U.S. interest rates will continue to drive investment decisions in 2019, and eyes will also be on China to see how the government will respond to slower growth in part caused by the U.S.-China trade war.
Marking ten years since the global financial crisis, 2018 has been a tough year for many businesses and investors around the globe. For the first time in a decade, corporate bonds and stocks are set to post negative returns.As governments around the globe exit years of ultra-loose monetary policy, global markets have fallen from their record highs; bitcoin has depreciated markedly while tech stocks, notably Facebook, have taken a beating. In the developed world, the UK is battling a no-deal Brexit, U.S.-China relations are at their worst for a generation, while the French government is trying to calm violent protests sparked by the country’s high cost of living.
At the start of the year, equities were a favored asset class. While the S&P 500 and Nasdaq set new highs, China’s A-share market rallied, supported by the prospect of the shares’ inclusion in the MSCI indices and confidence surrounding China’s consumption-upgrade stocks. The market value of Kweichou Moutai – a bellwether of China’s consumer stocks – exceeded 1 trillion yuan, indicative of market optimism. China’s positivity was further supported by the Belt and Road initiative and its “Made in China 2025” rhetoric. At home, real estate prices continue to set new highs.
Market turns sour on tariff war
However, the market’s buoyancy lasted barely a few weeks before the Trump administration slapped tariffs on Chinese-made solar panels as early as January. Since then the trade war has escalated, and its impact has reverberated across the globe. So far, the U.S. has imposed tariffs on US$250 billion worth of Chinese products and has threatened tariffs on US$267 billion more. China, on its part, has set tariffs on US$110 billion worth of U.S. goods.
Predictably, the impact of higher tariffs and rising interest rates impacted Hong Kong property shares. In August this year, the world’s priciest real estate market hit its tipping point and entered a correction phase. House prices fell for the first time in over two years with small flats on the Island taking the biggest blow as owners offered considerable discounts to unload their assets. Land values have also fallen with prices in Kai Tak, the site of the city’s former airport, dropping18.4% after peaking in May.[VC1]
This fall occurred on the back of the U.S.-China trade war, which accelerated the launch of new flats, and the rise of mortgage rates. The trade tiff is also one of the major factors that drove a more than 20% drop in Hong Kong’s stock market since its peak in January 2018. If the trade war worsens and stock prices resume its bearish run next year, Hong Kong’s home prices could fall by a further 15% in 2019 and possibly up to 25%.[VC2]
China’s economic health in question
Separately in China, hopes that local consumption will help offset the economic impact of the trade war dimmed after overall retail sales in November registered their weakest growth rate in 15 years. This lower growth was despite record spending posted on Singles’ Day and government regulations that raised the threshold for taxable personal income to 5,000 yuan per month. Undoubtedly, the tariff war has dealt a blow to China’s economy. Chinese economic indicators for November painted a gloomy picture of exports, industrial production, consumer spending and foreign investment. Financial institutions, both Chinese and foreign, predicted that the growth rate would continue to decelerate to just above, or even below, 6% next year from an estimated 6.5% this year. As the trade war bites, China’s SMEs have reportedly laid off millions of workers.
Another asset class that has fallen out of investor favor in 2018 is the Bitcoin. At its peak, the cryptocurrency was valued at $19,142, but it has lost about 70% of its value since January. The currency is now hovering around $4,000. Warren Buffet and other major investors have opined that unlike buying stocks, bonds or real estate, buying bitcoin is not an “investment”.
As we entered the fourth quarter, even the tech giants of Silicon Valley were not spared from the onslaught of the bears. Of the five "FAANG" stocks -- Facebook, Amazon, Apple, Netflix and Google-parent Alphabet — three have lost market value. New privacy rulings in the EU and data breaches have hit Facebook the hardest with its shares down by 25% for the year. Google has also been issued a $5 billion anti-trust fine in the EU. Separately, Apple shares have fallen on sluggish iPhone XS and XR sales.
On currencies, a clear winner is the greenback as interest rates continue to climb, and experts are expecting the dollar to maintain its strength until the first quarter of next year.
Business Leaders Making the News
2018 was also notable for the number of prominent Chinese business leaders who have made news headlines. The latest was Huawei’s CFO Meng Wanzhou, who is also the daughter of the company’s founder. She was arrested in Canada for allegedly breaking American sanctions on Iran. The arrest came as China and the U.S. had agreed to a 90-day truce in the trade war with both sides agreeing to work towards a resolution.
In another incident, JD.com founder Liu Qiangdong was arrested in the U.S for alleged rape. He denied the allegations and was later released without being charged. While he continued to lead the company, JD.com shares fell to an 18-month low.
Meanwhile, Jack Ma, the business tycoon and executive chairman of Alibaba, made a somewhat unexpected announcement that he plans to step down on September 10, 2019, to pursue philanthropy in education. The co-founder of the Chinese e-commerce giant is retiring as the business landscape in China becomes more challenging.
In Hong Kong, fondly known as “Superman,” Li Ka-Shing also announced his retirement. Widely regarded as the Warren Buffet of the East due to his business acumen and skill of knowing when and where to invest, the legendary tycoon has handed the rein of his empire to his son Victor Li.
Volatility Seen Extending into 2019
While these headlines may be sensational, they are symbolic of the fact that, particularly in Asia, a company’s fortunes are tied to the well-being of a business leader.
As we head into the new year, concerns over the impact of the U.S.-China trade spat as well as U.S. interest rate movements will undoubtedly remain key considerations influencing investment decisions.
One is the main lessons that we may glean from 2018 is the increased unpredictability of markets and uncertainty of events that impact markets. It remains to be seen if the same trends will continue into 2019, but wise investors would tread cautiously especially in these markets. Investing is about balancing risks and rewards, and investors should seek a diversified portfolio that could capture not only any upside but, importantly, able to limit the downside.
[VC1]From SCMP story: https://www.scmp.com/property/hong-kong-china/article/2178541/falling-land-values-indicate-developers-are-pessimistic
[VC2]From CNBC article quoting JLL. https://www.cnbc.com/2018/11/15/hong-kong-housing-prices-could-fall-25-percent-on-trade-war-jll.html