The Year Ahead: 10 things to look out for in 2021

This article first appeared in The Edge Malaysia Weekly, on December 28, 2020 - January 10, 2021.
The Year Ahead: 10 things to look out for in 2021
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IT would be accurate to say that 2020 has not been the start of a new decade that everyone had envisioned it to be. With Covid-19 sweeping through the globe, everything has gone topsy-turvy while governments around the world are still figuring out ways to curb the spread of the virus without killing their economies.

As we approach the year end, Covid-19 is still a part of our daily life. The virus has mutated and a new strain has been discovered in the UK and some European countries. However, there is a glimmer of hope with vaccines being developed at record speed and rolled out.

So, will 2021 be the “recovery” year everyone has been looking forward to? And if so, can stock markets, which have continued to trend higher each week, continue their rallies?

Here are 10 things to look out for in 2021.

1 Biden’s approach to China

Just because Donald Trump will no longer be the US president in 2021, it would be naive to think that the tensions that have been built up between the two superpowers of the world over the last couple of years will come to an end.

A recent interview with a Times columnist confirms this. US president-elect Joe Biden said in the interview that he would not make any immediate moves to end the phase one trade agreement with China. The same applies to tariffs, he added.

Under the Trump administration, the US has imposed US$370 billion worth of tariffs on Chinese goods.

Biden also said in the interview that his goal would be to “pursue trade policies that actually produce progress on China’s abusive practices — that is stealing intellectual property, dumping products, illegal subsidies to corporations” and forcing “tech transfers” from American companies to Chinese counterparts.

Some opine that the Biden administration’s stance on China will be a combination of Trump’s and Barack Obama’s policies on the country. As The Economist puts it, it will be “a Trumpian wariness of China combined with a preference for caution in handling strategic matters”.

As we all know, the trade war has developed into a tech war.

Huawei was the first to bear the brunt of the tensions between the US and China in 2019 when the Trump administration put the company on its trade blacklist — Entity List — to limit its use of American technologies. US suppliers are required to seek approval from the government before shipping products to Huawei. Then in May, the Trump administration imposed restrictions on non-US manufacturers, disallowing them from building any products for Huawei and its chip-designing arm HiSilicon as long as they used American equipment.

If that was not bad enough for Huawei, things escalated in August when the US imposed further sanctions, forbidding all suppliers using American technologies from selling to Huawei without a licence. Since then, more than 300 Chinese entities have been placed under the Entity List, the latest being Semiconductor Manufacturing International Corp.

Market observers believe that Biden will continue to keep the restrictions on Huawei, which is seen as a security threat, and expect the tech decoupling to remain the trend going forward.

2 Defeating Covid-19

Within a year, the impact from lockdown measures to curb the spread of the SARS-CoV-2 virus that causes Covid-19 has severely weakened economies around the world, increased government indebtedness everywhere and isolated countries. Countries that fought the virus deftly earlier in the year by imposing stringent measures are now seeing a resurgence in cases — except for China, which appears to have been successful in flattening the curve since March.

As 2021 draws nearer, the virus continues to be rampant. There have been more than 77.9 million cases and 1.71 million deaths worldwide. And the number is rising daily.

What is worrying is the new strain reported in the UK that scientists say is more transmissible than the current strain. This new strain — which was discovered in September in the UK — has become the dominant strain as of Dec 9, with 62% of Covid-19 cases in London linked to it, from 28% three weeks earlier.

Meanwhile, the governments of Italy, the Netherlands and Australia have also reported cases of the new strain. The new strain has prompted some of the UK’s European neighbours to cut transport links with the country.

On the bright side, Covid-19 vaccines are being deployed in some countries. Pharmaceutical companies have worked around the clock this year in the race to produce a vaccine against the coronavirus, which has been compared to the Spanish flu. Scientists have allayed fears that the vaccines currently being deployed would not protect against the new variant, saying that the current vaccine will also be effective against the new strain of the virus.

Malaysia plans to start its vaccination exercise as early as February using Pfizer’s Covid-19 vaccine. Prime Minister Tan Sri Muhyiddin Yassin will be among the first to receive the shot.

Will the spread of the Covid-19 virus finally be curbed in 2021?

3 The economic climate

After a contraction in the economy this year, the Malaysian government foresees a rebound of between 6.5% and 7.5% in 2021.

Notably, parliament has approved a behemoth RM322.5 billion budget for 2021, unveiled by the government in November. The cash aid, wage subsidies and other measures are expected to help stimulate the economy.

Meanwhile, Bank Negara Malaysia has hit the pause button on interest rate cuts, leaving the overnight policy rate unchanged at 1.75% at its last monetary policy committee meeting in November. Economists do not foresee any further rate cuts in 2021, barring any significant downside risks to the economy.

However, business confidence remains weak. The latest RAM Business Confidence Index survey for 4Q2020 showed little change at 35.9 from 33.7 in 3Q2020 (a number above 50 indicates positive sentiment). “The results suggest that businesses may be feeling the pressure from the third wave of Covid-19 infections and the reinstatement of the Conditional Movement Control Order (CMCO) in the Klang Valley since mid-October,” RAM says in a statement.

