2020 Market Outlook

China’s GDP growth slowed from 6.6% in 2018 to just above 6.0% in Q3 2019. Weakness was felt across the board – slower investment and retail sales growth, lacklustre exports, together with weaker industrial production and rising unemployment. This general trend has made divergences at sub-sector level increasingly visible. For example, despite the retail slowdown, cosmetic sales delivered a double-digit growth year-to-date, with online channels and popular products growing even faster.

There is no doubt that China’s economic growth will continue to slow over the next decade. In the long term, however, we expect to see new investment opportunities in the consumer, healthcare and technology sectors. New spending patterns of millennials, higher consumer spending in the lower tier cities, coupled with the willingness to pay more for better quality, augur well for the structural growth in specific consumer segments.

Meanwhile, the challenges arising from the US-China trade tensions have encouraged domestic research and development in the technology space while an ageing population demands better medical services and quality drugs.

The newly elected Indonesian government has shifted its development focus from infrastructure spending to human capital to create an economic structure that is more productive, sustainable and competitive.

Infrastructure development will continue with the planned shift of the country’s new capital to East Kalimantan. However, this will take time and the benefits will only be slowly realised. Meanwhile on the economic front, there are growth challenges arising from a decline in discretionary spending from rising utility tariffs, national healthcare service fees, and limited government spending capacity.

Companies listed on the stock exchange have reported a year-on-year decline in cumulative earnings of 1.4% in the nine months ended September versus an expansion of 0.9% in the first half of the year¹. We are therefore cautiously optimistic and prefer government bonds over equities. We will focus on companies that have sustainable business models and able to deliver decent earnings growth.

Source: ¹Bloomberg, data as at 1 November 2019

In 2019, the US-China trade tension, a slowing global economy, and the inventory burden of memory chips significantly impacted the Korean economy. All these headwinds have led to an almost 30% decline (market estimate) in earnings per share of the stock market.

Heading into 2020, we believe that earnings growth for major Korean exporters, especially semiconductor and IT hardware companies that can capitalise on the 5G network development worldwide, are likely to see meaningful recovery. We will therefore focus on corporate earnings; the spotlight will be on the earnings potential of the software sector especially since the Korean economy is entering a low growth phase.

As such, we maintain a cautious stance on cyclical sectors, such as chemicals and refinery (oil and gas), given the structurally declining demand due to tougher environmental regulations.

In Budget 2020, the Malaysian government is projecting 2020 growth to be 4.8% (vs 2019F at 4.7%) with the fiscal deficit projected to be lower at 3.2% (vs 2019F at 3.4%). This Budget is considered mildly expansionary as the new fiscal deficit target for 2020 of 3.2% is relaxed from the previous 3.0%.

Nonetheless, the government is still committed to the broad fiscal consolidation path, targeting to reduce fiscal deficit to 2.8% of the GDP over the medium-term. As such, we expect Malaysia’s sovereign rating to remain unchanged at A3/A-. The budget is focussed on measures to promote jobs, foreign direct investments, and structural reforms, rather than the traditional mega infrastructure pump-priming.

We therefore expect a positive outlook for equity themes relating to consumerism, digital economy, tourism, healthcare, property, Sabah and Sarawak. On bonds, we remain neutral, preferring corporate credits for yield pickup.

Taiwan’s central bank has recently forecast the economy will expand by 2.3% in 2020, underpinned by domestic demand. At the same time, semiconductor companies (with overseas operations) are expected to increase domestic capex investment and continue to invest in high-end processes. This augurs well for the stock market.

Taiwan’s semiconductor supply chain is poised to benefit from the world’s growing demand for fifth generation (5G) network development. Demand for Taiwan’s semiconductor products is expected to be strong and supported by China’s dependence on imports for many of its key components and chips to sustain its operations.

Our top picks include companies that produce power amplifiers, printed circuit boards and integrated circuits specifically designed for 5G smartphones and base stations. That said, one key risk we see is that if US and China fail to conclude a trade deal, global manufacturing activities could slow.

In 2019, a slowing global economy, US-China trade tensions, and the Thai baht’s appreciation have significantly impacted Thailand’s exports and tourism. High levels of household debt and an ageing population have continued to weigh on the Thai economy. Nevertheless, we believe Thailand’s long-term investment and short-term stimulus measures can create investment opportunities in selected sectors.

The new government is set to expedite infrastructure projects that include the high-speed rail link connecting Thailand to its ASEAN neighbours and China. This is an important strategic infrastructure project that will boost employment not only in the short term but also increase overall efficiency and improve utilisation of resources in the long term.

Select players in transportation and property development are likely to ride the infrastructure wave. Timely measures, such as reducing home ownership transfer duty fees in addition to incentives for domestic consumption and traveling, will likely benefit the retail and hospitality sectors, which are Thailand’s traditional competitive edges. Given the low interest rate environment, we also see opportunities in real estate investment trusts (REITs) and infrastructure companies that can provide a stable income stream.

Vietnam’s economy remains healthy given its favourable competitive labour force and relatively low wages. The US-China trade war has also accelerated the relocation of manufacturing operations to Vietnam and benefitted its economy and financial markets. With foreign investment inflows being an important economic contributor, the rise of foreign-owned companies in Vietnam may create more competition for domestic players.

We expect Vietnam’s bull equity market to continue into 2020, driven by excess liquidity and corporate earnings growth prospects. In the fixed income market, given Vietnam’s positive economic outlook, modest inflation and low government bond yields, Vietnam’s credit market offers attractive spreads for investors.

Moreover, the hope of Vietnam being reclassified from frontier to emerging market will support investor sentiment, barring any short-term volatility arising from turbulence in global markets.