The Chinese Year of the Tiger kicked off on Sunday, beginning a week of national holidays in China—and significant excitement here in Vancouver from which I write this post. The coincidence of the Olympics and Chinese new year should make for a pretty exuberant week here (check out some RGE coverage of the Economics and finances of the 21st winter Olympics here). Ahead of the festivities, we pulled together some of the commentary on what the year of the tiger might mean for regional and global markets. Although one might not want to reallocate your portfolio based on astrological proverbs, they could be as good as other crystal balls.
Market prognosticators suggest that the year of the Tiger is frequently a tumultuous one for asset markets, with some pretty significant gains followed by significant selloffs but likely ending up for the year… like what most market actors are already pricing in for 2010 given the uncertainties surrounding U.S. and Chinese exit strategies as well as the hangover from last years aggressive fiscal and monetary stimulus. This would be relatively consistent with RGE’s view of a year of two halves in which economic growth slows in H2 2010, weighed down by deleveraging and high unemployment in advanced economies.
Four of the last five years of the tiger were down years for Japanese equities, according to Mitsubishi UFJ – the one exception was 1986, which sparked the Japanese equity bubble which wasn’t to burst until several years later. Interestingly enough, that was another year when Vancouver hosted the world at the World’s fair, but I digress. On average the other four years of the Tiger experienced losses in the low double digits, not a bear market, but certainly a correction.
CLSA estimates the trajectory of markets. The company’s Feng Shui Index estimates a “surge in the first month followed by a decline that turns upwards in June, dips, and then swings up again in September to see the Golden Tiger roar by January 2011.” In particular, march-June will be quite volatile based on this assessment.
Beyond the roller coaster ride that some expect, 2010 is also the year of the Metal (or gold) Tiger which occurs every 5 cycles. This, some people expect, will be good for commodities, especially metal and gold. CLSA expects that metals will outperform. Wood items like pulp and paper, clothing and pharmaceuticals as well as ‘Fire’ and ‘earth’ elements, like technology, power, telecoms and property will do well while ‘water’ sectors will underperform – shipping, airlines, logistics, autos and transport.
Astrologists suggest that this could also be a year when hope springs eternal (perhaps driven by expectations of a strong exit from recession) so speculation on equity, property could increase, with those buying and holding perhaps at a disadvantage. Betting in casinos could also increase. Macau and Singapore, with its brand-new casino, must surely be hoping that that is the case.
This volatility could also extend to political and global affairs. The last year of the metal tiger, 1950, was also the start of the Korean war. While we may not be able to blame the tiger for this, geostrategic tensions are bursting on to the policy agenda. Already the number of conflicts seems to be on the rise, Iran and the U.S. have ratcheted up political rhetoric (the chance of conflict still seems low), the risk of terrorist activities remains despite the financial noose around al qaeda, violence is picking up in Iraq and Afghanistan.
However, the biggest geo-strategic and geo-economic fault-lines surround the U.S. China relationship. Tensions have been on the rise regarding Taiwan and U.S. military sales, Chinese energy purchases, the implementation of Chinese regulations towards foreign companies and a number of other issues including China’s holdings of U.S. assets. While a war between these trading nations seems unthinkable, tensions and sabre-rattling have increased, rhetorical battles and small-scale skirmishes in economic policy should continue to climb. Witness the rising tit-for-tat conflicts in trade policy.
Although outright war seems less likely, RGE has been highlighting the risk of global institutional gridlock on issues ranging from financial regulatory reform, rising energy prices, global warming. With a sluggish revival in global trade, the increase in trade protectionism is but one sign of such gridlock which could restrain global growth and add to market volatility. Now that the global economy is no longer in free fall as it was at the beginning of the year of the Ox, the political imperative to agree and coordinate has ebbed. Just how much global gridlock exists will become clearer as we approach this summer’s G20 meeting co-hosted by Canada and South Korea.
The biggest policy challenge for China in the Year of the Tiger is trying to manage monetary conditions in an uncertain global environment. Chinese policymakers signaled their attempts to avoid volatility and a boom and bust cycle last Friday, the last trading day before the holiday when they laid the ground work to neutralize the liquidity injected into the system ahead of the holiday. The required increase in banks required reserves, announced on Friday but to take effect on February 25 2010, after the holiday, will merely offset the additional liquidity and siphon off some of the increase in excess reserves. As highlighted in RGE’s Outlook for China, interest rate hikes and appreciation of the RMB are unlikely to come until Q2 2010. The sequential increase in inflation suggests that authorities are still following this path. Timely removal of excess liquidity will be needed to avoid having to use even more heavy-handed measures later in 2010.
So with all countries trying to wend their way to more sustainable growth, could 2010 be a more ferocious, volatile year?