Daily Brief Macro: Asian Equities: What if There’s a US Recession? and more

• US recession chatter is back. During past recessions, US declined less than Asia. Within Asia, select consumer staples, telecommunication, energy outperformed. Surprisingly, so did Korea and Taiwan tech, HK industrials.
• Asian equity drawdown was driven more by valuation derating than by earnings decline. During every US recession, all Asian currencies depreciated and FIIs sold almost all Asian markets. 
• In the event of a US recession, we think Asia would outperform US. We like attractively valued domestic-focused sectors and stocks, unless a globally linked stock is egregiously undervalued.

• Washington’s apparent disengagement from its European partners is troubling Asian governments who are rethinking their own foreign policy and security strategies.
• So far, the region has not been targeted by the US administration. But their persistent trade surpluses and security arrangements expose them to potentially aggressive measures.
• Domestically, political stability has deteriorated in Thailand, the Philippines, and Indonesia, distracting governments from providing effective leadership in a riskier world.

• EM sustainable debt universe is now $1.4 trillion, making up 14% of EM hard currency bond stock and 3% of EM local currency debt stock
• Use of proceeds bonds are the largest part of the sustainable debt asset class, with green bonds dominating at 59% of the outstanding notional
• EM corporate sustainable bonds have seen significant growth, with the stock of bonds increasing by over 40 billion to 360 billion in the past year, driven by strong issuance trends and a diversifying issuer base across regions, sectors, and countries

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• Overweight German  value and quality stocks with a sector bias towards consumer staples, tech hardware and defence. Avoid industrials and stay focussed on consumer related stocks.
• New chancellor Mertz is under pressure to revitalise the economy and restore competitiveness to corporates. 
• His Agenda 2030 proposal to cut tax rates, reduce red-tape and deregulating together with a raising of the debt break would turnaround the economy. Expect Mertz to deliver on both.

• US base oils demand likely to get support from seasonal pick-up in requirements that coincides with round of plant maintenance work.
• Mostly-steady outright base oils prices so far this year contrast with higher prices in other markets.
• Steady export base oils values vs VGO so far this year contrast with slump, then surge in base oils values from H2 March 2024.

• Asia’s base oils demand could hold steady even with high heavy-grade prices and seasonal slowdown in consumption at start of Q2 2025.
• Asia’s lube demand likely to peak in month of March, before holding at lower levels over following months.
• Lube demand in Q2 2025 likely to remain well above levels in Q1 2025 even with slowdown at start of Q2 2025.

• US base oils prices hold steady versus feedstock/competing fuel prices.
• Base oils margins hold in narrow range even as wave of plant maintenance work in North America coincides with seasonal rise in demand.
• Any tightening of supply fundamentals would typically first impact spot shipments for export markets.

• Global base oils prices mostly weaken vs higher feedstock/competing fuel prices.
• Lower prices of light-grade base oils relative to heavy-neutrals leave those supplies more exposed to impact of higher feedstock costs at a time when demand faces seasonal rise.
• FOB Asia base oils prices fall vs Singapore gasoil.

• Asia’s heavy-grade base oils prices stay high versus feedstock/competing fuel prices.
• High margins point to tight supply-demand fundamentals, incentivizing refiners to maintain or raise output.
• Light-grade base oils prices stay low vs feedstock/competing fuel prices, cutting incentive for refiners to raise output.

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