We reiterate our overweight call on Indian equities. Our December Austrian Stress Indicator update suggested that the business cycle was still stuck but the economy is gathering momentum. Fiscal policy has turned expansionary and will support consumption, particularly rural spending. Monetary conditions are easing and we expect the next move in policy rates to be down. The private investment cycle should be turning up by the end of the year. Strengthening economic activity together with an improvement in the current account balance should also underpin a recovery in the rupee.
Confirmation that the Federal Open Market Committee (FOMC) has adopted a patient approach to policy conduct provoked an unjustified rally in risky assets due to the earlier hints from Fed officials, but incoming economic data may not necessarily guarantee that the next move in the federal funds rate will be in a downward direction.
Furthermore, markets also rallied due to an intimation that the Fed will consider stopping balance sheet shrinkage at an early juncture, but Chair Powell indicated that the federal funds rate remains the prime policy tool to alter monetary conditions in a normal economic environment, not balance sheet size.
Due to potential downside risks in the economic outlook, the FOMC has seemingly raised the bar for increasing the federal funds rate, thereby indicating a dovish tilt in its prospective policy conduct.
Some commentators believe Fed Chair Powell has downgraded the role of the Phillips Curve in setting policy by announcing a patient policy approach at full employment, thus additionally raising the possibility that the FOMC is prepared to tolerate an overshooting of its 2% inflation target.
Meanwhile, other observers are hinting that the Fed’s dovish policy tilt simply reflects damage inflicted on Chair Powell and the FOMC in the aftermath of the recent spat with President Trump.
Some commentators are citing poor communication to financial markets by the FOMC since last September for creating excessive volatility during 2018 Q4, and this has consequently forced the adoption of the patient policy approach to rectify past mistakes.
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The UK PMIs all fell toward 50 in Jan-19, with the services survey’s 50.1 print over two standard deviations below its post-referendum
PMI-based estimates of the ONS services data have been biased to overstate the effect of political uncertainty, so 2019 probably started less sour than suggested.
I still expect 0.0% m-o-m GDP growth in Dec-18 and 0.3% q-o-q for 4Q18. Growth in 1Q19 may undershoot my 0.4% q-o-q forecast, but should easily exceed the PMIs.
The Indian Union Budget FY20 announced last week in the run-up to General Elections in May 2019 was without a doubt, a populist budget. It has directly touched the two key vote banks in India i.e. Middle Class and the Farmers. While a welfare announcement for farmers was expected due to significant distress in the rural hinterland, the tax sops given to the middle class was an unexpected surprise to take care of a growing disenchantment of this particular section considered to be a strong supporter of the ruling party.
Within acceptable fiscal imprudence
Despite being a populist budget with a slew of welfare handouts, the Government continued its commitment on fiscal prudence as the slippages are marginal. Even the assumptions in the budget don’t seem very aggressive albeit some of them might be difficult to achieve.
Consumption boost amid flagging economic growth
We believe that the income support scheme to the farmers and the tax sops to the middle class may eventually drive consumption and that may also benefit the government through indirect taxes. However, on the flip side these welfare schemes have come at the cost of capital expenditure that may derail the high growth that was witnessed in the manufacturing sector in recent times.
Our verdict: A one-off
The Modi government over the last four odd years has implemented and introduced a number of programs, interventions which we believe will go a long way in boosting the productivity of the Indian economy structurally. Notable ones were in health, infrastructure, financial inclusion, pension and social security. Since all these measures are more long term in nature and might not have an immediate impact on the electorate, this interim budget is a departure in a sense, aimed to enhance the government’s chance of a 2nd term. Therefore, we think this budget is a one-off event and believe that this government’s focus on productivity enhancements and structural reforms may continue going forward if re-elected. As it is, all the fiscal assumptions will be revisited in July, but the current estimates we believe are not too far off the mark.
Will the voter be enthused, that’s anybody’s guess.
First of all, Kung Hei Fat Choy and Saang Tai Gin Hon in the Year of the Earth Pig! As equity markets in Asia mostly take a break today we turn our attention to Indonesia.
