Topic: AA UNION CAPITAL INVESTMENT SOLUTIONS & PRODUCTS - Waypoints for 2019

[MelissaLiberson]

                       

Waypoints for 2019

From technology and USD stability to China’s management of its increasingly tricky relationship with the USA, we review six key market drivers and risks in 2019 with special attention given to implications for Asia.
 
Keeping inflation under control

Growth momentum in advanced economies seems strong enough to extend the cycle into 2019 and beyond. The more important question for markets is whether inflation will remain as benign as it has been. If inflation rises significantly more than what markets (and we) currently expect, the US Federal Reserve (Fed) will be seen as being behind the curve. Bond yields would further increase significantly, while equities and other risk assets would likely decline substantially. Barring an unlikely surge in productivity, wage growth should be the key driver of inflation.

In a largely oil-importing Asia, there is an additional element of supply-side inflation from a potential rebound in the price of oil. Although the current levels do appear somewhat oversold, we do not expect a sustained and excessive rise that will contribute meaningfully to imported inflation. If this plays out, then inflation across the region is likely to remain fairly benign, except for possibly in India and Indonesia. China is likely to see inflation easing to around 2%, which should give authorities a much needed wiggle room to deploy further monetary easing if needed.

US dollar stability

Gyrations of the USD tend to destabilize the world economy and financial markets. USD strengta h, as seen in H1 2018, can put severe strain on economies that require cheap dollar funding. Any significant weakness in the USD will put pressure on export champions, such as Germany and Japan. It will also raise the specter of inflation as commodity prices tend to rise sharply in response to a weak USD. The best of all worlds is a fairly stable USD. With Fed tightening being well advanced and the European Central Bank as well as the Bank of Japan gradually catching up, chances are good that the USD will indeed be stable.

A broadly stable USD against the majors should provide a platform for Asian currencies to find a firmer footing, especially if there is improved clarity on the trade tensions between the USA and China. A stronger EUR would also allow both the CNY and the SGD to appreciate against the USD without rising too much against their respective trade-weighted baskets, which are important barometers for both Chinese and Singaporean policy makers.

China’s resilience

The US trade policy is putting considerable strain on China. Moreover, after the USA recently renegotiated trade agreements with Mexico, Canada, and South Korea, and amid de-escalating trade tensions with Europe, the US trade stance toward China could harden further. China’s patience is thus likely to be additionally tested. If its policymakers proceed cautiously, as in 2018, risks of instability should be limited and the expansion can be extended. However, any aggressive currency policy, credit easing, or foreign policy would be destabilizing.

One issue that would also start to gain more attention is the ability of the People’s Bank of China to channel liquidity to small businesses, which have been perennially credit starved and thus capital injection. Thus far, success has been in short supply.

Calmer European politics

Eurozone growth is expected to remain above potential in 2019, thanks in part to the still-loose monetary conditions. We expect political stress to calm down to some extent. The exit of Britain from the European Union (EU), slated for 29 March 2019, should not do much harm to either side if handled wisely. In Germany, the ongoing political realignment is unlikely to cause instability as the influence of the extreme parties remains limited. Meanwhile, we believe that Italy and the EU will ultimately find a compromise over the country’s budget deficit while reaffirming Italy’s euro membership. The impact on Asia will likely be via EUR/USD, as outlined above.

Emerging markets rebalancing

Emerging markets (EM) entered the financial crisis with fairly healthy balance sheets. After 2008, cheap USD funds induced EM, especially corporations thereof, to substantially boost their foreign currency borrowing. Yet with the costs of USD liquidity rising in 2018 as a result of a more hawkish Fed, stresses emerged and some EM currencies suffered severe setbacks. At the end of 2018, there were indications that internal and external balance was being restored, in part with the support of the International Monetary Fund. If that process continues in 2019, EM can recover and global investors would benefit. For Asia, the rebalancing process will likely have less of an impact than what happens with global growth. Nevertheless, the stability that an orderly rebalancing brings will benefit Asian economies, especially those still in the EM space.

Tech and healthcare innovations

Technology stocks have been the dominant drivers of global equity markets over the past decade. The MSCI World IT sector has outperformed the overall market by approximately 200% since March 2009. Social media, online shopping, and the evermore advancing handheld devices have taken the world by storm. An important question for investors is whether growth in this sector will continue to remain this strong with the emergence of new areas of focus such as virtual reality and artificial intelligence.
 
Both of these two sectors have great relevance for Asia, where growing investment in mobile network infrastructure and rising disposable incomes have seen mobile penetration and usage growing sharply. Many parts of Asia are also seeing fairly acute graying of their respective populations and demand for healthcare services in those areas is likely to see strong sustained growth. With 2019 quite likely to see increased fiscal spending in a range of infrastructure (especially in China), mobile communications and healthcare in the region are likely to be meaningful beneficiaries.
 
A second key sector that is likely to influence the fate of equity markets is healthcare with investors keeping an eye on gene therapy and other innovative treatments.

Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.