Macro

In today’s briefing:

Reasons to Financial Model the Yom Kippur War
Buy Now, Pain Later
GEM Fund Q3 Performance. Active Managers Claw It Back After Blockbuster September.

Reasons to Financial Model the Yom Kippur War

The combination of high energy prices and a determined hawkish Fed is reminscient of the Yom Kippur War and the subsequent Arab Oil Embargo, which crashed the U.S. economy.
But it may not be as bearish as the 1974 bear market. Investors have to be prepared for a sudden Plaza Accord style policy decision to weaken the USD.
Another bullish development could see the end of the Russo-Ukraine war, which could spark a rip-your-face-off stock market rally.

Buy Now, Pain Later

We are constructive on the U.S. stock market for the next few weeks, perhaps as far as to year-end.
Investors need to be prepared for turbulence once any short-term rally peters out.
This is a bear market, and don’t mistake a bear market rally for the start of a fresh bull.

GEM Fund Q3 Performance. Active Managers Claw It Back After Blockbuster September.

By Steven Holden

Active EM managers outperform by 1.13% in Q3, with 59.3% of funds outperforming the MSCI EM Index
All Style groups outperformed the benchmark. Value underperformed Growth. Significant outperformance at the Small/Midcap end of the spectrum.
Key drivers: Underweights in China/Overweights in Brazil, Argentina and Mexico. Cash holdings, overweights in MercadoLibre and underweights in Tencent

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Oct 08

Daily Brief Macro: KOSDAQ 150 Rebalance in December Highlighted by Locals and more

In today’s briefing:

KOSDAQ 150 Rebalance in December Highlighted by Locals

KOSDAQ 150 Rebalance in December Highlighted by Locals

By Douglas Kim

This article discusses the potential inclusions and exclusions of KOSDAQ 150 rebalance in December 2022 (especially those that are highlighted by the locals).
The stocks that are potential inclusions in the KOSDAQ 150 index include Sungeel Hitech (365340 KS), HPSP (403870 KS), and CanriaBio. We highlighted 8 companies in the potential inclusion list.
The potential exclusions in the KOSDAQ 150 index include Cmg Pharmaceutical (058820 KS), AptaBio Therapeutics (293780 KS), and Eugene Corp (023410 KS).

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Oct 06

Daily Brief Macro: LDI – Leveraged and Dangerously Illiquid? and more

In today’s briefing:

LDI – Leveraged and Dangerously Illiquid?

LDI – Leveraged and Dangerously Illiquid?

By Mark Tinker

The recent panic in the LDI market has received a lot of coverage, some of it breathless and designed to promote a short narrative, but much of it calm and authoritative – and generally pointing out the broader issues.
As with previous commentary on things like Covid, we are not setting ourselves out to be experts on LDI investing, rather we are reading what the experts are saying, and adapting our narrative accordingly, rather than trying to shoe-horn the events into our pre-existing viewpoint.
We thus continue to recommend the articles in the FT on markets (it’s just their opinion writers we tend to disagree with), even though they are behind a paywall.

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Oct 04

Daily Brief Macro: The Week That Was in ASEAN@Smartkarma – Resilient Indonesia and more

In today’s briefing:

The Week That Was in ASEAN@Smartkarma – Resilient Indonesia, MAPI’s Secret, and SAT’s Acquisition.
The Commodity Report #71

The Week That Was in ASEAN@Smartkarma – Resilient Indonesia, MAPI’s Secret, and SAT’s Acquisition.

By Angus Mackintosh

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 PT Avia Avian, Mitra Adiperkasa, Prodia, Selamat Sempurna, Prodia, Sariguna Primatirta (CLEO), Bank Mandiri, Adi Sarana Armada (ASSA), Bank Negara Indonesia, and Medikaloka Hermina.
There were also macro insights on the Philippines and Indonesia plus SATS on its acquisition plans and the impact of the Total Access Communication/ True Corp merger on SET Index.

