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How will trades, the Fed and fiscal stimulus play out in 2019?

Margaret Yang
Margaret Yang • 5 min read
How will trades, the Fed and fiscal stimulus play out in 2019?
SINGAPORE (Jan 21): An eventful 2018 is behind us, and 2019 looks tricky for investors, with many legacy issues — trade disputes, interest rates, moderated rate of growth — still hanging over global markets. The revising-down of Apple’s revenue guid
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SINGAPORE (Jan 21): An eventful 2018 is behind us, and 2019 looks tricky for investors, with many legacy issues — trade disputes, interest rates, moderated rate of growth — still hanging over global markets. The revising-down of Apple’s revenue guidance is probably a snapshot of the challenges many MNCs are facing: rising input costs, tepid consumer confidence and trade uncertainties.

Investors are increasingly concerned about the magnitude of a slowdown in consumer spending in Greater China markets, especially on luxury goods from overseas. Many US-listed companies, such as FedEx Corp, Starbucks Corp, Tiffany & Co, Apple and Daimler, have highlighted slowing revenue growth in those markets. The trade war impact probably started to affect US corporate earnings during the holiday season, and President Donald Trump’s trade tariffs on China may prove to have backfired.

There are three main reasons behind this: slower economic growth; a weaker renminbi; and tighter border checks on goods that travellers try to bring back to the mainland to spur domestic spending. An inexplicit factor is the rising nationalism among Chinese consumers, who simply abandon luxury US goods such as the iPhone and turn to support domestic products such as Huawei in a trade war.

Rising stock market volatility and falling Purchasing Managers’ Index (PMI) readings highlighted increasing downward pressure ahead, urging Washington and Beijing to reach a common ground on trade issues before the end of the 90-day trade truce, which expires on March 2. (On Dec 2, the US and China agreed to the truce, in which the US will refrain from imposing a 25% tariff on US$200 billion worth of imports.) Straightforward deals, such as the importing of US agricultural and energy products, are likely to be struck first, as they would mutually benefit both sides. The “structural changes” in the way China handles trades and technology issues as demanded by the White House, however, will take a longer time to reach common ground. Any policy shift carried out by Beijing is more likely to be slow and gradual, to allow corporates to adapt and adjust to the new level of regulatory requirements.

Singapore’s PMI fell for a fourth straight month in December, which was in line with a broader slowdown in manufacturing activities seen in China and Europe, as we are off the peak of a cyclical upswing and global demand is clearly slowing down. The cyclical sector, such as semiconductors and electronics, got the bulk of the hit, and this sector has already entered contraction territory. Overall PMI was underpinned by the pharmaceutical and biomedical cluster, which is less vulnerable to cyclical headwinds.

The Straits Times Index has found strong support at 3,000 points, and many companies’ price and valuation have come to a multi-year low. Last year, retail investors were the biggest buyers in the local market, with net inflow of $4.2 billion, whereas institutional investors and market makers were net sellers. This mechanism could reverse if trade uncertainty alleviates and 4Q earnings turn out to be reasonably resilient in the weeks to come.

How to balance an overheated job market with rising stock market volatility? The job is tough for the US Federal Reserve. The December US non-farm payrolls report registered a strong gain of 312,000 new jobs, and wage growth jumped 3.2% from a year ago (see Chart 2). This led investors to believe that recession risk is still far off, and the US economy is still riding an upward momentum. After four quarter-point interest rate hikes in 2018, the Fed’s tone has softened in the last round of market communication (see Chart 3). Market turmoil has probably fed into a dovish-biased comment by Fed chairman Jerome Powell, who helped alleviate market concerns over liquidity tightening.

Hope on China stimulus in the form of tax cuts and infrastructural projects has fuelled the rebound in crude oil and commodity currencies such as the Australian dollar and Canadian dollar, following the People’s Bank of China’s 1% cut in banks’ reserve requirement ratio in early January. A string of missing manufacturing PMIs, retail growth and auto sales suggests that the economy is probably cooling at a faster pace than people thought, and these urge policymakers to be proactive in stimulus. China’s retail sales growth is falling rapidly, hitting a decade low of 8.1% in December from a low double-digit growth rate seen two years back (see Chart 4).

In fact, China’s government debt as a percentage of GDP stood at 36% for the last three years, far lower than other major economies such as the US (82%) and Japan (236%). This allows plenty of room for fiscal approaches such as tax cuts and infrastructure projects to cushion the economic slowdown.

This year marks the 70th anniversary of the People’s Republic of China and the 40th anniversary of the establishment of US-China diplomatic relations. Therefore, the Chinese government has strong incentive and determination to stabilise the market and control financial risks. The monetary environment is likely to remain accommodative, shifting from “deleverage” seen from 2016 to 2018 to “stabilisation”. Within the scope of risk control, the likelihood of large-scale monetary easing is small because it will put downward pressure on the currency and lead to capital outflows. Monetary stimulus will also cause rising non-performing loans, and defy the government’s deleveraging effort to tackle bad loans.

The Shanghai and Hong Kong markets exhibited resilience against a global selloff in 4Q2018 as the valuation of both markets came to a four-year low — 11.8 times and 9.8 times trailing price-to-earnings ratio.

Margaret Yang is a market analyst at CMC Markets Singapore

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