Year of the Dragon suggests stock market gains in 2012

The arrival of the year of the dragon next week could bring about a change of fortunes for the Hong Kong stock market, although not for a while yet. At least if one is it to believe CLSA’s popular Feng Shui Index — a tongue-in-cheek look at what lies ahead when interpreted in the context of the Chinese zodiac and the five elements of metal, water, wood, fire and earth.

While designed to put a light-hearted spin on the bank’s predictions for the year — it does arguably make CLSA stand out among the numerous outlooks that are published this time of year — some people seem to take it quite seriously. According to Philip Chow, a transport analyst at the firm who preceded over the release of the 18th incarnation of the index yesterday dressed in a traditional Chinese silk jacket, when the stock markets collapsed in September last year he was getting emails from people asking whether things would improve in the year of the dragon.

And it seems this could well be the case. A mythological creature, the dragon is viewed as a major game-changer and in Chinese history it usually appears as a pre-curser of an event of great relevance, Chow told a packed room at the China Club in Hong Kong yesterday.

“The dragon represents a transition of power, a change between old and new and is always seen as an inflection point,” he said.

Thinking back to the previous year of the dragon in 2000, which coincided with the collapse of the internet bubble, inflection point and game changer sound about right. Luckily for investors, one has to view the zodiac sign in the context of the five elements as well, and that makes 2012 the year of the water dragon. The way to interpret this, according to CLSA and the feng shui masters it has consulted to compile its index, is that the dragon will emerge from the water in a move that will herald positive events ahead.

“The dragon is bold and when it surges, it surges big,” Chow said, although he did acknowledge that the dragon is also an unpredictable beast that spits fire when it is angry. So, investors need to watch out they don’t get burnt, he said.

The last time the water dragon emerged from the lake was in 1952 and while the Dow Jones index finished higher that year, the gains did not come without a struggle. When the dragon handed over to the snake early the following year, the index had risen only about 8%.

CLSA’s feng shui index suggests that it will take the dragon until August to accumulate enough energy to come out of the water. But after this inflection point has been hit, the dragon will “turn sharply and head north at a rapid pace.”

“If our readings are right, September should be one of the best months of the year, with plenty of activity in the markets,” CLSA said and added that the upward trend should continue through October and November. However, since apparently you can never see the head and the tail of the dragon at the same time, the rally should run out of steam come December, although the index suggests that the market will continue to shuffle sideways through to the end of January 2013.

This year is also more balanced in terms of the five energy elements, which suggests that the market will be less volatile in 2012 than it was last year. Fire is the only element that is not represented at all this year, but since fire subdues metal — think gold — this should be positive for the financial markets. That said, metal and earth are also lacking in the first half, which is why the positive breakout isn’t expected to come until the second half — indeed, as the dragon sinks back into the lagoon after chasing the rabbit back into its hole next week, the market may well continue to slide until July. In March, the best direction for money is west, which doesn’t bode well for Hong Kong. Although Chow noted on a direct question that this could perhaps also refer to western China as this region continues to develop.

According to Emily Lam, who normally works in institutional sales but yesterday doubled as Chow’s apprentice in outlining the feng shui predictions, the prevalence of water and earth will make this a good year for stocks related to these two elements, including cement, gaming, property, tourism and transport. Cement in particular is expected to fair “exceptionally well”, she said.

Given the dragon’s association with a transition of power, it is perhaps logical that this is the year for a leadership change in China. There are also a number of elections to be held this year, including the US presidential race. However, Chow refrained from making a call on whether the presence of the dragon means President Obama will fail to be reelected.

Curiously though, there is little in the charts to suggest a major change of fortune for Xi Jinping, a water snake who is widely expected to take over from Hu Jintao as general secretary of the Chinese Communist Party later this year — although there is a rather understated hint of a job opening in the autumn, the CLSA report noted.

“This isn’t slated to be his best year by a long shot,” it continued, playing on the Cantonese word for dragon, which is long. “Best not to cross him, though, if he is true to type: snakes always settle scores.”

In Germany, Angela Merkel, like all wood horses, is faced with the threat of “a shocker of a year” and the fact that her inner animal is the sheep doesn’t bode well in times of trouble. That said, the wood horse is one of the strongest and most determined signs with seemingly endless stores of patience, persistence and persuasion — even this sceptical reporter must admit that is spot on with regard to the German chancellor so perhaps there is something to this Zodiac thing after all. And encouragingly, wood horses are “known for making decisions that turn out to be spot on”. Let’s hope for the sake of the future of the euro-zone that this continues to be the case.

One person, who is expected to have a “fab” year during the year of the dragon is Queen Elizabeth II. A fire tiger, she will celebrate 60 years as head of state this year, which means she has been on the throne for one full 60-year cycle of the Chinese zodiac. Based on the feng shui principles, she has begun one of the luckiest periods of her life and the fact that water, which is so prevalent this year, is her lucky element is “simply icing on the cake”, CLSA said, referring to it as a “win-Windsor” situation.

The year of the dragon will replace the year of the rabbit on January 23.