2019 global equity market outlook

December 21, 2018 13:25
The Fed's tightening cycle and the US-China trade war have affected stock markets worldwide. Photo: Reuters

The outlook for global equities next year will highly depend on two major developments. 

First, whether the Federal Reserve will slow down the pace of its tightening cycle or even halt the rate hikes altogether. 

Second, how the trade conflict between the United States and China will be resolved. 

If both developments turn out negative, there will be a bigger chance of another financial crisis. 

I believe the US and China are very likely to reach some sort of agreement in the first half of next year because both sides need a deal. 

US President Donald Trump has seen the trade war’s negative impact on the US stock market and he would want an agreement to boost investor sentiment. 

China, on the other hand, is experiencing an economic slowdown and pressure from the trade dispute. Beijing would also want a quick solution. 

Since the end of 2017, the MSCI Emerging Market Index has plunged around 17 percent. The strength of the US dollar and falling commodity prices have weighed on emerging economies. The US-China trade war has exerted additional pressure on stock markets in China and other emerging economies. 

If the trade war is out of the way, or at least partially resolved, and the Fed's tightening moves shift to a slower pace or end, stock markets in emerging economies would feel less sell-off pressure, and China’s stock markets may even stage a short-lived rebound. 

However, against the backdrop of weakening global growth and high corporate leverage in these nations, investors should not expect too much of a rally. The Shanghai Composite Index, for instance, may hover in the range of 2,250 to 2,830 points throughout next year. 

The Hang Seng Index hit a record high of 33,484 points at the beginning of this year. However, the corporate earnings have deteriorated since then.  

Supported by a low valuation, Hong Kong's benchmark index should find some support at 23,000. But if the business environment worsens further, the gauge could fall below 23,000 points next year. 

US stocks outperformed emerging markets in the first three quarters of this year. But things changed in the fourth quarter. Investors have become more cautious toward the US economic outlook. 

Since the US market has greatly outperformed non-US equities, even if global markets rebound next year, US equities may lag. 

If US economic growth slows down and corporate earnings growth decelerates, US equities could be vulnerable to any major financial shock, such as the euro debt crisis in 2011-2012, and technically enter the bear market (fall 20 percent from its peak). 

This article appeared in the Hong Kong Economic Journal on Dec 20 

Translation by Julie Zhu 

[Chinese version 中文版

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Hong Kong Economic Journal chief economist and strategist