In this briefing:
- Snippets #25: Ride Hailing Wars, Jasmine on The Block?
- Making Your Portfolio Crisis-Proof
- Powell’s Dilemma (And Why It Matters)
- Trade War/Tech War/Forex/Hong Kong/ Xinjiang
Five interesting news flow/trend developments in corporate Thailand recently. Here goes:
- SCB-GoJek alliance. Hot on the heels of KBANK’s investment into Grab and their new e-wallet joint venture, SCB invests in Grab’s Indonesian rival GoJek with similar terms. It looks like an uphill war for the latecomers though.
- Rumors about an impending AIS-Jasmine merger. Given Jasmine’s low share price and AIS Fiber’s low market share in broadband Internet, conditions seem ripe for a deal, but we are quite cautious on this since not all rumors about Jasmine in the past actually panned out.
- Government attempts to lower train fares. The newly formed government has come up with vague campaign promises to limit skytrain (and possibly subway) fares to just Bt15/trip. If this comes in the form of subsidies, we suspect it could lead to an 8% upside for BTS.
- Policy for the poor. The government recently announced handouts worth Bt180,000 per kid, while the BOT will use debt service ratios to limit credit for the low-income groups.
- Political unrest erupts. A bombing at the country’s tallest building and sequential fire events strains the relationship between the Army-dominated government and Thaksinite opposition. Not great for overall market sentiments.
Consensus is, we are at a late stage, but not yet at the end stage of the longest economic expansion since the 1990s:
- Credit spreads are tight and corporate defaults are low; yet, fundamentals remain constructive as long as the expansion goes on, supporting credit assets.
- Stocks are rich, but multiples’ expansion may continue as long as interest rates are expected to go down.
Meanwhile, risks are looming large:
- The yield curve is flat and interest rates have reached a cycle peak – both leading indicators of recessions in the past.
- As bank lending and leveraged investing become less profitable because of curve flattening, we may be just some event away from a liquidity crisis.
Which begs the question: can a portfolio be made crisis-proof?
The message from Jerome Powell’s post-FOMC press conference was confusing. The overall economic outlook was positive, but the Fed was nevertheless cutting the Fed Funds target rate by a quarter-point. It was advertised as an “insurance” cut. Powell went on to spook the markets by stating that it was not the start of an easing cycle, but walked that partially back by holding out the possibility of more cuts.
What is going on?
Josh Barro, writing in the New York Times, read between the lines and outlined what Powell couldn’t say. The Fed was reluctant to cut rates, but it believed that monetary policy was forced to offset the negative effects of the trade war.
One of the key factors the Fed must respond to is the specific economic mess Trump creates when he upsets the global trade regime, and the size of that mess requires a qualitative assessment. Powell can’t say “We’ll cut rates in September if Trump threatens Xi Jinping seven times on Twitter, but not if he only does it five times”; he’s going to have to make a judgment call about where we stand with trade (and about how businesses and investors are responding based on their own assessments about where we stand with trade) when the time comes.
We conclude that the stock market is poised for a correction and a valuation reset. Based on recent and past history of corrective episodes, we project a S&P 500 downside target of 2598 to 2891, with an average of 2738, or a -9.3% drawdown. From a valuation perspective, this translates into a forward P/E ratio of between 14.7 and 16.4, with an average of 15.5.
Assuming the economy manages to sidestep a recession, these projections appear to be reasonable, as valuations would bottom out at between slightly below its 10-year average or at its 5-year average. It would represent a valuation reset that presents itself as a buying opportunity.
Like the Federal Reserve, we are data dependent, and all bets are off if an actual recession were to develop.
China News That Matters
- Trump threatens new tariffs in renewed trade war
- Huawei relies on home
- China’s forex secrets revealed at last?
- Two months and counting: Hong Kong stays angry
- Chinese officials claim Xinjiang detainees “released”
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.