Extraordinary efforts by the U.S. Federal Reserve to foster an economic recovery from the financial crisis through asset purchases and rock-bottom interest rates have provided essential support for the market during its 10 year bull run. The S&P 500’s post-crisis low close was 676 points on March 9, 2009. On 9.3.19 the benchmark index closed at 2,743, down 2% for the week but represented a quadrupling of the 9.3.09 value – a handsome windfall for a savvy investor.
Sweeping corporate tax cuts passed by President Donald Trump fueled market gains for much of 2018 before a steep sell-off starting in September raised fears the bull run was coming to the end. The S&P 500 has turned in a handsome annualized return of 15%, with the consumer discretionary and information technology indexes each up about 20% annually.
The Brexit Quadrum
The UK economy after Brexit will prosper. It is hauntingly a services sector nation, not one that over depends on manufacturing exports. Malaysia’s GDP growth of more than 5% per annum is within reach of the United Kingdom. Inflation due to rising crude oil prices hit many countries but the US and UK are not badly affected because of their strong currencies. Once out of the euro zone food imports need to be mostly sourced elsewhere. Even currently the UK exports to the rest of the world have gown by 2.5% per year versus 1.5% per year to Europe.
UK jobless rate falls to new 43 year-low. The Euro zone June industry output plunges. Macron’s hollow 2017 election victory (France’s loss) now can look forward to French ports being excluded from European Commission plans for a new shipping route linking Ireland with the Continent post Brexit.
Italy and France budget deficits trajectory will exceed the EU commission’s guidelines and a no-deal Brexit will leave a giant size financial hole in the commission’s coffers. In August last year Greece warned it will need more financial aid from Brussels in a ‘no-deal’ Brexit scenario as the financial fallout could leave the country facing increased financial and political instability if there was a shortfall in the EU budget up to 2020. With a £10bn-a-year black hole in EU finances any Euro zone planned roller coaster quantitative easing rides will be painful options.
Leaving the EU without a deal on March 29 might bring some short-term instability but in the longer term it would allow the United Kingdom to thrive through forging beneficial trade deals across the world. Commonwealth New Zealand and Australia will be prominent for dairy products for instance to mitigate anticipated food imports.
Household consumption of the UK is a high 66% of GDP and job opportunities in the service sectors will be resilient, with tourism and banking enabling the job market to hold. A crash in house prices is unlikely as the UK will continue to see wealthy folks of third world countries drawn to it, thus people in the UK will keep on spending. This augers well for the UK since there is greater resilience to any likelihood of a global downturn.
An outlier Malaysian economic outlook
The Foreign direct investment into Malaysia increased to MYR 3.95 billion in the third quarter of 2018 compared to MYR 2.84 billion in the previous period. This bodes well for the government three-year period to improve the economy because there must be continued rise in business investment.
Brent crude oil prices holding above $75 per barrel is a blessing for Malaysia. More important is that higher prevailing oil price has contributed to palm based bio-diesel spread over palm oil to hit US$219 per tonne in early October 2018. It would be a badly needed growth engine in a scenario of weaker palm oil prices. Malaysia’s 720,410 tonnes of bio-diesel production in 2017 could reach 1.2 million tonnes in 2019. Its export could double the 235,291 tonnes in 2017.
In Malaysia although Brent crude price is currently below $70 per barrel, a B10 program will increase local consumption of palm oil and help reduce surplus in the global market. A new rule will come into full force from February 2019 to phase in the B10 biodiesel mandate on truck manufacturers such as Scania and bus manufacturers assuring engine warranty extension with usage of B10 in Malaysia.
The inflection point will set in with the ability of companies to service their debts. Earnings before interest and taxes (EBIT) must be greater than their interest expense. China might be in dire stance here if not for the nation’s high currency reserves. With higher crude oil price inflation worsens most countries economic situations. Malaysia of course is stabilized by Brent crude above $70 per barrel and its currency depreciation against the dollar is comparatively much better off than China and Indonesia. The Malaysian government’s ¥200 billion (RM7.34 billion) 10-year Samurai bond issuance of March 2019 is a brilliant move in attracting foreign investors to Malaysia. The coupon rate was estimated to be at 0.65% but Malaysia managed to lower it to 0.63% per annum.
Dr Mahathir official visit to China in mid-August 2018 was to place his own affinity with China correctly when he clarified the burden of Chinese-backed projects initiated by the previous government. The construction of the East Coast Railway Line (ECRL) and the Suria Strategic Energy Resources (SSER) pipeline project were thought to be perverted. There was no suspicion that Beijing did not act in good faith thus things ought to be sorted out. China’s support for Malaysia’s palm oil would help and a bilateral trade payment in ringgit and yuan agreement will upend new Chinese direct investments.