Bloomberg put up a rather great summary of where you might want to keep your money during December, given that there’s an expectation of a Santa Rally. This post doesn’t constitute an investment recommendation by any means, but it’s somewhat in the spirit of the CLSA annual forecasts that they do at the start of every Chinese New Year, trying to evaluate how traditional mysticism might influence the stock market and which developments to at least look out for. My mysticism of choice is uncertain statistics, technical analysis and recent trends to get you through the next month and hoping to follow up with the first quarter of 2015 in East Asian markets by providing a little insight and not a single investment idea worth putting money in.
Looking over the Asian markets we have here, there’s Taiwan, South Korea, Japan, Australia and India. India is not a market I am too familiar with, and same thing more or less goes to Australia. This is however compensated for by Hong Kong posting average December gains of 3.7%!
This time I will aim to involve you readers a bit more in the forecasting fun and really hope to hear your expectations for the markets I discuss here. I really appreciate any comments coming my way, and will gladly repost / reblog / feature some people, either by the strength of the discussion you bring out or by how accurate your forecasts are. At the start of the new year, I aim to publish a post with the best forecasts across the markets I track, the best total forecasts by one poster, and honorable mentions for markets I am not looking at within the first week of January. The scoring will run as follows, with the rules being the same as in golf – lowest number wins!
Single forecasts: [ln(prediction/actual)]^2 / [Days to December 31st]^2
Multiple forecasts total: [Sum of Single Forecasts scores] / [N × ln(1 + N/3)]
N = number of forecasts. To qualify for multiple scoring, one needs to provide at least 3 year-end forecasts. Thus the maximum marginal advantage conferred on guessing one more contract is 22% (by offering four predictions rather than three) but those offering ten predictions will get roughly double the leeway on their average accuracy versus those offering only three! Post many forecasts to discuss, but don’t spit out so many that I’d think you threw darts at a board!
The single forecast formula is done to premier early forecasting. It will get easier to guess by a square root of remaining time, so I have to penalize the late forecasts a lot to promote you guys to comment early so that there is something to discuss. The way the formula is currently written means that scoring should get harder by the square root of time. Forecasts today will have a four-times advantage on forecasts given Tuesday December 16th, and 16 times to those forecasts given Wednesday December 24th!
Let’s get started after the jump, so you get this before all the gains are gone!
The clearest explanation that makes economic sense for one country for the month of December is the Japanese tendency to get year-end bonuses through this time! Year-end bonuses will probably be stronger this year off the back of major stimulus, which has made corporate earnings go to near record levels and look set to feed into the retail sales for December. Adding to this is that there are relatively few holidays in Japan during this time (the Emperor’s Birthday falls on December 23rd but other than that the calendar is empty) and allows economic activity to go on as normal. Simply put: there is a lot more money to go around on in December, and as with all East Asian countries, savings and investments are an important part of what this money is used for.
I expect December bonuses to be significantly higher, off the back of increased corporate cash, profits and potential needs to show employees that they should stay with the company in a job market that is screaming for new hires. Although lifetime employment is still very much the rule in Japan, finding new people for business expansion won’t be easy these days, so those firms looking to expand probably have to pay a premium anyway.
This bet for increased year-end bonuses to lift the markets abnormally will go against the available data. Disposable personal income has been down roughly 3% on YoY basis in Japanese Fiscal 2014 so far, and would indicate a similar drop for December income, thus slightly dampening consumption further. Savings is also slowly normalizing over a very volatile annual cycle, which means that the disposable income will probably cause volatility in consumption and risky investments (because of funds being targets for savings cash favouring safe assets) through the savings portion as well.
In addition, Christmas is generally celebrated, but it is much more of a consumption / partying / hookup holiday than anything else, and it’s essentially Valentine’s Day for couples and a reason for singles to meet each other and consume alcohol. The Japanese love their consumption excuses, and marketing drives like Lucky Bags (where massive bags of random unknown store goods are sold and people leave, open the bags outside the stores and swap their hauls) really help the year-end sales. For New Years, things also tend to get rather hectic in the shopping department as people prepare for the New Year with offerings, general spending on consumption and seeing the old year off well, before going to the temples on New Year’s Day and the following days.
This year might be particularly interesting given the election on December 14th. If Abe sees a wider mandate for actual reforms, then spending could probably increase given the expectations of more monetary velocity and continued corporate reforms.
