Markets to enter 'wait-and-see' mode

Saturday's column touched on the "January effect", which is a fairly regular financial market phenomenon, where prices rise at the start of a new year after falling at the end of the previous year.

One theory to explain this oddity is that investors sell out of losing, non-performing positions to realise tax losses at the end of a calendar year, then buy back those same positions immediately afterwards, perhaps not wanting to abandon their original assessment or admit that they were wrong.

Of course, if markets are reasonably efficient, then it should be impossible for anyone to extract abnormal returns if they tried to exploit this phenomenon - enough buyers will emerge at the end of the year and sellers at the start of the new year to wipe out any hoped-for advantage.

Yet, for whatever reason, it does occasionally surface - witness, for example, the Straits Times Index's strong performance last week despite sombre projections from virtually all brokers.

Whether or not tax loss selling can explain the rise here is, of course, not known, conventional wisdom being that the local market has been the beneficiary of a reflationary US play that started in November and propelled Wall Street to all-time highs in December.

However, investors here should be aware that if the Donald Trump administration lives up to its promised protectionist agenda, any positive impact on Singapore's domestic growth from a recovering US economy will likely be nullified by trade barriers and tariffs.

Stated differently, there is every reason to believe that 2017 will be a year in which Asian markets decouple from Wall Street - the latter might benefit from US President-elect Trump's "America First" vow but the former might not.

The problem, of course, is that until the incoming administration clearly articulates its economic policies, nothing is certain and everything is really just guesswork - even for the US Federal Reserve.

In the minutes of its December meeting released last week, the Fed's officials emphasised their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect the economy.

Several participants pointed out that, depending on the mix of tax, spending, regulatory, and other possible policy changes, US economic growth might turn out to be faster or slower than they currently anticipate.

This might sound like classic economic doublespeak, but it is really a matter of "wait and see" until the US' next moves are known with greater clarity.

Furthermore, there are many risks to the rosy US economic outlook that Wall Street and many others are assuming will materialise.

For instance, Washington may not fully or even partially approve the infrastructure stimulus that the US market is banking on or the Fed may over-tighten. Again, no one knows - yet.

While it is true that the future is inherently uncertain and much of investment analysis rests on guesswork, it is also true that trying to forecast what will happen under a Trump administration is even more difficult than usual.

Until more is known, our guess is that markets, having bought in anticipation that Mr Trump will be able to lift the US economy while penalising others, will switch to a "wait-and- see" mode since his inauguration is only two weeks away.

For a Singapore market that has had to endure two consecutive years of non-performance, hopefully "wait and see" will not eventually morph into "sell on news".

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts