CREDIT Suisse’s top Asia investment chief has warned of the risks posed to Thailand by a possible rebound in the US dollar, alongside other concerns such as the country’s expensive stocks and debt-funded consumption.
However, John Woods, the chief investment officer for Asia-Pacific at Credit Suisse, said the financial services giant has a reasonably positive outlook for 2018, in comments during an exclusive interview with The Nation.
Credit Suisse has revised upwards its forecast for global economic growth this year to 3.8 per cent, said Woods, adding that the US economy would continue to expand.
“Growth, low inflation and withdrawal of QE by major central banks will shape the global economy into next year,” said Woods, referring to the quantitative easing programme |initiated by some of the major central banks to stimulate economic |activity.
The markets expect central banks in Japan and Europe will gradually withdraw massive liquidity under their QE programmes and that the US Federal Reserve would increase interest rates three time this year.
Thailand’s central bank, government and business leaders have spent much of the past year worrying about the effects of a weaker US dollar, and conversely a stronger baht, on the economy. In particular, they fear this trend might dampen demand for Thailand’s exports.
However, Woods said the market may have mispriced the US dollar. He argues that the greenback could strengthen given the widely expected increases in US increase interest rates this year.
He said growth in wages would accelerate in the United States, spurring increased consumption that will lead to higher inflation. Under these conditions, he said, the dollar may strengthen sooner rather than later.
He conceded that his perspective differs from the base case scenario predicted by Credit Suisse. “The stronger dollar is a tail risk,” said Woods.
The US benchmark stock indices fell sharply on Friday, apparently reflecting Woods’ view. His comments in The Nation interview were made before the US stock market tumbles, when investors were focusing more on their concerns over the likelihood of rising interest rates.
The baht had increased from 36 to the US dollar in early 2017 to around the 32 level by the latter months of last year.
Woods projects the baht will stabilise at 32 per dollar over the next three months and then strengthen to 31 over the next 12 months. “Baht appreciation pace is limited in the near term and Credit Suisse is neutral on the baht,” he said.
Aside from issues over the stronger baht, Woods said Thai equities are expensive, with a 12-month forward price to earning ratio (P/E) of 16.1 times.
In contrast, some markets in the Asia Pacific region have a P/E ratio of only 10 times. Foreign investors will choose cheaper markets, said Woods, adding that the benchmark Stock Exchange of Thailand (SET) Index is likely to be at about 1,850 points this year. “The big SET rally is last’s year story - not beyond,” said Woods.
He also expressed his concerns over debt-funded consumption in Thailand and other emerging economies in the region.
Household debt to GDP in Thailand is about 80 per cent.
Part of the problem of debt-financed consumption in Asia is the trend of rising populism in some Western countries that is leading to trade protectionism.
Thailand and many countries have adapted themselves to slower growth in international trade by turning to domestic consumption in the hope of turning their economies around or sustaining growth. But these efforts have led to higher household debts, Woods said. “Thailand, with its high household debt, is vulnerable to a rate hike,” said Woods.
However, he suggested that investment opportunities in Asia presented themselves with the demographic phenomenon of an ageing population. The working-age population will shrink across Asia, leading to changes in consumption behaviour.
Consumers in emerging markets are more likely to spend on services, rather than on luxury items, Woods said.
The businesses that will benefit from what Credit Suisse calls a super trend are healthcare, life insurance, private pension funds and asset management.
Patterns of spending for seniors’ lifestyle needs would also support consumer goods and seniors housing, Woods said.