In our last #MarketMonday US Dollar Climbs, Alone, we went in depth into the currencies market and marvelled at the greenback’s meteoric rise over the year while contemplating whether to invest in the US Dollar. In today’s issue, let us expand our scope to include other asset classes that may be worth investing in too.

Currencies – US Leads the Way

On 15th Dec 2016, shortly after the Federal Reserve announced its rate hike and a potential few more hikes next year, the US currency rose to its 14-year high of 103.560. This came at the expense of several other currencies. Most notably, the Chinese Yuan plummeted to its 8.5 years lowest.

The year of 2016, however, might not see the end of this Yuan depreciation. Analysts from Crédit Agricole Corporate and Investment Bank expects a further slide because of many “significant” domestic issues and speculate that the Yuan would drop more than 4% to 7.25 per dollar by the end of year 2017.

China has been suffering from massive capital outflows over this year. Stimulated by the strengthening dollar and weakening Yuan, further exacerbated by the hike in US interest rates making it more profitable to hold the US currency, net capital outflow from China almost made a record high of  $207 billion in Q3 2016. This created a big hole in China’s balance-of-payments and a deficit of $469 billion in the same quarter.

By the natural laws of economics, a deficit in the balance of payments would erode investor confidence and prompt investors worldwide to withdraw their funds from the China economy and dump the Yuan. This would inevitably lead to a further depreciation of the Chinese currency, creating a cycle that is difficult to break.

In the year 2017, investors might be better off investing in the strengthening US dollar and most might be skeptical in Yuan as it is “poised for its biggest annual plunge since 1994”, according to Bloomberg analysts.

Bonds – End of Bull Market

In our previous analysis of the Great Rotation Phenomenon, we discussed about the massive rotation of funds from bonds that is traditionally regarded as an investment safe haven, into shares. Global leaders are focusing on fiscal expansionary policies and investors are all ready to buy into companies that are expected to benefit from the growth.

Analysts from Bank of America Merrill Lynch noted that year 2016 is the year of “peak liquidity”. Since the Global Financial Crisis, governments around the world have launched their own expansionary monetary policies involving interest rates reduction and bonds buyback. Various central banks have reduced their rates for close to 700 times.

As such, it is expected that the economy would not react favourably to a big monetary easing for the first time since 2006. This resulted in what investors call the end of the 35-years bond bull market, making this asset class the “worst” of all in the year ahead.

Bond yields are soaring and bond prices are plunging. It would not be as profitable to invest in bonds because of 2 main reasons.

Firstly, the Federal Reserve has increased the interest rates early this month and hinted at increasing it next year for three or even four more times, as speculated by analysts. With the increase in the interest rates, to which the new bond yields are pegged, bonds in the market are less valuable and investors are fighting to sell them off.

Secondly, reflation trade has been at the top of the agenda for Trump as he strives to create over 25 million jobs in his term. In a year where the US economy has been doing fairly well, dissatisfied Trump promised extensive fiscal stimulus to further vitalise the economy. The resulting inflationary pressures set fears that fixed income assets like bonds would diminish in value.

Bond investors, however, need not despair. Rick Rieder, BlackRock’s Chief Investment Officer reckon that investors can still profit from shorter-term bonds, in particular the short-term inflation-protected treasuries. These securities provide more robust returns which are less affected by the rising inflation.

Stocks – The Biggest Winner?

Michael Bell, JP Morgan AM Global Market Strategist, expressed confidence in the US stocks market, putting special emphasis on energy companies which stand to gain the most from the oil price raise by OPEC. Analysts speculate that growth in the S&P Index would reach 7% to $127 in year 2017, up from the current $118.75.

What’s best, this optimistic forecast is independent of Trump’s expansionary policies and mainly only takes into account the incremental profit gains in US companies and the robust growth of energy companies.

JP Morgan analysts expect strong growth in Brazil, Russia, India and China, otherwise known as BRIC. Joining efforts with OPEC to limit oil supply, Russia would likely benefit from the higher oil prices and drive domestic growth. The Indian economy is also slowly gaining traction and is forecasted to achieve double digit growth. Even Brazil that is having a recession this year is likely to exit its recession next year and experience a rebound in its stocks market.

However it is important to note that China’s growth might be limited. Besides the capital flight problem elaborated above, the country is likely to be further burdened by its lack of structural reforms and the bad debts in its major banks. Chi Lo, senior greater China economist at BNP Paribas Investment Partners, expects more corporate defaults in China.

Emerging Markets Finally Emerging

Across all asset classes, investors can consider looking at the emerging markets which are more domestically focused and less dependant on the external volatility and demand. India and Indonesia markets stood out as good investment opportunities.

In terms of currency, India is poised for strong growth because its “good fundamentals, room for further rate cuts and higher yields” are strong pull factors for global capital. Besides, Indonesia is known for its high investment returns and strong governmental support. Hence there is a strong reason to invest in rupee and rupiah.

As for bonds, the 2 countries are faring much better than their peers. Indonesian sovereign bonds are known to offer good returns as the country experiences stable domestic growth amidst the global uncertainty that has plagued the year 2016. India is also undergoing efficient reforms to the economy which would further propel the country’s growth. Bloomberg analysts noted in the last 12 months, $7.64 billion worth of Indonesian bonds were purchased and $6.84 billion of Indian securities were sold.

Besides US equities, investors might also want to look at stocks in Indonesia, India and Philippines, following recommendations of IG Asia analysts. These countries have strong foundations in their local economy and are believed to do well in the stocks market next year. In fact, analysts suggest that any investment into the Jakarta Composite Index, below the 5000 level would prove to be profitable.

As the year wraps up, you should start planning your investment strategy for the new year and in case you are tired of tracking all these assets day in day out, you can consider using our Call Levels app to invest carefreely.


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