This article first appeared in Forum, The Edge Malaysia Weekly on January 6, 2020 - January 12, 2020

It is hardly surprising that many economists expect the global economic uncertainty to prevail in 2020. Economic news headlines in recent months say it all — manufacturing momentum in the US is still lacklustre, based on November readings of the widely followed Purchasing Managers’ Index (PMI); global trade barometers still show a downward trend; and worldwide semiconductor sales continue to fall. To put it in layman’s terms, prospects remain uninspiring as far as economists are concerned.

However, the equity markets reflect none of this pessimism. Upbeat headlines flash everywhere. The euphoria among equity investors is especially noticeable in the US, whose stock market surged to a record high in December 2019, despite news of President Donald Trump’s impeachment by the House of Representatives. Equity investors shrugged off the news and continued to ramp up purchases of US stocks, driving benchmark indices up by mind-boggling percentages. On a year-to-date basis (third week of December 2019), the US S&P 500 index has gained 28% while the Nasdaq Composite index has surged 35%. The last time stocks gained this much in a year was in 2013.

Of course, analysts have attributed the improving sentiment in recent weeks to “phase one” of the trade deal secured by the US and China. The belief that Trump will retain his presidency, thanks to strong support from his fellow Republicans, also supports the upbeat mood. Other boosts came in the form of marginal gains in the Output and New Orders sub-indices of the global PMI and the slightly better-than-expected US gross domestic product (GDP) growth numbers released for the third quarter.

Still, these do little to assuage economists’ concerns. Why? First and foremost, the global economy will likely not get a near-term lift from advanced economies. While it is true that the International Monetary Fund is projecting slightly stronger growth in 2020 (3.4% versus 2019’s expected growth of 3.0%), its forecast assumes that emerging economies will lead the turnaround in global growth momentum. Growth in advanced economies, on the other hand, is expected to remain stagnant. Is this a realistic scenario to paint for 2020?

It is, if we look closer at major economies like the US, eurozone and China. While the US’ growth looks surprisingly resilient at this juncture, its outlook remains slightly different if one were to judge by recent statistics. In particular, headwinds from slowing global demand and looming trade policy uncertainties are starting to build up. For instance, the New Orders sub-index of the US manufacturing PMI (a forward-looking indicator) remained lacklustre, suggesting a low probability of a near-term upside rebound. Growth in business investment also slowed to 1.3% year on year in the third quarter of 2019, compared with the 6.8% expansion recorded in the corresponding quarter in 2018.

There are also growing signs that weaknesses in the manufacturing sector and business investment have started to spill over into other parts of the US economy. A case in point: Average hourly wage growth slowed to 3.1% last November (3.4% in February 2019) despite favourable labour market conditions. And interestingly, consumers are turning cautious, as evidenced by a decline in inflation-adjusted consumer spending growth to 2.6% in October from August’s 3.7%.

Across the Atlantic Ocean, European economies are also expected to remain subdued with real GDP growth remaining circa 1.2% in the third quarter. The UK’s growth was stuck at 1% during the period as weakening global trade and Brexit-related uncertainties took a toll on industrial activity and business investment. Germany, the key growth driver of the eurozone, was particularly impacted by the industrial downturn and led the decline in the region’s growth.

China, an emerging economy, has its own set of issues to deal with. Its growth momentum continued to slip, with real GDP growth falling to a 27-year low of 6% in the third quarter. The slowdown was partly attributed to a moderation in fixed-asset investment growth to 5.2% in the first 10 months of 2019 — the slowest reading since 1998. A re-escalation of trade tensions between the US and China could exacerbate the slowdown of China’s economy.

And don’t forget, China is also confronting risks of a contagion from recent episodes of corporate bond defaults. Total corporate defaults were reported to be in the range of RMB120 billion (RM70.4 billion) in the first 11 months of last year, close to the RMB122 billion seen the year before. Concerns have arisen over the pressure on the Chinese government to support some important corporates in order to prevent a contagion.

Another point of concern is the constraint faced by major central banks in propping up their economies. Specifically, they could run out of monetary ammunition to support growth. Heads are turning to fiscal measures to do the trick. While advanced economies are expected to rely on fiscal policies to do the heavy lifting, this will be unlikely if debt concerns emerge. A country like Germany has always been sceptical about using fiscal policy to support growth. Some emerging economies, for example India and Malaysia, have limited fiscal space. They will likely remain cautious about spending for fear of expanding their budget deficits.

There is talk of the possible emergence of “grey swan” events. Some executives and market analysts are also looking at the likelihood of Japan’s central bank using its exchange rate tools to defend its export sector and prop up its economy, and the US introducing measures to protect American businesses (that is, to prevent Chinese companies from buying US technology companies). These are logical and cannot be ruled out.

So, why are investors still banking on equities in 2020? For one thing, market psychology is hard to predict, and this herd behaviour could continue to push the market up until someone turns around and says, “Hey, there’s too much exuberance now!” In 1996, Alan Greenspan uttered those words. We know the phrase will eventually be repeated, although the timing is beyond anyone’s knowledge. What remains true is that when things look too good to be true, they certainly are.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. The views expressed here are his own.

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