Sunday 11 October 2015

A Jittery September

It looks like the recent "bear" market is over before it has barely begun! Having said that, September was a very jittery month for me, not because stocks had fallen rapidly, but because I was trying to figure out whether and when to buy stocks. Stocks had already fallen sharply in mid August when China devalued its currency, but a look at the calendar for September showed there were several more events that could cause nervous moments for the stock market, with Singapore's General Election (GE) on 11 Sep, US Federal Reserve's interest rate decision on 17 Sep and finally Greece's GE on 20 Sep. Including the renminbi devaluation and US' announcement of higher GDP growth in Q2 in August, there were 5 events to digest in quick succession in order to conclude whether the "bear" was coming or just pretending.

Among these 5 events, 3 have economic significance, meaning they have an impact on the economics of companies and how stocks are likely perform in the medium term. These events help to determine whether stocks should be bought or sold. The other events merely affect the volatility of the stock market, meaning they only determine the timing of any buying or selling decision. The 3 events that have economic significance were China's renminbi devaluation, US higher Q2 GDP growth and US Fed interest rate decision. The events that have volatility implication were Singapore's GE, Greece's GE and, again, US Fed interest rate decision. Let us consider the events with economic significance first.

The reason why China's renminbi devaluation sparked off a global stock market sell-off was because it suggested that China's slowdown was larger than expected. In the absence of any other economic news, this is going to be very dismal for the stock market for months, because every month, there are economic statistics coming out of China and you could expect most of them to be negative. On the other hand, US announced a positive set of GDP growth rates for Q2, which were much higher than that for Q1. The big question is this: Is the world's No. 1 economy going to pull up the world's No. 2 economy (and the rest of the world), or is the world's No. 2 economy going to drag down the world's No. 1 economy (and the rest of the world)? It is easier to answer the second question first, so let me start with that one. Nevertheless, I have to admit that economics is one of my weaker subjects and I do not profess that my answers are correct.

To answer the second question, it is worthwhile to consider the answer to another related question: did China pull up US in the first place? Because if China did not pull up US significantly in the first place, then it is unlikely to drag down US significantly in the near future. As an example, the fate of resource-exporting economies such as Australia is very much tied to that of China. When China boomed or slowed, so did these economies. Unlike resource-exporting economies, the main source of US growth was not China. A look at the US GDP Q2 report revealed that the main source of growth was domestic. Hence, it would take more than China's slowdown to knock the wind out of US growth. Now, back to the first question, would US pull up China, the world's factory, with its domestic demand? There are several reasons for China's slowdown, such as over-capacity and over-leverage, etc. Such issues take time to work through, so it will take a lot more than US demand to pull up China. Thus, the conclusion is that neither China would drag down US nor US would pull up China in any significant manner. The world's No. 1 and No. 2 economies will go about their separate ways in the near future. The other economies will be in-between these 2 economies depending on the relative exposure they have to each of them. The key conclusion is this: the world is not going into a synchronised global recession.

By the time I figured the above out, it was early Sep. Sentiments were very fragile then. While I did not mind buying, say, Keppel Corp at the $6.80 price range, I mind a lot if it were to drop $0.30 the day after I bought it. It was not improbable for Keppel Corp to rise or fall by $0.30 in a single day during those days. So, I decided to wait until Singapore's GE was over. Surprisingly, stocks did not move much the following Monday after the GE, despite a landslide win for the governing party. That week was also the week of the Fed meeting and Grecee's GE. Let's talk about Greece's GE first. The key issue about it was whether there would be a replay of the Grexit drama in July, when Greece nearly exited the Euro zone because of opposition to austerity measures imposed by the EU as conditions for bailing out its debts. I managed to figure out beforehand that neither the anti-austerity governing party nor the pro-EU opposition party would oppose the debt bailout package, so Greece's GE was not a key event to consider. The final event left was Fed's interest rate decision on 17 Sep.

US Fed interest rate decision has both economic significance and volatility implications. The economic significance was discussed in Getting Ready for US Interest Rate Rises in Jun. To recap the key points from that discussion, interest rates are not going to rise significantly. However, regional currencies and US dollar-denominated assets like gold, oil and other commodities are in for a rough ride. Volatility in these assets will likely lead to volatility for the stock market. This conclusion is based on economic considerations. However, given the fact that interest rate rises have been discussed for a very long time already, I have a gut feeling that expectations for a drop in regional currencies and USD-denominated assets have been priced in already. There is a possibility of a counter-intuitive rally in the very assets that are supposed to fall when Fed announces a rise in interest rates!

To summarise, these are my conclusion of the key events of the past month that determine whether and when to buy stocks:
  • US vs China: The world is not going into a synchronised global recession
  • US Fed interest rate decision: Economically negative for regional currencies and USD-denominated assets, but possibility for a counter-intuitive rally in the same assets
  • Singapore's GE: Turned out to be a landslide win for the governing party
  • Greece's GE: No replay of Grexit

My key conclusion is that the "big bad bear" is not coming and I began to pick up stocks. Nevertheless, I remain wary of stocks with exposure to regional currencies and my warchest is still intact should my analysis be wrong and the bear returns.

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  1. Hi Chin Wai,

    I like your analysis. Lol, or thinking aloud. My thoughts are more on the commodity and currency "crisis"

    China import less, commodity export countries get hit, together with their currency. Their weak currency cause current Acc deficient and economy weaken further....

    But my thoughts are also, if exporting countries suffer, shouldn't importing countries be "gaining" with cheaper "cost of production"

    After a while, I just decide to wait for the right price and not think so much...

    I think I need to start building up cash again... I doubt I will do anything anymore anytime soon.

    1. Hi Sillyinvestor,

      By right, the importing countries should be gaining, but that is provided the demand and output do not slacken off.

      It's OK to take a breather from time to time to clear our thoughts and decide what are our next moves.

  2. Hi CW and SI,

    I learnt one thing over the years.

    When we are unsure, there can be a tendency to assume and if decision is correct, we thought we are smart and accurate! And if the decision is wrong, we curse and swear!

    Guess I prefer if I am unsure, I do or say nothing!

    If I am sure, then I take action! No assume!!!

    That is me, but of course I do admire people who take bets and win more than they lose!

    1. Hi Rolf,

      When things are uncertain, doing nothing can be a smart move. Waiting until things are clearer is usually better than doing something in the dark. I guess I have enough clarity and war chest to bail me out in case I'm wrong.

  3. I used to keep tabs on breaking news and key macro events voraciously. Nowadays, I just dial back a level or two and watch the world go by at a more leisurely pace. Maybe that's because I am in an almost 'all cash' position.

    1. Most of the time, I take the more passive approach. But this year, there have been a few market-moving events that forced me to pay more attention. When the dust has settled, I'll probably go back to the passive approach. Thinking about how the markets will move is actually very stressful!