Macro

In this briefing:

1. Japan – Chinese Flu
2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
3. Futures and Spot Opportunities
4. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

1. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

3. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

4. Low Core Inflation and Favourable Supply-Side Dynamics: Key to a Benign Fed Policy Outlook

By embracing a patient policy approach, the Federal Open Market Committee (FOMC) imparted a positive shock to markets that has successfully banished investors’ fears of looming recession that prevailed in Q4. 

Meanwhile, the Federal Reserve Bank of New York’s Underlying Inflation Gauge suggests the future core inflation backdrop will not present a significant hurdle for the FOMC to ease policy if necessary.

Financial markets have firmly embraced a Goldilocks economic scenario that precludes further Fed action which will be ultimately beneficial for risky assets.

Fed Vice Chair Clarida has hinted at a potential tolerance for inflation overshooting the 2% target as part of an overall “makeup” strategy to compensate for persistent undershooting that has produced sticky inflationary expectations.

Ultimately, supply-side developments in the economy could determine the endgame for Fed policy and, consequently, the cycle by deferring the arrival of overheating.

In this briefing:

1. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

1. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• The pace of UK activity growth implied by the services PMI picked up amid a surprise rebound to 51.3. It remains gloomy relative to the official data, consistent with the survey’s bias to exaggerate uncertainty’s depressing effect.
• A slight slowing in comparable sectors is still likely, but I maintain my relatively bullish forecast for 1Q19 GDP growth of 0.3% q-o-q, albeit close to rounding down.

In this briefing:

1. Fed Policy Independence: Facing the Biggest Challenges in Decades
2. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound
3. UK: PMIs Diverge as Bias Intensifies in Mar-19
4. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
5. UK: IP Indicators Boom Above Peers in Mar-19

1. Fed Policy Independence: Facing the Biggest Challenges in Decades

Low inflationary expectations have finally forced the Federal Open Market Committee (FOMC) to become even more dovish at its last policy meeting due their inherent stickiness.

Although benign inflationary expectations have lowered the bar for cutting the federal funds rate, incoming economic data will ultimately determine whether any reductions actually come into fruition.

Since the beginning of 2018, the Fed has been encountering rising political pressure from the Trump Administration that has ultimately forced Chair Powell, despite his attempt to display policy autonomy, onto the back foot.

The Fed is facing rising risks to its independence via overt political appointments onto the Board of Governors, while Modern Monetary Theory (MMT) has supporters on both sides of the US political divide.

Meanwhile, President Trump has significantly lowered the bar in selecting candidates for Fed Governor vacancies, notably Stephen Moore, while also ignoring the historic convention of respecting Fed independence to pursue their dual mandate.

The Fed’s decision to hike the federal funds rate last December could prove very costly, both economically and politically, particularly if the US economy enters recession later this year or in 2020.

2. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound

We expect the RBI’s MPC to cut the policy (repo) rate by 25bp on 4th April, thereby unwinding the policy error it made last year by raising the repo rate by 50bp — on the basis of an utterly erroneous inflation forecast. (Our view was: RBI Raises Rates, but Will Likely Look Foolish when Inflation Moderates). Between November 2018 and January 2019, India’s real policy rate was consequently well above +4%. Even after tomorrow’s rate cut, India’s real interest rate will be among the highest in the world — and so the appropriate cut on 4th April would have been 50bp. Real GDP has decelerated to 6.6% and is set to decelerate further in the Jan-Mar19 quarter, and the decline in imports over the past 3 months provides additional evidence for the slowdown. 

However, India’s external sector is likely to lead the recovery over the next few quarters. FDI inflows averaged US$33.63bn annually in the first 4 years of NDA2 (the Modi administration), up from US$18.19bn in the previous 4 years. In April-December 2018, FDI inflows have risen to US$44.7bn. Meanwhile, the current account deficit was 2.4% of GDP in 2018 (calendar year), the largest during the Modi years, but is likely to shrink to 1% of GDP in January-March 2019. (During UPA2, the current account deficit was consistently above 2.6% of GDP, peaking at above 5% of GDP in 2012). The improved basic balance will lay the basis for a modestly stronger rupee that allows the RBI to pursue more aggressive monetary easing over the next few meetings. 

