Macro

• 2023 will prove far better for most investors. Although the major World stock and bond indexes will range sideways, several national markets and sectors will perform strongly
• Behind our optimism is an expansion the all-important Global Liquidity cycle from last October. This is driven by the People’s Bank of China and paced by the US Federal Reserve
• World fixed income markets are exhibiting a ‘normal’, not the distorted cycle many claim. Coming months should see skidding bond market volatility and the beginning of yield curve steepening

• Active funds head in to 2023 overweight Industrials and Staples versus underweight Financials and Communication Services
• Energy stocks are still only owned by 51% of funds yet captured the largest increase in ownership through 2022.  
• China Banks are a key underweight.  Only 11% of funds are positioned ahead of the iShares MSCI China ETF benchmark.  Airlines, Casinos/Gaming and Airfreight/Couriers were the winners in 2022.

• With stocks up while the dollar is down, 2023 continues to surprise.
• It was supposed to be the great recession, but the market says otherwise.
• That is one of the confusions around gold. In this week’s Atlas Pulse, I compared the bull vs bear arguments. 

• The general market consensus going into the new year was that commodity prices would continue to correct.
• We also positioned ourselves in this camp, as we predicted the turnaround story a few months later.
• While some commodities such as wheat or natural gas (both commodities that had been priced in a risk bonus for a long time due to the Ukraine war) fell sharply, other commodities such as corn, soybeans, orange juice, or soybean meal remain not far from their highs.

• 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 Bank Central Asia, Bank Negara Indonesia, Central Retail Corp, Comfortdelgro Cor, Sea Ltd, and Thai Banks.
• We also saw insights on One Enterprise and Ramkhamhaeng Hospital also two pieces on the Thai Economy plus insights from Brian Freitas on Index rebalancing in Indonesia and the Philippines.

• While the short-term breadth and momentum indicators like the percentage of S&P 500 above their 20 and 50 dma exhibit negative divergences, the percentage above their 200 dma has resilient
• We interpret these readings as the S&P 500 may need a period of consolidation or pullback within a longer-term bull trend.
• However, the best opportunities are to be found within cyclical stocks and in non-U.S. regions.

• When the TGA is built up due to T-bills issuance, the ON RRP usage drops
• Net/Net it meanas that USD liquidity keeps printing at more benign levels than anticipated by many
• The USD liquidity additions will continue throughout February and March

• Ahead of the February FOMC meeting, our base-case scenario has changed to a cyclical and reflationary rebound in Q1 and Q2.
• The rebound is led by the prospect of China re-opening its economy and the positive liquidity effects of the U.S. Treasury’s extraordinary measures to avoid default.
• As the inflationary effects of the China re-opening become clear, the Fed will have to reconsider its rate pause and possibly raise rates by late Q2 or early Q3.

• Equity positioning remains very bearish despite the recent spike in price action
• The EUR remains a crowded long in FX space, while the AUD and JPY are still short
• The market continues to expect market rates to increase despite falling inflation 

• European equities have seen an incredible start to 2023 on top of strong performance in late 2022.
• But European manufacturing and tech finds itself under pressure from massive public investments in both the US and China.
• What to make of the EU’s response and how is the outlook for Europe?

• Despite Abenomics, Japan’s non-financial corporations have continued to hoard cash since 2005 to its current level of 44% of GDP.  Overseas investment has increased since 2005, indicating higher profitability.
• Although share buybacks have surged in recent years, they remain significantly below US levels, but are arguably more sustainable due to high cash balances.
• Japanese equities are cheap on a cross-border basis, but corporations’ shift to focus on shareholder value under Abenomics has not produced richer valuations.

• Laos’ public debt has likely exceeded USD20 billion, or 120% of its GDP. China’s share could be as high as USD12.3 billion, making it the largest creditor nation.
• If the debt concession Beijing offered to Sri Lanka this week is any guide, Laos could still avert a full-blown sovereign default.
• In return, Vientiane may have to grant its northern neighbor additional tax exemptions and greater access to strategic industries. This may all be part of the BRI playbook.

• In Depth: China boots record number of companies from its bourses

• Covid deaths fall nearly 80% from January peak, China CDC says

• China shivers through freezing Lunar New Year as temperature records tumble

• As we discussed last week, its different this time.
• Given that, it’s no surprise that markets and investors are confused about what is happening and more importantly what’s next.
• We see this clearly in the price action of both stocks and bonds, especially here in the US.

