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Dr Chan: Macroeconomic Conditions Are Turning Favourable

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The Shanghai Securities Exchange Composite (SSEC) index peaked out in January last year. However, at its highest last year, the SSEC was still significantly behind its 2007’s all-time high. Following January 2018, the SSEC trended downwards for the rest of the year, only bottoming out in the beginning of 2019.

In the first three months of this year, the SSEC rallied 33 percent to a new 52-week high. In face of global headwinds, the Chinese Government has laid down its six stabilising principles to boost the economy. As stimulus started to kick in, the Chinese stock market rebounded in tandem.

For most of 2018, the Chinese government was aggressively deleveraging its economy. On top of that, in spite of a protracted trade war with the US, Chinese trade data showed resilience and did not see any meaningful slowdown. The divergence in the Chinese stock market performance though, seems to suggest that the biggest driver is still China’s monetary policy.

In fact, the same could be said about the US. In September 2018, bellwether Dow Jones Industrial Average fell off the cliff almost immediately after posting a new record high. The sell-off continued into the Christmas Holiday, with the Dow making a 52-week low in less than three months.

However, in a twist of events, the US Federal Reserve took a sudden dovish turn since the start of 2019. Initially, the Fed only moderated its guidance from two interest rate hikes to one hike but later recanted and paused interest rate hikes altogether two months later in March.

The news spurred a recovery and the Dow rallied 22 percent in the first three months of 2019. In recent days, the market began speculating that the Fed would even slash interest rates going forward.

Over in Singapore, the local stock market is still underperforming that of the US, China and Hong Kong. Peaking out in May last year, the Straits Times Index went into a downward spiral before hitting a bottom last October. Since then, the STI has only rebounded 12 percent. On the other hand, the Hong Kong stock market which plunged after hitting a record high in January last year, rebounded by a bigger magnitude of 22 percent after hitting bottom in last October as well.

Dampening the performance of our local stock market is the weak sentiments plaguing our neighbouring Malaysian stock market. Just last week, the Kuala Lumpur Composite Index fell to a new 52-week low. The rebound after the weekend was also not significant.

Since the change of establishment, the new ruling party has yet been able to instill investors’ confidence in Malaysia. Unfortunately, the negative sentiments spilled over to impact the local stock market as well.

Ever since the coalition government took over the reins, all efforts were spent on weeding out the UMNO base to prevent the opposition party from making a comeback. To exemplify the wrongs of UMNO, Prime Minister Mahathir also suspended the Singapore-KL High Speed Rail project, thereby further dampening our local investment climate.

Meanwhile, Mahathir-led party PPBM has been busying itself with absorbing UMNO defectors to strengthen the party’s political standing. As a result, the new government has not devised any policies to promote growth for the economy.

That said, it has been over a year since the new establishment took over power. The end of the “political power” game should be near the corner and the new government should be returning to focus on Malaysia’s long-term prospects.

After three months of consecutive gains, many investors were hoping for a correction to bring about buying opportunities. However, on first day of April, the rally continued, leaving investors wondering what other good news is yet to be priced in.

Words on the street are speculating that the US-China trade war could see deal being struck real soon. However, with no confirmation being announced, there are still uncertainties and significant risks that persist.

Recall how Trump walked away from the second summit with North Korean Supreme Leader Kim Jong-un? How about the time when the Fed suddenly turn dovish? As there are many unknowns to how things would unfold, there is still room for upsides.

Given the circumstance, investors with larger risk appetite can still increase their positions despite at higher levels. While there is bound to be short-term volatility, it would not matter if one is confident that the broader market has yet to reach its peak.

The fear of a bear market is still having a grip on many investors though. These risk-averse investors believe the latest round of rally is just but a bull trap and that the next round of sell-off would be catastrophic. Others believe that a correction is imminent after recording three months of consecutive gains. However, by how much should the market correct before these investors start coming in again?

Drawing an analogy from the Hang Seng Index, on 4 April 2019, the Hong Kong benchmark broke into the 30,000 territory only to correct 300 points thereafter. As a result, many short positions were wiped out on that day as selling momentum failed to build.

On another note, while it is naturally good news that the US and China are nearing a trade deal, Chinese investors need to be careful about the Chinese government easing on stimulus so as to avoid inflation.

If a deal is struck, it is believed that China would open access of its financial market, as well as meeting other demands such as enhancing protection of intellectual property rights, lowering of tariffs for US automobiles and increase imports of US goods like Boeing aircrafts, soybeans, crude oil and natural gas. This would definitely bode well for the wide array of banking, insurance, financial, technology, auto and transport (Boeing), agricultural, and energy stocks in the US.

The opening up of China’s financial market would benefit foreign financial institutions such as HSBC Holdings (0005.HK), AIA Group (1299.HK) and local-listed DBS Group Holdings. Better enforcement of intellectual property rights would also benefit China’s own tech sector as it prevents plagiarism and theft.

With higher demand for energy coming from China, prices of crude oil and natural gas would be lifted in the global energy market. This would be beneficial for China National Offshore Oil (0883.HK), China National Petroleum Corporation (0857.HK), China Petrochemical (0386.HK) and local-listed Keppel Corporation.

However, the increased purchase of soybeans would lead to higher production of pork. This would put an end to the unsustainable rise in pork prices.

Last year, there are a number of defensive stocks that bucked the global downtrend. Amongst them are ST Engineering, SBS Transit, CLP Holdings (0002.HK), Hong Kong China Gas Company (0003.HK) and Link REIT (0823.HK). These stocks still carry quality and value, so hold onto to them through thick and thin.

Late of last year, I urged investors to look at Hong Kong property stocks. After observing how units of Sino Land’s (0083.HK) Grand Central project sold like hot cakes, I turned bullish on the Hong Kong property market.

Currently, there are a few HK property counters that have risen to record territory but a number are still lagging behind. Amongst them, K.Wah International (0173.HK) and Wheelock and Company (0020.HK) offer the best value to investors.

Nonetheless, the sky is the limit for HK property stocks that have already made new highs. With stock prices still trailing the net asset value per share, coupled with decent yield, HK property stocks offer tremendous upside potential and good margin of safety. Reflecting the booming Hong Kong property market is the Centa-City Leading index, which has ascended for the eighth straight week.

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