India’s exports grew 12.7% in 2017, 10% in 2018 and are up 3.1% YoY in Jan-Feb 2019. The latter seems unremarkable, except for the fact that Indonesia, South Korea, Taiwan and Singapore are all seeing their exports decline at a double-digit YoY pace over the past 4 months (and China’s exports are down 5.3% YoY in the latest 3 months) amid a renewed slump in global trade. In fact, India’s goods exports have grown faster than China’s for the past 3 years. In the last 3 months, India’s electronics exports (albeit only 3.3% of total goods exports) were up more than 50% YoY (amid a cyclical decline in global electronics demand!). Something big is beginning to stir in India, and it is not just the momentum in the election rallies!  

3. UK: PMIs Diverge as Bias Intensifies in Mar-19

• The pace of activity growth implied by the UK services PMI collapsed again in Mar-19 as the index fell by 2.4 points to 48.9. It is biased to overstate the effect of uncertainty, which has intensified recently amid political gridlock.
• A slight slowing in comparable sectors remains likely, but I maintain my relatively bullish forecast for 1Q19 GDP growth of 0.4% q-o-q, with 0.0% m-o-m in Feb-19.

4. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

5. UK: IP Indicators Boom Above Peers in Mar-19

• The UK’s manufacturing PMI surged to 55.1 in Mar-19, contrary to the consensus and the euro area’s ongoing collapse. Inventory accumulation ahead of Brexit is exaggerating the UK’s strength, but full payback may not come in April.
• Energy output also rebounded in March while robust extraction of oil and gas in February offsets some of the earlier energy weakness. My 1Q19 GDP growth forecast remains brisker than the BoE and Consensus at 0.4% q-o-q.

In this briefing:

1. China – Eurozone Negative Feedback Loop.
2. Non-Performing Loans in China

1. China – Eurozone Negative Feedback Loop.

Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit,  this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China. 

2. Non-Performing Loans in China

We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.

In this briefing:

1. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound
2. UK: PMIs Diverge as Bias Intensifies in Mar-19
3. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
4. UK: IP Indicators Boom Above Peers in Mar-19
5. Buy or Sell/Europe/Trade War/Huawei/Financial Services

1. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound

We expect the RBI’s MPC to cut the policy (repo) rate by 25bp on 4th April, thereby unwinding the policy error it made last year by raising the repo rate by 50bp — on the basis of an utterly erroneous inflation forecast. (Our view was: RBI Raises Rates, but Will Likely Look Foolish when Inflation Moderates). Between November 2018 and January 2019, India’s real policy rate was consequently well above +4%. Even after tomorrow’s rate cut, India’s real interest rate will be among the highest in the world — and so the appropriate cut on 4th April would have been 50bp. Real GDP has decelerated to 6.6% and is set to decelerate further in the Jan-Mar19 quarter, and the decline in imports over the past 3 months provides additional evidence for the slowdown. 

However, India’s external sector is likely to lead the recovery over the next few quarters. FDI inflows averaged US$33.63bn annually in the first 4 years of NDA2 (the Modi administration), up from US$18.19bn in the previous 4 years. In April-December 2018, FDI inflows have risen to US$44.7bn. Meanwhile, the current account deficit was 2.4% of GDP in 2018 (calendar year), the largest during the Modi years, but is likely to shrink to 1% of GDP in January-March 2019. (During UPA2, the current account deficit was consistently above 2.6% of GDP, peaking at above 5% of GDP in 2012). The improved basic balance will lay the basis for a modestly stronger rupee that allows the RBI to pursue more aggressive monetary easing over the next few meetings. 

