Macro

• China risks turning old before getting rich, with the labour force shrinkage progressively dragging on growth. There is little that policy can achieve to reverse this decline. 
• Productivity growth is not forthcoming, with the low-hanging fruits of sectoral reallocation and industrialization already exhausted. Global decoupling worsens matters. 
• Capital accumulation will also face rapidly diminishing returns, while a concentration of political power increases the risks of policy mistakes and damage economic growth.

• February 24th was the first anniversary of Russia’s invasion of Ukraine. We believe the likelihood of the war ending this year is very small.
• The 2/10 spread has remained in a negative territory, meaning the recession is coming.
• Slower and/or smaller than expected rate hikes provide a bullish case for bond investments this year.

• While the headline consolidation seems welcome, this relies heavily on assumptions of higher government revenues, which gave the government more scope for spending. 
• The government continues to seek alternatives to reintroducing the abolished Goods and Services Tax, but these do not raise sufficient revenues to fund key policy objectives.
• Measures to strengthen public finance governance and industrial upgrading are welcome steps to bolster long-term fiscal and economic prospects.

• The agency estimates that roughly 46% of Ukraine’s wheat production lies in areas where the war is currently threatening the planting process.
• US Soybean Crush Margin remains very high and therefore continues to support soybean meal prices
• USDA is expecting a larger uptick in planted acres for Wheat and Rice but a large drop in planted acres for Cotton.

• Core PCE increased 6.9%MoM (annualized) in Jan’23, and hence was up 4.71%YoY, moving further away from the FOMC’s 2%YoY target (rather than edging towards it as had been expected). 
• M2 growth averaging 18.2%YoY in Mar’20-Feb’22 (vs a pre-Covid average of 6.8%YoY in the previous 60 years) is the cause. FedFunds must rise to 5.5% by May’23 to compensate.
• Severely inverted yield curve indicates that a recession (from Q2CY23 onward) will also help generate slack, taming inflation. Any delay in recession’s onset will entail even more rate hikes. 

• Inflation once again printed at high levels in Spain and France
• Will the ECB be forced to tighten even further than priced in?
• Here is how we view the inflation risks in Europe and the likely response from the ECB

• Funds /: How China’s investment funds fared in 2022
• China-U.S. /: China threatens retaliation after U.S. sanctions Chinese firms with alleged Russia ties
• Li Yining /: Li Yining, who helped bring private investment to China’s state sector, dies at 92

• Tax / Cover Story: China’s tax system gets a digital upgrade
• Investment banking /: Investment banker Bao Fan is aiding an investigation, China Renaissance says
• Corruption /: Ex-provincial vice governor indicted for bribery, leaking insider information

• Renewed fear of more aggressive US interest rate hikes, and some financial difficulties at Vietnam’s fourth-biggest listed property developer, Novaland (NVL), sent the VN-Index sharply lower, down -9.2% (in USD terms) in February.
• Also, the NAV of our AFC Vietnam Fund closed the month -6% lower at an NAV of USD 2.839, according to internal estimates.
• February’s market correction was mainly caused by concerns about US inflation and higher than expected US interest rates.

• We find several similarities to the surprising spike in prices in August/September after the first peak in annualized price pressures in June-2022.
• We are at an ALL-TIME-HIGH spread between the CPI and the PCE in this category, which has been a growing issue since the pandemic.
• The tax-refund season has so far been relatively lukewarm compared to former years, but we are about to enter PEAK season this week. Positive for liquidity, all else equal.

• 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 Grab (GRAB US), Kalbe Farma (KLBF IJ), Pertamina Geothermal Energy (PGEO IJ), SATS (SATS SP), Boustead Projects (BOCJ SP), and Sea Ltd (SE US) 
• There were also two insights looking at Singapore’s Budget and the macro implications from Manu Bhaskaran, who sees further monetary tightening on the cards.

