We all know that something will happen in 2016. Some things already have, which could set the scene for the next 12 months and beyond. These include the first interest-rate hike in the US for almost a decade and a constant flow of news that China’s economy is growing less quickly than it has done in previous years. There have also been swathes of mergers and acquisitions that have taken place this year. The corporate activities have been driven, in part, by the availability of cheap money that have prevailed, since the financial crisis of 2008. It has also been…
We all know that something will happen in 2016. Some things already have, which could set the scene for the next 12 months and beyond. These include the first interest-rate hike in the US for almost a decade and a constant flow of news that China’s economy is growing less quickly than it has done in previous years.
There have also been swathes of mergers and acquisitions that have taken place this year. The corporate activities have been driven, in part, by the availability of cheap money that have prevailed, since the financial crisis of 2008.
It has also been prompted by reports that the global economy is expected to deliver, at best, pedestrian growth next year. Meanwhile, the precipitous fall in crude prices has shaken up the oil and gas industries.
A hiking we will go
But it is the first rate hike by the US Federal Reserve since 2006 that will probably set the tone for 2016 and beyond. With the first increase in interest rates out of the way, the market is now asking when and how quickly interest rates could rise from here.
Opinions differ. They always do. Some reckons that US interest rates could return to their normal levels quickly, while others are predicting that the cost of borrowing could take at least a decade to return to their normal levels of around 6%.
To hope that the US Federal Reserve would reverse course and cut interest rates is, probably, wishful thinking. The US economy is recovering, employment is rising, consumer spending is strong and there are signs that underlying inflation is picking up.
Banking on a rate hike
Consequently, any further rise in interest rates to reflect America’s economic recovery could benefit banks, some of which have already passed on the first interest-rate hike to borrowers.
They have effectively increased their Net Interest Margin, which is the difference between the interest rates they charge borrowers and the rate they pay savers. It is also their main source of profits. Banks that include DBS Group Holding Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) are therefore worth following closely in 2016.
China’s economic slowdown could impact many industries in a myriad ways. The slowdown has harmed many resources-related industries that are now paying the painful price for their rapid expansion to cater to China’s once insatiable hunger for minerals.
However, the much-vaunted supercycle for minerals has come to an abrupt end, with over-indebted and under-capitalised resources companies looking for strategic options to cope with the new normal.
But it is important to remember that these are cyclical industries. The fortunes of companies such as Golden Agri-Resources Ltd (SGX: E5H) and Wilmar International Limited (SGX: F34) are closely tied to the global economy. Currently, some of these companies are valued at levels not seen for at a decade. They are worth watching too.
China slowdown has been brought about by a realisation that its break-neck growth of the past is unsustainable. The new normal for China will be growth through consumer spending, rather than economic expansion through exports and industrialisation.
The rise of China’s consumers
Consumers in the Middle Kingdom have grown in prominence, almost in tandem with their growth in disposable incomes. Over the last 40 years, the disposable income of the typical Chinese consumer has increased some 80-fold. That is equivalent to a 12% increase in wages every year for the last four decades.
The increasing purchasing power of Chinese shoppers could provide an opportunity for consumer-focussed companies that are able to market their goods and services to a progressively consumer-conscious society. There are many companies in Singapore that already have a foothold in China. These include Straco Corporation Ltd (SGX: S85) and ComfortDelGro Corporation Ltd (SGX: C52). Their progress should be closely followed too.
Thorn in the side
Finally, oil has been a thorn in the side of global investors, as Saudi Arabia engages in an all-out price war with newer oil producers. Many oil companies, which were once darlings of the stock market, have struggled in the face of unforgivingly-low oil prices.
Some may even be forced out of business, which could prompt a fall in supply, even though demand is still increasing. At some point, when the supply of crude and the demand for oil are matched, the price for the commodity should either stabilise or might even rise.
The Organisation of the Petroleum Exporting Countries (OPEC) expects oil prices to start rising next year. It also forecasts that, over the longer term, prices could rise due to higher exploration costs. With crude in the doldrums, the oil and gas sector could provide fertile hunting ground for those who are prepared to wait for the upturn.
It never pays to be too pessimistic about the stock market. Warren Buffett once said: “You pay a very high price in the stock market for a cheery consensus”. He’s right.
A version of this article first appeared in the Independent on Sunday.
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