India’s exports grew 12.7% in 2017, 10% in 2018 and are up 3.1% YoY in Jan-Feb 2019. The latter seems unremarkable, except for the fact that Indonesia, South Korea, Taiwan and Singapore are all seeing their exports decline at a double-digit YoY pace over the past 4 months (and China’s exports are down 5.3% YoY in the latest 3 months) amid a renewed slump in global trade. In fact, India’s goods exports have grown faster than China’s for the past 3 years. In the last 3 months, India’s electronics exports (albeit only 3.3% of total goods exports) were up more than 50% YoY (amid a cyclical decline in global electronics demand!). Something big is beginning to stir in India, and it is not just the momentum in the election rallies!  

2. UK: PMIs Diverge as Bias Intensifies in Mar-19

• The pace of activity growth implied by the UK services PMI collapsed again in Mar-19 as the index fell by 2.4 points to 48.9. It is biased to overstate the effect of uncertainty, which has intensified recently amid political gridlock.
• A slight slowing in comparable sectors remains likely, but I maintain my relatively bullish forecast for 1Q19 GDP growth of 0.4% q-o-q, with 0.0% m-o-m in Feb-19.

3. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

4. UK: IP Indicators Boom Above Peers in Mar-19

• The UK’s manufacturing PMI surged to 55.1 in Mar-19, contrary to the consensus and the euro area’s ongoing collapse. Inventory accumulation ahead of Brexit is exaggerating the UK’s strength, but full payback may not come in April.
• Energy output also rebounded in March while robust extraction of oil and gas in February offsets some of the earlier energy weakness. My 1Q19 GDP growth forecast remains brisker than the BoE and Consensus at 0.4% q-o-q.

5. Buy or Sell/Europe/Trade War/Huawei/Financial Services

China News That Matters

• Ride that A-Share wave. Until you can’t
• Europe looks East
• Change, China! You’ll thank us for it
• We’ll buy your gear – but please try and behave
• Scots take aim at Chinese pension insurance

In this briefing:

1. Non-Performing Loans in China

1. Non-Performing Loans in China

We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.

In this briefing:

1. UK: PMIs Diverge as Bias Intensifies in Mar-19
2. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
3. UK: IP Indicators Boom Above Peers in Mar-19
4. Buy or Sell/Europe/Trade War/Huawei/Financial Services
5. Bull Or Bear? Latest Global Liquidity Readings

1. UK: PMIs Diverge as Bias Intensifies in Mar-19

• The pace of activity growth implied by the UK services PMI collapsed again in Mar-19 as the index fell by 2.4 points to 48.9. It is biased to overstate the effect of uncertainty, which has intensified recently amid political gridlock.
• A slight slowing in comparable sectors remains likely, but I maintain my relatively bullish forecast for 1Q19 GDP growth of 0.4% q-o-q, with 0.0% m-o-m in Feb-19.

2. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

3. UK: IP Indicators Boom Above Peers in Mar-19

• The UK’s manufacturing PMI surged to 55.1 in Mar-19, contrary to the consensus and the euro area’s ongoing collapse. Inventory accumulation ahead of Brexit is exaggerating the UK’s strength, but full payback may not come in April.
• Energy output also rebounded in March while robust extraction of oil and gas in February offsets some of the earlier energy weakness. My 1Q19 GDP growth forecast remains brisker than the BoE and Consensus at 0.4% q-o-q.