When President Joko Widodo (Jokowi) took office in 2014 one of the first speeches he made to a foreign audience contained the claim that Indonesia was “open for business”. Fast-forward four years to December 2018 and the government’s announcement that its Negative Investment List (NIL) was being revised and that 54 sectors were to be opened to foreign investment. The president sticking to his word? Well, no. That policy lasted less than seven days – the list of sectors wasn’t even published – before the announcement came that it was under review. Cabinet ministers were scrapping with each other, private sector businesses were unhappy and Indonesia’s proclivity to retreat into its nationalist shell was on full show once again.
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China has essentially shut down for Chinese New Year, but we want to take a look at FX markets and the relationship between the USD and RMB. Another reason to keep this at the forefront is that the trade talk deadline is on the other side of Spring Festival. We anticipate FX to be impacted by trade speculation ahead of the deadline.
Still lovin’ it? Beijing serves new law for foreign investors
Slowdown sparks profit warnings
Luring foreign lolly with combined schemes
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The UK’s manufacturing PMI fell by 1.4-points to 52.8 in Jan-19, which was double the Consensus decline. Inventory accumulation continues to support the UK survey.
Weakness across the European car manufacturing industry is weighing on output in the official data even more than the surveys. Industrial production only looks like it will rebound in Jan-19 because of energy output.
The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.
Police interrogated members of the independent General Election Commission (KPU), pursuant to a spurious case in which a coordinating minister has a conflict of interest. If police persist, perceptions of the election’s legitimacy could suffer. Lippo is under scrutiny for repudiating a foreign creditor — and the Information Ministry. FDI fell y-o-y in Q418 but rose q-o-q. Prosecutors blundered by jailing an opposition agitator for anodyne tweets. Indrawati is sanguine about 2019 GDP. The Football Association — a coveted rentier structure — is up for grabs again. Pertamina’s Eni JV for green fuels from CPO is questionable on numerous levels.
Politics: The Gerindra parliamentary candidate Ahmad Dhani suffered incarceration for having issued tweets in 2017 that judges deemed hateful. The rock star is uncouth and has evoked hatefulness at times (he dressed as a Nazi in a 2014 ad for Prabowo Subianto) – but his sentence reflects work by prosecutors that is shoddy if not expressly politicized. President Joko Widodo may lose more, from damage to his image, than he gains from the jailing of an opponent. In any event, the case focuses overdue scrutiny on draconian aspects of the 2008 Electronic Transactions and Information Law (UU ITE) (Page 2). Gerindra Chair Prabowo Subianto again harped on his claim that state debt is excessive. Apart from being false, the claim is far from the concerns of voters. With 10 weeks left to campaign, Prabowo has yet to critique Widodo effectively (p. 4).
Election Preparations: If police continue to pursue spurious complaints from Hanura Chair Oesman Sapta Odang, the effectiveness of the General Election Commission (KPU) will be at stake (p. 5). The 17 February one‑on‑one presidential debate will allow for unrestricted sparring during one segment (p. 6).
Justice: Press scrutiny is focusing on a Commercial Court ruling that accepted a dubious settlement in bankruptcy proceedings for the Lippo Group subsidiary PT Internux. The majority of creditors are clearly group affiliates. Accepting their 30‑year restructuring hurts an offshore creditor, Raiffeisen, while mistreating the Information Ministry (p. 7).
Papua: Yet another attack in Nduga District struck an aircraft, killing a soldier (p. 8).
Policy News: The government’s index of bureaucratic‑reform progress was static in 2018 (p. 10). Pertamina intends to develop biorefineries in Sumatra with Italy’s Eni S.p.A., for the stated goals of promoting clean energy and reducing the trade deficit. But the scheme may well do neither, if palm plantations expand at the expense of forest, while palm oil (CPO) exports contract. The energy minister also mentioned subsidizing green fuel, which would be fiscally unsound and inequitable (p. 11).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Economics: Investment Coordinating Board (BKPM) Chair Tom Lembong confirmed that fourth‑quarter Foreign Direct Investment (FDI) fell 12 percent year‑on‑year, although it at least rebounded 10 percent from the third quarter. He reiterated criticism of government ranks for mis‑implementing the president’s policy vision (p. 13). Finance Minister Sri Mulyani Indrawati emphasized potential to sustain GDP growth in 2019 based on consumer demand from households (p. 15).
