At Kreab Gavin Anderson we represent Standard Life Investments in Hong Kong. These are very insightful regular columns by their Chief Strategist. I rely on them and hope you find it useful.
30 November 2012
Andrew Milligan, Head of Global Strategy, Standard Life Investments
Despite the booms and busts of the past decade, the global economy has more than doubled in size between 2000 and the end of 2012. One of the key engines was global trade – the greater integration and interdependence between nations and regions. However, in the past year this factor has become less positive, as demonstrated by global trade slowing to a crawl. According to data gathered from the Netherlands Bureau for Economic Policy Analysis, also known as the CPB, global trade rose by only 0.8% in September. This followed three months of negative or zero growth as the realities of the Euro-zone crisis and weakness elsewhere in the world economy began to bite. Looking into 2013, the direction of global trade trends will provide important signals for investors about whether to take on board more risk.
Recent trade trends have resulted in winners and losers. On a local currency basis, Latin America and Central & Eastern Europe have seen their export volumes increase the most over the last 12 months. At the other end of the spectrum, Japan and a range of Asian emerging economies saw declines in export volumes. In the important middle ground, China and the U.S. have been winning market share while Europe, despite a lower Euro, has only seen a small increase in export volumes. This partly reflects changes in real exchange rates, which remain a key determinant of trade data, but also a shifting competitiveness across regions as well as the impact of policy tightening in countries such as China.
Asia is likely to be a crucial region in determining the fate of global trade during 2013. The signs are already encouraging with seasonally-adjusted exports expanding by an average of 2% month-on-month in September and October in China, Korea and Taiwan. This in part reflects a stabilisation of the Chinese economy but also points to a wider improvement in global growth. With the Euro-zone crisis easing and with a solution (of sorts) for the US ‘fiscal cliff’ in sight, some of the most significant drags on business sentiment appear to be lifting. This has already been feeding through to some Asian economies, particularly those that remain heavily dependent on end-markets in the OECD. In Taiwan, exports rose by 3% year-on-year during October, supported by a 5.6% and 5.9% surge in export orders to the US and Europe respectively. There was a similar revival in Korean export data in October with exports up 11% on a seasonally adjusted annualised basis.
To be more confident, however, we need to see these trends becoming more broadly based. In Hong Kong exports declined 2.8% year-on-year in October, down from 15.2% growth posted in September. In India, the October figures were even more depressing with the gaping trade deficit now meaning that export values account for just 52% of import values. It is not just national disparities across the region that are a concern. We are also witnessing a sector bias to Asian export trends. On the one hand, the high-technology sector appears to be bolstering Asian trade figures, with emerging Asian tech exports up nearly 6% in September on a US dollar basis. On the other hand, industrial goods exports remain far less robust, as highlighted by the 13% year-on-year fall in Thailand for this sector during October. In addition, the resources sector does not appear to be doing so well with exports from commodity regions across the emerging markets still contracting (in value terms) on an annual basis.
Bearish commentators would argue that this suggests the recent policy easing is not yet gaining traction. However, the House View is more positive that policy is starting to work as monetary transmission mechanisms slowly mend. Indeed, there is a more optimistic interpretation of the disparities within the recent trade data. We may be seeing market forces at work, with those sectors and nations best capable of efficiently allocating resources increasingly winning out. This may suggest that some of the political and credit blockages are beginning to clear, and that the ‘event risk’ associated with the US fiscal cliff, the Euro-zone sovereign crisis and the transfer of power in China may be starting to fade. The pick-up in the high technology sector also bodes well for global capital spending, and may prove a lead indicator for a loosening of purse strings from hesitant corporates. All in all, trends in Asian trade flows may be an important signpost for the direction of the global economy. If they stall, we may be witnessing another false dawn in this painfully protracted global recovery. If momentum can be sustained, it may indicate that the major economies, and therefore equity markets, can make positive headway into 2013-14.