Into the 4th quarter of 2012, global economies will be facing couple of important events that could potentially swing the stock markets one way to the other. Without any doubts, the focus will be on the 3 countries or region, US, China and Europe.
EU leaders held its EU Summit recently from 18th to 19th October without really producing any fantastic news and what can be confirmed from that meeting was by end of 2012, EU leaders will provide detail of the Banking Union, probably during the coming December EU Summit. Since ECB recently committed to its unlimited bond buying program into Government bonds, this has more or less provided a short-term downside support to the credit crunch facing EU in particular Spain. The act has no doubt bought some times for the EU leaders to trash out more measures to tackle the 3 years old debt crisis. The core of the crisis is still debt nations has to continue to proceed with austerity measures to cut debt and at the same time providing measures or policies to boost growth to prevent the whole of EU sinking into deeper recession. The debt crisis in Europe is not something that could print money or a one-off policy to get it totally resolve. Euro involves 17 nation using the same en-bloc currency whereas whole of EU consists on 27 nations integrated together. EU leaders at one hand has to co-ordinate among themselves and at the same time have to face their own domestic politics when they endorsing policies. This is not an easy task by all means. Take for example Germany is the nation in the Euro en-bloc to bailout the debt nations with their citizens tax money and for sure the German citizens will not be very pleased with such an act. Hence, the EU debt crisis could just drag on for a decade and at each time small little step of solution to resolve the crisis. Global economies just have to adapt with that and so as stock markets when dealing with events from EU. As can be seen, the immediate tasks for EU leaders will be trying to setting up the Banking Union and providing policies to boost growth. Event to watch for will be the December EU Summit in which EU leaders are expected to provide details in particular to the Banking Union formation.
China has been hit with slow growth for past months due to the weak export to the EU and US. This has resulting in the Chinese Government to launch stimulus for the past months to boost growth. Recent economic data might be showing sign of Chinese economy bottoming and potentially on a rebound. China will have changing of leadership in the month of November in which President Hu Jintao and Premier Wen Jiabao will be stepping down. Normally, the changing of leadership might not be a big focus for China as it was a one-party nation but this time round thing get a little bit different. China has been in transition mode of economic model switching to heavily relying on export to consumer and services based type of economy. The focus will be on the new leadership in how to reform China to the new economy model. During this transition phase, it will be difficult to see China economy getting back to the double-digit growth stage and might experience flat growth of around 7.5% to 8% GDP until the transition has been completed. Lot of focus has been on China stimulus to will affect the rest of the world and in turn the global stock markets. However, that is not the case as in 2008. China priority will be its own citizens so that the nation will not have high inflation and high unemployment rate. Failing to do so will result in critical social unrest in China and that is a very big problem for China itself. Therefore, investors should not be like in 2008 pinning of high hope that any China stimulus will save the world. However, there is still opportunity to leverage on China transformation. Since China is switching to consumer and services based economy model, any companies that could be a proxy towards the consumer and servicing sectors will be benefit from it and investors could focus on those. Why consumer and service based economy so important to China ? China has a very huge population based and imagine if one citizen say a farmer sold his crops and used the money to buy food in which the ingredients of the food are purely domestically made. The food seller with the money in turn spend again and the cycle repeats and that no doubt will create economic activities which does not totally involve any external factors (nations). This is what China does so that it can cushion any external shocks to its economy by rest of the world.
US has 2 important events in the 4th quarter of 2012. November US Presidential Election in which either Barrack Obama get re-elected or the place will go to Republican's Mitt Romney. The election is important as it will determine how US economy will shape into for the next 4 years. US economy has been stalling, unemployment rate has been stubbornly high and US Fed has to launch QE3 in September hoping to bring down the high unemployment rate. US also facing a time bomb fiscal cliff comes next January if the Deficit Reduction Panel fails to propose any measures to cut US Government debt, an auto mechanism will kick in to cut Government spending across the board. Back to the very basic fundamental of economy. Unemployment results in lower consumer spending and hence leading to weak economy. To raise employment, Government will have to spend to create jobs, spending on infrastructure like building roads, hospitals, schools, etc. With the fiscal cliff US Government will be facing, how US Government has the money to spend to create jobs ? To recap, since the financial crisis in 2008, US economy has been largely supported by its technology companies (Apple, Google, Microsoft, Intel, IBM, etc). These companies' products coupling with weak USD (all due to US Fed printing money) result in export attractiveness. These companies might be earning good revenue but they are not creating much jobs for US. Most of the backend stuff by these companies like assembly have been located to outside US like China. Furthermore, the recent corporate earnings by these companies have show sign of weakness. Technology is something about quality and not quantity. Take example Apple, it has missed market expectation for the past 2 quarters of earning. Apple smartphones market share has long overtaken by Samsung and currently surviving by its tablet business in which it still have the major market share. However, the recent earning has shown that its bottomline has been hit which eats into its revenue. This is mainly because the rush in releasing its latest version of tablet. As it goes for quantity, it misses out on the quality. Consumers will just want to wait to buy another better version each time a new release comes out. This has no doubt potentially creating a tech bubble in the process. While in EU and China, the leaders are talking about reform to their respectively economy, it is also strange that US with its stalling economy that currently staying alive with life-supporting system (US Fed QE) fails to see itself also in need of reform to save its economy. This is where the US Presidential Election comes into picture. Can the newly elected President be bold enough to reform its economy or just continue doing what it is doing now and waiting for the next recession to come only. In a nutshell, with US economy in life-supporting system and potential fiscal cliff, US poses high risk of going back to recession and US stocks are no longer cheap despite companies might have strong cashflow in them. Events to watch will be the outcome of the Presidential Election and the then after resolution of the debt by the Deficit Reduction Panel before the clock ticks to January 2013.
Singapore with its open economy style has not been spared with the ongoing headwinds globally and Singapore thought might not be recording a recession in the short-term but the GDP growth for 2012 practically is flat. Should the global events showing no improvement in 2013, Singapore might just drop into recession then. However, there is some light to it if Singapore Government knows what to do. Like China, Singapore could slowly switch to consumer and service based type of economy and reducing the heavy reliance on export. Singapore is a small nation and does not have a huge population like China and to make it worse, Singapore does not have natural resources. These factors have made limitation for Singapore effort to switch to focus on consumer and services based. However, should the Government be able to look at a border sense this is still possible. ASEAN is a 10-nations region, the combine population is no lesser than China and as a region itself it could provide lot of consumer and services based type of economy activities. Vietnam, Laos, Cambodia and Myanmar are the developing and underdeveloped nations among the ASEAN while the more advanced nations like Singapore, Malaysia, Indonesia and Thailand have the capability to help the 3 to develop which boost economy among the ASEAN nations. It might not be an easy tasks as required lot of co-ordination and co-operation among the ASEAN leaders but it can be done. ASEAN region emulating China as a consumption and services central could also potentially build a firewall around ASEAN nations' economy to cushion any external shocks from rest of the world.
In short, there are couple of critical events to watch out for in the final 2 months of 2012 and the outcome of these events could swing the stock markets from one way to another. Despite that, the stance of cautiously optimistic still remain status quo. The fiscal cliff issue in US could potentially create another bottom for the stock markets in December before it rebounds and further confirming the last leg of the bull market which started in 2009. How long that last leg will last ? It could be between 1 to 2 years times and a threat that in 2014 global economy will sink into recession is an option investors need to bare in mind. Having said last leg of bull market doesn't mean investors must all flow into stocks. After all, the last leg of bull markets is a trader market and not an investment market (from the perspective of fundamental and value investing). Should one need to buy, must maintain tight risk management and know when to take profit.
