Macro

China News That Matters

• We don’t need no (private) education
• Evergrande, just not forever 
• China’s new man in Washington 
• PLA trains hard for Taiwan – and expands nukes?
• The Chairman tours Tibet

The mainstream financial media mistakenly uses the term of animal spirits to encapsulate all forms of capital spending. While the COVID-19 pandemic temporarily crushed animal spirits, projects receiving prior approval simply had their start dates delayed. Non-commodity capital spending has remained resilient during the pandemic and will register robust gains in 2021.

China’s rise as an economic power means that Asia Pacific corporates are the main contributors to global capital spending, while Europe and North America’s share has declined significantly. Improved commodity prices means that Latin America should register strong capital spending in 2021, while Europe should make its significant improvement since 2006.

Structural factors forcing companies to invest in digital technology and environmentally-friendly production techniques will persist and help to underpin capital spending in the aftermath of the COVID-19 pandemic. Higher capital spending in the semiconductor sector will alleviate product shortages across various end users, but there are fears that higher investment will come on stream after demand rolls over producing another supply glut similar to 2018.

The pandemic has created great hype about the need for companies to invest in intangible assets, thereby further casting doubt on the relevance of the Q-ratio as a measure of equity valuation. US data indicates that equipment and structures still dominate aggregate capital spending and even technology companies need to undertake sizeable investment in tangible assets to conduct business.

Cyclical forces, notably in the US, will also determine the outlook for capital spending, particularly if there are risks of policy mistakes to counter higher inflation. High corporate cash levels have traditionally been supportive for capital spending, but difficulty in finding worthwhile long-term projects since the financial crisis has raised the ante on companies to deploy cash in merger & acquisitions, as well as share buybacks.

While the US was the epicentre of the world’s first Covid wave (peaking in January 2021), and India the second (peaking in early-May 2021), the epicentre of the current third global Covid wave is ASEAN. While Indonesia was initially the worst hit, this wave has spread to Malaysia, Thailand and Vietnam (the latter two among the most successful in combatting Covid in 2020), with some scares in Singapore and the Philippines as well. ASEAN’s real GDP is estimated to have grown over 10% YoY in 2Q 2021 (helped by a very depressed base from 2Q 2020) but the renewed Covid surge is set to weaken the economic recovery in 2H 2021. 

In July 2021, Indonesia has had more new Covid cases than any other nation globally. But the worst of Indonesia’s Covid wave was reached on 18 July 2021 (at a 7-day moving average of 50,039 new daily infections), and these have since receded by nearly a fifth. The biggest hit will occur in 3Q 2021 growth, but Indonesia’s real GDP should exceed 6% YoY in 4Q 2021, bringing full-year growth to about 5%. The worst-hit ASEAN economy (and polity) is Malaysia, where there have been 3 successive Covid waves in 2021, the last of which has not yet reached its peak. Consequently, the greatest economic and political uncertainty in 2H 2021 will be in Malaysia, which has the highest per capita Covid case load in South or South-east Asia (at 31,334 cases per million population). We expect real GDP to grow no more than 3% YoY in 2H 2021 despite a low base. 

Thailand and Vietnam, both extremely successful in containing Covid in 2020 (although Thailand’s tourism-dependent economy nonetheless suffered a severe hit from the drying-up of tourist arrivals) are now seeing their first wave of Covid infections, in July 2021. The peak of the current Covid wave is not yet detectable in either country. Vietnam’s Covid wave is concentrated in the south (Ho Chi Minh City and surrounding provinces), but Thailand’s is concentrated around the main economic centre, Bangkok, and its surrounding provinces. However, the base effect is more helpful in Thialand than Vietnam (the latter having continued to grow in all four quarters of 2020), so we expect Vietnam’s real GDP to grow 5% YoY and Thailand’s 5-6% YoY in 2H 2021. Despite a major alarm being raised in Singapore as well, the latest Covid wave is very mild in the island-republic, and real GDP in Singapore is consequently likely to grow 7.2% in 2021.  

