Year the snake bit, but not fatally

Year the snake bit, but not fatally

The Year of the Snake, 2013, has been mixed in many ways. We have witnessed some unexpected surprises while certain expectations have not come to fruition. Will this uneven trend continue into next year and beyond? Here is a recap of current trends and a look ahead.

Bond funds have had their worst year in history. Concerns over a tapering of the Federal Reserve's quantitative easing policy have driven bond values down and their yields up. This has given rise to a very high outflow of investor funds from bonds in the last half of 2013. Just look at the graph showing bond flows through 2013.

Throughout 2012, the possibility of quantitative easing (QE) tapering in 2013 also seemed to have an influence on equity market indices. In late 2012 and during 2013, markets reacted to any news of potential QE tapering by adjusting downward sharply. However, each piece of news was subsequently rebutted and there was no QE tapering at all. The Fed only confirmed on Dec 18 that a modest scaling-back in monthly asset purchases, to US$75 billion (2.46 trillion baht) from $85 billion, would begin in January.

Equity markets thus continued their climb, adding to the bull run that has been in place since 2009, as the second chart shows. The S&P 500 index has more than doubled since the lows of March, 2009. The German DAX and US Dow Jones are not far behind this impressive performance.

Many see the equity run in the most recent years as a result of banks utilising QE funds through bonds which the government finances, as a way of investing in equities rather than feeding cash into industry and the economy as loans. This is sometimes considered negative in relation to economic recovery.

Analysts are now predicting that when QE begins to taper, the market bull run will end and there will be significant corrections. Others say that there will be no such effect and that markets will actually stand on their own after some initial corrections. These analysts predict that the bull run is edging into its last quartile and that this is the most exciting part. Certainly the balance of getting sovereign economic growth right without allowing inflation to overheat an economy is tricky and so far it remains to be seen what 2014 will bring.

Gold has crashed this year. Despite the expectations that it would hit $2,000 per ounce at some stage in the near future, the price of gold declined from a high of just under $1,700 at the start of the year to a recent low of $1,217. That is an overall drop of 28%. Gold saw its steepest drop in a single quarter for 90 years in 2013.

Currencies have moved in line with expectations this year although when it comes to currencies there is no one expert who can accurately predict what is going to happen. Currencies usually follow trends but they also have a habit of reversing expectations and going in directions that follow no logic. In 2013, the US dollar strengthened against the Australian dollar by nearly 15% and the baht by nearly 5%. It also weakened against the euro, British pound and Chinese yuan by varying factors between 0.32% and 2.85%. Given the massive decline in gold prices, this is rather surprising as the dollar has traditionally strengthened significantly when gold values decline.

In addition to gold and currency movements, general commodities have also experienced a very tough time this year, if tough is considered declining prices. This is bad news for those invested in commodities but good news for us as consumers because the cost of living is held somewhat in check. Could this signal the end of the commodity super cycle? (See "The commodity super cycle", Net Worth July 27, 2009.) At the beginning of 2013, many analysts predicted that this could be a year in which commodities would perform very well for investors. Nothing could have been far from the truth. Many commodities have declined a long way and left investors winded from the shock. A great deal of emphasis has been placed on China, the major commodity consumer of the future. We have also witnessed the fact that China has smart management through very well-educated individuals who are leading the way. While the growth in China has slowed, it is still exponential in terms of the real practicalities it is facing.

In this respect much of the commodity world needs to look at China and see it as the leader in driving prices higher. If growth picks up in the next year then the chances are commodities will make some sort of recovery. Despite the fact that China has been seen as trying to move toward an economy led by domestic demand, its reliance on global supply sources could emerge once more.

Moving away from standard market variables and global trends, other factors of interest in 2013 have included the birth of Prince George in the UK. This was seen as a boost to the morale of the public but one wonders if there is any relation to the recent strong increase in economic growth both experienced and projected for the next two years.

In his autumn statement, George Osborne, the British chancellor, announced these facts and then went on to disappoint expats by stating that capital gains on property sales will be taxed for all non-UK residents from 2015. This may have dampened the prospect of property investors in the UK from overseas.

Of course there is an allowance of growth prior to taxation and many will actually not suffer taxes in a practical sense.

Some say that this is a measure to curb the significant increases in property prices in the UK, particularly London, over the past two years.

The move toward the implementation of Foreign Accounts Tax Compliance Act (Fatca) in the US has continued to advance. The US government has continued to sign agreements with various countries that will comply with their requirements to report US citizens' assets and income movements above certain thresholds. The implementation was to be effective in 2014, and has now changed twice to a new date in 2015.

Will that, in fact, affect many expats in Asia? It largely depends on their own circumstances and whether they have anything to hide from the US Internal Revenue Service. Some of the confusion and delays have related back to the countries that have signed agreements.

There have been hearsay reports that all US dollar transactions would be discontinued in countries that do not cooperate.

Other countries apparently have requested reciprocal arrangements, leaving it unclear as to whether this would go against the constitutional rights to privacy of individuals in the US. Despite these rumoured reports, it seems that Fatca is progressing.

These macroeconomic and market facts have and will continue to have an impact on expat life in Thailand and Southeast Asia. Are you ready for potential changes?


Andrew Wood has been an expat in Asia for 34 years and is executive director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back over nine years. These articles, which cover the complete A-Z of financial planning, are available to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to enquiriesthailand@fsplatinum.com.

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