Weekly investment views across key regions

Argentina's debt restructuring, the deal struck between China and the US, and more weekly insights from around the globe.



Light at the end of the tunnel

The bottom-line is that we think the economy will stay sluggish next year, but the worst of the economic malaise is likely over. Singapore's economy just missed a technical recession, squeezing out 0.1% y/y growth in the third quarter. The global slowdown in trade and manufacturing has been battering the region, and smaller open economies like Singapore's have been bearing the brunt of the pain. The city state's manufacturing sector continued to contract in the third quarter (–3.5% y/y, vs. – 3.3% in 2Q), and industrial production worsened (–4% y/y in July and August, vs. –3.3% y/y in 2Q).

The official GDP growth forecast for this year of just 0–1% y/y paints a gloomy picture. Likewise, UBS projects a sharp deceleration in growth to 0.4% in 2019 from 3.1% in 2018. And activity data points to continued weakness in the fourth quarter; the PMI and new orders both remained in contractionary territory in September and at three-year lows. But not all is bad – some relief may be on the way from central bank easing, and areas within the service sector are thriving.

The Monetary Authority of Singapore (MAS) eased its monetary policy settings on 14 October by "slightly" reducing the appreciation rate of the SGD NEER band. Its accompanying statement was fairly dovish, stating that the “the output gap has turned slightly negative," which is expected to persist and "keep inflationary pressures muted.” The MAS also left the door open to further easing, saying that it will continue to monitor economic developments and "is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly."

However, while a weaker Singapore dollar would help export industries, it is unlikely to slide too much because of strong safe-haven demand for the currency. The SGD will likely move in tandem with US-China trade headlines as a result – meaning it will rise/fall on good/bad news. So we forecast USDSGD at 1.41 by December before declining into next year.

Another positive development is the 3Q services and construction data. The service industry grew from the quarter before thanks to finance, insurance and business services. Solid high-end property sales and higher spending related to rising property launches likely buoyed business services, better visitor numbers bolstered tourism-related services, and less vulnerable domestic-oriented services (e.g. social services) provided underlying support. Meanwhile, construction continued to recover, rising 2.7% y/y, thanks to greater public and private construction activity.

The bottom-line is that we think the economy will stay sluggish next year, but the worst of the economic malaise is likely over. Manufacturing will likely remain weak, but services and construction may increasingly offset the poor production trends. The possibility of several mini-deals being reached may improve business sentiment heading into next year and limit the downside to growth in 2020, mainly in the export-oriented economies.

The city-state announces its GDP prints before most of the region. So the read-through is that 3Q growth will likely also be poor for the rest of Asia, with downside surprises to growth possible. This comes despite expectations of production front-loading and a seasonal uplift for product launches in 3Q, both of which should support economic growth in the export-oriented economies. But likewise for Singapore, the economic backdrop for Asia ex-Japan appears to be finally stabilizing and looks set to improve heading into 2020.


Valerie Chan, Analyst


Emerging Markets

Takeaways from 2019 IMF-World Bank fall meetings

The overwhelming consensus among meeting participants is that low growth, low inflation, and low interest rates are here to stay. The IMF-World Bank fall meetings took place in Washington DC, this past weekend. Our team attended a number of seminars with policymakers, academics, and investors from around the world.

When it comes to the outlook for the global economy, the overwhelming consensus among meeting participants was that low growth, low inflation, and low interest rates are here to stay. Secular stagnation views—which posit that investors with excess savings seeking safe investments are driving interest rates lower, in turn pushing up asset prices and adding to wealth disparities, therefore leading to even lower consumption and growth—have become more mainstream and less marginal than a few years back.

Participants expressed widespread agreement that monetary policy support has mostly run its course in the developed world. Overuse of this tool risks fueling asset bubbles and wealth inequality and destabilizing income. Cyclical fiscal policy isn’t the answer to the world’s structural challenges, either. Structural reforms are the only way out. Political appetite for the latter is seen widely lacking in the US, Europe, and Japan.

Few attendees were ready to defend a baseline scenario of an imminent global recession, however, with activity expected to bottom out early 2020. Next year’s recovery is viewed as soft at best, and quite vulnerable to geopolitical shocks.

Of all the geopolitical topics discussed, the nature of the US-China relationship stole the limelight. In meetings with US officials, the sense was that there’s a 50-50 chance the “Phase 1” deal gets signed in Chile next month during the Asia-Pacific Economic Cooperation meetings. There was clear consensus across the US political spectrum that the country needs to confront China on trade but little agreement on how to get there. Tensions between the two countries are expected to persist for years

Quite interestingly, China's representatives took an assertive stance, dismissing Sino-US tensions as at most triggering a temporary deviation from China’s long-term economic development plans. They highlighted that China continues to focus on structural changes, such as the opening up the economy and digitalization. 5G technology, for example, is expected to become available throughout China in two years, which, together with artificial intelligence, will lead to great efficiency improvements, in their view. Lower but better-quality Chinese growth is expected ahead.

