SURPRISES FOR 2014
Byron Wien, the respected Wall Street strategist, issues his annual list of "ten surprises" every January. Our crystal ball is not as clear as Mr. Wien’s is, but for fun, we shall mimic his New Year’s tradition and post our surprises for 2014. We do not see these surprises as high probability events, but merely the ones within the realm of probability and not often discussed.
• The ultra-low interest rate and a somewhat scaled down QE program will propel the S&P 500 index to new highs after a flattish first half of the year. Contrary to common belief, the stock market will take the tapering of QE in stride.
• The influx of new supply from shale oil in the US and the resumption of Iranian oil exports should push the price of oil below USD $80 at one point in 2014. This downdraft in the price of oil will pressure the prices of other commodities and send a couple of medium sized coal producers into bankruptcy.
• Despite a lack of concrete action to follow up the Chinese government’s reform promises, the China/Hong Kong stock market (as measured by the Hang Seng Index) will outperform most developed markets. The market will benefit from foreign capital inflows driven by a perception of favorable valuation and a desire to play the laggard, as the China/HK stock market has underperformed in recent years.
• Prices of HK residential properties will crawl to a marginal new high. The HK government’s property cooling measures will be largely offset by ultra-low interest rates and continued aggressive monetary expansion in the US and China.
• The “Occupied Central” movement will fail to produce any material and sustained protest in the Central District, and the movement’s leaders will be ridiculed and written off by the media. Beijing will steamroll ahead with its version of political reform in HK while facing little effective opposition. However, a riot will later break out in Mongkok, incited by a spontaneous event, certain jewelry stores will be looted and dozens of mainland tourists will be injured.
• Shares of Apple will surge to a new high, after the company announces an unprecedented USD $100 billion buyback and finally delivers a genuinely revamped iPhone 6, which will surpass past iPhone sales records.
• A major stock market will undergo a “Flash Crash”, when algorithmic trading programs convert a downtrend into a -5% intraday plunge. The SEC will respond by proposing new regulations on program trading.
• Tension will continue to mount between China and Japan, and the Japanese Yen will depreciate -5% against the USD. Japanese Prime Minister Shinzo Abe’s popularity will drop, but he will manage to retain his position as Prime Minister.
• India, Turkey and South Africa will become the biggest losers as the result of the US Federal Reserve’s tapering of the QE program, as the lack of structural reforms and the reliance on foreign capital will wreak havoc on these economies, forcing -25% currency deprecations. Riots will break out, and armies will be called in to suppress demonstrations against inflation and inept governance.