Macro

In today’s briefing:

Two Key Positive Catalysts for Major Korean Holding Companies
India: Budget Aims to Generate Concentric Virtuous Circles & Crowd-In Private Capex
An Update on High Conviction 2022 Thematic Rate Curve Steepening Trades in EM

Two Key Positive Catalysts for Major Korean Holding Companies

By Douglas Kim

There are two key, positive catalysts for major Korean holding companies that could result in these stocks outperforming the market in the coming months.
The first main catalyst is that the two leading presidential candidates are both have campaign pledges to protect minority shareholders when conglomerates conduct physical division spin-offs/splits.
The second key catalyst is the shift from growth to value stocks amid heightened market volatility.

India: Budget Aims to Generate Concentric Virtuous Circles & Crowd-In Private Capex

By Prasenjit K. Basu

In the first 9 months of FY2021/22, the fiscal deficit was 50% of the budgeted estimate for the full-year. More realistically, this year’s fiscal deficit will be 5.7% of GDP.
Given more credible revenue estimates, the deficit for FY2022/23 will decline to 4.9% of GDP. The government’s lower borrowing requirement will help crowd-in private investment.
A 35%YoY increase in public investment will fund a multimodal connectivity rollout, while carbon-fibre will reach all villages, solar and 5G will be harnessed to create a tech virtuous circle.

An Update on High Conviction 2022 Thematic Rate Curve Steepening Trades in EM

With the volatility of US rates remaining elevated, it is a good time to evaluate how my thematic recommendation for 2022 of curve steepening trades in EM is playing out.
The slopes of rate curves in EM have stabilized even as they continue to flatten in the US and, more broadly, DM – a break in correlation that should persist.
EM curves should start steepening as ex-Asia they are ahead of DM in rate-hiking cycles and their worsening debt dynamics should keep the risk premium elevated in the long end.

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Feb 09

Macro: What Does the Global Economy Hold in Store for Asian Economies? and more

In today’s briefing:

What Does the Global Economy Hold in Store for Asian Economies?
Playing with Fire – FX & Rates, Japan
Fed Hikes Not Immune from Equity Collapse
Pain Trades
Indian Budget: Reform Impetus Hits A Wall As Electoral Cycle Turns Up
Red Pill or Blue Pill?

What Does the Global Economy Hold in Store for Asian Economies?

By Manu Bhaskaran

Resurgent covid-19 infections have slowed the global recovery but there are also clear signs of resilience and optimism about the future.
Adjustments being made by the corporate sector and policy makers suggest that this optimism for global growth and inflation is well founded.
Save for a modest hiccup in 1Q22, expect global demand to continue boosting Asian economies. Watch for divergences within Asia and the prospect of renewed trade aggression.

Playing with Fire – FX & Rates, Japan

By Shyam Devani

This is an opinion piece that attempts to look at the sustainability of policies set out by the Bank of Japan, namely the yield curve control.
There seems to be a growing risk that long end yields are set to rise further, testing the BoJ’s resolve.
Indications are already there in the interest rate curves and the performance of Japanese Banks. A further report will follow, highlighting relevant charts and trade ideas

Fed Hikes Not Immune from Equity Collapse

By Olivier Desbarres

Markets focussed on the risk that likely Federal Reserve and global central bank policy rate hikes and monetary policy tightening will weigh on equities and implications for Dollar.
But there’s also risk that downturn in US equities would weigh on US consumer confidence and demand and in turn inflationary pressures and see the Fed pausing its hiking cycle.
It may be different this time round, given very negative Fed real policy rate, but in the previous three Fed rate hiking cycles US equities were generally trending higher.

Pain Trades

By Untying The Gordian Knot

Painful trades are usually where the trend seems strong, and participants think it has a lot further to go; leverage usually is high at this point
Last year’s yield curve steepener trade saw an abrupt trend change even though inflation expectations continued to rise
Pain trade is never apparent, so I looked for prolonging the misery. Oil and rising long-end rates fit the bill.

Indian Budget: Reform Impetus Hits A Wall As Electoral Cycle Turns Up

By Nicholas Chia

The government is making another big push for growth, marked by a 24.5% increase in capex spending while revenue expenditures are flat.
References to structural reforms were omitted altogether as the authorities slow the pace of fiscal consolidation, marked by elevated fiscal deficits and the absence of any credible medium-term fiscal roadmap.
Consequently, the deluge of borrowings is set to test the RBI’s ability to manage yield expectations at a time when global monetary policy is tightening.

Red Pill or Blue Pill?

