Could Markets Fly In 2016?

2015 was a difficult year for not only investors in South East Asia but for investors all around the globe. The Straits Times Index (SGX: ^STI) was down 14%; the Jakarta Composite Index lost 12%, while the Kuala Lumpur Composite Index fell 4%.

In Asia, the Hang Seng Index slipped 7% but the Nikkei 225 was only one of a handful of markets that bucked the trend – it ended the year up 9%. In Europe the FTSE 100 Index slid 4% and in America, the Dow Jones Industrial Index slipped 1%.

A bag of spam

It has not been a great year for equity investors, as concerns over falling oil price, worries over China’s economic slowdown, mixed signals about the effectiveness of Japan’s Abenomics and the anticipation of a rise in US interest rates hit many markets around the globe.

It was not an easy year to make money from shares. Ezion Holdings (SGX: 5ME) fell 45% and Ezra Holdings (SGX: 5DN) lost 80% of its value.

Given the events of 2015, investors are understandably cautious about 2016 too.

But with oil prices bumping along the bottom and China’s Herculean efforts to manage a difficult economic transition, things could be at a turning point for global markets.

At the cusp

Additionally, with America’s decision to raise interest rates for the first time in nearly a decade now out of the way, we could be on the cusp witnessing something quite exciting for equity markets.

But it was the US Federal Reserve’s indecision over interest rates that probably caused the most concern for global investors.

Investors don’t mind news, regardless of whether it is good or bad. They can cope with that. But they are uncomfortable with uncertainty, which is precisely what the Federal Reserve caused by dithering over interest rates for too long.

That said, the debate over interest rates is now over. Janet Yellen, the chair of the Federal Reserve has deemed that the US economy is able to cope with higher interest rates.

It’s fixed

By and large, the US financial system, and in particular its banks, have been fixed. US banks are now reckoned to be strong enough to handle another crisis, if one should happen.

Apart from the banks, the US economy, as a whole, is also showing signs of strength. Unemployment, which now stands at 5%, has fallen to below its long-term average of 5.8%. Inflation has picked up gradually too.

However, that has much to do with the disproportionately heavy weighting of energy in the US consumer basket. It has kept a lid on inflation. But the lid could be quickly blown off, if oil prices should recover.

A thorny issue

Oil, which has been another thorn in the side of the market, has added to fears that the commodity slump could deflate prices. The deflationary pressures caused by low oil prices can act like a double-edged sword.

On the one hand, it could dampen company profits and workers’ wages. After all, it is not easy to raise prices or wages when inflation is almost non-existent.

Low oil prices could also delay projects associated with oil exploration. A number of these major projects have already been shelved, mothballed or jettisoned entirely. Consequently, Keppel Corporation (SGX: BN4) fell 26% and Sembcorp Marine (SGX: S51) gave up 46%.

But low oil prices can be good news for consumers and also for countries that are net importers of energy. In the US, gasoline prices are now within a whisker of their lowest mark of US$2 a gallon since 2009. In the UK, petrol prices have fallen to below £1 a litre, for the first time in five years, much to the delight of motorists.

Transfer of money

The cut in energy costs, whilst troubling for some, has effectively transferred money from energy producers to consumers. It is estimated that the transfer could be worth around US$1.5 trillion a year.

The seismic event, whilst it might only be short lived, is effectively a tax-cut for every person. It increases our disposal income almost instantaneously.

Disposable income is something that China is banking on to drive a structural reform of its economy. Unquestionably China’s transition from a fast-growing, export-led economy to a slower-growing, consumer-led society has been painful.

Noisy neighbours

It has disrupted many neighbouring economies that have depended on China’s insatiable demand for commodities and raw materials. But China’s slowdown means it now needs fewer of those things dug from the ground and many things that grow on trees.

For instance, China’s reduced demand for iron ore and coal has hurt mining companies from Australia to Brazil. It hasn’t done a whole lot of good for the shipping industry, either. COSCO Corporation (SGX: F83) sank 18%, while Yangzijiang Shipbuilding (Holdings) (SGX: BS6) dropped 8%.

But China’s transition also opens up a wealth of opportunities for those companies that can recognise and appreciate the demands of its new consumers. That presents an exciting prospect for the many consumer-focussed businesses around the world.

So, as one door closes, another opens, in much the same way that as one stock-market year ends another one begins. Last year, Hongkong Land (SGX: H78) delivered a total return of 6%; Mapletree Industrial Trust (SGX: ME8U) and Ascendas Real Estate Investment Trust (SGX:  A17U) returned 9% and 3%, respectively.

Consequently, it is important not to be too negative. There are many companies that could do well in not just 2016 but in the many years that follow. You just have to stay calm and look for them.

A version of this article first appeared in the Straits Times.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.