Slowing world economy poses risk to stocks
With the world economy showing clear signs of deceleration, the risk that world stock markets may be peaking soon is rising.
Economic indicators reported by several countries over the past few weeks continue to show signs of slowing growth.
In the United States, the Commerce Department reported on 24 November that durable goods orders fell 0.4 percent in October. Although the University of Michigan reported on the same day that its consumer confidence index for November rose to 92.8 from 91.7 in October, a survey by ACNielsen showed that 28 percent of consumers say they have no extra money to spend.
At least third quarter growth in the US managed to hold up, chugging along at an annual rate of 3.7 percent against 3.3 percent in the second quarter. Other countries have not been so fortunate. The biggest Asian economy, Japan's, grew at an annualised rate of just 0.3 percent in the third quarter from the previous quarter, down from the 1.1 percent rate in the second quarter.
Many other Asian economies are experiencing similar slowdowns. Taiwan's economic growth slowed to 5.3 percent year-on-year in the third quarter from 7.9 percent in the second quarter. In South Korea, GDP growth eased to 4.6 percent year-on-year in the third quarter from 5.5 percent in the second; on a seasonally-adjusted quarter-on-quarter basis, growth in the third quarter was just 0.6 percent. Hong Kong's GDP rose 7.2 percent year-on-year in the third quarter after having risen 12.1 percent in the second; on a seasonally-adjusted quarter-on-quarter basis, third quarter GDP was up 1.9 percent, down from 2.6 percent growth in the second quarter.
Probably worst of all was Singapore, whose third quarter GDP was up 7.5 percent year-on-year but down 3 percent on an annualised seasonally-adjusted quarter-on-quarter basis. Any pickup in the fourth quarter is likely to be minimal; October manufacturing output in the island economy was up only 2.4 percent from the year before, although it was up 5.1 percent on a seasonally-adjusted month-on-month basis, largely on the strength of a resumption in biomedical output after production had been affected the previous month by a switch in product lines.
In Europe, the two biggest economies have also reported slowing growth. In Germany, GDP growth moderated from 0.4 quarter-on-quarter in the second quarter to 0.1 percent in the third. In the UK, growth in the third quarter was 0.4 percent, down from 0.9 percent in the previous quarter.
And the prognosis for the world economy is not improving. Oil prices are still flirting near US$50 for NYMEX light sweet crude, which will raise costs for both consumers and businesses going forward. The falling US dollar will frighten investors away from US financial assets, including bonds, which will translate into higher interest rates.
All these bode ill for stocks. And with the US presidential election just over, it is also worth remembering that the first two years after the election tends to provide poorer returns than the preceding two years.
In a market commentary on GloomBoomDoom.com on 11 November, investment adviser Marc Faber said that the stock market often bottoms out around election time. However, he also warned that "many post election rallies fizzle out relatively soon and give way to renewed weakness".
Similarly, in an article on 24 November for CBS MarketWatch, Peter Brimelow quoted an analysis by Investors Intelligence's Michael Burke on the US stock market as follows:
According to Brimelow, Burke's record is "solid", with market-timing a particular strength of his.
Stock market weakness, however, may not be uniformly felt everywhere. Burke, for example, appears relatively sanguine on Asian stocks. He thinks that the Japanese market "could well rally if the US market falls".
Indeed, stocks in Asia could well benefit from liquidity fleeing a falling US dollar. Asian countries -- many of whom have large current account surpluses -- are under pressure to allow their currencies to appreciate to balance the world economy as well as their own. That may attract capital into these Asian countries, potentially causing interest rates to fall and liquidity to rise, which could then flow into Asian stocks.
Today, The Straits Times market report mentions a recent Citigroup report which pointed out that the strengthening Asian currencies implies that "domestic sectors such as importers, real estate and banking stand to benefit". The newspaper also mentions that Singapore brokerage UOB Kay Hian thinks that banks and property are likely to do well, the former because of rising interest rate spreads and the latter from low interest rates as well as a recovering job market.
The main caveat to this optimistic scenario for Asian stocks is that a weakening world economy -- especially one with its engine of growth, the United States, fast losing its purchasing power as a result of a weakening currency and possibly rising interest rates -- is not the most favourable backdrop for a bull market in stocks.
Economic indicators reported by several countries over the past few weeks continue to show signs of slowing growth.
