Events that made waves in financial markets and global economy

1 Black gold loses its shine

Oil suffered one of its worst years in the past decade, as a combination of severe over-capacity and weak demand forced oil prices to their lowest levels since the financial crisis.

Brent crude fell to below US$35 last week, the weakest level in six years. Over the past 18 months alone, oil prices have fallen over 50 per cent.

The outlook remains murky for the commodity, also known as black gold, with Goldman Sachs predicting that it could hit US$20 a barrel. A big factor in the current weakness in oil prices has been the decision by the oil cartel, the Organisation of the Petroleum Exporting Countries (Opec), to continue pumping well above the usual consumption levels.

Goldman Sachs estimates that the 13 members are currently producing 32 million barrels per day, above the 30 million barrels a day level previously agreed by Opec.

The decision to produce more oil came as American producers could extract oil from shale reserves at about US$60 a barrel.

Hence, the current strategy used by Opec, engineered by Saudi Arabia, is aimed at keeping market share for Opec and forcing US producers out altogether.

Whether this level of low oil prices will remain will be a question answered possibly by next year, especially if demand from China picks up. This looks increasingly unlikely, however, with Chinese growth tipped to come in at 6 per cent next year, down from this year's projected 7 per cent rate.

For now though, consumers in Singapore are enjoying much lower pump prices and electricity costs.

Inflation across many oil importers are also down, with Singapore's own topline inflation hitting negative territory as a result of weak oil prices.

2 Blockbuster acquisitions

While public markets were in turmoil, private dealmakers were busy on the sidelines making some of the biggest mergers and acquisitions in corporate history.

According to market information services provider Dealogic, 2015 is set to be the biggest year for buyouts ever, with about 37,431 deals worth US$4.75 trillion (S$6.7 trillion) sewn up.

The biggest was pharma giant Pfizer's US$160 billion acquisition of Allergan. The deal was struck to help Pfizer cut its tax load through a process called "tax inversion" - getting its company reincorprated in a country with lower taxes.

Another gigantic deal was the US$130 billion all-stock merger between chemical giants DuPont and Dow Chemical. Dubbed "the deal of three centuries" by Wells Fargo analyst Frank Mitsch, the merger was one of several in a wave of consolidation across the industry precipitated by falling demand and weaker commodity prices.

Behind the deals, bankers profited immensely from the surge in mergers and acquisitions this year.

Goldman Sachs topped the league of extraordinary investment bankers, responsible for advising on more than US$1.7 trillion worth of deals. Morgan Stanley was a close second on US$1.49 trillion and JP Morgan third on US$1.48 trillion, according to Dealogic.

3 Connecting the trade dots

The global economy may be in a funk, with China looking fragile and Europe unable to get its act together, but the gloomy outlook has not stopped policymakers from concluding major trade pacts this year.

At the top of the list is the ambitious Trans-Pacific Partnership, a free trade deal inked in October after years of negotiations.

Led by the United States, the deal will link 12 countries across three continents in a pact that covers goods, services and investments.

The deal needs to be endorsed by the government of each participating country but analysts are already predicting positive impacts.

For one, the deal will change the rules of the game for trade and innovation, noted HSBC.

"Developing countries like Chile, Malaysia, Peru or Vietnam gain access to a large pool of innovation via open markets, promoting technology transfer. Developed countries like the US and Japan will be able to market each innovative product to more customers," it said.

Not to be outdone, China also made big moves on the trade front, pitching a new development bank to rival the International Monetary Fund and the Asian Development Bank. The Asian Infrastructure Investment Bank (AIIB) aims to invest in and facilitate infrastructure projects in this part of the world.

The US$100 billion (S$141 billion) AIIB has garnered the commitment of 57 countries as potential founding members, including Singapore, India, Britain, France, South Korea, Australia and Iran.

Nearer home, after a year of preparations, the ASEAN Economic Community will finally come into force at the turn of the year, heralding new opportunities for one of the world's fastest-growing regions.

4 Noble comes under attack

One of the year's biggest local corporate controversies was that swirling around commodity trader Noble, which saw its share price plummet after an anonymous research firm accused it of cooking its books.

What made it more astonishing was that the attack was similar to an incident in 2013 when short-seller Muddy Waters took on commodity firm Olam.

In February, Iceberg Research accused Noble of exploiting accounting loopholes. These accusations centred on Noble's asset and contract valuations, which Iceberg claimed Noble had manipulated to hide cash flow and debt problems.

Together with the global commodity woes, the Iceberg saga severely hit investor sentiment, sending Noble's shares down by as much as 70 per cent during the worst of the saga. In response, Noble put up a stout defence, accusing a disgruntled former employee of being behind Iceberg.

