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This article first appeared in The Edge Financial Daily on January 3, 2019

It has been a nail-biting 2018 for investors, economists and policymakers alike. With a less-than-exciting ending for the year across numerous indicators, pundits are mixed over the weather ahead. Are we going through a correction? A bear market? Have the good times passed? One way to glimpse into the future is by learning about the past. The Edge Financial Daily compiled key data over the last eight years to paint a picture of where we were, where we are headed and whether we have reached the peak of the current economic cycle.

 

1. Equities: Mirror, mirror on the Wall (Street)

After a bullish run in 2017, most equity markets globally ended 2018 on a bearish stance. This is no surprise as they usually mirror the market performance on Wall Street.

The sombre performance across the board was mainly caused by concerns over the US-China trade war and the US Federal Reserve’s tightening of monetary policy, coupled with a reversal of oil price movements near end-2018.

Interestingly, the Qatar Exchange Index emerged as one of the rare few gainers with a striking 20.83% increase despite the sea of red around the globe, helped by higher oil price most of the year.

Conditions on the domestic front did not help, as policy and political uncertainties plagued the equity market after the Pakatan Harapan coalition, to the market’s surprise, won the 14th General Election.

Looking back, the FBM KLCI has gained just 10% from 2011 to 2018 — far from the 90% seen in the Dow Jones Industrial Average, 40% at the Hang Seng Index, and still behind the 16% gained by the Singapore Straits Times Index in the same period.

 

2. Commodities: Nearing the 2008 lows

Prices of commodities are theoretically affected by economic growth or contraction, which affects demand, and concurrently, supply.

Sector-specific factors like competition among producers (for crude oil) and debates over environmental impact (for palm oil) also come into play.

Ten years after the 2008 commodity bubble burst, prices have again contracted towards the lower spectrum in 2018. Raw sugar and crude palm oil hit their lowest year-end close in a decade.

The three-year effort by crude oil producers to stabilise prices was erased by a 40% decline in the last three months, while rubber prices were just slightly higher than its multi-year low of 2015.

As we enter 2019, concerns of a slowing global economy still looms. As the world’s largest two economies — the US and China — continue their baby steps into a full-fledged trade war, the year may not offer much respite for the prices of raw materials.

 

3. Global and domestic economy: A mixed basket

After a healthy growth in 2017, most economies on the selected list of countries are anticipated to see a decline in gross domestic product (GDP) growth for 2018, save for the US and Thailand.

The International Monetary Fund (IMF) projected a 0.5% year-on-year increase in GDP growth to 2.9% for the US and a 0.7% increase in GDP growth to 4.6% for Thailand.

Global economic growth in 2018, on the other hand, is expected to stay flat, according to both the World Bank’s and IMF’s projection of 3.1% and 3.7% respectively, with the US-China trade tension and US monetary policy normalisation the culprits. China’s GDP growth, for one, is expected to be at its slowest since 1990.

Nonetheless, it is worth noting that other major central banks, such as the European Central Bank, Bank of Japan as well as the People’s Bank of China, are still maintaining an accommodating monetary policy to support economic growth. Similarly, Bank Negara Malaysia’s overnight policy rate is also largely unchanged from 2011 levels.

Meanwhile, the government change in May 2018 unearthed multiple financial discrepancies at a time when the global economic climate was not so nurturing for an open and emerging market like Malaysia.

With it came a persistent call for higher productivity and efficiency while policymakers scramble to reorganise its budget and ramp up on development expenditure — a key driver of long-term growth — to the point where the goal of a balanced budget has been pushed forward indefinitely from its initial 2020 target.

Note that the reduced budget deficit-to-GDP ratio from 2014 to 2017 was mostly helped by a speedier growth in GDP rather than more prudent government spending. A dwindling current account balance — while still positive — is not a good sign. Neither is a higher dependency on oil revenue in 2019 amid current volatility in the commodities market.

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