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Plunging Oil Prices, Time To Bargain Hunt For Cheap Oil Assets?
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By: Dr Chan Yan Chong
Articles (200) Profile

US Federal Reserve Chairwoman Janet Yellen has stated clearly that the Fed will not raise interest rates over the first two meetings of 2015, or simply put, during the first quarter. This piece of news has bolstered investor confidence. The Dow Jones Industrial Average rebounded for three days in a row after the last Fed meeting to hit 17,804 points, just 1.1 percent short of another historical high.

The plunge in international oil prices has evolved into a global diplomatic battle. However, the current collapse of oil prices is more than simply an issue of demand and supply. Apart from oil producing and buying nations, the oil market today has a group of new players – big boys from the US commodity market. These guys would back off once they have made a killing. This plunge in oil prices will not last long, which is why Warren Buffett has been buying into oil assets.

Yet, the fact that Buffett is buying does not mean that oil counters have bottomed out, though they are definitely at bargain prices. Who, then, will the eventual winner be? My bet is – Warren Buffett.

Buffett’s decision is based on the analysis from a long-term investment perspective, that his targets are already at bargain prices and thus present themselves as good buys. However, bargain prices do not necessarily mean they are at or near rock bottom. What bargain hunters are counting on is the investment returns a few years or even decades later. This is different from a hit and run strategy that puts one’s judgment to the test, hoping that the entry price is transacted at the lowest price level or betting on an immediate rebound.

The so-called Russian ‘financial crisis’ is a non-issue in my opinion. In the first place, Russia is not a totally free financial market and the ruble is not an international currency given its low circulation. The alleged appreciation and devaluation of the ruble is more likely the works of a handful of players stirring up some excitement in the forex market outside of Russia. It is very easy for the Russian government to exercise full control over the movement of currencies into and out of Russia. Furthermore, the Russian government is sitting on a reserve in excess of US$400 billion, which is way more than what any major international player has at its disposal.

Additionally, the market has been overplaying Russia’s debt situation as well as the fact that Russia defaulted in 1998. If the Russian government were to default on its debts, it would be the creditors who would lose big and not Russia.

Exchange rates of regional currencies like the Singapore dollar, Malaysian ringgit, Indonesian rupiah, Thai baht and Indian rupee against the US dollar will in turn be affected and continue to fluctuate. This will naturally affect the stock market.

The Chinese stock market is gripped by a fever at the moment. The Shanghai Composite Index (SHCOMP) leapfrogged 100 points at a time from the 2,000-point level in the middle of this year to 3,127 points by 22 December. The 2009 high of 3,400 points is definitely in sight.

On 17 November, the Shanghai-Hong Kong Stock Connect scheme was launched, followed by the People’s Bank of China announcing a rate cut on 21 November. The Chinese stock market responded to these developments with a rally. I believe the ardour of these investors will not cool so quickly, so you should take this opportunity to enter into the Chinese A-share market through the scheme. You may also want to buy a basket of exchange traded funds (ETF) of Chinese A-shares. Of course, if you think the Chinese A-shares of your choice have risen too fast, and the H-shares of these companies that are listed in Hong Kong is comparatively cheaper, you can consider buying H-shares and ETFs of H-shares in Hong Kong. At the moment, I am directly holding some Chinese A-shares and A-share ETFs, as well as Hong Kong H-shares and H-share ETFs.

In any case, be it A-shares or H-shares, the share prices of components Chinese stocks of the SHCOMP that have a heavy weightage should rise very soon. Over the recent few weeks, there was a baffling scenario that was played out in the midst of the frenzied trading in the Chinese stock market: some A-shares listed in China shot up, while the Hong Kong-listed H-shares of these same companies slumped. The only plausible explanation for this phenomenon is the gambling nature of Chinese investors and their speculative mentality, which manifests itself by chasing after stocks on the rise without caring about the reason behind the rise.

Even though Chinese A-shares have risen by more than 50 percent, massive amounts of funds from the banks are being poured into the stock market. Every day, the fixed deposits of some will mature, and investors will channel these funds into the stock market. For this reason, the prospect of the A-shares market is still good. The best strategy currently is to shift your battle front and join the Chinese investors.

Major international investors have the ability to move any market in the world, except in China. The daily turnover of the Chinese stock market is one trillion yuan, which is 10 times that of Hong Kong. Retail investors hold sway in the Chinese stock market, and taken as a whole, they prove too formidable an opponent for major international investors. If the day comes, when Chinese retail investors feel that Hong Kong shares are cheap and they storm into the territory, they will move the Hong Kong market in such a way that major international investors will not dare to dabble in Hong Kong any more. The rebound on Wall Street will also trigger a rebound in the regional bourses and currency exchange, including Singapore.

At the recent Central Economic Work Conference, President Xi Jinping admitted that the Chinese economy is at risk of softening. To prevent this, China will need to inject massive amounts of funds into the market. If the central bank does loosen monetary policies, banks will do more business and thus stand to benefit most. Even though Chinese bank stocks, both A- and H-shares, have risen by a fair bit lately, I still view them favourably. Investors should take advantage of every correction to buy bank shares at a low.

With the global plunge in oil prices, will the profits of Singapore Airlines (SIA), which uses a massive amount of fuel, rise significantly? I do not think so, the reason being the company will probably suffer losses from its hedge against fuel costs. The possible oversupply of passenger capacity in the Asia-Pacific region, coupled with losses made by Tiger Airways Holdings, will dilute any gains that lower oil prices will bring to SIA. On the other hand, Vistara – the airline that SIA has partnered Tata Group’s holding company, Tata Sons, to set up – will open for business soon, providing domestic flights across the Indian subcontinent. SIA holds 49 percent of the new airline that is headquartered in New Delhi, and that is a promising news for the national carrier.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

Singapore Airlines  9.140 -0.11 -1.19%   
Business: Co provides air transportation services to destinations spanning a network spread over 6 continents. [FY19 Turnover] SIA (80%), Budget Aviation (10.5%), SilkAir (6.2%), SIAEC (3.1%), others (0.2%).

Insight: May-19, FY19 revenue edged up 3.3% to $16.3b. Pass... Read More

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