By Market Sentiment

Even after all the analyses and strategies I have created, I allocate most of my investments to the S&P500 while keeping some part of it for the moonshots.
The problem with most financial advice is that it’s biased heavily towards your experience
I am considering an equal amount invested monthly into every strategy

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Feb 08

Macro: MSCI EM Indices Korean Stocks Allocations Amid Potential Inclusion of Korea in MSCI Developed and more

In today’s briefing:

MSCI EM Indices Korean Stocks Allocations Amid Potential Inclusion of Korea in MSCI Developed
China: CNY to Out-Perform Despite Fed and PBOC’s Divergent Stances
The Week That Was in ASEAN@Smartkarma – Bank Rakyat Indonesia, Buy Now Pay Later, and BFI Finance
Alpha Bites: Long Israeli Shekel (ILS) Vs Short British Pound (GBP)

MSCI EM Indices Korean Stocks Allocations Amid Potential Inclusion of Korea in MSCI Developed

By Douglas Kim

There are two main reasons why Korean stocks included in the MSCI EM Large Cap Index could outperform the Korean stocks included in the MSCI EM Small Cap Index.
First, there is an increasing probability that South Korea could finally be included in the MSCI Developed country status.
Second, amid the increasing market volatility along with higher interest rates, capital preservation may become emphasized and more investors may shift towards large cap versus small cap stocks.

China: CNY to Out-Perform Despite Fed and PBOC’s Divergent Stances

By Nigel Chiang

The trade surplus will remain in China’s favour given the likelihood of weak domestic demand in China juxtaposed against a recovery in consumer demand and capex in her trading partners.
Capital flows may also favour the CNY. Continued liberalisation of the services sector will support FDI, while weak domestic inflation will support China’s positive real yield differential vs. the RoW.
The key risk to our view: capital outflows sparked by the authorities’ radical changes in the regulation of big tech, and the shift in the political economy against big capital.

The Week That Was in ASEAN@Smartkarma – Bank Rakyat Indonesia, Buy Now Pay Later, and BFI Finance

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 pasy week in insights on BFI Finance Indonesia following the news that Jerry Ng of Bank Jago will take a controlling stake plus an update on microlender Bank Rakyat.
We also look at OVO’s destiny, food delivery, and explore why Buy Now Pay Later is different in South East Asia plus the rising importance of ESG for Indonesian investors.

Alpha Bites: Long Israeli Shekel (ILS) Vs Short British Pound (GBP)

The shekel has been the worst-performing currency in EM since late November with potential Fed hikes and hedging activity related to the sell-off in international stock markets weighing on it.
The shekel should resume its appreciating trend as the central bank would likely raise rates this year with inflation making a comeback and the balance of payment position remaining strong.
I recommend funding the shekel in British pounds to minimize exposure to the dollar, which continues to be volatile, and the BoE is further along in its rate-hiking cycle.

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Feb 07

Macro: Can the Fed Engineer a Soft Landing? and more

In today’s briefing:

Can the Fed Engineer a Soft Landing?
4 Reasons to Be Bullish, 4 to Be Bearish

Can the Fed Engineer a Soft Landing?

By Cam Hui

The current rate of expected Fed tightening will push the 2s10s yield curve to invert in late 2022 or early 2023, which would be a recession signal.
Our base-case scenario calls for a soft landing, which we assign a 60% probability, though the risk of a policy error and over-tightening is high.
As long as the Fed adopts a hawkish tone, growth expectations will be under pressure, which should be favourable to high-quality growth and unfavourable to value for their cyclical exposure.

4 Reasons to Be Bullish, 4 to Be Bearish

By Cam Hui

The current rally is a bear market rally. Expect further choppiness and volatility for the next few months with little upward progress in the major equity averages.
Investment-Oriented accounts are advised to maintain a neutral position in line with the asset allocation targets specified by investment policy.
Traders could try to capitalize on further potential gains, but purely from a tactical perspective.

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Feb 06

Macro: Short Selling of All Stocks in Korea Could Resume in March to May 2022 and more

In today’s briefing:

Short Selling of All Stocks in Korea Could Resume in March to May 2022

Short Selling of All Stocks in Korea Could Resume in March to May 2022

By Douglas Kim

In order for South Korea to be seriously considered in the MSCI Developed Country status this year, it would need to change the current short ban on stocks regulations.
Short selling of stocks is a sensitive issue among millions of Korean retail investors.,
It is likely that the announcement to allow full shorting of stocks in Korea could occur after the election date (3 March) but prior to the inauguration date (10 May).

