BY RHB WEALTH RESEARCH
2020 is expected to be another year of uncertainty, with events and factors from 2019 continuing to influence the markets. Further escalation of trade tensions between the US and China, a messy Brexit, increase in domestic political instability in multiple countries and the return of recession fears should be the top concerns for investors next year, according to RHB Wealth Research.
The trade war, it notes, will remain one of the thorniest geopolitical issues for 2020. While recent developments on the phase one agreements between China and the US have somewhat improved sentiments, significant longer term issues involving technology leadership may escalate trade tensions.
“On top of increasing tariffs, the US may prevent pension funds from investing in Chinese companies or impose restrictions through stricter CFIUS [Committee on Foreign Investment in the United States] reviews,” says RHB.
On the political front, many important events will be developing in the next year. For the UK, there is the general election on Dec 12, 2019, and the Brexit deadline on Jan 31, 2020, to watch. Across the pond, the US is gearing up for its presidential election in November as the impeachment process for President Donald Trump continues to unfold.
“The ongoing unrest in Hong Kong is a cause for concern, as there seems to be no resolution in sight for the conflict. Within Asia, the political calendar next year includes Taiwan’s presidential and legislative election in January and South Korea’s legislative election in April,” says RHB.
Some of these factors contributed to the sluggish growth last year, the slowest since the financial crisis. The global economy only grew 3% in 2019, and the result was attributed to a broad based slowdown in manufacturing and global trade, driven by higher tariffs as well as uncertainty surrounding the trade policy.
A silver lining is that global growth is expected to pick up to 3.4% in 2020 despite the uncertainties. Some of the concerns are also being addressed by negotiations or policy actions. This includes the accommodative stance of various central banks. The European Central Bank, for instance, resumed its quantitative easing programme with net purchases of government and corporate debt at a monthly pace of €20 billion from November 2019.
“While further cuts in most developed central banks will be limited, we expect further cuts in some emerging markets. As for fiscal policy, it has been more of a supporting role so far, with Japan providing a fiscal boost to mitigate the negative impact from the October consumption tax hike. The Chinese government has also been rolling out supportive policy measures from VAT [value added tax] cuts that came into effect on April 1 and aids in the boost in discretionary income,” says RHB.
All is not doom and gloom, however. There is growth to be captured in the markets. For 2020, RHB is increasing its allocation into equities, as it expects a pick up in response to easier financial conditions, the peaking of import tariffs and a resolution of Brexit.
The market sentiment has been taking a positive turn of late and the optimism is expected to continue into the new year.
“2019 has been a good year for asset returns, both in equities and fixed income. The improvement in sentiment and near term growth outlook prompt some rotation from fixed income to equities. This is justified by the Federal Reserve’s (Fed) guidance to hold rates. The Fed Chair Jerome Powell set a high bar for further cuts during his post meeting press conference, where he expressed a constructive outlook and concluded that ‘monetary policy is in a good place’ and it would take a ‘material reassessment’ to change his views,” says RHB.
As at the time of writing, the market has priced in zero percent probability of a further rate cut in the December Federal Open Market Committee meeting and, at most, one rate cut next year. Low risk free rates and narrowing growth differentials in developed markets are prompting investors to rotate into emerging markets.
The RHB Wealth Research team is overweight on Asian equities as the region is expected to be a key driver of growth for the global economy.
“According to the International Monetary Fund, as at end October, Asia was the fastest growing region in the world, accounting for more than two thirds of global growth in 2019. This comes despite continuing weakness in global trade and policy uncertainty in the region,” says RHB.
Sector and company selection will be critical in delivering returns, it notes, especially at a point when the global economy is vulnerable to shocks.
“We favour companies that fit into structural growth trends, and possess strong fundamentals that will help the companies ride through uncertain times and benefit from industry consolidation,” says RHB.
While China’s growth is expected to slow from 6.1% in 2019 to 5.8% in 2020, policy makers there are focused on boosting the quality of growth and limiting overall leverage, thus improving the standing of the country’s economy.
Some of the sectors in China that RHB is positive about include technology, where the development and adoption of 5G in the country will benefit the supply chain and increase technology CapEx.
Within the property sector, RHB predicts that the Chinese government will implement a few targeted loosening policies in key cities in an attempt to create a floor for the cooling market.
“Responses and forecasts for year end sales from property developers have also been optimistic. We are optimistic about property management companies. We find them attractive due to the asset light model, high return on equity, net cash position and high growth potential,” says RHB.
In addition, it views the healthcare sector as a key structural growth area that will benefit from the longevity trend in Asia. Lastly, Chinese construction companies are seeing their order book grow in double digits. This growth may pick up further, as a key component in the Chinese government’s upcoming 14th Five Year Plan is expected to revolve around investments in infrastructure, such as railways and highways. The Plan will be announced in 2020.
Within developed markets, RHB expects a gradual pick up in the UK and Europe over stabilisation in the manufacturing sector, a modest fiscal impulse and a resolution of the Brexit uncertainty.
The global economy is currently at its longest cycle, and many have questioned if we are heading towards a recession. This concern was exacerbated when the yield spread between two year and 10 year US Treasury bonds moved below zero in August, the first time since February 2006.
Such “inversions” of the yield curve — whereby the short maturity yields exceed those of longer maturity bonds are important as they have preceded many recessions dating back to the 1950s.
In addition, the New York Federal Reserve’s measurement for the probability of a US recession in the next 12 months rose to 37.9% in August 2019. This rattled investors, as this indicator rose to 40.7% in November 2007, a few months before the 2008 recession began.
But the fear of recession has now subsided to a certain extent. The spread of the yield curve has widened back to positive territory, and the New York Fed’s measurement of a probable US recession fell to 29% in November 2019.
“Indeed, on the economic front, the latest round of Purchasing Managers’ Indices do show that the drop in manufacturing activity has stabilised and see some recovery,” says RHB.
Central banks are also acting to prevent a recession from occurring by cutting rates. The benign credit cycle will continue beyond 2019, especially with the near term outlook for positive economic growth, although it is less so for the US, China and Malaysia, RHB adds.
Malaysia has been making the headlines frequently this year for being one of the worst performing markets in Asia in 2019. Indeed, foreign ownership in Bursa Malaysia fell to 17.9% in October from a high of 28.6% in March, according to Bursa Malaysia.
“Valuation for Malaysian equities is attractive but it comes without a catalyst. There have been concerns around political risks and earnings outlook. Uncertainty on the political front on who is the next prime minister, the underperformance [of the governing party] in the recent by elections and the uncertainty around government policy are affecting business sentiment. However, consumer sentiment has been quite resilient,” says RHB.
One impetus for future growth, however, could come from greater government spending.
“Budget 2020 is an expansionary budget, with RM3 billion worth of pre-emptive measures put in place to support the economy. Financial conditions have been relatively accommodative with rate cuts from various Asian central banks. Bank Negara has also cut rates by 25 bps this year and may cut rates again in the first quarter of next year,” says RHB.