Bad as it gets right now for oil, exports and inventories in APAC: analysis

Assuming there's no global recession, though.

It has been noted that APAC exports should be less bad by 2H16, and that Korean USD exports dropped 16%y/y in Jan-Feb, setting the opening pace for regional trade growth this year.

According to a research note from UBS, however, this is probably as bad as it gets assuming oil prices stabilize and manufacturing weakness does not lead to a global recession.

First, Asian exports are highly correlated with oil prices. Hence, last year's renewed plunge in oil prices explains renewed weakness in nominal exports. Real exports have also been weak, but nothing like USD exports.

The UBS view is that oil prices should rise modestly toward year end assuming supply responds to very low oil prices over time.

Here's more from UBS:

Secondly, we suspect sharply lower oil prices caused an unintended increase in global manufacturing inventories late last year as US oil-related equipment and machinery production was cut back. The latest evidence from US ISM is suggests the worst of that may be over with new orders to inventories looking better.

Finally, falling oil and other commodity prices may have encouraged global corporates to destock for price related reasons – through the fear of having to take a hit on inventory value or simply on the expectation that prices might keep falling and inputs could be bought cheaper later. This may have exacerbated destocking, weak production, and Asian exports.

Indeed, today's APAC strategy note looks at inventory bottom-up and supports this view. There has been a greater inventory volume run down in sectors where falling commodity prices have played a role (e.g. Chemicals, Steel) than in Tech where commodity prices matter less.

None of this suggests a recovery in exports or manufacturing, but it does imply that concerns about a manufacturing-led global recession should ease toward mid-year and that Asian exports should look less bad in 2H16 at a time when markets appear extremely bearish.