SINGAPORE (Dec 25): This time last year, I was warning that stocks were headed for a turbulent 2017 because of rising interest rates, geopolitical turmoil and technological disruption. I was wrong. Stock markets around the world have generally done well and many investors are now bullish. But the risks have not abated. If anything, they have worsened.
In the geopolitical sphere, for instance, North Korea still poses a nuclear threat, which could pressure relations between China and the US. More recently, a dangerous political purge appears to have taken place in Saudi Arabia, once a relatively stable nation in the Middle East. Tensions now also appear to be growing between Saudi Arabia and Iran.
On the interest rate front, the US Federal Reserve hiked the federal funds rate by 25 basis points three times in 2017 and has set the stage for three more hikes in 2018. The Singapore Interbank Offered Rate, against which a large swathe of mortgage loans are priced, has also crept up over the course of the past year. Meanwhile, new technologies have continued disrupting everything from retailing and transport to banking and media.
However, stocks have benefited over the past year from a rare period of synchronised global economic expansion. And, while most major industrialised countries have charted moderate positive growth, inflation has not picked up in a big way and long-term US Treasury bond yields are likely to end the year pretty much where they started. As a result, the Standard & Poor’s 500, Nikkei 225 and Straits Times Index are all up nearly 20% since the beginning of the year. The S&P Europe 350 is up nearly 8%.
With those gains, a sense of optimism has taken hold in the local market. IPOs have drawn an enthusiastic response from investors. Cyclical stocks such as banks, property developers and technology manufacturers have performed strongly. And, companies are investing in their future growth with renewed vigour.
Notably, property companies have been scrambling to acquire new development sites through en bloc deals. Some of these deals have been done on terms that will require the redeveloped properties to be sold at record prices in a couple of years. Even a recent warning from the Monetary Authority of Singapore that banks, developers and homebuyers should tread carefully does not seem to have dampened the exuberance.
We have also seen a spirited response to the onslaught of technology disruption from major companies such as ComfortDelGro Corp, CapitaLand, DBS Group Holdings, Keppel Corp and Singapore Telecommunications, all of which have shown a willingness to make big investments and adopt news ways of running their businesses. And, the response from the market has been broadly positive. In particular, DBS has been one of best-performing large-cap stocks this past year, partly on optimism about the progress it has made with its technology-related investments.
Will the market keep running in 2018? Or, should investors run for cover?
Dynamic environment
Many analysts and economists are expecting the current global growth momentum to continue into next year and spur a big capital expenditure cycle, which is likely to be beneficial for Asian companies and stock markets. The US corporate tax cut now in the works could further fuel this trend. Against that backdrop, the market is unlikely to share my concerns about souring geopolitics, tightening monetary policy and technology disruption in 2018. Instead, the thinking in the market is more likely that it is pointless to worry about risks that one cannot do anything about until they actually begin weighing on the market.
This view might seem reckless, but it has some merit. For instance, I cannot think of anything that would hold up in the face of actual nuclear-armed conflict in the Korean peninsula, except perhaps gold. Yet, the likelihood of it happening is very low, because all the players involved are aware of the dire consequences. On the other hand, interest rates are only likely to be a problem if they are pushed up very sharply. A moderate rise in interest rates would be consistent with firming global growth, and actually boost the net interest margins and earnings of the three local banks — DBS, Oversea-Chinese Banking Corp and United Overseas Bank — which are all sizeable components of the STI.
Similarly, higher oil prices as a result of brewing tensions in the Middle East would only be a problem when they begin stoking inflation and weighing on the profitability of companies that are big energy users, such as Singapore Airlines. A moderate rise in oil prices could well be supportive for the many energy-related stocks listed on the local bourse.
With the chances of a cathartic crash opening up a big value investing opportunity looking remote, participating in the market in 2018 is going to be about hunting for stocks that are insulated from the risks while keeping a close eye on valuations. It would also probably be useful to maintain an international perspective and construct a portfolio that is diversified geographically as well as in terms of volatility.
And, most importantly, investors should keep in mind that they are in a dynamic environment. Understanding how things are changing and being aware of how companies are finding new paths to growth could be crucial to making money in the market in the year ahead.
New global portfolio
The centrepiece of this final issue for 2017 is a slate of stories on how some of the largest and most widely owned companies in the market are coping with disruption in their respective industries. It may be too early to make a judgement on their efforts, but it is clear that they are not standing still in the face of change and that their initiatives are eliciting a response from the market.
We have also pulled together pieces on the outlook for the Singapore economy and which locally listed stocks analysts are recommending for 2018. There is also an interesting story on what lies ahead for cryptocurrencies such as bitcoin, easily the most gripping financial phenomenon of the past year.
Finally, we have unveiled in this issue a new global stock portfolio by Tong Kooi Ong, the chairman of The Edge Media Group, which owns this newspaper. This portfolio will be a regular feature of our new Capital section, which will be introduced in our first issue of 2018. That issue will begin reaching our subscribers on Jan 5, 2018.
All of us at The Edge Singapore hope that the past year has been kind to you, and are looking forward to helping you make better sense of the markets in the year ahead. We wish all our readers a Merry Christmas and a Happy New Year.
