Where will the money flow next year?
IF YOU had tracked fund flows closely this year and acted on the directions in which they were moving, there is a pretty good chance that you would have made at least a small fortune.
Citi Investment Research's latest fund-flow data shows that, in the past 12 months, equity funds attracted a staggering inflow of US$252 billion (S$320 billion) in fresh monies.
Nearly half of that money - US$118 billion, to be precise - was invested in exchange-traded funds, which pool money to buy into baskets of stocks, in the United States.
In hindsight, this would help to explain the record-breaking performance of US stock indexes: the Dow Jones Industrial Average has gained 25.76 per cent while the S&P 500 Index has jumped 29.16 per cent, with the Nasdaq Composite recording an even bigger 38.01 per cent rise.
So much money has been poured into Wall Street this year that even an ordinary investor would have enjoyed the kind of spectacular returns that used to be achieved only by canny investment gurus.
Another market that attracted a big inflow of funds this year was Tokyo, which netted US$44 billion. It caused the Nikkei 225 Index to jump an eye-popping 55.64 per cent for the year.
Meanwhile, emerging-market funds have turned into a pariah for investors. Compared with the US$50-billion inflow last year, there has been a net US$15-billion outflow this past year.
That explains why South-east Asian markets failed to register any big gains. Singapore's benchmark Straits Times Index is flat for the year, Bangkok's SET Index is down 6.7 per cent while the Jakarta Composite Index has lost 2.4 per cent.
Now, as we head towards the last full trading day of the year today, we find ourselves asking if the same trading patterns will hold true next year.
This year, investors finally got sick of the anxiety that had soured their appetite for stocks since the global financial crisis five years ago, and put serious money back into US equities.
And as the stampede into the US equities market started, safe-haven assets such as gold took a beating as fears of a fresh financial crisis receded, while inflation in major economies such as the United States, Europe and Japan remained low.
But now that US equities have risen so much in percentage terms, the big question is whether there will be a major correction on Wall Street. The bigger fear is whether markets such as Singapore would suffer collateral damage, too, even though they had failed to enjoy upside gains.
What else could possibly go wrong in the market?
It is hard to say. With the US central bank still printing money at a prodigal rate of US$75 billion a month even after it starts its tapering efforts from Wednesday, the liquidity it is pouring into the financial system will remain the single biggest factor determining how US stocks perform.
In Japan, where a similarly massive money-printing effort is under way, the worry is that it will succeed in bringing back inflation, but not the economic growth which investors long for. That may, in turn, slay the bulls now on the rampage in the Tokyo stock market.
As for China, whose Shanghai stock market is down 7.4 per cent this year, the perennial question over whether bubbles are forming in its real-estate market will persist. There is another big worry: the occasional seize-up in its banking system as stronger banks hoard their cash and refuse to lend to weaker ones.
Still, the odds are that traders will be able to navigate the next year as deftly as they have done this year, while the world's central banks will succeed in their balancing acts to keep their respective economies humming. Happy New Year.