You are here
What's next after the twin peaks of globalisation and monetary policy?
AS we embark on a new decade, we face the prospect of peak globalisation and the peak effectiveness of monetary policy. How should investors think about these twin peaks?
The rise of populism and protectionism suggests we may have passed the peak of globalisation. There seems to be a shifting trend from globalisation to localisation and this is creating opportunities in regional/local markets. Simultaneously, the by-product of deglobalisation is a higher level of political/geopolitical uncertainty, which could lead to more market volatility.
The most talked about issues involve trade. Bilateral trade conflicts (eg US-China, Japan-South Korea etc) have replaced multilateral trade agreement frameworks (eg North American Free Trade Agreement, Trans-Pacific Partnership). There are more signs that companies are shifting or planning relocations of their supply chains regionally/locally, which could result in medium to long term economic implications. In light of the US-China trade tensions, some Emerging Markets in Asia (India and Thailand) have also been offering tax incentives to attract companies looking to shift their supply chains out of China.
Overall, we expect the diversification of supply chains to benefit Southern Asian countries for low-end consumer products, and Taiwan and South Korea for sophisticated upstream manufacturing products.
In January 2020, US and China signed a "Phase One" trade agreement to put a truce to the 18-month long trade war. This is seen more as a ceasefire rather than an end to the trade conflict, as the market now looks to "Phase Two" discussions, where key fundamental issues that drove the trade dispute initially will be addressed.
Nevertheless, there were many positive takeaways for the truce. The agreement was much more detailed than most expected and it provides breathing space for global economies to recover from the prolonged uncertainty.
Another event relating to deglobalisation is Brexit, and the recent general election was a key milestone. The Conservative Party won a majority in the election comfortably, and Britain has now officially withdrawn from the EU. The key will be the type of trade deal being negotiated, although we will likely not have many details until we get closer to year-end. The EU and UK are likely to dig in and talk tough during the negotiation, and we have seen this many times, with any possible agreement happening at the final deadline. Clearly, there are vested interests on both sides in coming to a deal, but should it prove unsuccessful, trade would then revert to World Trade Organisation rules. Should the UK economy slow further, the Bank of England will be ready to act and we could also expect moderate fiscal stimulus to boost growth.
We turned positive on UK equities last October, for the first time in some years. It is possible to see a re-rating in UK equities and UK Reits, as well as a rebound in sterling. Dividend yields are also attractive, near 5 per cent in the UK, with global multinationals in a negative or low-rate world.
The biggest political event this year is the US elections. US equities generally perform well in an election year, with the S&P 500 index gaining an average of 9 per cent in the 12 months prior to the election. The only year with a negative return was 2008 during the Great Financial Crisis. It is too early to know who the Democratic challenger will be. So far, almost all presidential candidates have plans to benefit US households. Our base case is for a divided Congress between Republicans and Democrats, no matter who wins the presidency. This is important as major policy changes in healthcare, tax, and other changes would need to be passed by Congress. The outlier event that could unsettle markets is a more progressive Democrat candidate combined with a sweep of Congress, which we rate with a lower probability.
MONETARY TO FISCAL
The other "twin peak" is that we are reaching the limits of monetary policy. Japan has been in negative rates for some time and Europe may not raise rates this cycle. 2019 was a year of synchronised global monetary easing. A large number of central banks have taken an accommodative monetary policy stance to support their respective economies as uncertainty lingered. Most developed markets have also struggled to meet their inflation targets in this business cycle, even though central banks continue to ease monetary policy.
Countries will come under more pressure to conduct some form of fiscal stimulus to spur growth. Therefore, market performance and opportunities will be more impacted by fiscal policy differential between countries and regions. For developed nations like Germany, more fiscal spending is likely to come in the form of green energy spending. In addition, some countries in Asia have already turned to ambitious fiscal plans, including increases in infrastructure-spending and tax reductions.
MEGATRENDS (5G, BIG DATA, AI & HEALTHCARE)
Innovation is accelerating and is increasingly disruptive for businesses. Among the most disruptive technologies are 5G and artificial intelligence. 5G is a huge leap forward and a powerful catalyst for digital transformation. As for artificial intelligence, it is present in virtually every value-added stage of a company.
Consumers will be more connected than ever as their access to a new range of products and services increases. The e-commerce market is estimated to expand from US$1.8 trillion in 2018 to US$2.7 trillion in 2023. Online providers and services are growing as well in education, streaming, gaming, augmented reality, etc.
Similarly, the healthcare sector will likely benefit from the advancement in technology. Remote diagnosis, surgery and tele-medicine are promising long-term trends, while new powerful methods of treatments such as genomics open new possibilities in the world of science. The recent acceleration of the novel coronavirus outbreak in China could spur further interest in this sub-sector. The healthcare industry in its entirety should outpace the rest of the economy.
To conclude, the peaking of two mega-trends, globalisation and monetary policy, could create disruption while also opening up new investment opportunities. Furthermore, the interplay of 5G, artificial intelligence, and healthcare are global secular mega-themes that are compelling investments for the long-term.
- The writer is Chief Investment Officer, Asia, BNP Paribas Wealth Management