24 October 2016
Despite remarkable volatility, stocks on the Shenzhen Stock Exchange surged 64 percent in 2015. Photo: Arup
Despite remarkable volatility, stocks on the Shenzhen Stock Exchange surged 64 percent in 2015. Photo: Arup

Five more major themes of the financial markets in 2015

Last week, I shared with readers the first five of the top 10 major themes in the financial markets in 2015.

Let me now talk about the remaining five.

Sixth, China’s stock market outperformed despite huge volatility this year.

The Shenzhen market surged 64 percent, while the Shanghai market rose 10 percent.

By contrast, the Hong Kong market dropped 7 percent, and the Hang Seng China Enterprises Index tumbled 18 percent this year.

That reflects the divergent views on Chinese companies between foreign investors and individual mainland investors.

In fact, there are many investment opportunities in China.

For example, one of my friends raised 1 million yuan (US$150,000) in 2006 and established a health check-up firm, which was listed on the board for small and medium-sized enterprises this June with a market cap of 100 million yuan.

The global economic recovery might take 10 to 15 years after the 2008 financial crisis.

Investors in developed markets will become more cautious and conservative.

By contrast, China’s equity market has much shorter cycles, and investors can recoup their losses very soon.

So, they can find more and faster opportunities in the China market, albeit with higher risk, because of its underdeveloped legal system.

Seventh, Russia’s economy has been dragged down by low oil prices.

The Russian government expects the oil price to hover in the range of US$25-US$30 per barrel next year.

As result, Russia might strengthen its economic ties with China in future.

Eighth, financial markets might suffer from presidential elections in the United States and Taiwan.

Hillary Clinton has stepped up her attack on drug prices, which has halved the rallies in the Biotechnology Index and the Healthcare Index this year.

If she wins the election next year, there might be a sell-off of related stocks. That would be a good buying opportunity for medium- and long-term investors.

Also, the Taiwan market dropped 11 percent because of the upcoming presidential election.

If Tsai Ing-wen, the front-running opposition candidate, becomes president, more capital will flow out of Taiwan, which will weigh on the equity market in the short term.

Ninth, the eurozone might extend quantitative easing and the negative interest rate.

The monetary easing in the region has lagged behind market expectations.

Terrorist attacks and the influx of refugees will create huge shocks for the region’s economy and politics.

However, the euro may also touch bottom, as the market already priced in the US Federal Reserve’s liftoff.

I believe global investors will switch to overweighting European equities and underweighting US stocks next year.

Tenth, there has been a boom in global mergers and acquisitions.

Global M&A deals hit a record of US$5 trillion this year, amid low interest rates and abundant market liquidity.

Meanwhile, there were 111 company defaults this year, the most since 2009. Sixty percent of these defaults occurred in the US.

The company default ratio in the US may rise to 3.3 percent in September 2016 from 2.5 percent a year earlier. Most of the defaults took place in the oil and gas sector.

Gold and precious metals funds have performed the worst over the last three to five years.

Inflation remains at subdued levels despite economic recovery in developed markets.

And the market’s expectation of the Fed liftoff has already dragged down the gold price.

Meanwhile, property and biotechnology funds have fared the best over the last five years.

The latter have outperformed in the last three years, thanks to aging populations and technological advances.

Over the past year, funds with exposure to China, Europe, South Korea and Japan posted good returns.

The market will not be that bad in 2016, as economic recovery is well on track and China’s reforms are moving forward.

This article appeared in the Hong Kong Economic Journal on Dec. 31.

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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