Macro

• The UK government is delivering the tax cuts pledged by Liz Truss during her leadership campaign and more. Tax hikes are broadly reversing while spending is maintained.
• New policy decisions cost about £40bn a year, plus £60bn for the energy price guarantee in year one. Stimulus from a stamp duty cut leans against the BoE’s rate hikes.
• Measures may not survive the next general election. The risk of another reversal lessens their impact on incentives. A lack of proper scrutiny also doesn’t help confidence.

• After last week’s Bear Porn note, this explains best the focus of the note.
• We have a critical few weeks ahead of us as we open with a gap down on the index and many stocks on Thursday 22nd.
• However, I think I will focus on just a few things that matter most, the four essential heavy weights and, last but not least, the long-term chart of the Hang Seng Index.

• Central banks are trying to catch up with the Fed, but the US dollar remains strong.  The Fed will not be swayed from its hawkish stance to restore price stability.
• The restoration of normal supply chains since the pandemic has been severely hampered by the willingness of Western countries to embrace tariffs and sanctions to pursue geopolitical interests. 
• Corporate bond issuers face higher funding costs due to quantitative tightening, but the ECB faces tougher challenges than the Fed in this realm of policy conduct. 

• The BoE hiked by another 50bps to 2.25%, as economists (including us) expected, rather than the 75bps risk embedded in market pricing. Dissent split on both sides of this.
• Further forthcoming fiscal stimulus will likely encourage the BoE to forcefully hike again in November before slowing as the 2yr inflation outlook rolls below the target.
• Active gilt sales are beginning, but a hurdle to change outside of annual reviews means the programme is worryingly unresponsive to the economy’s requirements.

• Drugs / In Depth: Why China’s regulators have cough medicine in their sights

• Corruption / Former justice minister given suspended death sentence

• Yuan / China and Kazakhstan set up offshore yuan clearing

• President Biden’s statement committing the US to defend Taiwan will have far-reaching implications, forcing a re-think in China’s strategy. 
• The statement will encourage Chinese leaders to turn further inward to insulate the Chinese economy from US pressure.
• Facing a more difficult position in the Taiwan theatre, it would make sense for China to find ways to appease India . India may well be a winner from that.

• In the last three posts on Model Portfolios, we have looked at Global Bonds, Global Equity Factors and Global Equity Themes.
• In each case we have made the case for applying the principles of Market Thinking in terms of our Confidence Scores combined with disciplined and dynamic allocation (between bonds, Factors and Themes respectively) to achieve a better risk return profile than the benchmark indices.
• In particular the ability to allocate higher amounts to cash (in reality ultra short dated bonds) has enabled us to manage the downside risk and considerably reduce volatility.

• In Depth: The shadowy businessman behind a multibillion-dollar bank swindle

• Chongqing monkeypox patient caught the disease in Berlin, China CDC says

• Former Shanghai police chief sentenced to life in prison for corruption

• Cover Story: The double squeeze on China’s ‘sandwich generation’.

• Covid quarantine bus crash kills 27 in Guizhou province.

• CDC expert warns of potential monkeypox outbreak as first case hits mainland.

• In Depth: How China’s insurance industry is slowly opening to the ill

• Officials probed after fatal crash of bus traveling to Covid quarantine facility

• Hong Kong may scrap hotel quarantines and pre-arrival tests

• The economic momentum is waning as tailwinds from the reopening fade.
• Inflationary pressures have trended up, primarily because of base effects. We envision inflation easing to 7.0% in 3Q22 and 6.4% in 4Q22.
• But, the RBI will not let up on tightening just yet, given that price pressures are stickier in India. We therefore pencil a 35bps rate hike on 30th September.

• Stimulus is bearing fruit as economic activity picks up amid a continuing slump in the real estate sector and continued lockdowns.
• But stronger growth is not necessarily on the cards yet. The effectiveness of stimulus is diminished by weakened confidence in the economy and poor incentives to implement policy.
• The net result is a sluggish recovery in growth with continued large downside risks. The authorities will have little choice but to expand their support measures more aggressively.

• Early signs of export declines: Export figures for Taiwan and South Korea, two powerhouse exporters of technology-related goods, are showing the beginnings of a slowdown
• Inventory accumulation has continued: A combination of a build-up in inventories and a downturn in Capex intentions are further risk factors for the sector’s performance
• But long-term structural factors such as changing consumer and business practices and government priorities may provide a medium-to-long term buffer against cyclical forces.