The JPX Nikkei Index 400 will also probably inspire some managers to a) distribute more bonuses (less impact on the fixed compensation structure, and lowers the cash held on hand) or b) window-dress with a lot of rebalancing of their corporate investments/cash to increase future prospects. It will be interesting to see going forwards, definitely, but I’m mostly expecting to fool only myself with this last part on investments! Window dressing isn’t even that strong given that the accounting year often starts on April 1st for a lot of Japanese companies! Still, paying higher bonuses is a good way to compensate your employees without having to contribute to their social security funds!
Much more substantial is the increase in GPIF equity quotas, which means that pension savers will probably get bonuses, and then invest these in funds that will probably have to invest much more aggressively in equities!
Although the yen will probably weaken during the first few days of the month, I take it that it might generally stay rather put. Again, investment inflows into funds that look to hold balanced global portfolios might increase, but I expect the gist of this to occur during the first quarter of 2015 instead. Partially because of a lesser frenzy into stock markets at those times tending to help a bit with lowering valuations, and partially because of annual pattern tradition.
Taiwan is rather similar when it comes to consumption patterns, and few people really believe in gifts of the season more than for purposes of retail sales!
A slightly more interesting prospect is generally rather Asia-wide, and probably applies to South Korea too: Chinese imports going up before the end of the year to get goods into the country before Chinese New Year. Given Taiwan’s trade surplus to China, this is a rather important effect and explains the addition of capital coming in. Part of Taiwan’s export mix also comes in very well for increased consumer spending in Japan, and Japanese imports thus adds extra cash to the Taiwanese economy during the year-end period.
Taiwan doesn’t largely have the same bonus patterns as Japan does (bonuses are generally distributed in conjunction with the Chinese New Year) but they do close the books to the calendar year ending, meaning that there will be a lot of pressure to find new investments and distribute capital in ways that allows the firms to lower net income for tax purposes. Since Taiwan generally has a lot of capital relative to the other economic inputs, short-term increases are generally invested in capital expenditures or into financial capital markets, especially since inventory levels tend to decrease at this time of year to keep a slimmer operation going into the “slow months” of January and February.
I have actually not found any domestic reasons for Korea to gain stock benefits. However, as total trade is close to 100% of GDP on an annual basis, Korea has a massive trade surplus, and both that and overall exports sees a very stable bump in November/December. It is pretty feasible to expect that books close, and exports to China bump up which fuels the overall economy and particularly investable cash, as Korea also has a very noticeable dip in exports/trade surplus during January and February. As exports YTD are marginally up, I would expect a rather strong finish to the year, especially with the bump that seems to have started in October already.
I think it is reasonable to expect general won strengthening, but looking at the charts for the last ten years, on average the results of won movements are mixed, but with occasional spikes in the USD/KRW rate (presumably before the BOK can easily adjust this smoothly downwards without raising too much ire around the rest of the world). However, the won is in a massive weakening trend and has lost 8.3% since the end of August versus the US dollar, presumably to maintain competitive stances relative the yen. (Yeah, honestly… looking at a log-scale graph of what increases in the JPY/KRW rate looks like vs what decreases in the same rate look like is nearly comical…) I expect the Korean won to keep falling mostly from a pure momentum play at this point.
Hong Kong is obviously the big “China imports” beneficiary, as Hong Kong’s exports see a big gain during these periods. On top of this, you get closing of the books, and lots of exports from China passing through the Hong Kong system, adding a lot to the Hong Kong economy without specifically showing up in pure export numbers.
Hong Kong consumer spending also goes up rather significantly in December, and although data is spotty on the specifics of how this translates to investments, knowing just exactly how much people I know in Hong Kong tend to invest (particularly in the stock market) that seems like where a much more significant portion of year-end cash goes on the consumer level. Retail sales, for example, do not show as massive month-to-month fluctuations going from November to December, so year-end bonus expectations are largely placed in savings or investments.
