Macro

In this briefing:

1. China’s Pharmaceutical and TCM Industry
2. ECB, BoJ Suck Wind – EA Threatened with Japanisation
3. India Monthly Report: Jan’19 – Feb’19
4. India: Outlook on Capex Recovery Continues to Brighten
5. BoJ Steps in as ECB Exits

1. China’s Pharmaceutical and TCM Industry

Chinese healthcare is fascinating in that one minute you can visit a doctor practicing the latest modern medicine and then stop at the corner store for traditional Chinese medicines specializing in random herbs and fungi. The dichotomy is a truly Chinese experience. However, China is increasingly a manufacturing and therefore export destination for both modern and traditional Chinese medicines (TCM).

2. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

3. India Monthly Report: Jan’19 – Feb’19

Indian indices were the least performing among the select global indices with S&P BSE Sensex and Nifty 50 generating returns of 0.01% and negative 0.73% in domestic terms respectively. In Dollar terms they fell by 2.18% and 2.89% respectively. Indian Rupee witnessed deprecation of 2.18% during the period and fell from 69.40 USD/ INR to 70.95 USD/ INR. Among the select indices, Hang Seng was the best performer with dollar returns of 10.89% and among the select currencies, South African Rand was the best performing with an appreciation of 7.88%.

Among the Sectoral indices, Nifty Pharma was the best performing with returns of 4.91% in dollar terms and Nifty Realty was the worst performing with falling by 17.41%

4. India: Outlook on Capex Recovery Continues to Brighten

As per the CSO, gross fixed capital formation (GFCF) has grown above nominal GDP for 4 consecutive quarters now (latest data for September quarter). This, after GFCF grew slower than nominal GDP in 20 of the preceding 21 quarters. Capex cycle is thus picking up. And there are good reasons to expect this continue in the foreseeable future. Capacity utilisation is increasing in a broad-based manner. Liquidity conditions have improved, and cost of capital is likely to fall. Corporate profit cycle is no longer a headwind, although it is not yet a strong tailwind. The nascent signs of a recovery in the capex cycle are thus likely to get stronger in the months ahead.

5. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

In this briefing:

1. Philippines: Institutional Reforms that Promote Macro Stability
2. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text
3. US Dollar Demand – Fading Appetite
4. The Internet: Hacks, Clicks, and Money
5. China’s Pharmaceutical and TCM Industry

1. Philippines: Institutional Reforms that Promote Macro Stability

• Legislation on rice tariffication signed by President Duterte into law allows for liberal rice imports, thus, effectively dismantling the State regulatory control over the grains sector. This bodes well for stabilizing food inflation that has been the scourge of low income groups. Lower food prices over time help anchor inflation expectations while ‘freeing’ up purchasing power among low income households for redeployment to support non-food demand. Rice imports would be slapped tariffs with the proceeds targeted at developmental support for vulnerable local rice farmers.

• Market segmentation (between local and imported rice), bias for affordable food choices among households with limited incomes, and fiscal interventions to attain food security, would spare the local market from the heavy assault of rice imports. 

• As these laws on rice tariffication and BSP charter amendments gain traction, we expect the BSP to depend largely on market-based, policy tools in inflation and liquidity management. As high bank reserve ratios lose policy relevance, we sense the likelihood of a conversion to a single-digit reserve ratio over the medium-term. This policy outcome augurs for lower intermediation costs among banks that hopefully translates into better yielding, regular savings and time deposits that could appeal to low income depositors. 

• Inclusive of the TRAIN law package 1 that’s intact despite the high inflation challenge, the recent institutional reforms provide the backdrop for another round of investment-credit ratings upgrade.

2. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text

Prabowo again squandered a chance in a debate to gain ground, as Widodo appeared more confident and in command.  Prabowo’s incessant efforts to sow fear of foreigners does little to weaken his opponent.  Widodo’s lead was intact as of late January, despite claims from two pollsters (Indomatrik, Median) who are demonstrably unreliable or even fraudulent.  Lippo Group owner James Riady suffered repudiation: after having testified in court that he met the Bekasi District chief by coincidence and did not discuss his Meikarta project with her, KPK prosecutors played a phone recording that shows otherwise.  BI has held rates steady, citing the current account deficit after a gaping January trade deficit.  The government continues its efforts to sack more than 2,000 civil servants who are corruption convicts.  Repsol discovered gas in South Sumatra. 

