What you need to know about economy in September 2016

So here we are at statistically the worst performing month of the stock market in the calendar year.

Investors have come back from the summer vacation to face the same major questions about the global economy that they faced before the holiday season started. Will the Fed raise rates one more time this year? Will China see growth rates improve? How will the UK proceed with Brexit?

The macro environment is continuing to dominate stock markets, including Singapore’s. The recent corporate results season in Singapore was largely disappointing, and provided little incentive to investors.

About a third of all listed companies reported red ink. Although crude has staged a significant rally this year, prices are still way below recent highs. This means the struggling offshore and marine industry is in a particularly parlous state, and consequently, the near term outlook for the Singapore banks is fairly bleak.

But not all hope is lost. The good news for Singapore is that the US economy seems to be sustaining something close to the 2.0% average expansion rate of the previous five years. Even if the Fed were to raise rates before year-end, the pace is so measured that it is highly unlikely to destabilize US or world growth.

And as for the impact on global stock markets – just as a correction or worse is foreseeable, equally a Fed rate hike could actually be seen as positive, by removing some of the uncertainty, and as part of the ‘normalization’ of the rate cycle.

In the rest of the world, Japan is limping along, and Europe is performing a bit better, although growth remains tepid. China is being helped by policy stimulus, albeit of a stop-start nature.

So the export outlook for Singapore could see improvement, but the timing is hard to gage, and the upward trajectory would probably not be sharp. At least the Brexit fall-out looks like it will be a slow-motion rather than high speed train wreck – therefore plenty of damage, but not immediate!

Of greatest concern this month is probably the whole global monetary policy outlook.

There are some respected voices, of whom Mohamed El-Erian is probably the most illustrious, suggesting that markets will attempt ‘to force central banks into a round of supportive liquidity injections and an even more protracted period of ultra-low interest rates.’

His concern, and that of others, is that fundamentals are responding in an ever weaker fashion, and stock and bond markets simply cannot go on forever ignoring this.

We may in fact already be seeing signs that central bank pumping of vast amounts of liquidity is set – if not to end – then at least to slow. Negative interest rates do not appear to be having the desired affect, and there may be a change of course on the cards.

If at the same time, US corporate buybacks and dividend payout ratios are set to fall back as a result, this change in direction too, could not be seen as anything but a negative.

For those of sunnier dispositions, it would make sense to at least hold more blue chips and less risky stocks. Nervous nellies might want a bit more cash to hand – as well as the tin hat!

(By Celia Farnon)

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