Macro

• For years, the US have struggled to find their footing vis-a-vis the new Chinese threat.
• We have seen countless attempts at “strategic pivots” and contructive meetings, but it’s no wonder if the Chinese are left with a feeling of confusion. 
• What do the US actually want? What will be the next steps in Bidens “de-coupling” from China?

• UK GDP started 2023 with a slightly fuller rebound, continuing the skew towards upside surprises. Resilience was broad across services sectors.
• Strikes at schools failed to knock activity as much as those in other sectors or even prevent a rebound from the sickness-depressed attendance in December.
• The Q1 decline now looks likely to be only marginal, although we continue to expect a recession this year as excessive inflation and demand eventually get squeezed out.

• Money growth is slowing right about everywhere including in Japan after extreme increases during the early stages of the pandemic
• With the recent U-turn in money growth, this means: Everything DOWN, until lower rates saves us again
• We take a look at assets and CPI in the 70s and compare it to today’s data to determine what might happen in the macro landscape next

• Uncertainty undermines prospects of China’s homegrown Covid antivirals

• China vows to get tough on online crimes behind cyberbullying

• Officials face steep pay cuts under China’s financial regulatory overhaul

• Just when one was getting sick & tired of the never ending inflation saga along comes something straight out of the blue – like a hurricane to paraphrase Neil Young & Crazy Horse.
• In this case it’s the crypto collapse with a sting in its tail which took down Silvergate Capital Corp & Silicon Valley Bank (SVB) in a matter of days, upending even the top tier jobs #.
• Neil & the band came up with that tune back in 1977 (personal confession – Live Rust is one of my go tos for gym workouts) and today one can read about how SVB parallels not quite the 1970s but the S&L crisis of the early 80s.

• The swiftly growing number of participants in the Fed Senior Loan Officer Survey signaling tighter lending standards for Commercial and Industrial loans suggests a 2023 default rate above 6%.
• Improved high yield quality and still low interest expenses put our 2023 default estimate at 5.0%, with potential contagion risk coming from the CMBS market.
• In any case, spreads do not reflect a higher default rate, let alone a recession, and remain too low to provide value. Underweight High Yield Corporate Bond ETF (HYG US) 

• The AFC Iraq Fund Class D shares returned +23.3% in February 2023 with a NAV of USD 833.91, underperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which gained 25.0% during the month.
• The fund is up 22.6% year to date versus 18.8% for the index. Since inception, the fund has lost 16.6% while the RSISUSD index is down 37.6%.
• The performance of the fund and the index were positively affected by two crucial decisions taken by the Central Bank of Iraq (CBI).

• Regulators / China plans to create vast new financial regulator

• Foreign policy / China warns of ‘catastrophic consequences’ of U.S. zero-sum strategy

• Budget / China sees land sales flat at $1.1 trillion this year

• After a massive rise in short-term yields, Money Market Funds compete with both other asset classes and Commercial Bank Deposits. 
• Commercial banks face a dilemma. Raise interest rates at the cost of profitability. Or lose deposits and face higher risks. The dilemma explains why the Fed is not really tightening.
• Second, Money Market Fund and Commercial Bank flows are yet another example of how unprecedented stimulus following Covid adds to the ‘Great Recession Delay.’ 

• Market participants have renewed their hawkish views of inflation and monetary tightening in 2023. Hopes for a dovish pivot proved premature.
• Firms’ expected price rises have lost some skew but are converging around 5%, as are wage settlements. Inflation expectations appear to be anchoring at excessive highs.
• Frontloaded monetary tightening remains necessary with hawkish risks to a 4.5% BoE peak. The dovish turn should be swift and lucratively steep, but it isn’t here yet.

• The AFC Iraq Fund, and its benchmark the Rabee Securities RSISX USD Index, “skyrocketed” +23.3%, +24.9% respectively in February.
• For the year, the AFC Iraq Fund is up 22.6%, outperforming the index’s increase of 18.8%.
• February’s gain once again illustrates the diversification benefits that the AFC Iraq Fund and Asian frontier markets offer to investors since the performance of the AFC Iraq Fund is already well ahead of global benchmarks two months into the year.