Politics: The second of five debates in the presidential election marked another missed opportunity for Gerindra Chair Prabowo Subianto to gain ground on President Joko Widodo.  Instead, the incumbent again landed blows that hurt the retired general, highlighting his unfamiliarity with e-commerce jargon and drawing attention to his land assets measuring 340,000 ha.  For his part, Prabowo pointedly projected a conciliatory demeanor, perhaps to dispel perceptions that he is temperamental, but it squandered a chance to assail the incumbent and thereby persuade voters to opt for change.  Prabowo adhered to form by advocating protectionism and expansion of state involvement in the economy.  He used nearly every answer to disparage foreigners, which is an error: sowing suspicion of foreigners does little to weaken his opponent (Page 2) (Transcript translated by Ref Wkly, p. 8).  Hard‑line Islamic groups convened again in Jakarta (p. 3). 

Surveys: In the July 2014 election, the Center for Strategic Development and Policy Studies (Puskaptis) performed a Quick Count survey of ballot‑station results that declared Prabowo the winner, and the Association of Polling Firms (Persepsi) ousted Puskaptis from its ranks.  But the head, Hasan Yazid, has re‑emerged as the founder of Indomatrik, another purported polling firm.  Yazid claims to have findings showing Prabowo’s support on par with Widodo’s.  Along with supposed findings from another obscure agency, Median, this is injecting confusion into perceptions of the presidential election.  In fact, two reputable agencies determined in late January that Widodo’s lead was intact (p. 4).   

Justice: In the Meikarta‑Lippo bribery scandal, prosecutors dispute the testimony provided in court last month by group owner James Riady (p. 5).  Information Minister Rudiantara faced questioning from the Election Oversight Agency (Bawaslu) for having jested, in an event with ministry personnel, about preferences for presidential tickets (p. 7).

Policy News: Cabinet members are preparing measures that will finally force regional officials to sack civil servants convicted of corruption (p. 7). 

Energy: Spain’s Repsol announced the largest gas discovery in 18 years – a reservoir in Musi Banyuasin, South Sumatra measuring two trillion cubic feet (p. 8).

Economics: Bank Indonesia (BI) kept its benchmark rate unchanged at 6.0% (p. 9).

Appendix: The presidential candidates debated the topics of infrastructure, the environment and natural resources on 17 February (transcript and analysis, p. 9).

3. US Dollar Demand – Fading Appetite

In 2011 the world experienced the best year of demand expansion – in US dollar terms – in any year since the financial crisis, until 2018 that is. But you would hardly realise that that was the case by reading the newswires, the stories there since early 2018 have been about ‘synchronised slowdown’ and, in particular, the demand downdraft from China. The reality is that developed countries (the US, EU, UK and Japan) plus developing Asia (China, India and the Asean-4) produced US$4.1trn of ‘new’ GDP demand in 2011 and in 2018 was on course to produce US$4.1trn in new dollar demand.

4. The Internet: Hacks, Clicks, and Money

There is this thing called the internet that can be pretty cool sometimes. In all seriousness though, the internet is a driving force for making money and spending money. Last week we took a long look at mobile phones and continuing a deep dive on technology today we take look at the internet in China. This will not be a total encyclopedia but a snap shot of some key features.

5. China’s Pharmaceutical and TCM Industry

Chinese healthcare is fascinating in that one minute you can visit a doctor practicing the latest modern medicine and then stop at the corner store for traditional Chinese medicines specializing in random herbs and fungi. The dichotomy is a truly Chinese experience. However, China is increasingly a manufacturing and therefore export destination for both modern and traditional Chinese medicines (TCM).

