Richard Cayne at Meyer International in Bangkok Thailand comments how last week was a very poor week for equity investors. Worldwide, there were signs of slowing growth, from weak data from China; multiple downgrades of global oil demand accompanied by further declines in prices; more stringent collateral requirements in China; and renewed angst over European politics. The contrast between the US and other countries was notable this week by fund flows, with US exchange-traded funds gathering $2.5 billion of inflows, while those in Europe saw $1.6 billion of outflows comments Richard Cayne. It was a particularly poor week for equity investors in Europe, led by the Greek stock exchange, as there is potential for the Syriza Party to triumph in a series of presidential elections, which start on the 17th December. The Greek stock market dropped 18.6% on the week, and Greek bonds had a strong selloff. The equity markets across Europe were also weak as the potential risk to global growth suggested by the declining oil price led to people exiting those markets in anticipation of earnings downgrades.
Richard Cayne comments that while fundamentals in the US are strong assets are demonstrating that they’re not immune to the global slowdown. The S&P 500 traded down to a five-week low, with technology and energy leading the drop. Volatility, as measured by the VIX index, rose above the 20 threshold for the first time since October. This increase in volatility was consistent with the further widening of credit spreads, which are now at their highest level since June 2013. The sell-off in high yield has been largely driven by growing concern over energy issuers. Indeed, since the OPEC meeting at the end of November – when no cut in the quota was suggested – we’ve seen the spread on energy stocks rise by 260 basis points. The oil price is the central topic of the moment. Is it the canary in the coal mine, warning us about global growth declining, or is it actually a stimulus to global growth? It’s probably a bit of both in that we’re seeing reductions in energy intensity in a number of countries (China, in particular), but we would expect there to be some activity boost from consumers, who are now finding it cheaper to fill up at the pump. And that is the dilemma that investors find themselves in, because bond markets are rallying strongly: last week, US 10-year Treasuries touched 208, which is the lowest level in over a year, and government bond markets in Europe also rallied notes Richard Cayne from Bangkok Thailand.
A further big event of the week was the re-election of Prime Minister Shinzo Abe in Japan and the market will now be looking for an acceleration of institutional and structural reform over the next few months says Richard Cayne. However, it must be said that investors are a bit nervous as we head into year end. A couple of crucial points to look out for this week: firstly, as mentioned, there will be a Greek parliamentary vote for a new president, the final votes will be held on 30 December. If the Syriza Party should prevail, we will need answers to the following questions: Despite their statements that they won’t will they pull out of the euro? Will they renegotiate or ignore Greece’s International Monetary Fund payments and loans? (In terms of austerity, almost certainly, yes.) And would that be a crack in the Eurozone’s recovery? Richard Cayne believes is that while there are some extreme parties in Europe, this is an unusual case, because Greece has suffered more than most in terms of the aftermath of the crash. The decline in European assets has as much to do with the falling oil price and the time of year, but there are concerns that the Greek presidential election will start off a kind of snowballing effect. The other point that spooked people about Europe last week was the relatively small take-up of the European Central Bank (ECB)’s targeted long-term refinancing operations. Richard Cayne explains that investors still hope for quantitative easing involving sovereign-bond purchases by the ECB in the first quarter of 2015. Otherwise, as we head into year-end, Wednesday will be an important day, with the Federal Open Market Committee’s last meeting of the year. All eyes will be on the language of their statements regarding, specifically, whether they remove the reference to not changing rates for a “considerable” amount of time. Also, purchasing managers’ indices across Europe will give us a sense of how flat that economy is.
One major issue that people are having difficulty with is the decline in the oil price explains Cayne. If we look at stock market indices again, because much of the decline in those indices and the widening in spreads is down to the energy sector. The main question that people want to look into as we move into next year is: has there been a lot of bad lending to energy companies that will impact our capital markets and our banking ratios? The answer is: there probably has been a lot of bad lending, because the oil price has been remarkably stable at a very high level for three years, which set off an increase in global exploration and production. So a spillover exists from this comfortable range; it’s being felt in the high-yield markets and the leveraged-loans markets most of all, and in the equity markets in terms of downgrading earnings forecasts for energy companies. But there are bright spots as well: this fall in energy prices is essentially a tax cut for consumers, and as we move into the new year, we feel that investors will start to look at the positive side of the coin as well, and will almost certainly be looking to bargain-hunt in equity markets.
Richard Cayne a native of Montreal, Quebec Canada presently resides in Bangkok Thailand with his wife Akiko Cayne and their two young children and runs the Meyer Group of Companies www.meyerjapan.com. Prior to which he was residing in Tokyo Japan for over 15 years and is currently CEO of Asia Wealth Group Holdings Ltd a London, UK Stock Exchange listed Financial Holdings Company
Richard Cayne has been involved in wealth management in Asia for over 19 years and has assisted many High Net worth Japanese families create innovative international tax and wealth management planning solutions. The public company of which he is CEO can be seen at www.asiawealthgroup.com or stock exchange link https://www.isdx.com/Asia Wealth Group