Ninety-nine red balloons
floating in the summer sky
Panic bells, it’s red alert
There’s something here from somewhere else
The war machine, it springs to life
Opens up one eager eye focusing it on the sky
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As ninety-nine red balloons go by
— 99 Luftballoons
Last week, we talked about 2023 markets being one for “kung fu hustling” as investors are advised to stay nimble and skim off the odd profit amid the presence of few clear secular trends.
See also: 2024 conducive to risk-taking, but Trump brings headwinds in 2025: OCBC
Apple’s revenue drop indicates weaker consumer spending but strong US payroll numbers on Feb 2 gave plenty of cheer that the US economy might just see a soft landing instead of tipping into a recession as feared. Despite a muted equity pullback, the hope of optimists for a Capricorn effect — where markets gained in January each year — was kept alive.
However, over the last weekend, we have all suddenly become balloon experts, as we were vaccine experts just recently too. Where does that leave the markets?
Back in 1983, at the height of the Cold War, German singer Nena produced an unlikely global hit — 99 Luftballoons. The song narrates how she bought a bag of balloons from a toy store and set them free. In doing so, the balloons tripped the radars of hostile nations, leading ministers and presidents to send fighter fighters to identify and intercept the “UFOs”. As “everyone’s a superhero, everyone’s a Captain Kirk, Nuclear Armageddon results”, Nena’s 99 balloons disintegrated as cities turn to dust.
If you are reading this at press time, then cooler heads must have prevailed and we are still alive, even if there were jokes that by taking out the Chinese balloon hovering over the east coast of the US, this was the first thing US President Joe Biden ever did to combat inflation!
After all, Biden had been responsible for a whole lot of fiscal, Covid-related and other stimuli, including the recent Chips Act. Together with a compliant Federal Reserves, which launched into the current rapid-fire interest step-ups belatedly in 2H2022, the US is as much to blame for today’s inflation as Putin’s war in Ukraine kicked off some cost-push inflation in food and energy prices.
Likewise, Covid — and the need to keep supplies and supply chains — may have been a catalyst for self-sufficiency for essential items. But present-day US “friend-shoring” and trade policy, which are simply different forms of protectionism, make a mockery of the World Trade Organization rules they are similarly trying to enforce.
Tensions are further fuelled by both sides of the political spectrum in the US, reinforced by the Western media whose underlying view is that China needs to be contained, come what may. And this “what may” — is the projection by Goldman Sachs that China’s economy will overtake the US in 2035. Separately, PWC argues that China is already ahead in purchasing power parity terms even as India is projected to overtake the US by that metric by 2040, leaving the mighty US in third place.
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Every breath you take — The Police
So how exactly did a weather balloon (as claimed by the Chinese) blow the impending detente — characterised by a now cancelled Anthony Blinken visit to China off course? Was that trip ever likely to take place (“when conditions are right”) — the concession made when the Americans cancelled?
We may never know the real answer about why a balloon, perhaps “lost” and cruising high above the ground, was such a threat to the US. Forensics from the debris over the Atlantic may give us only as much insight as where MH370’s final resting place is.
But what is certain is that the US itself has a track record of spying from the air. Back in 1960, Francis Gary Powers, flying a U-2 spy plane that took off from Pakistan, was shot down by the Soviets. Since then, unmanned satellites pass regularly over China, tracking and trailing all manner of data daily. Maybe unlike a balloon, they can’t just pause and hang around too much — which is arguably more annoying. And there is some chatter that China — allegedly far behind in logic chips and AI, is far better in balloon technology than Nasa (probably at a fraction of the cost). I also wonder, taking a leaf from the recent Top Gun Maverick, whether the pilot that burst China’s bubble with a Sidewinder missile will be able to register this as an actual enemy kill. If so, this F-22 jock is four more balloons away from being an ace.
For those with conspiracy theories, the Chinese foreign ministry’s rapid statement that it “regretted” the civilian balloon being blown off course” — in an attempt to placate the US and keep Blinken’s visit — was already a big olive branch. With the media circus, and the need for Biden to look strong by both his Democrats, and especially the calls by Republican stakeholders, taking inevitable military action can only derail cooler heads. Now both sides have to look strong but even if contained to just shrill Chinese rhetoric, it creates sustenance for US protectionist policy.
Do you really want to hurt me? — Culture Club
Unfortunately, Xi Jinping’s determination to globally reconnect post-China’s Covid reopening, which was broadly welcomed by the rest of the world, has hit another road bump. It was barely a fortnight earlier when Vice-Premier Liu He proclaimed at Davos at the World Economic Forum that “we are back in business” after three years of pandemic-related curbs.
