Macro

In this briefing:

1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN
2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN

Prabowo persists in refusing to acknowledge the election outcome, while attempting to delegitimize electoral authorities.  He has rejected an emissary from the president and declared victory four times, while top figures in his campaign are issuing bellicose remarks about ‘no return’ and ‘total war’.  A Third Clerics Conference is undergoing preparation and Prabowo seems likely to eventually deploy Islamist demonstrators, who have proven their ability to inundate Jakarta.  Security forces are assembling personnel and preparing for confrontations, although these might not occur until late May or June.  Ultimately, a second term for Widodo is not in jeopardy.  But, in the meantime, disruptions seem likely to damage Indonesia’s image, spook investors (especially domestic) and pressure the exchange rate. 

Politics: Tensions remain elevated as Gerindra Chair Prabowo Subianto has shown no signs of wavering from his stance that he is the rightful winner of the presidential election.  He has conducted four victory celebrations to date, while rejecting Quick Count indications of the result, impugning the work of the General Election Commission (KPU) and refusing to meet with the president’s ‘emissary’ (Coordinating Maritime Affairs Minister Luhut Panjaitan).  Bellicose rhetoric has emanated from top aides: the chair of Prabowo’s official campaign team, former Military Chief Gen (ret) Djoko Santoso, insisted that the declaration of a win with 62 percent of the vote is a “point of no return”.  The Prabowo supporter Amien Rais, founder of the National Mandate Party (Pan), warned that, “If [the administration] wants to engage in ‘total war’, we are better able to wage it.”  Prabowo conducted a rally for campaigners on 24 April but prohibited journalists from covering it (when one activated a camera, he reportedly suffered a beating).  The Islamic Defenders Front (FPI) is calling for a Third Conference of Clerics to address election cheating.  Tensions could subside if Prabowo changes course – which, given his mercurial character – could occur at any time.  But indications to date suggest he will continue rejecting the Real Count, eventually reject the official count and finally reject a Constitutional Court ruling if it is adverse.  He would then likely mobilize strident Islamic groups to protest, with potential for disruptions in Jakarta (Page 2).  Security officials generated headlines by transferring several Police Mobil Brigade (Brimob) companies from remote provinces to Jakarta (p. 4).  Prabowo’s running mate, Sandiaga Uno, ruled out returning to the Jakarta vice‑governor post (p. 5).

Justice: State Power Company (PLN) Chief Director Sofyan Basir became a suspect in the Riau-1 powerplant case.  Since 2014 he has dominated decisions on structuring pro­jects, and his removal may therefore trigger changes.  State Minister for State Enterprises Rini Soemarno will likely attempt to impose control through PLN’s interim head (p. 6).

Policy News: For the second time this month, the labor minister made uncharacteristic calls for regulatory reform to realize flexibility and encourage investment.  But he has also pledged to satisfy demands made during the campaign by labor unions (p. 8).

Vote Count: With 36% of the Real Count uploaded, Widodo has 56.1% (p. 11).

Economics:  GDP growth may have reached 5.2 percent during the first quarter, according to Bank Indonesia (BI).  First quarter revenues are low and budget cuts may receive consideration (p. 13). 

2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

• World (gross) cross-border flows have rebounded strongly
• Global Liquidity and World Business cycle are increasing driven by cross-border flows
• Strong cross-border flows drive outperformance of cyclicals and non-US markets

In this briefing:

1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN
2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows
3. Spring Seasonality and Commodities
4. Iron Ore and the Inventory Mystery

1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN

Prabowo persists in refusing to acknowledge the election outcome, while attempting to delegitimize electoral authorities.  He has rejected an emissary from the president and declared victory four times, while top figures in his campaign are issuing bellicose remarks about ‘no return’ and ‘total war’.  A Third Clerics Conference is undergoing preparation and Prabowo seems likely to eventually deploy Islamist demonstrators, who have proven their ability to inundate Jakarta.  Security forces are assembling personnel and preparing for confrontations, although these might not occur until late May or June.  Ultimately, a second term for Widodo is not in jeopardy.  But, in the meantime, disruptions seem likely to damage Indonesia’s image, spook investors (especially domestic) and pressure the exchange rate. 