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Still lovin’ it? Beijing serves new law for foreign investors
Slowdown sparks profit warnings
Luring foreign lolly with combined schemes
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
India’s finance minister, Piyush Goyal (standing in for Arun Jaitley, who was hospitalised for cancer treatment just 8 days ago) delivered a spectacular interim Budget — sustaining fiscal prudence while selectively providing rational, market-oriented support to farmers, the middle-class and workers in the unorganised sector. Unlike the Congress party’s dole/hand-out schemes (such as the 2009 and Dec2018 farm-loan waivers) which act as a disincentive to work, the BJP’s are carefully-designed to provide supplemental income while still rewarding those actually working or making timely repayments of loans.
The government’s net market borrowing in the fiscal year-to-date (April-November 2018) was down 21% YoY — helped by 16.7% YoY growth in corporate tax and 16.1% YoY increase in income tax revenue. Given that CPI inflation has moderated sharply to 2.2% YoY in December 2018 (and 2.3% YoY the previous month), there is now scope for the RBI to undo last year’s policy error and cut the policy rate by 50bp. This could be spread out over two MPC meetings (although we think it would be better to do it in one move next week). The spur to growth will be substantial, enabling real GDP to accelerate to 8% YoY growth in FY2019/20.
The most transformative step, however, entails a pension scheme for the “unorganised sector” (where workers currently have virtually no rights whatsoever, in contrast with the gold-plated safeguards available to organised-sector workers, which act as a deterrent to enhanced organised-sector employment). In order to obtain a future pension of Rs3000 per month, unorganised-sector workers will be required to contribute Rs100 monthly during their working years. (That it is contribution-based and not a hand-out is another positive). By thus self-identifying themselves, at least 100 million unorganised-sector workers will be better counted. Eventually, the vast gulf in safeguards/protections between organised and unorganised-sector workers can begin to be bridged if the latter can be identified. In bridging that vast gulf lies the prospect of a much more flexible labour market in future. Through universal health insurance, universal access to bank accounts, universal sanitation, and free access to clean cooking gas for rural women, this government has provided a comprehensive basis for civilised living that half of India previously lacked. When combined with the GST, insolvency & bankruptcy code, and a flexible labour market, the groundwork has been laid for India to be propelled toward average annual real GDP growth of 10% over the next five years. With interest rates set to decline, and growth set to strengthen, we recommend staying Overweight Indian equities.
The NDA Government presented its 5th and final budget before they face elections in a few months’ time. This budget should have been a non-event due to the long followed tradition in which outgoing governments do not present a proper budget but only present a short vote-on-account (which essentially is just taking approval for routine government expenditure till the time the new government is in place). But it was known this would not be a non-event given the political scenario and the media was full of rumours of what the government may or may not announce in the budget. But we were looking for just 2 things in the budget: first, whether the government will take a decisive populist turn and second while the government will meet the fiscal math, are the assumptions underlying those credible. And sadly, the answer to the first question was a yes and to the second question a no. But perversely, this will not matter, at least in the short-run due to the fact that full fledged implementation in a short-period is not possible and secondly, by the time the full year fiscal deficit numbers are out, elections would be over and focus would shift to the new government and its budget.
Employment growth is strengthening and manufacturing growth picked up early in 2019. The Fed, however, has pivoted to a significantly more dovish stance. The Powell Fed appears to have turned former Fed Chairman McChesney Martin’s operating regime (the Fed should order “the punch bowl removed just when the party was really warming up”) on its head. Powell failed to provide a clear and convincing explanation for why Fed thinking on the rate outlook and the balance sheet has shifted so much since the December FOMC meeting. Subsequently, the January employment and ISM manufacturing data indicate that neither the market swoon nor the government shutdown slowed U.S. growth. We discuss the Fed’s surprisingly dovish pivot and some potential consequences.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The UK’s manufacturing PMI fell by 1.4-points to 52.8 in Jan-19, which was double the Consensus decline. Inventory accumulation continues to support the UK survey.
