Tuesday, 19 January 2016

3 Reasons Why Global Stock Markets Are Crashing!

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.....

2016, one of the worst start of the year for Global Equities!
As a matter of fact, the first 10 trading days of the year saw a loss of over 1,400 points on the Dow, marking the worst two-week start to a year ever!

Just take a look at the Year To Date (YTD) as of 18th January 2016 for Global Stock Market Indexes below:

Shanghai (China)
Frankfurt (Germany)
Hong Kong
Nikkei 225 (Japan)
NASDAQ (United States)
Dow (United States)
S&P 500 (United States)

What's causing the bearish sentiment?
1) OIL
Oil price was hovering at the $100 per barrel mark in 2014 before it suffered a significant drop in 2015. Take a look at the Crude Oil Price graph below:

As of 2016, the price per barrel has fallen below $30 with economist predicting further drop in prices over the coming months. 

What's causing the oil price to crash? Two major factors:
1. Oversupply - Oil producing nations refuse to reduce production
2. Lower Demands - Largely caused by the slowdown in China's economy

Here's a clear explanation of the current "oily" situation provided by this excerpt from Yahoo Finance:
Note : Sanction on Iran has been lifted.. More oil is expected to flood the market!
How does falling oil prices impact the equity market?
  1. Like it or not, oil and stocks/equities are positively correlated. When one falls drastically, the other will follow suit. In this case, the market is starting to feel the brunt from falling oil prices.
  2. Lower oil prices cancel capital spending plans of companies that invest primarily into energy. In other words, when businesses from a specific sector starts to cut capital spending, that is a bad sign for the equity market.
  3. Certain sectors such as materials and industrials are also feeling the impact of oil's fall.
  4. Oil producing countries are making lesser profit (to a certain point some are already in the red). This will certainly have a significant impact on the country's GDP. Just take a look at the production cost for countries, compare it with the current oil price and you'll see why.

What to look forward to?
So far there's none. As long as all oil producing nations refuses to reduce their production, low oil prices are here to stay. 

Factors that could cause a turnaround in oil prices?
  • Conflict between Middle East Countries
  • OPEC manages to convince its members to reduce oil production
  • War

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)

Fear and Uncertainty?
When the stock market of the second largest economy in worlds goes into a free fall, it creates uncertainties and concerns for investors. This too has caused a spillover of bearish sentiment into neighboring markets such as Australia, Japan, South Korea and India.

Investors don’t have a clear idea of how strong the underlying Chinese economy is and are worried that policy makers are struggling to revive the export-reliant economy. 

In addition a weaker yuan heightens worries that the slowdown in China's economy is deeper than official data suggests. 

What to look forward to?
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.

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.

Effects of further interest rate hike?
One possible impact as indicated below:

Questions unanswered!
When the FED increase the interest rate in December 2015, there was general optimism that the equity market will rally. However when 2016 was ushered in, the equity market tanked, creating uncertainty and fear among investors towards future interest rate hike.

With four more interest rate hike expected for 2016, will the market drop further after each hike?

Why is the market reacting negatively toward interest rate hike despite the so called "recovering economy" of the US market? 

2016 will certainly be a challenging year for equity investors as we face multiple uncertainties as listed above. In addition, investors should also be on a lookout for the outcome of these key events highlighted in this post

Lastly always remember:
  • Stay true to your investment goals
  • Short term volatility is always there when one is involved in equity investing. What goes down will come up again.
  • Fear not and look ahead. 
  • If you're losing sleep when your investment suffers 30% losses, stay away from equity. It is not your cup of tea.
Cheers and Happy Investing!

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