The Commodity Report #71

By The Commodity Report

We expect the oil crisis to worsen once economic activity resumes again. Till then some months will probably pass.
Nevertheless, the industry hasn’t increased production significantly enough, and the SPR release by the Biden administration veiled the actual grim picture in the oil market.
Those stories from Bloomberg show how relaxed the sentiment seems to be again. I have the feeling that this sentiment won’t age well at all.

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Oct 03

Daily Brief Macro: A Coming Crash: The Law of Conservation of Financial Volatility? and more

In today’s briefing:

A Coming Crash: The Law of Conservation of Financial Volatility?
Seven Reasons Why Traders Should Grit Their Teeth and Buy
The Anatomy of a Failed Breadth Thrust

A Coming Crash: The Law of Conservation of Financial Volatility?

By Michael J. Howell

Volatility is sequential and the turbulence and illiquidity in forex and bond markets will inevitably spread to equities? A CRASH could be coming!
VIX has already moved up, but this barely acknowledges volatility elsewhere. The VIX always sees greater volatility because it includes the effects of economic volatility as the business cycle breaks
Upcoming World recession seems set to force the VIX above 50 index points. Stay ‘risk-off’ and choose ‘carry’ at the front-end of yield curves

Seven Reasons Why Traders Should Grit Their Teeth and Buy

Market and sentiment indicators are lining up for a strong relief rally.
While the intermediate-term trend is still down after a bounce, traders should be prepared for a rip-your-face-off rally that could happen at any time.
To be sure, tail-risk is still present. The Guardian reported that Ukrainian intelligence believes the threat of Russian use of tactical nukes are “very high”.

The Anatomy of a Failed Breadth Thrust

Many technical analysts turned excited in late August when the percentage of S&P 500 stocks above their 50 dma surged from 5% to 90%. Since then, the breadth thrust fizzled.
We can think of two possible scenarios for U.S. equities. The first is a multiple bottom, with several re-tests of support and a final bottom next spring or summer.
The second the world experiences a financial crisis with sufficient contagion risk that global central bankers are forced to pivot monetary and save the system.

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Oct 01

Daily Brief Macro: End of Mandatory Lock-Up Periods for 42 Companies in Korea in October 2022 and more

In today’s briefing:

End of Mandatory Lock-Up Periods for 42 Companies in Korea in October 2022
Looming Structural Pressures Suggest Fed’s Anti-Inflation Battle Could Be Prolonged
CX Daily: Lessons From The Chinese Silk Road Fund’s Eight-Year Journey Along The Belt And Road
EA: Inflation Burns Up Forecasts Again

End of Mandatory Lock-Up Periods for 42 Companies in Korea in October 2022

By Douglas Kim

We discuss end of the mandatory lock-up periods for 42 stocks in Korea in October 2022, among which 7 are in KOSPI and 35 are in KOSDAQ.
These 42 stocks on average could be subject to further selling pressures in October and could underperform relative to the market.
Among these 42 stocks, the top 3 market cap stocks include NH Investment & Securities, Sungeel Hitech, and Dongwon Systems. They could be exposed to greater selling pressures in October.

Looming Structural Pressures Suggest Fed’s Anti-Inflation Battle Could Be Prolonged

By Said Desaque

Financial markets are finally dancing to the tune of the Fed. Unless price pressures ease significantly in Q4, real interest rates may not rise sufficiently to restrain the economy.
Potential GDP growth has slowed since 2000 which has lowered the neutral federal funds rate. Financial assets have not reflected this outcome due to unprecedented support from the Fed.
The Fed is confident about restoring price stability. Supply-side forces will play an important role in determining inflation. Labour shortages and higher federal government borrowing will steepen the yield curve.

CX Daily: Lessons From The Chinese Silk Road Fund’s Eight-Year Journey Along The Belt And Road

Exclusive: Lessons From the Chinese Silk Road Fund’s Eight-Year Journey Along the Belt and Road
Restaurant blaze kills 17 in northeastern China
As tensions mount, Xi and Japan’s Kishida discuss future of ties

EA: Inflation Burns Up Forecasts Again

By Phil Rush

EA inflation surged beyond forecasts again to rise 82bp to 10.0% in Sep-22. The only consolation is that the upside news was in energy rather than the core.
Month-Ahead forecasts are consistently exceeded, with the latest 0.36pp miss only about a tenth below the past year’s average. Inflationary trends appear unwavering.
ECB hawks are likely to seek another 75bps hike in October, despite not being the norm. It is in a rush to get rates back to neutral, if not beyond.