Weakness across the European car manufacturing industry is weighing on output in the official data even more than the surveys. Industrial production only looks like it will rebound in Jan-19 because of energy output.
The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.
Police interrogated members of the independent General Election Commission (KPU), pursuant to a spurious case in which a coordinating minister has a conflict of interest. If police persist, perceptions of the election’s legitimacy could suffer. Lippo is under scrutiny for repudiating a foreign creditor — and the Information Ministry. FDI fell y-o-y in Q418 but rose q-o-q. Prosecutors blundered by jailing an opposition agitator for anodyne tweets. Indrawati is sanguine about 2019 GDP. The Football Association — a coveted rentier structure — is up for grabs again. Pertamina’s Eni JV for green fuels from CPO is questionable on numerous levels.
Politics: The Gerindra parliamentary candidate Ahmad Dhani suffered incarceration for having issued tweets in 2017 that judges deemed hateful. The rock star is uncouth and has evoked hatefulness at times (he dressed as a Nazi in a 2014 ad for Prabowo Subianto) – but his sentence reflects work by prosecutors that is shoddy if not expressly politicized. President Joko Widodo may lose more, from damage to his image, than he gains from the jailing of an opponent. In any event, the case focuses overdue scrutiny on draconian aspects of the 2008 Electronic Transactions and Information Law (UU ITE) (Page 2). Gerindra Chair Prabowo Subianto again harped on his claim that state debt is excessive. Apart from being false, the claim is far from the concerns of voters. With 10 weeks left to campaign, Prabowo has yet to critique Widodo effectively (p. 4).
Election Preparations: If police continue to pursue spurious complaints from Hanura Chair Oesman Sapta Odang, the effectiveness of the General Election Commission (KPU) will be at stake (p. 5). The 17 February one‑on‑one presidential debate will allow for unrestricted sparring during one segment (p. 6).
Justice: Press scrutiny is focusing on a Commercial Court ruling that accepted a dubious settlement in bankruptcy proceedings for the Lippo Group subsidiary PT Internux. The majority of creditors are clearly group affiliates. Accepting their 30‑year restructuring hurts an offshore creditor, Raiffeisen, while mistreating the Information Ministry (p. 7).
Papua: Yet another attack in Nduga District struck an aircraft, killing a soldier (p. 8).
Policy News: The government’s index of bureaucratic‑reform progress was static in 2018 (p. 10). Pertamina intends to develop biorefineries in Sumatra with Italy’s Eni S.p.A., for the stated goals of promoting clean energy and reducing the trade deficit. But the scheme may well do neither, if palm plantations expand at the expense of forest, while palm oil (CPO) exports contract. The energy minister also mentioned subsidizing green fuel, which would be fiscally unsound and inequitable (p. 11).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Economics: Investment Coordinating Board (BKPM) Chair Tom Lembong confirmed that fourth‑quarter Foreign Direct Investment (FDI) fell 12 percent year‑on‑year, although it at least rebounded 10 percent from the third quarter. He reiterated criticism of government ranks for mis‑implementing the president’s policy vision (p. 13). Finance Minister Sri Mulyani Indrawati emphasized potential to sustain GDP growth in 2019 based on consumer demand from households (p. 15).
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Still lovin’ it? Beijing serves new law for foreign investors
Slowdown sparks profit warnings
Luring foreign lolly with combined schemes
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
India’s finance minister, Piyush Goyal (standing in for Arun Jaitley, who was hospitalised for cancer treatment just 8 days ago) delivered a spectacular interim Budget — sustaining fiscal prudence while selectively providing rational, market-oriented support to farmers, the middle-class and workers in the unorganised sector. Unlike the Congress party’s dole/hand-out schemes (such as the 2009 and Dec2018 farm-loan waivers) which act as a disincentive to work, the BJP’s are carefully-designed to provide supplemental income while still rewarding those actually working or making timely repayments of loans.