In this briefing:

1. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text
2. US Dollar Demand – Fading Appetite
3. The Internet: Hacks, Clicks, and Money
4. China’s Pharmaceutical and TCM Industry
5. ECB, BoJ Suck Wind – EA Threatened with Japanisation

1. Prabowo Errs Again; Widodo Lead Intact; Riady’s Mei-Egg-Karta; BI Holds; Repsol’s Find; Debate Text

Prabowo again squandered a chance in a debate to gain ground, as Widodo appeared more confident and in command.  Prabowo’s incessant efforts to sow fear of foreigners does little to weaken his opponent.  Widodo’s lead was intact as of late January, despite claims from two pollsters (Indomatrik, Median) who are demonstrably unreliable or even fraudulent.  Lippo Group owner James Riady suffered repudiation: after having testified in court that he met the Bekasi District chief by coincidence and did not discuss his Meikarta project with her, KPK prosecutors played a phone recording that shows otherwise.  BI has held rates steady, citing the current account deficit after a gaping January trade deficit.  The government continues its efforts to sack more than 2,000 civil servants who are corruption convicts.  Repsol discovered gas in South Sumatra. 

Politics: The second of five debates in the presidential election marked another missed opportunity for Gerindra Chair Prabowo Subianto to gain ground on President Joko Widodo.  Instead, the incumbent again landed blows that hurt the retired general, highlighting his unfamiliarity with e-commerce jargon and drawing attention to his land assets measuring 340,000 ha.  For his part, Prabowo pointedly projected a conciliatory demeanor, perhaps to dispel perceptions that he is temperamental, but it squandered a chance to assail the incumbent and thereby persuade voters to opt for change.  Prabowo adhered to form by advocating protectionism and expansion of state involvement in the economy.  He used nearly every answer to disparage foreigners, which is an error: sowing suspicion of foreigners does little to weaken his opponent (Page 2) (Transcript translated by Ref Wkly, p. 8).  Hard‑line Islamic groups convened again in Jakarta (p. 3). 

Surveys: In the July 2014 election, the Center for Strategic Development and Policy Studies (Puskaptis) performed a Quick Count survey of ballot‑station results that declared Prabowo the winner, and the Association of Polling Firms (Persepsi) ousted Puskaptis from its ranks.  But the head, Hasan Yazid, has re‑emerged as the founder of Indomatrik, another purported polling firm.  Yazid claims to have findings showing Prabowo’s support on par with Widodo’s.  Along with supposed findings from another obscure agency, Median, this is injecting confusion into perceptions of the presidential election.  In fact, two reputable agencies determined in late January that Widodo’s lead was intact (p. 4).   

Justice: In the Meikarta‑Lippo bribery scandal, prosecutors dispute the testimony provided in court last month by group owner James Riady (p. 5).  Information Minister Rudiantara faced questioning from the Election Oversight Agency (Bawaslu) for having jested, in an event with ministry personnel, about preferences for presidential tickets (p. 7).

Policy News: Cabinet members are preparing measures that will finally force regional officials to sack civil servants convicted of corruption (p. 7). 

Energy: Spain’s Repsol announced the largest gas discovery in 18 years – a reservoir in Musi Banyuasin, South Sumatra measuring two trillion cubic feet (p. 8).

Economics: Bank Indonesia (BI) kept its benchmark rate unchanged at 6.0% (p. 9).

Appendix: The presidential candidates debated the topics of infrastructure, the environment and natural resources on 17 February (transcript and analysis, p. 9).

2. US Dollar Demand – Fading Appetite

In 2011 the world experienced the best year of demand expansion – in US dollar terms – in any year since the financial crisis, until 2018 that is. But you would hardly realise that that was the case by reading the newswires, the stories there since early 2018 have been about ‘synchronised slowdown’ and, in particular, the demand downdraft from China. The reality is that developed countries (the US, EU, UK and Japan) plus developing Asia (China, India and the Asean-4) produced US$4.1trn of ‘new’ GDP demand in 2011 and in 2018 was on course to produce US$4.1trn in new dollar demand.

3. The Internet: Hacks, Clicks, and Money

There is this thing called the internet that can be pretty cool sometimes. In all seriousness though, the internet is a driving force for making money and spending money. Last week we took a long look at mobile phones and continuing a deep dive on technology today we take look at the internet in China. This will not be a total encyclopedia but a snap shot of some key features.

