19 January 2019
The US dollar staged a strong rally after the US election, pushing the dollar index to a multi-year high. Photo: Reuters
The US dollar staged a strong rally after the US election, pushing the dollar index to a multi-year high. Photo: Reuters

A review of 2016 forecasts

I made 10 forecasts for major trends in the financial market in 2016, let’s take a look at how accurate these are.

1. Strong dollar (right). After hovering in the range of 94 to 98 most of the time, the US dollar index spiked after the US election amid expectations of tax cuts and fiscal stimulus under Donald Trump’s incoming administration.

2. Commodity prices to remain under pressure (half right). Various raw materials and commodities extended declines at the beginning of the year but soon bottomed out by the end of the first quarter.

3. Global economic growth remains subdued (half right). The global economy appeared to be sluggish until the first half of the year. US growth eased to 1.6 percent in first quarter and 1.3 percent in second quarter from 1.9 percent in late 2015. PMI readings of several major economies also tumbled during first two quarters. However, these indicators began to turn upward again.

4. Global inflation falls while deflationary risk emerges (wrong). Deflation risk actually eased last year.

5. Emerging markets might witness another financial crisis (half right). Financial turmoil in emerging markets came to an end between January and February this year as reflected by the MSCI emerging market index bottoming out in January. In fact, large amounts of capital actually flowed into emerging markets after the Brexit vote. Nonetheless, investors began to withdraw money from emerging markets again after the US election. JP Morgan Emerging Markets Currency Index and JPMorgan Asia Dollar Index (ADXY) both hit renewed lows this year, hinting at the risk of another round of emerging market turmoil.

6. Chinese yuan to weaken further and Beijing continues with monetary easing (right). The Chinese central bank cut the reserve requirement ratio in the first quarter. Social aggregate financing and new loans also posted rapid growth. Meanwhile, the yuan has witnessed increasing pressure since the second quarter and accelerated its decline after the currency was included in the SDR basket in October. Offshore yuan dropped to a low of 6.9772 on Dec. 28, very close to the downside target of 7-7.40.

7. The Federal Reserve might launch QE4 (wrong). Although Federal Reserve chair Janet Yellen has postponed hiking interest rates till earlier this month, another round of quantitative easing didn’t happen.

8. Hong Kong housing prices to fall by 10 to 15 percent (right). The Centa-city Leading Index fell off the peak of 146.92 points in September last year to a low of 127.46 points on March 27, 2016, a decline of 13.2 percent.

9. The US market may suffer a slump of over 15 percent, but stage another rally in the second half (right). The S&P 500 index did slump around 13 percent early this year amid the emerging markets turmoil. Nasdaq tumbled 17.5 percent at one point. US equities than posted a rally after the US election.

10. The Hang Seng Index to tumble below 19,000 points and test 18,400 points (right). The index dropped to a low of 18,278.8 points on Feb. 12, matching the forecast.

This article appeared in the Hong Kong Economic Journal on Dec. 28

Translation by Alan Lee

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist

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