It's a decade since the full onset of the financial crisis. Going into 2018, we finally look well-poised for synchronized global growth, even as the cheap money (free if you're in Japan!) that central banks have pumped into the system ever since the Western financial crisis is slowly withdrawn.
What does that mean for emerging Asia? The region appears to be on firmer footing than usual heading into the new year. There's the prospect of 5% to 6% growth for many Asian emerging markets (EMs), which are switching en masse from an export-only approach to focus on domestic demand. If the United States becomes more protectionist in 2018, as seems likely, expect intra-Asia trade to flourish faster than it otherwise might have done, too.
The withdrawal of the liquid float provided by central bank stimulus likely means that all boats won't be rising in 2018. The broad-based rallies we've seen in 2017 will give way to choppier trade as markets peak out.
When will see the end of this strong bull run? We know it will end, but as usual, timing is the billion-dollar question. If there's one thing I've learned from a quarter-century of business reporting, it's that timing the market is extremely difficult. Even the most seasoned pros get it wrong more often than not.
This means it's best to stay in the market rather than hoarding all your money in cash and gold. As an aside, I've never understood gold as an investment. It just sits there. Doesn't do anything. Sure, it'll be useful if the apocalypse comes. But it would be equally useful, in the apocalypse, to have a shotgun and a bunch of shells, a lifetime supply of Spam and your own lake of pure water. I'm not investing in any of the above. I'll take my chances.
No, 2018 is not going to be the year of the apocalypse. For sure, North Korea will be a constant thorn in the U.S. side. I wouldn't be surprised to see Donald Trump meet with Kim Jong-un at some point during his presidency. They're cut from the same cloth. Next year may be too soon -- we likely would see some lower-level ministerial meetings first. We are building to that point. It'll be a mistake, but Trump just can't resist the thought of doing a deal with Pyongyang.
We certainly will see more rocket tests from North Korea in 2018. To what end? We now know the nation is nuclearized. Its most powerful missiles can reach the U.S. mainland. So, what's the end game?
Respect. That's basically what Kim wants. He would get it from a tete-a-tete with Trump. North Korea would get obliterated if it ever puts its nukes to use. A more likely result would be for the North Korean situation to devolve into stasis, the next test causing a flurry of protestations before everyone gets on with business.
Absent the apocalypse, it's the time to get more selective and more active in your management, according to AXA Investment Management. They envision a David Lynch year -- twin peaks. Global growth likely will top out, and so too will the amount of quantitative easing in the system.
Both will ease heading into 2019, AXA IM predicts. "In this environment, we continue to favor risky assets, though we are starting to find that nearly all asset classes are now expensive, and therefore we tend to be more selective," Laurence Boone, the head of Research and & Investment Strategy at AXA IM, says.
Boone favors European over U.S. equities for 2018. Trump's promise to spend on tax breaks, infrastructure and other government grants should pump an extra one-quarter percentage point into economic growth in the year ahead.
U.S. growth picked up to 2.3% this year, according to Oxford Economics, almost an entire percentage point better than last year. And 2018 should see it pick up more speed, to 2.7%. But Oxford Economics says that will be the peak of the expansion, as it shrinks to 1.9% growth in 2019 and to around 1.5% in the next decade. Faster inflation, resulting in faster Fed hikes than expected, is the main threat.
China's huge debt pile seems to worry economists, and hardly anybody else. Let's face it: The Chinese government has extremely deep pockets and enough cash on hand to bail itself and its industry out of most problems.
But will it? Beijing is increasingly willing to let companies run into problems and even bankruptcy, and it is right to do so. The men in suits (and in China, they're still all men) would take action if faced with any systemic slowdown, but they're perfectly willing to let even a lot of companies go bust.
China is adjusting to slower growth on a bigger base. The Chinese economy hit 14 digits this year, as it grew an estimated at 6.7% in 2017 and is now $10.2 trillion in size. Double-digit gains simply aren't possible, and the pace of growth should drop below 6% by the end of the decade. Instead, the country will continue its transition toward a service-driven developed model.
To continue the reform of China's bloated, inefficient state-owned enterprises will take persistent effort by President Xi Jinping. It requires a willingness to create some pain. Like the United States, China is shedding jobs in heavy industry, and those workers need retraining to move into the modern jobs in tech and innovation that Chian increasingly is creating.
Its push into electric vehicles truly will gain pace next year. China is already the biggest market for electric vehicles, both in terms of production and consumption. That has lured the likes of Tesla Inc. (TSLA) , which founder Elon Musk says will begin production of its vehicles at the free-trade zone in Shanghai by 2020. Big auto manufacturers such as Ford Motor Co. (F) have followed suit, saying it will produce 15 models of electric vehicles in China by 2025. Any carmaker that wants to keep afloat should follow that example, and investors should consider selling the stocks of those that don't.
For Asia's export-driven economies, which is most of them, the good news is that global trade continues to advance. That's the case despite Trump's efforts to do everything he can to disrupt it.
Electronics manufacturers are riding a wave of demand to strong gains. It's one of the main forces behind the decision by Standard & Poor's to raise its growth forecasts for the Asia Pacific region, which it predicts will grow at close to 3% for the next few years, well ahead of the pace of the United States.
I'm betting that U.S.-China trade becomes a very nasty dispute indeed in 2018. The signs are already there, with the U.S. Commerce Department "self-initiating" a trade action alleging anti-competitive subsidies and dumping by China's aluminum industry without being asked to do so by U.S. companies. At the same time, the Office of the U.S. Trade Representative has already said that China has a case to answer over alleged intellectual property theft.
India should regain its title of the world's fastest-growing major economy next year, having temporarily surrendered it to China. With the sudden shocks behind it of demonetization that rendered 86% of the cash in circulation worthless this time last year and a nationwide sales tax with its super-complex series of bands, the Indian economy should recover from growth of "only" 6.8% this year and build back to a pace of more than 7.5% in each of the next three years.
Indian equities, one of the strongest performers in the first half of this year, therefore should regain a lot of luster. Other Asian economies to watch are Indonesia, which is expected to grow at 5.5% or thereabouts for the rest of the decade, and Malaysia, which has been largely forgotten in the Asian emerging market discussion. However, Malaysia is one of the most-developed of the Asian EMs and should be buoyed by growth of around 5.0% through to 2021.
The Philippines is a major beneficiary of the trend of outsourcing. It's not just airline call centers but also accounting back office, human resources, software assistance and basic banking that are offshoring from the developed world to an English-speaking and now, under maverick Trump-plus President Rodrigo Duterte, highly business-friendly nation. Growth out of Manila is also running around 6.6%.
Vietnam's growth currently is running at the same 6.6% pace, meaning that China's little cousin (just don't call it that!) is matching Big Brother step for step. Vietnam's emergence from Communist to capitalist is at an earlier stage than that in China, meaning many of the rules are still being written, but the fledging Ho Chi Minh City Stock exchange is listing companies fast. Foreign direct investment will continue apace, and buyers of real estate are likely to find good gains if they invest in mid- to high-end residential or office property.
It stands to be a strong year ahead for Asia, then, with imports to Europe picking up to bolster already-existing U.S. demand. Asia is always exciting on the political front. Thailand is still settling under a new monarch, Seoul must contend with the provocations from barely 40 miles to the north, and China's island building has provoked most of its neighbors.
But on the business front, Asia's companies appear to have debt burdens that are manageable. With domestic growth an increasingly important factor in Asia's emerging markets, not to mention the old favorite of exports looking extremely favorable, it should be a sustained strong year for Asia's emerging markets.