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Will the Year of the Dog take a bite out of investor profits?

In 2017, the Chinese year of the Rooster, investors found themselves crowing over the returns that saw global markets accelerate the gains that we were starting to see at the end of the year of the Monkey in 2016.

Investors were optimistic that having seen Donald Trump elected as President of the United States, that he would deliver on his pledges to deliver a massive boost to infrastructure spending and tax reform.

This expectation of a significant fiscal stimulus, as well as a growing global economy, helped drive gains that helped stock markets deliver some very decent returns despite concerns over tighter monetary policy by the US Federal Reserve, throughout 2017.

Year of the Rooster  (ending 31 January 2018)
Solar Year S&P500 Hang Seng Shanghai FTSE All ASX TSX
1946 37.86%         44.49%
1958 -6.75%         -21%
1970 -17.46% 41%   -17.97% 1.12% -10.14%
1982 -7.06 -13.5%   13.31% -16.47% -19.75%
1994 9.76% 106.5% -35.5% 27.97% 51.22% 37.8%
2006 8.36% 15.5% 1.6% 19.96% 18.84% 29.78%
2018 22.84% 39.6% 10.9% 3 9% 6.64% 1.66%
Average 6.79% 37.85% -7.6% 9.4% 12.27% 8.99%

Source: CMC Markets

For the purposes of this analysis I have taken the annual gains to the end of January 2018, even though the year ends on February 13th, and we will have to take note of the fact that we’ve seen some big drops in the past two weeks, which aren’t reflected in the numbers in the table above.

As we draw a line under the year of the Rooster, investors are now shifting their horizons to the Year of the Dog and thus far the New Year has got off to an uncertain start, with sharp declines in equity markets across the board.

The Chinese economy appears to be performing well with the most recent Singles Day on November 11th last year seeing consumers spend a record $25bn, as it becomes an even bigger event than Black Friday and Cyber Monday in terms of sales turnover.

On a broader level the Chinese economy grew at a much faster rate than expected last year coming in at 6.9% and well above expectations of 6.5% at the beginning of the year. It is expected to continue this progress albeit at a slightly slower pace in 2018.

The reforms to older more energy intensive and polluting industries don’t appear to be having too much of a drag on economic activity while on the consumer side retail sales have managed to stay above the 10% level for most of the last 12 months.

The Chinese government increased its spending plans last year on R&D by 11.6% and intends to spend another $556bn on expanding its hi-tech high speed railway system, by another 18% over the next two years. High speed rail is a sector where China leads the world and over Chinese New Year 400 million people are expected to cross the country as China shuts down for the week long holiday.

In the last four years the rail network has seen over 10,000km of extra capacity added and the plan is to expand the existing 25,000km by another 50% by 2025.

The only concerns revolve around corporate debt and while the Chinese authorities have taken steps to crack down on lending practices, concerns remain around property and the shadow banking system, which could roil financial markets in the months ahead if financial conditions start to tighten and rates start to rise in response to rising prices and inflation concerns.

As we look ahead to the year of the Dog previous stock market performance in these years has been patchy at best, with either big losses or big gains.

Year of the Dog (ending 2019)
Solar Year S&P500 Hang Seng Shanghai FTSE All ASX TSX
1947 -15.5%          
1959 33%       20% 26%
1971 11.9% 34%   -7.5% -20.5% -25%
1983 20% -37.5%   21% 10.1% 13.5%
1995 -2.4% -46% -27% -15.2% -20.5% -11.8%
2007 11.37% 28.5% 115.5% 9.6% 18% 9.1%
Average 9.72% -5.25% N/A 1.975% 1.42% 2.36%

Source CMC Markets

Judging by these numbers, and it’s probably wise not to use the Shanghai figures as a reference point, the prospects for this year, if the last two weeks are any indication suggest that the Year of the Dog could see investors undergo a turbulent time over the next 12 months. Certainly looking back over the last few years returns have been harder to come by.

Let’s hope the Year of the Dog isn’t the year that markets bite back on investors who’ve had an easy time of it over the last two to three years.

The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person

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