The Year Ahead

The eventful year is coming to a close soon. Kudos to everyone for surviving the rollercoaster ride! President-elect Donald Trump was a total game changer indeed, and we are now facing a stronger US dollar, higher commodity prices, higher bond yields, and lower gold prices. Even the US Federal Reserve has become more hawkish.

For the past 1.5 months or so, the growth strategy has continued to fire on all cylinders and pushed equities in the US up by nearly 6%, while the STI rallied by 5% to ~2,960 within a month of the elections (although it has since retraced by about half of that move). There was a comment in a Bloomberg News article that if one closed his eyes and bought into the market at the start of 2016 and only opened his eyes again at the end of the year, he would never have guessed that events like Brexit and Trump happened. Lol.

With still so little concrete information besides who won the elections and the appointments for the various posts in the administration, one does wonder though whether markets are getting ahead of themselves (especially for us folks in this part of the world - Asian countries are running a $401 billion goods trade surplus with the US this year, according to the US Census Bureau). For investors who did not join the growth trade immediately after the elections, this translates into the question of whether it is now too late to join in.

Some food for thought:

1. Singapore is facing a period of slower growth as it attempts to reorient its economy. GDP growth is trending at about 1%, supported by government spending. 3Q GDP growth was revised upwards to 1.1% year-on-year from the advance estimate of 0.6%, but still a slowdown from 2% in 2Q. The services industries, which together account for around two-thirds of GDP, entered a third consecutive quarter of contraction, led by the external-oriented sectors. The financial and insurance services sector underwent its first y-o-y contraction since the global financial crisis. Singapore banks continue to grapple with a credit cycle. In the property market, concerns remain over the overcapacity in office space, falling retail sales, and a residential market correction.

2. Will MAS come in to support? The latest meeting saw the central bank keeping on hold as it believes its past policy easing will continue to filter through to the economy in the quarters ahead. It probably can ease further if growth does not pick up as expected, but this may get tricky against a backdrop of US rates and the dollar continuing to rise. Furthermore, note that with higher US rates and dollar, Asia (including Singapore) may see reduced support from foreign inflows.  

3. How high can the US Treasury yields go? Market expectations of two hikes in 2017 proved to be too conservative and the outcome of the Fed’s December meeting, with median projections of three hikes next year, caused some repricing. One of the Fed’s most hawkish policy makers has even warned that the Fed may have to raise rates more than three times next year. During the 2013 taper tantrum, the 10-year yields rose to 3%. The US labour market is much tighter now than it was in 2013. Seems like there’s more room to go?

4. Eurozone equities have lagged significantly year to date and suffered from big outflows. The Eurozone business cycle is also at a much earlier stage than the US one. Valuations may therefore be looking cheap, but the election calendar going forward is heavy. Trump’s victory could just be the start of the rise of populism, and this could potentially throw markets off by a greater extent.

Mentioned Europe because I’m considering getting some exposure likely via a low cost ETF. Anyway, I’m generally still on the sidelines, didn’t participate in the rally and hence am more cautious now on the trends going forward. Would be looking for cues on policy direction from the new US administration next year. Plus, I may need some extra cash for a new flat sometime next year (maybe - haven’t even gotten queue number yet), so not much dry powder.

In November I added Singtel and Aims Amp Capital Industrial REIT. For Singtel, being a blue chip name that everyone likes, I needn’t explain more right? Added on the dip during the month, though it was still an average up. I’m also a happy subscriber because now my mobile phone bills are lower by ~$20 per month after I switched to their SIM-only plan (I know this is not good for ARPU though… :p). Aims Amp: averaged down my cost when the price came off after the lower 3Q DPU. I think concerns about the sector are well flagged and management has been pretty proactive. This month, I took profit on Apple, which I held for trading (total return ~24% in SGD terms - some dividends, some unrealised FX gains, mostly capital gains). It rose further after I sold zzz. Anyway, will be keeping the USD proceeds for the next trade.

Merry Christmas and happy 2017 in advance!

Regards

Yolohuat