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Analisi 06.01.2020

Hong Kong: Market Valuation Amid Local Recession

Hong Kong: Market Valuation Amid Local Recession

After a global slowdown in 2019, UBP expects world growth to stabilise on a moderate trend in 2020 (up 2.4% vs. 2.3% in 2019).


Growth Prospects: Cyclical Rebound against Subdued Backdrop

We expect an industrial cyclical rebound on low inventory provided that United States (US) and China sign a phase one trade agreement.

Political and geopolitical risks will remain, but recession risks have abated in US and Germany. Trade wars have been a drag on global growth. Beyond a possible phase one trade deal, further Sino-US trade negotiations on remaining tough issues could be as bumpy and even more prolonged. Also, a trade deal signed between US and China does not necessarily prevent an escalating confrontation on non-tariff issues.

The Asian outlook remains subdued but may improve if tariff rollback occurs as part of a partial trade agreement. Asia’s (ex. Japan) gross domestic product (GDP) is expected to grow 5.1% in 2020. Excluding China, GDP for the rest of the region is expected to expand by 3.8%.

China’s growth will slow to 5.7% on Beijing’s continued measured and targeted policy easing. India’s expansion will pick up from this year’s trough to 6.1%, while the export-led economies such as South Korea, Taiwan, and Singapore should improve modestly from current subdued trends.

Hong Kong’s economic recession will extend into the next few quarters and will end 2020 with a mild annual contraction.

Inflation risk remains distant and we expect Asia’s CPI inflation to average 2.1% in 2020, down from 2.6% this year. Beyond the surge in food prices – most noticeably in China and India but should eventually normalize - core inflation rates should stay benign across the region given the modest growth profile. A weaker USD and continued stable oil prices will also help control imported inflation in Asia.

Policy Outlook: Fiscal and Continued Monetary Easing Important

Accommodative monetary policy will remain in place for a long time, with further central banks’ balance sheet expansion. But with low and negative interest rates limiting the power of monetary policy, additional support from fiscal policy will be a key market focus in the coming years.

Japan has already kick-started a modest fiscal package to offset its value-added tax (VAT) drag and should have room for modest supplementary budget as monetary easing runs to its limit.

Europe may expand fiscal measures in 2020 under the new economic leadership but the US is expected to follow only after next year’s presidential election.

We anticipate the US dollar (USD) will depreciate modestly in 2020 on slower US growth and inflation dynamics as well as further Federal Reserve’s (Fed’s) rate easing and balance sheet expansion. Unless global growth nosedives, the USD’s safe haven status that supported its appreciation in 2019 is unlikely to maintain.

A more stable USD/CNY profile will also help prevent the greenback strength. USD weakness will provide an important backdrop for more stability in EM and Asian currencies and selective strength in high-carry currencies such as the Indonesian rupiah (IDR).

Most Asian countries should have sufficient fiscal flexibility especially China, Hong Kong, South Korea and Singapore. India’s bold corporate tax cuts in late 2019 should curb its ability to pump-prime further while Indonesia will focus on long-term infrastructure investment. Hong Kong’s huge fiscal reserves will be useful to buttress the economy during these rainy days under which lingering political tensions have caused an abrupt economic contraction.

Overall, Asia’s fiscal policy will be modestly expansionary but unlikely to see serious slippage as fiscal discipline remains key to the region’s policy mindset.

Measured monetary easing is anticipated to extend in China to avoid major re-leveraging risk, while further policy rate cuts are expected in South Korea, Indonesia, Philippines and Malaysia.

We expect India’s central bank to look beyond transitory inflation factors due to higher food prices and continue interest rate reduction in 2020 in light of its fiscal constraint.

Read the full document with charts

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Anthony Chan
Chief Asia Investment Strategist

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