2021 started as a continuation of 2020, with “stay-at-home” beneficiaries, technology and China stocks doing very well for the 1st month. China stocks are the best performing asset until March. But the tide quickly turned with the crash of both US Technology shares and China stock market.
Interestingly, Singapore, one of the most unloved markets in the past year has done very well since. This is because value rotations and rising interest rates are beneficial to the Banks and more than 30% of the Straits Times index are banks.
The other big development in the market was Biden’s $1.9 Trillion “American Rescue Plan”. The impact of this should not be undermined. When the US Federal Reserve printing money, it was “monetary policy” while they are playing with the numbers game. Biden’s “fiscal policy” means that the money is finally going back to the real economy.
This is an expected move as in any post-crisis era, Infrastructure is on the top of the mind of policymakers. That is where you can spending a lot of money and create a lot of jobs. Ultimately, America’s re-building plan will have a spillover effect on the other countries. It is just like when Singapore builds HDB, it creates jobs for the foreign workers. At the same time, Biden’s push on renewable energy may revamp and revive the Energy industry which has been forgotten by the market for a long time due to its sector underperformance.
The third biggest thing is in China, the long-waited conclusion of antitrust investigations on Alibaba is finally upon us. China’s regulator slapped a record 18.2 billion yuan (US$2.8 billion) fine on Alibaba. Ironically, this the probably the “best news” on Alibaba’s shareholders lately as things maybe finally put behind. Alibaba’s share price jumped 9% after the news. Around the same time, Tencent faced a bombshell from its largest shareholder Prosus to took 2% off the table (worth $15.5 billion). However, Tencent’s share price stood steadily above HKD 600.
I am talking about this because Alibaba and Tencent are the pillar of China’s new economy against their US rivalry. These are the signs that the China stock market’s correction may end here.
Learning from the past financial crisis, China’s authority is always paranoid about the asset bubble created by the spillover effect due to the US monetary policy. I have explained how this will end in this article which I wrote last year. It is well-known fact that China wants to open up the financial markets, but they do not want it to run too fast. So the market should behave in a similar manner going forward.
Lastly, the rising interest rate risk is real. The bond markets have been sold off globally, from the US to China to Singapore. There is no immunity. We can almost conclude that the bond’s supercycle is over and I think there are more rooms for the rates to continue increasing. Therefore, I am very bearish on bonds in general. It seems to me that holding bonds have more risks than holding stocks now.
Will Singapore stocks recovery continue?
In my opinion, the spike in interest rate is not going to stop here. Singapore’s stock markets are the “old economy” which was underperformed for more than a decade. From the chart below, you can see how poorly Singapore’s stock market has done to other major economies.
So I think the Singapore market may continue performing well in a post-pandemic recovery world. Singapore banks and real estate companies may be poised to benefit from a recovery of global demand backed by coordinated fiscal stimulus.
Will Oil make a comeback?
As I mentioned earlier, the energy sector was unloved for a long time. But it is under-appreciated. The “electric car” story may sound sexy but it is not going to kill the oil industry.
We need to understand that Aeroplane, Cruise and Industrial Trucks can’t run on electricity. Oil’s position is irreplaceable. In a post-pandemic world, we will see more aeroplanes in the sky, more cruises at the sea and more human activities. All these will increase the consumption of energy. Just as the US VP Kamala Harris openly admitted recently, “For years and generations, wars have been fought over oil”.
Personally, I am more confident in the traditional energy industry which has been profitable and paying out consistent dividends.
Watch out for Infrastructure
Biden’s infrastructure plans are also going to benefit this industry and many other infrastructure stocks. In case you are not familiar, infrastructure stocks are building the backbones for the country. For example
- Transportation (roads, airports, marine ports and railways),
- Energy (gas and electricity transmission, distribution and generation),
- Water (irrigation, drinking water and sewage)
- Communications (radio and cell towers, satellites, fibre optic and copper cable).
These companies are generally large, stable and profitable. The shares are also suitable for long term dividend income.
Is there value in bond investing?
In short, no.
I hate to say this, but the days that retirees can invest for stable income is over.
The US Fed may be keeping short term interest rates low for now, but the long end of the yield curve has already risen. The relationship between bonds and interest rate is mathematical. Unlikely in stock markets, the return of bonds are more predictable if the interest rates keep on going up.
As I mentioned in my previous month’s updates, inflation is inevitable and the US will joyfully allow the rate to go up higher. Then they will have a good “excuse” to raise interest rates. The market is smart enough to see that. It will be a very challenging environment for bond investors in the next few years.
In Summary…
“Ivan’s Reflection” is my monthly investment note. The purpose of this article is to document my thought on stocks markets and investment ideas so I can review if they are right and wrong in the future. The strategy I use is called Global Momentum Compass which I have developed over the years through my experiences of helping clients manage their investment portfolios. I think for now,
- US Technology shares and China stock market have dragged the market lately.
- If you have value stocks in your portfolio, your risks should have been mitigated.
- I expected the interest rate to continue rising, this will put on pressure on growth stocks and bonds.
- Singapore stock markets have done better than Europe, the US and China year to date, I expect more upside as it is still largely discounted compared to other markets.
- Global reopening may benefit energy sectors
- Biden’s infrastructure plans may benefit infrastructure companies globally.
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