The Global Stock Markets have rallied beyond its mean of 50.45 pct on three previous occasions and on all three we have had a significant correction lower, with balance sheets wiped out.
The same is witnessed in 2016-2017; the Market Capitalization is currently at 97 pct of GDP. While Gross Fixed Capital Formation as a percentage of GDP is indicating a declining trend (Blue line). This is indicative of a trend going against fundamentals and the ability generates such high market capitalization gains remains questionable.
Therefore, Econsult expects 2019 to be a year of lower corrections in the global stock markets. This downturn can signal another deeper adjustment in global GDP as our Sri Lanka too must be watchful, as our external finances can be under stress.
Global markets are a buzz with fear being mooted about a “contagion” and China debt trap sweeping across Asian markets, the currencies have become a quick focus by analysist and it seems to be the go to button to push towards weakening of the currencies and dampening import demand, more so, Chinese import demand. This could be a strategic call given the rebalancing needed from a geopolitical point of view. The China and USA tussle for market share is at the forefront of this new “contagion” mantra.
The US has in fact declared war on trade and have undermined the WTO framework in the process as it does not suit their re-balancing agenda. Asian stocks have slipped to a 14-month low as at 12th Sep (Wednesday) with investor confidence chilled by the latest round of verbal threats in an intensifying U.S.-China trade conflict
China too is seeking WTO sanctions. China stocks fell on Wednesday morning, dragging the Shanghai Composite and the blue-chip CSI300 indexes down to new multi-year lows, as worries over escalation in the U.S.-China trade war hit investor sentiment.
Despite the rhetoric global trade volumes remain healthy (as indicated by the Baltic Dry Freight Index) and commodities seem to be rallying on the back of the trade wars, this price movement is fundamentally seen as markets discounting long term geo political risk to the Global economy, as both USA and China both still show signs of strong balance sheets and improving corporate profitability. Thus, the two largest consumer markets don’t seem to be dented as yet as the play for Asian market share continues, the winner of this bout would depreciate their currency to sustain the shift in market dominance and profits.
The USD/LKR has halted its slide temporarily. The main factor had being CBSL “Moral Suasion” and regular intervention in the spot market. Despite these measure the external environment vulnerability had seen the currency slip by 19pct in 2018.
The analysis below indicates the rupee weakness over the past 2 years. Thus we continue to believe that the overall trend of a stronger Dollar viz a viz the LKR would continue in 2019.
The Central Bank has made it position clear as they are going stick to an exchange rate policy of cautious intervention at times of excessive volatility in the forex market, Central Bank Governor Dr. Indrajit Coomaraswamy said on 4th January 2019 at the launching of the economic road map for 2019.
Recommendation by Econsult – Stay long Dollars and use opportunity of selling by the CBSL / Moral Suasion to buy Dollars on dips
Forward Market Quotes For USD/LKR- FWD prices must be used in pricing of Cost of sales