Insights With Topics: Market Views


Yield curve steepening – which has been accelerating in recent weeks as the market contemplates a whopper of a stimulus package under a possible Biden White House – is likely to continue regardless of the winner on November 3.


Oct 14, 2020


The Chinese economy continues to normalize across the board at an impressive rate, leading to the strong likelihood of it beating the current Bloomberg consensus GDP estimate growth rate of around 2% for 2020.


Oct 6, 2020


The COVID-19 pandemic could accelerate new thinking about Emerging Markets in asset allocations.


Sep 23, 2020


An overdue technical rebound in the US Dollar – which started a week ago – may give investors an opportunity to diversify their currency holdings away from the Greenback. What is emerging could well turn out to be a counter-trend rally in a bigger, multi-year Dollar decline.


Sep 9, 2020


CSI 300 outperforms S&P 500, Chinese tech outruns Nasdaq 100. How has China’s new economy sectors including its recently launched “Nasdaq” – the STAR board (Shanghai Stock Exchange’s Science and Technology Innovation Board) – outperformed global indices despite being at the center of a trade-tech war with the United States?


Sep 1, 2020


Highest recorded yield spread between the China 10Y Government Bond and the 10Y UST. The yield spread between the China 10-year government bond over the 10-year US Treasury recently hit its widest ever recorded level.


Aug 25, 2020


In the midst of a US tech bubble, Chinese and Hong Kong equities have emerged in the sweet spot between valuations, profitability and balance sheet strength.


Aug 18, 2020


Are US indices rallying because of COVID-19? The most common narrative is that “US stocks have been rising despite the pandemic.” Perhaps a more accurate explanation is “US stocks have been rising because of the pandemic”.


Aug 12, 2020


Back to the future. Clues to US policy makers’ long game for the Dollar can be found in the long-term historical relationship between money supply growth, the inflation rate, and nominal GDP growth. Conclusion upfront: We are likely to see a long cycle of aggressive US monetary expansion ahead – to depreciate the Dollar, revive inflation, and boost nominal GDP growth.


Aug 3, 2020


The international media reckoned a front-page editorial in the China Securities Journal calling for a “healthy bull market” to create “new opportunities in crisis” was responsible for last week’s red-hot run-up in the Shanghai Composite Index. But perhaps there are less “exciting”, but more enduring, explanations for the surge in Chinese stocks.


Jul 13, 2020


Fed bond buying won’t prevent the coming wave of debt defaults. It may have been missed in the midst of the stock market’s bullishness, but debt defaults have already been surging. How does the Fed’s USD 750 billion bond buying programme measure up to the job? And what shall we watch out for?


Jul 8, 2020


Although the US Dollar Index DXY is likely to pick up a bit more in coming weeks if equities weaken, the longer-term outlook for the Greenback beyond the acute phase of COVID-19 is bleak.


Jun 23, 2020


Given the trade tensions and looming risks of de-globalisation, it is likely that China will embark on a different growth path in the aftermath of COVID, and increasingly rely on domestic demand to drive growth. This structural shift holds significant implications for EM Asia. In fact, ASEAN replaced the European Union as China’s biggest trading partner in 1Q20. And as a result of the increased tension and US protectionist measures targeting China, and pressure for MNCs to choose which one they side with under the pretext of protection against production disruptions in China, ASEAN and notably Vietnam are clear winners. But a more nuanced picture is closer to the truth. That is, the shifts in supply chains are more likely to be gradual than dramatic.


May 18, 2020


Vietnam government has started a gradual and orderly reopening since April 23rd, though the macro data was still weak as expected due to the lockdown around the world. After initially keeping the goal for 5% GDP growth this year the government revised growth target last week to a two-scenario range of 4.4%-5.2% if major trading partners can control the outbreak by end of Q3 and 3.6%-4.4% if by Q4. How are things doing in Vietnam at the moment? Is it the time to position for recovery? Here is a quick update on the various.