4. China’s Pharmaceutical and TCM Industry

Chinese healthcare is fascinating in that one minute you can visit a doctor practicing the latest modern medicine and then stop at the corner store for traditional Chinese medicines specializing in random herbs and fungi. The dichotomy is a truly Chinese experience. However, China is increasingly a manufacturing and therefore export destination for both modern and traditional Chinese medicines (TCM).

5. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

In this briefing:

1. US Dollar Demand – Fading Appetite
2. The Internet: Hacks, Clicks, and Money
3. China’s Pharmaceutical and TCM Industry
4. ECB, BoJ Suck Wind – EA Threatened with Japanisation
5. India Monthly Report: Jan’19 – Feb’19

1. US Dollar Demand – Fading Appetite

In 2011 the world experienced the best year of demand expansion – in US dollar terms – in any year since the financial crisis, until 2018 that is. But you would hardly realise that that was the case by reading the newswires, the stories there since early 2018 have been about ‘synchronised slowdown’ and, in particular, the demand downdraft from China. The reality is that developed countries (the US, EU, UK and Japan) plus developing Asia (China, India and the Asean-4) produced US$4.1trn of ‘new’ GDP demand in 2011 and in 2018 was on course to produce US$4.1trn in new dollar demand.

2. The Internet: Hacks, Clicks, and Money

There is this thing called the internet that can be pretty cool sometimes. In all seriousness though, the internet is a driving force for making money and spending money. Last week we took a long look at mobile phones and continuing a deep dive on technology today we take look at the internet in China. This will not be a total encyclopedia but a snap shot of some key features.

3. China’s Pharmaceutical and TCM Industry

Chinese healthcare is fascinating in that one minute you can visit a doctor practicing the latest modern medicine and then stop at the corner store for traditional Chinese medicines specializing in random herbs and fungi. The dichotomy is a truly Chinese experience. However, China is increasingly a manufacturing and therefore export destination for both modern and traditional Chinese medicines (TCM).

4. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

5. India Monthly Report: Jan’19 – Feb’19

Indian indices were the least performing among the select global indices with S&P BSE Sensex and Nifty 50 generating returns of 0.01% and negative 0.73% in domestic terms respectively. In Dollar terms they fell by 2.18% and 2.89% respectively. Indian Rupee witnessed deprecation of 2.18% during the period and fell from 69.40 USD/ INR to 70.95 USD/ INR. Among the select indices, Hang Seng was the best performer with dollar returns of 10.89% and among the select currencies, South African Rand was the best performing with an appreciation of 7.88%.

Among the Sectoral indices, Nifty Pharma was the best performing with returns of 4.91% in dollar terms and Nifty Realty was the worst performing with falling by 17.41%

In this briefing:

1. The Internet: Hacks, Clicks, and Money
2. China’s Pharmaceutical and TCM Industry
3. ECB, BoJ Suck Wind – EA Threatened with Japanisation
4. India Monthly Report: Jan’19 – Feb’19
5. India: Outlook on Capex Recovery Continues to Brighten

1. The Internet: Hacks, Clicks, and Money

There is this thing called the internet that can be pretty cool sometimes. In all seriousness though, the internet is a driving force for making money and spending money. Last week we took a long look at mobile phones and continuing a deep dive on technology today we take look at the internet in China. This will not be a total encyclopedia but a snap shot of some key features.

2. China’s Pharmaceutical and TCM Industry

Chinese healthcare is fascinating in that one minute you can visit a doctor practicing the latest modern medicine and then stop at the corner store for traditional Chinese medicines specializing in random herbs and fungi. The dichotomy is a truly Chinese experience. However, China is increasingly a manufacturing and therefore export destination for both modern and traditional Chinese medicines (TCM).

3. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

4. India Monthly Report: Jan’19 – Feb’19

Indian indices were the least performing among the select global indices with S&P BSE Sensex and Nifty 50 generating returns of 0.01% and negative 0.73% in domestic terms respectively. In Dollar terms they fell by 2.18% and 2.89% respectively. Indian Rupee witnessed deprecation of 2.18% during the period and fell from 69.40 USD/ INR to 70.95 USD/ INR. Among the select indices, Hang Seng was the best performer with dollar returns of 10.89% and among the select currencies, South African Rand was the best performing with an appreciation of 7.88%.