Close to 70% of the survey respondents said the CMCO had further eroded their business cash flow. Notably, the survey was done among micro, small and medium enterprises.

Another factor that will be watched closely is the fiscal position of the country. Due to the Covid-19 pandemic and the collapse of oil prices, this year’s revenue at RM153.26 billion is 15.1% lower than the previous year. The government is expecting revenue to increase to RM174.37 billion in 2021, slightly below the level seen in 2019.

The revenue projection for 2021 is counting on a recovery in business and individual income to help raise revenue that was lost in 2020. All this is premised on improving economic activity, stable employment prospects and sustained wage growth.

Crude oil prices have regained some strength to US$50 per barrel since it plunged below US$20 per barrel in April. But the question is, will the price hold in 2021?

Under a blue-sky scenario, federal government debt is projected to increase to about 61% of GDP in 2021, from 60.7% in 2020. However, if the economy doesn’t recover as forecast, Malaysia could find itself having to increase its borrowings to support its expenditure.

4 Reopening of borders

Some countries are selectively and gradually reopening their borders. They are also forming “travel bubble” programmes with other countries where Covid-19 has been brought under control. Australia and New Zealand have formed a travel bubble while Singapore and Hong Kong are set to form one too.

There was a plan to reopen the Johor-Singapore border, but it has been placed on the back burner given the resurgence in cases in Malaysia.

It remains to be seen how the government will move forward with the issue of reopening borders next year. While fighting Covid-19 is important, it is also pertinent that borders reopen to further stimulate the economy.

The closure of borders have had a huge impact on the world economy. First, oil consumption has dropped dramatically due to significantly less travel domestically and abroad. Not only have flights been reduced but there has also been less use of private and public vehicles due to the lockdowns.

In 2021, global oil consumption is expected to come in at 96.9 million barrels per day (bpd), up from the current 91.2 million bpd forecast for 2020, according to the International Energy Agency. The expectation is for borders to largely remain closed until vaccines are widely available, implying that a rebound in demand for oil could be slower than anticipated.

Border closures have also impacted the global tourism industry, and Malaysia has not been spared from the fallout. The travel sector contributes about RM168.5 billion to the country’s economy.

This year, international tourist spending in Malaysia declined 70% to RM12.58 billion in the first half of the year from RM41.69 billion in 2019. Industry players say their 12-month outlook remains bleak and lament the lack of government support for the sector.

So, it comes as no surprise that foreign direct investment (FDI) has also trended downwards this year. From January to September, the total FDI amounted to RM42.61 billion, only half of the RM82.91 billion achieved in 2019.

As it is, Malaysia is seen as less competitive as a manufacturing hub compared with other countries in Southeast Asia. While it is true that the country has an advantage in terms of its multilingual capabilities, decent infrastructure and highly skilled workforce, will foreign investors wait for Malaysia’s borders to reopen or will they flock to the next best available option?

5 Domestic politics

While the global Covid-19 pandemic was unexpected, all that unfolded on the domestic political scene was totally unanticipated too. Malaysia, which had been ruled by the same coalition party for 60 years since independence, saw two changes of government in less than two years after the 14th general election (GE14).

The power struggle before Malaysian voters seems to have gotten worse.

Bluntly put, there is always a question of how long the existing government will last given the thin majority that it has in the Dewan Rakyat. This casts uncertainties on many fronts, including the country’s long-term policy direction. This will not augur well as the nation is battling with the Covid-19 pandemic and the domestic economy is highly vulnerable to a recession.

Although GE15 is not due until 2023, speculation is rife that polls are likely to be held in 2021 and may be as early as March or April.

To end the political uncertainties, an increasing number of Malaysians see a snap poll as the solution. A government with the people’s mandate is expected to have an easier time in terms of formulating policies and executing long-term plans.

6 Two oil prices

Although services and manufacturing have become Malaysia’s key economic growth engines, fluctuations in the prices of two commodities — crude oil and crude palm oil (CPO) — will still have an impact on the domestic economy.

The fact that the ringgit’s exchange rate against the US dollar tracks the price of crude oil closely says it all — the strength of crude oil prices affects the country’s sovereign rating. While the government should not rely on the national oil firm to foot its expenditure bills, still it is a comfort that Petroliam Nasional Bhd can afford to pay dividends at this critical moment.

In a nutshell, Malaysians should wish for higher crude oil prices, although it would mean petrol prices will also go up. Likewise, with the country being the world’s second largest CPO producer, strong prices will also be a boon.

Brent crude price started the year with a 70% plunge from the US$68 level to a low of US$20 in 1Q2020. It has rebounded since May, attempting to breach US$50 per barrel in late December.

In contrast, CPO prices have been on a steady climb after they dropped to the RM2,000 level in early May. The edible oil price soared to RM3,849 on Dec 24 — the highest since February 2011. Should CPO prices be able to sustain at its current level until Dec 31, it would be the highest year-end closing in 25 years, if not for a longer period.

