The American dilemma – recession by policy tightening or stagflation by policy avoidance. US GDP growth is running so low now that a recession is a very high probability event within 12 months as rates rise further. The drivers of that coming recession will be both inflation and higher rates: There can be many different variations of the balance between the pace of rate hikes and the pace of inflation. As US economic growth slows further in coming months, the US Federal Reserve will be tormented over the awful choice between the longer-term impact of inflation and the more immediate risk of recession. Yet in the end, if rate hikes do not crush US economic growth, inflation will eventually do the same, albeit with a greater lag. In this article, our Senior Advisor Say Boon Lim explains why bounces in US equities are likely to be “get out of jail” cards, with lower lows and lower highs the most likely outcome.

Chinese equities have been putting on breakouts above technical resistances just as Developed Markets are breaking down and US stocks have been collapsing into bear territory – and this does not seem coincidental. At opposite ends of the policy cycle. At the heart of this may be the policy tightening in the US, the looming consequent recession, and the search for alternatives to US assets – stocks, Treasuries and corporate credits. China’s recent commitments to fiscal and monetary stimulus are a welcome counterpoint to the falling monetary aggregates, surging rates and yields, and fiscal consolidation in the US. In this article, our Senior Advisor Say Boon Lim discussed the significance of onshore A-shares breaking above the technical resistance of 100-day moving average, as it has a tendency to be followed by quite substantial periods of gains.

The US Federal Reserve has signalled the imminent start of the transition from the Great Stimulus of 2020-2021 to a period with new uncertainties. The Fed’s suggested pace of tapering quantitative easing was at the high end of expectations. In this article our Senior Advisor Say Boon Lim discusses his thoughts on what to expect regarding US inflation rate and 10Y UST yield, and why we need to brace for more challenging US equity and bond markets with lower return and higher risk coming up on the horizon.

The upward momentum of US equities has slowed considerably over the past 16 months, from the explosive initial rebound in late March last year. Our sense is that we would either see small gains in coming months or indeed a correction in the face of the likely peaks in economic growth, earnings growth, and policy stimulus. In this article our Senior Advisor Say Boon Lim discusses why investors in US equities may have to lower their returns expectations for 2H21 in the face of what some are calling the “triple peaks”.

Recently we wrote about how investors can navigate “Mr. Market’s manic-depressive mood swings”, cautioning that those swings are likely to get shorter and more frequent. Indeed, Mr. Market may already be getting grumpy again. And it is not quite because things are going badly. It will more likely be because he has gotten ahead of himself in terms of expectations. In this article our Senior Advisor Say Boon Lim shared his thoughts on why a correction is due and it’s important to watch the divergences - as the high growth with low inflation narrative is wearing thin and the US economy may be losing its ability to surprise on the upside.

Navigating Mr. Market’s Mood Swings Warren Buffett – channeling his teacher Benjamin Graham – famously said: “Mr. Market is kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed.” In recent times, the market has looked a lot more like the “drunken psycho” of Warren Buffett’s characterisation than usual. In this article our Senior Advisor Say Boon Lim shares his thoughts on how we would navigate through the market swings under signals from rate movements and expectations, economic recovery, covid control and vaccination roll outs, and in the process, the divide between the “vaxed” and the “vaxed-nots”.

Amidst the high risk of holding Developed Market government bonds and credits in an environment of rising inflation and historically low spreads, a frequent lament among institutions and large family offices is “but our mandate requires us to hold bonds.”

The inflation threat is now clear and present. And while equities may tolerate rising US inflation for a while longer, the Developed Market bond markets are highly vulnerable.

China’s tough new regulations on its tech giants will result in competitive gains for consumers, level the playing field for small and medium enterprises, and generate productivity gains for the economy.

KOSPI and TWSE outperformed the S&P 500 over 6 months and 12 months. South Korea’s KOSPI and Taiwan’s TWSE indices have outperformed the S&P 500 over the past 6 months and 12 months. However, on a year-to-date basis, the S&P 500 has done better than the KOSPI but continues to lag the TWSE by a long way.

Index provider FTSE Russell will add Chinese Government Bonds (CGBs) to the FTSE World Government Bond Index (WGBI) over three years from the end of October – a move that is expected to draw billions of Dollars of new portfolio inflows. Already, there has been a sharp increase in foreign inflows into RMB bonds over the past 12 months, accelerating soon after the start of the pandemic. In this 2-part series, our Senior Advisor Say Boon Lim highlights the drivers for new demand for CGBs and the reasons to own them.

A popular media narrative for the recent correction in Chinese equities was that it was caused by tightening of financial conditions in China.

Economic policy settings between the United States and China – which have been diverging since the onset of the COVID-19 pandemic – are now on stark display as a result of the recent outcomes of the annual plenary session of the National People’s Congress.

The great divergence between economic growth in China versus the rest of the Emerging Markets post-COVID-19 has increased the likelihood of a parting of ways between China and EM in asset allocations.

