KUALA LUMPUR, 18 January – 2018 started on a wave of optimism over prospects for synchronised global growth. Instead, it turned out to be one of divergent trends and increased geopolitical and economic uncertainty, which weighed heavily on financial markets. Geoff Lewis, Senior Strategist, Asia, Manulife Asset Management, expects the following top-line outlook for 2019:
• Moderate and more balanced global growth, which will reduce worries over inflation and interest rates, and put less pressure on bond markets.
• Central banks will not deliberately trigger recessions as long as inflation remains well-behaved.
• The US dollar is peaking and could begin its descent in 2019, which could provide an important tailwind for emerging markets.
The US economy clearly outperformed in 2018 thanks to tax cuts and fiscal stimulus by US President Donald Trump. In contrast, the European and Japanese economies turned out weaker than expected and emerging markets suffered from fears of a China slowdown, growing US-China trade friction, and economic crises in Turkey and Argentina.
Geoff believes many of the economic difficulties experienced this year are likely to become less problematic in 2019.
“The gradual progress in trade negotiations between China and the US is a hopeful sign. We could see economic growth in major regions re-converge at moderately lower levels that would make the continuation of that growth more sustainable. Moderate, better balanced global growth will reduce concerns on inflation and interest rates, which will put less pressure on bond markets.”
“For equities, the key issue after the fourth quarter correction is whether global growth can continue in 2019 and 2020 without a slide into a recession. We believe it can. The leading indicators that we follow have yet to send any strong warning signals, though some are now at neutral rather than green. Meantime, the Fed looks to be turning more dovish, which is warranted in our view as in some areas the US economy is showing signs of slower growth ahead. This may put monetary tightening on hold with perhaps two more 25bp rate hikes to come,” Lewis added.
Central banks will not deliberately trigger recessions as long as inflation remains well-behaved in 2019.
“Market expectations will switch from fears of tightening to anticipation of easing in 2020, which will provide support to markets. That in turn should remove further upward pressure on the US dollar. We think the US dollar is currently close to its peak and will begin a structural descent in 2019, providing tailwind for emerging markets.” Lewis commented.
Malaysia Equities Outlook: Structural reforms to strengthen economic foundationAsian equities experienced a rough 2018 as investors de-risked from a slew of geopolitical uncertainties.
As the set of uncertainties have begun to unwind in addition to a more constructive framework for resolving trade conflicts, there are meaningful upside opportunities for Asia as fundamentals remains strong amid dampened valuations.
The Manulife Investor Sentiment Index, which tracks investors’ views across eight Asian markets on their attitudes towards key asset classes for the following 6 months, saw sentiment of equity investments stabilizing in the second half of 2018. In Malaysia, the index for equity has experienced a drastic drop from January (35 points) to June (14 points), while it stabilised in the second half from June (14 points) to December (14 points).
Tock Chin Hui, Head of Total Solutions & Equity Investments, Manulife Asset Management Services Bhd, believes that while global economic and geopolitical events continuing from 2018 will still have an impact on the Malaysian market, there are a number of favourable factors that will support Malaysian equities going forward.
“Globally, we are seeing fewer political events that could negatively impact the local market, and the Fed potentially slowing interest rate hike is certainly a welcomed move. Regionally and domestically, equity valuations have become more favourable as they are now below their historic mean and slightly above previous recessions levels, but we do not expect a similar meltdown as in the past given the stronger fundamentals and the enhanced quality of companies. In addition, markets tend to react positively over the long term on newly elected leaders, and we expect this to be the same for Malaysia should the new government continue to deliver on its promises.” Tock added.
“Longer term, we do expect Malaysia to reap benefits from certain global and domestic political actions. Globally, the US-China trade tension has already led some US firms to shift their supply chain from China to Southeast Asia with Malaysia as their regional or global base. Domestically, the government’s planned structuring of certain industries such as automotive, power, property, telco, gaming, and alcohol & cigarette, coupled with its Industry 4.0 initiative particularly on the technology front, could bring about interesting opportunities in these sectors.” Tock concluded.
Malaysia Fixed Income: Corporate bonds to drive performance
A raft of macroeconomic headwinds globally has challenged bond markets in 2018. US growth looks to have already peaked in 2Q/3Q of 2018, and Asian bonds could benefit in 2019 as funds seeking higher returns flow back into the region against the backdrop of a slowing US economy and stabilising economic fundamentals across Asia.
In Malaysia, the Manulife Investor Sentiment Index for fixed income has seen a stabilised trend from 29 points in June to 29 points in December 2018.
Andy Luk Chee Vui, Head of Fixed Income, Manulife Asset Management Services Bhd, believes the risk- reward in the Malaysia bond market is quite balanced over the medium term and that corporate bonds could be the key driver of returns for bond investors.
“The Malaysia bond market is well-supported by ample domestic liquidity and real money demand. Coupled with expectations for more subdued economic growth and a benign inflation outlook – Overnight Policy Rate could remain unchanged in the early part of 2019 – we believe this presents a conducive environment for investing in bonds.” Luk commented.
“But on the other hand, the market has been weighed down by uncertainties over Malaysia’s long-term fiscal outlook. The government’s new targets for the country’s fiscal deficit target imply there will be a longer timeline for fiscal consolidation efforts, and this has impacted investor sentiment. In addition, potential higher net supply of government bonds in first half of 2019 may pose a slight drag to the market (though we could see this easing in the second half as bond maturity increases). On top of that, Malaysia’s higher reliance on oil-related revenue increases its vulnerability to global oil price movement, which could hinder the local bond market.” Luk added.
“With this backdrop, we see the market environment as neutral, and we believe corporate bonds will remain an attractive asset class to invest in, as it offers higher returns with lower volatility. We expect credit spreads to remain tight as investors continue to chase for yields amid smaller supply of corporate bonds in 2019.” Luk concluded.