Politics: Tensions remain elevated as Gerindra Chair Prabowo Subianto has shown no signs of wavering from his stance that he is the rightful winner of the presidential election.  He has conducted four victory celebrations to date, while rejecting Quick Count indications of the result, impugning the work of the General Election Commission (KPU) and refusing to meet with the president’s ‘emissary’ (Coordinating Maritime Affairs Minister Luhut Panjaitan).  Bellicose rhetoric has emanated from top aides: the chair of Prabowo’s official campaign team, former Military Chief Gen (ret) Djoko Santoso, insisted that the declaration of a win with 62 percent of the vote is a “point of no return”.  The Prabowo supporter Amien Rais, founder of the National Mandate Party (Pan), warned that, “If [the administration] wants to engage in ‘total war’, we are better able to wage it.”  Prabowo conducted a rally for campaigners on 24 April but prohibited journalists from covering it (when one activated a camera, he reportedly suffered a beating).  The Islamic Defenders Front (FPI) is calling for a Third Conference of Clerics to address election cheating.  Tensions could subside if Prabowo changes course – which, given his mercurial character – could occur at any time.  But indications to date suggest he will continue rejecting the Real Count, eventually reject the official count and finally reject a Constitutional Court ruling if it is adverse.  He would then likely mobilize strident Islamic groups to protest, with potential for disruptions in Jakarta (Page 2).  Security officials generated headlines by transferring several Police Mobil Brigade (Brimob) companies from remote provinces to Jakarta (p. 4).  Prabowo’s running mate, Sandiaga Uno, ruled out returning to the Jakarta vice‑governor post (p. 5).

Justice: State Power Company (PLN) Chief Director Sofyan Basir became a suspect in the Riau-1 powerplant case.  Since 2014 he has dominated decisions on structuring pro­jects, and his removal may therefore trigger changes.  State Minister for State Enterprises Rini Soemarno will likely attempt to impose control through PLN’s interim head (p. 6).

Policy News: For the second time this month, the labor minister made uncharacteristic calls for regulatory reform to realize flexibility and encourage investment.  But he has also pledged to satisfy demands made during the campaign by labor unions (p. 8).

Vote Count: With 36% of the Real Count uploaded, Widodo has 56.1% (p. 11).

Economics:  GDP growth may have reached 5.2 percent during the first quarter, according to Bank Indonesia (BI).  First quarter revenues are low and budget cuts may receive consideration (p. 13). 

2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

• World (gross) cross-border flows have rebounded strongly
• Global Liquidity and World Business cycle are increasing driven by cross-border flows
• Strong cross-border flows drive outperformance of cyclicals and non-US markets

3. Spring Seasonality and Commodities

We have not taken a good look at seasonality in a few months. In light of the GDP rates last week and other first quarter data we are taking a look at seasonal commodities. Copper is lower in comparison to 2018 and 2017. In February 2019 copper rates actually crosses 2017 more than 2018 in recent trading. In recent trading copper pricing is a relatively flat and has in fact shifted very little. Copper had a difficult late 2018 due to a strong dollar and that appears to still be the case. There is clear pressure on copper that is not giving up anytime soon.

4. Iron Ore and the Inventory Mystery

Just days after China makes a big push to keep supporting the economy, iron ore prices ticked upward. Even though GDP beat expectations, the fact that China is still pushing the support the domestic economy feels a little bit like the Wizard of Oz, as in don’t look behind the curtain. Today we are looking at iron ore from a few different angles in order to give a good look at what Beijing is looking to support and ultimately maintain.

In this briefing:

1. Singapore MAS – To Stay On Hold In 2019

1. Singapore MAS – To Stay On Hold In 2019

We are underweight Singaporean equities. We would expect the MAS to maintain its current exchange rate policy stance through 2019 and would not be surprised to see a further loosening of property market austerity measures.

In this briefing:

1. UK: Consumers Keep Outspending Peers
2. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin
3. The Global Recovery Narrative Crumbles
4. Brexit: Restacking Negotiation Teams
5. Real Estate Pricing

1. UK: Consumers Keep Outspending Peers

• UK retail sales remained elevated in Apr-19 after surging in recent months. Annual growth was several tenths above expectations again. Payback towards the brisk underlying trend is still likely, though, not least because real wages have stalled.
• British consumers have matched their bullish expenditures abroad while visitors to the UK have maintained sterling spending levels, despite devaluation. Brexit uncertainty has not stopped UK households from outspending their global peers.

2. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin

Long-awaited demonstrations on behalf of Prabowo proved far smaller than the Gerindra chair needed — meanwhile, police exposed how some 2,000 paid thugs rioted on his behalf, which discredits his cause.   Tensions are likely to subside as the denouement of a court appeal unfolds through 28 June.  Despite some 8 deaths in the rioting, Widodo has maintained the all-important moral high ground.  Official election results show Widodo having won by an 11.0% margin.  A breakdown by province suggests that identity politics was indeed at the fore. 

Politics: As many as eight fatalities occurred in two nights of rioting on 21-23 May – but the bulk of those actively rioting were clearly professional thugs hired to attack police.  A different group consisted of peaceful and orderly demonstrators complaining of supposed election fraud – but these numbered no more than 10,000, which pales in comparison to the one million that Islamic groups mobilized in Jakarta last December.  Police claim that several pro‑Isis militants carried handguns.  Police used assertive public communications to expose the sordid characteristics of rioters, which has discredited Gerindra Chair Prabowo Subianto.  There were over 700 casualties and 257 arrests.  Events portray the Prabowo camp as having stooped to paying goons to run amok, tarnishing Indonesia’s democracy.  Consequently, motivating genuine supporters to publicly protest far‑fetched claims of fraud will be even more difficult for Prabowo.  But much still depends on explanations for the deaths of rioters: at least one reportedly died of a bullet wound, but police are adamant that none in their ranks used live rounds (Page 2).  Authorities arrested a pro‑Prabowo former Special Forces (Kopassus) commander, Maj Gen (ret) Soenarko, for having allegedly smuggled M4 carbines into Indonesia (p. 7).

Election Results: The General Election Commission (KPU) disclosed the official final vote count for both contests.  Widodo’s margin was 11.0 percent (p. 9).  Prabowo finally decided to lodge an electoral appeal with the Constitutional Court, which aims to issue a verdict on 28 June.  Justices are highly unlikely to overturn Widodo’s win (p. 14). 

Justice: The president formed a Selection Committee (Pansel) for nominees for the Anti-Corruption Commission (KPK).  The roster is strong overall and concern from critics may be overdone (p. 15).  State Sports Minister Imam Nahrowi faced court testimony from witnesses who say they made kickback payments to him totaling Rp11.5 billion (p. 15).

Economics: The rupiah has been sliding amid international uncertainties and the  persis­tent current account deficit, but pressure from domestic political tensions may lift (p. 16). 

Outlook: Despite deaths of eight rioters, Prabowo suffered disgrace from demonstra­tions in Jakarta.  Peaceful ralliers were few in number, while police produced compelling evidence that the Prabowo camp hired hoodlums to wreak havoc.  When Prabowo finally called on protesters to retire and rest, he was – in effect – finally acknowledging his election defeat.  Any additional demonstrations seem unlikely to be significant and Prabowo’s court appeal may be an uneventful dénouement (p. 18).

3. The Global Recovery Narrative Crumbles

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

4. Brexit: Restacking Negotiation Teams

• Failure to agree on a compromise deal with the Labour leadership has left the Conservatives with a Withdrawal Bill bleeding more support than it is gaining, and the Prime Minister seems set to resign soon.
• A Eurosceptic replacement Leader, like Boris Johnson, still seems most likely, but they will have to agree on withdrawal and future trading arrangements. I now see the probability of a deal, no deal and no Brexit at 50:30:20 (55:25:20 before).
• New European leadership is unlikely to upend the current deal but could bring some flexibility following the political breaks. A compromise and more time to consider it or leave with no deal looks like the way forward, in my view.

5. Real Estate Pricing

Real Estate is hands down one of the major topics we write about. Not because we have particular skin in China’s real estate game, but it is such a good indicator of China’s economic health. Notably, for the average Chinese citizen their money will be in houses, not China’s stock market.

In this briefing:

1. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin
2. The Global Recovery Narrative Crumbles
3. Brexit: Restacking Negotiation Teams
4. Real Estate Pricing
5. UK Inflation: Apr-19 Surge Against Down-Trend

1. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin

Long-awaited demonstrations on behalf of Prabowo proved far smaller than the Gerindra chair needed — meanwhile, police exposed how some 2,000 paid thugs rioted on his behalf, which discredits his cause.   Tensions are likely to subside as the denouement of a court appeal unfolds through 28 June.  Despite some 8 deaths in the rioting, Widodo has maintained the all-important moral high ground.  Official election results show Widodo having won by an 11.0% margin.  A breakdown by province suggests that identity politics was indeed at the fore. 