It also moved to make the company more transparent, changed its management team and sold some of its assets, including its base metal stockpiles, to reassure investors about its balance sheet.

Chief executive Yusuf Alireza has repeatedly stressed that Noble has more than enough liquidity to service short-term debt.

And it said it plans to raise at least US$500 million (S$705 million) through "asset disposals and/or other strategic/financial transactions currently under discussion".

With its stock trading at about 43 cents, down more than 60 per cent from its February peak, the company has a fight on its hands to regain the confidence of the market, even as its core business, commodities, continues to face stiff headwinds.

5 French firm buys NOL

After months of speculation, Neptune Orient Lines (NOL) was finally shipped off to a larger rival as the industry is buffeted by fierce competition and weak demand.

The buyer is CMA CGM, the world's third largest shipping liner, which is offering $1.30 a share, valuing NOL at about $3.4 billion.

Temasek Holdings, which holds 67 per cent of NOL, has agreed to sell its entire stake to CMA CGM.

The combined entity will cement CMA CGM in third place as other rivals in the industry also continue to consolidate.

NOL became a Singapore icon after it was set up in 1968 by the Government to boost maritime trade to the island's ports.

Over the years, it grew its fleet from a handful of ships to become a global shipping line that, at one point, challenged the industry's biggest companies.

But, plagued by overcapacity and falling demand, a wave of consolidation took place in the industry and NOL was caught swimming against the tide. It never managed to recover, following a dip in fortunes after the financial crisis.

The shipping firm, in the red for the past four years, had embarked on a series of cost-cutting exercises to stem its losses, but to no avail.

It has sold off its building in Alexandra Road as well as its logistics business to raise funds. But the company kept burning through cash, with no end in sight - until November last year, when CMA CGM first approached NOL about the possibility of a takeover.

The $1.30 offer is far below NOL's share price of $5 in the middle of the past decade but analysts have given the deal the thumbs up, noting that it will take a major investment to make it competitive again.

In the end, NOL chief executive Ng Yat Chung decided to opt for a merger than try to battle the raging seas of consolidation and over-capacity.

Obstacles remain, however, especially as the deal needs to gain anti- trust approval from Europe, China and the United States.

That could be why NOL shares are still trading at about $1.24, below the $1.30 offer price.

But barring this slight hiccup, it looks likely that NOL will not remain a Singapore icon much longer.

6 Emissions scandal engulfs Volkswagen

In September, the US Environmental Protection Agency found many Volkswagen cars had a device which could detect when they were being tested, and change their performance to improve results.

What made the scandal even worse was this device was implanted with special software designed specifically to cheat test standards.

Since then, the German carmaker, which has been on a drive to sell diesel engine cars, has admitted to cheating in US emissions tests.

The storm later grew global, as Volkswagen, the world's second-biggest carmaker, also said about 11 million cars worldwide, including eight million in Europe, are fitted with this so-called "defeat device".

The impact of the cheating scandal on the company was immediate, with the firm's reputation taking a huge hit. "We've totally screwed up," said Volkswagen's US boss Michael Horn.

The company's group chief executive at the time, Mr Martin Winterkorn, said his company had "broken the trust of our customers and the public". Mr Winterkorn later stepped down, to be replaced by Mr Matthias Mueller, but that has not helped the company regain its lost reputation.

There was also a huge financial cost to the company. It has set aside €6.7 billion (S$10.3 billion) to cover costs, which resulted in the company posting its first quarterly loss in 15 years of €2.5 billion in late October.

What's more, analysts are increasingly questioning the entire diesel engine industry, arguing that the whole premise of the industry is a hoax to begin with.

For now, though, some companies are benefiting from Volkswagen's problems.

Japanese carmaker Toyota has cemented its position as the world's biggest carmaker, after seeing its sales jump following the scandal.

7 The blackest Monday after Shanghai rout

For the first six months of the year, it looked as if the markets would treat investors well.

Shares were generally up, with the Shanghai Composite stock index looking particularly strong. The index hit 5,166.35 points on June 12, more than double the level in the middle of last year.

Much of this frenetic buying in China was the result of highly leveraged trades, with investors using borrowed money to bet on small counters.

It would only be a matter of time before the bubble burst. And so it did, in spectacular fashion.

Spooked by the poor economic data that showed the slowdown in the Chinese economy, big institutional funds started to unwind their positions from late June.

And then panic set in.

Following a shock move by the Chinese government to devalue the yuan on Aug 10, the Shanghai stock market endured one of the worst one-day falls in history.

Stocks fell 8.49 per cent on Aug 24 - dubbed Black Monday by the media - with many counters losing more than 20 per cent of their value.

