Date
17 December 2017
Beijing is keen to steer its economy to a consumption-driven model from an investment-driven one. The progress of its reform will hold a key to investor confidence. Photo: CNSA
Beijing is keen to steer its economy to a consumption-driven model from an investment-driven one. The progress of its reform will hold a key to investor confidence. Photo: CNSA

US rate hikes, China restructuring are keys to markets in 2016

Global equity markets posted a nearly 4 percent drop last year as a result of uncertainty about the timing of the US Federal Reserve’s liftoff in interest rates, slower growth in emerging economies and plunging commodity prices.

By contrast, the bond markets registered growth in 2015, bolstered by safe-haven demand.

The pace of US rate hikes and China’s economic restructuring will hold the keys to the performance of various asset classes in the new year.

The International Monetary Fund estimated global economic growth at 3.1 percent last year, compared with 3.4 percent in 2014.

Emerging markets are expected to have expanded only 4 percent, a fifth straight year of deceleration.

As a result, different equity markets had divergent performances.

The European and Japanese markets grew in nearly double-digit percentages in local currency terms last year on the back of an economic recovery and monetary easing.

The US market rose almost 2.3 percent last year, while emerging markets slumped by double-digit percentages.

Nevertheless, China’s A shares jumped 12 percent last year despite huge volatility. China was the star emerging market last year.

Global interest rates remain at subdued levels, which underpinned the bond market.

US treasury yields have yet to spike despite the Fed liftoff, and short-duration German treasuries continue to offer negative yields amid loose monetary policy in the eurozone.

The pace of US rate hikes will be closely watched by the market this year, as it will determine the price of US dollar-denominated assets and the direction of global capital flows.

In addition, whether emerging markets, led by China, will manage to restructure their growth models against weak external demand is critical for restoring market confidence.

The forward price-to-earnings ratios of European equities have already increased to 16 times, and those of Japanese equities, 17 times.

Corporate earnings growth will determine the performance of markets this year.

Also, capital inflows into the US market following the rate hike will support US dollar assets.

Beijing is keen to steer its economy to a consumption-driven model from an investment-driven one. The progress of its reform will hold a key to investor confidence.

The so-called new-economy sectors, including internet services and technology, are set to outperform old-economy sectors like raw materials.

For example, the information technology category of the MSCI China Index surged almost 20 percent last year, far exceeding the gain for other industries.

There are two catalysts for market upside in the China and Hong Kong markets.

First, low inflation will provide room for the Chinese central bank to further ease its monetary policy, which will boost the equity market.

Second, the expected inclusion of A shares in the MSCI Emerging Markets Index and the launch of Shenzhen-Hong Kong Stock Connect should also improve market sentiment.

It’s widely expected that the Fed will adopt a cautious stance in hiking rates this time, which will support the bond market.

The market expects three rate hikes in 2016, five in 2017 and three in 2018, compared with 17 increases between 2004 and 2006.

The median estimate for the target US benchmark rate at the end of this year is 1.25 percent, which means an increase of less than 1 percent within the year.

The Hong Kong dollar will move in line with the US dollar because of the currency peg.

However, the aggregate balance published by the Hong Kong Monetary Authority hit a record high of HK$420 billion (US$54.1 billion) in November, which reflects abundant liquidity in the banking sector.

The city might lag behind the US in hiking interest rates.

Local inflation remained at 2.4 percent in November, and investors might fail to protect their wealth if the rise in interest rates is limited.

Investors could consider short-maturity bonds or certificates of deposit, which are less sensitive to rate increases.

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

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]j.com

JZ/DY/FL

Head of wealth development for Hong Kong, HSBC

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