• For a second consecutive year, fiscal policy is mildly contractionary while accommodating a 30%+ hike in public investment. Strong tax revenues help lower the fiscal deficit by 0.5% of GDP.
• Surging nominal GDP boosted corporate & income tax revenue by 16%YoY+ and central GST revenue by 30%YoY in Apr-Dec’22. Actual FY23 deficit will be 6% (rather than 6.4%) of GDP. 
• We expect nominal GDP to grow 13% (vs 10.4% official projection) in FY24, cutting fiscal deficit to 5.5% of GDP, thus crowding-in private investment, enabling real GDP to grow 7.2%. 

• Institutional Investors and Venture Funds have had a sharp reversal in fortunes over the past eighteen months, coming off the post-pandemic high to face the harsh reality of a severe recession, uncertain macroeconomic conditions, and a plunge in valuations of tech stocks.
• Despite this, Hedge Funds and Asset Management firms have largely outperformed other institutional investors, relying on alternative strategies and making unconventional bets.
• Wealth and Asset manager Alvarium Tiedmann, which recently merged through a $1.4 billion SPAC deal, is looking to disrupt the mid-market with its range of services and newfound scale.

• Local debts / In Depth: China grapples with fiscal overhaul as budgets come under pressure
• China-Russia /: China’s top diplomat hails Russia ties as ‘resilient, stable’ in meeting with Putin
• Children /: Chinese tech hub to offer handouts to families with more than one child

• Fears about persistent inflation and stagflation have come full circle and returned to financial markets due to insufficient Fed tightening as measured by real interest rates. 
• Service sector price increases have replaced commodities as the main driver of inflation, thereby presenting the Fed with a big challenge due to their greater importance in the economy. 
• Adjustment to the Fed’s policy framework is required due to the resilience of the real economy to policy tightening. A higher terminal level of the federal funds rate is required. 

• As the S&P 500 tests a critical support level as defined by the falling trend line, it’s technical decision time for both bulls and bears.
• A break of support opens the door to considerable downside risk to the 200 wma at about 3715.
• On the other hand, a relief rally is likely to be capped at resistance of about 4180.

• There still is an abundance of inflation out there. Eurozone ‘Supercore’ inflation has not peaked and is now at 6.0%, while US Core PCE stunned markets by accelerating.
• The S&P 500 Index SPDR S&P 500 (SPY US)  has closed within 1% of the 200-day moving average. Dropping below it, would trigger another sell signal.
• The 2-year US Treasury Yield has made news high, but stock market valuation has not followed, providing additional downside for equities. Yields Up? Add Another 10% Downside for Stocks! 

• Increasingly, the market narrative is shifting from a growth slowdown to no recession and continued growth. Rising global liquidity is also putting a floor on the price of risky assets.
• The February FOMC minutes warned, “Participants observed that a restrictive policy stance would need…”
• What should investors do? Fight the tape or fight the Fed?

• The Macro Regime indicator points to an improvement in March
• Inflation wreaked havoc with the regime indicator model in February 
• Will inflation re-decelerate in March/April? Our forward looking indicators suggest as much

• Global Liquidity is projected to rise in 2023 after last year’s tumble, but after its recent surge are we seeing a material pull-back?
• UK gilt crisis in September was a wake-up call. In the 23 following weeks, US Fed liquidity has flat-lined not fallen. US monetary policy is bifurcating
• Deteriorating US fiscal position will place huge demands for more QE. Between now and 2023 the Fed balance sheet could double in size. QT is dead in America

• China’s PBoC injected a whopping RMB 3 trillion (US$450 billion) into money markets through December and January
• Latest data show sharp fall-off in Chinese liquidity from late-February. Nonetheless, it is hard to extrapolate much from this. 2023 still looks to be a year of much more liquidity
• The close connection between the PBoC and Chinese business points to a stronger Chinese and World economy in the second half of 2023. Buy cyclicals?