• The EUR/USD exchange rate has been moving upwards, as seen in Graph 1. There were four secondary movements throughout the considered time period.
• More specifically, the currency pair showed an upward movement from November 30th up to December 2nd.
• From 3rd to 12th of December, the exchange rate fluctuated up and down, ending with a higher price range on December 14th.

• APAC-Inflation is booming as a consequence of lagged effects of European energy buying and the Chinese reopening
• The new BoJ governor will be tested almost immediately due to rising inflation 
• US wages have PEAKED, which is likely to spill-over to lower US inflation

• Despite differences in views on the legacy of Abenomics, many people agree that Abenomics played a key role and was a clear tipping point for corporate governance improvements in Japan.
• Likewise, we believe Yoonomics will follow similar steps and make significant efforts to improve corporate governance reforms in Korea. 
• So far in 2023, CORPORATE ACTIVISM has been THE MOST IMPORTANT TOPIC in Korea’s equity markets. 

• The performance of equities, especially highly shorted equities, since the turn of the year has been remarkable. (See below for names.)
• This performance was achieved via the embrace of the riskiest attributes: small caps, aggressive industries, lack of profitability, leverage, etc… as well as short covering. See below.
• We’re betting this begets a reversal over the coming weeks and months.

• A mild start to the European winter has reversed the past year’s energy price surge. They remain painfully high and volatile by typical standards amid ongoing supply risks.
• Falling futures prices roll into a lower energy price cap. We now expect the government to cancel its planned Energy Price Guarantee rise to avoid a temporary spike in Q2.
• The price level effect lowers inflation for a year, helping the government meet its 2023 plan. A cut could still occur in Jul-23 if not offset by extra policy costs.

• India’s real policy rate was +0.55% in Dec’22, as CPI inflation receded to 5.72%YoY, within the RBI’s 2-6% inflation target for the second consecutive month. No more rate hikes likely. 
• Industrial output expanded 7.1% YoY in Nov’22, with consumer nondurables output up 8.9%YoY — tentative sign of a turnaround in consumption after a half-year of sluggishness. Consumer durables rebounded too. 
• After a stagnant decade, capital goods output expanded 20.7%YoY in Nov’22 (+14.9%YoY in Apr-Nov’22), capital goods imports +15.4%YoY. Rebounding GFCF will ensure 7.5% RGDP growth in FY23, 7.2% in FY24.

Is India the next growth miracle? Market sentiment is increasingly optimistic that this will be so. In particular, the country’s remarkable progress in digitalizing the economy has created the conditions for a burst of entrepreneurial activity. However, some of its traditional weaknesses such as limited openness, macroeconomic mismanagement, and social cleavages need to be remedied to unlock India’s full economic potential. 

• Seek carry / exposure in Eastern Europe, if you think the USD will weaken further – it is your best BETA
• Prefer metals to oil as the correlation between a weaker USD and higher commodity prices is stronger and more stable in precious -and industrial metals over time
• Hold less (USD) cash than in 2022 as investors will seek for the USD cash exit door

After years of hardball on economic and foreign policy, policymakers in Beijing are embarking on major policy pivots that aim to resuscitate an ailing economy and re-engage with foreign governments on friendlier terms. The jury is still out on whether these are sufficient.

• Flash PMIs broadly bounced back a little in Jan-23, as activity proved surprisingly resilient. Manufacturing’s trend decline broke, at least temporarily.
• Most firms are still reporting activity declines, albeit fewer than before, aided by falling energy prices. Resilience remains too broad to break tight labour markets.
• Central banks need cyclical pressures to fall back to target-consistent levels. Postponing that victory sustains the need for tight monetary policy.

• 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 Semen Indonesia (SMGR IJ), Kalbe Farma (KLBF IJ), CP ALL PCL (CPALL TB), as well as an initial view on Pertamina Geothermal’s IPO.
• In addition, there was commentary South East Asia’s Food Delivery business plus Olam Group (OLG SP)‘s plans to unlock value through an IPO of Olam Agri, and a lot more. 

