24 October 2016
Chinese stocks hold a lot of promise next year, but they can also be very volatile. Photo: Reuters
Chinese stocks hold a lot of promise next year, but they can also be very volatile. Photo: Reuters

How to deal with market challenges in 2016

December is usually a quiet period in the stock market. However, this year the situation has been different. The Hang Seng Index recorded a 9-day consecutive slide recently, the first time we’ve seen that in 30 years.

The nervousness was more due to the issues surrounding a Federal Reserve rate hike rather than the city’s economic fundamentals.

I believe global monetary environment overall will continue to be easy in coming year, providing a safety net for investors.

Investors may be unhappy with the markets in 2015, especially those investing in the mainland and the Hong Kong stocks. But investment is always about the outlook, rather than the past. There’s a saying: the past doesn’t represent the future. I hope 2016 will have a different and better direction.

Investment is closely linked to the economy, although not simultaneously. It has been said that the stock market is a leading indicator for the economy nine or twelve months down the road. We have to wait now to verify the assumption.

However, what is certain is that not many investors are optimistic about the coming situation, due to concerns about China’s slowdown and doubts whether the US economy can cushion the impact from the interest rate rise.

The US economy has recorded years of growth after the financial crisis in 2008. The present cycle is already longer than historical average. Some investors are worrying about whether the growth will come to an end, or if another contraction cycle is emerging.

As per my judgment, based on various indicators, I expect the uptrend to continue for at least one or two years.

Global equity markets put up a strong performance in the early part of 2015. Unfortunately, it failed to last to the end of the year.

Although China’s A-share market experienced a crash, it doesn’t change my optimism about the prospects for the overall global equity market.

A key factor for making investment decisions for 2016 is to focus on the earnings outlook. The eurozone and Japan are expected to see good performance because corporates are likely to have high-single-digit or low-double-digit profit growth in the year, benefiting from their weak currencies and increasing domestic consumption.

Extremely easy monetary policies will support the valuation of stocks in both the regions.

The situation in the US market may be more complex. I expect the strong dollar and weak oil price to start turning around by the end of 2016. Corporates’ profitability is likely to increase but it will be lower than the market consensus of 8 percent.

With moderate tightening of the Fed’s monetary policy, revaluation of stock prices in the US is unlikely to happen, nor a large boost in the overall market. I project only a moderate rise for that market in 2016.

As for Asia, China’s economic structural transformation efforts will boost profitability of the service sector in the region. I believe a revamp of the MSCI China Index to include the “new economy” stocks will be a catalyst for the market.

Within Asia, China is still the one with most potential and highest volatility.

This article appeared in the Hong Kong Economic Journal on Dec. 17.

Translation by Myssie You

[Chinese version中文版]

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Investment Strategy Head in Northeast Asia at Standard Chartered (H.K.)

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