Emerging markets were described as being in a better position than a decade or two ago to deal with capital flows and FX movements. Balance sheets are in better shape as borrowing in local currency has become more widespread, and countries maintain large stocks of foreign assets. The pass-through from currency depreciation to inflation was widely recognized to have come down as well. Drastic regional disparities were highlighted, however, with the macro outlook for emerging Asia looking a lot more promising than that for the more fundamentally challenged Latin America, Eastern Europe, Middle East, and Africa regions.

Long discussions on the future of Latin America took place. Participants believed the region should get over the commodity super cycle talk. The extremely poor growth levels observed in the region are the new normal as investment and productivity growth remain lackluster. Structural reforms in the region are becoming indispensable, but given the very challenging public opinion environment with respect to presidents, parliaments and political parties, these politically costly changes to the region's economic structure will remain few and far between.


Alejo Czerwonko, Emerging Markets Strategist Americas



How trade and investment are working to slow growth

Growth in the OECD economies has slowed noticeably this year, but developed economies are not yet in a severe slowdown. Growth has been poor since the end of last year, however.

Overall consumer spending is still growing slightly faster than average, though has slowed. The real drag on growth is coming from private investment spending. Investment spending is now growing more slowly than exports in the OECD. There are also second round effects. Countries like Germany, which make and export investment goods, are hurt again by slower investment. Why has investment slowed?

Investment may be moving to a lower trend rate of growth. Changes in the world economy mean that we are becoming more efficient. Office density rates keep going up (meaning more people per square meter of office space). Even economists use their personal electronic devices for work. The difference between investment at work and consumption at home has blurred. In the past a person might have a computer sitting unused at home, while they used a computer at work. Now they are more likely to use one computer for both home and work. Investment in technology, offices and equipment goes down. The technology we already have is used more efficiently. The old-fashioned way we calculate investment struggles to recognize this.

Trade taxes raise the cost of traded goods. This is either because the taxes are paid (a straightforward cost), or because companies are pushed by the taxes into buying "second best" products. Investment is the most import intensive part of an advanced economy. In other words, investment uses proportionately more imports than does consumption or government spending. That means that taxing trade will tax investment more heavily than consumption or government spending.

Taxing trade has also created uncertainty about global supply chains. Two thirds of all global trade is done by multinational companies. Over half of all global trade is part of long and complex supply chains. These supply chains have been built, link by link, over nearly a quarter century of freer and freer trade, and lower and lower trade taxes. These are now less certain. Companies appear to be thinking more carefully about investing in supply chains. This is a threat that affects all companies with overseas operations or sales. It is not just the US and China.

Trade uncertainty helped push investment lower, and thus growth lower. Will a US-China trade deal turn things around? A trade deal would be good for the global economy, but not that good. The structural move towards efficient investment is not likely to be changed by a trade deal. This is a gradual adjustment however, and should not be too negative.

Lowering taxes on trade will lower the cost of investment. That should be a modest support for investment spending. However, companies surveyed in the UBS Industry Leader Insights were not changing investment plans with lower borrowing costs. That suggests a muted response to lower trade taxes.

The obstacle to a strong investment recovery is trust. A trade deal, even a big trade deal, is unlikely to be trusted to last. The damage has been done. Burned toast cannot turn back into bread. The burned global trade system cannot return to what it was. Eventually new patterns of investment will emerge. Technology is encouraging localisation of production. That will mean different investment. In the meantime companies will try to work out the new world trade order. This would not stop a post deal pick-up in investment. It will limit how strong the pick-up could be.


Paul Donovan, Global Chief Economist GWM


United Kingdom

Cracks appearing?

"We don’t consider a global recession, something that would definitely dent the UK economy, likely, but growth is bound to be subpar for a while yet." One of the remarkable successes of the UK economy in recent years has been the performance of the labour market. Since the post-crisis peak of 8.5% back in 2011, the unemployment rate has fallen steadily to a level not seen for more than four decades.

AuthorOn the employment side of the coin, the numbers are equally impressive. A little under 33 million people are gainfully working in the UK, the highest figure on record in absolute terms. And the participation rate, which takes into account the share of the available workforce, stands close to an all-time high as well.

There have been many questions about the quality of the labour market recovery, but even here the news is largely positive. First, the share of part-time workers as a percentage of the total has dropped in the last two years. Second, although higher than before the financial crisis, the percentage of workers classified as self-employed has remained largely steady since 2014.

But with economic growth notably weaker and the outlook more uncertain worldwide, not just in the UK, questions are legitimately arising as to whether the labour market phenomenon can be sustained. Allowing for the fact that the strength of household spending has been a key factor supporting the domestic economy as business investment has waned, this question takes on extra relevance.