• Even as governments attempt to normalize fiscal policy following the massive expansions induced by the pandemic, long-run structural factors point to increased fiscal pressures.
• Older and sicker populations, a deteriorating security environment, and climate change will induce additional demands on government spending in health, defence, and environmental areas. 
• In the long run, there are few alternatives to broad-based tax and spending reforms for Asian economies to develop the fiscal capacity to address these challenges. 

• The abiding tale of a Chinese reopening has been about as labile as pundits’ conviction of a soft landing.
• Now, it seems data has finally arrived to firmly lay to rest the debate whether a reopening would show.
• What better time then to unwrap and examine the implications for markets again? 

• The net selling of equities in the SPY ETF (S&P 500) evidently continues. The evidence that investors want to chase the market higher here remains very limited.
• History has been hard on those betting against the USD, and that may be a reason for traders to be reluctant 
• The broad commodities index, BCOM, is in a full blown nosedive bearing with it the benefit of fading inflation

• The ongoing structural changes in the green transition and economic digitalization will make these sectors future drivers of foreign investment activity in the region.
• International business confidence in China continues to deteriorate. China’s competitors will take advantage of the resulting production relocation.  
• Governments will also be seeking to improve the quality of FDI inflows to better achieve domestic policy goals such as industrial upgrading and high-value job creation

• Is this a recession without any major job losses in the US economy?
• Large lay-offs have been seen in Tech, Finance and Retail in recent months
• But Leisure/Entertainment jobs are booming. Here are 7 charts on the US labour market right now

• China’s top legislature, the National People’s Congress (NPC), opened its annual meeting yesterday. 
• The main highlight was the presentation of the new work report by outgoing Premier, Li Keqiang, which sets the 2023 fiscal targets for the Chinese economy.
• Later this week, Xi Jinping is expected to further consolidate his power with several high-profile appointments including the new Premier, vice-premiers, and the new governor of the central bank.

• Despite the S&P 500 Index SPDR S&P 500 (SPY US) declining to the 200-day average, the VIX Index has fallen by a whopping 20% during the last nine trading days.
• Realized volatility has dropped below 15 and is the lowest in more than a year, driven by a rising economic surprise index and lower perceived earnings-related uncertainty.
• However, our Volatility Heat Map and the direct link between the MOVE Index and stock market valuation reveal current equity market calmness comes with at least a whiff of complacency.

• Is the current inflation pressure better than the inflation seen in 2022?
• China is wide-open for business despite schizophrenic assesments of the momentum in Western media
• We find continued reasons to remain upbeat on risk assets despite the fears of inflation resurging

• The Week That Was in ASEAN@Smartkarma is filled with an eclectic mix of differentiated, substantive, and actionable insights, macro and equity bottom-up, from across South East Asia.
• The past week saw insights on Matahari Department Store (LPPF IJ), Astra International (ASII IJ), Arwana Citramulia (ARNA IJ), GK Goh Holdings (GKG SP), and Sheng Siong (SSG SP).
• There was also an economic commentary on Anwar’s first budget in 25 years from Manu Bhaskaran plus a piece looking at the lowball bid to Golden Energy & Resources. 

• US Large-Sized Farms Increase – Due to Input Cost Pressure According to the Farms and Land in Farms Report by the USDA, the largest farms in the US that had sales of $1 million or more, now operate almost 26% of the country’s farmland.
• The farms in this sales class have increased in size, while farms in every other sales class have either remained the same size or decreased.
• According to the Farms and Land in Farms Report by the USDA, the largest farms in the US that had sales of $1 million or more, now operate almost 26% of the country’s farmland.

• Some early indicators of inflation have started to show worrisome signals 6 months down the road
• Short-Term indicators continue to point to the downside for inflation
• Is the double-top inflation narrative warranted? Let’s have a look at pros and cons.