Politics: As many as eight fatalities occurred in two nights of rioting on 21-23 May – but the bulk of those actively rioting were clearly professional thugs hired to attack police.  A different group consisted of peaceful and orderly demonstrators complaining of supposed election fraud – but these numbered no more than 10,000, which pales in comparison to the one million that Islamic groups mobilized in Jakarta last December.  Police claim that several pro‑Isis militants carried handguns.  Police used assertive public communications to expose the sordid characteristics of rioters, which has discredited Gerindra Chair Prabowo Subianto.  There were over 700 casualties and 257 arrests.  Events portray the Prabowo camp as having stooped to paying goons to run amok, tarnishing Indonesia’s democracy.  Consequently, motivating genuine supporters to publicly protest far‑fetched claims of fraud will be even more difficult for Prabowo.  But much still depends on explanations for the deaths of rioters: at least one reportedly died of a bullet wound, but police are adamant that none in their ranks used live rounds (Page 2).  Authorities arrested a pro‑Prabowo former Special Forces (Kopassus) commander, Maj Gen (ret) Soenarko, for having allegedly smuggled M4 carbines into Indonesia (p. 7).

Election Results: The General Election Commission (KPU) disclosed the official final vote count for both contests.  Widodo’s margin was 11.0 percent (p. 9).  Prabowo finally decided to lodge an electoral appeal with the Constitutional Court, which aims to issue a verdict on 28 June.  Justices are highly unlikely to overturn Widodo’s win (p. 14). 

Justice: The president formed a Selection Committee (Pansel) for nominees for the Anti-Corruption Commission (KPK).  The roster is strong overall and concern from critics may be overdone (p. 15).  State Sports Minister Imam Nahrowi faced court testimony from witnesses who say they made kickback payments to him totaling Rp11.5 billion (p. 15).

Economics: The rupiah has been sliding amid international uncertainties and the  persis­tent current account deficit, but pressure from domestic political tensions may lift (p. 16). 

Outlook: Despite deaths of eight rioters, Prabowo suffered disgrace from demonstra­tions in Jakarta.  Peaceful ralliers were few in number, while police produced compelling evidence that the Prabowo camp hired hoodlums to wreak havoc.  When Prabowo finally called on protesters to retire and rest, he was – in effect – finally acknowledging his election defeat.  Any additional demonstrations seem unlikely to be significant and Prabowo’s court appeal may be an uneventful dénouement (p. 18).

2. The Global Recovery Narrative Crumbles

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

3. Brexit: Restacking Negotiation Teams

• Failure to agree on a compromise deal with the Labour leadership has left the Conservatives with a Withdrawal Bill bleeding more support than it is gaining, and the Prime Minister seems set to resign soon.
• A Eurosceptic replacement Leader, like Boris Johnson, still seems most likely, but they will have to agree on withdrawal and future trading arrangements. I now see the probability of a deal, no deal and no Brexit at 50:30:20 (55:25:20 before).
• New European leadership is unlikely to upend the current deal but could bring some flexibility following the political breaks. A compromise and more time to consider it or leave with no deal looks like the way forward, in my view.

4. Real Estate Pricing

Real Estate is hands down one of the major topics we write about. Not because we have particular skin in China’s real estate game, but it is such a good indicator of China’s economic health. Notably, for the average Chinese citizen their money will be in houses, not China’s stock market.

5. UK Inflation: Apr-19 Surge Against Down-Trend

• UK inflation data delivered mixed surprises in Apr-19 as the CPI increased by 21bp to 2.12% and the RPI surged 60bp to 3.04% (index at 288.2).
• Airfares and household energy prices drove the increase, but another disinflationary shock from computer games constrained the CPI.
• An unwinding airfare effect still weighs heavily on my May-19 forecast with the trough in the temporarily broken down-trend occurring in Oct-19 when household energy utility prices seem set to collapse again.

