Daily BriefsMacro

Macro: CrossASEAN Indonesian Strategy – Peaks and Troughs and more

In today’s briefing:

  • CrossASEAN Indonesian Strategy – Peaks and Troughs
  • China to Decelerate: Overcapacity Weakens FAI, Capital Flight Limits Monetary Ease
  • Asian Monetary Policy: Liftoff in 2022
  • Rates 10y Dashboard: Are Rates in Turkey Due for a Reprieve?

CrossASEAN Indonesian Strategy – Peaks and Troughs

By Angus Mackintosh

Indonesia has seen its new COVID-19 cases swell significantly since the Lebaran holiday. As a result of the outbreak, the government implemented Emergency PPKM measures, which have closed shopping malls, reduced mobility, and moved non-essential workers to work from home. 

The big question on everyone’s minds is when this outbreak will peak, and how long the government will extend the Emergency PPKM measures to control mobility.  The longer the measures are kept in place, the greater the impact on the overall economy, although we still see far less damage to the economy than in 2Q2020.

Obviously, it may be too soon to confirm we are past the peak but these numbers look hopeful but there are some positive signals and the government has stepped up the vaccination program significantly.

In a testing survey in Jakarta conducted at the end of March, it was found that nearly half of those tested already had antibodies to the COVID-19 virus, pointing toward a significant underestimate of the true numbers but it also means we may be closer to reaching herd immunity.

The Indonesian government has already downgraded its GDP forecast for 2021 to +3.7%-4.5% versus its previous forecast of +4.5%-5.3% GDP growth to reflect the recent new wave of COVID-19 cases.

If the PKN measures are relaxed by mid-August then it is quite possible that Indonesia could achieve +5% GDP growth in 3Q and 4Q2021, assuming the vaccination rollout continues, bringing the country closer to herd immunity.

The JCI has effectively moved sideways for the past month and we continue to recommend buying blue-chip recovery plays on this market weakness with a positive view on banks, telcos, selective consumer stocks, and healthcare. More detail on our stock picks below the fold. 

China to Decelerate: Overcapacity Weakens FAI, Capital Flight Limits Monetary Ease

By Prasenjit K. Basu

FAI (fixed asset investment) declined in 2Q 2021, a sensible response to China’s massive industrial overcapacity. Net exports and consumption were the key drivers of 7.9% YoY real GDP growth in 2Q 2021, which took 1H 2021 growth to 12.7% YoY. TSF (total social financing) did decelerate in January-May 2021, but began re-accelerating in June 2021 as the PBOC turned more dovish, following through with an RRR cut (effective 15 July 2021). 

With China’s monetary conditions easing, at a time when US monetary policy is gradually hardening, the RMB will depreciate further, continuing the trend depreciation that began at the start of June 2021. Even during the period of a strengthening RMB, China was experiencing large capital flight: in 1H 2021, China’s foreign reserves declined (by a marginal US$3 billion) even as the trade surplus remained elevated at US$255 billion. Despite the persistence of capital controls, China’s capital flight is likely to accelerate in the rest of 2021 as monetary policy eases. 

With limited support from easier monetary policy, FAI will continue to decline marginally, and private consumption will decelerate (as the underlying social causes of high savings remain). Net exports will be less helpful, as the impact of de-globalization and reshoring of manufacturing reduces the demand for China’s exports. So real GDP will likely decelerate to 6.7% YoY in 3Q 2021, and to 5% YoY in 4Q 2021. Overcapacity issues will begin to exert a significant drag on bank asset quality by 4Q 2021. We would recommend being mildly underweight China equities, as political risk factors begin rising further.  

Asian Monetary Policy: Liftoff in 2022

By Manu Bhaskaran

  • There are many reasons why emerging Asian central banks might be expected to tighten policy – fear of inflation, worries over financial imbalances and the need to protect against taper tantrums once the Federal Reserve starts to tighten policy.
  • However, we do not see the monetary authorities rushing to raise rates in Southeast Asia, given how the surge in COVID infections has pummelled growth prospects
  • In India, the RBI is likely to first tighten by unwinding its liquidity measures in 4Q21 before raising rates in 1Q22.
  • Bank Indonesia is likely to defer rate hikes to as late as possible, probably 3Q22.
  • Similarly, Bank Negara Malaysia is likely to raise rates only in the second half of 2022.
  • Singapore is likely to tighten policy in April 2022.
  • We see the Bank of Thailand maintaining rates at current levels through 2023.
  • The Philippine central bank will probably be the last to raise rates, likely in 4Q22.

Rates 10y Dashboard: Are Rates in Turkey Due for a Reprieve?

By Gautam Jain, PhD, CFA

Long-end rates in EM have not kept up with the rally in US rates, with the notable exception of Turkey. The rally in Turkish rates has been impressive especially when factoring in the recent spike in inflation. Nevertheless, Turkish rates should continue to outperform as we expect the central bank to ease later this year and the macroeconomic and technical backdrops have improved. However, any position in Turkey is inherently risky because of political meddling in monetary policymaking.

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.

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