May 18, 2020


Yes, possibly. The different approaches taken by the US and China towards managing COVID-19 has likely set the stage for a widening of the growth differential between the two countries. Immediately, the earlier reopening of the Chinese economy means China’s GDP will still show a bit of growth this year. This compares to the controversial, tentative easing of restrictions in the US, only in May. Even if the US gradually normalizes from here, its GDP for will end 2020 with a big hole, which will take three to four years to fill. If China maintains its productivity growth, it should be able to manage a long-term average GDP growth rate of around 5.8% a year. Meanwhile, long-term US GDP growth from 2022 onwards could ease to 1.5% on lower investment/lower productivity growth. Taking into account IMF projected growth rates for 2020 and 2021, China could overtake the US in Dollar terms by 2029.


May 13, 2020


COVID-19 spread accelerating in the US, even as the number of new infections in China eases Impact will be significant on the largely consumer-driven US economy Markets are either in or on the brink of bear territory, and this is an angry bear Recession likely already in progress in Japan; possible recession in Europe; near zero GDP growth likely in the US by 2Q20 Corporate credit protection costs have started rising – more trouble ahead Seek safety in cash and US Treasury-related instruments


Mar 10, 2020


Relief rally unlikely to last Beyond COVID-19, economies could flatline or enter recession Corporate earnings could stop growing at a time of heightened valuations There is a tail risk of credit defaults on liquidity and cashflow squeeze


Mar 3, 2020


As we expected, markets did bounce on policy stimulus hopes. While rate cuts and liquidity injections will make markets feel better for a while at least, what is it likely to do for the economy?


Mar 3, 2020


The sharp pullback in developed markets could see 10% knocked off the S&P 500 The correction was due to a more complex mix of factors than just COVID-19 A rebound could emerge on monetary stimulus hopes But deeper problems of overvaluation and negligible earnings growth will remain to trouble markets later in the year


Feb 25, 2020


Recent market rallies, despite COVID-19, are neither “ill informed” nor “complacent” Markets are looking past the viral outbreak Stocks will likely return to being driven by whatever the trends were before the outbreak Developed markets are at the tail end of bull moves – they could edge a bit higher but the risks are on the downside, and that's got nothing to do with COVID-19 either Chinese equities could ironically outperform developed market stocks this year


Feb 24, 2020


Markets are forward looking and they follow the money Pandemics/Epidemics have had little discernible impacts on markets Hang Seng and S&P 500 rallied in the face of SARS 2002-2003 - they were focused on recovery from the Nasdaq Crash S&P 500 rallied despite devastating Swine Flu in 2009-2010 - it was more focused on recovery from the global financial crisis Even the Spanish Flu pandemic, which killed between 50 million and 100 million people, did little to drive the Dow Jones China's GDP will be dented in 1Q2020 but should recover later in the year


Jan 29, 2020


The deal is containment of conflict, not cessation of hostilities US demands against China’s subsidies for State-Owned Enterprises (SOE) and control over the Renminbi remain unresolved core issuesUS targets for Chinese purchases over the next two years are extremely ambitious and at risk of not being metChina has bought some time to reduce its technology and trade dependence on the USChinese policy makers will likely maintain a cautious monetary and fiscal policy stance to avoid a “Japanese Bubble” outcome


Jan 16, 2020


2019 saw expensive asset classes get more expensive, a global yield back-up replaced by a yield rally, continued outperformance of DM over EM and Growth over Value (notwithstanding a few wobbles). As we approach 2020, we review market behavior during the last 12 months, the risk and opportunities going forward and make a few observations about trends that will dictate returns.


Dec 9, 2019


Forget about Donald Trump – this is what the markets are really worried about. Forget about the Trump Impeachment. That’s a sideshow. It will get sordid but Democrats won’t get rid of Donald Trump without the support of two-thirds of the Senate. That’s unlikely to happen, given currently available information about the President’s activities. At most, the impeachment inquiry will contribute to the political point-scoring of the 2020 Presidential Election. The greater decision facing investors now is whether they are prepared to put more money down on renewed quantitative easing in Europe and eventually the United States – a phenomena that will simultaneously feed asset markets and distort resource allocation around the world.


Oct 3, 2019


A new equities downtrend is likely to have started and the coming months will be treacherous to navigate. They will be marked by violent swings, driven in turn by fear of recession and renewed monetary easing. Yet ultimately, markets are likely to see lower lows, driven by the likely failure of policy makers to nullify economic and market cycles. We are suggesting six different strategies to help investors ride out the storm.