Last week the Office of National Statistics (ONS) released the labour market report for August. Much as it has done for the last few months, it contained something for everyone. Those looking for cracks in the current story will point to the decline of 56,000 jobs in the three months to August, as well as to the modest tick-up in the unemployment rate to 3.9%. Granted, job momentum has waned of late, a trend also confirmed by the drop in vacancies. But we should put these numbers into context.

Employment falls were largely concentrated in the part-time and self-employed categories. Full-time jobs actually increased by 73,000 in the time period. And vacancies and unemployment both are at rates that remain consistent with a labour market still in good shape. Momentum is weaker but not to the extent that we should be overly concerned, in my view.

And then there is the wage story. Readers may be familiar with the concept of the Phillips Curve. The good news is that the UK still apparently has one, as the healthy labour markets are fueling fairly robust wage growth running at close to 4%.

This latest report may not have been a perfect or flawless one on the state of the labour market from the latest data available. But such reports rarely are. Our assessment is that it is too early to conclude that things are about to get materially worse.

Of course, how the labour market moves from here will be determined by a number of factors. In the short term, the Brexit situation is improving as the risks of a no-deal departure have faded. But risks linked to the global economy are higher than they have been for some time. We don’t consider a global recession, something that would definitely dent the UK economy, likely, but growth is bound to be subpar for a while yet. This probably means that the labour market will ebb to a standstill rather than a reversal.

The Bank of England (BoE) will focus on the employment trends in the months ahead. As things stand we think that a weaker global backdrop is likely to nudge the BoE in the direction of easing in the first half of next year. But this is far from certain, especially if wages continue to point to higher inflation.


Dean Turner, Economist UBS AG


United States

Seasons change (a little)

Stock markets have remained resilient in these early stages of earnings season, perhaps because the outlook does not appear to be as weak as feared. Here in New York, autumn is making its debut. Shades of yellow and orange are just starting to mix in with the green, apple picking is on the weekend calendar (especially those looking for activities for the kids!), and warmer jackets have been roused from their hibernations. Summer seems like a distant memory.

As the season is changing outside, financial market participants are turning their attention to another season—third quarter earnings season. This is the time of year when publicly traded companies will reveal the quarterly answer to the question "how's business?" by disclosing results for the third quarter and offering some thoughts about the outlook.

Even though it’s a new earnings season, we don’t expect the "weather" to be very different from the first half of the year. Earnings growth has been fairly tepid all year, a stark contrast from the corporate tax cut-fueled 23% surge in 2018. Growth has slowed this year due to a variety of factors: global economic growth has downshifted, tariffs have increased, business confidence has declined, and the positive effect of US fiscal stimulus (tax cuts and higher government spending) has rolled off. As a result, S&P 500 earnings growth was just less than 2% in the first half of the year.

We expect a similar, if not even weaker result for the third quarter. The headwinds facing corporate America have become even more challenging and profits look poised to contract, albeit barely, for the first time since 2016 when plunging oil prices resulted in a manufacturing recession. We forecast a 2% decline in S&P 500 profits for the quarter.

However, our analysis shows that the sluggish numbers for the market in aggregate mask more resilient results for the typical company. The earnings pressures are fairly concentrated and particularly acute in sectors that are the most impacted by slowing global economic growth. Profits should be down 30% and 15% respectively for the energy and materials sectors. The technology sector is contending with an oversupply of semiconductors and a mature smartphone market which is driving a 10% decline. These three sectors comprise roughly 30% of S&P 500 profits. More broadly, the typical (median) S&P 500 company should see earnings rise by about 5%.

Based on the limited number (70) of S&P 500 companies that have reported so far, 80% are beating consensus profit estimates and nearly 60% are beating revenue expectations—results that are fairly normal. Similar to prior quarters, consumer spending remains a bright spot. This is good news considering that more than two-thirds of economic activity is driven by consumer spending. We expect consumer trends to remain healthy due to a strong labor market, low mortgage rates, and prudent consumer debt levels.

Results have been more mixed for companies that rely on business spending. Ongoing weakness in the industrial sector seems to be spreading and deepening a bit. But results from the largest US banks have underscored that credit quality is very good across the economy and there are no indications that clients—neither businesses nor consumers—are having difficulty servicing their debt. This backdrop, in conjunction with recent Fed interest rate cuts, means that access to capital should remain fairly easy, supporting the economic expansion.

Still, the tone from corporate management teams does seem incrementally more cautious. But stock markets have remained resilient in these early stages of earnings season, perhaps because the outlook does not appear to be as weak as feared. In fact, guidance for the fourth quarter from the small set of companies that have reported suggests no meaningful deterioration in the outlook.

So far, results are consistent with our view that, while S&P 500 profit growth remains tepid for now, it should modestly improve (to 5%) next year. However, the trade conflict between the US and China remains fluid and could be a source of earnings downgrades if progress does not occur in November. In other words, this earnings season looks like it will be pretty similar to the last two, despite the changing seasons outside.


David Lefkowitz, CFA, Sr. Equity Strategist Americas

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