• 1) China wants Russia to be in their camp. Both for political reasons, but also to be able to offer cheap energy to non-aligned third world countries.
• 2) Every day the war continues, Russia becomes more and more dependant on China.
• 3) While the war is a strain on Chinese international diplomacy, the Chinese are basically carrying on their business of buying every port, factory or railway that they possibly can. 

• Back in 2020, the yield on global Treasuries was 0.4%, and negative on money market funds. 
• But the biggest central bank tightening cycle in decades has turned things around completely.
• Bonds offer a significantly higher volatility-adjusted yield, but now face fierce competition from money market funds.

Global cross asset market action is really stretching one’s inventory of analogies – we have already employed the two steps forward, one step back analogy so now we are going to use the traffic in foggy weather one.

It came to me when I was biking to work (big NYC City Bike fan) the other morning and as usual I looked up to the Empire State Bldg. as I rode up Broadway (yes, I know, going against traffic – what else is new).

Some days it is a beautiful sight; the early morning sun striking the top of the spire; other times, low hanging clouds scud across the tip.

• The last time the 2-year US Treasury yield was at the current level, the S&P 500 Index (SPDR S&P 500 (SPY US))  was trading at just below 3,800.
• But even then, the P/E ratio of US equities was too high relative to short-term interest rates.
• The S&P 500 Index P/E ratio would have to fall to 17.4 from the current 19.1 to realign with bond yields, proving nearly 10% downside. Stay short.

• The final EA HICP inflation print was revised up to 8.64%, precisely in line with our forecast for the revision (and flash) owing to less weakness in Germany.
• Core pressures regained pace, dashing hopes that the underlying monthly impulse would keep slowing toward the 2% target rather than sprinting at nearer triple the speed.
• Inflation should keep trending down, but that isn’t enough for the ECB. It should hike until pressures realign with the target or a crash makes an undershoot inevitable.

• Reform /: China plans deeper reforms to modernize key areas of government and party
• Covid-19 /: South Korea will end testing for travelers from China
• Homes /: More Chinese families planning to buy a home, survey shows

• Allocations in China & HK Banks are at depressed levels. The percentage of funds with exposure has fallen from a high of 78% in 2011 to just 58.2% today.
• More funds have exposure to Mexico, Brazil and Indonesian Banks.  Versus benchmark, China Banks are the 2nd largest Bank country underweight.
• For the major stocks in the sector, we see a picture of low positioning and declining sentiment.  

• The higher for longer narrative is tattooed all over the current market
• But if the economy is actually rebounding it is not bad news for risk assets
• Something has to give. Either rates and equities go up in tandem or else the current narrative is wrongfooted

• China-Malaysia /: Q&A: Malaysia’s new trade minister explains why China matters to Southeast Asia
• Security /: China spells out ‘Global Security Initiative’ for international conflict settlement
• ChatGPT /: Chinese educators should embrace ChatGPT as part of reform, experts say

• Budget 2023 signalled continued fiscal conservatism that risks increasing public savings beyond what is economically efficient.  More money can be spent on pursuing long-term goals. 
• The step up in social assistance schemes was welcome, but there is considerable latitude for more support for Singaporeans to face looming economic and social challenges. 
• Goodies in Budget 2023 can be justified by prevailing macroeconomic conditions and the government’s policy goals, so the budget is not sufficiently indicative of an early election.

• The latest budget continues a contractionary fiscal stance, in line with policy normalization following the massive pandemic-induced expansion in 2020. 
• Further monetary tightening is on the cards, given pressures from labour markets and further room for the services sectors to recover.
• Singapore’s growth prospects have improved at the margin, arising from China’s recovery and resilience in advanced economies.  Services exports and fixed investments also support domestic activity. 