• Probably the best news of the week was that a rail strike in the US was averted after both parties agreed on a deal including higher wages and benefits for rail workers.
• The deal includes a 24% wage increase over five years, including 14,1 % effective immediately as well as five annual $1.000 payments, according to the National Carriers’ Conference Committee.
• According to the Bureau of Labor Statistics, there are currently 150.000 people working in the US railway sector.

• S&P500 (SPX) likely to test 3200, may be even 3000, as earnings get crushed. It looks like a classic ‘second leg-down’ in the bear market
• Tight Central Bank Liquidity has hit sensitive bond markets driving yields higher, but also causing term premia to worryingly collapse to near all-time lows
• Term premia fall is already set-in-stone and historically has led to much weaker reported corporate earnings some 15 months later. Hence US S&P500 earnings could skid by 20% in 2023

• Is the universe unfolding as it should? Most technical and sentiment indicators argue for a near-term double bottom in the S&P 500.
• The new bull narrative sounds far too easy. Macro and fundamental factors argue for further downside potential.
• Most of the growth concerns and opportunities are outside the U.S., while large-cap U.S. equity valuations are elevated because of their perceived safe-haven status.

• It’s difficult to make definitive calls on market direction ahead of a FOMC meeting.
• Price momentum is negative in the wake of the hot CPI report and we would expect it to continue into the date of the meeting.
• Investors need to be prepared for a possible reversal should sentiment and positioning become excessively bearish and hawkish.

• The growth in China A-Share exposure has slowed as we approach full ownership across the EM active fund universe.
• China A-Share allocations have remained solid throughout this year’s volatility and heavy country rotation.
• Midea Group, Kweichow Moutai and Contemporary Amperex Technology remain the most widely held stocks, but others are starting to make their mark.

• 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 PropertyGuru (PGRU US), Moya Holdings Asia (MHAL SP), and Singapore Medical (SMG SP), as well as Tisco Financial, and Minor International.
• There was also macro commentary on the Philippines plus we look at Ace Hardware Indonesia at a 5-year low, and BFI Finance Indonesia post strong results.

• NEVs / In Depth: New battle lines emerge in China’s shifting NEV market. 

• Foreign affairs / Xi and Putin vow to have each other’s back. 

• Drought / Central China’s Hunan province faces severe drought. 

• Central to Market Thinking is the notion that there are Three Tribes at work in markets – the short term leveraged traders, the medium term asset allocators and risk managers and the long term investors.
• Sometimes they all move in harmony, making for powerful momentum markets, but more often they move in some form of discord.
• Understanding which of the tribes is driving markets at any time is thus central to Market Thinking.

• EA HICP inflation was revised up by 6bps in the final print for Aug-22, although that was masked in the rounding at 9.14%, unlike the surprise HICPxT rise to 9.3%.
• Underlying inflationary impulses diverged in August as France surged ahead of slowing Germany. Meanwhile, Italy picked up, and Spain eased.
• Fiscal support should help truncate the upside in EA inflation, allowing base effects to work through. Still, the ECB hawkishly faces a worryingly resilient core pressure.

• Payback was brutal in August after retail sales relied on Amazon Prime Day sales for buoyancy in July. All the main sectors fell m-o-m for the first time since Jul-21.
• The underlying trend decline remains intact and has now broadly reversed the rotation from covid, but with sales volumes still collapsing at about a 5% annualised pace.
• High inflation and rates are continuing to crush real incomes and sales volumes. More forceful rate hikes risk driving a recession as bleak as consumers already feel.

• Chinese exports have slowed significantly while import data showed that domestic demand weakened further.
• Policymakers are signalling an intensification of stimulus to arrest the economic descent and contain the fallout from the lockdowns. 
• But weak consumer and business confidence constrain their impact, in view of the scarring effect from the repeated lockdowns from the zero-Covid approach. 

• China’s BRI loans that funded infrastructure projects in emerging markets are turning sour. A more hostile West is seeking to disrupt China’s BRI-related soft-power objectives.
• Many BRI projects have stalled due to oversights and excessive top-down supervision. But China will not give up on the BRI – expect a recalibration of the BRI.
• The financing approach could change to focus more on project viability. The emphasis will shift from transport infrastructure to digital connectivity & clean energy , alongside a more geostrategic emphasis.

• Domestic demand remains firm, given the spirited performance by the bevy of lagging indicators.
• The Bangko Sentral ng Pilipinas is poised to rate rates by 50bps in this month’s policy review, given the hot core inflation print for August. 
• Market expectations for another jumbo 75bps hike by the Fed have translated into record weakness for the Philippine Peso as well.