4. Buy or Sell/Europe/Trade War/Huawei/Financial Services

China News That Matters

• Ride that A-Share wave. Until you can’t
• Europe looks East
• Change, China! You’ll thank us for it
• We’ll buy your gear – but please try and behave
• Scots take aim at Chinese pension insurance

5. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

In this briefing:

1. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
2. UK: IP Indicators Boom Above Peers in Mar-19
3. Buy or Sell/Europe/Trade War/Huawei/Financial Services
4. Bull Or Bear? Latest Global Liquidity Readings
5. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

1. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

2. UK: IP Indicators Boom Above Peers in Mar-19

• The UK’s manufacturing PMI surged to 55.1 in Mar-19, contrary to the consensus and the euro area’s ongoing collapse. Inventory accumulation ahead of Brexit is exaggerating the UK’s strength, but full payback may not come in April.
• Energy output also rebounded in March while robust extraction of oil and gas in February offsets some of the earlier energy weakness. My 1Q19 GDP growth forecast remains brisker than the BoE and Consensus at 0.4% q-o-q.

3. Buy or Sell/Europe/Trade War/Huawei/Financial Services

China News That Matters

• Ride that A-Share wave. Until you can’t
• Europe looks East
• Change, China! You’ll thank us for it
• We’ll buy your gear – but please try and behave
• Scots take aim at Chinese pension insurance

4. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

5. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo.  This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook.  Polls show PDI-P and Gerindra gaining at the expense of Islamic parties.  The 4th debate on 30 March could help Prabowo draw slightly closer.  The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen.  Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia.  A reasonable MRT tariff is in place.

Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day.  He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2).  The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2).  Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4).  Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5). 

Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact.  A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided.  Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate.  Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6). 

Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10). 

Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).

Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).

Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks.  But his opponent is brazen and risks therefore exist.  Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact.  Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14). 

In this briefing:

1. Taiwan Investors Factor In China Recovery
2. FLASH: UK PMIs Pare Some Excess Pain in Feb-19
3. China – Eurozone Negative Feedback Loop.
4. Non-Performing Loans in China

1. Taiwan Investors Factor In China Recovery

It is time to go increase exposure to Taiwanese equities, if you haven’t already. Like bourses around the region, Taiwan’s stock market has rebounded from its January low and is up over 10% in two months. Underpinning our and investor optimism are expectations that Taiwan stands to benefit disproportionately from the fiscal and monetary policy easing underway in China,  that China and the US will get to some kind of trade deal and a positive reaction to TSMC’s 2019 dividend pay-out plan.

2. FLASH: UK PMIs Pare Some Excess Pain in Feb-19

• The pace of UK activity growth implied by the services PMI picked up amid a surprise rebound to 51.3. It remains gloomy relative to the official data, consistent with the survey’s bias to exaggerate uncertainty’s depressing effect.
• A slight slowing in comparable sectors is still likely, but I maintain my relatively bullish forecast for 1Q19 GDP growth of 0.3% q-o-q, albeit close to rounding down.

3. China – Eurozone Negative Feedback Loop.

Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit,  this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China. 

4. Non-Performing Loans in China

We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.

In this briefing:

1. UK: IP Indicators Boom Above Peers in Mar-19
2. Buy or Sell/Europe/Trade War/Huawei/Financial Services
3. Bull Or Bear? Latest Global Liquidity Readings
4. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate
5. Vietnam Picks up the China Baton

1. UK: IP Indicators Boom Above Peers in Mar-19

• The UK’s manufacturing PMI surged to 55.1 in Mar-19, contrary to the consensus and the euro area’s ongoing collapse. Inventory accumulation ahead of Brexit is exaggerating the UK’s strength, but full payback may not come in April.
• Energy output also rebounded in March while robust extraction of oil and gas in February offsets some of the earlier energy weakness. My 1Q19 GDP growth forecast remains brisker than the BoE and Consensus at 0.4% q-o-q.