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Sep 29

Daily Brief Macro: Dr BoE Brings Bonds to Heel for Healing and more

In today’s briefing:

Dr BoE Brings Bonds to Heel for Healing
The Philippines: Limited Upside To Peso Even If Dollar Strength Abates
CX Daily: Cash-Strapped Local Governments Turn to Financing Vehicles to Plug Fiscal Shortfalls
CX Daily: Has China’s Monetary Policy Reached Its Limit?

Dr BoE Brings Bonds to Heel for Healing

By Phil Rush

UK market misfunctioning has forced the BoE to intervene in-between meetings. It will buy gilts every day until 14 October without an overall limit.
That aggressive intervention is reassuringly responding to the real issue rather than blindly following commentators calling for rate hikes to match dysfunctional pricing.
The BoE has postponed its active gilt sales until 31 October. However, the forced U-turn within a week should highlight the risk of its worryingly non-state-dependent policy.

The Philippines: Limited Upside To Peso Even If Dollar Strength Abates

By Manu Bhaskaran

Both the consumer and business confidence surveys shine a light on the negative spillovers from rising inflationary pressures in the Philippines.
CPI inflation may have peaked, in our view, but the higher price pressures will weigh on household spending just as the effects of monetary tightening become more apparent.
Longer-Term, a structurally weaker Peso is likely under the incumbent administration, given the dearth of FDI from a timid reform agenda and slowing remittances and BPO revenues.

CX Daily: Cash-Strapped Local Governments Turn to Financing Vehicles to Plug Fiscal Shortfalls

In Depth: Cash-strapped local governments turn to financing vehicles to plug fiscal shortfalls
Communist Party elects delegates ahead of 20th National Congress
Charts of the Day: Yuan’s cross-border settlements grew in 2021

CX Daily: Has China’s Monetary Policy Reached Its Limit?

Monetary / In Depth: Has China’s monetary policy reached its limit?
Cyberattack / Alleged U.S. cyberattack targeted China’s key telecom infrastructure
Pensions / China announces tax breaks to kick start personal pensions market

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Sep 28

Daily Brief Macro: North America Hits New Highs as Global Rotation Continues and more

In today’s briefing:

North America Hits New Highs as Global Rotation Continues
CX Daily: The Heated Fight Against Facial Recognition Scams
BoE: Waiting for Broken Markets to Heal
Commodities, Politics, and Mispriced Securities in Emerging Markets

North America Hits New Highs as Global Rotation Continues

By Steven Holden

North American allocations continue to trend higher, hitting a record average weight of 58.1% across the 358 global funds in our analysis
North America has consistently stolen market share from other key global regions, most notably Developed Market Europe, where average fund weights have hit all-time lows of 24.24%
Sectors driving allocations higher are led by Energy, Health Care and Industrials with active rotation in to all 3, whilst Consumer Staples have seen signs of investor fatigue.

CX Daily: The Heated Fight Against Facial Recognition Scams

Cover Story: The heated fight against facial recognition scams
China foreign minister urges U.S. to clearly denounce Taiwan separatist activities
Chinese mainland students are flocking back to Hong Kong universities

BoE: Waiting for Broken Markets to Heal

By Phil Rush

Markets puked after the new UK government announced its fiscal plans, and panic ensued. Sterling and rates remain at historically extreme levels.
Rate rises are more than offsetting the inflationary effect of GBP devaluation, which suggests the BoE need not match hawkish pricing unless neutral rates have surged.
We struggle to see the BoE massively exceeding the Fed’s tightening pace and extent. Contrarian trades are tough, but that is arguably why the current spread exists.

