(Dec 20): This decade will end pretty much the way it started: Global central banks embarking on loose monetary policy and quantitative easing to counter slowing GDP growth. In 2019, global economic growth seems to have fallen to a post-global financial crisis (GFC) low, owing to economic slowdowns in the US, Europe and China.
However, that is where the similarities end. While the dismal growth rates in the early 2010s were largely because of the fallout from the GFC in 2008, the decade ahead is likely to look quite different. Populism and protectionism are the new buzzwords, compared with the era of globalisation the decades before.
In fact, we are likely to start the next decade with geopolitical risk becoming a recurring theme in global markets largely because of the increasing divisiveness brought forth by a growing inequality of income in many parts of the world. A low-growth, highly indebted world has accentuated these differences. Since the GFC, topics such as terrorism, cybersecurity, integration in the Economic and Monetary Union and the various trade conflicts have made repeated headlines.
Yet, although trade growth weakened as the US-China trade conflict impacted business confidence, the labour market and consumption remained relatively healthy. And this resilience, combined with looser monetary policy, contributed to strong performance in financial markets. Year to date, equities have rallied by around 22% and bond yields have fallen by more than one percentage point, contributing to very strong 2019 performance for most balanced portfolios.
One could argue that historically low interest rates globally and US$16 trillion ($21.7 trillion) worth of negative yielding global bonds have fuelled the continued pliability of equity markets. But does this mean that equity markets will continue to outperform in 2020, albeit with the occasional hiccup, as long as rates remain low?
What will 2020 and the start of a whole new decade portend for Asia ex-Japan?
Asian GDP growth has slowed from 6.1% in 2018 to 5.4% in 2019, but will it keep decelerating in 2020? We don’t think so 2020 is likely to be a turnaround year as the successive rounds of tariff hikes, which brought trade and investment to a near standstill this year, come to an end. Regional GDP should expand 5.4% in 2020, keeping pace with 2019. The health of the US economy and US-China tensions are key risks.
The world is transforming, and Asia is no exception. Next year will mark the beginning of a new phase in Asia’s economic development. Beyond being an industrial powerhouse, the region is charging ahead into an era of global technological leadership as it champions breakthrough innovations in 5G, artificial intelligence and autonomous driving.
Already, we are seeing early signs of green shoots in Asian economic activity. The tech sector is driving the improvement, with China spending more on 5G and policy easing supporting the region’s IT manufacturing sector. The economies with higher IT industrial concentration (Korea, Taiwan, Singapore and, increasingly, China) should benefit the most.
China’s pioneering development of 5G-linked technologies should feed through to the rest of the region. Significant telecom investment in base stations is underway and set to ramp up in 2020 and beyond. We estimate 5G-related revenues of upstream industries in Asia (semiconductors and related equipment) should more than double annually over the next five years. This should start to show up in industrial production and in Chinese imports from North Asia and Singapore.
Infrastructure spending, particularly in the Philippines, Malaysia and Thailand, is also set to surge next year. Thailand has approved a number of rail and port projects that would raise spending by 7%.
The US will end this current decade as a net exporter of crude oil and petroleum products for the first time since the 1940s. High oil prices no longer subtract from US economic growth as it used to in the past, with energy production and energy-related investment and employment contributing substantially to US growth over the past several years.
Both from an oil supply shock and US economic slowdown perspective, these developments are positive, as Asia is now less vulnerable to higher oil prices, which in the past would have meant high interest rates, a stronger US dollar, lower forex reserves and so on and the resulting slowdown, owing to a US recession. Furthermore, for most Asian markets, China is now their biggest export destination, not the US.
Finally, we see another 30-basis-point decline in Asian policy rates in 2020 (versus about 50bps in 2019). Lower interest rates should spur private-sector spending and borrowing once the ongoing trade uncertainty starts to lift. With rates likely to trend down and remain lower for longer, we like growth stocks trading at reasonable premiums, and in the light of the extreme market swings this year, value stocks, particularly high-quality ones, are looking attractive.
After years of underperformance, the valuations of Asian ex-Japan value stocks are near GFC levels (0.98x P/B) and their discount to growth stocks is close to a 15-year high of 66%. While structural concerns do exist for many of these names, we see select opportunities in stocks that exhibit both value and quality. We prefer laggards in Mainland Chinese internet stocks with strong turnaround potential, as we believe they are attractively valued and have been unduly punished recently by Brexit concerns.
Other opportunities abound, from investing in smart cities and 5G leaders to companies with high ESG (environmental, social and governance) scores. While there is plenty to be optimistic about, geopolitical uncertainties remain real risks to both economic growth and financial markets in the year and decade ahead. Importantly, investors need to stay invested, managing downside risks through diversified portfolios.
Kelvin Tay is the regional chief investment officer at UBS Global Wealth Management. Kelvin is a member of the UBS Global Emerging Markets Investment Committee, as well as the Asia-Pacific Investment Committee where he provides strategic research and inputs to the investment and asset allocation process across asset classes