• Russia-Ukraine /: One year into Russia-Ukraine war and still no end in sight
• Investment banking / In Depth: Hiring of ICBC veteran looms over disappearance of China Renaissance founder
• IPOs /: China completes rollout of new IPO system with inclusion of main boards in Shanghai, Shenzhen

• The Flash PMIs rebounded further away from recessionary levels in Feb-23. The resilient output is a tailwind to employment, excess inflation, and above-neutral rates.
• Falling forward rates have proved premature, but their partial reversal has not yet broken bullish spirits. Expectations are too high, especially in the UK.
• Low official inflation forecasts are conditional on conquering the inflation issue. More aggressive steps are needed to avoid defeat and its persistently high pressures.

• Our Dollar’O’Meter hints of further USD weakness on the cards in coming months
• Relative liquidity, relative inflation and relative forward interest rates suggest a weaker USD
• The outlook for the USD is a bit more muddy in H2-2023, but we remain negative for now

• 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 My E.G. Services (MYEG MK), Pentamaster Corp (PENT MK), Keppel Corp (KEP SP), and Adaro Energy (ADRO IJ).
• There were also insights on Sea Ltd (SE US) ahead of its 4Q2022 results, Sembcorp Marine (SMM SP), and ESR-LOGOS REIT (EREIT SP) in Singapore.

• Global Liquidity cycle bottomed around October 2022 based on our calculations, immediately following the UK gilt crisis. That is no coincidence!
• Central Banks are increasingly using their balance sheets to focus on financial stability. Expect more subtle forms of YCC in the future
• QT (quantitative tightening) is effectively dead. Central Banks are becoming active collateral managers. Investors must closely watch the MOVE not the VIX

• The sensitivity of liquidity to changes in monetary policy has increased since the adoption of quantitative easing in the aftermath of the global financial crisis (GFC).
• The importance of officially-sourced liquidity has increased since the GFC via central bank asset purchases, but privately-sourced liquidity still dominates the global pool.
• Investors’ willingness to extend duration risk with inflation still above desired levels could determine where significant amounts of global savings and liquidity will be allocated in 2023.

• ONE WEEK until “The Most Important Election of the Year”. Young disenfranchised Nigerians hope that outsider, Peter Obi, can shake-up a Nigerian democratic system in decline.
• Investors should not let their future earnings rely on who they think is going to win the Nigerian election. Instead you should focus on the circumstances surrounding the election.
• The best outcome to hope for as an investor is a peaceful ballot with minimal controversy – albeit the current outlook is concerning.

• Seasonal adjustments are all time high in January due to noise from Omicron in 2021/2022
• Around 50% of the cyclical upswing seen in January is driven by extraordinary adjustments
• Both inflation, retail sales and ISM Services printed higher than they should

• Is rising inflation becoming a problem again for central bankers?
• While the Fed may be on the verge of a pause, last week’s hot PPI report and slightly than higher-than-expected CPI print have raised doubts about a dovish pivot.
• Only two major central banks, the BoJ and the PBoC, are meaningful suppliers of global liquidity. The rest are raising interest rates and engaged in quantitative tightening.

• A review of the performance of the major regions shows that all regions have achieved golden crosses, but MSCI Emerging Markets is lagging and testing its 50 dma.
• Could EM weakness unravel the bull case? We find that EM equities have become a crowded trade based on the China re-opening narrative, which is showing signs of sputtering.
• We believe the China cyclical re-opening rebound may become a drag on EM equity performance, it is unlikely to derail the equity bullish impulse that just began in 2023.

• Global Fund managers are positioned at their highest ever net overweight in the EMEA Technology sector.
• EMEA Technology has been at the forefront of a broader diversification away from key sectors in the Americas region.
• ASML and SAP SE are prominent holdings among Growth and GARP investors, whilst Value funds prefer Nokia OYJ and Nxp Semiconductors 

• Over the past year, what was good for the US dollar was bad for the stockmarket.
• The world’s reserve currency lubricates (or seizes up) financial markets.
• A weak dollar is bullish, and a strong dollar, bearish. The dollar was strong (the euro weak) until September, and that put downward pressure on stocks.