21 March 2019
A man refuels a vehicle next to a pricing quotation board at a petrol station in Tokyo

Divergence to be main theme in financial markets

There are fears that the A-share market rally in China is irrational and that the equity gains fail to reflect economic fundamentals.

If Beijing’s measures fail to bolster economic growth, a hard-landing could occur. That would jeopardize global markets and create deflation pressure.

That said, several economies are benefiting from lower oil prices. They include US, Japan and European nations, as well as some Asian countries including China.

Asian economies will see their annual growth get boosted by 0.1 to 0.45 percentage points if oil price drops 10 percent.

And their inflation will slip by 0.1 to 0.45 percentage points, while their balance sheets will improve by 0.2 to 0.6 percentage points.

Japan will be able to reduce its trade deficit as oil makes up 18 percent of its total imports and 3.3 percent of its GDP.

China will be able to save as much as US$117.2 billion or half its oil imports spending if oil price halves. Last year, the nation paid a total of US$234.4 billion for oil imports.

Also, lower oil price will stimulate US consumption as gasoline and heating expenses account for 18 percent of US households on average.

Therefore, divergence will dominate financial markets in the future.

In 2015, companies with abundant cash flow, high dividend payout and stock buyback will benefit from the overall market environment of low interest rates, low inflation and low growth.

Inflation rates of US and China will ease to 1 percent, while lower oil prices may even give rise to deflation in Europe and Japan. As a result, excessive market liquidity will flow to bonds. The fund flow has already pushed the yield of 10-year bonds in Germany and Japan to 0.46 percent and 0.29 percent respectively.

By contrast, US 10-year yield reaches 1.95 percent, a fairly attractive level for investors who fear deflation risks.

US government bonds will be the top choices for many investors although the 10-year yield may dip further to below 2 percent or even back to 1.5 percent driven by massive capital inflow and frequent interest rate arbitrage trading. Investors should take the opportunity to cash out in the second quarter or within the first half.

The Chinese government and the Hong Kong Monetary Authority, among the big buyers of US government bonds, should take profit on some of their holdings at high level.

This article appeared in the Hong Kong Economic Journal on Jan. 8

Translation by Julie Zhu

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The slide in oil prices will help importers such as Japan, but the markets and the global economy will have other factors to contend with. Photo: Reuters

Founder and Managing Director of Pegasus Fund Managers Ltd.

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