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Wednesday, February 3, 2016

Is the Bear Out Already?

Hi! Long time no see..

Article courtesy of Invest Made Easy Blog (link). I made some modifications and my own comments.

If you're an investor investing into stocks or unit trust, it is vital that you should keep abreast with the latest development of the global equity markets as well as understand the key factors that are affecting the market sentiment. The recent massive drop in the global equity markets is one event that you as an investor should look into thoroughly and fully understand the causes before deciding on your next investment decision.

Here's what happened most recently and what's causing it.....

One of the worst start of the year for global markets (below as of 2nd February 2016)

- Major markets broke their long term trend lines and rebounds in these two days of Feb don't look strong enough to climb back to uptrend direction.

- #1 Part of the reason is oil. Price of crude oil has slide 55% over the past one year and that has an impact on a number of countries around the world. This is due to [1] oversupply - oil nations refuse to reduce production for fear of losing market share [2] lower demand - slower China growth.
- Oil and stocks/equities are positively correlated. Market is starting to feel the brunt from falling oil prices.
- Lower oil prices cancel capital spending plans of companies that invest primarily into energy. Certain sectors such as materials and industrial are also feeling the impact of oil's fall.
- Oil producing countries are making lesser profit (like Malaysia). This will certainly have a significant impact on the country's GDP and finances.

What to be aware of?
As long as all oil producing nations refuses to reduce their production, low oil prices are here to stay. Unless there is a major conflict in Middle East (e.g. Saudi vs Iran), war, OPEC cuts production.

- #2 Slowdown in China. IMF cut its world economic growth forecast by 0.2% to 3.4% on concerns of a slowdown in China.
- China; world's second largest economy grew by 6.9% for 2015 the slowest rate of growth since 1990.
- China stocks has tanked big time since the start of 2016. Within the first week of 2016, the China stock market (Shanghai Stock Exchange) was shut down twice as circuit breakers were triggered when the index fell below 7% of its opening value.

First trading halt (4th January 2016)

Second trading halt (7th January 2016)

It has since removed the circuit breakers for it is said to have worsen the sell-off and create uneasiness.

What to be aware of?
This March 2016, the ruling party is expected to unveil a new 5 year plan that touches on nation building, from the economy to foreign policy, the military and the environment. If the plan is able to convincingly calm the nerves of investors, we might witness a rebound for the China stock market.

- #3 US Fed Rate Hike. When an interest rate is raised, it means that the country's economy is recovering from a recession. Therefore when the Federal Reserve of the world's largest economy announced an interest rate hike on the 16th of December, the general believe (for the decision makers) was that the US has finally come out from recession. There's also talks that the FEDs intend to raise the interest four more times over the period of 2016.

Such optimism is not share by many investors whom strongly believe that the economic data referred to by the FEDs are fundamentally flawed. As a matter of fact, the consensus is that the US economy is not as healthy as the FEDs think it is. Poor retail sales, low inflation and a myriad of other economic data are pointing at the opposite direction.

What to be aware of?
US Fed's original plan is to up the rate by 1% within 2016. This is unlikely to happen judging by the shaky start of 2016. It is more likely it will be a cautious 0.25% hike in 2016. You should be aware of the dates of the FOMC meeting, this is when and where they will decide for a rate hike or not.

In a Nutshell
It's a challenging year for equity investors with multiple headwinds in multiple fronts. I made my decision way back in 2015 already and it remains the same. Cash is king. Wait for "Jualan Harga Murah". Look for safer alternatives even though it offers lower returns. I will be posting my likely picks and my strategies for 2016 so stay tuned. All the best and happy investing, it's never too late!

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