In this briefing:

1. The Global Recovery Narrative Crumbles
2. Brexit: Restacking Negotiation Teams
3. Real Estate Pricing
4. UK Inflation: Apr-19 Surge Against Down-Trend
5. Trade-Fixated Markets Ignore Fundamentals, While Asian Currencies Suggest Tougher Times Ahead

1. The Global Recovery Narrative Crumbles

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

2. Brexit: Restacking Negotiation Teams

• Failure to agree on a compromise deal with the Labour leadership has left the Conservatives with a Withdrawal Bill bleeding more support than it is gaining, and the Prime Minister seems set to resign soon.
• A Eurosceptic replacement Leader, like Boris Johnson, still seems most likely, but they will have to agree on withdrawal and future trading arrangements. I now see the probability of a deal, no deal and no Brexit at 50:30:20 (55:25:20 before).
• New European leadership is unlikely to upend the current deal but could bring some flexibility following the political breaks. A compromise and more time to consider it or leave with no deal looks like the way forward, in my view.

3. Real Estate Pricing

Real Estate is hands down one of the major topics we write about. Not because we have particular skin in China’s real estate game, but it is such a good indicator of China’s economic health. Notably, for the average Chinese citizen their money will be in houses, not China’s stock market.

4. UK Inflation: Apr-19 Surge Against Down-Trend

• UK inflation data delivered mixed surprises in Apr-19 as the CPI increased by 21bp to 2.12% and the RPI surged 60bp to 3.04% (index at 288.2).
• Airfares and household energy prices drove the increase, but another disinflationary shock from computer games constrained the CPI.
• An unwinding airfare effect still weighs heavily on my May-19 forecast with the trough in the temporarily broken down-trend occurring in Oct-19 when household energy utility prices seem set to collapse again.

5. Trade-Fixated Markets Ignore Fundamentals, While Asian Currencies Suggest Tougher Times Ahead

Financial markets are currently fixated with US-China trade developments while ignoring signals emanating from the global economy. Meanwhile, US bond investors are discounting a cumulative 75 basis points reduction in the federal funds rate in 2019.

US bond investors believe that protectionism will force the Fed to ease policy due to its impact on the real economy, as well as raising the risks of systemic financial stress.

Recent softening in US economic activity probably reflects an inventory correction, capturing efforts by companies to bring stock levels into better alignment with sales. This backdrop does not justify a 75 basis points reduction in the federal funds rate.

Currency movements in Asia will become more pronounced if there is no trade agreement reached between the US and China, as Asian countries seek to preserve the market share of their exports in the US.

Meanwhile, China’s equity market movements in 2019 have imparted downward pressure on the Hong Kong dollar versus yuan, while the continued weakness versus the US dollar has raised questions about the viability of the currency board system.

Hong Kong’s currency peg has been attacked in the past, notably during the Asian financial crisis, but the likely path of Fed policy should ease concerns of another speculative assault for the time being.

In this briefing:

1. Iron Ore and the Inventory Mystery
2. Vietnam: Savings and the Nature of Growth
3. Singapore MAS – To Stay On Hold In 2019
4. Flawed & Competing Sino-US Capitalist Models: Risks for Short-Term Investors

1. Iron Ore and the Inventory Mystery

Just days after China makes a big push to keep supporting the economy, iron ore prices ticked upward. Even though GDP beat expectations, the fact that China is still pushing the support the domestic economy feels a little bit like the Wizard of Oz, as in don’t look behind the curtain. Today we are looking at iron ore from a few different angles in order to give a good look at what Beijing is looking to support and ultimately maintain.

2. Vietnam: Savings and the Nature of Growth

In Vietnam: The One, we briefly discussed the savings rate in Vietnam, estimated to be 30% by the IMF. This is a boon for the economy, despite conventional wisdom which suggests that borrowing and consuming are the main paths to growth. 

3. Singapore MAS – To Stay On Hold In 2019

We are underweight Singaporean equities. We would expect the MAS to maintain its current exchange rate policy stance through 2019 and would not be surprised to see a further loosening of property market austerity measures.

4. Flawed & Competing Sino-US Capitalist Models: Risks for Short-Term Investors

Recently released economic data from China suggests a stabilisation in economic activity due to various stimulus measures, although it is premature to conjecture that a faster growth trajectory is looming.

The current geopolitical standoff between China and the US is very different from the Cold War confrontation between the US and Soviet Union due to extensive Sino-US economic and financial linkages that can impart significant collateral damage to both countries.

Although China and the US have embraced competing versions of capitalism for economic development, their respective systems have been mutually interdependent.

