Hopes of export-led recovery in Asia fading

Hopes of export-led recovery in Asia fading

Hopes that Asia will see an improved economic performance backed by gains in exports now appear remote as many Asian countries have gradually shifted their export focus away from the only market that is witnessing a recovery, the United States.

"Old school" Asian export sectors face trouble, says Kelvin Tay of UBS.

"Asia is likely to see a moderate slowdown this year because over the past 18-24 months there has been little recovery in exports despite the resurgence of the US economy," said Kelvin Tay, the regional chief investment officer of UBS.

Mr Tay, who was in Bangkok to meet with the bank's private wealth management clients, was particularly blunt about the bleak outlook for countries — Thailand among them — that still relied on "old school" products such as hard disk drives and other electronic components now in decline.

"A lot of Asian exporters are not geared toward the new school," he said in a reference to the higher sales of mobile and tablet devices against the gradual decline in use of products that require hard disk drives such as personal computers and laptops.

About 50% of the Thailand's electronic goods exports were in the "old school" segment, he noted.

To complicate matters, the sharp decline in oil prices will cancel out many of the expected benefits for countries that rely on oil and gas for their revenue. Malaysia is a prime example.

UBS does not believe that world oil prices, now around $50 a barrel, have found a bottom yet, although it forecasts prices in the range of $65-70 by the third quarter as the current surplus starts to shrink.

Currently the world market has an excess supply of oil while demand has gradually slowed in line with economic weakness almost everywhere except the US. Supply/demand equilibrium could be seen sometime in the second half of the year as producers rein in activity because prices do not cover their costs.

Mr Tay and Paul Donovan, managing director for Global Economics at UBS Investment Bank, agree that the fall in oil prices is not likely to be long-term, but they do not see prices returning to past levels of $100 or more a barrel.

Cheaper oil, they say, is good for the overall consumption story. In the United States, every saving of 30 cents a gallon on gasoline translates into $40 billion saved across the entire economy, and unlike Asians, American families tend to spend the savings, which has a multiplier effect on the economy.

There are those who believe that the Organisation of Petroleum Exporting Countries (Opec) will have to blink soon because some members are suffering from the dip in oil prices, but Mr Tay is not one of them. The cartel's biggest and most influential member, Saudi Arabia, enjoys a production cost per barrel of barely $15 against the current price of $45-50. However, producers in the booming US shale oil sector, one of the factors being blamed for the current global surplus, start to suffer when oil goes below $40,

"At $40-50 per barrel, the shale oil producers are still profitable although some may be at a loss, but a majority of them are not," Mr Tay said, while stressing that even if the prices dip below $40, these producers are unlikely to stop as doing so would push them to bankruptcy. That would put at risk hundreds of billions of dollars that has been lent to exploration firms and cause even worse problems.

The decline in oil prices helps net oil importing countries such as Thailand, according to UBS. For every $10 fall in the price of a barrel, the GDP of such countries could rise by 0.1%. Consumption, which accounts for 54% of GDP in Thailand, 73% in the Philippines and 43% in Indonesia, would see a boost, thus helping the growth of the economy. However, high household debts could mean that Thai consumption would likely be weaker.

Looking at equity markets, UBS does not see a major turnaround for Thailand this year.

"Thai equities are dead money; you are better off investing your money overseas,"w Mr Tay said to about 100 people attending the event. He noted that foreign investors had been net sellers on the SET for the past year and foreign ownership of Thai equities was at an "all-time low" except for investment by Japanese pension funds.

He said that one good thing about low foreign ownership that there would be lower downside risk for the SET, with upside potential if areas such as tourism pick up.

Mr Donavan suggested that the United States was where investors should park their money as the equity markets there are set to see a major rebound thanks to the 3% plus growth in GDP and the recovery of consumer and investor sentiment.

He added that sentiment in China was not very strong and GDP growth this year would most likely be below 7%. "In the long-term view we are now assuming that the Chinese economy will never grow beyond 7% and that 5.5% is now the trend going forward," he said.

The good news, he said, is that Southeast Asian economies have an opportunity to benefit because China is moving away from infrastructure and housing and toward consumption as a driver of growth. As a result, China will demand more imports and there is a chance as well for greater integration with other Asian economies.

Do you like the content of this article?
COMMENT