As we approach the midpoint of the third quarter, the economic and financial market picture is becoming clearer. First, the US Federal Reserve is likely to cut interest rates soon. Second, the US presidential race is likely to intensify. And third, China's economic slowdown is decelerating, implying the need for more stimulus. But the signals from the Beijing government have been to focus more on quality growth than quantity.
Looking at interest rates, the case for cuts is building as the American economy shows a clearer trend of slowing down. The latest Fed Beige Book report for the third quarter indicates that more than half of the US regional economies are starting to stabilise or slow down.
Meanwhile, inflation has begun to decline as people reduce spending on luxuries and turn to spending more on essentials. The headline Consumer Price Index has decreased steadily, reaching 2.97% in June, from 3.47% in February. The June unemployment rate ticked up to 4.1%, which gives the Fed more confidence that it can cut interest rates.
On the political front, the sudden exit of President Joe Biden from the race -- and the success of Vice President Kamala Harris in picking up enough delegates to assure her nomination -- has reinvigorated the Democrats. But Ms Harris is still in a neck-and-neck race with Republican nominee Donald Trump, whose popularity increased after an assassination attempt. Investors need to monitor both candidates given that they have very different sets of economic and foreign policies.
THE TRUMP EFFECT
Many believe a Trump presidency will result in increased inflation and higher interest rates. They point to his plan to increase tariffs on many goods from China to as much as 60%, with 10% rates applied to many goods from other countries. His plan to deport illegal immigrants has implications for the labour market, and cuts to corporate and personal income taxes will also have consequences.
We disagree with the doomsayers, however. Even if Mr Trump wins the election, many of his more extreme policies might not make it through Congress. If some do, the impact, or the damage to the economy, will be limited. Nevertheless, we think a Trump return will definitely increase turbulence.
In China, meanwhile, second-quarter GDP and monthly retail sales, industrial production and fixed asset investment all slowed down. This means China's three crises -- deflation, income crisis and housing crisis -- will persist. The figures also show that the measures taken so far by Chinese authorities have not been very effective.
The signals from the recent Communist Party third plenum were not encouraging. Official statements indicated the focus would remain on developing the economy through advanced manufacturing such as electric vehicles (EVs), semiconductors and batteries. Many analysts view such policies will lead to trade tensions. We have already seen the US and the European Union impose more tariffs on imported goods from China.
EXPECT MORE VOLATILITY
All three of the issues outlined above make investing in the United States attractive. But the recent run-up in technology stocks has led to expensive valuations, and investors are now looking actively for quality small-caps. In any case, we foresee more investment volatility based on three factors:
First, share valuations are high. The cyclically adjusted price-earnings (CAPE) ratio, a measure created by economist Robert Shiller, is 36, which is about the same level as it was during the dot-com bubble before it burst in 2001. And with today's high interest rates, US stock prices would have to fall by about a third for the earnings yield gap to return to its current average.
Second, geopolitical risks. For example, if Mr Trump wins the presidency and enacts the tariffs he has promised, trade retaliation may occur, which will cause the economy to slow down and inflation to rise.
Third, we must consider economic factors including GDP growth, interest rates and listed companies' revenue. For example, currently the market has priced in a soft-landing scenario, where inflation has slowed down but the economy can still expand. But what if any other scenario occurs, such as a "no landing", or when inflation stops slowing down? This may cause stocks to continue rising and be at risk of a more severe correction.
As for Thai stocks, many challenges remain, although the economic direction in large sectors is likely to improve in the next period. But the domestic economy is quite fragile as the production sector has been slow for a long time, while tourism is in the low season. Moreover, the risk of a political vacuum remains until the Constitutional Court rules next month on the ethics case against the prime minister.
Therefore, we still recommend a wait-and-see strategy. But if you want to invest, choose stocks of companies whose profits are expected to continue to grow. We recommend stocks with good fundamentals and high ESG ratings, as well as stocks that protect against risks from geopolitical issues. Top choices include MINT, BEM, OSP, TU, KCE, CPF, HANA, TOP, BBL, SCGP, AOT, CPALL, BDMS, GULF and PTTEP.
Dr Piyasak Manason is head of economic research at InnovestX Securities Co Ltd, a subsidiary of SCBX group
