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China Advances, US Abates, Singapore Caught In Between
By: Dr Chan Yan Chong
Articles (200) Profile

I published a book entitled 《步步为营》 (Caution with every step) in early 2014. In September last year, I published another book entitled 《机不可失》 (Opportunity does not knock twice). The progression from caution to opportunity refers not to the local stock market but rather the Chinese stock market that had been bearish for five years in a row. The Shanghai Composite Index (SHCOMP) was the top performer among global indices in 2014, having risen 53 percent.

In mid-2014, I have repeatedly pointed out that the SHCOMP has already bottomed out at 2,000 points. The SHCOMP started its ascend during the run-up to the launch of the Shanghai-Hong Kong Stock Connect scheme, and really took off when the scheme went live. After the People’s Bank of China cut interest rates, the index shot up. On its first day of trading in 2015, the SHCOMP hit 3,350 points and had risen by nearly 70 percent.

In the last issue, I encouraged everyone to buy into the exchange traded funds (ETF) of China A-shares listed in Singapore or Hong Kong. Two weeks has past since, and though A-shares have not stopped rising, I continue to be bullish on the uptrend of the A-shares. Although the SHCOMP has already risen by 70 percent, it represents a rebound from a bottom where the basis value is low, so there is still room for the bull run to continue.

Chinese financial stocks have performed well over the past two months, but many retail investors are afraid to jump in on the grounds that they have risen too quickly. This is a wrong mindset. Though there may be a possibility of speculative buying when a stock appreciates too quickly, decisions should be made based on the fundamentals. If fundamentals are strong, investors should not be too timid. So far, the price-earnings ratio (P/E) and price-book value ratio (P/B) of Chinese financial stocks are generally very low and dividend yield is also good, so what is there to worry?

A point to note, when investing in Chinese shares, it is best to concentrate on component stocks of the SHCOMP that carry higher weightage. On 4 January 2015, Chinese Prime Minister Li Keqiang said when he was visiting Shenzhen, “Now that Shanghai-Hong Kong Stocks Connect scheme has gone live, it is time for a similar scheme between Shenzhen and Hong Kong.” Chinese A-shares listed on the Shenzhen bourse skyrocketed upon his remark.

The US stock market is causing more concern, as 2015 is shaping up to be the year for a rate hike. After testing and breaking new highs for 22 months in a row, the Dow Jones Industrial Average is now showing signs of stress. In 2014, the Dow rose by just 7.5 percent, showing that its bull run is losing steam.

The US Federal Reserve is likely to raise interest rates in 3Q15, which will put pressure on the run on Wall Street. However, the interest rate for the US 10-year Treasury bond is still very low. This reflects international investors’ views that the rate hike, if any, will be very modest and will not have much impact the stock market.

The stock markets of Singapore and Hong Kong will thus be caught between that of Chinese and US in 2015. The thing is, Wall Street has been on the rise over the past few years while China was sliding. Now, at least for the time being, the Chinese stock market still has steam to sustain its run while the US seem to be losing momentum. The situation is dicey, no doubt, as Singapore and Hong Kong bourses can only rely on China to keep their stock markets afloat for now.

As the Chinese economy slows down, it will surely relax its monetary policy. Falling property prices will affect consumption, so the government will definitely introduce some measures to stimulate the property market. The Chinese stock market will continue to be powered along by infrastructure building, which is back on track, and the launch of the New Silk Road project. These will also help to support the stock markets of Singapore and Hong Kong. The safer way to deflect any threats brought on by the rate hike in the US is to focus your investments on Chinese stocks. The Chinese stocks listed in Singapore, also known as the ‘dragon’ shares, will outperform other shares.

Singapore is currently faced with a slowing economy, falling property prices and negative inflation rates. According to figures released by the Ministry of Trade and Industry Singapore; on a seasonally-adjusted annualised basis, Singapore’s gross domestic product (GDP) in the fourth quarter of 2014 has slowed to 1.6 percent quarter-on-quarter, while its year-on-year growth has also slowed to 1.5 percent, which are below market expectations.

The main reason Singapore’s economic growth fell below expectations was the contraction in the manufacturing sector and a downturn in the tourism industry. As a small, open economy, Singapore is heavily reliant on external demands to drive its growth. With its weak economic data, Singapore’s monetary policy could undergo major changes or there may even be a Singapore version of quantitative easing (QE). Fortunately, the fall in property prices, which the government brought about through cooling measures, came about upon the requests of Singaporeans. Should the slump in property prices cause the economy to go into a recession, I believe the Singapore government will relax these cooling measures.

Faced with the possibility of Greece leaving the Eurozone, coupled with European Central Bank Governor Mario Draghi’s repeated warning of the risk of deflation in Europe and the prospect of impending QE, the exchange rate for the Euro against the US dollar has hit a nine-year record low of US$1.19. This has affected stock markets worldwide. In 2015, the Eurozone will admit one more member state – Lithuania, which is poorer than Greece. In its bid to match the US for might, political leaders in the EU has forcibly lumped countries with widely disparate economic strengths together and made all of them use a common currency. This brought about the first European debt crisis in 2011. I believe there will be a second and even a third European crisis, and Lithuania could be the trigger.

International oil prices have continued its freefall and are now below the US$50 level. How far will this slide go? Conspiracy theorists believe that bringing oil prices down will bring Russia to its knees. However, should the US punish Russia in this way, it will only serve to bring China and Russia closer together. China could take this opportunity to buy natural gases from Russia and build gas pipes that stretches thousands of kilometres in Russia. At present, China and Japan are pulling out all the stops to buy oil in bulk and stockpile them as strategic reserves. The plunging oil price has reaped great benefits for China, which may have been an oversight on the part of the US.

In 2014, property prices fell in Singapore but rose in Hong Kong, so even though Hong Kong’s Hang Seng Index rose a mere 1.3 percent, the performance of its constituent property stocks was outstanding. Looking forward, property prices in Hong Kong should continue to stay strong, so I remain upbeat about its property stocks. Henderson Land continues to look promising. Its chairman Dr. Lee Shau Kee believes that there is a huge gap between the company’s share prices and its asset value, so he has been constantly increasing his shareholding last year. I believe he will continue to do so this year.

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

Please click here for more information about this author.


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