7 Will quantitative easing continue?

Central banks worldwide have all done the same thing in 2020 — slash interest rates to stimulate economic growth in the face of the Covid-19 pandemic, which had brought many economic activities to a halt as a result of lockdowns.

On top of that, the European Central Bank and US Federal Reserve had stepped up their quantitative easing (QE) efforts.

This resulted in a flood of liquidity. During the 2008/09 global financial crisis, ample liquidity drove up asset prices, but this time around, the money flow has gone into the equity markets, particularly Wall Street and stock markets that have a high number of technology-related companies such as those in South Korea and Taiwan.

As at mid-November, the Fed’s balance sheet had almost doubled to US$7.24 trillion, from US$4.31 trillion in March 2020, following QE carried out earlier this year.

Moving into 2021, MIDF Research head of research Imran Yassin Md Yusof says with the expected widespread availability of the vaccine, governments and central banks should be disincentivised to continue with either fiscal stimulus or monetary easing. “However, we do not discount further support in the short term given that the economy may require additional support or boost,” he notes.

With that, will businesses be concerned whether the central bank will reverse the policy direction by raising interest rates?

8 Will the equity bulls continue to run?

Many stock investors do not seem to be worried about the Covid-19 pandemic. The equity bulls did not just show the world a sharp V-shaped rebound in May but new peaks in markets such as Seoul, Taipei, New Delhi and New York, even as the number of coronavirus infections continued to climb globally.

The Dow Jones Industrial Average hit 30,000 points after plummeting to a low of 18,590 points during the global equity rout. Year to date (YTD), the US benchmark index closed 5.6% up at 30,129.83 points on Dec 23.

The FBM KLCI is one of two bourses in Asean to see gains. It was up 3.7% YTD to close at 1,647.5 points on Dec 23.

Stocks are at unprecedented price-earnings multiples, prompting sceptics to wonder what will keep driving share prices higher in 2021. The high valuation also means there may be little room for error when it comes to a global economic recovery.

Fortress Capital Asset Management (M) Sdn Bhd investment adviser and director Geoffrey Ng Ching Fung opines that Bursa Malaysia will not be immune to macro drivers — including a weakening in global equity markets, further waves of Covid-19 infections and other geopolitical risks such as the ongoing US-China trade war. This, coupled with the ongoing political uncertainty in the country, will continue to cast a pall over domestic and foreign investor sentiment.

“Still, we do not expect the FBM KLCI to experience a sharp correction since the local bourse’s valuations are not exorbitant these days, after experiencing tepid equity performance over the past five years,” he says.

9 ESG becoming mainstream

Many believe that the Covid-19 pandemic has made companies and investors alike sit up and pay more attention to environmental, social and governance (ESG) factors. While ESG investing is not new, especially in developed markets, it can be said that it has only just begun in Malaysia.

More and more companies are starting to jump on the ESG bandwagon because investors demand it. In Schroders 2019 Global Investor Survey, it found that 66% of Asian respondents would always consider sustainability factors when selecting an investment product, compared with 57% of global respondents who said they would.

In July, it was reported that BlackRock, the world’s largest asset manager, had written to 577 companies in Asia-Pacific, which represent 90% of the MSCI index constituents, saying that it expects greater sustainability disclosure from them.

However, it is not just investors who are pushing such efforts. Global customers are also piling pressure on companies they deal with to get them to comply with the efforts they are committed to — palm oil companies are all too familiar with this.

The problem with the age of connectivity is that paying mere lip service will not be enough. Companies will have to be entirely on board with their investors’ agenda or risk facing reputational damage for not committing to the cause.

With the ESG trend continuing to grow, especially as awareness increases, local companies could soon find themselves changing policies and implementing ESG initiatives to remain attractive to investors and customers. In 2021, expect more organisations to announce ESG policies in the way they do business.

10 A defining year for climate change?

In 2021, many expect a turning point for the climate change agenda with its biggest critic, Trump, out of the White House. He had announced in June 2017 the US’ withdrawal from the Paris Agreement, but the move only took effect on Nov 4 this year.

Many global-warming watchers expect a reset of the US policy on climate change when Biden, who has pledged to rejoin the Paris climate accord, is sworn in on Jan 20. In fact, his proposals to tackle climate change have been described as the most ambitious of any presidential candidate.

Biden plans to spend US$2 trillion over four years to escalate the use of clean energy in the transport, electricity and building sectors. His New Green Deal aims to make US electricity production carbon-free by 2035 and for the country to achieve net zero emissions by 2050.

Biden’s choice of former secretary of state John Kerry as his special climate envoy underscores his commitment to climate change as a foreign policy issue.

Any move to address global warming will be welcomed by climate-change activists who expect the world to heat up by 3°C this century if nothing is done to tackle the issue.

The Climate Ambition summit held on Dec 12, where more than 75 world leaders — including Chinese President Xi Jinping and Indian Prime Minister Narendra Modi — announced renewed emissions-cutting targets, has set the course for what could be a defining year for climate action globally, say experts.


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