• This year’s narrative from US treasuries suggests a short-lived inflation/overheating scare in Q1, which coincided with Winter Storm Uri and the Texas power crisis, along with an initial phase of tapering talk from regional Fed presidents which subsequently faded; since the March peak, 10yr yields are down -45bps or a whopping -26%, representing the view that inflationary pressures have been entirely transitory
• The picture from 5yr TIPS breakevens and the 5yr5yr has been more closely attuned to commodities:  In the past 6 months, 5yr TIPS breakevens and 5yr5yr have been 74% and 70% correlated with copper prices vs. the 10yr yield’s 46%, though correlations with oil have been low; breakevens peaked with copper in May and bottomed in June-July
• While 10yr yields continued to grind lower in July, our text mining is picking up a new surge in reports of supply constraints, which have been strongly correlated with breakevens and reflect corporate commentary in the current earnings season
• The inflation narrative from treasuries appears to be asynchronous with the Q2 earnings season narrative from cyclical corporates, who are uniformly reporting worsening raw materials inflation expected in Q3 and lingering supply constraints
• Nonetheless, our text mining acknowledges that talk of tightening financial conditions last spiked in March and has not resurfaced since, and expectations of a massive US infrastructure package have faded

US rates volatility has picked up again and is close to the highs of the year despite the US 10y yield dropping. With rising US rates volatility, the EM-US 10y spread is now close to its widest in 5 years, suggesting that if US long-end rates stay low then EM local debt can start attracting inflows. We use two factors to identify some of the countries that may be targeted for inflows.

Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

The recent regulatory blitz on China’s technology/internet companies and now the edutech sector has significantly unnerved financial markets. The key takeaway from a macro standpoint is that the balance between the state and private enterprise has shifted even more in favour of the state, continuing a trend that had begun earlier. Private enterprises in China must now recognise that the Chinese state’s strategic priorities will take precedence over corporate interests to a greater extent than in the past. The blunt assertion of the state’s interests over private enterprise in China will raise the risk premium of investing in Chinese assets.

The crackdown on the online education sector indicates that the Chinese leadership sees the demographic trends as a serious threat to their ambitions for the nation: it is almost certain that they will reinforce these measures with more radical moves on the provision of childcare/infant care as well as parental leave and subsidies for child-raising.

There is also the view that the housing sector will be next in line for regulation. Our prior is that regulatory action on this front will be somewhat more calibrated, given the housing market’s centrality to the economy, and the relatively high level of financial vulnerabilities that have built up over time in certain pockets of the property sector.

We expect more forceful action in areas where regulators have been behind the curve, for instance in China’s financial markets where a number of financial and accounting scandals have hurt the credibility of its capital markets. To this end, the ongoing regulatory blitz could result in some positive changes to the structure of China’s economy over the long term.

Given this fundamental change, the business sector in China – especially domestic private firms – will rethink its strategy in various ways. The less high-profile wealthy could move more capital abroad. Hong Kong businesses would accelerate the diversification and restructuring of their businesses.

Emerging policy signals suggest that there has been a deep rethinking of fundamental policies.

Singapore appears poised to see potentially ground-breaking policy changes in areas where the government has long resisted change, such as the minimum wage and tax measures to redress increased inequality.

The developments taking place on Copper and the wider London Metals Exchange Index, indicate further gains from here in base metals. The corrections over the past couple of months seem to be over and we might even be ready to rally back to the trend highs.

Should that unfold, it would only bring inflationary pressures back to the fore and help push breakevens higher, which has already started to happen.

Combining that with the recent trouble in Chinese equities & the low nominal yields has resulted in the lowest ever print on US 10 year real yield today.

Unless one believes nominal yields are going to shoot up quickly (not a belief held here even if there seems to be little value in Bonds) then this picture should continue to provide a positive backdrop for precious metals and a negative one for the USD generally.

Macro Insights

In CrossASEAN Indonesian Strategy – Peaks and Troughs, CrossASEAN insight provider Angus Mackintosh puts forward his Indonesia market strategy as COVID-19 cases swell but he takes a constructive view on the recovery.

In Malaysia: Growing Despair As Covid-19 Crisis Spirals Out of Control, Manu Bhaskaran takes a closer look at Malaysia’s political outlook as Malaysians are angry at how the government is handling the COVID-19 crisis.

Equity Bottom Up

In Arwana Citramulia (ARNA IJ) – Glazed Porcelain, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s leading tile producer post its recent results.

In ComfortDelgro (CD): Buy On (Temp) Weakness, Henry Soediarko returns to look at Comfortdelgro Corp (CD SP) after the Singaporean government placed a ban on dining-in as part of the stricter measures to handle the delta variant.  

