Macro

The S&P 500 has been rising steadily since late February. As the stock market advanced, readings became increasingly overbought. The S&P 500 has spent two consecutive weeks above its weekly Bollinger Band (BB). Past upper BB episodes have tended to be signals of positive momentum that led to further gains. The market spent several months on an upper BB ride in late 2017 and early 2018 before it finally topped out.

It appears the S&P 500 is undergoing another melt-up, with a blow-off top ahead. In the past, overruns of a rising trend line have been signals of an imminent blow-off top that lasts no more than two weeks.

Despite our near-term caution, we expect any pullback to be no more than 5–10%. This is still a bull market. Both the Dow Jones Industrials and Transports have achieved fresh all-time highs, which are classic Dow Theory buy signals.

Investors should view any weakness as buying opportunities. Traders should be positioned for a possible blow-off top, followed by a sharp pullback.

Russia is the largest country overweight among active Emerging Market funds.  The average holding weight of 4.11% represents an overweight of 1.04% above the iShares MSCI Emerging Markets ETF weight (cash adjusted).

In the wake of new US sanctions and troops gathering on the Ukraine border, the key stock risks to active investors are overweight positions in Sberbank Of Russia Pjsc (SBER LI), LUKOIL PJSC (LUKOY US) and Yandex (YNDX US), with over 80% of the funds in our analysis holding one or more of these stocks.

The 2014 annexation of Crimea provides a useful insight in to the behavior of active investors during a period of political uncertainty.  EM investors were quick to react, reducing Russia exposure by 4.26% over the course of the year and over a quarter of funds moving from overweight to underweight.  Whether this situation reaches the heights of 2014 remains to be seen, but do not underestimate an active manager’s willingness to cut or reduce allocations when the investment case becomes muddied by political events. 

On our next Webinar, we welcome Insight Provider Steven Holden for a general analysis of fund positioning across countries/sectors and stocks, to highlight under-owned and over-owned areas of the market using Steven’s unique data-driven approach.

The webinar will be hosted on Wednesday, 21 April 2021, 17:00 SGT/HKT.

Steven Holden is the CEO and Founder of Copley Fund Research, an independent provider of research on equity fund positioning and performance. Set up in 2014, Copley focuses on global, global EM, US, Asia Ex-Japan and China active equity funds, covering over US$4 trillion in assets across 1,300 active managers.

We discuss the recent underperformance of the Taiwan dollar in the context of the possibility that the US Treasury may label the country a currency manipulator this month.

Separately, the attached file is a snapshot of EM currency market, which we produce daily, and where 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 the broad market.

In this note, we look at curve steepness across emerging markets to identify countries where curves are relatively steep and where they are relatively flat.

Separately, the attached file is a snapshot of EM 10y rates market, which we produce daily, and where 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 the broad market.

• The current Covid19 crisis is an opportunity for the EU to force the door open a little further towards sharing debt – the Hamiltonian moment.
• However, the attitude of any new German administration to further fiscal entanglement with southern Europe is unclear.  We believe the doom loop has yet to be extinguished.

• CPIF inflation rose to 1.9% in March, very close to the RB’s target, while the CPI rate was bang in line with the consensus and ourselves, at 1.7%.
• We still expect inflation to accelerate to the peak in April before driving back to a near-1% trough in July. Our 2021 call is broadly a consensus one but is above the local view.

Macro Insights

In Singapore: Snag in Succession Points to Deeper Weaknesses in Political System, Manu Bhaskaran discusses the recent hiccup with succession plans in Singapore and the political consequences. 

Equity Bottom Up

In Grab – Biting the Bullet with a SPAC Listing?, CrossASEAN Insight Provider Angus Mackintosh reports back on Grab (0967655D SP) as it looks to be going ahead with a SPAC listing through Altimeter Capital in the US. 

In Siloam International Hospital (SILO IJ) – A Quickening Metabolism, CrossASEAN insight provider Angus Mackintosh revisits Siloam International Hospital (SILO IJ) after the company released a very solid set of FY2020 numbers. 

In Airport of Thailand (AOT): 3rd Wave Is a Charm, CrossASEAN Insight Provider Henry Soediarko discusses the outlook for Airports of Thailand (AOT TB) in light of rising COVID-19 cases in Thailand.

In ThaiBev BeerCo Pre-IPO – Valuation Updates and Crystallizing Growth Potential for BeerCo, Zhen Zhou, Toh updates on the progress on this upcoming IPO and looks at the valuations for Thai Beverage (THBEV SP) in light of the impending spin-off. 

In CHIB: Better Capitalisation, Liquidity & Efficiency Offset Asset Quality Concerns, Paul Hollingworth reports back on China Banking (CHIB PM) after its FY20/19 results show strong fundamental trends.

In VNG (VinaGame): The Only Tech Unicorn In Vietnam, Alec Tseung discusses Vinagame Corp (0113477D VN) and sees exciting prospects ahead.  

In Singapore Exchange – Into Merlion’s Mouth, Thomas J. Monaco takes a look at SGX (SGX SP) in light of its recent plans to allow SPAC listings but does not see this as any sort of panacea.

