For a complete understanding of the investment market, we need to perform 4 levels of analysis:
L1 = individual stock, L2 = sector / industry, L3 = country / region, L4 = world.
These 4 levels will interact with one another to generate the complex stock market responses. From the past 5 years of regional stock indices (see Figure) in Singapore, China, Hong Kong and USA, we could observe the following important trends and correlations, which could help us in making the right positions for the next 1 year:
1) In the earlier stage, due to different political economy policies, US and China have been diverged in the trends, China has been bearish after the tightening of cash supply since 2009 while US has been consistently bullish after QE 1,2,3 with near-zero interest rate.
2) In the past 1 year, supported by strong recover of economy, US could still maintain the uptrend in stocks, continue to create new record high in stock market for S&P500, Dow Jones Index and Nasdaq.
3) With tapering of QE3, risk of domestic inflation is lower, China could loosen the monetary policy to accelerate the growth of economy, resulting in the recent rally of SSEC index from 2000 points to 4500 points, sentiment of market is very positive.
4) Singapore (STI) and Hong Kong (HSI) are closely correlated like twin markets over the past few market cycles. In the past 5 years, variations between 2 markets are within 10%. Fund managers and retail traders/investors know both market well, the fund could flow smoothly between 2 markets, although they are not officially “connected”.
5) Both Singapore and Hong Kong markets are followers, sandwiched between US and China, world No1 and No 2 largest economy.
In conclusions, China is fast in catching up with the lagging performance, pulling Hong Kong up along the way, while Singapore is likely to follow the twin in this rally.
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