In the first half of this year, the world economy and investments have performed rather well. First-quarter GDP growth in many countries is trending upward, while higher purchasing managers' indices, especially in developed countries, point to a manufacturing recovery.
On the investment side, especially in the capital market, stocks have generally performed well. Indices of major markets such as the US and Europe are up more than 10% year-to-date, while most markets in Asia have gained 5-10%. Chinese indices are a surprising exception, having barely budged even though the economic recovery there is well ahead of the global pace.
However, recently the picture of the world economy has started to change. In previously strong-growth economies such as the US and China, recent figures have been disappointing, including job data in the US and retail sales in both countries. We expect the slower momentum will continue in the third quarter.
Meanwhile, we are seeing an inflation surprise as a result of price increases for several commodities. Some, such as copper, iron ore, aluminium and cobalt, have rallied to record highs. Prices of agricultural products such as corn, wheat, rubber, palm oil, sugar and others have also risen to their highest in years.
Consequently, we are seeing signals of tighter controls in major economies such as the US and China, including tax increases and the likelihood that the US Federal Reserve will start scaling back its bond buying.
In China, tighter regulation of financial regulation has affected three risky business groups: mining (especially coal), real estate and special-purpose companies owned by local governments. A noteworthy example has been the distressed-debt specialist China Huarong Asset Management, in which the Finance Ministry is the largest shareholder. Amid fraud and corruption allegations against company management, prices of its debentures have plummeted, putting it on the brink of bankruptcy.
The Chinese government is also continuing to tighten its grip on tech businesses such as Alibaba and Meituan, levying heavy fines for monopolistic behaviour.
VEXED BY VIRUS
Meanwhile, developing countries, especially in Asia, continue to be preoccupied with the worst coronavirus surge to date. New variants, notably then one first detected in India, are more contagious, last longer and can be more deadly. Infections and deaths continue to mount even as most countries' vaccination programmes stumble.
The world economy has thus become divided into two groups, with most developed economies, especially in the western hemisphere, on a path to recovery and most developing ones struggling.
The third Covid wave has hit Thailand especially hard. During the second wave from mid-December to late January, authorities stimulated the economy through various handout programmes to consumers, yet the domestic sector, especially private consumption, still contracted.
A rebound in merchandise exports could not mitigate the negative impact of the tourism collapse. As a result, overall exports of goods and services contracted significantly and contributed to the overall shrinkage of the economy in the first quarter.
Looking forward, we believe sluggish domestic demand will persist, given that we are unable to open the country to foreign tourists. Phuket has made great progress with vaccinations and is on track to open its "sandbox" programme for vaccinated foreign visitors on July 1. But under its "sandbox" programme, but concerns about Covid variants might prompt Western tourists to delay their travel plans to Asia and Thailand in particular. One major deterrent is hat they might have to quarantine for 7-14 days when they return to their home countries.
We believe the fate of the economy will depend on the speed of the vaccine rollout. According to our calculations, 70% of the population of Thailand will have received at least one dose of vaccine by October or November. This could support a full recovery of the economy in the fourth quarter, after the arrival of tourists and a full reopening of the economy.
STIMULUS BOOST
The impact of a 224-billion-baht stimulus package approved by the cabinet on May 5 will also help. It includes the continuation of the cash giveaway programmes such as "We Win" and "S.33 We Love Each Other", and phase 3 of the co-payment scheme. A new project, "the more you spend, the more you get", could be a significant incentive to consumption in the fourth quarter, when almost two-thirds of the total budget is to be allocates.
A new decree supporting 500 billion baht in additional borrowing, in our view, will provide further fiscal stimulus -- or a credit line if the economy has not fully recovered and we face another round of Covid.
But in light of greater economic and investment risks in the near future, we recommend an underweight position on risky assets. Developed countries' capital markets are likely to have more opportunities to grow than those in developing countries, which face higher risk from new infections and low vaccination levels. European markets have more potential to expand compared to the US, which appears to have more policy risks going forward.
In Thailand, despite the current severe headwinds, the high levels of liquidity and relatively stable energy prices will still be a beneficial factor for the Thai stock market. However, we believe that the economy is facing numerous risks, and we therefore advise readers to invest carefully and choose stocks with good fundamentals. These include small-cap stocks that operate in upcountry markets and may benefit from government programmes.
The economic and investment picture has changed substantially, so it's time to carefully recalibrate your strategies.
Piyasak Manason is senior vice-president and head of the wealth research department at SCB Securities, email piyasak.manason@scb.co.th