The Old Lion Is Losing Its Grip
WASHINGTON, DC – January 11, 2019
President Donald Trump may be winning the trade battle with China, but China could still end up winning the war.
Everything looks fine at first glance, and few are ready to believe in forecasts about the beginning of a recession in the second half of 2019 or 2020.
The Christmas rally didn’t happen this year, but apparently, it will in the first quarter of 2019. Investors, especially in the US are optimistic, for subjective, but so far convincing reasons:
- The US and China could conclude an agreement that will stop the "trade war”
- The fed will slow down the rate hike (investors around the world "believe that Trump will not allow it" and that the fed "sees no reason for further increase”)
- Stock looks "oversold."
In fact, speculators and investment funds need to sell their existing assets better, but this is not strongly related to the real economy: Even the current S&P 500 quotes at the end of November (about 2700) expected a zero average growth of corporate profits in 2019, at P / E=16.4 (9% above average).
But later in the first quarter of 2019, the market is likely to continue to decline. First of all, because large volumes of risky assets are under the risk of forced sales. According to BIS, up to $45 trillion of US financial assets, of which 72% will not be able to withstand the outflow of funds in the falling market. The reason for this is that the trading operations of banks and active funds, which could become counterparties in these sales, have been greatly reduced. Suffice it to say the $4.2 trillion financial instruments issued in the US for commercial real estate have continuously declining valuation, and hence deteriorating quality.
According to the results of the deal on US tariffs with China in early January, there isn’t much reason for hope, especially for the whole of 2019. The new trade agreement has already had the most positive impact on the market and the rally will soon be over, as it is impossible to wait for the growth of China's economy and their trade with the US after this agreement.
The conflict about the border wall remains an important risk factor for the market. The end of the government shutdown could be the second stage of a market rebound, but after that there will be no more reason for growth.
The US could lose its position as the world’s biggest economy as soon as next year — and once that happens, it is unlikely to regain the top spot as developing Asian economies power ahead.
According to research released this week by Standard Chartered Bank, China is likely to become the world's biggest economy at some point in 2020, when measured by a combination of purchasing-power-parity exchange rates and nominal gross domestic product.
Using PPP alone, China is already considered the world's largest economy, but the US remains in the lead on a nominal basis.
Not only is China likely to overtake the US in 2020, but by 2030 it will be joined by India, Standard Chartered said in its report, with annual GDP growth set to accelerate from about 6% now to almost 8% in the coming decade.
"India will likely be the main mover, with its trend growth accelerating to 7.8% by the 2020s partly due to ongoing reforms, including the introduction of a national goods and services tax (GST) and the Indian Bankruptcy Code," Standard Chartered said.
India's rise would also reflect Asia's becoming the dominant economic region of the planet as the size of its output starts to match the size of its population.
By 2030, 6 of the 10 largest economies could be in Asia.
"Our long-term growth forecasts are underpinned by one key principle: countries' share of world GDP should eventually converge with their share of the world's population, driven by the convergence of per-capita GDP between advanced and emerging economies," a team of economists from the bank wrote in a note to clients.
By 2030, the bank said, the Asian GDP will account for roughly 35% of the global GDP, up from 28% last year and 20% in 2010. This would be equivalent to the combined output of the Eurozone and the US.