In the United States, the Commerce Department reported on 24 November that durable goods orders fell 0.4 percent in October. Although the University of Michigan reported on the same day that its consumer confidence index for November rose to 92.8 from 91.7 in October, a survey by ACNielsen showed that 28 percent of consumers say they have no extra money to spend.
At least third quarter growth in the US managed to hold up, chugging along at an annual rate of 3.7 percent against 3.3 percent in the second quarter. Other countries have not been so fortunate. The biggest Asian economy, Japan's, grew at an annualised rate of just 0.3 percent in the third quarter from the previous quarter, down from the 1.1 percent rate in the second quarter.
Many other Asian economies are experiencing similar slowdowns. Taiwan's economic growth slowed to 5.3 percent year-on-year in the third quarter from 7.9 percent in the second quarter. In South Korea, GDP growth eased to 4.6 percent year-on-year in the third quarter from 5.5 percent in the second; on a seasonally-adjusted quarter-on-quarter basis, growth in the third quarter was just 0.6 percent. Hong Kong's GDP rose 7.2 percent year-on-year in the third quarter after having risen 12.1 percent in the second; on a seasonally-adjusted quarter-on-quarter basis, third quarter GDP was up 1.9 percent, down from 2.6 percent growth in the second quarter.
Probably worst of all was Singapore, whose third quarter GDP was up 7.5 percent year-on-year but down 3 percent on an annualised seasonally-adjusted quarter-on-quarter basis. Any pickup in the fourth quarter is likely to be minimal; October manufacturing output in the island economy was up only 2.4 percent from the year before, although it was up 5.1 percent on a seasonally-adjusted month-on-month basis, largely on the strength of a resumption in biomedical output after production had been affected the previous month by a switch in product lines.
In Europe, the two biggest economies have also reported slowing growth. In Germany, GDP growth moderated from 0.4 quarter-on-quarter in the second quarter to 0.1 percent in the third. In the UK, growth in the third quarter was 0.4 percent, down from 0.9 percent in the previous quarter.
And the prognosis for the world economy is not improving. Oil prices are still flirting near US$50 for NYMEX light sweet crude, which will raise costs for both consumers and businesses going forward. The falling US dollar will frighten investors away from US financial assets, including bonds, which will translate into higher interest rates.
All these bode ill for stocks. And with the US presidential election just over, it is also worth remembering that the first two years after the election tends to provide poorer returns than the preceding two years.
In a market commentary on GloomBoomDoom.com on 11 November, investment adviser Marc Faber said that the stock market often bottoms out around election time. However, he also warned that "many post election rallies fizzle out relatively soon and give way to renewed weakness".
Similarly, in an article on 24 November for CBS MarketWatch, Peter Brimelow quoted an analysis by Investors Intelligence's Michael Burke on the US stock market as follows:
The large number (500+) of buying climaxes last week is a worrisome event, and we plan to get a bit more defensive in the days ahead. We have been thinking that the post election rally could last into December or even January, but that outlook could change. With current broad overbought levels, and historical precedents, we are nervous that next year will be negative and will be looking to reduce our invested position here in the next few weeks.
According to Brimelow, Burke's record is "solid", with market-timing a particular strength of his.
Stock market weakness, however, may not be uniformly felt everywhere. Burke, for example, appears relatively sanguine on Asian stocks. He thinks that the Japanese market "could well rally if the US market falls".
Indeed, stocks in Asia could well benefit from liquidity fleeing a falling US dollar. Asian countries -- many of whom have large current account surpluses -- are under pressure to allow their currencies to appreciate to balance the world economy as well as their own. That may attract capital into these Asian countries, potentially causing interest rates to fall and liquidity to rise, which could then flow into Asian stocks.
Today, The Straits Times market report mentions a recent Citigroup report which pointed out that the strengthening Asian currencies implies that "domestic sectors such as importers, real estate and banking stand to benefit". The newspaper also mentions that Singapore brokerage UOB Kay Hian thinks that banks and property are likely to do well, the former because of rising interest rate spreads and the latter from low interest rates as well as a recovering job market.
The main caveat to this optimistic scenario for Asian stocks is that a weakening world economy -- especially one with its engine of growth, the United States, fast losing its purchasing power as a result of a weakening currency and possibly rising interest rates -- is not the most favourable backdrop for a bull market in stocks.
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