China should choose its strategy wisely during the trade war with the United States. Photo: iStock
China should choose its strategy wisely during the trade war with the United States. Photo: iStock

The current slowdown in the Chinese economy, the world’s second-largest, is likely to define the 2019 economic outlook in Asia. After years of expansion, the Chinese economy is showing signs of waning. It is anticipated that growth in 2018 will be the weakest seen since 1990.

Gross domestic product expanded by 6.8% on the year in the first quarter last year, reduced to 6.7% in Q2, and to 6.5% by the third quarter. This was predominantly down to the government curbing spending on infrastructure in an aim to reduce local debt.

The forecast for 2019 is worse still, as the escalating trade war with the United States and attempts by the Chinese government to restrict runaway debt weigh heavy.

Should a trade agreement not be reached with the US by the March 1 deadline, and Washington advances with its threat to hike tariffs from 10% to 25% on $200 billion worth of Chinese goods, there are concerns that China’s economy will be further negatively affected.

While it may seem as though China’s economy is losing steam, it cannot all be blamed on the trade dispute with the United States.

The deteriorating outlook for the Chinese economy was underlined by the fall in the Caixin Purchasing Managers Index (PMI) to 49.7 in December, from 50.2 the month before.

The economic slowdown in China will have a ripple effect throughout Asia, as it is a key trading partner for the majority of nations on the continent. Indeed, as trade tensions worsened in the second half of last year, most economies in Southeast Asia began to cool.

Concurrently, this week tech giant Apple affirmed that it expected a weaker Chinese economy to affect sales, with chief executive officer Tim Cook telling investors the company had been blindsided by “the magnitude of the economic deceleration” there.

The slowdown in the world’s second-largest economy could also affect multinationals including General Motors, Volkswagen and Starbucks, which are due to report earnings in the next few weeks.

Additionally, another threatening factor in Asia this year is elections and the political uncertainty that could occur.

Thailand is first off the starting blocks, with voters due to head to the polls for parliamentary elections in February, indicating a breakthrough in the country reverting to civilian rule. Should further protests and conflicts ensue, akin to those seen in 2010 and 2014, this will signify a harsh blow to the economy.

Furthermore, Indonesia is holding a presidential election in April, with midterms in the Philippines in May, as well as a general election in India, with political issues already impacting the third-largest economy in Asia.

And now the good news

That said, despite all these headwinds kicking off the new year, there are also a number of positives for investors to focus on in 2019. And these will help drive returns in the right direction.

First, stock markets are, generally speaking, not overstretched, with the exception of a few sectors in Japan, the US, the UK and Europe. In particular, emerging markets are offering value. As such, with ultra-low interest rates in Japan, Europe and the US, investors still shouldn’t hold on to large cash reserves. This, therefore, supports the stock markets.

Second, despite the slowdown in China and other major economies, global growth is still solid. Also, the US Federal Reserve has indicated that 2019’s scheduled interest-rate increases could be postponed should economic data weaken. As such, if this is the case, a delay in a rate increase by the Fed will help the US and, therefore, global economy.

Third, the global financial system is in a far better condition than it was a decade ago. Banks and other financial institutions have considerably bolstered their capital levels over the past 10 years, meaning they are more able to endure defaults on loans.

As we launch into 2019, the most important thing for investors is to ensure their portfolios are sufficiently diversified, over geographical regions, asset classes, sectors and currencies. This is, by far, the optimum way to circumvent risk and make the most of opportunities.

Although last year was characterized by decelerating global growth, increased financial turbulence, the trade dispute and tariff measures, investors should still take advantage of the rewarding opportunities that will inevitably present themselves.

Nigel Green

Nigel Green founded deVere Group in 2002 from a single office in Hong Kong after discovering a niche market for expatriates in the financial services sector. Since then, it has grown to become one of the largest independent financial advisory organizations in the world with offices and clients across the globe.