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Feb 05

Macro: China: Economy off to Weak Start in 2022; Brace for More Tech Crackdowns and more

In today’s briefing:

China: Economy off to Weak Start in 2022; Brace for More Tech Crackdowns
Long-Short Trades: Oil Versus Stocks
Singapore: Broader Macro Shifts Compel Fundamental Policy Changes
Russia-China/ US-China/ Olympic Tech/ Holidays/ Emissions
Latest Taper Tantrum Primarily Hits Equity Valuations as Bank Lending Remains Supportive for Growth

China: Economy off to Weak Start in 2022; Brace for More Tech Crackdowns

By Nigel Chiang

The latest PMI data show clearly that a broad-based deceleration is underway in the Chinese economy, one that requires substantial policy support.
While policymakers are showing more urgency to provide support for the economy, these efforts are localised and highly selective.
Moreover, the continued push for regulatory crackdowns in an inchoate manner will unnerve private sector investors and potentially negate other policy efforts.

Long-Short Trades: Oil Versus Stocks

By Shyam Devani

As equity indices take a wobble again the Oil price has remained strong after posting both bullish weekly monthly close to new trend highs
The relationship between Oil & stocks is in question because it is unclear whether a higher Oil price in an already inflationary environment is seen as “good” or “bad”
Even in the case that the S&P 500 holds up and becomes correlated properly to Oil, the charts below suggest it will still underperform

Singapore: Broader Macro Shifts Compel Fundamental Policy Changes

By Nigel Chiang

Inflation risks have risen as the stronger than expected economic rebound is closing the output gap quickly and thus price pressures are becoming more broad-based.
The central bank’s surprise move to tighten monetary policy further last week is likely to be followed by more tightening, in monetary policy in October and in macro-prudential measures.
We also expect non-monetary moves to cool inflation. A more aggressive easing of border restrictions to allow migrant workers in would improve labour supply and cool wage growth.

Russia-China/ US-China/ Olympic Tech/ Holidays/ Emissions

By Diana Choyleva

China doesn’t just want to be part of the global order; it wants to shape it. These Olympics and future business will be conducted on Beijing’s terms.
Winter Olympics highlight US-China cold war, growing tensions are deepening the rift between the two rivals’ financial systems.
Olympic visitors will be wowed by China’s tech – and nervous of its use to monitor their lives.

Latest Taper Tantrum Primarily Hits Equity Valuations as Bank Lending Remains Supportive for Growth

By Said Desaque

Elevated inflation makes it impossible for the Fed to ease to alleviate turbulence in the equity market. Equity valuations have borne the brunt of the latest taper tantrum.
Current economic conditions are similar to 1984 when the Fed commenced a short tightening cycle by initially raising the federal funds rate by 50 basis points .
The flattening yield curve raises concerns about potential inversion that has presaged recessions. Access to credit in the banking system has not tightened, despite fears of higher future funding costs.

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Feb 04

Macro: BoE: Early and more

In today’s briefing:

BoE: Early, Often, but Probably Not Far
ECB: Inflation Alarm Wakes Policy in 2022
Alpha Bites: Take Profits on Recommendation as Rates Move in Opposite Directions in India and Mexico

BoE: Early, Often, but Probably Not Far

By Phil Rush

The BoE delivered a 25bps rate hike to 0.5%. In a hawkish twist, four members dissented for a 50bps jump. They are likely to carry that into a March hike.
Excess inflation squeezes policy tightening enough to balance future spare capacity in the BoE’s trade-off.
Energy futures prices imply much lower inflation, which would not justify rates rising as far as markets price – i.e. there is internal inconsistency.

ECB: Inflation Alarm Wakes Policy in 2022

By Phil Rush

High inflation and a tightening of capacity raise hawkish pressure on the ECB.
President Lagarde has stopped ruling out a potential rate hike this year.
We expect asset purchases to slow more swiftly than the ECB previously indicated and for deposit rate hikes to begin in Dec-22.

Alpha Bites: Take Profits on Recommendation as Rates Move in Opposite Directions in India and Mexico

While EM rates on aggregate have moved up as US rates have risen, there is a fair degree of differentiation within EM; e.g., the divergence between India and Mexico.
Rates in India climbed higher following the pro-growth budget, which increased borrowing needs, while yields rallied in Mexico following indications that the country has entered a technical recession.
These idiosyncratic developments accelerated the divergence in rates between the two countries, allowing me to suggest taking profits on my Receive Mexico 5y vs Pay India 5y rate trade recommendation.

