I started off 2012 citing cautiously optimistic year in the Recap 2011 & Looking Ahead 2012 analysis and without any doubt it turned out to be true for 2012. For the year 2012, FTSE STI rose 19.68% producing one of the best return year since 2009. However, it was not a smooth ride to the gain along the years as couple of important global events did cause a sharp pull back in the market before staging a strong rebound in the second-half of 2012. A recap of those several important global events in 2012.
1. China stock market was the worst performer for 2012 as its economy felt the burnt of the effect of monetary tightening to curb rising inflation and also a reform in its economic model (transform to customer and services oriented instead of the heavily export oriented) in which leading to investors wonder is China going for a soft or hard lending. The rising inflation managed to cool down in 1Q2012 and that has allowed Chinese Government some room to play in doing interest rate and RRR cut to stimulate the economic growth. The Chinese Government also rolled out stimulus in infrastructure spending to boost growth. That stimulus was not as aggressive as the one in 2008 as they still worried on inflation coming back. With those monetary easing and selective stimulus package, China economy finally managed to rebound in 4Q2012. In November, China held the once-a-decade change of leadership in which President Hu Jintao and Premier Wen Jiabao will be replaced by Xi Jinping and Le Keqiang respectively in March this year. The new leadership will usher China in its new economic model into the next decade without any doubt.
2. Another eventful year for Europe but was not as bad as in October 2011. Election for France and Greece in April brought some worries to investors. Hollande oust Sarkozy in the French Presidential Election and he was pretty much anti-austerity fellow which worried investors whether can he worked with German leader Angela Merkel to iron out EU debt problem. Greece has a roller-coaster ride in its election. The outcome of the election will determine Greece will continue its austerity measures to get the next bailout and after the first election in April, no majority party emerged as winner which later failed to form a coalition government. A re-election was scheduled in June in which caused some stock markets correction in fear of Greece can be default. At that time, rest of the world were preparing for emergency measures in case Greece default. Eventually, Greece managed to form a coalition government this time round led by the pro-austerity group, Greece adopted the EU austerity requirements and managed to get the bailout. In June EU Summit, EU leaders also pledged 120b euro growth package to stimulate the already in recession EU. Still EU nations in debt have to continue austerity measures to reduce debt level. Spain and Italy were also on the radar for getting bailout. Spain was on the brink of getting one when ECB stepped in after approval from EU leaders to use the EU bailout funds to perform unlimited Government bond purchase. That move put a stopper to the credit crunch risk but did not solve the fiscal debt issue. In December, EU leaders finally approved on the EU Banking Union policy with ECB as the supervisor. The main thing for EU to fully resolve the debt crisis still on austerity vs growth policies.
3. US, the culprit for the 2008 global financial crisis still facing headwinds in its economy recovery. The persistent high unemployment rate and stalled economy growth despite 2 QEs eventually led US Fed to launch QE3 in September, continued to maintain low interest rate and extended bond buying in December (after Operation Twist expired). In a bold move by the US Fed, all the above measures will have no time frame and tied to conditions of unemployment rate drops below 6.5% or inflation rises above 2.5%. In another word, aggressive printing of money continued. In November, Barack Obama managed to get re-elected defeating Republican Mitt Romney in the Presidential Election. Soon after the election, global stock markets experienced selling down as investors focus to the US fiscal cliff in which should no measures being proposed, come 1st January 2013, tax hike for all and across-the board spending cut. In a scenario in which US need to create jobs to stimulate economy growth, the fiscal cliff if not averted together with its massive debt hitting the already raise debt ceiling will bring US back to recession.
4. Japan, the world number 3 economy failing to fully recover from the March 2011 tsunami and together with global economy weakness, an island dispute with China eventually led Japan fell back to recession. That caused a Election in December in which the LDP led by former PM Shinzo Abe took back the control of the Government. The leading to and outcome of the election has caused Japanese stock market to rally to new 52-week high as investors anticipating aggressive stimulus will be launched should Abe won the election.
5. For rest of the world, it was pretty much the same issue. In the west, countries struggling with debts while countries in the East facing slow down.
In short, global stock markets performed strongly in the second-half of 2012 was mainly contributed by the excessive liquidity around in a low interest rate environment when investors chasing for return.
Looking ahead of 2013, most analysts are pretty bullish in both global economy and stock markets in general. Could not disagree with that but still need to maintain cautiously optimistic as global headwinds still exists. On top of the cautiously optimistic view, 2013 could be jolly well the last leg of the bull markets which started in 2009. Value/fundamental investment would have to be selective and in general it will be a trader market. After 2014, there is a high chance global economy will enter into recession again.
1. China with its reformed economic model should continue to rebound but like what the new President Xi Jinping was saying China will be looking at quality and sustainable growth, the days of having double-digit GDP growth will be gone. With focus on consumer and services based, even if there is any chance of monetary easing, it will be targeted to selective sectors only. The Chinese Government still maintain its curbing measures in property sector. The Chinese Government will definitely monitoring closely growth and inflation this time round and applies appropriate measures so that either of the two will not get out of hand. Selective sectors should be performing well in 2013 for China and hence expecting a better performance from the Chinese stock market as compared with 2012.