Aug 23, 2019


The recent falls in equities were more than just about the US Federal Reserve “disappointing” the market with its rate guidance. Equities bulls got the 25 basis points cut they expected. But they wanted more – they wanted Jerome Powell to assure them there will be many more to come.And while President Donald Trump didn’t help by ratcheting up the trade war with China, you couldn’t say that was totally unexpected either. Indeed, I had been saying that the so-called “ceasefire” promised by the US President at the G20 meeting in Osaka was not even a truce. It was a temporary freezing of the conflict at existing levels, with the potential for escalation later. In short, good enough is not enough for the market. It wants perfection. Why not? US stocks have been priced for perfection. Nevertheless the global economy had been weakening while stock markets were pushing higher. Perversely, equities were moving higher because economic fundamentals had been deteriorating. This is bad news as good news, as the global economy fumbles along, with growing uncertainties heading into 2020.China just reported the slowest economic growth in 27 years for 2Q19 – at 6.2% y/y versus 6.4% for 1Q19. This is not all cyclical. There is a structural element to the story too. But whatever the story behind the data, the slowdown has impacted and will continue to affect world economic activity.Singapore – often described as the “canary in the coalmine” for world trade – turned in an annualised 3.4% GDP contraction in 2Q19 over the previous quarter. This was the worst GDP figure since 2012.Reflecting the same trade drag, the Japanese Government has downgraded its forecast GDP growth for the current fiscal year (ending March 2020) from 1.3% to only 0.9%. But the private sector is only expecting 0.5% growth, according to Japan’s Cabinet Office. This suggests a recession in Japan this year.Indeed, Japan may already be in the midst of a recession, which may be confirmed only later this year. Japanese GDP contracted 0.4% in May, according to estimates from the Japan Centre For Economic Research. The economy was dragged down by external demand which fell 120 basis points amidst falling export data. Exports fell again in June – by 6.7% y/y, following a 7.8% decline in May – making it the seventh consecutive month of falls in exports.Euro Area GDP should come in around 1.2%--1.3% for 2019. But data suggests likely deterioration in the second half of this year, with the preliminary, “flash” manufacturing Purchasing Managers Index (PMI) falling deeper into contraction with a reading of 46.4 for July from 47.6 in June. The US economy also slowed significantly in 2Q19, with growth down to 2.1% from 3.1% in the first quarter. While the economy is still growing, the market is surely aware that the Treasury spread between the 10 year and the 3-month bill rate is now negative. That is, the yield curve has inverted. The New York Federal Reserve has assigned a 32.88% probability of a recession by June next year. That was where we were around August of 2007, just before the start of the Great Recession. The market is also surely aware that over the past half century, every time that spread goes over 30%, the US has had a recession. Indeed, this is so well known in the market, it just about elicits a yawn.Global manufacturing is likely to already be in a recession. Japanese and Euro area manufacturing purchasing managers’ indices have been in contraction since February. China’s official PMI has been flitting in and out of contraction since the start of the year. US manufacturing PMI has slumped to the 50-point borderline between growth and contraction. Yet, the manufacturing output index is already in contraction. There is an argument in the market that manufacturing recessions are not that important these days because of the diminished role of manufacturing in GDP. Growing services PMIs are still holding up composite PMIs. However, there is still a broad relationship between US manufacturing and services PMIs, add or subtract some time lags and occasional breaks in the relation. Dismissing the likelihood of a prolonged manufacturing recession triggering a broader recession seems reckless.Long before the equities fall of recent days, various measures of market breadth suggested lack of broad participation in the rally.Over the past 12 months, defensive sectors led the US market rally – with utilities up 17.1% for the 12 months to late July, and consumer staples up 17.0%. Yet, cyclicals lagged, with materials barely changed. Another divergence is between small cap/mid cap versus large cap stocks – with the Russell 2000 down around 3.8% over those 12 months.The ratio of consumer discretionary to consumer staples – which Jesse Felder of the Felder Report called his “equity risk appetite” measure – had been muted even as the S&P 500 index was pushing higher. In a similar vein, the CBOE VIX had generally been trending higher from early 2018 even while the S&P 500 was pushing higher, albeit with a lot of choppiness. This is in contrast with the decline in volatility in the US equities rally from early 2016 to late 2017. And as Felder also notes, the BBB corporate bond spread had also been generally rising since 2018 – that is, diverging from the “risk-love” in equities – even while the S&P 500 was rising.Notwithstanding considerable nervousness among investors, the calculations of the bulls were that: 1) this time could be different because of likely renewed monetary stimulus; 2) even if it isn’t different, the US is still a good year away from a recession on historical indications; 3) traders can pick up some further gains and clear out before the bad stuff hits.Well, the Federal Reserve has started to cut rates. Notwithstanding what Jerome Powell says the future is, the future path of rates is, as the Fed likes to say, “data dependent”. Meanwhile, the European Central Bank will likely take its deposit rate deeper negative and renew quantitative easing.The market’s calculation was that this should push yield deprived savers back into risk assets, bearing in mind the huge recent flows into bonds, and the rising flood of negative yielding bonds. That could still happen again notwithstanding the recent selling of risk. Bloomberg Barclays Index data showed US$13.6 trillion of negative yielding bonds worldwide in late July, more than double the US$5.9 trillion in October last year.That explains the surge in gold from US$1186 per oz August last year to US$1425 late July. As rates go lower or indeed, deeper negative, gold is likely to continue higher. And of course, the point of all this is that, governments and corporations can then borrow even more than they have done over the past 10 years.If you accept the logic that debt borrows from future economic activity, we are digging bigger and bigger holes to fall into in the future. But none of that constrained punters up until a week ago because their calculations were much shorter than that.To repeat, of course the market knew the New York Fed’s recession probability calculation, and its historical significance. Yet, some thought this time would be different because of the likely resumption of monetary easing all over the world. Even if that failed to rev up the economy, there was still time to clear out of risk assets before the final denouement.There could still be time after a brief sell-off. I won’t pretend to know if this is the beginning of that “final denouement”.But I do believe that at best, this is like an accelerating game of “pass the parcel”. The players know the music will end soon. They therefore pass the parcel with increasing speed, to avoid getting caught when the music stops. Yet, the risks are rising rapidly. With the cyclically-adjusted price to earnings (CAPE) ratio for the S&P 500 reverting downwards from cyclical highs, market sentiment is fragile. The risk of an increasingly manic-depressive “Mr Market” being disappointed with Jerome Powell, Donald Trump or the economy, etc, is high.So, what do you do if you are not into rapid games of passing the parcel? Here are some options: 1) Hedge out as much beta risk as possible through market-neutral long-short funds. 2) Seek out markets with low correlations to major markets – e.g. Vietnam. 3) Ride the return of monetary debasement through gold. 4) Keep your financial “powder” dry – park your cash in a short-duration, risk-free, instrument that pays you some returns while you wait for better valuations. With the yield curve inverted, an instrument tied to the short-end is preferred over the longer end. That is, prefer the 3-month over the 10-year.Related Premia ETF tickers Vietnam: Premia MSCI Vietnam ETF – 2804 HK / 9804 HK Ultra-short Duration: Premia US Treasury Floating Rate ETF – 3077 HK / 9077 HK


