Daily BriefsMacro

Macro: Is Trouble Brewing for Xi Jinping Under the Calm Surface of Chinese Politics? and more

In today’s briefing:

  • Is Trouble Brewing for Xi Jinping Under the Calm Surface of Chinese Politics?
  • China: Brace For Upside Surprises To Growth in 2021
  • India: Recovery Looks Increasingly Tenuous But Modi Will Survive
  • FX Dashboard: EM Currencies on Aggregate Have Mirrored the Dollar This Year
  • India: 2nd Covid Wave Will Delay (Not Halt) The Strength of the Economic Rebound
  • Rates 10y Dashboard: EM Long-End Rates Continue to Maintain Risk Premium Cushion
  • Q1 Earnings Monitor: Reopening Giddiness
  • Bonds – Clear Levels to Watch
  • Sweden: Riksbank Cautiously Optimistic

Is Trouble Brewing for Xi Jinping Under the Calm Surface of Chinese Politics?

By Nicholas Chia

  • Much is happening in Chinese politics in the run-up to the 20th party congress in November 2022. Former Premier Wen’s essay indirectly criticizing President Xi Jinping is just the most prominent example of potential disaffection with Xi.
  • While Xi has crushed these recent expressions of dissent and is likely to continue firming his grip on power in the near term, his position is not so indomitable as it might seem.
  • Xi has built a power base but there are questions over how loyal his acolytes really are. He has made many enemies as well and has reversed the reforms which had helped China’s political system offset some of the downsides of authoritarianism. Any serious misjudgement in either the domestic sphere or in foreign policy would crystallise these weaknesses in Xi’s position.

China: Brace For Upside Surprises To Growth in 2021

By Manu Bhaskaran

  • There is considerable debate over the outlook for the Chinese economy given recent adverse news on housing market regulation and fears of policy tightening. The authorities have also ramped up antitrust probes into the practices of major tech companies such as Alibaba and Tencent, further impacting sentiment.
  • Our analysis suggests that these fears are likely overdone. We now expect full-year GDP growth to print 8.4%, up from 8.0% previously.
  • Two main factors underpin our revised forecasts: (1) a bigger expected contribution from exports and industrial production followed by (2) a less accentuated slowdown in the interest-rate sensitive sectors – more than offsetting persistent weakness in consumer spending. 
  • The balance of risks to the outlook are in our view tilted to the upside, should private sector investment show signs of a turnaround by year-end.

India: Recovery Looks Increasingly Tenuous But Modi Will Survive

By Manu Bhaskaran

  • India is wilting as the pandemic turns into a tragedy. There is more limited policy space for the government and the RBI to respond to the second wave of infections – the RBI’s foray into QE comes at a tricky time when yields in the US are on the ascendancy.
  • Given the limited options for policy support to offset the damage, the economic recovery will be set back for several months. 
  • Premier Modi’s popularity will be hurt but he has shown a capacity to overcome political adversity. Neither is India’s crisis likely to affect the global economy given its relatively small footprint.

FX Dashboard: EM Currencies on Aggregate Have Mirrored the Dollar This Year

By Gautam Jain, PhD, CFA

In this note, we look at the strong negative correlation between EM currencies and the dollar, and its implication for trading opportunities within EM.

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.


India: 2nd Covid Wave Will Delay (Not Halt) The Strength of the Economic Rebound

By Prasenjit K. Basu

We recommend staying underweight India until the 7-day moving average of Covid cases turns down (likely no sooner than mid-May). There would then be an excellent buying opportunity: we have lowered our forecast of real GDP growth in FY2020/21 to 12% (from 13.5%), but the vaccine roll-out (with 60% of all those above 45 likely to have been vaccinated by the end of this month) should wrestle the new Covid case numbers down from peaks by end-May. A current account surplus, liquid banks, and a reformed, privatization-driven policy framework should ensure that the rebound is delayed but not halted by this virulent Second Covid wave.  

When the IMF was forecasting 8.8% real GDP growth for FY2021/22 and the consensus was 8-9%, we raised our forecast to 12.5% in December 2020 — and to 13.5% at the beginning of February 2021 (post the reform-oriented Budget). Now that the IMF has caught up with our end-2020 forecast, we are lowering ours to 12%, acknowledging the huge uncertainties induced by this 2nd Covid wave. Given the low base in April-May 2020, YoY growth rates for production will barely budge, but private consumption will likely weaken during these months as retailers in key hotspots (including Delhi, Mumbai, Bengaluru) will stay shut during 2-week curfews/lockdowns. The current account surplus of 1.5% of GDP in 2021, and loan-deposit ratio of 72%, imply there is ample external and domestic liquidity to spur a strong economic recovery once lockdowns are lifted. 

At 145 million vaccinations, 17.7% of the adult population (18 & over) or 57% of all those eligible (45 & over) have had at least one vaccine dose. This is far from achieving herd immunity, but faster vaccinations from June should allow over a billion people to be vaccinated by end-2021. Lockdowns and curfews are proving effective in Maharashtra and Delhi (the worst hotspots), but will now roll through several other states. But the base effects will help the YoY growth rates in April-May. In March 2020 there was only a week’s disruption, but exports were up 60% YoY (imports 53% YoY) in March 2021, steel output up a world-leading 23.9% YoY and car production up 79% YoY in March 2021. April and May 2020 were almost wiped out economically, so the YoY growth rates will still be spectacular in Apr-May 2021, given the strong underlying momentum.

The disruptions to consumption (especially) and production should be made up in the next few months. The low corporate tax rate, reformed labour market and production-linked incentives should induce a powerful surge in investment, with privatization and asset-monetization providing an extra fillip as they are implemented during the course of the year. We do not expect the liquid banking system (L-D ratio 72%) to contribute to the rebound until early-2022, with early-recapitalization of state-owned banks helping a bit, but privatizations providing a bigger spur.   


Rates 10y Dashboard: EM Long-End Rates Continue to Maintain Risk Premium Cushion

By Gautam Jain, PhD, CFA

In this note, we discuss why the spread of EM rates to the US has widened even as the volatility of US rates has come off the peak when typically the reverse happens.

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.


Q1 Earnings Monitor: Reopening Giddiness

By Cam Hui

Q1 earnings season is well underway. 25% of the S&P 500 has reported and a number of large-cap bellwether technology companies will report this week. So far, the EPS and sales beat rates are above their historical averages and forward 12-month EPS estimates continue to surge.

However, risks are rising as the sunny bottom-up view is coming into conflict with a more cautious top-down outlook. The consensus GDP growth rate is expected to peak in Q2 and decelerate into 2022. On the other hand, an analysis of bottom-up S&P 500 quarterly EPS shows sequential EPS growth peaking in Q3, with no signs of visible deceleration except for Q1 2022.

Are company analysts too bullish or are top-down strategists too bearish?


Bonds – Clear Levels to Watch

By Shyam Devani

After a period of correction and consolidation over the past few week, it is becoming clearer that a base could be forming on US 30 year yield.

Key downside pivots at 2.20% were, and remain, important to watch. So far the supports are holding the market. Focus however is now shifting to the key level above at 2.32%, especially as many industrial metals have rallied.


Sweden: Riksbank Cautiously Optimistic

By Phil Rush

  • The economy is recovering faster than assumed in February, but the Riksbank deems the risks from tightening policy too soon as greater than keeping them looser for longer. 
  • The key risks to their base case relate to how the pandemic plays out from here and any further rise in global bond yields.

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