What are the biggest risks for stocks in 2020?


  • Markets
  • Monday, 30 Dec 2019

Bumpy road ahead on a combination of local, external factors

PETALING JAYA: The uncertainty on Malaysia’s political transition, an ongoing trade war between the US and China, fears of a recession and the US Presidential elections are just some of the risks that could affect the performance of Malaysian stocks in 2020.

Malaysian equities have been slumbering over the last three years, plagued predominantly by political issues. Before the Pakatan Harapan took over in May 2018, the market was bogged down by the 1Malaysia Development Bhd saga.

Since the new government took over, the market has continued to trade in lacklustre fashion, reflecting investor disappointment on the lack of clear policy signals.

This has rendered the FBM KLCI one of the worst performing bourses in the region. Not surprisingly, as of Dec 29, the FBM KLCI is still down 4.73% on a year-to-date basis.

While undemanding stock prices and a weak ringgit could see the market finally play catch up to its regional peers, the road ahead might still be bumpy on a combination of local and external factors. Below are some of the factors that analysts think could see the market take a roller-coaster ride in 2020.

Transition of power

External factors aside, the single biggest risk for Malaysia has always been its politics. This was especially evident throughout 2019.

While the market was initially full of hopes for a new Malaysia following Pakatan Harapan’s win during the 14th General Election in May 2018, the market was subsequently weighed down by the uncertainty of the power transition between Tun Dr Mahathir Mohamad and Datuk Seri Anwar Ibrahim.

The power transition, initially anticipated to happen two years after the 14th General Election, has been a matter of great interest and concern among Malaysians and internationally.

It is a known fact that Dr Mahathir, the world’s oldest prime minister at 94, has promised to hand over power to his chosen successor Anwar.

Dr Mahathir, 94, said he would not hand over before a summit of Asia-Pacific Economic Cooperation (Apec) countries that Malaysia is to host in November 2020, but could be ready after that.

However, when asked if a handover could come in December 2020, Dr Mahathir said: “We’ll look at that when the time comes.”

The tempestuous relationship between the two men has shaped Malaysia’s political environment for decades now.

The US-China trade war

The dispute, which has bubbled for nearly 18 months, has seen the US and China imposing tariffs on hundreds of billions of dollars worth of one another’s goods.

Negotiations are ongoing but have proven difficult. In December, the two sides announced a preliminary “phase one” deal, which saw stocks in the US celebrating by hitting record highs.

Nonetheless, due to the prolonged and political nature of this trade war, analysts believe that trade will still be one of the main risks, moving into 2020.

The “phase one” deal reduces some US tariffs in exchange for more Chinese purchases of American products, and better protection for US intellectual property.

The deal is yet to be signed and tariffs of 25% on US$250bil worth of Chinese goods remain in place.

However, the US will drop tariffs on US$120bil worth of Chinese goods to 7.5%.

Washington also shelved a planned round of tariffs, which would have hit Chinese smartphones, clothing and toys.

If this agreement is signed, a full-fledged deal still needs to be negotiated.

Even with the “phase one” trade deal, many economists expect the negotiations to drag for years, and hence tariff drag to extend for years, potentially choking off business investments and muzzling sentiment and future growth for a long time to come.

Furthermore, the US is not just locked in a trade war with China. The US has also threatened more import tariffs on its European partners.

There is the question of auto tariffs on Germany, and there are also US President Donald Trump’s renewed threat of steel and aluminum tariffs on Brazil and Argentina at the start of December.

Recession or last leg of bull?

Recession risks abated in the second half of 2019, but the longest-running expansion in US history will have to come to an end at some point.

Will it be 2020?

Schroders global credit fund manager of fixed income Rick Rezek said he is cautiously optimistic about 2020 amid signs that the US growth engine, consumption, is cooling.

Consumer spending and retail sales, while healthy, have been moderating. Against this, the manufacturing sector seems to be regaining some ground.