The government’s net market borrowing in the fiscal year-to-date (April-November 2018) was down 21% YoY — helped by 16.7% YoY growth in corporate tax and 16.1% YoY increase in income tax revenue. Given that CPI inflation has moderated sharply to 2.2% YoY in December 2018 (and 2.3% YoY the previous month), there is now scope for the RBI to undo last year’s policy error and cut the policy rate by 50bp. This could be spread out over two MPC meetings (although we think it would be better to do it in one move next week). The spur to growth will be substantial, enabling real GDP to accelerate to 8% YoY growth in FY2019/20.
The most transformative step, however, entails a pension scheme for the “unorganised sector” (where workers currently have virtually no rights whatsoever, in contrast with the gold-plated safeguards available to organised-sector workers, which act as a deterrent to enhanced organised-sector employment). In order to obtain a future pension of Rs3000 per month, unorganised-sector workers will be required to contribute Rs100 monthly during their working years. (That it is contribution-based and not a hand-out is another positive). By thus self-identifying themselves, at least 100 million unorganised-sector workers will be better counted. Eventually, the vast gulf in safeguards/protections between organised and unorganised-sector workers can begin to be bridged if the latter can be identified. In bridging that vast gulf lies the prospect of a much more flexible labour market in future. Through universal health insurance, universal access to bank accounts, universal sanitation, and free access to clean cooking gas for rural women, this government has provided a comprehensive basis for civilised living that half of India previously lacked. When combined with the GST, insolvency & bankruptcy code, and a flexible labour market, the groundwork has been laid for India to be propelled toward average annual real GDP growth of 10% over the next five years. With interest rates set to decline, and growth set to strengthen, we recommend staying Overweight Indian equities.
The NDA Government presented its 5th and final budget before they face elections in a few months’ time. This budget should have been a non-event due to the long followed tradition in which outgoing governments do not present a proper budget but only present a short vote-on-account (which essentially is just taking approval for routine government expenditure till the time the new government is in place). But it was known this would not be a non-event given the political scenario and the media was full of rumours of what the government may or may not announce in the budget. But we were looking for just 2 things in the budget: first, whether the government will take a decisive populist turn and second while the government will meet the fiscal math, are the assumptions underlying those credible. And sadly, the answer to the first question was a yes and to the second question a no. But perversely, this will not matter, at least in the short-run due to the fact that full fledged implementation in a short-period is not possible and secondly, by the time the full year fiscal deficit numbers are out, elections would be over and focus would shift to the new government and its budget.
Employment growth is strengthening and manufacturing growth picked up early in 2019. The Fed, however, has pivoted to a significantly more dovish stance. The Powell Fed appears to have turned former Fed Chairman McChesney Martin’s operating regime (the Fed should order “the punch bowl removed just when the party was really warming up”) on its head. Powell failed to provide a clear and convincing explanation for why Fed thinking on the rate outlook and the balance sheet has shifted so much since the December FOMC meeting. Subsequently, the January employment and ISM manufacturing data indicate that neither the market swoon nor the government shutdown slowed U.S. growth. We discuss the Fed’s surprisingly dovish pivot and some potential consequences.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Police interrogated members of the independent General Election Commission (KPU), pursuant to a spurious case in which a coordinating minister has a conflict of interest. If police persist, perceptions of the election’s legitimacy could suffer. Lippo is under scrutiny for repudiating a foreign creditor — and the Information Ministry. FDI fell y-o-y in Q418 but rose q-o-q. Prosecutors blundered by jailing an opposition agitator for anodyne tweets. Indrawati is sanguine about 2019 GDP. The Football Association — a coveted rentier structure — is up for grabs again. Pertamina’s Eni JV for green fuels from CPO is questionable on numerous levels.
