The return of political influence in our equity market — after an extended rally of equity markets the year before  — has caught many investors by surprise. The beginning of a trade war between the US and China, which started in early 2018, has now escalated to a level beyond what most analysts would have predicted.

The impact will be felt on several fronts, including currencies, commodities and listed companies. The pain inflicted on stocks would be two-fold, hurting companies that source material and goods from China — as the US is the world’s consumer market with China as its factory.

France’s recent protest is a huge challenge to President Emmanuel Macron; sending his approval rate to historical low at 26% in just two years from a peak of 66%. Similar incidents were witnessed in Taiwan, and also the US mid term elections where voters are now becoming less patience.

The flip-flopping in politics has spurred much volatility within stock markets globally. On top of that, European Union issues such as Brexit, political uncertainties in Germany and Italy have left investors in the dark about the future of the eurozone. Coming back to Malaysia, the shift in government in May this year has brought some uncertainties onto the country’s outlook.

However, Prime Minister Tun Dr Mahathir has reassured markets and said he will lead a business-friendly administration and that Malaysia, as a nation, would seek friendly ties with other countries. Malaysia’s track record during Dr Mahathir’s tenure in the 1990s and substantial foreign direct investment then gives credence to his assurances.

What to Focus ON In 2019

Monetary policies: The Federal Reserve’s benchmark is now the highest since 2008 and will be more in 2019. Without question, central banks worldwide are poised to follow the US Federal Reserve’s tightening path in 2019 if they have not done so, particularly the European Central Bank and the Bank of Japan  — which has kept their rates near record lows. That said, the US market has pretty much expected and priced in a potential rate hike and the Quantitative Tightening (“Unwinding of Quantitative Easing”) but not so much for Europe and Japan as yet. Considering benign inflation and robust employment, tightening program will continue but it might not be an aggressive one.

Trade war: The intensifying trade war between the US and China will definitely dampen world economic growth although its impact so far has seemed to be limited — with the Chinese yuan having depreciated nearly 10% against the US dollar, offsetting some of the tariff imposed. The US is promoting an ‘American first’ policy and has turned its back on the tenets of openness in favour of a more nationalistic approach. RHB Wealth Research team believed that US President Donald Trump will continue to flex his muscle in the next two years to strengthen the odds for his re-election, providing much headwind for the emerging economies who have more exposure in trades.

Late business cycle: Most indicators — such as slowing economic growth, consumer confidence at a peak, a record low unemployment rate and the bottoming up of commodity prices — are hinting at a late peak in business cycle. Late-cycle returns can still be quite substantial and investors also should understand the inflation sensitivity of their portfolios as stocks tend to respond negatively to inflation surprises. Although some might argue that the low interest rate might prolong the cycle thus putting off the recession risk to  year 2020, RHB Wealth Research team would suggest that investors not to speculate by thinking they can beat timing risk at this juncture.

Asset Trends

The US’s 10-year/2-year treasury yield spread is likely to turn negative in 2019, signalling an economic downturn might occur in 2020 but again, there is no need to panic as long as one’s portfolio has been properly diversified and it’s a wait-and-see game for investors.

In fixed income, a rising interest rate will lift borrowing cost higher and bring risks to less stable firms. This was highlighted in a study by the Bank of International Settlements which raised their concerns about  “zombie firms” — firms that are barely surviving to pay its interest cost thanks to an ultra-low interest rate environment.

As such, RHB Wealth Research team would prefer investment grade bonds from a strong credit quality issuer with solid balance sheet as the risk trade off from a yield perspective against the high yield sector is not justifiable.

For equity, RHB Wealth Research team see most analysts have lowered their growth estimation from an earnings and revenue perspective across all sectors due to slowing growth and lesser fiscal spending too. This combining with higher risk free rate (rising US treasury yield) has pressured the forward valuation of stocks. From a top down angle, RHB Wealth Research team will stick to a few sectors namely energy, healthcare, technology and commodities.

The energy sector has had a somewhat flattish performance despite oil prices having recovered from a trough. However, the recent volatility has kept share prices in check; which RHB Wealth Research team foresee as temporary — as demand should continue to outstrip supply.

Healthcare will benefit from a demographic shift into a population that is ageing more, and also from a technology revolution that has been constantly delivering breakthroughs.

Technology will be the new normal, such as online sales and advertisements will continue to grab market share from conventional players — thereby lending some potential support to share prices during tough times. Do bear in mind that closer scrutiny from regulators might bring some headwinds to the healthcare and the technology sectors.

Commodities would be preferred as oil and gold tends to prove its value during a late cycle. Gold, which is poised to benefit from a potential weaker US dollar and rising volatilities, deserve to see more demand in the next year or two.

In the currency space, emerging currencies shall continue to suffer as long as the trade war continues. RHB Wealth Research team are seeing some values in the currencies of Canada and Japan which would seem to be less affected by the trade war cross fire.

Bumpy Road Ahead

Economic growth is slowing but it is not as yet indicating negative growth. As such, the selection of the type of investment could be key. An active investment manager will prove his or her value by outstanding stock and bond selections, and those — who have been consistently delivering results — that outperform the benchmark are likely to continue to do so.

All in all, the investment journey will not be smooth sailing. A long term view of investment would be the key to smoothen out the volatility sparked along the journey.

Therefore in RHB, let us help you to identify the potential underlying from a wide range of product suit, then assist you to construct a resilience portfolio through proper diversification into different strategies rather than simply diversifying into asset classes which has little benefit due to the high correlation nowadays.

Invest with RHB today! Visit RHB Premier Centre to unlock the wealth opportunities. For more information, visit www.rhbgroup.com