However, if history is any guide, protectionist beggar-thy-neighbour containment does not work over a sustained period. It has not taken more than a few years for Brexit to add a toll on the UK economy it is unable to recover from, even if the politicians will not admit to it. Those on the Right — including Liz Truss — are still trumping (pun intended) her theory that her project to change UK’s economic course had barely started before she was unceremoniously ejected.
It is ironic that the Western free market economic doctrine — exported and enforced through the International Monetary Fund and the World Bank — is completely subservient to politics. A bigger conceit is that the US itself has the biggest dependency on foreign lenders — just look at the foreign holdings of the T-bills. In the near term, for investors of Chinese stocks who have taken profit on the way up, there are still plenty of opportunities to buy them back at lower prices to catch the next wave. Meanwhile, for those who have not yet lightened up on US stocks, a combination of Fed risk, debt ceiling, and frankly, long-term economic inefficiency, I suggest a “sell” coming into any rally.
A good friend suggested that US domestic-focused stocks could be better than stocks of companies that depend on the vagaries of global trade in this uncertain world. That may still be a haven if one really needs any allocation in the US. However, in a year the US dollar is giving up its 2022 gains and the renminbi is chipping away at its reserve status, I question that decision if you are a Singdollar-based investor.
For now, it may be one rule for the satellites and one for balloons — since US stock markets account for 63% of MSCI World, any global investor will still be weighted there. For those unconstrained like me, I am staying out.
Is there something I should know — Duran Duran
In this new East-West Cold War, is there a place to hide? Early this year, this column also postulated that last year’s emerging market equity winner India (in rupee terms), was going to lag as money was reallocated to China. Indian equity markets had steadily risen in the past years led by the Adani group of companies, which some argue are symbiotically linked to the success of Prime Minister Narendra Modi and his Bharatiya Janata Party.
In just two weeks, some US$120 billion ($158.84 billion) has been wiped off Gautam Adani’s listed companies, along with a cancelled US$2.5 billion share sale of Adani Enterprises, a US$120 million bond issue, and a whole lot of margin calls on their leveraged positions, as private banks like Credit Suisse zero-weighted these securities. This has taken Indian markets straight down to the other end of the league table.
All this resulted from Hindenburg Research’s expose of the Adani group for a host of allegations including accounting fraud. A 400-page defence by the company soon after failed to stem the bloodletting. Aptly named after the infamous airship disaster of 1937, the short seller Hindenburg seems to have uncovered a can of worms festering apparently for decades. Notwithstanding, other global partners including TotalEnergies which invested US$3.1 billion as part of a venture bet on India’s green energy, defended their investment as “undertaken in full compliance with applicable — namely Indian law”.
Irrespective of who is ultimately proven right, a couple of investment maxims hold true. First, investing in politically connected conglomerates always runs the tail risk of a sudden turnaround. CLOB investors in Malaysia and those who followed companies owned by regional political princelings from Indonesia to China have always had good runs before a disaster. Second, there are dead giveaways. Without Hindenburg’s report, one simply had to look at the P/E ratios of many of the group companies which were full of hot air. Adani Wilmar, the joint venture between Adani and Singapore-listed Wilmar International, for instance, was trading over 100x P/E, before correcting to around 60x. Fortunately, Wilmar’s stock price in Singapore never rallied on the JV’s listing in India as global investors did not price this in. Similarly, it should hold and not be affected by a one-third price correction of its Indian venture.
The safety dance — Men Without Hats
Last week, the “boring” FTSE 100 (as UK media tends to lament — without all manner of New Economy stocks) hit a record high. Unfortunately for the Singaporean investor, the sterling loss would have set aside any gains if investments were unhedged.
The similarly “boring” Straits Times Index had not yet reached its all-time high of 3,906 points in 2007 before Lehman triggered the Global Financial Crisis. However, the Singdollar’s gain from $1.70 in the mid-2000s to $1.31 technically puts us ahead from a global investor’s point of view, excluding a 4% annual dividend yield which has rewarded local investors with returns of some 60% in theory as well, even if they bought at the top 15 years ago.
Ironically, if the Fed remains stubborn, it supports our three local banks which collectively account for a weightage of more than 40% of our index. An uncertain Sino-US politics, trade and capital market outlook, could continue to keep capital flowing here as a neutral venue with access to Asean’s relative regional economic strength. We will see volatility pick up in North Asia and the US, but Singapore will likely comfortingly stay boring. If so, pullbacks around 3,250–3,300 points may present re-entry opportunities at the index level for those who managed to hustle out of the market towards 3,400 points recently. As you scour the market for opportunities, do stay clear of hot air.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