2. EU in mild recession in 2012 and hope will be it can get out of recession in 2013. German leader Angel Merkel started 2013 with a warning that EU debt crisis is far from over. Unfortunately, that is a reality and true fact as headwinds in EU are still there. EU leaders will have to continue to work hard in the austerity vs growth section to bring down the debt level and stimulate growth. Germany and Italy will be having election this year and the one in Germany should be closely monitored as that will decide whether Angela Merkel can get re-elected and continued to fight on the EU debt. The on-and-off Greece debt and bailout might resurface again as Greece has until 2022 to meet the debt-to-GDP ratio (an extend of 2 years by EU leaders in 2012). In general, so far those measures being implemented in EU (especially ECB) are merely a stopper to any downside risk for credit crunch, the work to fully resolve the debt crisis might even take a decade to do so and investors just have to get used to any EU debt issue being pop up along the way and muddled through.
3. Officially, US Congress failed to put up any fiscal cliff deal to avert that. However, a deal with only rising tax for individual of over US$400k, couple over US$450k and delay the across-the-board spending cut by 2 months was patched-up in the early days of January (which could back-dated to 1st January) and temporary advert the fiscal cliff. However, US Treasury Department is current on "extraordinary measures" as officially US has hit its debt ceiling as of 31st December 2012. Should nothing to be done on the debt ceiling, come end February or March, US will have to default on its financial obligation. The across-the-board spending cut and debt ceiling will be in focus for debate in the Congress again 2 months later and global stock markets with a strong rally in early 2013 might correct in reaction to that. Expectation will be somehow and somewhat US Government is able to resolve those 2 issues just a matter whether it is the full or another kicking the can down the road type of solution. The political gridlock in resolving critical issue by the Democrats and Republicans have been there in the past, it is happening now again and will not be surprised still there in the future. Apart from this issue, the concern of creating jobs to bring down high unemployment and stimulate growth will always in focus for 2013. It will definitely not be a smooth ride in the stock markets will all these problems hanging around. Do also keep option opens of what happen when US Fed withdraws the stimulus due to conditions meet (unemployment rate drops to below 6.5% or inflation hit more than 2.5% in which US Fed has to hike interest rate) and how that will affect stock markets.
4. Japan with its new leader and stimulus package, hopefully can emerge out of recession in 2013 and that is probably the minimum expectation for it. The deflation and huge public debt issue after so many years still exist unfortunately.
5. For rest of the world, how the respective economy will fare will depend on how strong US, China, Europe and Japan rebound from their weak economy.
For Singapore, it recorded a GDP growth of 1.2% in 2012 (preliminary estimation) below the forecast of 1.5% and in 2013 projected growth will be between 1% to 3%. The weakness in Singapore growth mainly due to the manufacturing sector in which the weakness in US and Europe impacted it. The very open economy model of Singapore will continue to face headwind and slow growth in 2013 from drag by manufacturing sector if US and Europe could not rebound strongly. This is the reason why Singapore Government should co-operate with ASEAN nations to create the ASEAN consumer based region in which through consumer and services activities among ASEAN could potentially provide a cushion to ASEAN economy against the external shock from relying in export activities. China has more than 1 billion in population and it has the size to create its own consumer market whereas the combine population of ASEAN is about half of China and should be enough to create a secondary consumer market.
2012 has seen property and REIT sectors being the strongest performer in the stock markets and potentially that could roll over to 2013. However, the upside might not be comparable to that in 2012. The rising property prices could potentially lead to more curbing by Singapore Government in 2013. The price appreciation of S-Reits has rendered their dividend yield to an average 5.5%. However, with global low interest rate environment and Singapore inflation still on the high, investors would still be attracted to putting money into S-Reit to get the yield return to hedge against inflation (after all leaving the money in saving bank, getting peanut interest merely destroy the value of the money). As such, investors thinking of investing for dividend yield can still consider selectively on the S-Reits but for those looking for capital appreciation, do not have high expectation. Shipping and aviation sectors were the laggard and weakest in 2012. Thing might change in 2013 should global economies do a strong rebound and those could potentially be the biggest gainer for 2013. Offshore/Marine sector has been very robust mainly due to the rising crude oil prices and more oil-rig related contracts rolling in. However, investors have to take note of the profit margin from these companies even with rising order books. Strengthening in SGD (weakness in USD) and rising cost (labor, admin and logistic expenses) could just erode into the profit margin. Hence, getting more orders doesn't mean good sign for the companies. Commodity sector has been had a bear market in 2011 when global inflation was peaked. Sign of rebounding is there but with Central Bankers (especially in the East) are keeping a close eye on inflation to ensure it will not spike up again, might still be having a muted performance in 2013. Finance sector probably would be another neutral performer in 2013. To the West of the globe is full of debt while to the East is on surplus, nett off either we have 0 or still slight deficit globally though.
Since 2009 till now, global economy able to rebound from the 2008 crisis was mainly due to excessive liquidity ie printing money. Like the Chinese saying 水能載舟亦能覆舟 (water can transport a boat but also can capsize it), the excessive monies can stimulate economic growth but also cause rising inflation which eventually will be the cause of economy downturn. Bond and Tech bubbles are the other possible trigger that could sink the global economy into recession too. With all these threats, there is strong reason to believe stock markets are having the last leg of bull market now, still maintain cautiously optimistic, value/fundamental investing has to be selective, must know the downside risk and it is a trader market.
From value/fundamental investing perspective, prices ain't cheap, any investing has to be extremely selective and aware of the potential downside risk of global economy can go into recession next.
For trader or short to mid-term investor, 2013 could be your year with the last leg of bull market. Remember also to maintain strict cut loss policy if not when the music stops, you will not be the one still standing and not having a seat.
Stocks trading at deeply discounted NAV with strong cash flow (Cash in Hand per share) and most important of all a business model that is not complicated would be the one that could bring you the biggest return for the year.
