Overall global economic growth is slowing and Thailand is no exception -- GDP expansion slowed to 3.7% in the fourth quarter of 2018 from 4.8% in the first half. The consensus view is for growth of 3.5% to 4.0% in 2019, compared with more than 4% in 2018. One of the major headwinds is the trade dispute that has caused global trade to shift into a lower gear.
Despite some good signs in the US-China negotiations, a strong rebound in global trade is not on the cards. While there is a chance the US will partially lift some tariffs on imports from China, the trade relationship is unlikely to return to the pre-trade-war level.
Naming China as an enemy seems to have resonated well with American voters regardless of political affiliation. No politician thus has an incentive to tone down the trade rhetoric against Beijing -- and there are good reasons behind the nationalist trend.
Over the past 20 years, globalisation and the worldwide expansion of manufacturing supply chains have led to improved earnings and quality of life for the grassroots population in developing nations. The global investment theme we often hear cites the rising middle class and urbanisation in emerging markets, including the boom of Chinese tourism, rising protein consumption by new middle-income earners, rising demand for automobiles and an insatiable demand for brand-name products.
However, there are two sides to the coin. The rise of emerging market middle-income consumers comes at the expense of the middle class in developed markets, where incomes are stagnating and inequality is expanding. The US financial crisis of 2008 exacerbated the problem.
Nationalist and protectionist policies have been gaining momentum ever since, resulting in the rise of Donald Trump, the Brexit vote, anti-establishment regimes such the Five Star movement in Italy, the yellow vests' protest in France and the erasure of Chancellor Angela Merkel's long-held majority in Germany.
NO QUICK FIX
There is no quick fix for this deep-rooted inequality via superficial tariff measures. While the US bumped up tariffs on imports from China several times in 2018, the trade deficit between two countries continues to widen.
Even moving production bases out of China may not help middle-income workers in the US. The first choices for production relocation from China are likely to be low-cost countries in Asean to utilise the existing regional supply chain and production clusters.
The second choice for relocation is likely to be somewhere near the US, such as Mexico, where firms can enjoy low labour costs and low logistics costs when sending finished goods to the US market. Those that do choose to move back to the US will probably be using a lot of automation and not human workers.
Globalisation could end up as "regionalisation", in which supply chains are concentrated near markets where there are few trade barriers and low logistics costs. Intra-regional trade relationships are getting stronger and may even surpass cross-continent ties. Europe has the EU, North America has the US-Mexico-Canada trade pact (replacing Nafta) and Asean has the AEC, which will soon be connecting with regional superpowers China and India.
FEW BARRIERS TO SERVICES
Another clear trend is the rise of the services sector. While trade barriers tend to focus on blocking the movement of manufactured goods, as seen in the sharp decline in manufacturing purchasing managers' indices (PMI), the services sector seems to be doing just fine, as it is far more difficult to erect trade barriers to services.
Services are more localised with less cross-border activity, and the services sector normally involves people, not machines or goods. Services sector PMI continues to show signs of strong expansion, even in emerging markets where manufacturing PMI has nearly dropped to the contraction zone.
The recent reading of Thai GDP growth has shown a clear slowdown in exports and manufacturing because of global trade disputes. However, most services sectors (especially those related to tourism) are expanding at a strong pace, despite a slowdown in Chinese arrivals in the second half of 2018. Among the top performers in supply-side GDP are hotels, restaurants, retail trade, transport and hospitals.
While we expect this late economic cycle to be prolonged, by nature a late cycle is accompanied by greater volatility. Investors who can withstand a short-term swing should take this as an opportunity to selectively buy stocks with a long-term growth story. Focus on the regionalisation trend by looking for companies expanding into neighbouring countries. An intra-regional trade war is unlikely because of close and longstanding ties.
Also, focus on service sectors that are likely to be resilient in the face of a global trade war. Sectors that we like include tourism-related sectors (hit hard in 2018 due to the Chinese tourist contraction), banking (enjoying the strengthening local investment cycle), retail trade (short- to medium-term boost from election promises) and hospitals (unaffected by trade disputes with a long-term growth story from Thailand's ageing population).
Pornthep Jubandhu is senior vice-president for the investment strategy department at SCB Securities Co Ltd.
