Four issues that make 2018 fraught

They may be known as black swans or gray rhinos.

Mary Ma

Friday, December 29, 2017

They may be known as black swans or gray rhinos. Whatever their label, they're events that can change the optimism that has shaped 2017.

That resulted in a lift for the Hang Seng Index by 35 percent this year, the Dow Jones Industrial Average by 25 percent, and the Shanghai-Shenzhen CSI 300 index by 21 percent. The year has been pretty impressive, with Hong Kong arguably the most outstanding.

However, measured against the last financial crisis in 2008, the HSI turned in its worst performance, for its level is now at only 95 percent of its 2007 peak, or 2.33 times the trough following the crash. The Dow, meanwhile, is at 1.78 times the pre-crisis peak, or 3.5 times the post-crisis low.

The HSI's movement largely simulates that of the mainland, demonstrating the SAR is influenced more and more by China than Wall Street. And that trend is expected to be even closer in 2018 amid economic integration.

But that doesn't mean we will be less affected by the United States. Quite to the contrary, it's said that whenever China or America sneezes, the SAR catches pneumonia.

After Donald Trump was elected US president, he was expected to achieve little. It had been the case most of the year - until his tax cut plan, which was announced in September and passed before Christmas. Efficient, right?

Trump expects the tax cuts to result in a US$4 trillion (HK$31.2 trillion) repatriation. US investors are dancing in the streets over the prospect, thinking even if only half that amount returns, it's still US$2 trillion more - meaning trillions less in other markets, with China standing to be hard hit.

This will be the most outstanding uncertainty facing Hong Kong. Nonetheless, in light of the prevalent bullish sentiment, it would be viewed by spectators as a gray rhino. The danger is all too obvious for people to pay due caution.

In 2018, there are other risk factors to consider too. First, there's the question of liquidity supply. As the US Federal Reserve sheds trillions of bonds on its balance sheet, European central banks are expected to speed up the unwinding of liquidity tools in view of steady economic recovery on the European continent. China will also continue deleveraging, albeit on a softer note.

Second, there are regional uncertainties to worry about. As Trump presses ahead with his America First policy, agreements are being ripped up to create regional power vacuums for strongman states such as Russia and Turkey to fill.

Then, will the North Korea crisis escalate further, following reports its brutal leader, Kim Jong Un, is expanding his arsenal of mass destruction to include anthrax, the cheaper alternative to nuclear warheads? Will war break out?

Also, a political fire is spreading in the Middle East following Trump's ill-advised decision to recognize Jerusalem as Israel's capital, and his plans to move the US embassy to the Holy City of the Jews, Muslims and Christians.

Together, these issues make up a Sword of Damocles that threaten to unleash imminent disaster.