Among the Sectoral indices, Nifty Pharma was the best performing with returns of 4.91% in dollar terms and Nifty Realty was the worst performing with falling by 17.41%

5. India: Outlook on Capex Recovery Continues to Brighten

As per the CSO, gross fixed capital formation (GFCF) has grown above nominal GDP for 4 consecutive quarters now (latest data for September quarter). This, after GFCF grew slower than nominal GDP in 20 of the preceding 21 quarters. Capex cycle is thus picking up. And there are good reasons to expect this continue in the foreseeable future. Capacity utilisation is increasing in a broad-based manner. Liquidity conditions have improved, and cost of capital is likely to fall. Corporate profit cycle is no longer a headwind, although it is not yet a strong tailwind. The nascent signs of a recovery in the capex cycle are thus likely to get stronger in the months ahead.

In this briefing:

1. January Headline Data for China
2. Trade Talks/Tech Trouble/ Rural Revival/Data Digest /Bad Bonds

1. January Headline Data for China

Sometimes at Balding’s World we explore worm holes of Chinese data. Yes, granular data is awesome, but the global economic calendar should not be overlooked nor headline data taken for granted. To that end today we take a look at some key figures to recently emerge.

2. Trade Talks/Tech Trouble/ Rural Revival/Data Digest /Bad Bonds

China News That Matters

• Will tariff hike be delayed to May?
• Like rugby without the All Blacks!
• Funding the farmers – with better financial services
• Good signs, bad signs
• High time for a check-up

In this briefing:

1. Japan: Upcycle Intact
2. Free Money Has Flown
3. UK Cycle: Bullish Trends Stretch Before Slowing
4. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data
5. Mildly Expansionary, but Socially Magnanimous While Staying Focused on Long-Term Competitiveness

1. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

2. Free Money Has Flown

The world will soon discover that debt matters.

The announcement of each round of QE increased asset prices, but the effect on Treasury bond prices began to fade when central bank purchases began. This unexpected behaviour revealed a little-known fact: asset prices react more to the expectation of changes in liquidity than to the experience of greater liquidity in financial markets. By contrast, economic growth is subject to the fluctuating standards of commercial bank lending, which follow variations in the demand for credit. Consequently, financial markets lead the economy. Meanwhile, central banks focus on lagging indicators, so they’re followers, not leaders. Bond markets usually predict more accurately than stock markets. To work, central bank easing policies require real risk-adjusted interest rates. However, with those rates below zero in many countries, further reductions would penalise lenders without helping borrowers. Thus, only rising inflation can save stressed debtors.

3. UK Cycle: Bullish Trends Stretch Before Slowing

• UK employment growth increased further in Dec-18 despite GDP’s yearend weakness. Higher participation has bolstered the bullish trend but tends to be temporary.
• Slower employment growth need not prevent further falls in the unemployment rate, which looks to be creating an increasingly tight labour market.
• Wage growth is also likely to ease back in the new year, although the extent should be curtailed by an unwind of the depressed bonus share, in my view.

4. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data

5. Mildly Expansionary, but Socially Magnanimous While Staying Focused on Long-Term Competitiveness

Singapore’s growth in 2017 and 2018 has been primarily productivity-driven, suggesting that the 5-year project of reducing dependence on foreign workers (of all skill levels) is finally bearing fruit. The 2019 Budget further lowered the ceiling on employing foreigners in the services sector, and withdrew the NOR scheme from 2002 that was aimed at attracting senior executives with  regional/global roles.

The healthy twin surpluses are evident even amid the fog of ultra-conservative fiscal accounting (which excludes land sales and investment income from GIC, MAS and Temasek from revenue, and only includes a small part of their past earnings as a “net investment return contribution”). The small stimulus was aimed mainly at providing a slew of health and other benefits to those born between 1950 and 1959 (the “Merdeka Generation”); the previous “Pioneer Generation” having already been rewarded previously. These are sensible interventions to reduce inequality. 

