26 October 2016
The slumping oil price could have an impact on market liquidity. Photo: Bloomberg
The slumping oil price could have an impact on market liquidity. Photo: Bloomberg

Five major themes of the financial market in 2015

In order to make accurate forecast for the new year, we should better review the 10 major themes of the financial market in 2015. In this article, I will cover the top five.

First, oil price plunged to a record low. Crude oil fell 32 percent this year, and once tumbled to as low as US$34 per barrel. It has managed to stabilize at US$36 before the Christmas holiday, as the United States posted a 2 percent GDP growth for the third quarter.

Nevertheless, the super-cycle of oil and other commodities has already ended.

China’s astonishing growth had driven up commodity prices sharply over the last decade, which benefited emerging markets and the Middle East.

The Middle East, Norway, Russia and other sovereign wealth funds had massive “petrodollars” which they invested in capital markets.

Many of these funds are now forced to withdraw their money amid the slumping oil price, which could tighten market liquidity.

This could affect less-liquid assets like real estate, hedge funds and private equity funds with poor performance, equities and bonds in emerging markets. It would be a painful process.

Second, the BRICS – the once hot emerging markets that include Brazil, Russia, India, China and South Africa – are dead as an investment destination. The term was first coined by Goldman Sachs’ former chief economist Jim O’Neill a decade ago. In 2011, South Africa was included in the group in a documentary produced by China’s CCTV.

However, Russia, Brazil and South Africa have been battered by plunging commodity prices.

Brazil, the largest economy in Latin America, has been plunged into recession, and its currency has tumbled as much as 33 percent this year. That has resulted in a sharp rise in inflation, which is expected to hit over 10 percent this year.

Its economy is likely to contract by 3.6 percent this year, the worst since 1990. The recession has led to rising public debt; the budget deficit already accounts for 9.5 percent of its GDP.

The Brazilian central bank may hike the interest rate to 14.75 percent amid currency depreciation and rising inflation. Brazil’s prospects are quite worrying in the short term.

Third, China might face hard-landing risk. Two of China’s three growth engines are problematic. Exports have suffered, as its two rivals, Germany and Japan, have sharply weakened their currencies.

The nation also faces increasing competition from other emerging markets that have devalued their currencies. By contrast, the renminbi only weakened by 4.2 percent this year, and it would lose another 4 to 5 percent next year.

Also, the nation’s capital investment is being hampered by efforts by the US and Japan to thwart its “One Belt, One Road” initiatives. China has made limited progress in exporting high-speed railway and infrastructure capacity.

Beijing has tried to boost its automobile and property sectors to stimulate domestic demand. However, the authorities focus on cutting high inventory in the property sector. If Beijing could tackle its “ghost towns”, it could ease the pressure of bad loans on local banks and reduce the debt burden of local governments.

A recovery of the housing market would prompt property developers to ramp up investment in land purchases and housing construction. If that happens, China’s GDP growth may bottom out next year.

Fourth, the US Fed liftoff has great significance. It signifies that US economic growth is on track. Most investors estimate that the US may hike interest rates by another 1 percent at the most next year. If so, it would take a long time for rates to return to their level before the financial crisis.

Apart from economic growth, oil and commodity prices are also contributing to low inflation. The latter mainly depends on the biggest buyer, China.

Fifth, India is the exception among emerging markets. Most emerging economies are grappling with falling commodity prices and rising fiscal deficits.

Investors are avoiding emerging markets amid the strong US dollar. However, India is the biggest beneficiary of plunging commodity prices, which have driven down its inflation.

A rate cut would benefit the Indian economy as well as equities and bonds.

This article appeared in the Hong Kong Economic Journal on Dec. 24.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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