April is a good time to pause and recalibrate one's investment strategy to reflect the changing economic and investment landscape. Four major developments in the global economic, finance and investment climate merit your attention.
First, the improvement in financial markets has been much greater than the decline last year. Several developed market indices (US, Europe, Japan) and emerging markets (India, Indonesia, Thailand) have recovered fully or almost fully from last year's slump.
Second, in opposition to the improved direction of financial markets, the global economy continues to deteriorate. The International Monetary Fund (IMF) has downgraded its global GDP growth forecast to 3.3% from 3.5%, while the Bank of Thailand cut its projection for Thai economic growth to 3.8% from 4.0%. SCB's Economic Intelligence Center lowered its projection of Thai GDP growth to 3.6% from 3.8%, citing slowing exports, investment and consumption.
Third, while economic growth is weakening, financial markets are thriving because of stimulus measures by major economies, especially the US and China, with an abrupt change from tightening to relaxing. Notably, the US Federal Reserve has made a U-turn from a projection of at least two rate increases this year to no change; apart from that, the Fed also plans to stop its bond-buying programme, which will increase liquidity.
Meanwhile, the Chinese government has pumped 6.2 trillion yuan into the system, higher than the 4 trillion committed during the 2008-09 crisis. These measures help shore up investor confidence, which will lead to increases in risk-asset investment.
Finally, the geopolitical winds buffeting investor confidence have ebbed. The US-China trade conflict has eased, with new tariffs on hold while both sides negotiate a deal. Brexit has been put off to late October, reducing the risk that the UK will exit the EU without a deal. Opec and its allies have cut oil production, and the US has ended sanctions waivers for imports of Iranian oil, allowing prices to stabilise at around $75 a barrel.
These developments lead us to believe that now is a good time to make adjustments in strategy and to overweight risky assets. We have three recommendations:
1. Stocks look increasingly promising, especially in the US and Asia ex-Japan markets, because of global monetary policy easing. Performances in the US and China in particular have been highly positive since the start of the year. In the US, although the market price/earnings ratio is high (about 17), it's still not overly high compared with the past five years, implying that the index may have room to rise.
Meanwhile, exports in Asia, which will benefit from China's economic recovery, are set to rebound in the second half. This, combined with the cheap valuations, makes Asia-ex-Japan markets interesting. We believe a good time to buy is in May, when we expect indices to show some signs of correction.
In other developed markets such as Europe and Japan, even though valuations are lower than in the US, the risk is higher. The IMF has downgraded the growth outlook for Europe significantly, while Japan's economy faces the risk of a rise in sales tax. Investors in these two markets must be cautious.
2. Fixed-income investment is also interesting for two reasons. First, central banks are relaxing monetary policy and signalling a longer period of low interest rates, especially during the "late cycle" period. Second, the global economy is in a stage of high "volatility, uncertainty, complexity and ambiguity" (VUCA). Fixed-income assets such as hedging instruments look attractive.
That said, we believe debt instruments of developed countries are quite expensive, since yields are relatively lower. We therefore recommend bonds and debt instruments of developing countries such as China, which Bloomberg recently included in the Bloomberg Barclays Global Aggregate Index. We also recommend real estate funds in developing countries, especially in Asia.
3. We also suggest investment in commodities, especially gold and oil. Gold in particular is a good hedge against VUCA. Oil prices, meanwhile, may increase in the near term due to recovering demand, a supply shortage resulting from Opec production cuts and lower Iranian exports, and geopolitical risk affecting production, specifically in Libya and Venezuela. But be aware of some downside risk from a rise in oil production by Saudi Arabia and from the US once pipeline expansion is finished.
These are our investment recommendations for the second quarter of 2019. Are you ready to act?
Piyasak Manason is senior vice-president and head of the wealth research department at SCB Securities.
