CS, MBKE: 5 Things To Know About The Global Economy In 2H17

Lim Si Jie

The markets have been affected by global events taking place around the world, from Trump’s withdrawal from the Paris agreement to the terrorist attack in London to the latest saga in the allegations against his involvement with Russia.

Even Singapore wasn’t excluded with a public disclosure of disagreement among the Lee family. In order to help you make better investment decisions, we have summarised a list of five things you need to know about the market as an investor.

1. Has the ‘Buy Trump’ trade run its course?

James Comey, the director of the Federal Bureau of Investigation, arrives to testify before the Senate Intelligence Select Committee during an open hearing.

Lately, Trump has started to show his erratic behaviour that has had Democrat voters worrying. While it might be interesting how President Trump could deny the existence of global warming despite feeling the effects of it, it was disappointing to hear of his announcement to withdraw from the Paris agreement.

Soon after, President Trump fired FBI chief James Comey out of the blue while James Comey was investigating Russia’s election meddling. This came back to haunt him as James Comey is now testifying against President Trump, claiming that Trump was only concerned about how Russia’s election interference affected him personally.

The series of events have re-triggered fears in markets that were previously worrying investors around the world as he was campaigning against Hillary Clinton. According to Maybank Kim Eng Research (MBKE), the Trump trade might have run its course, even if the Fed decides to raise interest rates.

2. Global economic growth still going strong

However, economists seem to be signalling that global economic growth is still strong enough to pull us through another year.

Previously, governments were focused on fiscal tightening and cutting budget deficits. The implementation of fiscal policies in Europe and US now appears to be a more likely option for governments to boost growth.

Furthermore, world economies have managed to ride past the Euro crisis which led to tight bank lending conditions and abnormally high lending rates for small and medium enterprises.

3. Equities market showing positive sentiments, ignoring bad news

Even as seemingly negative events have been hitting the markets, equity markets have been upward trending. Among the list of negative news, the insider buy/sell ratio fell to its 30-year lows and there was a lack of follow-through of Trump’s tax reform.

Yet, despite this news, markets have shown that they are now becoming more resilient to negative news. The Dow had been climbing higher to record high, backed by a strong run in the tech stocks.

However, the low volatility of equity markets is a concern among investors and might appear to be a worrying sign of an impending increase in volatility.

4. Regional market outlook

In terms of the regional market outlook, Credit Suisse Research (CS) highlights Europe as a consensus long-term investment. While European equities are trading near its two-year high on a Price-Earnings (P/E) multiple bases, European equities P/E is still trading a 16-percent discount relative to US equities.

ASEAN vs China

On the other hand, China appears to be the biggest risk to equity markets. There is a growing concern whether the rising Shanghai Interbank Offered Rate (SHIBOR) could cause the credit bubble to unwind, having risen since November.

CS opines that there is still significant imbalances in the Chinese economy, in terms of a credit bubble, over-investment and rather high and unwarranted valuation in real estate.

Given global economic growth uncertainties and the risks from China’s financial deleveraging, the current valuation of ASEAN is much more attractive than China.

5. Sectors to focus on

Zooming into the sectors, CS believes that telcos could be an interesting defensive play. Telcos, especially in the European region, are still relatively cheap and haven’t managed to outperform.

This puts them in a good position as a proxy for growth in the European economies.

Some sectors that were highlighted as underweight by CS includes non-cyclical financials, oil and commodity-related companies.

However, CS appears to believe that oil price could recover to US$65 per barrel by 2018 and that investors have given oil-related stocks too much of a beating.