Commodities, Politics, and Mispriced Securities in Emerging Markets

By Dylan Waller

Commodity price gyrations and political black swan events will shape frontier and emerging equity markets during the next few years.
2022-2023 are the best years to selectively shop for attractive narratives, as normalization in commodity prices and geopolitical tensions is necessary in order to adopt a holistic bullish view of emerging market equities.
If equity valuations move towards Post 2008 levels, then emerging market equities could be one of the most attractive buys of this decade by 2024 or later.

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Sep 27

Daily Brief Macro: FOMC Acknowledges Its Policy Error and Will Front-Load Rate Hikes and more

In today’s briefing:

FOMC Acknowledges Its Policy Error and Will Front-Load Rate Hikes
US Inflation and Asia: A Regime Change in Asset Pricing Looms Large Amid Higher-For-Longer Yields
Supply-Chain Reconfiguration: Acceleration And Not Exodus Of Production Relocation Out Of China
Taiwan: Export Orders and Border Re-Opening Are Green-Shoots For Growth

FOMC Acknowledges Its Policy Error and Will Front-Load Rate Hikes

By Prasenjit K. Basu

FOMC raised the FF rate by 75bp for the third consecutive time, taking it to 3-3.25% as expected. We expect the Fed Funds rate to peak at 5% in Mar’23.
The more aggressive monetary tightening by the US (outlined in the SER) will likely bring forward the US recession to Q2CY23 (two quarters ahead of our previous forecast).
USD will continue to strengthen, weakening the prospects for emerging markets. India, Indonesia, Vietnam will be safe havens, and Japan will continue riding the weak Yen. Avoid EM-creditor China.

US Inflation and Asia: A Regime Change in Asset Pricing Looms Large Amid Higher-For-Longer Yields

By Nicholas Chia

The Fed is expecting a terminal rate of 4.6% in 2023, which suggests that it is willing to risk over-tightening. Near-term, that has two implications for Asia.
Dollar strength will persist beyond what we had expected, with added strains on Asian currencies and on central banks to raise rates more aggressively.
That policy tightening will translate into a higher cost of capital that will weigh on US capital spending, and therefore on demand for Asian exports.

Supply-Chain Reconfiguration: Acceleration And Not Exodus Of Production Relocation Out Of China

By Manu Bhaskaran

Production relocation from China is accelerating. But our baseline scenario is a diversification of production locations by international manufacturers, not an exodus of production from China.
Continued offshoring to other low-cost economies, near-shoring, and re-shoring are the main production relocation strategies for firms. Friend-shoring is an emerging alternative.
Firms are unlikely to have a preferred relocation strategy. Rather, production relocation decisions will be made based on the specific needs of a business.

Taiwan: Export Orders and Border Re-Opening Are Green-Shoots For Growth

By Nigel Chiang

Taiwan’s economy has been bolstered by export orders, industrial production and bolder border reopening.
While export orders from China has been a drag, orders from the US, ASEAN and Europe have held up admirably, despite the formidable headwinds.
The government’s plans to further loosen covid restrictions will probably help to boost the economy with the introduction of the visa-free travel for foreign tourists.

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Sep 26

Daily Brief Macro: Icarus Is Falling! The Markets Are Breaking: More Volatility Is Coming and more

In today’s briefing:

Icarus Is Falling! The Markets Are Breaking: More Volatility Is Coming
The Right and Wrong Way to Throw in the Towel
The Week That Was in ASEAN@Smartkarma – Astra International, Ace Hardware, and DTAC’s Merger
The Commodity Report #70

Icarus Is Falling! The Markets Are Breaking: More Volatility Is Coming

By Michael J. Howell

Daily Liquidity has tanked lower, causing bond term premia to worryingly collapse to near all-time lows
S&P500 (SPX) likely to test 3200 because of skidding Liquidity, but may even drop below 3000 as earnings get crushed.
Lower term premia are already set-in-stone and have always led to much weaker reported corporate earnings some 15 months later. US S&P500 earnings could skid by over 20% in 2023

The Right and Wrong Way to Throw in the Towel