THINK TANKFeb 07, 2018

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 by one. This situation makes many investors think that there still will be 1 to 2 years of upward trend in the future. However, I think that 2018 is likely to erupt the global financial crisis, investors need to beware of the global market diving sharply and be cautious.

As the saying goes, a heavy snow promises a good harvest. While in 2008, heavy snow did not 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 2ed 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 has increased 178.20%, 181.77%, and 258.61% respectively. 2018, heavy snow fell again China, whether it is a good harvest, so we'll see!

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 my more than a decade experience in international financial markets, the core issue in the economic development of the U.S. is due to the monetary policy. If Trump continues the policy of monetary quantitative easing, the rise 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, each time the U. S. outbreak of the financial crisis will be introduced monetary quantitative easing, with the gradual recovery of the U.S. economy, the Federal Reserve will gradually implement the interest rate hikes policy, followed is a new round financial crisis.

In 2018, whether the Federal Reserve will raise interest rates is a sure answer. 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 difficult to rely on tax cuts to support the U.S. stock market's continued strength. Because the economic benefits of the U.S. stock market breaking are greater than the U.S. stock market increasing.

If the U.S. stock market plunges, will this affect Chinese stock market? I believe it is the most important thing that Chinese investors care about. My answer is: YES! There are 236 Chinese stocks included in the Ming Sheng index currently. Assuming the decline in the U.S. stocks, it is bound to affect these 236 stocks suffered panic selling pressure by international market. This also goes without saying that the trend of the Chinese stock market.

In 2015, the Chinese stock market 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 decrease of 44.947%. Perhaps Chinese investors have forgotten the plunge in China's stock market two years ago. At that time, many investors directly in accordance with the lowest sale price is also difficult to sell stocks. And perhaps, investors would say that China's stock market in 2015 has become the past, the future will not happen. I believe that the Chinese stock market in 2015 was staged 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.

About 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 is related to high risk. However, in my own opinion, a high leverage may not be a high risk. This opinion has discussed further in my two articles, "Understanding the Relationship between Financial Leverage and Investment Risk" and "Application of Financial Leverage in International Investment Market ". I believe that in the futures market the higher leverage is related with the 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. Assuming 1 yuan of the principal can get 4 yuan of funding, the total is 5 yuan, 2 limit down let investors lose all. This is the risk of funding. This proves the higher the leverage, the greater the risk for 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 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 dominate in China's 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 dropping 30-50%, the Chinese market must be loss. Assuming that the U.S. stock market plunged, do you think the 236 Chinese stocks in the Ming Sheng Index will not fall? Assuming 236 Chinese stocks plunged as the United States plunged, do you think the CSI 300 will still be strong? If the CSI 300 Index also drop, do you think the Shanghai Composite Index and the SZSE Component Index will carry it? If the Shanghai Composite Index and SZSE Component Index are following the global market decline, do you think stocks will rise? Therefore, investment has risk, investor need to be cautious!

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 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 give themselves a long holiday and retail investors should not participate in 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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