures. The Dow Jones and S&P 500 indexes were showing continued uptrend which was momentarily disrupted by the recent crises. The US presidential election is slated to be held near the end of 2012. The government is not expected to do unfavourable measures to upset the market, especially when it is on its third year of running since the last election, as illustrated by previous election cycles. China is poised to contain its inflationary rate between 3-4% this year.

However, in a short to medium term view, there lies several risks which may hamper global economic growth and negative impact to the market.

Japan, suffering from a triple whammy disaster, will spend the next few years rebuilding its nation. As a world supplier of many advanced technologies like microchip and automobile, related industries are going to feel the ripple effect from a serious shortfall of supply. The government has to sort out the urgent need of restoring power back to factories.

The Quantitative Easing 2 (QE2) fund injection of the US Fed is ending by mid of 2011. If there is no deterioration of the US economy, no fresh injection of funds would be expected further. Less hot money would be free flowing in and out of market. Furthermore, the Fed would start to increase the interest rates amid an improved economy. It would then be less attractive for fund managers to borrow from banks and invest into equities.

If crude oil price continues its relentless upward trend, it is certainly going to derail the recovery of the global economy.

Market Comments by Economist Dr CY Chan

I have extracted an article, written in chinese and translated to english, by Dr CY Chan, a program director in City University of Hong Kong. He is a well known figure as an advisor to many enterprises and a frequent public speaker about world economics:

3 March 2011

"Dear Friends
The stock market fell heavily for the first two months in 2011. Many small punters did not believe the the market would fall andwent in, hoping the market would rebound. Indeed there was no logical reason why the market should fall. Singapore economy is doing well and the government in its budget is paying out financial goodies to the people. US stocks keep rising to two years’ new high. There is no reason for Singapore stock market to fall. In my opinion, the only reason for the market to fall because too many people think there is no reason for it to fall.
Thus, many individual short term punters gamble on market’s rebound, gamble on derivative instruments in particular, hoping to have good returns with small capital outlay. But we cannot deny the big punters with their financial backing are able to
press the stocks until the small punters to surrender and give up. I believe in fundamental analysis. The fundamentals did not turn sour during the past two months. I cannot guess and do not want to guess the market’s short term fluctuations. Now is best to patiently wait for the corporate results which support the stock prices. Listed companies are going to announce their corporate results; those companies with good improved profits would make their stock prices look cheap as PE ratio would be much lower to attract investment interest. The Jasmine Revolution that started in Tunisia has spread like wild fire, engulfing North Africa and all the Arab countries in the Middle East. Tunisia is still in turmoil since the president stepped down. Egypt is under the control of military junta. Oil producing Libya is out of control. German and British oil companies have begun to evacuate their staff. In other word, oil production has stopped. Peoples of Iran, Bahrain, Yemem and Jordan demonstrate to overthrow the governments. Midde East and North Africa countries can be grouped into oil and non oil producing ones. US only concerns with who is who governing the oil producing countries. North Africa and Middle East cooutries can also be grouped into pro US and anti US. US, under the internal pressure of own people will oppose pro US governments to use force to surpress the demonstrations; therefore chances of these pro US regimes being overthrown are greater. Anti US groups will surely use force to clamp down the demonstrations; these regimes will not collapse without bloodshed. Many years ago the fanatic Gaddafi openly financed and supported Muslim extremists. Then one day US fighters flew over Lybian sky and started bombing with intent to kill him. Gaddafi, escaped and his life spared, became tamer since. Later when US invaded Iraq, Gaddafi got scared, and began to communicate with Western countries. There are US and European oil companies exploring Lybian oil fields today.
The unrests in Middle East and North Africa give US headaches. The locality is the largest global oil export region. Rising oil price will lead to price hike in other commodities. US is now in the wake of economic recovery and can ill afford continuous rising oil price that may lead to what the economists termed stagnation.
What is stagnation? It is where vicious inflation and recession happen at the same time. It happened in the 70s of the last century once due to certain rise in oll price. A price rise is either due to demands increase or supplies decrease, a simple economic concept. If the price rise is due to increase in demands, the issue is not so crittcal as it signifies economic prosperity; people have more money to spend
(though it may be due to printing of currency notes). People do not grumble that much if inflation is due to booming economy. In this case, only the less competitive and weaker group needs to be taken care of. If the price rise is the result of short supplies, then except for a few hoarders, most people whose income remains static will suffer as income lags behind rising prices. Consumption and expenditure will be cut, and economic recession follows. Should US economic recovery is hindered by rising oil price, global stock markets will be adversely affected. More frequent turbulences they are in Middle East the better it is for China. The 911 attack in 2001 was the watershed for China. President Bush’s all out efforts to counter terrorism altered his foreign policy. China became the world factory during Bush’s 8 years tenure. In order to have China against terrorism, Bush supported China’s entry to World Trade Organisation, thus opened up US market to China. As a result not a single US factory that originally rolled out cowboy jeans remaind in business. When Obama was elected, US foreign policy changed again. US is trying to woo Muslin countries, getting ready to pulll out from Iraq, liken China as an adversary. Nontheless, America had to ceremoniously welcome China’s Hu Jing Tao on his visit to US in return for financial aids. Inspite of this, the US foreign strategy to contain China has been formulated. Should the dictatorship Middle East regimes collapse one after another and these regimes ruled by Muslim fundamentalists, US foreign policy may yet change again. Obama is now trying to find a suitable pro US candidate to govern Egypt. Obama has no more energy to trade waring with China. The 20 nation finance minister forum on global inbalnce is over. It is conspicuously a meeting of tussle between Western fully developed nations and newly developing nations. Western fully developed nations have gathered some evidences to accuse the newly developing nations for causing the economic inbalance to prosperity at the expense of the fully developed nations. In other word the fullty developed nations are using all kinds of pretexts to blame the newly developing nations for their economic woes. Will the developing nations keep quiet? Not so. Yet to ignore the accusations means each goes its own way. Fully developed nations will exercise protectionism. As a compromise, Chinese finance minister suggested using trade accounts in lieu of exchange rates and foreign reserves as the benchmark. The G20 meeting was an important meeting that would have far reaching consequences to China’s government policy to avoild being accused as the chief culprit of economic inbalance. In short, China will have to increase imports by lowering import tariff to counter her strong exports. The moment when the G20 meeting ended, rumours had it that China would be lowering the import tariff for cometics and milk powder. Take a note of it."