23 October 2018
Oil prices could stage a modest recovery, but the near-term outlook for the equity markets remains bleak. Photo: Bloomberg
Oil prices could stage a modest recovery, but the near-term outlook for the equity markets remains bleak. Photo: Bloomberg

Why equities could suffer more pain

What Hong Kong investors care the most about are four things: US dollar, oil price, gold price, and the stock markets in mainland China and Hong Kong.

In the year of the Monkey, I believe the US dollar will continue leading the trend of other currencies, while oil price may rebound from the steep decline.

Meanwhile, gold, or even bitcoin, may increasingly find favor as a safe haven in the first half amid market turmoil and increasing geopolitical risks.

As for the mainland and Hong Kong stock markets, it remains to be seen whether they will benefit from any potential policy moves by Beijing such as tax cuts.

Markets now expect the United States to slow its pace of interest rate hikes due to the uncertain global macro environment.

While a weaker dollar will ease the devaluation pressure on other currencies, especially the renminbi, and could offer some relief to world stock markets, a strong dollar may still be a big trend for the coming years.


It’s because there’s no reason for the renminbi, yen and euro to appreciate. China, Japan and the Eurozone are all trying to save their economies by devaluating their currencies (the only difference is the pace of devaluation).

However, Fed officials in the US are determined to overcome an addiction to quantitative easing. The decision to begin tightening monetary policy mainly stems from America’s own interest. So there’s no doubt the Fed will continue to normalize rates and that the dollar will remain strong.

In terms of oil price, OPEC countries are hesitating to make decisions on oil output targets, although US Energy Information Administration (EIA) and International Energy Agency (IEA) have both said that oil oversupply will last for some more time.

The IEA reckons that OPEC members should lower supply to 300,000 barrels in the second half of the year from 2 million barrels in the first quarter. Meanwhile, as Iran is willing to sit down at the negotiation table and non-OPEC members are trying to reach an oil output agreement, oil price will definitely see a strong rebound within this year.

US$26 to US$28 is a key support level. While in the short term the price will go up and down, in the longer term an uptrend is inevitable.

Meanwhile, gold and bitcoin are likely to outperform the market.

Although gold price is negatively correlated to the dollar, the instability in the financial markets and increasing geopolitical risks in the Middle East has lead to a strong uptrend in gold price in recent months. The precious metal has reached US$1,256 per ounce, creating a technical bull market.

As for bitcoin, it has become an alternative risk aversion asset in the past year. Price of one unit of bitcoin has climbed to US$375 from US$216 from a year ago, up 73.6 percent.

Smart money will likely continue rushing to buy gold and bitcoin in the first half as all other major investment products are expected to yield low returns.

Hong Kong and mainland stock markets may not recover until the second half of 2016. The Hang Seng Index has fallen below a low point of 18,534 recorded on January 21. Deeper correction is likely to come within the year.

I don’t rule out the possibility of the benchmark falling below the 16,170 points level, which was the bottom seen in 2011 during the European debt crisis.

If we draw a line linking the low points of HSI throughout the decades (the Asian financial crisis bottom of 6,544, seen in 1998; the SARS bottom of 8,331, seen in 2003; and the global financial storm bottom of 10,676, recorded in 2008), the worst situation for this round of correction for the index could be 13,649.

As for whether the worst-case scenario can be avoided, a lot will depend on China taking effective steps to cut taxes and attract more foreign capital.

This article appeared in the Hong Kong Economic Journal on Feb. 11.

Translation by Myssie You

[Chinese version 中文版]

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HKEJ columnist

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