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06 November 2019

Get Happy? In protectionism there’s still opportunity, survey says

Head of Trade, Treasury and Risk
It’s not often nowadays that trade financiers get a positive survey to chew upon. Stuart Nivison digests HSBC’s latest Navigator Survey with TXF. Is the remarkable degree of positivity in global corporates’ trade outlook pure Animal Spirits or something more canny in operation?

I’m an economist and, as the old joke goes, I have predicted five of the past one recessions. Positive surveys on trade don’t sit naturally, but they sure do make a change. You only need to look at other leading indicators, such as global manufacturing purchasing managers indices or the IMF’s latest World Economic Outlook to see not everyone is dancing in the streets.  

HSBC’s latest Navigator Survey: Now Next and How, published on 5 November, marks a step change from the run of negative news on confidence about trade. Surveying more than 9100 companies across 35 countries in August and September, this is a poll worth a second glance. Globally, nearly half the companies questioned (47%) are more optimistic than they were last year. 

“The biggest surprise so far is the overwhelming degree of optimism despite all the noise businesses hear about geopolitical instability and trade protectionism,” Stuart Nivison, HSBC’s head of client network banking, tells TXF. “It seems counterintuitive. And the fact that nearly half are more optimistic than last year goes against the mood music in the market.”

On closer inspection, nearly eight in 10 companies (79%) are expecting their sales to go up over the next year, and fully 81% thought their sales internationally would increase, which is also higher than last year’s survey.

How does that reflect HSBC’s own trade book – bearing in mind, the survey comes out a week after some relatively downbeat third quarter results for the bank itself? “There are some trends underneath which fit with what our customers are telling us,” Nivison says. “I’ve been involved in trade finance for a long time and if you look at the regional variations, in particular within Asia, there are two patterns that you see. One of them is that there are a group of countries and companies in those countries that are benefiting from changes in the supply chain and that is overwhelmingly positive.”

Shifting supply chains in action – China plus

Asia is a case in point. “It’s no surprise that places like Vietnam, Indonesia, India, Bangladesh, which are 96% to 99% [positive], expect sales to increase,” Nivison says. “A lot of that is supply chains repositioning themselves and more manufacturing coming from there.”

Companies in other Asian economies were less sanguine, but the majority – including those with more mature trade economies and more direct exposure to mainland China (and the US) – still expected growth. South Korea companies were 64% positive, Japan (57%), Hong Kong (52%). 

Causation versus correlation (again)

To what extent is trade protectionism itself causing the changes, or is it just correlation? 

“The large corporates that I speak to that are repositioning some of their supply chains, quite often it's not that they're going to cease sourcing from China. It's more what we call the ‘China plus’ strategy, where they say, ‘we've got a source in China, but we'd also like to source from other countries and get more of a balance’,” Nivison says. 

The second pattern is the sentiment relating to the US and mainland China themselves, where confidence for future sales growth remains very strong (80% and 86% of companies respectively). Large and growing domestic markets is likely at the core of this, Nivison says. US consumer spending continues apace and increasing per capita income in China keeps internal demand buoyant. It’s becoming easier for them to sell elsewhere. For instance, China companies are increasing their exports to markets such as ASEAN, India and Latin America. “If you look at these three alone, they account for more China exports than they do to the US.” 

The interesting dynamic then is a shifting of supply chains, a shift in exports. “And it means those countries that are supposedly the most impacted by trade wars – China and the US – aren’t, and there are others that are benefiting from a reallocation or repositioning of the supply chain.” And that’s contributing to the degree of optimism in general. 

No heads in sands for business

What is behind the companies’ optimism globally? Is it blithe Animal Spirits Keynesian-style – the confidence and ‘gut instinct’ that economist John Maynard Keynes pointed to in the General Theory of Employment Interest and Money back in 1936, that manifested even in times of economic uncertainty? Perhaps not. 

The businesses surveyed certainly did not appear to have their heads in the sand about trade wars. The survey says 65% of the companies were seeing increased protectionist activity in government (up from 63% in the same year earlier period). “But the majority of those, 57%, said that they thought that their business would gain from it, which again, appears counterintuitive,” Nivison says. What are they actually doing to benefit from it? First priority, according to the survey, was looking at new markets, the second, focusing on digital and technology investment. 