Sector and Thematic 

In Quiddity M&A Guide 2021: Thailand, David Blennerhassett provides an updated guide on Mergers and acquisitions of public companies in Thailand. 

Credit Insights

In Indika Energy – Earnings Flash – FY 2020 Results – Lucror Analytics, credit specialist Trung Nguyen revisits Indika Energy (INDY IJ) after its FY 2020 results came in weaker than expected. He expects the company will have a  better performance in FY2021.

In Morning Views Asia: China Aoyuan Property, CIFI Holdings, Lippo Karawaci, Sirtex Medical, Trung Nguyen provides an update on Lippo Karawaci (LPKR IJ) after the company reported a strong set of Q1/21 marketing sales. 

In this week’s Alpha Bites, we recommend going long the Indonesian rupiah (IDR) against the Singapore dollar (SGD) in a beta-neutral ratio. SGD NEER has appreciated close to its strongest level in a year ahead of the MAS policy meeting where we do no expect tightening yet. Meanwhile, IDR has been hit by uncertainty due to potential changes to the central bank’s mandate. However, with real rates among the highest in the world, we expect flows to stay supportive in Indonesia.

Jerome Powell is turning out to be the Un-Volcker Fed Chair. Paul Volcker wrung all the inflation expectations out of the system and convinced everyone that the Fed is an inflation hawk. By contrast, Jerome Powell is attempting a mirror image policy of convincing everyone the Fed is an inflation dove. For investors, this has several implications:

• The bond market’s inflation expectations are too high, expect lower yields, especially at the short end of the yield curve.
• Barring any pandemic hiccups, this is a V-shaped recovery. Small caps perform especially well in such environments.
• Similarly, cyclical and value exposure is expected to outperform.

We normally only give seasonality secondary consideration in our analysis. But April is the most bullish month of the year for the S&P 500 in the last 20 years and positive 80% of the time. Combined with the recent healthy internal rotation in the market, and if seasonality continues to track, the stock market should grind higher for the remainder of the month.

We conclude from our analysis that the market can continue to rise in April. A healthy internal rotation has occurred that has relieved the pressure of overbought excesses. Several potential opportunities have arisen as a result of the market rotation:

• A opportunity to lighten up on growth stocks;
• A opportunity to buy into value stocks;
• A bond market rally; and
• A possible bullish set-up for gold and gold stocks.

Sri Lanka’s public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China’s support is a poisoned chalice (with an “unequal treaty” already handing one port, Hambantota, to China’s control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. 

Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka’s external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka’s annual exports of goods & services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. 

Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch’s estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn’t cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. 

The Rajapaksa government has spoken of two approaches to meeting its external obligations — using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the “Malaysia template” (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks’ bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka’s current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China — which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment. 

• The global recovery is gaining traction and feeding through strongly into more robust export growth in Asia. The forward-looking indicators for exports remain upbeat.
• One risk to Asia’s growth is that new virus variants spark off further surges in COVID infections – but this risk is likely to be contained as vaccines are rolled out and improved vaccines are introduced.
• A second risk to Asia is an unexpectedly strong revival in global inflation. However, we do believe the chances are low, so long as inflationary expectations remain well-anchored and the slack in the global economy and major labour markets persists. There is a growing risk though of an abrupt shift in Federal Reserve policy signals: we see a robust recovery making its ultra-easy policy stance increasingly untenable. 

• High street inflation has two components: monetary inflation and cost inflation
• Gold price is sensitive to monetary inflation and it is trading well-below its ‘liquidity-based’ fair-value
• Existence of Bitcoin as a rival monetary inflation hedge has lopped-off US$158/oz from gold’s ‘fair-value’
• Gold price ‘fair value’ assuming unchanged Bitcoin is US$2527/oz
• But on same basis, Bitcoin’s liquidity-based fair-value assuming no change in gold price, is a staggering US$341250/coin

The price or yield action on US 10 year Treasury is now beginning to reveal a loss of momentum and indicate at least a consolidation if not lower yields in the short term.

A move below 1.58% would be particularly telling.

What this, and the developing price action on Oil, tells us about equities is up for interpretation – though from our stand point the bias is to remain cautious on equities as we settle into the new month and quarter.

Two weeks ago in a note titled Commodity Currencies and Their Warnings we examined their short term setups and potential declines (mainly against the USD)

This was largely on the back of a slip in the Oil price and long term levels being tested on major commodity indices. A lot of the indications in that note are still valid.

Since then, we see fresh indications that yields will likely slip too which brings some JPY crosses into focus. While there have not been any breaks as yet, key levels on AUDJPY and CADJPY should be watched closely.

In this note, we go over the reasons that Latin American currencies have started outperforming against their Asian counterparts, a trend we expect to continue with a range-bound dollar.

The attached file is a snapshot of EM currency market, which we produce daily, and where 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 the broad market.

We expect long-end rates in Mexico to perform well and show that the technical backdrop is supportive with the drop in foreign positions over the past year.

The attached file is a snapshot of EM 10y rates market, which we produce daily, and where 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 the broad market.