In Del Monte Philippines IPO Initiation: Tempting Fruit, Arun George takes a closer look at Del Monte Philippines (1575316D PM) as the company is in the process of pre-marketing for its IPO.

In Del Monte Philippines IPO: Valuation First-Look, Arun George returns to look at Del Monte Philippines (1575316D PM)‘s potential valuations and present his forecasts on the company. 

In Bank Central Asia – Good, But New Credit Challenges Ahead, Thomas J. Monaco returns to look at Bank Central Asia (BBCA IJ) after the bank released a solid set of 2Q2021 results. 

In SCC: Expected Strong 2Q21E but Would Lose Momentum in 3Q21E, Country Group returns to look at Siam Cement (SCC TB) and expects a strong set of 2Q2021 results driven by its Packaging business expansion and better petrochemical prices. 

In BBL: 2Q21 Result Was in Line with Our Expectation, Country Group reports back on Bangkok Bank Public (BBL TB) after the company released a better than expected set of 2Q021 results. 

In PLANB: Expect Solid Recovery Period in Mid 4Q21, Country Group reiterates its BUY rating for Plan B Media (PLANB TB) but expects the company to report a net loss in 2Q2021. 

In KBANK: 2Q21 Result Was in Line with Our Expectation, Country Group circles back to Kasikornbank PCL (KBANK TB) after the analyst meeting came out with a positive tone after the bank posted a solid set of 2Q2021 results. 

In BEM: Expect Earnings to Remain Dull at Least in 2Q21 and 3Q21, Country Group takes a look at Bangkok Expressway and Metro (BEM TB) which is still experiencing contraction due to the 3rd wave of COVID-19. This has reduced average daily toll traffic to 770k trips/day (-21%QoQ -4%YoY) and MRT ridership to 119k trips per day (-44%QoQ -11%YoY). 

In Bukalapak IPO: Revenue Take Rate Moving Up, But Not Fast Enough, Oshadhi Kumarasiri returns to look at Bukalapak (BUKA IJ) as it priced its IPO at the top end of the range.

Credit Insights

In Morning Views Asia: ABM Investama, Evergrande Real Estate Group, Medco Energi, credit specialist Leonard Law, CFA revisits Medco Energi (MEDC IJ) after its announced a rights issue. 

In Morning Views Asia: ABM Investama, Evergrande Real Estate Group, Medco Energi, credit specialist Trung Nguyen takes a look at ABM Investama (ABMM IJ) after Moody’s assigned B1 rating to their Notes, and at the same time placed it on review for possible downgrade (in line with its other ratings).

In Morning Views Asia: Agung Podomoro Land, Bright Scholar Education, Lifestyle International Holdings, Trung Nguyen maintain his “Hold” recommendation on the Agung Podomoro Land (APLN IJ) 5.95 24 as he sees a high likelihood of the company’s notes 5.95 24 being restructured.

In this week’s Alpha Bites, we recommend receiving the 5-year rate in Czech Republic vs paying the 5-year rate in Poland via IRS. Poland’s rates have outperformed its regional peers on the back of the uber-dovish monetary policy stance of the central bank and the June CPI reading coming off slightly from May. We continue to find the nominal and real rates in Poland to be too low in comparison with other countries, particularly Czechia, and unlikely to sustain at current levels with inflation running hot on the back of easy monetary and fiscal policies.

Malaysian tensions will come to a head this week when Parliament is called into session. A change of government is possible as is a more fundamental political realignment amid bubbling resentment on the ground over the government’s mis-management of the response to the pandemic.

• The BoE has become more concerned about the size of its gilt holdings reducing future policy options: there is less to buy and more uncomfortable fiscal-monetary linkages.
• Balance sheet problems can unwind by swapping the BoE’s gilt portfolio for T-Bills with the Debt Management Account. Undesirable linkages would break immediately as monetary and issuance functions are strengthened in their natural institutions.
• Recycling these swapped gilts to the market instead of new gilt issuance would entirely normalise monetary policy space, intra-public sector linkages, and the tradeable free float by 2025-26. The BoE needs to innovate in its ongoing review of this, in our view.

The Chilean peso has given up its outperformance from earlier this year following the central bank’s dovish hike. We remain constructive on the currency on the back of the market-friendly outcome of the presidential primaries last weekend, upward revisions to Chile’s growth, the outlook for copper prices, and the possibility that the central bank raises rates faster than currently priced.

Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.