Aug 5, 2019


The highly anticipated G20 Summit seemed to have concluded in a nice conciliatory note as the world powers converged in Osaka this past weekend. Or did it? While it seemed to have eliminated the “total risk-off” worst case scenario, and perhaps rebuilt confidence for China equities especially the new economy sectors, beyond the rhetoric, what we have is not really a pause in the trade war. The war continues as evident in the tariffs. A more accurate description is that both sides have agreed not to escalate the trade war while talks resume.


Jul 2, 2019


Whatever happens over coming weeks and even months in the US-China trade war, Donald Trump has irreparably broken the global trade architecture. And with it, he has also forced a realignment of the global supply chain that will likely see ASEAN emerge as a new manufacturing centre.


Jun 27, 2019


As we head toward the G20 meeting in Osaka, we take a moment to review the latest status of the trade war between the two largest economies today. Is it about containment or tariffs? How does the current situation compare to Japan in the ‘80s? Do either China or the US actually want to make a deal? What are the possible paths going forward?


Jun 12, 2019


Looking past stellar Q1 returns, we discuss positioning going forward and the need to navigate the conflicting signals offered by equity and bond markets today


Apr 10, 2019


With the CSI300 up ~25% YTD, many clients are worried that the market has fully priced in the MSCI inclusion. We review 5 flawed assumptions and explain why the rally is just the start of a long-term trend.


Mar 26, 2019