2018 was a particularly significant year in the history of global finance. Over the past decade, following the major financial crisis of 2008, governments around the world, especially large countries like the United States, Europe, and Japan, implemented loose monetary policies known as QE (Quantitative Easing). This resulted in an abundance of financial liquidity, low interest rates, and soaring asset prices across all categories, including stocks, bonds, and real estate, reaching unprecedented highs.

          However, in 2018, these countries, led by the United States, began to reduce financial injections. Policy interest rates gradually increased, causing global financial liquidity to awaken slowly, and we started to see stock markets worldwide decline from their peaks. These developments are quite unique as they have never occurred before in the history of global finance. Therefore, in the upcoming year of 2019, there are several domestic and international factors that we should closely monitor.

1. Bond Yields, particularly U.S. Treasury Bonds, which represent the largest bond market in the world. If bond yields rise, it indicates that bond prices are falling, which will increase global financial costs and may lead to liquidity issues, especially for businesses that have high borrowing relative to their assets.

          Imagine if you run a business and have borrowed money. An interest rate increase of just 1% to 2% can significantly impact financial costs, as the burden of interest can increase by as much as 100%. For example, if you could borrow at an interest rate of 3% and it rises to 4%, your business would have to pay 33% more in interest.

2. Inflation rates in the United States and Thailand.

          Rising inflation can affect the everyday lives of the general public, especially since many people hold cash rather than other assets like real estate. An increase in inflation will quickly erode the wealth stored in cash.

          Why should we be concerned about rising inflation, especially in countries that have adopted loose monetary policies? Historically, after increasing the money supply (essentially printing more money), inflation has typically surged. However, one might wonder why this hasn't happened yet. It could be because the global money market currently trusts the U.S. dollar. But if countries worldwide begin to doubt that the dollar is being overproduced, it could lead to a decrease in its value, resulting in significant inflation. Investors should not hold only U.S. dollars.

3. Brexit and the Eurozone.


          Tensions are rising within the Eurozone as some countries are unhappy being part of it, feeling that wealthier nations should not have to support poorer ones, which creates unfairness for taxpayers. Additionally, financial policies cannot be executed independently as they must adhere to the collective policies of the group, causing delays in addressing various issues. Previously, the UK, which collaborated with the Eurozone on certain matters, is now seeking to exit membership. Other countries like France and Italy have seen citizens protest for their governments to withdraw from the Eurozone, which, if it happens, could destabilize Europe's financial system and lead to financial turmoil once again.

4. Prices of risk assets, especially global stock markets. If volatility occurs in other markets, such as bonds or instability within the Eurozone, it may impact risk assets, particularly global stock markets. A decline in these markets could affect investment confidence and make investing significantly more challenging.

These factors are what we should keep an eye on in the upcoming year of 2019. The risks are not limited to these alone.

Nevertheless, investors should proceed with caution and avoid purchasing assets that are overvalued compared to their true worth.

Dr. Tanapoom Damraks, CFA.

Article by Terra BKK Dr. Tanapoom Damraks, CFA. Email: [email protected]