The contagion also spread to other markets, including the United States. The Dow Jones Industrial Average fell 1,000 points at the opening bell on Aug 25 and eventually closed 588 points in the red.

Analysts estimate that more than US$5 trillion (S$7 trillion) was wiped out from the markets over August alone.

Fortunately, the scare did not have a more permanent effect on the economy, with many markets having stabilised since then.

Sentiment, however, remains weak, with the Straits Times Index unable to rise above the psychological 3,000-point barrier.

But for many investors Aug 24, 2015, will be remembered as one of the blackest days for the markets.

8 Massive lay-offs in banking industry

Falling profits and regulatory scrutiny meant the banking industry suffered another wave of lay-offs.

The worst hit were major banks in Europe and the United States, which have shed close to 100,000 jobs this year, according to reports.

Some of the biggest names in the industry have been affected, including HSBC Bank, Standard Chartered, Rabobank and JP Morgan.

Barclays imposed a hiring freeze in September after announcing that it will slash 19,000 jobs across the group, including 7,000 in its investment bank.

Others like Unicredit, Italy's largest bank by assets, said they will shed 18,000 jobs by 2018.

A big part of their mounting woes are the much stricter regulations arising from the financial crisis wrought by the US sub-prime collapse in 2008.

Regulations like Basel III make it a requirement for banks to raise capital.

Coupled with low interest rates, many lenders continue to suffer.

Another reason is weaker economic growth that has translated into poor investment sentiment.

Usual money spinners such as companies' listings on share markets have been weak this year, with more money going into private equity deals.

In Singapore, local banks have not resorted to mass lay-offs, given that their business remains strong but hiring sentiment has been muted, said human resource professionals.

Asian banks, bolstered by strong reserves and more liberal regulations in the region, have continued to grow.

But even so, headhunters warn that hiring sentiment will be weak next year as banks continue to consolidate.

9 US interest rates lift off - at last

After keeping markets on edge for most of this year, the United States Federal Reserve finally raised interest rates, the first time in nearly a decade. The actual hike was not significant on its own: Rates will be raised by just 0.25 of a percentage point.

But it marked the end of a seven-year period of near-zero interest rates and a period when hundreds of billions of dollars were poured into the economic system by central banks. These extraordinary moves were made to avert another Great Depression, following the financial crisis in 2008. Since then the US has made progress, albeit slow steps, on getting its economy back in shape.

The unemployment rate has dropped to 5 per cent, down from the heights of nearly 10 per cent in 2008, while growth is steady at about 2.4 per cent.

Mr Nick Peters, portfolio manager at Fidelity Solutions, said: "This is ultimately a vote of confidence in the US and its continuing economic expansion. Over the next few months, the Fed will be watching to see how the economy and markets react to this rise."

But there are risks that may arise from the Fed's move, particularly for emerging markets such as parts of Latin America and Asia. Many corporates in these regions borrowed heavily during the record low-interest-rate period but, with growth slowing, they might struggle to repay their debts.

If a debt crisis does start to form, Fed chair Janet Yellen will have her work cut out for her.

Even though the Fed has always placed domestic concerns - balancing US inflation and growth - at the forefront of its decisions, it may well be that, given the connectedness of the global economy, she may have to turn her gaze to the global economy for future monetary policy decisions.

10 Yuan's great leap forward

The Chinese yuan took a great leap forward this year in its quest to become a key international currency.

It was accepted as part of the basket of currencies, alongside the United States dollar, the euro, the British pound and the Japanese yen, in the International Monetary Fund's Special Drawing Rights (IMF's SDR).

The yuan will be introduced to the SDR on Oct 1 next year, a move aimed at accelerating greater liberalisation of the world's second-biggest economy.

Under the SDR's new make-up, the dollar will be strongest, at 41.7 per cent. The euro will be 30.9 per cent, the yuan 10.9 per cent, the yen 8.3 per cent, and the pound 8.1 per cent.

The SDR plays an influential role in global finance, helping governments protect their financial reserves against global currency fluctuations.

It is also used as the basis of loans from the IMF's crisis-lending facilities.

But the yuan's transition to a global currency will not be a smooth ride.

The Chinese government devalued the currency in a shock move in August, which led to huge corrections in stock markets around the world.

But the volatility should not sidetrack the yuan's ascent, with Singapore likely to be a big beneficiary.

Singapore will continue to benefit from the internationalisation of the yuan, as it is one of the key offshore hubs for the currency.

Analysts expect Singapore to continue growing its role in helping to push the yuan as a global currency.

This should, in turn, help further cement Singapore's position as the major foreign exchange centre in Asia.

This article was first published on December 22, 2015.
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