• The recent rollout of a tax-deferred individual pension scheme marks a pivotal moment in the country’s preparation for seismic shifts in its demographics.
• The transition towards Pillar 3 of the retirement system has important implications for global asset allocators’ long-term China investment thesis.
• It’s still early days, but there are ways to participate in the growth of private pensions. We look at the scale of the opportunities available and the potential beneficiaries.

• Sentiment is very important when it comes to trading any financial asset. In terms of commodities, Goldman Sachs seems to be still a bit too optimistic for me.
• This year has started with a pullback in prices driven by warm weather shock and rising interest rates, Jeff Currie, the head of commodities at the investment bank, said at a presentation in London on Monday.
• But demand in China starting to rebound and there’s insufficient investment in supply, meaning the year as a whole will be a “Goldilocks” moment for rising prices, he said. 

• Rising uncertainty about the economic outlook and investors’ lack of understanding about quantitative tightening (QT) have raised concerns of unintended and excessive US monetary tightening.
• Disintermediation by households is putting downward pressure on bank reserves via direct cash purchases of T-bills due to unattractive returns on certificates of deposits. 
• The US debt ceiling impasse raises the prospect of QT being neutralised as depletion of the Treasury’s General Account at the Fed is offset by an increase in bank reserves. 

• We still keep a watchful eye on copper which, in our opinion, still possesses all the fundamentals for further upside. 
• JPY positioning is way too SHORT, should the BoJ further widen the band. AUD is too NEGATIVE, if China is to fully reopen.
• We perceive the near future somewhat optimistically – relatively to consensus. We believe that the market is a bit too bearish, and we favor some net equity exposure

• Christopher Waller from the Fed hinted of a rule-based policy setup on QT
• If USD reserves reach 10-11% of GDP, the Fed may consider pausing the balance sheet
• A lot of liquidity will have to be withdrawn to get to 10% of GDP – S&P 500 at 3250?

• Will the soft landing shoots be trampled? The coming weeks will be an acid test. Risk levels are elevated and everything has to go right for the bulls to prevail.
• Earnings season is in full swing and the macro narrative of a soft landing could shift suddenly to an earnings recession.
• China is celebrating its Spring Festival as workers return to their homes for the Lunar New Year. Spring Festival travel has the potential to develop into a COVID catastrophe.

• Technical analysts recently became very excited when price momentum signals began to flash buy signals. Should you trust the historical evidence of breadth thrusts? Opinions are varied.
• The S&P 500 stalled at trend-line resistance and support can be found at about 3850, while resistance is at about 3970.
• From a fundamental perspective, a substantial number of S&P 500 stocks will report earnings in the next 2–3 weeks and set the tone for equity risk appetite.

• Firstly, a Happy Chinese New Year to all our friends and colleagues in Asia, for as we pointed out in a post this time a year ago Chinese New Year is celebrated not only in Greater China but across much of Asia.
• Indeed, we would estimate that close to 2bn people are celebrating this week, and after the disruption of the last two years, there is enormous pent up demand for travel and social interaction. Enjoy!
• This year is the year of the Rabbit, or more specifically, the Water Rabbit, as each of the 12 signs of the Chinese Zodiac rotates through a cycle of five elements, nicely described in the annual (tongue in cheek) investment guide from CLSA on the Feng Shui Index .

• Analyst sentiment improved.  Net 32% of companies are seeing raises (v 27% last week).  The average estimate revision  is a raise of +0.8%, very slightly higher than last week. 
• Sentiment is uniform and bullish for Precious Metals, Auto Parts, Electronics/Appliances, Personal Care, Restaurants, Software, Med/Nursing, Advertising/Marketing, Specialty Telecom.  Sentiment is deeply depressed for Oil Production, AgriCommodities and Shipping.
• New estimate cuts have come for AgriChemicals, Environmental Services, Hotels/Resorts and Major Banks.  Integrated Oil, Oil Production, Department Stores and Major Banks are in accelerating estimate downtrends. 

• The soft landing crew is increasingly taking over.
• No, the bond market’s base case is not a recession – it’s immaculate disinflation.
• Yes, getting this call right is crucial for your portfolio performance in 2023.

• Our models suggest that we should see further weakness in the USD in the coming months.
• Expected interest rate divergence (EU/US) would, all else equal, strengthen the Euro relative to the Dollar.
• Another source of dollar weakness can be attributed to the rise in the Chinese credit impulse.