Thailand: Strongly affected by the corona crisis
Thailand is headed for a deep and relatively longer economic contraction, which may top the one during the Asian Financial Crisis. With the worst yet to come in Q2, the latest GDP data showed that economic growth had already started to contract in Q4 2019 and worsened in Q1 due to fallouts from the coronavirus. More fiscal and monetary support is near. Watch out for the Bank of Thailand’s monetary meeting this Wednesday, when interest rates will likely be cut again, supported by negative inflation.
Thailand’s economy took another hit in Q1 when the coronavirus started spreading internationally. The economy, which had already been contracting before the health crisis due to reduced external goods demand from the US-China trade war, a drought affecting agricultural produce and delays in the 2020 budget weighing on investments, now additionally faces plummeting domestic demand due to falling tourism numbers and social distancing measures. These developments are set to intensify in Q2 given a two-month lockdown imposed at the end of March and fresh headwinds to external demand. The dire situation has also clearly led to a fall in inflation (the drop in headline exacerbated by low oil prices), which will likely persist this year. These are good reasons for the Bank of Thailand to slash its policy rate further on the coming Wednesday from the current 0.75%.
Susan Joho, Economist, Julius Baer
German growth: The lockdown takes its toll
The German economy slowed sharply in the second quarter but much less than its European peers. A later lockdown than in Italy and Spain as well as the high resilience of the publics and construction sectors helped to cushion the headwinds for economic growth. We adjust our 2020 growth forecast to 6.0% from 6.8% before.
German gross domestic product (GDP) declined by 2.2% in the second quarter, in line with consensus expectations but less sharply than our own expectations of a 3.5% decline. This compares to France, Italy and Spain, where GDP declined by 5.8%, 4.8% and 5.2%, respectively. Detailed numbers of the growth contributions have not been released yet, but the statistical office highlighted that a strong drag from private consumption and machinery and equipment investment was at least partly offset by solid public consumption and construction investment. Exports and imports both declined sharply, offsetting their impact on growth in the first quarter 2020. The drop in economic activity materialised entirely in the second half of March, highlighting the very special conditions of this downturn. We still expect that German economic activity will be depressed even more in the second quarter, resulting in a negative growth rate of -10.5% before a restart of large part of the economy should result in eye-popping growth rates in the third quarter. Growth rates appear highly misleading in the current lockdown-induced downturn as even a growth rate of 6% in the third quarter and 4% in the final quarter of 2020 will equal a German GDP 3.5% below the level before the corona crisis.
David Kohl, Chief Economist Germany, Julius Baer
China Equity Strategy
US-China rhetoric heating up
President Trump recently urged to halt plans of the government’s main pension fund to invest in Chinese equities. While the implications for Chinese ADRs listed in the US should be fairly small, there is a risk that the administration will extend the restrictions to other US investors. We continue to view Chinese equities as a core holding and reiterate our strategic Overweight rating.
In the latest escalation between the US and China, Donald Trump urged to halt plans of the government’s main pension fund to invest in Chinese equities. The moves comes after an intensifying blame game over the handling of the Covid-19 outbreak over the past weeks. While the implications for Chinese American depositary receipts (ADR) listed in the US should be fairly small, there is a risk that the administration will extend the restrictions to other US investors. This would result in a major headwind, given that US investors own positions of around USD5.4tn market cap in the largest 100 Chinese stocks, especially those listed in the US (ADRs.), according to a recent study by Bank of America Merrill Lynch. The policy would affect those stocks first and accelerate the trend of Chinese ADRs returning to Hong Kong for secondary listing. At this juncture, an extension of the policy to other US investors remains a tail risk. Nevertheless, in view of the recent heated tensions between China and the US, which will likely remain ahead of the US presidential elections, the near-term outperformance potential of Chinese equities has diminished. We continue to view Chinese equities as a core holding and reiterate our strategic Overweight rating. The latest activity data showed a broadening recovery in China, and we expect the economy to reach pre-crisis output levels already at the end of 2020, which should support the equity market.
Mathieu Racheter, Strategy Research Analyst Emerging Markets, Julius Baer
Fixed Income
Brazil: Moody’s affirms rating with stable outlook
Moody’s affirmed its Ba2 rating and stable outlook on Brazil. The rating agency expects that Brazil’s debt will increase as a response to the coronavirus. However, fiscal and structural reforms will continue post crisis. This view is further supported by low external debt.
On Friday Moody’s affirmed Brazil’s Ba2 rating and maintained the stable outlook. The rating agency based its decision on the country’s capacity to manage higher debt levels due to the coronavirus outbreak, improved policy effectiveness and fiscal consolidation post-crisis, as well as Brazil’s low external debt and strong foreign reserves (18% of GDP). While Brazil’s debt/GDP of 76% in 2019 is expected to deteriorate to 88% in 2020–21, the fact that 64% of its total government debt is in inflation-linked and floating-rate debt – and as inflation and interest rates will remain low – this will allow Brazil to absorb the increase in debt without eroding its fiscal strength. In addition, its foreign debt is only 5% of total debt. The stable outlook reflects Moody’s expectations that the government will resume its fiscal reforms and fiscal consolidation efforts after the coronavirus.
Eirini Tsekeridou, Fixed Income Analyst, Julius Baer