Both state capitalism (China) and financial capitalism (US) suffer from fundamental flaws, including lower economic efficiency in the former and greater wealth inequality within the latter.

Greater competition (both local and foreign) is required in China’s product and financial markets to enhance economic efficiency.

Meanwhile, private firms in China outside of the high-technology sector face significantly higher funding costs, partly due to the lack of support offered from local governments, even though they remain an important source of employment in urban areas.

In this briefing:

1. Brexit: Restacking Negotiation Teams
2. Real Estate Pricing
3. UK Inflation: Apr-19 Surge Against Down-Trend
4. Trade-Fixated Markets Ignore Fundamentals, While Asian Currencies Suggest Tougher Times Ahead
5. China’s Slumping Domestic Demand Is Dragging Asia Down: Except JP, IN, VN

1. Brexit: Restacking Negotiation Teams

• Failure to agree on a compromise deal with the Labour leadership has left the Conservatives with a Withdrawal Bill bleeding more support than it is gaining, and the Prime Minister seems set to resign soon.
• A Eurosceptic replacement Leader, like Boris Johnson, still seems most likely, but they will have to agree on withdrawal and future trading arrangements. I now see the probability of a deal, no deal and no Brexit at 50:30:20 (55:25:20 before).
• New European leadership is unlikely to upend the current deal but could bring some flexibility following the political breaks. A compromise and more time to consider it or leave with no deal looks like the way forward, in my view.

2. Real Estate Pricing

Real Estate is hands down one of the major topics we write about. Not because we have particular skin in China’s real estate game, but it is such a good indicator of China’s economic health. Notably, for the average Chinese citizen their money will be in houses, not China’s stock market.

3. UK Inflation: Apr-19 Surge Against Down-Trend

• UK inflation data delivered mixed surprises in Apr-19 as the CPI increased by 21bp to 2.12% and the RPI surged 60bp to 3.04% (index at 288.2).
• Airfares and household energy prices drove the increase, but another disinflationary shock from computer games constrained the CPI.
• An unwinding airfare effect still weighs heavily on my May-19 forecast with the trough in the temporarily broken down-trend occurring in Oct-19 when household energy utility prices seem set to collapse again.

4. Trade-Fixated Markets Ignore Fundamentals, While Asian Currencies Suggest Tougher Times Ahead

Financial markets are currently fixated with US-China trade developments while ignoring signals emanating from the global economy. Meanwhile, US bond investors are discounting a cumulative 75 basis points reduction in the federal funds rate in 2019.

US bond investors believe that protectionism will force the Fed to ease policy due to its impact on the real economy, as well as raising the risks of systemic financial stress.

Recent softening in US economic activity probably reflects an inventory correction, capturing efforts by companies to bring stock levels into better alignment with sales. This backdrop does not justify a 75 basis points reduction in the federal funds rate.

Currency movements in Asia will become more pronounced if there is no trade agreement reached between the US and China, as Asian countries seek to preserve the market share of their exports in the US.

Meanwhile, China’s equity market movements in 2019 have imparted downward pressure on the Hong Kong dollar versus yuan, while the continued weakness versus the US dollar has raised questions about the viability of the currency board system.

Hong Kong’s currency peg has been attacked in the past, notably during the Asian financial crisis, but the likely path of Fed policy should ease concerns of another speculative assault for the time being.

5. China’s Slumping Domestic Demand Is Dragging Asia Down: Except JP, IN, VN

Despite a record RMB 9.59 trillion (US$1.39 trillion) increase in new TSF (total social financing) in January-April 2019 (a 34.7% faster pace than a year ago), China’s domestic demand continued to weaken. Imports declined 2.1% YoY in the latest 6 months (November 2018-April 2019), car sales declined 13.5% YoY (Jan-Apr19), and overall retail sales expanded at their slowest pace in 16 years in April 2019. The weakening of China’s import demand has caused the exports of Korea, Taiwan and Indonesia to decline YoY in each of the last 6 months, and those of Singapore, Malaysia, Thailand, and the Philippines to contract YoY in all but one of those months.  In 1Q 2019, real GDP in Singapore (+1.2% YoY) and Korea (+1.8% YoY)  grew at their slowest pace since the GFC, the Philippines (+5.6% YoY) its slowest in 4 years, while Taiwan (+1.7% YoY) and Thailand (+2.8% YoY) grew at their slowest in 3 years. 

