What's in store for 2003
THE year just ended was one of surprises in the financial markets, which is perhaps in the normal way of things. That being so, it's worth speculating what we could expect to see in 2003, including the wild cards.
First, a recap on the quite extraordinary events of the last year. It was, in brief, a year of continuing carnage in the markets, of corporate skullduggery on a grand scale, a frustrating year for economic policymakers against a backdrop of high political tension. Last year, the Dow Jones industrial index notched up its first three-year losing streak since 1941, posting a 17 per cent loss. The technology-heavy Nasdaq did even worse, shedding more than 30 per cent, as the excesses of the tech bubble of the late 1990s continued to weigh heavy. Fortune 500 companies such as Enron, Arthur Andersen and Worldcom went bust after a wave of accounting scandals. Dozens of others had a close shave.
Across the Atlantic, European markets didn't fare much better, also racking up double-digit losses. Asia's main markets - Tokyo, Hong Kong and Singapore - too were all down by close to 20 per cent. The only markets that yielded decent returns were ones few would have bet on: Pakistan, which jumped 118 per cent in US dollar terms, Indonesia, which rose 26 per cent and Thailand, up 20 per cent.
In general, stock and technology funds had a miserable year, but highly-rated corporate bonds and treasuries did well, as did many hedge funds and some commodity-based funds, especially those with big holdings of gold and oil-price sensitive assets.
This was not how it was expected to pan out at the start of the year, when analysts bet that major stock markets would recover, that bonds had topped out, and commodities looked unexciting; hardly anybody bet that oil prices would end the year at more than US$30 a barrel.
Looking ahead, what can we anticipate? It does not seem unreasonable to expect that oil prices at least will come down, once Iraq-war fears abate (although until this happens, the risks are high), calm returns to oil-rich Venezuela, and the Northern Hemisphere winter tapers off.
In the bellwether equity markets of Wall Street, it would be surprising indeed if the Dow and the Nasdaq were to tank for a fourth straight year; with the US economy likely to avoid recession and with corporate earnings coming off their low base in 2002, the odds-on scenario has to be a market recovery - especially once the threat of war lifts and oil prices moderate. A wild card, however, could be interest rate hikes (after 12 consecutive cuts) by the US Federal Reserve during the second half of the year, once the US economy starts to show signs of strength. That, in turn, could - together with rising US budget deficits - make it a tough year for bonds.
Japan surprise
Major Asian markets should benefit in the wake of a Wall Street recovery. An additional, tantalising, possibility is a rise in the Japanese market, which spent much of 2002 bumping along levels close to its 19-year low. While continuing economic weakness and a hobbled banking system is the baseline scenario for Japan, there is a chance the coming new leadership at the Bank of Japan could wage war on deflation in a way never done before. If this happens, expect Japan's market and economy to start recovering, though this could be accompanied by a weakening of the yen - another possible wild card this year, which implies a strengthening of the US dollar, rather than the widely-expected weakening.
Finally, at home, while the current picture is so-so at best, with low growth, high unemployment and an anaemic stock market, much could change in 2003 as the US economy and markets recover, the electronics cycle picks up, and oil prices trend down. Chances are that both the Singapore economy and stock markets will fare better this year than last.
But for Singapore, it will also be a big year for structural change; the final verdict of the Economic Review Committee will be in early in the year. Some of the changes - such as those relating to taxes, CPF and wage structures - are already known. But reshaping Singapore - by sharpening competitiveness, unleashing entrepreneurship, and setting the stage for a more vibrant, creative society - could involve several additional surprises, so stay tuned. And more generally, as is true just about every year, don't expect this year to be like the last.