US sanctions on trade, technology, and financial market access have done little to dampen foreign investor enthusiasm for China. There has been a surge in foreign investment flows, both portfolio and direct, into China over the course of 2020: All of which begs the questions “why” and “how sustainable is this”?

Little speculative manias are bubbling up to the surface in the US markets. But while financial instability is growing in the United States as a result of aggressive monetary expansion, a collapse in the equities market does not appear imminent given tame inflation and ultra-low rates and yields.

The only major economy to grow in 2020. China has turned adversity from the COVID-19 pandemic into the best growth performance in the world for 2020.

According to the United Nation Environment Programme, an inclusive green economy is an alternative to today's dominant economic model, which exacerbates inequalities, encourages waste, triggers resource scarcities, and generates widespread threats to the environment and human health.

The US Federal Reserve pumps out an endless stream of zero interest rate money to finance the Government’s deficit spending. The handouts make most American workers better off financially during the pandemic than before. Meanwhile, the stock market soars. Not bad for the worst pandemic in 100 years. What can possibly go wrong?

The red-hot performers of the past 12 months have been the broad market indices from North Asia – Kospi (44%), CSI 300 (34%), TWSE (30%)

Outperformer from first news of successful vaccines. Emerging ASEAN has been one of the best performers among major global equity indices since the start of November. And that was likely due to the region’s high economic leverage to normalisation after the distribution of COVID-19 vaccines and its high trend GDP growth rates relative to other Emerging Market economies.

Global equities look likely to push higher in 2021, despite the pandemic’s economic and human toll.

To summarize the year of 2020, the opening lines from Charles Dicken’s A Tale of twin cities sounds like an accurate description. It was certainly the best of times and the worst of times. Global equities have been doing reasonably well with developed market up by 12.0% and emerging market up by 11.7%. Fixed income managed to gain by 7.4% whilst gold price was up by 19.1%. On the other hand, real economy has been suffering from the pandemic with almost all major economies getting into recession. International Monetary Fund sees the world would contract by 4.4% in total output, the worst crisis since the 1930s Great Depression with -5.8% among advanced economies and -3.3% on developing countries.

上星期發生了一件有關全球主要貿易和地緣政治的大事, 其受媒體關注程度遠不如於美國政治和現時疫情。

So, it is official: Exit Donald Trump, enter President Joe Biden. And when the cheering and crying is done, we are likely to see that the election meant more emotionally to Americans than it does economically for the nation, or financially for the markets. The big economic and market trends are unlikely to be changed by the election.

The term "dual circulation” is one of the hot searches in China and receives great attention after President Xi first expressed this idea at a top official meeting held earlier this year. He then elaborated further that China’s economic model will be involving an internal circulation developing a substantial domestic market, and an external circulation deepening the international trade. The latest meeting of Communist Party’s Central Committee reinforced this policy will be the core component of the 14th five-year plan for the development between 2021 and 2025.

China’s 14th, Five-Year Plan is a refreshing reiteration of conventional supply side policies, at a time when Developed Markets are in the grip of very unorthodox economic policies.

The latest economic data confirms the upward trajectory of Chinese growth, putting China on track to be the only major economy to register growth for the full year 2020. And it highlights the attractiveness of China’s asset markets and supports the case for continued outperformance against other major markets.

Two separate news items last week focused our attention on the gap in understanding about the rapidly changing energy landscape in China.

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.

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彭博目前預估中國2020年平圴國內生產總值（GDP）增長率僅約2%；然而，中國經濟卻正持續全面加速正常化，提高了打破這個預測的可能性。

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

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.

在經歷今年首季度的急劇拋售後，全球股市在近幾個月表現亮眼。這個反彈看似是典型的非理性「大爆發」，因為全球主要經濟體正在或即將進入衰退期，且全球新冠肺炎疫情仍未見緩和之勢；然而，從另一方面而言，這具前瞻性的市場走勢，可能反映出投資者已走出疫情陰霾，整裝以待爭相捕捉股市V型反彈所帶來的投資機遇。中國A股市場既擁有穩健的基本面，又具相當吸引人的估值。因應全球股市下跌，投資者可考慮穩步增持中國A股。本篇文章中，我們將簡述當前市場動態與如何精準捕捉中國A股反彈的增長機會。

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?

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.

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.

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”.

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.

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.

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?

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.

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.

越南防疫佳績有目共睹，政府自4月23日以來循序漸進地鬆綁封鎖政策，儘管受全球疫情影響，其宏觀數據仍不如預期。越南政府於上週（5月15日）調整了原先設定的5%經濟增長率目標，根據不同假設情境制訂兩個方案：若主要貿易夥伴的疫情在今年第三季得到控制，則增長目標為4.4%-5.2%；若主要貿易夥伴的疫情遲至第四季才得到控制，則增長目標為3.6%-4.4%。越南目前的情況究竟為何？是時候復甦了嗎？本篇文章我們將針對多方面進行簡要更新。

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.

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

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

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?

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

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

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

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

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.

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.

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.

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

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.

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.

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?

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

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.