2. Buy or Sell/Europe/Trade War/Huawei/Financial Services

China News That Matters

• Ride that A-Share wave. Until you can’t
• Europe looks East
• Change, China! You’ll thank us for it
• We’ll buy your gear – but please try and behave
• Scots take aim at Chinese pension insurance

3. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

4. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate

Two new and credible polls show Widodo leading by margins of 18-19 percentage points over Prabowo.  This mitigates — but does not entirely eliminate — risks surrounding the 17 April election outlook.  Polls show PDI-P and Gerindra gaining at the expense of Islamic parties.  The 4th debate on 30 March could help Prabowo draw slightly closer.  The planned US$400 million relocation of a textile plant from China to Central Java bodes well, but whether central government policies are supportive remains to be seen.  Two SOEs are under corruption scrutiny: Krakatau Steel Persero Tbk (KRAS IJ) and Pupuk Indonesia.  A reasonable MRT tariff is in place.

Politics: Coordinating Security Minister Wiranto threatened to invoke the Terrorism Law on those who advocate abstaining on election day.  He may believe that high turnout will benefit President Joko Widodo – but the draconian threat will harm Widodo’s image more than it helps (Page 2).  The next presidential debate on 30 March will likely feature discussion of Widodo’s proposal to place active military officers in civilian bureaucratic posts (Page 2).  Vice‑presidential nominee Sandiaga Uno promised fisheries operators that he and Prabowo Subianto would overturn a ban on dragnet trawling (p. 4).  Constitutional Court justices will prioritize the resolution of legislative election disputes (p. 5). 

Surveys: With less than three weeks remaining until the 17 April election day, two more new polls show the lead for President Joko Widodo remains intact.  A poll by the Center for Strategic and International Studies (CSIS) took place from 15-22 March; it shows Widodo ahead by 18 percentage points, with 15 percent undecided.  Similarly, a poll by Charta Politik showed Widodo leading by 19 points; it also implies that Islamic and Islamic‑oriented parties will shrink by a third on aggregate.  Both polls indicate that the reform‑minded Solidarity Party (PSI) is unlikely to pass the four‑percent threshold required to occupy parliamentary seats; incumbent parties at risk of falling short are Hanura, the National Mandate Party (Pan) and the United Development Party (PPP) (p. 6). 

Justice: Investigators from the Anti-Corruption Commission (KPK) made arrests in cases involving the state enterprises PT Krakatau Steel Tbk and PT Pupuk (p. 10). 

Jakarta: Policymakers finally decided upon a reasonable tariff for the new Mass Rapid Transit (MRT) – Rp10,000 per 10 kilometers, with a maximum fare of Rp14,000 (p. 11).

Economics: Plans to relocate a sizeable Chinese textile plant in Central Java send a positive signal about manufacturing – but whether central‑government policies will be adequately supportive remains to be seen (p. 12).

Outlook: Plentiful poll data shows that Widodo has a comfortable margin of 55‑60 percent, with few factors likely to alter circumstances in the final three weeks.  But his opponent is brazen and risks therefore exist.  Widodo winning by only a very narrow margin is a scenario with a low probability – but a high potential impact.  Prabowo has a penchant for protesting angrily, hard‑line supporters can inundate Jakarta and the Constitutional Court has a protracted schedule for resolving disputes (its deadline is 8 August) (p. 14). 

5. Vietnam Picks up the China Baton

The US-China trade dispute simmers on. Regardless of the outcome of talks between the two largest economies on earth, the damage to the existing world manufacturing trading order has already been done. China plus one is no longer a preferential industrial location strategy for multinational companies, it is an imperative. Like Brexit, companies are beginning to relocate out of China even before the dispute is either settled or escalated. Profits can’t wait for governments to behave sensibly.

But where to go? Indonesia and Vietnam are the most obvious potential beneficiaries of the fallout from the ongoing trade dispute between the US and China. There are a number of alternatives but Indonesia and Vietnam both have large, youthful working populations (and really here we are talking about the accessible workforces on Java and in Vietnam) and both are located within easy reach of the existing Asian supply chain. But are both equally ready and equally keen to pick up the China baton? Vietnam is the obvious winner in this contest. Unfortunately, for institutional equity investors the market isn’t included in Asia-Pacific or emerging market benchmarks.