The imposition of a 25% tariff on nearly 40% of US imports from China will cause a steeper decline (of 25%+ YoY) in China’s exports to the US in 2H 2019; if the same level of tariffs are also imposed on the remaining ~$300 billion of US imports from China, the impact on Chinese exports will be crippling. Initially, some of China’s exports will be diverted to other markets (gaining market share at the expense of other Asian exporters, in particular), but the consequent weakening of Asia’s economies will have a negative feedback effect on China’s exports. We expect China’s exports to decline 5-7% YoY in 3Q 2019 and 10-12% YoY in 4Q 2019. China’s ability to compensate by depreciating the RMB will be limited, because any one-way depreciation will likely result in large-scale capital flight. More than 20% of China’s exports go to the US, while Canada and Mexico buy 5-times more US exports than China (which takes just 6.4% of US exports). So the new USMCA plus abolition of steel and aluminium tariffs will smooth exports to the US’ 2 largest markets.  

Among Asian economies, only Vietnam and India have consistently had YoY export growth in the last half-year. Japan has seen weakness in its exports too, but its current account surplus widened YoY in 1Q 2019, delivering an acceleration in real GDP to 2.1% YoY growth (In 2018, Japan had a current account surplus of 3.5% of GDP, down only marginally from 4.1% in 2017).  We recommend staying strongly Underweight China, while increasing weights instead in Japan, India and Vietnam — the safe havens in the trade war storm.  

In this briefing:

1. Real Estate Pricing
2. UK Inflation: Apr-19 Surge Against Down-Trend
3. Trade-Fixated Markets Ignore Fundamentals, While Asian Currencies Suggest Tougher Times Ahead
4. China’s Slumping Domestic Demand Is Dragging Asia Down: Except JP, IN, VN
5. Hong Kong – On Edge

1. Real Estate Pricing

Real Estate is hands down one of the major topics we write about. Not because we have particular skin in China’s real estate game, but it is such a good indicator of China’s economic health. Notably, for the average Chinese citizen their money will be in houses, not China’s stock market.

2. UK Inflation: Apr-19 Surge Against Down-Trend

• UK inflation data delivered mixed surprises in Apr-19 as the CPI increased by 21bp to 2.12% and the RPI surged 60bp to 3.04% (index at 288.2).
• Airfares and household energy prices drove the increase, but another disinflationary shock from computer games constrained the CPI.
• An unwinding airfare effect still weighs heavily on my May-19 forecast with the trough in the temporarily broken down-trend occurring in Oct-19 when household energy utility prices seem set to collapse again.

3. Trade-Fixated Markets Ignore Fundamentals, While Asian Currencies Suggest Tougher Times Ahead

Financial markets are currently fixated with US-China trade developments while ignoring signals emanating from the global economy. Meanwhile, US bond investors are discounting a cumulative 75 basis points reduction in the federal funds rate in 2019.

US bond investors believe that protectionism will force the Fed to ease policy due to its impact on the real economy, as well as raising the risks of systemic financial stress.

Recent softening in US economic activity probably reflects an inventory correction, capturing efforts by companies to bring stock levels into better alignment with sales. This backdrop does not justify a 75 basis points reduction in the federal funds rate.

Currency movements in Asia will become more pronounced if there is no trade agreement reached between the US and China, as Asian countries seek to preserve the market share of their exports in the US.

Meanwhile, China’s equity market movements in 2019 have imparted downward pressure on the Hong Kong dollar versus yuan, while the continued weakness versus the US dollar has raised questions about the viability of the currency board system.

Hong Kong’s currency peg has been attacked in the past, notably during the Asian financial crisis, but the likely path of Fed policy should ease concerns of another speculative assault for the time being.

4. China’s Slumping Domestic Demand Is Dragging Asia Down: Except JP, IN, VN

Despite a record RMB 9.59 trillion (US$1.39 trillion) increase in new TSF (total social financing) in January-April 2019 (a 34.7% faster pace than a year ago), China’s domestic demand continued to weaken. Imports declined 2.1% YoY in the latest 6 months (November 2018-April 2019), car sales declined 13.5% YoY (Jan-Apr19), and overall retail sales expanded at their slowest pace in 16 years in April 2019. The weakening of China’s import demand has caused the exports of Korea, Taiwan and Indonesia to decline YoY in each of the last 6 months, and those of Singapore, Malaysia, Thailand, and the Philippines to contract YoY in all but one of those months.  In 1Q 2019, real GDP in Singapore (+1.2% YoY) and Korea (+1.8% YoY)  grew at their slowest pace since the GFC, the Philippines (+5.6% YoY) its slowest in 4 years, while Taiwan (+1.7% YoY) and Thailand (+2.8% YoY) grew at their slowest in 3 years. 

