If human productivity is measured by the stock market, it would have meant that nothing was achieved this year. As Shakespeare aptly phrased it, it was much ado about nothing, as regional equities gave up almost all gains by August after a hugely volatile trading year.
Equities rallied in the first three months of this year, fresh from the drastic decline in most equity markets in the last month of 2018. The Chinese market was down a sharp 25 per cent last year (based on the Shanghai Shenzhen CSI 300 Index), making it one of the worst performers of the year.
By the second quarter, equity prices powered ahead but the brake came in the form of heightened United States-China tensions. This tricky situation came in and out of focus and equities gyrated in tandem with the developments on both the US and China fronts.
By the third quarter, most equities surrendered all the gains clocked up in the first five months of the year and most were close to December 2018 lows. However, US equities fared sharply better than regional markets, with the S&P 500 Index up almost 19 per cent despite underwhelming economic indicators from several key economies and the ongoing trade tensions. Meanwhile, US President Donald Trump’s job approval remained high this year – an average of 43.4 versus the low of 37 in December 2017, and close to the high of 47.3 shortly after he took office.
Will the wild ride continue into the fourth quarter?
History has quite a lot to share for this and seasonal trends have displayed some rather interesting patterns. In the US market, and as measured by the S&P 500 Index, the largest single month decline was in October 2008 during the global financial crisis, when the S&P 500 index shed 16.9 per cent that month, following a 9.1 per cent decline the month before.
The Internet bubble led to a market meltdown between 2001 and 2002, with peak month-on-month declines taking place largely during the September to October period (down 11 per cent in October 2002). With the concentrated October declines from 1999 to 2003, it created the impression that October is typically a bad month for equities, otherwise known as the October effect.
Further perpetuating this view was the massive Black Monday crash in October 1987, when stock markets around the world plummeted. While some of the biggest historical declines took place in October, it is heartening to note that the current long market bull upcycle has effectively negated this, with October generally being a positive month for the S&P 500. Based on the past 10 years, the S&P 500 is up an average of 1.9 per cent in October. In fact, this positive momentum continued into November and the S&P 500 posted an average gain of 1.9 per cent in November for the same period from 2009 to last year. With the exception of the sharp 9.2 per cent decline last December, equities generally ended the last month of the year up.
What about the regional markets?
Focusing closer to home, Hong Kong’s Hang Seng Index and Singapore’s Straits Times Index (STI) seem to have been displaying similar trends in the past 20 years. For the Hang Seng Index, the sharpest single month decline in the past 20 years was in October last year, when it crashed 22.5 per cent in one month. However, in the past 20 years, the Hang Seng closed higher in October 14 times versus being down six times, with average gains of 1.6 per cent.
Based on historical trends, while August and September were generally down months, October was an up month, contrary to widely held views that equities generally closed lower in October. This trend is similarly seen for the STI.
Trade tensions continue to dictate market directions
Since the US-China tariff negotiations started some time in March last year, there have been severalrounds of progressively higher tariffs on a wide range of goods from both sides. There were also small concession steps along the way, but these were not impactful enough to result in any quick resolution to the protracted and tricky US-China trade situation.
Unfortunately, many companies in both countries, and even in Europe and Asia, have been caught in this crossfire, which has led to lower corporate earnings and slower economic growth. China’s manufacturing sector has been contracting.
Based on China’s manufacturing Purchasing Managers’ Index from Bloomberg, this August was the fourth straight month that the reading fell below 50. On the corporate side, earnings have been impacted as guidance is softer in a generally more cautious operating environment brought on by higher tariffs.
Based on the S&P 500, corporate earnings growth for this year was projected at 7.3 per cent at the beginning of the year, but this has since dropped to 4.7 per cent.
Formal impeachment inquiry of Trump
After months of speculation, House Speaker Nancy Pelosi finally announced that the House is opening a formal impeachment inquiry. Our view is that the odds of removing President Trump from office are low, with the Republicans controlling the Senate and a twothirds Senate super-majority needed to convict him.
Social unrest in Hong Kong, flight to safety
Apart from trade tensions, there is also a barrage of dismal geopolitical news and this is likely to continue to weigh on market sentiment in the region. There is investor fatigue as seen from the decline in trading volumes and activities. The social unrest in Hong Kong is also causing investors to stay away from the market.
Oil had a recent volatile quarter, but prices have now stabilised and eased off from the recent spike following the drone attacks on Saudi Arabian oil facilities. Against this backdrop, regional markets are likely to remain volatile in the final quarter of the year.
There is a flight to safety, and gold has benefited, rallying 17 per cent so far this year. It is a rocky road ahead, and we expect this to cap investor participation in the market, especially in an environment of muted earnings growth and lower interest rates. Investors are likely to stay away from risky assets.
We do not expect to see a sharp market correction in the near term. Trading is likely to be within a narrow range, largely reflecting the lacklustre corporate earnings outlook. Investor interest in equities is likely to be rekindled only if there are visible signs of improving economic or corporate earnings and not in this current environment of potential earnings contraction.
The battles between the bulls and bears will continue to rage in the last quarter of this year. Share prices will find some support at the current level as valuations are not expensive, but upside will also be capped by the lack of positive drivers.
We expect defensive stocks with steady earning streams to remain in favour due to lower risk appetite. Higher growth companies operating in the Internet, e-commerce and data centre sectors will also attract institutional interest. Higher dividend-yielding stocks, especially as interest rates are likely to head lower in the next 12 months, will also be favoured.
Singapore real estate investment trusts have done exceptionally well this year. Based on the FTSE Straits Times Real Estate Investment Trust Index, the sector is up 19.7 per cent this year versus plus 1.1 per cent for the benchmark STI. This out-performance is not surprising, given the market expectation of lower interest rates ahead.
• The writer is head of OCBC Investment Research.
Source: The Sunday Times © Singapore Press Holdings Limited. Permission required for reproduction.