Politics: The Gerindra parliamentary candidate Ahmad Dhani suffered incarceration for having issued tweets in 2017 that judges deemed hateful. The rock star is uncouth and has evoked hatefulness at times (he dressed as a Nazi in a 2014 ad for Prabowo Subianto) – but his sentence reflects work by prosecutors that is shoddy if not expressly politicized. President Joko Widodo may lose more, from damage to his image, than he gains from the jailing of an opponent. In any event, the case focuses overdue scrutiny on draconian aspects of the 2008 Electronic Transactions and Information Law (UU ITE) (Page 2). Gerindra Chair Prabowo Subianto again harped on his claim that state debt is excessive. Apart from being false, the claim is far from the concerns of voters. With 10 weeks left to campaign, Prabowo has yet to critique Widodo effectively (p. 4).
Election Preparations: If police continue to pursue spurious complaints from Hanura Chair Oesman Sapta Odang, the effectiveness of the General Election Commission (KPU) will be at stake (p. 5). The 17 February one‑on‑one presidential debate will allow for unrestricted sparring during one segment (p. 6).
Justice: Press scrutiny is focusing on a Commercial Court ruling that accepted a dubious settlement in bankruptcy proceedings for the Lippo Group subsidiary PT Internux. The majority of creditors are clearly group affiliates. Accepting their 30‑year restructuring hurts an offshore creditor, Raiffeisen, while mistreating the Information Ministry (p. 7).
Papua: Yet another attack in Nduga District struck an aircraft, killing a soldier (p. 8).
Policy News: The government’s index of bureaucratic‑reform progress was static in 2018 (p. 10). Pertamina intends to develop biorefineries in Sumatra with Italy’s Eni S.p.A., for the stated goals of promoting clean energy and reducing the trade deficit. But the scheme may well do neither, if palm plantations expand at the expense of forest, while palm oil (CPO) exports contract. The energy minister also mentioned subsidizing green fuel, which would be fiscally unsound and inequitable (p. 11).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Economics: Investment Coordinating Board (BKPM) Chair Tom Lembong confirmed that fourth‑quarter Foreign Direct Investment (FDI) fell 12 percent year‑on‑year, although it at least rebounded 10 percent from the third quarter. He reiterated criticism of government ranks for mis‑implementing the president’s policy vision (p. 13). Finance Minister Sri Mulyani Indrawati emphasized potential to sustain GDP growth in 2019 based on consumer demand from households (p. 15).
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
India’s finance minister, Piyush Goyal (standing in for Arun Jaitley, who was hospitalised for cancer treatment just 8 days ago) delivered a spectacular interim Budget — sustaining fiscal prudence while selectively providing rational, market-oriented support to farmers, the middle-class and workers in the unorganised sector. Unlike the Congress party’s dole/hand-out schemes (such as the 2009 and Dec2018 farm-loan waivers) which act as a disincentive to work, the BJP’s are carefully-designed to provide supplemental income while still rewarding those actually working or making timely repayments of loans.
The government’s net market borrowing in the fiscal year-to-date (April-November 2018) was down 21% YoY — helped by 16.7% YoY growth in corporate tax and 16.1% YoY increase in income tax revenue. Given that CPI inflation has moderated sharply to 2.2% YoY in December 2018 (and 2.3% YoY the previous month), there is now scope for the RBI to undo last year’s policy error and cut the policy rate by 50bp. This could be spread out over two MPC meetings (although we think it would be better to do it in one move next week). The spur to growth will be substantial, enabling real GDP to accelerate to 8% YoY growth in FY2019/20.
