Wednesday, January 20, 2016

The Current Crisis (My Thoughts)

The past year has been an eventful for the markets.The problems are all well known and discussed. The drastic drop in oil prices (supply demand issue, OPEC vs US Shale battle etc).The China slowdown (whether soft or hard landing etc),the fossil energy sector crisis as a direct effect of the lowoil prices, US rate hike and maybe slowdown etc.

The STI was at 2559 yesterday comparable to the depth of the Euro crisis in 2011.Still a long way from 1600 achieved at the depth of the GFC in  March 2009.The Euro crisis was a retrace of about 20% from max and the GFC was a retrace of about 60% from max.Other crisis like Sars and 2000/2001 dotcom burst led to a retrace of about 35% from max.

So it will be reasonable to place a bottom for the current crisis at 2300 (for 35% decline from max of 3550) or 1800 (for a 50% decline from max.) I do not expect the current crisis to be worse than the GFC.It is estimated that the total O&G loans in the US is about $500b whereas the total residential mortgages is about $11 trillion.

As for oil prices, it can still go lower than $28 but we are witnessing the transfer of wealth from oil producers to net oil consumers like China, Japan, India, Europe, etc. Even the US benefit from low oil prices though the shale sector will be affected.In Singapore unless you are in the O&Gsector, low oil prices should be good for the economy ie SIA, SATs etc.But I do not forsee $28 oil prices for an extended of time like more than 1 year or at most 2 year simply because the OPEC countries will deplete their reserves , the high cost shale produers will go belly up once their hedges expired, wells dried up as yields of Shale wells drop drastically after first year.

As for China, it will be a clumsy rebalancing but eventually it will be good for china and the rest because high capital investment is simply not sustainable in the long term.The Chinese stock market is pretty isolated and is not too far away from the bottom ( I reckon SSE bottom to be around 2500).

I know a lot of people is waiting for DBS to go to $6 or UOB to $9 like in the GFC. But it must be know that over the last seven years, these two banks have made tons of money and their NAV would have increased by at around $6 since GFC. Ditto OCBC. So for them to go down to GFC prices things has to be much worse than GFC or we see a severe deterioration in the loan books. Even during the GFC, these banks still made money every quarter. Only a throwback to the Asian financial crisis do we
see the banks making losses.

Good luck!

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