The imposition of a 25% tariff on nearly 40% of US imports from China will cause a steeper decline (of 25%+ YoY) in China’s exports to the US in 2H 2019; if the same level of tariffs are also imposed on the remaining ~$300 billion of US imports from China, the impact on Chinese exports will be crippling. Initially, some of China’s exports will be diverted to other markets (gaining market share at the expense of other Asian exporters, in particular), but the consequent weakening of Asia’s economies will have a negative feedback effect on China’s exports. We expect China’s exports to decline 5-7% YoY in 3Q 2019 and 10-12% YoY in 4Q 2019. China’s ability to compensate by depreciating the RMB will be limited, because any one-way depreciation will likely result in large-scale capital flight. More than 20% of China’s exports go to the US, while Canada and Mexico buy 5-times more US exports than China (which takes just 6.4% of US exports). So the new USMCA plus abolition of steel and aluminium tariffs will smooth exports to the US’ 2 largest markets.  

Among Asian economies, only Vietnam and India have consistently had YoY export growth in the last half-year. Japan has seen weakness in its exports too, but its current account surplus widened YoY in 1Q 2019, delivering an acceleration in real GDP to 2.1% YoY growth (In 2018, Japan had a current account surplus of 3.5% of GDP, down only marginally from 4.1% in 2017).  We recommend staying strongly Underweight China, while increasing weights instead in Japan, India and Vietnam — the safe havens in the trade war storm.  

5. Hong Kong – On Edge

The US-China trade talks have collapsed.  Mr Trump is has declared an all out war by targeting Chinese technology companies. In response China is hardening its stance.  It is little wonder Hong Kong is on edge. The Hang Seng has been correcting since early May. Hibor has spiked and the Hong Kong dollar is under pressure. Still we do not expect growth to be too far off 3% this year and maintain our overweight call on Hong Kong equities.

In this briefing:

1. Vietnam: Savings and the Nature of Growth
2. Singapore MAS – To Stay On Hold In 2019
3. Flawed & Competing Sino-US Capitalist Models: Risks for Short-Term Investors
4. Bitcoin Is Back on Its Feet

1. Vietnam: Savings and the Nature of Growth

In Vietnam: The One, we briefly discussed the savings rate in Vietnam, estimated to be 30% by the IMF. This is a boon for the economy, despite conventional wisdom which suggests that borrowing and consuming are the main paths to growth. 

2. Singapore MAS – To Stay On Hold In 2019

We are underweight Singaporean equities. We would expect the MAS to maintain its current exchange rate policy stance through 2019 and would not be surprised to see a further loosening of property market austerity measures.

3. Flawed & Competing Sino-US Capitalist Models: Risks for Short-Term Investors

Recently released economic data from China suggests a stabilisation in economic activity due to various stimulus measures, although it is premature to conjecture that a faster growth trajectory is looming.

The current geopolitical standoff between China and the US is very different from the Cold War confrontation between the US and Soviet Union due to extensive Sino-US economic and financial linkages that can impart significant collateral damage to both countries.

Although China and the US have embraced competing versions of capitalism for economic development, their respective systems have been mutually interdependent.

Both state capitalism (China) and financial capitalism (US) suffer from fundamental flaws, including lower economic efficiency in the former and greater wealth inequality within the latter.

Greater competition (both local and foreign) is required in China’s product and financial markets to enhance economic efficiency.

Meanwhile, private firms in China outside of the high-technology sector face significantly higher funding costs, partly due to the lack of support offered from local governments, even though they remain an important source of employment in urban areas.

4. Bitcoin Is Back on Its Feet

Bitcoin has been getting back on its feet since March, after a year-long bear market that saw the currency going from an almost $20,000 peak in December 2017 to a bottom of $3,200 in December of 2018.

Yet since March, the Fed has performed a complete U-turn in monetary policy, going from signalling three more rate hikes this year back in December, to none expected now.

Is this just a coincidence?