CECG on 2015 Market Prospects on Oil and Equity Markets... Due to exuberant trading momentum in equity markets, especially in US stock exchanges, we witnessed a 17% hefty annual return on investment in S&P 500, among others as of mid-December, 2014. In contrast, oil pirces fell 42%, along with a 34% drop in gasoline price in the same time period (Exhibit 1). Neverthelss, could these market moments carry over into 2015? CECGs economic research team reachs the following conclusions, assisted by the US-based NBER, Goldman Sachs, HKUSTs Center for Macroeconomic Policy Research: (1) Petroleum price will bottom out in Q1 2015 when the 30 US$/barrel WTI crude oil price forces shade oil producers of NA to shut down massively. The expected return on oil-price rebound for the H1 2015 will be 12%, while the whole-year ROI could be around 28 - 30%. Stocks of Oil Majors will start to rebound in early Q1 and will realize an annual ROI at least 45%. (2) After the expected increase in US interest rate in Q2 2015, major US stock indexes will retreat to the mid-year level of 2014. That is, a drop of 8 - 10% index can be expected. Interest rate-sensitive sectors will perform differently: The banking & insurance stocks will rebound swiftly, while the real estate & infrastructure stocks will be hit the most. As Exhibit 2 shows, US stock performance has been trailing corporate earnings gorwth since the beginning of 2014. The long-lasting discount of expected return on US stocks could be due to unclear furture of credit risk & market risk after the end of QE in 2015. From the Tobin-q perspective, which has been below 1 (fewer investment opportunities) for past six months, we are cautiously concerned about the sustainability of US stock indexes in 2015. Moreover, as a spillover effect, fixed income equities (& their derivatives) of 2015 will perform much better by at 10% than this year. Gold price will lose its steam by retreating to 1080 ~ 1120 US$/ounce range. Finally, Exhibit 3 gives us a comparison among 2015 prospect of global equity markets (i.e., both stocks and bonds). At a first glance, it seems that US stock indexes and bond prices still under-valued by global standards. Nevertheless, if we think the other way around: When US stock markets could not sustain themselves in 2015, how about the counterparts in the rest of the world? Thus, a high degree of caution on equities in US and other major stock markets (eps. Japan, China, HK) is desirable.
Posted on: Wed, 31 Dec 2014 12:30:08 +0000
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