The year of the Fire Rooster: a phoenix or fried chicken?

President Donald Trump seems to be a man of his word. Since officially taking office on 20 January, he has signed the executive orders to withdraw the US from the Trans-Pacific Partnership (TPP) and build the wall along the Mexican border. He does not believe in free trade and wants a ‘fair trade’ for his country, which means a trade conflict with China and the rest of the world, is about to happen.

Despite the dimmer outlook for global trade as a result of ‘America First’ policies, global stock markets have done surprisingly well in January. The Dow Jones index has risen 1.7%, crossing the 20,000 level for the first time. The Straits Times Index (STI) has risen 6.4%, well above the psychologically important 3,000 level.

Between economics and politics, while the latter could certainly affect the former, ultimately, it’s the economics that matter to financial markets. The reality is the global macroeconomic background has been gradually improving.

Contrary to initial fears of a ‘hard landing’, China’s economy has been able to maintain stability, even growing at a faster-than-expected 6.8% in Q4 and 6.7% for 2016. The US economy is clearly stronger, so much so that the Fed is now projecting to raise interest rates three times instead of twice in 2017.

In Singapore, while the job market is under strain, the factory output in December expanded at the fastest pace in 5 years, jumping 21.3% year-on-year, which bodes well for the economy.   

Source: Thinkstock/Getty Images

Another important indicator of a better global macroeconomic picture is the significant recovery in commodity prices in the past year. Oil (WTI) price is currently hovering above US$53/barrel, 70% higher than its lowest price level of about US$30/barrel. Crude palm oil price has risen some 40% from its lowest level to above RM3,000/ton, while iron ore price has nearly doubled to about US$80/ton. There seems now to be a better balance between supply and demand, a more sustainable win-win situation for both the producers and consumers.  

In the years following the Global Financial Crisis in 2008, the global financial markets have never really had a moment of peace, beset with one fear after another. The European debt crisis came into the picture in 2010 and lasted till about 2012. The major concern back then was a bankrupt Greece leaving and triggering the break-up of the Eurozone. Then in 2013, came the ‘taper tantrum’, when financial markets suddenly became worried about when the Fed would start to withdraw its stimulus measures.

In 2014, fears of a slowdown and hard landing of China’s economy started to gain momentum, followed by the devaluation of the Yuan and the country’s stock indices plunging over 40% in 2015. Commodity prices also came down sharply throughout 2015 till the first quarter of the following year. In June 2016, the United Kingdom voted to leave the European Union in a referendum, causing the Pound Sterling to plunge.

There were so many frightening events, one after another, in the last seven years. There were good reasons for money to be hiding – in the safety of cash and government bonds, with very low or even negative yields. However now, with rising interest rates, the safety of bonds becomes questionable, especially when you can get so much higher (dividend) yield investing in stocks.

For example, in the local context, why would money be parked in 10-year government bonds with 2% coupon, when it can earn at least 5% distribution yield from REITs? At some point, money would come out of hiding and the much talked-about ‘great rotation’ from bonds into equities would happen.             

Finally, there is a great deal of nervousness surrounding President Donald Trump’s ‘America First’ policies. He wants to make America great again. He wants the American economy to grow 4%. It’s an ambitious task that requires a radical approach, even if it means challenging conventional economic wisdom of free trade.

Source: Thinkstock/Getty Images

He wants a ‘fair trade’, a better deal for this country, which is a legitimate goal for any country to have and not necessarily detrimental to the global economy. Give the man a chance because he is taking a big gamble himself. If he fails to deliver on his big promises, he will be booted out in the next election.

In mean time, the global economy need not be at the mercy of America’s whims and fancy for it’s not the only economic powerhouse in the world. Among others, there are Japan, China, India, Australia, UK, ASEAN and the EU who still believe in free trade. As long as America doesn’t provoke a diplomatic stand-off or threaten an armed conflict with anyone, whatever protectionist policies it chooses to implement will not be fatal to the global economy.  

The phoenix is known as a mythological bird associated with fire or the sun that is cyclically reborn from the ashes of its predecessor. In the year of the fire rooster, the Singapore stock market could be like the phoenix rising from the ashes, but it would be a real pity if it turns out to be a fried chicken instead. 

Source: Pixabay

(By Sasono Adhiguna)

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