Sunday 2 November 2008
Market Mood
In the past couple of weeks, the stock market has acted like a bottomless pit. In the unprecedented financial crisis, it has sunk in an atmosphere of panic. Neither fundamental nor technical analysis works in such an environment, and all the so-called support levels have been no help either.
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Market Mood
Paul Pong
2 November 2008
In the past couple of weeks, the stock market has acted like a bottomless pit. In the unprecedented financial crisis, it has sunk in an atmosphere of panic. Neither fundamental nor technical analysis works in such an environment, and all the so-called support levels have been no help either.
The Hang Seng Index (HSI) has dropped 55 per cent below the 250-day moving average. From its peak last October, the HSI has already fallen 56 per cent - a fall steeper than in the 1997 Asian financial crisis. Investors who bought stocks when the HSI was above 30,000 points - in the bull-market frenzy last year - have lost a lot. Even those who entered the market when the index dropped to the 20,000 level have lost around half of their money. Individual sectors such as mainland property developers, resources and shipping have tumbled by around 90 per cent.
Hammered by the financial crisis, prices of many types of assets have dropped substantially. With the bursting of the US housing bubble, first mortgage-backed securities and credit derivatives plunged. The crisis then spread into the global stock and bond markets. Now even commodities and currencies don’t seem immune from the crisis, the only exceptions being the greenback and the Japanese yen.
The Japanese currency soared to nearly 90 yen to the US dollar because of the unwinding of carry trade positions, with investors transferring most of their capital to risk-free assets. However, risk is relative. Holding cash in the long term will see it depreciate because of inflation, and is thus a loss in real terms. So money, ultimately, will flow into “risky” assets again.
The Federal Reserve has cut the Fed funds target rate to 1 per cent, as the market expected. Governments and central banks around the world did not take action in time to solve the crisis, so the situation worsened. If they can act boldly in the coming months, the global stock market can rebound. In fact, the HSI has rebounded more than 30 per cent from the trough.
Readers who closely monitored the market know the US stock markets hit bottom on October 10, while the emerging markets continued to sink. US stocks will lead other markets in this rebound. In the short term, the HSI may rebound to the 15,000 level. However, mainland stock markets are still troubled by the problem of non-floating shares, and the Shanghai Composite Index may continue to fluctuate.
Investors may worry about the Chinese economy itself. According to the economic data released by the National Bureau of Statistics on October 20, economic growth in the first three quarters of this year was 9.9 per cent - a single-digit figure for the first time in five years.
The economic slowdown is mainly linked to the decline in exports and investment growth. External demand has been weakened by the global downturn, hence foreign trade has continued to decline. The yuan has appreciated 20 per cent since 2005. The rapid appreciation of the yuan has hurt exports badly. In the past year, the monetary policy has been changed from tight to loose. And the People’s Bank of China has lowered interest rates and the deposit reserve ratio three times in a month after the US financial crisis spread into emerging markets. But the relaxation may not be effective to boost exports, as consumer confidence in major markets abroad is falling.
Domestic demand is falling as well. A report from China International Capital Corp, the mainland’s sovereign wealth fund, pointed out that investment growth in real estate dropped sharply. In August, the growth rate went down to 18.9 per cent, the lowest in three years. The figure was expected to keep falling in September.
Slowing exports have led to factory closures. Also as a result of slowing investment, the job market has taken a hit. Property and stock setbacks have also led to substantial wealth shrinkage. Negative interest rates have dented real purchasing power. Along with the declining level of real income, actual consumption growth will also slow down.
However, I am still optimistic about the Chinese economy. One of the reasons is that the mainland government has taken precautions for rainy days. With the huge foreign exchange reserve and past fiscal surplus, it is on solid financial ground. Therefore, it is capable of enacting fiscal policies such as tax cuts and higher infrastructure spending to support economic growth. As spending has increased to stimulate the economy, there was a deficit of 73.2 billion yuan in September. The deficit for the whole of this year is expected to account for only 0.3-0.5 per cent of the GDP. The mainland is equipped to meet the worsening financial situation. But it needs to take further measures to stimulate domestic demand.
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