In previous articles, I had outlined my predictions for firmer commodity prices, stronger global growth, further gains of the US dollar and continued rise in bond yields. This week, I will share my outlook on renminbi, emerging markets, US stocks, Hong Kong equities and the property market.
As the greenback surges, mainland residents and corporates have been racing to take their money offshore to avoid further depreciation of the renminbi. It is estimated that over US$900 billion left the country over the last 12 months.
Such capital flight is expected to continue next year, as the People’s Bank of China may have to allow the yuan to weaken further.
Based on how much the Asian currencies have declined versus the dollar and the estimation of how much they could weaken further next year, the Chinese currency could drop to the 7.6 level against the US unit.
As the dollar strengthens, numerous emerging economies will face mounting debt repayment pressure.
Corporate or government borrowers from emerging countries have to repay over US$14 trillion of debt next year, of which about 40 percent is dollar-denominated.
The debt repayment challenge may prompt more funds to flee emerging markets, triggering major turbulence in the worst case.
Coming to real estate, Hong Kong government unveiled further tightening measures in November to cool off the red-hot property market.
The new policy will probably push buyers away from the secondary market and into primary market, rather than hitting demand in any substantial way.
But if US interest rates go up persistently, and Hong Kong dollar interest rates tag along, the housing market is likely to stall, and could eventually, perhaps in 2018-2019, suffer a serious setback.
Now, with regard to stock market prospects, since over half of listed companies in Hong Kong generate more than 50 percent of their revenue from mainland China, a weaker renminbi will translate into weaker earnings.
Against such backdrop, the Hang Seng Index could weaken to 18,800 points next year. The index will face resistance at around the 24,400 level.
By contrast, US stocks may continue to rally, benefiting from a stronger economy and fund inflows from investors switching out of the bond market.
A strong greenback will also lure more overseas capital into US equities.
Based on the average cycle adjusted price earnings ratio when the market peaked out in 1929 and 2000, the Dow Jones Industrial Average could rise to as high as 27,000 points next year, 35 percent above the current level.
Likewise, the target for the S&P 500 index would be 3,060.
This article appeared in the Hong Kong Economic Journal on Dec. 22
Translation by Julie Zhu
[Chinese version 中文版]
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