The most transformative step, however, entails a pension scheme for the “unorganised sector” (where workers currently have virtually no rights whatsoever, in contrast with the gold-plated safeguards available to organised-sector workers, which act as a deterrent to enhanced organised-sector employment). In order to obtain a future pension of Rs3000 per month, unorganised-sector workers will be required to contribute Rs100 monthly during their working years. (That it is contribution-based and not a hand-out is another positive). By thus self-identifying themselves, at least 100 million unorganised-sector workers will be better counted. Eventually, the vast gulf in safeguards/protections between organised and unorganised-sector workers can begin to be bridged if the latter can be identified. In bridging that vast gulf lies the prospect of a much more flexible labour market in future. Through universal health insurance, universal access to bank accounts, universal sanitation, and free access to clean cooking gas for rural women, this government has provided a comprehensive basis for civilised living that half of India previously lacked. When combined with the GST, insolvency & bankruptcy code, and a flexible labour market, the groundwork has been laid for India to be propelled toward average annual real GDP growth of 10% over the next five years. With interest rates set to decline, and growth set to strengthen, we recommend staying Overweight Indian equities.
The NDA Government presented its 5th and final budget before they face elections in a few months’ time. This budget should have been a non-event due to the long followed tradition in which outgoing governments do not present a proper budget but only present a short vote-on-account (which essentially is just taking approval for routine government expenditure till the time the new government is in place). But it was known this would not be a non-event given the political scenario and the media was full of rumours of what the government may or may not announce in the budget. But we were looking for just 2 things in the budget: first, whether the government will take a decisive populist turn and second while the government will meet the fiscal math, are the assumptions underlying those credible. And sadly, the answer to the first question was a yes and to the second question a no. But perversely, this will not matter, at least in the short-run due to the fact that full fledged implementation in a short-period is not possible and secondly, by the time the full year fiscal deficit numbers are out, elections would be over and focus would shift to the new government and its budget.
Employment growth is strengthening and manufacturing growth picked up early in 2019. The Fed, however, has pivoted to a significantly more dovish stance. The Powell Fed appears to have turned former Fed Chairman McChesney Martin’s operating regime (the Fed should order “the punch bowl removed just when the party was really warming up”) on its head. Powell failed to provide a clear and convincing explanation for why Fed thinking on the rate outlook and the balance sheet has shifted so much since the December FOMC meeting. Subsequently, the January employment and ISM manufacturing data indicate that neither the market swoon nor the government shutdown slowed U.S. growth. We discuss the Fed’s surprisingly dovish pivot and some potential consequences.
The UK’s manufacturing PMI fell by 1.4-points to 52.8 in Jan-19, which was double the Consensus decline. Inventory accumulation continues to support the UK survey.
Weakness across the European car manufacturing industry is weighing on output in the official data even more than the surveys. Industrial production only looks like it will rebound in Jan-19 because of energy output.
The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
China’s 4Q GDP grew just 6.4% in Q4, 2018, the lowest since the Global Financial Crisis (GFC). We do not believe the number matched the market expectation, however. Since the GFC, every rebound of the Chinese economy has been accompanied with the rebound of the real estate sector (such as in 2009, in 2012 and in 2016). However, this time is different, in our view. The real estate sector only grew 2% in Q4, 2018, the lowest in 4 years.
If the Chinese government had relaxed its regulation on this sector, China would have grown higher, but that would be at the expense of bigger bubble-driven growth, in our judgment. As we argued before, the consumption growth is closely-corelated with the wealth effect from real estate market. Accordingly, as to the questions such as why the Chinese economy has slowed down, and why Chinese consumption has declined, we believe the answer lies in the real estate sector. As a result, this has become a matter of real estate bubble versus consumption, the debacle we believe will last at least this year.
In addition, the industrial-value added growth, infrastructure investment, electricity generation and retail sales as well, have all marginally rebounded in December. China’s growth may finally rebound in the second quarter of 2019.
Political uncertainty continues to constrain the MPC, which looks set to unanimously announce no change in policy at its February Inflation Report.
Looser monetary conditions are likely to offset the disinflationary effect of energy price weakness and raise the Bank’s medium-term inflation forecasts slightly. Ongoing excess inflation and excess demand is an uncomfortably hawkish forecast.
Rather than risk perceptions of the MPC’s reaction function shifting, I expect the MPC to indicate its tolerance is only temporarily increased. That is a reasonable policy amid a Brexit-related risk and forecast inconsistency that biases up excesses.
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