International expansion is seen as the main driver of growth by those firms that were optimistic for growth (38%) as well as being a defensive reaction to new threats (29%). Entering new markets is the joint top change businesses plan to make to their supply chains over the next three years for 28% of respondents (up from 23% in 2018) alongside increasing use of digital technology.

“If you’ve got a complete status quo, people carry on with what they are doing. But if you have  protectionism, tariffs, geopolitical issues, companies need to think about adaptation and how to change,” says Nivison. “The fact that so many are looking at new markets and see that as a priority, that they are optimistic about international trade, people are having to look over the parapet and rethink what they are doing.”

Accidental exporters on the rise

Moreover, digitisation is also transforming the way companies can sell cross border. “Once you put your goods online, they’re suddenly globally visible and we’re getting a lot of these ‘accidental exporters’ with orders from places they never expected to sell to and are having to think about their business models. It’s a very interesting dynamic, and the survey says there are only 8% of companies that thought they would be domestic only in three to five years.” For sure, if you are under pressure to put your own goods online, your shop window is the world, and you soon become involved in world trade. 

Does the survey relate only to physical goods? Nivison says not. “The split of the survey is approximately 55% trading in goods, 45% in services. Also, the companies range in size from SMEs [which comprise around 5000 respondents] to large corporates.”

All in all, the survey has been a “pleasant surprise” for Nivison. “We could have had people saying that tariffs are bad, trade wars are bad so we’ll stay at home and focus on our domestic markets, but it’s been the opposite. We have come away with the overwhelming feeling that companies see trade as a force for good and a positive thing for the future.”

Again as the eternal pessimist economist, the market in the US seems ‘toppy’. What would happen to sentiment with a turn in the US business cycle? It’s tricky to tell. “Despite all we hear, the global economy is still growing – 2.6% forecast this year and 2.5% next [HSBC forecasts]. If there is a change [in the US] it may affect that, but there’s no sign yet, and it seems in terms of the number of companies intending to increase sales, it’s not as if they’re anticipating things falling off a cliff, or taking a downturn. If anything, it’s the opposite.”

The UK is not immune to the optimistic tone, with the survey pointing to 77% of companies surveyed expecting sales growth and an even higher proportion (86%) expecting international trade to grow. And 39% the companies globally said they put a European country in their top three for expansion in the next three to five years (up from 33% in 2018’s survey).

Strategic relationships growing in importance

While the survey itself didn’t look through the lens of how this trade is likely to be financed, or indeed how the trade finance gap is likely to be narrowed, there continue to be strategic changes in how large companies (and banks and non-banks) are financing supply chains. “We are looking increasingly at the nature of supply chains, the nature of relationships, the forward-looking plans that the large companies have, and not just the transactions individually,” Nivison says. “You can make yourself more comfortable with financing suppliers strategically on a bilateral basis – the wider needs they have based on their place in the supply chain – as opposed to purely financing invoice by invoice. I think trade finance is maturing. The relationships between buyers and suppliers are getting stickier with more longer-term partnership type relationships and not a 'get it cheaply as I can drop you off if I want to’ trade relationship. That's changed. So we need to reflect that in financing. There's still a need for financing for trade finance, there's no question of it.”

Have we reached peak pessimism?

Have we have had ‘peak pessimism’ in terms of protectionism and globalisation? “I’m really hoping so, and that’s certainly what our clients are telling us they are looking for. People are getting on with life. The only ones I’m worrying about are those that are putting their heads in the sand and not thinking about the opportunities out there, and that’s probably the subset who didn’t think sales were going to grow, and that’s a much smaller number.“

"It's not us saying we think the world's a rosy place, but we're just feeding back what these 9100 plus companies have said across the world, which is, they're getting on with it.”

So, for this week at least, I’m parking my traditional economist’s downbeat nature with my choice of songs. The unforgettable Judy Garland singing ‘Get Happy’ from the more forgettable 1950 musical ‘Summer Stock’. Forget your troubles, get happy (I’d omit the bit about judgement day, at least for now, the brittleness is manifest in her eyes).  

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