• UK inflation undershot forecasts for a change, as the CPI and RPI rates slowed in August. The news was more mixed for us, with small offsetting surprises.
• Some past shocks are not repeating, with negative payback compounding the effect on transport prices. Underlying inflation remains far too high, though. 
• CPI inflation is in line with the BoE’s August forecast, while the new energy price cap has hacked down the peak. Forceful rate hikes should moderate after Sep-22’s jump.

• The Fed’s plans to shrink its balance sheet will accelerate this month. Investors should be wary of changes in US financial conditions as the Fed reduces its holdings of securities. 
• The Fed estimates that a $2.5 trillion reduction in assets by 2024 Q3 will be equivalent to a 50 basis points increase in the federal funds rate. 
• Quantitative tightening will be gradual and the Fed’s balance sheet will not return its pre-pandemic level, but the timing of its cessation depends on success in restoring price stability.

• 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 Total Access Communication and True Corp, as well as Carro and Ninja Van in the private digital space.
• There were also insights on Muangthai Capital (MTC TB) in Thailand and Sea Ltd (SE US) plus an interesting screen on the Indonesian banks.

• The UK unemployment rate was shockingly cut by 0.2pp to 3.6% in July amid resampling effects rather than genuine change. 
• Participation of the over 50s has crashed further. Vacancies trend down while the stabilisation of wage settlements suggests that the labour market cycle will still move towards burning out soon.
• Inflation is consuming pay rises for most workers. The energy price guarantee will avoid some intensification and lessen second-round effects from firms trying to keep up.

• Governments in developed economies are more actively intervening to reshape their industrial structures, with significant and mostly positive implications for Asia ex-China. 
• Competition in the semiconductor industry and production relocation hits China the hardest while the rest of Asia stands to benefit. 
• Defence and commodities exports from Asia will see a boost from increased government military expenditure and green industrial policies in the advanced economies.

• Ant Group / In Depth: Ant Group rebuilds for regulators, but at what cost?

• Foreign affairs / Xi to make first foreign trip since pandemic began

• Holiday / Tougher Covid measures weigh on Mid-Autumn Festival spending

• UK GDP rebounded by 0.2% m-o-m in Jul-22 after depressing bank holiday shifts. Merely returning to Feb-22 levels confirms that the UK economy is flatlining.
• Another new Bank holiday on 19 September will likely tip the economy into a technical recession. Surveys are also indicating increasingly broad-based contractions.
• The government’s energy price guarantee will curb the winter squeeze and the need for excessive monetary tightening. UK asset values can temporarily outperform.

• On 12 September, South Korea’s Financial Services Commission (FSC) announced significant changes to pre-disclosure of major insiders trading in Korea.
• The executives and the major shareholders of Korean companies will be required to disclose their shares transaction plans at least 30 days prior to the actual transaction date.
• The pre-disclosure of major insiders trading in Korea will have big impact on the Korean stock market including deterring large scale block deal sales.

In our next Webinar, we welcome Analyst Said Desaque, who will outline his outlook on the Asian economy and its opportunities. Is wage inflation becoming an issue for ASEAN countries? Is there the possibility of a yuan versus yen currency war? Tune in to find out more. 

The webinar will be hosted on Wednesday, 14 September 2022, 17:00 SGT/HKT.

Said DeSaque is a professional economist with over 33 years of experience covering the global economy, with significant expertise in the US, China, Japan and emerging markets. He worked with US investment banks for 25 years covering institutional investors in Europe, Middle East, Far East and Australia. Covers financial markets on a multi asset basis. Said has been an independent economist covering the global economy and financial markets for the past 8 years since founding DeSaque Macro Research in London.

• In our last post on Model Portfolios*, we considered looking at Global Equities through the lens of Factors – Momentum, Min Volatility, Value, Quality and Size.
• This allowed us to achieve diversification, while Dynamic allocation between the factors allowed us to achieve a superior risk return profile – primarily through the ability to use cash to protect the downside in times of low conviction.
• In this note, we look at how we can construct a different Global Equity Model Portfolio using the same process of Conviction Scores and Dynamic Allocation, but looking instead at a diversified portfolio through the lens of ‘Global Themes’.

• India, the world’s biggest rice shipper, restricted exports of key varieties that mainly go toward feeding Asia and Africa.
• India imposed a 20% duty on a variety of rice varieties. Keep in mind that Asia is producing and consuming about 90% of the global supply. 
• India alone is the world’s most important exporter with a share of 40%.