India

In this briefing:

1. Axis Bank Board’s Motto: Trust Only in Strangers
2. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL
3. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way
4. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success
5. Indian Election Antics

1. Axis Bank Board’s Motto: Trust Only in Strangers

The Reserve Bank of India’s (RBI) approval of the selection of Amitabh Chaudhry, the then HDFC Standard Life Insurance Chief Executive Officer (CEO), as the Axis Bank CEO on August 8, 2018, and his taking charge on January 1, 2019, were celebrated by the market. Analysts and the media were also favourably inclined towards his lateral new hires in the senior management, all of whom had spent many years in HDFC Bank. Unfortunately, these developments actually revealed a strategic fault line in the organisation. The Axis Bank board in its quarter century of existence has not only failed to groom internal candidates for the top-most job, but also recently has been unable to nurture or to trust internal candidates being appointed as executive directors and other critical posts (exception of Chief Risk Officer) in senior management. Recently, it has announced a voluntary retirement scheme which is virtually devoid of benefits to the retiring personnel; over 50 senior management personnel are being eased out at the end of April 2019 with little more than Mediclaim and unexercised stock options to show for their years of service. Such a step is likely to send demoralising tremors down the entire organisation. When the board of Axis Bank believes that only outsiders can be trusted in critical posts in senior management, and these posts are denied to the in-house cadre, how can the bank achieve the present CEO’s performance objectives of a sustainable ROE of 18% and doubling the market capitalisation?  

2. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL

• Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
• Firstly, we analyse what a NPL is.
• We then evaluate provisioning changes across Asia. We rank countries.
• We further analyse specific underlying NPL recognition issues in China.
• We then rank a sample of regional banks and countries by NPL recognition.
• Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
• Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.

3. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way

In our latest Asian Tower Trends report, Chris Hoare looks at the listed telecom tower industry across the region. During 4Q18, we became more optimistic on the Asian tower space. 

• China: Last December, we upgraded what is by far the largest towerco globally, China Tower (788 HK), after it became clear the story was much better than disclosed at the time of the IPO (still a mystery as to why this happened),
• The Indian tower business has been buffeted by rapid industry consolidation but we think it is now near a bottom, and recently raised Bharti Infratel (BHIN IN) to Neutral, and
• Growth is improving in Indonesia with increased investment ex Java from the smaller operators. Protelindo (TOWR IJ) our preferred name, but Tower Bersama (TBIG IJ) has lagged badly recently and may be due some catch up. 

With the 5G investment cycle a key theme for coming years, we are now more constructive on the telecom tower space in general. 

4. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

This second part of the series explains how China chose commodity semiconductors (DRAM and NAND flash memory chips) as the best technology to pursue.

5. Indian Election Antics

India is in an election year. Sensibility has gone out of the window, replaced by fantastical promises and irresponsible spending. If the Modi government is desperate hold on to power, the Congress Party is equally determine to wrest power away. And then there is the RBI, which working hand in glove with the government, cut policy rates again this month. We hope that cooler heads and more importantly objectivity will prevail once the elections are over, but further interest rate cuts cannot be ruled out at this stage. It follows that the rupee is vulnerable. We reiterate our underweight Indian equities call.

In this briefing:

1. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing
2. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?
3. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

1. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing

The weak January industrial production data and benign inflation data for February reinforce the belief that the economy has hit a soft patch. With the government in election mode, public spending is likely to slowdown. Monetary policy is thus likely to turn accommodative to support growth given that inflation is likely to remain well inside the MPC’s target of 4%. Indeed odds are increasing for continuation of monetary easing beyond April, especially if the forecast is for a normal monsoon.

2. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?

For the beleaguered non-bank finance company (NBFC) sector, banks are the single largest component of external funding. This source peaked at the end of September 2018, in the aftermath of the default of IL&FS, a private unlisted infrastructure developer and financer.  However, in the beginning of the last quarter of the financial year ended March 31, 2019 (4QFY2019), when bank credit in the economy normally peaks, bank credit to NBFCs (as on January 18, 2019) has declined as compared with the previous month. The sharp spurt in bank credit at end-September probably indicates that NBFCs utilised their sanctioned limits with the banks, and top-rated NBFCs took on excessive bank loans to tide over their asset-liability mis-matches in that period. Subsequently, by early January 2019, banks may not have renewed or rolled over the NBFC bank limits, which led to a drawing down of bank credit. It therefore appears that bank finance will continue to remain tight for NBFCs in the last quarter of FY2019, as they sell their assets to banks and restrict asset growth in order to remain liquid.

3. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).

In this briefing:

1. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL
2. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way
3. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success
4. Indian Election Antics
5. GEM Active Funds:  Big Q1 Outperformance

1. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL

• Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
• Firstly, we analyse what a NPL is.
• We then evaluate provisioning changes across Asia. We rank countries.
• We further analyse specific underlying NPL recognition issues in China.
• We then rank a sample of regional banks and countries by NPL recognition.
• Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
• Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.

2. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way

In our latest Asian Tower Trends report, Chris Hoare looks at the listed telecom tower industry across the region. During 4Q18, we became more optimistic on the Asian tower space. 

• China: Last December, we upgraded what is by far the largest towerco globally, China Tower (788 HK), after it became clear the story was much better than disclosed at the time of the IPO (still a mystery as to why this happened),
• The Indian tower business has been buffeted by rapid industry consolidation but we think it is now near a bottom, and recently raised Bharti Infratel (BHIN IN) to Neutral, and
• Growth is improving in Indonesia with increased investment ex Java from the smaller operators. Protelindo (TOWR IJ) our preferred name, but Tower Bersama (TBIG IJ) has lagged badly recently and may be due some catch up. 

With the 5G investment cycle a key theme for coming years, we are now more constructive on the telecom tower space in general. 

3. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

This second part of the series explains how China chose commodity semiconductors (DRAM and NAND flash memory chips) as the best technology to pursue.

4. Indian Election Antics

India is in an election year. Sensibility has gone out of the window, replaced by fantastical promises and irresponsible spending. If the Modi government is desperate hold on to power, the Congress Party is equally determine to wrest power away. And then there is the RBI, which working hand in glove with the government, cut policy rates again this month. We hope that cooler heads and more importantly objectivity will prevail once the elections are over, but further interest rate cuts cannot be ruled out at this stage. It follows that the rupee is vulnerable. We reiterate our underweight Indian equities call.

5. GEM Active Funds:  Big Q1 Outperformance

Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average alpha above the IShares MSCI Emerging Markets Indx (ETF) (EEM US) of 1.3%.

In this report, we look at the performance of 180 global emerging market strategies over the first quarter of 2019 and analyse the countries, sectors and stocks that helped generate that outperformance.  We also take a look at the longer-dated outperformance of active GEM funds.

In this briefing:

1. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?
2. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

1. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?

For the beleaguered non-bank finance company (NBFC) sector, banks are the single largest component of external funding. This source peaked at the end of September 2018, in the aftermath of the default of IL&FS, a private unlisted infrastructure developer and financer.  However, in the beginning of the last quarter of the financial year ended March 31, 2019 (4QFY2019), when bank credit in the economy normally peaks, bank credit to NBFCs (as on January 18, 2019) has declined as compared with the previous month. The sharp spurt in bank credit at end-September probably indicates that NBFCs utilised their sanctioned limits with the banks, and top-rated NBFCs took on excessive bank loans to tide over their asset-liability mis-matches in that period. Subsequently, by early January 2019, banks may not have renewed or rolled over the NBFC bank limits, which led to a drawing down of bank credit. It therefore appears that bank finance will continue to remain tight for NBFCs in the last quarter of FY2019, as they sell their assets to banks and restrict asset growth in order to remain liquid.

2. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).

In this briefing:

1. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way
2. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success
3. Indian Election Antics
4. GEM Active Funds:  Big Q1 Outperformance
5. Last Week in GER Research: Huya, Bilibili and Qutoutiao

1. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way

In our latest Asian Tower Trends report, Chris Hoare looks at the listed telecom tower industry across the region. During 4Q18, we became more optimistic on the Asian tower space. 

• China: Last December, we upgraded what is by far the largest towerco globally, China Tower (788 HK), after it became clear the story was much better than disclosed at the time of the IPO (still a mystery as to why this happened),
• The Indian tower business has been buffeted by rapid industry consolidation but we think it is now near a bottom, and recently raised Bharti Infratel (BHIN IN) to Neutral, and
• Growth is improving in Indonesia with increased investment ex Java from the smaller operators. Protelindo (TOWR IJ) our preferred name, but Tower Bersama (TBIG IJ) has lagged badly recently and may be due some catch up. 

With the 5G investment cycle a key theme for coming years, we are now more constructive on the telecom tower space in general. 

2. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

This second part of the series explains how China chose commodity semiconductors (DRAM and NAND flash memory chips) as the best technology to pursue.

