Overall, global markets started the year with positive returns from most equity markets. Can this positive momentum continue? Our research team at SCB Securities stands by our optimistic view. We offer four top-of-mind themes for 2019 affecting our investment decisions going forward.
1. A synchronised slowdown in major economies from their peak will continue to generate volatility throughout 2019. Developed markets are entering a late cycle, especially the United States, which is coming off a growth peak in the first half of 2018 as stimulus from the tax cut fades.
The European Union will face a bumpy geopolitical path in several countries: jittery coalitions in Greece and Italy, yellow-vest protesters in France, weaker pro-EU parties in Germany -- and the Brexit mess is likely to get worse before it gets better.
Japan, meanwhile, will go through another round of fiscal drag from a bump-up in the sales tax. China's economic expansion will continue to slow, hurting confidence and the earnings growth outlook.
Implications: Risky assets will continue to be volatile, driven by a difficult-to-predict news flow. However, equity markets are likely to provide a decent return on investment for those who can withstand short-term volatility. This is based on the market view that there is unlikely to be an outright recession in 2019 and that company earnings will continue to grow.
2. Monetary policy changes become more accommodative. Recent signals from the US Federal Reserve are clearly more dovish, after an increase in its policy rate each quarter in 2018. It is beginning to signal a halt in increases, and the market sees a more than 50% chance of no hikes at all in 2019.
China's central bank has reversed its tightening stance and is beginning to lower interest rates, inject more liquidity and lower the reserve requirement, allowing banks to lend more. In Europe, markets now see a greater chance that the first rate hikes in years will be postponed to 2020 from late 2019.
Implications: The tightening liquidity trend is about to pause or even reverse. The risk of over-tightening monetary policy, a common factor that pushed economies into recession in past cycles, has been reduced. This is good for risky assets, especially emerging-market equities.
The pause is also positive for yield plays such as property funds, real estate investment trusts (REITs) and infrastructure funds, which also benefit from more fiscal stimulus via public investment.
3. Oil prices rebound. It should not take much for the world oil price to recover from the recent low of US$45 a barrel -- a level considered below break-even cost for most shale producers.
The US Energy Information Administration revised down its excess supply forecast for 2019 in its most recent report on Jan 15 and expects the price of West Texas Intermediate (WTI) crude to rise back to around $60 -- up 30% from last year's bottom.
Opec has just cut output by the most in two years, down 751,000 barrels per day in December, a good sign for the Opec-Russia deal to cut 1.2 million bpd in the first half of this year. The oil price bottom is already behind us.
Implications: Higher oil prices are good for Thai equities in the energy sector. They also lend support to higher inflation, which is a key driver for a steepening yield curve, normally associated with improving bank profitability.
4. Thailand's domestic demand growth story will counter the global slowdown. Exports have already slowed, along with regional peers, hurt by the trade dispute between the US and China. While we expect the situation to improve based on signals from both sides after mid-January meetings, the impact from the current tax on trade is likely to last for some time.
The key drivers for the Thai economy will have to come from domestic demand, which continued to accelerate through the second half of 2018, despite slower growth in headline GDP. Private investment will continue to expand in response to rising capacity utilisation.
Foreign direct investment inflows will remain strong thanks to stimulus measures related to the Eastern Economic Corridor, infrastructure investment and some windfall from companies expanding (or diversifying) out of China due to the trade dispute with the US.
Implications: Our key investment themes for early 2019 have been based on domestic demand stories, such as the investment cycle (private and public), rising interest rates and improving household consumption.
Overall, as part of the late expansion cycle, investors should expect higher volatility and possibly lower capital gains. Growth stocks are likely to underperform those with attractive valuations and strong yields. In terms of portfolio management, investors should increase exposure to REITs and infrastructure funds.
Keep some cash in the money market (stand ready to buy on dips to benefit from increasing volatility). Add some gold for hedging purposes. Also add some oil exposure to benefit from the rebound.
Pornthep Jubandhu is senior vice-president of the Investment Strategy Department at SCB Securities Co Ltd.