This year, obviously the Shanghai – Hong Kong Stock Connect will throw an extra bone to the Hong Kong market, particularly on the turnover side of things. I do expect a lot of cash to be invested rather long-term in Chinese shares through the link due to retail investor action, but there will be spillover effects. I can also expect the closing aggregate balances expanding as people try to get in on the Hong Kong action early, hold cash and then ride the generally greater turnover that tends to occur in Hong Kong between the calendar New Year and Chinese New Year. As Chinese New Year in 2015 falls on February 19th (very late) this means that there will be one and a half month of trading to enjoy, which normally tends to be good for the market, and there should be less problems with any liquidity concerns between holidays. This will thus, as the HK$ is currently near the top of the trading band, stretch the closing aggregate balances, force liquidity into the system and provide a much steeper advance on the market overall than is normal when CABs don’t go up. Over 5% on the HSI would also put it above the 24 000 range, and get rid of that pesky 4 (“death”) sound!
As this will push markets in Hong Kong higher, and monetary easing will be in the cards in, Europe and Japan, probably Korea as well, the strong Hong Kong dollar will be a really attractive place to hold money, especially with an equally strong China to invest money in as an alternative. I think the CAB pressure will be higher than normal in December, and would not be surprised to see new 5-year highs here.
I do expect Chinese stocks to increase in value on the month, largely thanks to a much more accommodating monetary and fiscal stance than has been the case earlier. Liquidity will need to be injected due to the holidays coming up, and import front-loading probably increases the needs for extra cash throughout the system, so firms going below capacity and expecting to see capacity gains further on will probably punch in larger orders here to bulk up inventory. If the weather proves to be cold, then imports of heating and fuel commodities will probably be in strong demand.
Imports overall should further stretch liquidity, and coupled with more IPOs and sustenance of the Shanghai – Hong Kong Stock Connect and overall promotion of the equity market valuations in preparation for further developments on opening the capital accounts, I think that there will be a lot of added liquidity from up high.
Plus, the momentum is strong, and China has yet to start their Chinese New Year cash bulk-up, which will only occur in February of 2015. Volume in the markets should be kept really high as there will be Hong Kong and overseas interest in the stock market.
Australia and India:
I am mostly writing this as I want to allow you guys to speculate on it, but my own estimations are really yanked from thin air here.
I do think that the commodity pricing was a little too violent last week (as funny as that sounds when commodity prices are tumbling this morning), and that the increase in Chinese imports will probably moderate this fall in import prices somewhat, which should prop up Australia and the Australian dollar. It will probably negatively impact India, as that market is currently benign to them with much lower import prices (and they still post massive trade deficits…) but at least inflation is going down considerably.
I do think the Indian SENSEX is overvalued. It is no news that I’m largely bearish India, and I think a stock market growth in excess of 30% with increasing trade deficits in a commodity-correction phase is not a good signal. I wouldn’t be surprised to see up to 10% of a SENSEX correction, with at least 5% in December.
Australia has been caught between broadly increasing economic sentiment and rallying markets globally, and slumping commodity prices, causing the market to trade sideways for much of the year, but if commodities find a bottom I don’t think that pushing Australia towards the higher areas of its annual trading range should be a problem, and a 5% increase doesn’t seem outlandish.
In the interest of getting this out in any due time, I will post my predictions later on here, and the reasoning for specific indices in a separate post (so that the tags here won’t be cluttered completely with index names), so if you’re reading this before Chinese-time lunch on December 1st, hold a bit steady. Feel free to comment on your own expectations for the market in the mean time!
Predictions for 31/12/2014
- Nikkei 225: 18 150
- TOPIX: 1 469
- JPX Nikkei Index 400: 13 600
- USD/JPY: 120.30
- EUR/JPY: 149.50
- Taiwan TAIEX: 9 450
- KOSPI: 2 044
- USD/KRW: 1 140
- JPY/KRW: 9.65
- Hang Seng Index: 25 088
- Hang Seng China Enterprises Index:11 645
- Closing Aggregate Balances: HK$280 billion
- Monetary Base: HK$1.39 trillion
- NBFI holdings of OEFBNs: HK$73.8 billion
- For fun (not counting towards the total tracked):
- Days of Northbound trading full use on the SH-HK Stock Connect: 4
- Biggest daily turnover on the HSI: HK$95 billion
- Biggest daily Southbound trading quota use on the SH-HK Stock Connect: RMB5 billion
- Shanghai A-Shares Top 50: 8 850
- Shanghai Composite: 2 880
- For fun – Biggest turnover on the Shanghai Composite: RMB500 billion
Australia and India:
- ASX200: 5 520
- SENSEX: 26 820
- USD/AUD: 0.8560
- USD/INR: 65.650