Fears for next year after a ‘scary’ 2018 for markets
The Star Online (31/12/2018) - The year 2018 was miserable for emerging markets (EMs), beset by, among other things, aggressive US interest rate hikes, tariffs and a trade war.
Increasingly aggressive is the withdrawal of liquidity through the automatic unwinding of the Fed’s stimulus bond purchases, which had mostly kept markets bubbling since the 2008 financial crisis. Within this unlucky confluence of factors, markets lately flew into a frenzy over a rapid slowdown in forecasts for global growth.
In the growing absence of liquidity-induced markets, it is back to fundamentals and earnings, with uncertainty stemming from a Fed that appears to be still hawkish and interferences from politics and erratic leadership.
The year ends with US markets just pulled back from the brink of a bear market that, according to Martin Feldstein, president of the US National Bureau of Economic Research, could set off US$10 trillion crashing in US household assets, with cascading effects on the retail economy.
‘Fearmongering’ may be on the rise but there are strong concerns of a global recession potentially caused by a global slowdown, the popping of debt and asset bubbles and a trade war that impacts growth and confidence. Trouble is brewing in the two largest economies.
In the US, a double whammy from Fed rate hikes and the fading sugar rush from tax cuts could further slow down the economy while China is experiencing a continuous slide in its economy despite various stimulus measures put in place.
With debt piled up in most countries, there may not be much room left for fiscal stimulus to get us out of another recession. Global solidarity, one of the factors that took the world out of the last recession, may be shrinking.
The US, in lashing out on countries over tariffs and trade deficits, seems focused on its own priorities.
Tougher rules will now constrain the Fed’s ability to move quickly in various ways, as it did in 2008, to shore up markets.
After spending US$586bil in the last recession, China’s hands seem tied this time round as it grapple with debts and a slowdown that is aggravated by the trade war.
Of the fears for 2019, “a nasty global recession is the main one,’’ said Pong Teng Siew, the head of research of InterPacific Securities.
“If there is going to be one, it will likely last longer than a usual recession. “There will be no free-spending China to get us out like in 2008.’’
Although US-China trade talks are ongoing, fears of persistent trade tensions rank high among concerns for 2019. Further uncertainty is fuelled by word that the Chinese are quite clueless on the next steps in the deescalation. The competition among superpowers goes beyond, for instance, buying and selling of soybeans; it can unravel in many forms.
After a few surprise developments, for example, on the trade front or talk of President Donald Trump wanting to fire Fed chairman Jerome Powell, many are bracing for the unknown.
Policy mistakes or missteps or government intervention in central banks are 2019 fears for Lee Heng Guie, the executive director, of Socio Economic Research Center. Geopolitical risks for 2019 include US-China relations, global trade tensions, European fragmentation, Gulf tensions and the Russia-NATO conflict, according to the BlackRock Investment Institute.
Within these risks, Danny Wong, the CEO of Areca Capital, is concerned about the possibility of a worsening trade war. With some markets already in bear territory, the worry for 2019 is that the flare-up of geopolitical risks could sink markets further.
While many prefer to hold cash and the Fed withdraws from its liquidity bondbuying stimulus, contraction in global liquidity’ ranks the highest among 2019 fears for Vincent Khoo, the head of research of UOB Kay Hian.
Crude oil prices staged a small rally, on news of a cut of 1.2 million barrels per day by major oil producers, against worries of weak global demand. Although forecasts are for a rebound, the fear is of crude oil price sustaining below U$45 per barrel for 2019. A no deal hard Brexit for Britain’s exit from the European Union could lead to falls in confidence, asset and currency prices, and disruption in the economy.
Against these fears, year-end market rallies were mostly seen as “bear traps” or a “dead cat bounce.”
While for US markets, a peak in rate hikes, growth and the dollar is expected, the situation may not apply to Asia.
Have EM stocks bottomed out? Looking at EM currencies, those said to be “re-emerging” are the Indian rupee, Indonesian rupiah, Russian rouble, South African rand, Brazilian real, Argentine peso and Turkish lira.
The economies of Turkey and Brazil have rebounded into growth territory following contractions in late 2016.
Columnist Yap Leng Kuen is apprehensive of bear traps.