Can a stabilised economy further spur markets?

  • Business
  • Monday, 20 Jan 2020

WITH stocks on Wall Street at the extremes of 2000, the start of the dotcom crash, will improved prospects for the global economy give the extra spur to markets?

Against the slight de-escalation in US-China trade tensions, there is still caution on trickier issues to be hammered out under phase two of their trade agreement.

Despite signs of stabilisation in the Chinese economy, growth at 6.1% last year was the lowest in three decades, challenges remain. The Chinese central government needs to boost growth and confidence as the economy faces further downward pressure.

Europe is still weak. Germany saw its lowest growth since 2013, at 0.6% last year; the US economy is expected to slow down to possibly 1.75% to 2%.

Japanese growth may decline 2.6% in the last three months of 2019, as the consumption tax hike dents spending.

Fundamental issues are often disregarded in a stock market melt-up as investors stampede to cash in from sudden price gains.

With the leading indicators from the Organisation for Economic Co-operation and Development painting the picture of an economic rebound, the United States and to a certain extent, other major markets, are in a melt-up phase, according to Inter-Pacific Securities head of research Pong Teng Siew.

Characterised by a relentless rally, this melt-up ignores questions on extremes in valuation that are emerging.

In Malaysia, the celebratory mood is absent due to brewing structural changes involving major government-linked companies; the government philosophy is not to concentrate market domination and pricing power in their hands. Hence, the implications on their profitability could be negative.

Stock market action may not reflect economic health.

Between the second half of 2015 and first half of 2016, the United States’ real gross domestic product growth slowed markedly due to an industrial downturn, but US benchmark indices suffered only minor dips before picking up again, said Malaysian Rating Corp associate director, economic research division, Nor Zahidi Alias.

A modest rebound in global trade is expected as business expansion plans could be capped by lingering trade-related uncertainties which may further slow US and Chinese economic growth.

A large portion of US tariffs on Chinese imports remain, with their continued impact on both economies.

Some think there is no recession at all on the horizon but it may be too early for such a conclusion.

At best, the tentative date for the onset of the next recession is now pushed back to the end of 2021 instead of the middle of 2020, said Pong.

While US weekly jobless claims are trending lower, worrying signs are emerging with layoffs in manufacturing, transportation and warehousing, construction, educational services and accommodation, and food services industries in late 2019 and early 2020, said CNBC.

US non-farm payrolls for December 2019 and wage growth missed expectations by adding just 145,000 jobs against an expected 160,000, and hitting 2.9% below the 3.1% forecast respectively.

It was the first time that wage growth in December fell below the 3% gain year-on-year since July 2018.

US non-farm payrolls increased by 2.1 million in 2019, significantly lower than the 2.7 million jobs added in 2018. Last year was the slowest year for job creation since 2011.

Fears of an outright US downturn may have receded, but recent surveys indicate a “high level of unease about slowing growth”, said CNBC.

The expected weakening of the US dollar would likely benefit higher yielding Asian currencies like the ringgit.

With risk-on sentiment and an improved outlook for the second half, the ringgit has room to appreciate, said RHB Research Institute chief Asean economist Peck Boon Soon.

Against easing of trade tensions and more clarity over Brexit, global growth is expected at lower levels; the ringgit may hit 4.00 to 4.05 to the dollar in the weeks ahead, said Hong Leong Bank chief operating officer, global markets, Hor Kwok Wai.

Malaysia’s inclusion in the FTSE World Government Bond Index, which is under review, is a concern while domestic economic conditions and macroeconomic policies may influence the direction of the ringgit.

The local currency can intermittently rise to 3.95 to the dollar in the first half, said Socio Economic Research Center executive director Lee Heng Guie.

Slower growth coupled with rising current and budget deficits in the United States may see the softening of the greenback, but unfavourable macro developments that cause significant outflows from China could weaken the yuan, said Zahidi.

The ringgit could weaken in tandem.

Columnist Yap Leng Kuen sees a generally positive outlook with caution signs. The views expressed are the writer’s own.

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