Some things that can go wrong in 2018

Stronger ringgit: Lee says the ringgit could end on a stronger note by the end of the year in anticipation of a change in monetary policies

NEXT year is regarded to be a year of good global growth but we are cautioned against complacency.

“The recovery in the global economy has largely been fuelled by debt due to low interest rates coupled with ample liquidity.

“With central banks expected to tighten policies, growth could be affected, especially when household and corporate debts have hit record levels in many countries,’’ said Thomas Yong, CEO, Fortress Capital.

“One potential shock relates to the pace of the US Fed’s monetary tightening – if the risk of inflation is under-estimated in the months ahead,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.

“While the global backdrop looks favourable, financial markets are beginning to approach ‘exuberance.’ This does not mean that an implosion is imminent but its fragility is rapidly increasing.

“As such, any minor reasons that could cause investors to pull back their assets in the financial markets will have speedier knock-on effects globally,’’ said Nor Zahidi Alias, chief economist, Malaysian Rating Corp.

“Looming among risks related to financial stability is the mountain of non-financial debt that makes markets nervous and increases the system’s vulnerability to destabilising shocks,’’ said Lee.

If the US economy can keep chugging along through the first quarter, it will match the second longest expansionary period in modern history, according to data compiled by the National Bureau of Economic Research and Bloomberg Intelligence.

In 2018, investors would have to assess the sustainability of the cycle amid risks of financial overheating and corporate America’s levered balance sheets, said Bloomberg.

Last year, investors were caught by the near-complete absence of volatility. In 2018, they may suddenly experience price fluctuations roaring back to life.

Over US$2 trillion in strategies are effectively reliant on market stability to generate returns, said Bloomberg, quoting October estimates from Artemis Capital’s Christopher Cole.

That raises the risk of outsize losses across stock and bond markets globally if volatility finally returns.

“An important factor that could cause higher volatility in the financial market is none other than policy mishaps such as a faster-than-expected monetary policy normalisation, be it in the US or other parts of the world.

“Another possible factor could be failure to continue the delicate balancing act by the Chinese authorities to rein in excess credit while preventing a sharp deceleration in the economy and financial markets,” said Zahidi.

“Apart from central bank policies, US fiscal policies like that on tax reform can affect fund flows across regions. This might pose risks to financial markets and destabilise certain regions.

“And while its size is considered too small to disrupt financial markets, current speculative interest in cryptocurrency such as bitcoin could be sowing seeds for future crisis,” said Yong.

“In emerging markets where more net inflows of capital into portfolio investments are generally expected in the near term, a synchronised pullback by foreign investors (possibly from an unexpected strengthening of the greenback to weakness in the Chinese economy), may lead to another round of currency depreciation in the region.

“Another unfavourable turn in the commodity cycle could hit Asian exporters, sparking off another period of ‘risk-off.’ However, we do not give high probability of this happening in 2018,” said Zahidi.

He said that in Europe, the major risk came from political developments which would continue to take centrestage in the near term, adding that Brexit talks are still casting doubts on the medium-term prospects of the investment climate in the region.

“The impending election in Italy and doubts over reforms promised by French President Emmanuel Macron are some of the concerns in the region. The latest political scenario is also clouded by the crisis in Spain,” said Zahidi.

With different expectations for oil price next year, the outlook could be influenced by consumers and shale oil producers.

“If growth in oil consumption is as robust as in the last two years, the market will likely be balanced; US oil production accelerating faster than consumption growth would likely cap prices in the near term,” said Yong.

“Oil prices are expected at US$60-US$65 per barrel in the first half, underpinned by steady global demand and extension of production cuts till end of 2018,” said Lee, adding that risks included a fallout in global growth due to a sharp correction in asset prices and non-compliance on production cuts.

Columnist Yap Leng Kuen agrees there are many risks that will keep investors on their toes.