Download Stagflation in Asia

Asianomics outlook:
Stagflation in Asia?
Dr Jim Walker
October 2011
Asianomics Global Investment Strategy
(2nd Half 2011)
Recommendation
Short Spanish government bonds and equities
Short Aussie dollar and equities
Short the euro Short/underweight the Bovespa
Long 3-­‐month Treasury
Long gold Short copper
2
13-­‐May-­‐11
30-­‐Sep-­‐11
Asianomics Performance
10-­‐year bond at 5.21%
10-­‐year bond at 5.14%
+0.6% (including yield)
IBEX 35 at 10488
IBEX 35 at 8547
+18.5%
US$1.0629/AUD1
US$0.9662/AUD1
+10.7%
S&P/ASX 200 at 4696
S&P/ASX 200 at 4009
+14.6%
EUR 1.419/US$1
EUR 1.339/US$1
+5.7%
Bovespa at 64003
Bovespa at 52324
+18.2%
3-­‐month T bill at 12.43%
3-­‐month T bill at 11.18%
+ve (no price data available)
GOLDS at US$1505/oz GOLDS at US$1624/oz HGA at US$398/lb
HGA at US$315/lb
Source: Asianomics Limited
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
+7.9% +20.9%
America and Eurozone round-up
3
—  Efforts to shore up the eurozone periphery will fail. Greece,
Ireland, Portugal, Spain and Italy are all in deep trouble
—  The US labour market is looking more like a recession
case than a year-three recovery patient
—  The yield curve, the best indicator of future US growth
prospects, looks in good shape but is badly distorted by
Fed policy. The Trahan Curve looks terrible
—  Monetary policy signals are confusing the private sector
and leading to stagnating capex
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
This is a Year-Three recovery?
4
Without job growth the US will double-dip
160000
(Thous)
5
Ue = 11.7%
4
Civilian Employment
155000
(% YoY)
CLF with normal growth
3
Civilian Labour Force
2
150000
Official Ue = 9 .1%
1
145000
0
-1
140000
US Real Average Hourly Earning
-2
135000
Source: Haver Analytics
Source: Haver Analytics
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Sep-11
Jan-11
May-10
Sep-09
Jan-09
May-08
Sep-07
Jan-07
May-06
Sep-05
Jan-05
May-04
Sep-03
Jan-03
May-02
Sep-01
Jan-01
-3
The US yield curve revisited
5
No official recession signal but the Trahan Curve says otherwise
1.03
1.05
(Ratio)
(Ratio)
1.04
1.02
1.03
1.02
1.01
1.01
1.00
1.00
0.99
0.99
5Yr - 1Yr Treasury Ratio
0.98
0.98
5Yr - 1Yr Treasury Ratio with inflation proxy
Source: Asianomics Limited
Jan-61
Jan-63
Jan-65
Jan-67
Jan-69
Jan-71
Jan-73
Jan-75
Jan-77
Jan-79
Jan-81
Jan-83
Jan-85
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-61
Jan-63
Jan-65
Jan-67
Jan-69
Jan-71
Jan-73
Jan-75
Jan-77
Jan-79
Jan-81
Jan-83
Jan-85
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
0.97
Source: Asianomics Limited
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
EU and US profit margins peaked?
6
Investment not responding to profits – an unnatural tale
16.0
(% of GDP)
(% of GDP)
41.5
13
(%)
US Pretax Corporate Profit as a % of GDP
12
15.5
41.0
US Capital Equipment & Software as a % of GDP
11
15.0
40.5
14.5
40.0
10
9
8
39.5
EA 16: Non-residential Investment
7
Source: Haver Analytics
Source: Haver Analytics
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Q1-11
Q4-08
Q3-06
Q2-04
Q1-02
Q4-99
Q3-97
Q2-95
Q1-93
Q4-90
Q3-88
Q2-86
Q1-84
Q4-81
6
Q3-79
Q1-11
Q1-10
Q1-09
Q1-08
Q1-07
Q1-06
Q1-05
Q1-04
Q1-03
Q1-02
Q1-01
Q1-00
39.0
Q2-77
EA 16: Gross Operating Surplus [RHS]
13.5
Q1-75
14.0
Asianomics Asian investment strategy
(2nd Half 2011)
7
Country China
Agg. PE Forensic Asia
Score
13.3
5.7
Hong Kong
Recommendations
Underweight
(esp. consumer plays)
Upgrade to Overweight
(11 Oct 11)
Upgrade to Neutral
(6 Sep 11)
