THINK TANKFeb 07, 2018

Andrew X. Tang: Beware of the 2018 global financial crisis

As 2018 China Spring Festival is approaching, many investors are full of confidence in the future of stock market. In particular, the stock market in the United States hit a series of new peaks one after another. This situation makes many investors think that the upward trend would still last for at least 2 years. However, I think the global financial crisis would most probably explode in 2018, investors need to beware of the global market diving sharply and be really cautious.




As the saying goes, a heavy snow promises a good harvest. While in 2008, heavy snow does not actually bring good harvest to investors. On the contrary, many investors shrouded in the shadow of the financial tsunami in 2008, the U.S. subprime mortgage crisis triggered a global financial crisis. Lehman Brothers and Bear Stearns, the world's leading investment banks, closed down and Merrill Lynch was acquired by Bank of America. Immediately afterwards, the U.S. introduced the policy of quantitative easing of the currency, which has stimulated the U.S. economic recovery. Until 2nd February, 2018, the S&P 500 Index closed at 2762.13, the Dow Jones Index closed at 25520.96 and the Nasdaq Index closed at 7240.95. Compared with the highest point in October 2007, the S&P 500 Index, the Dow Jones index and the NASDAQ have increased by 178.20%, 181.77%, and 258.61% respectively. 2018, heavy snow fell again China, we will see if it indicates a good harvest!


For the future trend of the U.S. stock market, many investors think that the tax cuts and technological innovations launched after Trump took office will continue to push the U.S. stock market to have at least 2 years of rally. Based on a decade experience of mine in the aspect of international financial markets, the major problem hinders the healthy development of the economy of the US is its monetary policy. If Trump continues the quantitative monetary easing policy, the upward tendency of the U.S. stocks will be overwhelming. However, Trump is advocating the implementation of interest rate hikes rather than quantitative easing. Our team’s study of the U.S. stock markets in the past 100 years comes to a conclusion that the breaking out of the financial crisis will definitely lead to the quantitative monetary easing policy. With the gradual recovery of the U.S. economy, the Federal Reserve will gradually implement the rate-hiking policy, which would definitely be followed by a new round financial crisis.


In 2018, it is quite sure that the Federal Reserve will raise interest rate. In the past ten years, thanks to the quantitative easing monetary policy, the U.S. economy has recovered and the U.S. has got rid of the impact of the 2008 financial tsunami. However, during Trump's administration, it is somewhat even harder to take tax cuts as the only life-saving straw as it even contributes more to the stock market if it has a market meltdown.


I assume that whether or not market plunges of the U.S stock market will affect our Chinese stock market could be an anxiety point of Chinese investors. However, my answer is: Absolutely positive! There are 236 Chinese stocks included in Ming Sheng Index, a panic selling could surely happen if a meltdown market occurs. The Chinese stock market also notoriously susceptible to the plummet.


In 2015, the Chinese stock market once experienced an avalanche. Shanghai Composite Index touched 5178.19 as of 12 June, 2015; as of 26 August, 2015, the Shanghai Composite Index fell to 2850.71, a significant drop of 44.947%. Perhaps the plunge in Chinese stock market two years ago have been forgotten by the Chinese investors when many investors even hard to sell-off even at a below-cost price. When most of us have a sure mind that history will not repeat itself, the sad story is that history even repeats every day in the international market. The Chinese stock market has a limit of up and down movements (10% per day). However, there is no such restriction for international financial markets. Rising and falling can be achieved in one step. If we add tens or hundreds of levers, the financial myth can be realized.


As for the financial leverage, deleveraging has always been a topic of discussion in the Chinese financial market. I believe that many Chinese investors think leverage is risky under the inertia of thinking, and high leverage equals to high risks. However, in my own opinion, a high leverage may not be a high risk at all. This opinion has been further discussed in my previous articles, "Understanding the Relationship between Financial Leverage and Investment Risks" and "the Application of Financial Leverage in International Investment Market ". I believe that in the futures market, a higher leverage is related to a lower risk. A high leverage should be used to manage positions in the futures market, because the remaining capital determines whether the positions held by the explosion positions. Only high leverage can reduce risk, low leverage explosion probability higher than high leverage. For a high leverage and a high risk, this is another topic in the financial markets, that is, funding. Funding and futures are two distinct investment patterns.


As we all know, funding is due to the lack of funds, investors need to borrow funds to invest in order to increase investment income. If you have a deal of 5 yuan which consists of 4/5 of funding from investors, a 2 limit down will lead to a devastating ending thus we can easily prove that the leverage has a positive relationship with the risk of funding.


China's financial market is still in the early stages of development, far behind the international financial markets. As China's financial markets become more and more in line with the international financial markets, investors can only remain invincible if they improve their financial investment capabilities. However, financial investment is still a highly specialized skill. For the retail-investors-based Chinese financial market, in my opinion, retail investors should consider choosing professional private equity (PE) manager to avoid various risks. There still exists a big gap of professional between retail investors and PE manager. Moreover, private equity in China have gradually entered a mature stage. In the future, China's private equity will finally dominate in the securities market.


Nowadays, the Shanghai Composite Index consolidates at 3400-3500. As the Chinese New Year is coming, I am not positive about the future prospect of the Chinese stock market. After all, this year is a tough year for the international financial market. If the U.S. market has a decrease of 30-50%, the Chinese market must be affected.


The U.S market, 236 Chinese stocks in the Ming Sheng Index, CSI 300, the Shanghai Composite Index as well as the SZSE Component Index are all linked closely to each other which indicates that even a tiny variation could possibly bring about impact towards our Chinese stock market. Butterfly effect could best explain that. As a mature investor, all risks should be taken into consideration in the fierce market.


Chinese retail investors take about 80% of the Chinese stock market. If this year's global financial crisis really broke out, there will be a group of innocent retail investors who suffer from damage. Although we could not predict the exactly date of the next financial tsunami, as an international financial professional investor, I suggest that investors should relax and take a deep breath whilst retail investors should be away from the decisive battle between two armies, for the future trend of the international financial market, I believe that, ‘All phenomena are like a dream, an illusion, a bubble and a shadow, like dew and lightning. Thus, should you meditate upon them.’

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