Daily BriefsMacro

Macro: FX Dashboard: Will Asian Currencies Continue to Underperform? and more

In today’s briefing:

  • FX Dashboard: Will Asian Currencies Continue to Underperform?
  • Inflation: Will Your Anchor Hold?
  • China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity
  • China A-Shares – EM Fund Ownership Guide

FX Dashboard: Will Asian Currencies Continue to Underperform?

By Gautam Jain, PhD, CFA

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.

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.


Inflation: Will Your Anchor Hold?

By Phil Rush

  • Surveys and other indicators now suggest that pricing pressures are rising. The coming months will be a major test for inflation targeting regimes aiming to keep expectations anchored and separated from realised inflation rates.
  • At least for now, inflation anchors appear to be holding, so the market may well be surprised at how quickly the base effects which drove up headline inflation and wages in 2021 go into reverse.

China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

By Roger Xie

  • China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. Hang Seng Tech Index (HSTECH INDEX) has declined 40% from its high in February this year.
  • In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit HKEX (388 HK) as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. 
  • China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.

China A-Shares – EM Fund Ownership Guide

By Steven Holden

China A-Shares represent the 6th largest country holding among active EM investors, if taken as a separate allocation from their non A-Share peers.  Average holding weights of 4.74% puts them sandwiched between Russia and Brazil, and inline with the benchmark iShares MSCI Emerging Markets ETF weight.

Industrials and Consumer Discretionary are the most widely held sectors, as well as being the largest allocations and biggest overweights in active EM portfolios.  Financials are the key underweight holding.

The most widely held stocks are Kweichow Moutai (600519 CH) and Midea Group Co Ltd A (000333 CH), both held by 23% of the funds in our analysis.  There is a reasonable gap to the 2nd tier, with Gree Electric Appliances (000651 CH)Sany Heavy Industry (600031 CH) and CATL (A) (300750 CH) held by 14% of funds at much lower average weights.

Over the last 6-months, Sungrow Power Supply (300274 CH) saw the largest increase in the percentage of EM Funds invested (+6.3%), followed by CATL (A) (300750 CH) and LONGi Green Energy Technology (601012 CH).


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