Neutral ( underweight commodity counters)
Strong underweight
13-­‐May-­‐11
30-­‐Sep-­‐11
CSI 300 at 3098
2581
-­‐16.7%
17592
-­‐23.4%
16453
-­‐1.3%
3549
-­‐7.1%
761
-­‐9.1%
1769
-­‐5.9%
1387
-­‐9.8%
4000
-­‐6.8%
2675
-­‐14.8%
7225
-­‐6.7%
916
-­‐15.8%
-­‐12.9%
-­‐4.6%
7.8
5.3
India
14.4
5.7
Indonesia
14.8
4.3
Japan
16.0
4.4
Korea
11.6
5.0
Malaysia
14.5
4.2
Downgrade to Neutral
(6 Sep 11)
Overweight
Philippines
13.3
5.1
Overweight
PSE at 4292
7.3
5.4
Overweight
STI at 3139
Taiwan
13.4
4.5
Thailand
10.6
4.5
Downgrade to Strong Underweight ( 6 Sep 11)
Overweight
Singapore
Asian average
(Unweighted)
HSI at 22972
Sensex at 16677
(6 Sep 11)
JCSE at 3822
Topix at 837
Kospi at 1880
(6 Sep 11)
KLCI at 1538
Taiex at 7741
(6 Sep 11)
SET at 1088
13 May -­‐ 30 Sep
6 Sep -­‐ 30 Sep Source: Asianomics Limited
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Asianomics Performance
Outperform
Underperform
Outperform
Outperform
Underperform
Outperform
Outperform
Outperform
Underperform
Outperform
Underperform
Asian round-up
8
—  Asian PMIs are signaling that expansion is losing
momentum
—  Industrial production across the region has turned
down decisively
—  Inflation of money and credit is still an issue
—  Asian interest rates have more upside
—  Watch out for weakening growth in India and a fiscal
blowout
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Asian PMIs and industrial production indicate
slower growth ahead
9
China, Taiwan and Singapore manufacturing PMIs contracting as is Thai IP
% YoY
Sep
Aug
July
June
Japan manufacturing
49.3
51.9
52.1
50.7
China Official
manufacturing
51.6
50.9
50.7
50.9
35
25
HSBC China
manufacturing
49.9
49.9
49.3
50.1
HSBC China
services
53.0
50.6
53.5
57.0
India manufacturing
49.8
52.6
53.6
55.3
55
(% YoY)
45
Thailand IP
Korea IP
Taiwan IP
Malaysia IP
15
5
-5
Taiwan
manufacturing
44.5
45.2
46.1
49.9
Korea manufacturing
47.5
49.7
51.3
51.1
-25
Hong Kong overall
45.9
47.8
51.4
50.3
-35
Singapore overall
48.3
49.4
49.3
50.4
Source: Bloomberg & Haver Analytics
Source: Haver Analytics
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
-15
It is not such good news on the inflation
front
10
CPIs have barely peaked and real inflation is picking up
10
21
(% YoY)
8
18
6
15
4
12
2
9
0
6
Thailand CPI
-2
Malaysia Credit
Korea Credit
Thailand Credit
(% YoY)
3
Korea CPI
Taiwan CPI
-4
Taiwan Credit
0
Malaysia CPI
-6
Source: Haver Analytics
Source: Haver Analytics
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
-3
Is stagflation a possibility?
11
Easy money and policy minefield – no safe bets
Country
Bank deposit rate
Consumer price
inflation (% YoY)
Real deposit rate
Interest rate outlook
Exchange rate
outlook
Vietnam
14.0
22.6
(8.6)
Up ++
Deval
Hong Kong
0.0
5.8
(5.8)
Stable
Stable
Singapore
0.2
5.7
(5.5)
Stable
App
United States
0.4
3.8
(3.4)
Stable
_
China
3.5
6.3
(2.8)
Up +++
Slow App
India
8.5
10.9
(2.4)
Up
Dep
Thailand
2.1
4.0
(1.9)
Up
Stable
Philippines
3.1
4.8
(1.7)
Up
Slow App
Korea
3.6
4.3
(0.7)
Up
App
Taiwan
0.9
1.3
(0.4)
Up
Stable
Malaysia
3.0
3.3
(0.3)
Stable
Slow App
Japan
0.0
0.2
(0.2)
Stable
App
Indonesia
6.6
4.6
2.0
Up +++
Dep
Notes: India average deposit rate; China 1-year deposit rate; Hong Kong savings deposit rate; Indonesia 3-month average deposit rate; Korea 91-day deposit rate; Malaysia 3-month CD; Philippines
short-term deposit; Singapore 3-month deposit rate; Taiwan 3-month deposit rate; Thailand 3-month time deposit rate; US 3-month CD; Japan ordinary savings rate & Vietnam 3-month deposit rate.