3. Indian Election Antics

India is in an election year. Sensibility has gone out of the window, replaced by fantastical promises and irresponsible spending. If the Modi government is desperate hold on to power, the Congress Party is equally determine to wrest power away. And then there is the RBI, which working hand in glove with the government, cut policy rates again this month. We hope that cooler heads and more importantly objectivity will prevail once the elections are over, but further interest rate cuts cannot be ruled out at this stage. It follows that the rupee is vulnerable. We reiterate our underweight Indian equities call.

4. GEM Active Funds:  Big Q1 Outperformance

Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average alpha above the IShares MSCI Emerging Markets Indx (ETF) (EEM US) of 1.3%.

In this report, we look at the performance of 180 global emerging market strategies over the first quarter of 2019 and analyse the countries, sectors and stocks that helped generate that outperformance.  We also take a look at the longer-dated outperformance of active GEM funds.

5. Last Week in GER Research: Huya, Bilibili and Qutoutiao

Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below 

In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below. 

Best of luck for the new week – Arun, Venkat and Rickin

In this briefing:

1. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?
2. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral
3. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

1. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?

For the beleaguered non-bank finance company (NBFC) sector, banks are the single largest component of external funding. This source peaked at the end of September 2018, in the aftermath of the default of IL&FS, a private unlisted infrastructure developer and financer.  However, in the beginning of the last quarter of the financial year ended March 31, 2019 (4QFY2019), when bank credit in the economy normally peaks, bank credit to NBFCs (as on January 18, 2019) has declined as compared with the previous month. The sharp spurt in bank credit at end-September probably indicates that NBFCs utilised their sanctioned limits with the banks, and top-rated NBFCs took on excessive bank loans to tide over their asset-liability mis-matches in that period. Subsequently, by early January 2019, banks may not have renewed or rolled over the NBFC bank limits, which led to a drawing down of bank credit. It therefore appears that bank finance will continue to remain tight for NBFCs in the last quarter of FY2019, as they sell their assets to banks and restrict asset growth in order to remain liquid.

2. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).

3. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.

However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.

Nonetheless, benchmark Brent and WTI  crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.

The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.

OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months. 

In this briefing:

1. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success
2. Indian Election Antics
3. GEM Active Funds:  Big Q1 Outperformance
4. Last Week in GER Research: Huya, Bilibili and Qutoutiao
5. Battery Technology- The Key To An Electric Vehicle Future

1. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

This second part of the series explains how China chose commodity semiconductors (DRAM and NAND flash memory chips) as the best technology to pursue.

2. Indian Election Antics

India is in an election year. Sensibility has gone out of the window, replaced by fantastical promises and irresponsible spending. If the Modi government is desperate hold on to power, the Congress Party is equally determine to wrest power away. And then there is the RBI, which working hand in glove with the government, cut policy rates again this month. We hope that cooler heads and more importantly objectivity will prevail once the elections are over, but further interest rate cuts cannot be ruled out at this stage. It follows that the rupee is vulnerable. We reiterate our underweight Indian equities call.

3. GEM Active Funds:  Big Q1 Outperformance

Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average alpha above the IShares MSCI Emerging Markets Indx (ETF) (EEM US) of 1.3%.

In this report, we look at the performance of 180 global emerging market strategies over the first quarter of 2019 and analyse the countries, sectors and stocks that helped generate that outperformance.  We also take a look at the longer-dated outperformance of active GEM funds.

4. Last Week in GER Research: Huya, Bilibili and Qutoutiao

Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below 

In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below. 

Best of luck for the new week – Arun, Venkat and Rickin

5. Battery Technology- The Key To An Electric Vehicle Future

The Insight is structured as follows:

• A. Key  Conclusions
• B. Report Highlights
• C.History of Electric Vehicles
• E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries
• F. Batteries Beyond Li-ion
• G. Supply Constraints for Key Raw Materials
• H. The Competitive Landscape

A. Key  Conclusions

Global sales of EV’s reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.

Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there’s nothing on the horizon to completely displace Lithium Ion within the next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors. 

Quite apart from the technology,  the EV battery segment faces other significant challenges including increasing costs for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework. 

In this briefing:

1. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral
2. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

1. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).

2. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.

However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.

Nonetheless, benchmark Brent and WTI  crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.

The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.

OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months. 

In this briefing:

1. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

1. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.

However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.

Nonetheless, benchmark Brent and WTI  crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.

The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.

OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months. 

In this briefing:

1. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

1. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom

Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.

However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.

Nonetheless, benchmark Brent and WTI  crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.

The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.

OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months. 

2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message