Ben Bernanke, the former Fed chairman, says his personal investment portfolio is quite diversified. He advised investors against winding up all their positions when the market is very volatile or when the mood is overly pessimistic. If they do so, the investors might regret for the rest of their lives that they may have dumped shares at the bottom, he said.
In other comments, Bernanke noted that the US dollar index surged over 100 last year, and that it has already priced in future rate hikes.
The actual tightening pace may, however, lag market expectations given the challenges in emerging economies, particularly China.
Commodity prices have fallen sharply, but they could witness a rebound if the US dollar weakens.
Overall, I believe five factors will dominate the market this year.
1. US rate hike
The market has long expected the US tightening, which has pushed up the US dollar for some time. The dollar strength has already reflected most of that expectation. The greenback may not post further rapid rally, according to Bernanke. Whether the unit can keep rising would really depend on the pace of US rate hikes and the economic conditions in America.
2. Strong dollar
Dollar strength is set to hurt emerging markets and oil price, and both have already been suffering.
3. Oil price to fall further
Oil producing nations have to sell oil to cover fiscal deficits. But a supply glut has dragged down prices even lower. In this situation, oil consumers like China, India, Japan, Europe have the upper hand. Global equity markets and some emerging markets would bottom out when oil price starts to stabilize. Emerging nations which are manufacturers and exporters to developed nations are less affected by the slumping oil price, while most resource exporters have been badly hurt.
4. Yuan depreciation
There are onshore and offshore renminbi markets. It’s much better than what we’ve seen in 1998. There is around 2 trillion yuan in offshore market, and most Chinese companies have more yuan-denominated debt. Hence, the rising dollar will have limited impact.
Also, the onshore market has maintained a low rate, which would protect the economy.
5. Emerging market turmoil
There are only China and India still standing in the “BRICS”. China is the largest among the emerging nations. The emerging markets and oil price are likely to bottom out when the most powerful one is tumbling to the bottom.
The focus should be placed on two issues: when the oil price will bottom out, and when China’s financial market will come out of woods.
Beijing has imposed heavy restrictions in relation to A-shares. That is resulting in the Hong Kong market becoming the main battlefield. Hong Kong has rule of law, currency peg with US dollar, and free capital flow. Despite this, the market has seen a surge in volatility. It will provide good opportunities for hedge funds.
I believe hedge funds can utilize low interest rates and gloomy macro outlook and stir up the financial markets as they did in 1998. However, both investors and government are more mature and experienced now in the wake of the 1997 Asian financial crisis.
This article appeared in the Hong Kong Economic Journal on Jan. 21.
Translation by Julie Zhu
[Chinese version 中文版]
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