Source: Haver Analytics, Bloomberg & Asianomics Limited
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
The Fail of China
12
—  China’s growth model is centred on state-owned enterprises and
‘authoritarian capitalism’
—  In the last 20 years Beijing has succeeded in feeding the elites in
Chinese society. Inequality is now reaching extremes
—  Its response to the Global Financial Crisis has made rebalancing the
economy even more difficult. Policy now backed into a corner
—  Capital mispricing is at the heart of poor returns on investment and
the malinvested nature of the economy
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
China’s monetary explosion (real inflation)
13
Work to do: 250-450 basis points of rate rises in 2011
14000
6
(US$ bn)
12000
(%)
4
10000
2
8000
0
6000
-2
4000
US M2
-4
China M2
2000
0
China 1-Yr Real Deposit Rate
Source: Haver Analytics
Source: Haver Analytics
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Sep-11
Jan-11
May-10
Sep-09
Jan-09
May-08
Sep-07
Jan-07
May-06
Sep-05
Jan-05
May-04
Sep-03
Jan-03
May-02
Sep-01
Jan-01
May-00
Sep-99
Jan-99
Sep-11
Jul-10
Feb-11
Dec-09
May-09
Oct-08
Mar-08
Aug-07
Jan-07
Jun-06
Apr-05
Nov-05
Sep-04
Feb-04
Jul-03
Dec-02
May-02
Oct-01
Mar-01
Jan-00
Aug-00
-6
International reserve use is constrained
14
Too many liabilities, reliant on closed capital account
12500
3000
(US$ bn)
(US$ bn)
11250
2500
China M2 in US$
10000
China Foreign Reserves
China Foreign Reserves
8750
2000
Reserves less External Debt
7500
'Free' Reserves
1500
6250
5000
1000
3750
500
2500
1250
0
Source: Haver Analytics
Sep-11
Feb-11
Jul-10
Dec-09
May-09
Oct-08
Mar-08
Jan-07
Aug-07
Jun-06
Nov-05
Apr-05
Sep-04
Feb-04
Jul-03
Dec-02
Oct-01
May-02
Mar-01
Aug-00
Jan-00
0
-500
00
01
02
03
04
05
Source: Haver Analytics
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
06
07
08
09
10
Has the inflation even been addressed?
15
Alternative credit measures suggest no easing any time soon
13.9
44.1
10.8
34.3
15.0
47.6
2010
12.1
35.0
8.8
25.5
16.5
47.8
130
125
120
115
20
Residuals
2009
China Bank Credit Relative as a % of GDP, Jan 00 - Jun 11
110
105
10
100
0
95
-10
-20
2011*
7.2
17.9
8.1
20.2
18.0
44.9
00
01
02
03
04
Residual
Source: Haver Analytics & Fitch Ratings
05
06
Actual
Source: Asianomics Limited
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
07
08
09
Fitted
10
Private Credit as a % of GDP
Year Additional % of previous Additional % of Additional Fitch-­‐ % of M2 (Rmb trn) year’s GDP official credit previous adjusted total previous (Rmb trn) year’s GDP societal funding year’s GDP
(Rmb trn)
2008
7.3
27.5
4.0 15.0
6.5 24.5
India’s State of Confusion
16
—  Inflation signals are not good despite significant RBI tightening.
Growth signals now mixed too
—  But fiscal policy is the real issue. The government is pursuing
entitlement programmes rather than a growth strategy
—  We expect real GDP growth to dip below 7% in fiscal year 2012.
Central government budget deficit will rise from 4.8% to 6%+
—  Ratings agencies likely to put India on watch list. Market is richly
valued given the growth and policy outlook
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
The RBI’s quandary – inflation or growth?
17
Manufacturing WPI concerning, GDP growth softening
12
(% YoY)
20
(% YoY)
Wholesale Price: All Items
10
Wholesale Price:
Manufactured Products
8
15
10
6
4
5
India Real GDP
2
India Real GFCF
0
Source: Haver Analytics
Source: Haver Analytics
Copyright © Asianomics Limited
IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of
use are available on our website at www.asianom.com
Q2-11
Q3-10
Q4-09
Q1-09
Q2-08
Q3-07
Q4-06
Q1-06
Q2-05
Q3-04
Q4-03
Q1-03
Q2-02
Q3-01
-5
Q4-00
Sep-11
Jan-11
May-10
Sep-09
Jan-09
May-08
Sep-07
Jan-07
May-06
Sep-05
Jan-05
May-04
Sep-03
Jan-03
May-02
Sep-01
Jan-01
-2
Q1-00
0