• China’s government aims to reinvigorate economic growth in 2023 by selective assistance to sectors that have recently experienced regulatory headwinds, notably technology and real estate. 
• Strategic geopolitical competition between Beijing and the West makes it difficult for technology to be a major source of growth from external demand sources.
• The reopening of China’s economy could stoke a new wave of commodity inflation that may have hawkish implications for monetary policy in developed markets.

• It was the best of times. It was the worst of times. The S&P 500 remains in an uptrend, NASDAQ 100 violated an uptrend stretching back to the GFC.
• What’s the outlook for U.S. growth stocks? Have they bottomed?
• U.S. equities have been leading non-U.S. since the GFC, but much of the outperformance is attributable to the NASDAQ. Can U.S. equities continue to be global leaders?

• Charts of the Euro STOXX 50, MSCI China, and S&P 500 (all in USD) tells a story of differing relative strength.
• Europe is still the global leader. U.S. equities are likely to be laggards for the remainder of this year.
• China and Asia are showing signs of a bullish turnaround and could be the catalyst for the next bull phase in equities.

Fiscal /: China local governments’ fiscal stress may roll over to 2023, think tank warns

Containers /: How a global shortage turned into a shipping container glut

Corruption /: Corruption charges filed against former China Merchants Bank president

• As Narrative Speed turns investors into contortionists it seems like a good time to consider short term vs long term investment thinking.
• Most investment money is LT: pensions, endowments, 401Ks, target date funds etc.
• Significant amounts are managed on a short term trading basis – often by machines.

• Pakistan has gone through a rough 12 months – floods, constitutional crisis and now a potential border war with Afghanistan
• Since Taliban re-took control over Pakistan, border skirmished have erupted and increased
• The upcoming election will be watched closely throughout the world

• A disappointing wage agreement for German metal workers in November was an early indicator that trade unions will be a poor match against employers in upcoming wage negotiations. 
• The 5 most important wage battlegrounds to watch in Europe in Q2-Q3 will be Germany, UK, France, Italy and the Netherlands – read full case studies below.
• Despite weak unions, current broad-based wage pressures of 4-5% is enough to keep core inflation TOO elevated in the Euro zone. The ECB has more work to do on tightening.

• China’s reopening is finally showing up in the Macro numbers. But there is still an awful lot of catching up to do.
• We look at if the China reopening provides a buying opportunity for Chinese (iShares MSCI China ETF (MCHI US)) and Emerging Market (iShares MSCI Emerging Markets (EEM US))  Equities.
• Going through the three pillars of our investment framework, Macro, Sentiment, and Valuation, we conclude that the outlook for EM Equities is slightly more attractive than for DM Equities.

• Lithium /: In Depth: Why China’s lithium firms have their sights set on Bolivia
• Covid-19 /: China eases requirement of negative preflight Covid tests for some countries
• PMI /: China’s factory activity gets back to growth, Caixin PMI shows

• Flash EA inflation only slowed by 15bp to 8.49% in Feb-23. That was 18bp above our forecast but 0.3pp above the consensus, breaking the downward surprise trend.
• Germany contributed the most upside to our view, but there was a broad skew higher in food prices, core goods, and headline rates outside the big-4 countries.
• Powerful base effects should still trigger a steep drop in March, but resilience in core and food price inflation reinforces our hawkish view of a stronger underlying trend.

• How to Invest in 2023 and 2024 based on the evolving cycle of Global Liquidity, which likely bottomed in October 2022 and is now rising again
• QT is effectively dead. Major stock and bond markets may range in 2023, but certain areas, like cyclical, commodities and EM, will show strong gains
• Three major changes are driving Global Liquidity higher: Fed stops QT, PBoC eases liquidity aggressively and collateral supply improves as bond volatility drops. MOVE index important

• Eurozone M1 Money Supply growth turned negative for the first time in history in January, triggering a wave of deflation forecasts.
• But looks can be deceiving. The relationship between Money Supply growth and Headline and Core inflation is far from perfect, with just one-third of CPI variation explained.
• The recent inflation stickiness substantiates the hypothesis that other factors are at work and that the ECB must continue hiking until it breaks something, most likely the economy.