IS THIS THE TURNING POINT?

In our last column we warned about the great uncertainties surrounding the divergence of the economic and investment worlds, and how they may converge due to the rise of those uncertainties. It is possible that we may begin to see a turning point this month.

Stock markets around the world are still offering good returns, rising by 1-4% from June. Some, such as the S&P 500, are positive for the year. But during the last week we began to see signs of contraction, especially in the technology sector.

On the other hand, bond yields, especially for long issues such as 10 years, have declined slightly, reflecting rising uncertainty. Gold also rose to $1,890 an ounce, closing in on the all-time high of $1,920 set in September 2011, even as the dollar continues to depreciate. These factors reflect a market that has grown more uncertain about the global economy and investment outlook.

SCBS sees three risk factors that will pressure the economy and global investment in the next phase, as follows:

1. Second wave of infections. Indicators from several countries are showing signs of recovery. Retail and labour market indicators in the US and Europe, as well as Chinese second-quarter GDP, were better than expected.

But the global economy is facing a risk stemming from the second wave of Covid-19, especially in the United States, where new daily case totals continue to set records. Renewed curbs in key states have eroded confidence and reduced economic activity. In the week to July 18, US jobless claims rose by 1.4 million, halting what had been a steady descent from a peak of 6.9 million in late March.

However, we believe this round of infections may not be as worrying as the first, for three reasons:

Most of the infected people are young, resulting in a low death-to-infection ratio.

Authorities now have more knowledge about how to manage the epidemic. More rigorous test, trace, isolate and treat procedures will help reduce the need for more extreme lockdowns. People are beginning to learn how to live with Covid-19: wearing masks, washing hands and distancing. As well, public health authorities now have the tools they need and are not experiencing the shortages seen earlier.

2. Monetary and fiscal stimulus tapering off. With stimulus injections, such as tax cuts and government handouts, totalling about 17% of global GDP, economists and policymakers are fretting about increasing public debt.

In the US, the debate about curtailing special unemployment benefits that will expire at the end of this month is gaining ground. Though the amount is debatable, the failure to renew the programme will lead to reduced incomes and consumption and hurt the overall economy.

In many countries, political systems prevent full and timely stimulus. In Europe, there were cheers when leaders agreed on the €750-billion Euro Recovery Fund, but it will need parliamentary approval from each of the 27 EU members before the money can be disbursed.

In Thailand, we’re in a political vacuum after the resignation of the previous economic team, which has cast doubt on the effectiveness of government policy going forward.

These problems cause the economy and financial markets to rely on monetary measures. Although most central banks have consistently shown signs that they are ready to relax policy, the magnitude of the stimulus has begun to taper off.

In the US, the Federal Reserve has reduced the amount of quantitative easing (QE) from an unlimited amount to $120 billion per month. Moreover, there is some talk of the Fed beginning to consider measures like yield curve control. The market views this as a form of scaling back liquidity injections.

Likewise, the Bank of Thailand has sent a strong signal that the time to “heal” those affected by the crisis is over. Instead, it will focus on economic recovery measures. This means that the temporary debt moratorium is going to end soon.

Furthermore, the bank will not cut its policy rate to zero and has rejected the idea of a QE programme, at least for now, as the country’s long-dated bond yields are still relatively high compared with, for example, US yields. This signals that, from now on, the central bank is reducing support to the economy.

3. Continuing global geopolitical risk. Although the risk of a trade war between the US and China has eased somewhat, new challenges have emerged, including tit-for-tat consulate closures this week and renewed US allegations of Chinese spying.

In our view, the current escalation of tensions is not totally surprising, and we may see more soon. But we believe that the possibility of full-blown war or the cancellation of the phase-one trade deal is still low, at least before the November election.

In short, we believe that the first two factors — infection rates and stimulus spending — will have a greater impact on the economy-investment picture in the near term.

Nevertheless, given the increasing uncertainty, while valuations of risky assets have already increased beyond their fundamentals, it’s possible that prices may consolidate going forward.

Therefore, investors should be extremely cautious and pay attention to stocks with solid fundamentals. Due to increasing policy and economic risk, consider trimming investment in the Thai stock market while broadening exposure to gold as a hedge.

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With stimulus injections, such as tax cuts and government handouts, totalling about 17% of global GDP, economists and policymakers are fretting about increasing public debt.

Piyasak Manason is senior vice-president and head of the wealth research department at SCB Securities, email piyasak.manason@scb.co.th