Schroders head of US credit Martha Metcalf sees US growth bottoming at 1.4% to 1.8% in 2020 as consumer spending and employment hold firm and worries of a manufacturing or investment-driven recession prove too pessimistic.

“The Fed is unlikely to cut from here unless there is a material negative change, so Treasury yields could rise over the coming quarters. Globally, we feel growth could rebound modestly, driven by thawing trade tensions and easier global financial conditions that will help emerging markets become a core contributor to global growth, ” said Metcalf.

Schroders head of Asian ex-Japan equity investments Toby Hudson said the firm’s strategy for Asian equities remained balanced.

Overall market valuations in Asia look reasonable against historical comparisons.

“However, this masks the fact that sectors such as banks, auto and commodities drag down the headline valuations. The valuations of stocks we want to own are definitely not cheap, so we anticipate moderate returns from the region.

“However, we have a strong long-term conviction on where the best opportunities are in Asia, ” said Hudson.

For him, these include stocks in sectors such as Chinese consumption, insurance, technology, real estate in Singapore and Indian private sector banks.

Presidential election

Market participants agree that the US presidential elections are a big event for 2020.

Financial markets are keenly aware of the ideological differences between a Democratic candidate and current US President Donald Trump, and hence, many are already positioning and making bets.

Should Trump win, it would likely be business as usual in terms of stock selection. He is pro energy, pro American and will carry on with his disruptive twits.

A more moderate Democrat could, however, reduce political uncertainty and this may result in the market moving up.

However, a sharply left-leaning candidate could represent risks for specific sectors, as well as the country’s fiscal balance. Democratic contender Elizabeth Warren, for example, proposed to ban all fracking. Wall Street is certain a Warren administration would be bad for energy companies. At the same time, Warren could also be bad for business for banks and investment firms.

Looking at the history of presidential election returns and inaugural year returns, (there are very few exceptions to this) on the years when the US elects a Republican, election year returns are above average and inaugural year returns are below average, but in reverse when the US elects a Democrat. Election year returns are below average and inaugural year returns are above average.

Founder and chairman of Fisher Investments Ken Fisher has previously explained that this could perhaps be because the market tends to think that Republicans are pro-market and pro-growth. They later find out that the Republican is just a politician.

Then when a Democrat is elected, the market is fearful, and then find out in the inaugural year they’re not as bad because presidents don’t really have as much power as people think they do.

“However, we have a strong long-term conviction on where the best opportunities are in Asia, ” said Hudson.

For him, these include stocks in sectors such as Chinese consumption, insurance, technology, real estate in Singapore and Indian private sector banks.

Presidential election

Market participants agree that the US presidential elections are a big event for 2020.

Financial markets are keenly aware of the ideological differences between a Democratic candidate and current US President Donald Trump, and hence, many are already positioning and making bets.

Should Trump win, it would likely be business as usual in terms of stock selection. He is pro energy, pro American and will carry on with his disruptive twits.

A more moderate Democrat could, however, reduce political uncertainty and this may result in the market moving up.

However, a sharply left-leaning candidate could represent risks for specific sectors, as well as the country’s fiscal balance. Democratic contender Elizabeth Warren, for example, proposed to ban all fracking. Wall Street is certain a Warren administration would be bad for energy companies. At the same time, Warren could also be bad for business for banks and investment firms.

Looking at the history of presidential election returns and inaugural year returns, (there are very few exceptions to this) on the years when the US elects a Republican, election year returns are above average and inaugural year returns are below average, but in reverse when the US elects a Democrat. Election year returns are below average and inaugural year returns are above average.

Founder and chairman of Fisher Investments Ken Fisher has previously explained that this could perhaps be because the market tends to think that Republicans are pro-market and pro-growth. They later find out that the Republican is just a politician.

Then when a Democrat is elected, the market is fearful, and then find out in the inaugural year they’re not as bad because presidents don’t really have as much power as people think they do.


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