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In a previous article, bear and bull calls for 2019were summarized. Where could each be flawed?
The countries within the Association of Southeast Asian Nations (ASEAN) may provide a positive upside to Asia’s growth in 2019, though intraregional demand will likely not entirely offset a modest deceleration in China. This region might provide some positive surprises in 2019, however.
One surprise might come on the inflation front. Consumer prices in Asia are already relatively manageable. If oil prices trend lower in 2019, then countries like Indonesia and the Philippines might see pricing pressures reverse course or at the very least, stabilize.
Softer inflation may provide additional room for maneuvering for Asia’s central banks to maintain accommodative policies, particularly if the U.S. Federal Reserve pauses on raising interest rates. In light of rate differentials, most central banks in the region have followed the lead of the Federal Reserve, with countries like Indonesia and the Philippines tightening faster to stem currency depreciation. A pause by the Fed would likely be beneficial to the region.
The ASEAN countries have also seen some spillover orders as a result of the US-China trade confrontation. However, the key word here is ‘some’, as quantifying a precise amount is difficult.
Southeast Asia is witnessing a rise in light manufacturing investments as Chinese companies grapple with rising domestic wages, along with a desire on the part of global companies to be closer to countries where raw materials are sourced. This rise is also related to Beijing’s desire to have its domestic manufacturers upgrade to higher value products and more advanced technological production. While this trend is likely to continue, it is also unlikely to completely replace China’s integrated supply chain, particularly within the next few years.
China retains the ability to meet sudden demand peaks, and has greater overall industrial capabilities than the ASEAN countries. Trade rules may place a near-term cap as well. If the U.S. experiences a falling trade deficit with China in tandem with a rising one with the ASEAN countries, this would present unwanted attention for the region.
So What Happens Next and Who Is Right?
Making forecasts isn’t easy. And most of them are usually wrong. Predicting 2019 is especially difficult, given the uncertainties surrounding China and the United States.
I’m not an expert on trade policy, but would suggest that any resolution of the China-U.S. dispute will be temporary in light of the deeply rooted grievances on both sides. Much of the current trade war is related to technology with each country recognizing that maintaining a competitive edge in this area is essential for achieving and maintaining global economic power.
The trade war may bring some benefits, however. A modernization of rules on data ownership and privacy will be welcomed by markets. And U.S. politicians and Chinese private enterprises will be happy to see improving reciprocal investment arrangements.
As liquidity is being withdrawn from the economy, major banks are better capitalized than before the global financial crisis. However, with interest rates still near record lows, the monetary tools available to address the next crisis are limited. US interest rates are rising at a time when the economic data is positive. This is a necessary step for cooling off-market valuations. It will benefit long-term investors.
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