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Feb 03

Macro: Drivers Behind the Turnaround of Asian Currencies and more

In today’s briefing:

Drivers Behind the Turnaround of Asian Currencies
EA: Weights Compound Inflation in Jan-22

Drivers Behind the Turnaround of Asian Currencies

The turnaround of Asian currencies is likely to continue with growth resurfacing in the region ex-China and the interest rate differential with the rest of emerging markets narrowing.
The main risks to watch are whether the slowdown in China worsens and weighs on the region as a whole and whether central banks embark on FX interventions again.
While the overall view on Asian currencies is constructive, I prefer cross-country trades to take advantage of differences arising from idiosyncratic drivers and to eliminate the dollar risk.

EA: Weights Compound Inflation in Jan-22

By Phil Rush

Flash EA HICP inflation continued its extremely strong trend as broad support lifted it to 5.1% y-o-y in Jan-22. That was well beyond even our above-consensus forecast.
About a third of that 0.6pp error reflected weightings, with the rest more “core”. The shift up in the core trend seems set to remain problematic for economic models.
It looks increasingly likely that the downtrend will only noticeably begin in H2, with hawkish pressure mounting on the ECB in the interim.

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Feb 02

Macro: The Yield Curve Inversion is Coming and more

In today’s briefing:

The Yield Curve Inversion is Coming

The Yield Curve Inversion is Coming

By The Macro Compass

An inverted yield curve not only predicts, but it directly contributes to sharp economic slowdowns.
As refinancing credit short-term becomes prohibitively expensive while markets already price in poor expectations for long-term growth, the economic engine actually slows down and a vicious circle unfolds.
Today, we will talk about which yield curve to look at, why it’s very likely to invert and what does this mean for markets and the economy.

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Feb 01

Macro: The Crude Awakening – Oil’s Break Higher and more

In today’s briefing:

The Crude Awakening – Oil’s Break Higher
Can Southeast Asia Become the Pre-Eminent Destination for Foreign Investment?
Oil Prices Are Poised For A Correction But Supply Remains The Wildcard
The Week That Was in ASEAN@Smartkarma – Grab & Bank Fama, XL Axiata & Link Net, and Shopee in India
Alpha Bites: A Local Rate Curve Steepening Trade in Chile
How is the Federal Interest Rate hike going to affect the Stock Market?

The Crude Awakening – Oil’s Break Higher

By Shyam Devani

The rally in Oil has taken us through the key levels that were in focus up to $89.58
The weekly close is particularly constructive as we posted a bullish outside week
This should open the way for further gains to the tune of some 20%-25% over the coming weeks / months

Can Southeast Asia Become the Pre-Eminent Destination for Foreign Investment?

By Manu Bhaskaran

Foreign direct investment and funding of start-ups in Southeast Asia surged in 2021. We see good reasons for such funds flows into the region to accelerate.
Infrastructure development and reforms in major economies are improving the business eco-system, such as the Omnibus bill in Indonesia and a push for liberalisation in the Philippines.
Once the pandemic eases, we believe that the reconfiguration of supply chains will resume and a material part of that will benefit Southeast Asia

Oil Prices Are Poised For A Correction But Supply Remains The Wildcard

By Nicholas Chia

Global demand for oil is set to converge onto pre-pandemic levels in 2022.
Supply is the wildcard here. Smaller members of the OPEC cartel have struggled to meet their production targets, while US shale is constrained by capital discipline.
For the region, higher oil prices entail slower growth as real incomes weaken; greater price pressures at a time when negative output gaps are closing; and widening external imbalances.

The Week That Was in ASEAN@Smartkarma – Grab & Bank Fama, XL Axiata & Link Net, and Shopee in India

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 Grab (GRAB US) after a bank acquisition with Singtel (ST SP) in Indonesia plus on ASSA after the spin off of its auto business.
We also look at XL Axiata (EXCL IJ) and Link Net (LINK IJ) plus the strong reception that Shopee (Sea Ltd (SE US)) is seeing in India and more.

Alpha Bites: A Local Rate Curve Steepening Trade in Chile

Chile’s rate curve has bear-flattened driven by the short end with inflation running at a decade high on the heels of strong demand, leading to an aggressive monetary tightening cycle.
Over the coming months, the monetary tightening cycle should end with inflation coming off the highs and growth slowing down sharply, which should lead to steepening of the curve.
Additionally, with the still-high political uncertainty and the fiscal deterioration of recent years continuing to weigh on the long end, I recommend a beta-neutral 5s10s curve steepening trade.

How is the Federal Interest Rate hike going to affect the Stock Market?

By Market Sentiment

The U.S Federal Reserve has finally given a clear indication that it intends to increase the interest rate to combat inflation in 2022
The borrowing rates had been left unchanged at near-zero since the start of the pandemic
While the conventional wisdom is that rate hikes, in general, are not good for stock market returns, the data seems to tell a totally different story

Before it’s here, it’s on Smartkarma