This year, we estimate that Singapore’s real GDP will decelerate to 2.8% growth (from 3.7% in 2017 and 3.2% in 2018) as the global electronics cycle turns downward — evident in the sharp slump in non-oil domestic exports in Dec18 and Jan19. But Singapore’s twin surpluses have ample room to provide a substantial fiscal stimulus should the global economy worsen substantially further. 

In this briefing:

1. ECB, BoJ Suck Wind – EA Threatened with Japanisation
2. India Monthly Report: Jan’19 – Feb’19
3. India: Outlook on Capex Recovery Continues to Brighten
4. BoJ Steps in as ECB Exits
5. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon

1. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

2. India Monthly Report: Jan’19 – Feb’19

Indian indices were the least performing among the select global indices with S&P BSE Sensex and Nifty 50 generating returns of 0.01% and negative 0.73% in domestic terms respectively. In Dollar terms they fell by 2.18% and 2.89% respectively. Indian Rupee witnessed deprecation of 2.18% during the period and fell from 69.40 USD/ INR to 70.95 USD/ INR. Among the select indices, Hang Seng was the best performer with dollar returns of 10.89% and among the select currencies, South African Rand was the best performing with an appreciation of 7.88%.

Among the Sectoral indices, Nifty Pharma was the best performing with returns of 4.91% in dollar terms and Nifty Realty was the worst performing with falling by 17.41%

3. India: Outlook on Capex Recovery Continues to Brighten

As per the CSO, gross fixed capital formation (GFCF) has grown above nominal GDP for 4 consecutive quarters now (latest data for September quarter). This, after GFCF grew slower than nominal GDP in 20 of the preceding 21 quarters. Capex cycle is thus picking up. And there are good reasons to expect this continue in the foreseeable future. Capacity utilisation is increasing in a broad-based manner. Liquidity conditions have improved, and cost of capital is likely to fall. Corporate profit cycle is no longer a headwind, although it is not yet a strong tailwind. The nascent signs of a recovery in the capex cycle are thus likely to get stronger in the months ahead.

4. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

5. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon

Following the release of the December US retail sales report, recession doomsayers have become much more vocal and their calls will invariably become louder as economic deceleration unfolds.

There are currently no major signs of excesses in important sectors of the US economy to unhinge the flat Phillips Curve, while structural shifts over time have made forecasting inflexion points in the business cycle much more difficult.

Meanwhile, although the Federal Open Market Committee (FOMC) is concerned about externally-sourced headwinds, members seem content with the current behaviour of the domestic economy, at least for the time being.

The Trump Administration will be keen to ease fiscal policy again to prevent a 2020 recession if growth slows significantly this year, while the Democrats would face a tricky task obstructing if there was a sizeable infrastructure spending component included as part of the measures.

Meanwhile, some Democratic politicians have been exploring deploying Modern Monetary Theory to facilitate the greater provision of free government services, but financial markets would baulk at this prospect, particularly bond market vigilantes.

The behaviour of the bond market vigilantes have highlighted the problems facing the Fed in trying to raise the policy rate significantly above zero, but they have at least provided the FOMC with an interest rate buffer to counter economic slowdown, something conspicuously absent in the Eurozone and Japan.

In this briefing:

1. India Monthly Report: Jan’19 – Feb’19
2. India: Outlook on Capex Recovery Continues to Brighten
3. BoJ Steps in as ECB Exits
4. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon
5. Japan: Upcycle Intact

1. India Monthly Report: Jan’19 – Feb’19

Indian indices were the least performing among the select global indices with S&P BSE Sensex and Nifty 50 generating returns of 0.01% and negative 0.73% in domestic terms respectively. In Dollar terms they fell by 2.18% and 2.89% respectively. Indian Rupee witnessed deprecation of 2.18% during the period and fell from 69.40 USD/ INR to 70.95 USD/ INR. Among the select indices, Hang Seng was the best performer with dollar returns of 10.89% and among the select currencies, South African Rand was the best performing with an appreciation of 7.88%.

Among the Sectoral indices, Nifty Pharma was the best performing with returns of 4.91% in dollar terms and Nifty Realty was the worst performing with falling by 17.41%

2. India: Outlook on Capex Recovery Continues to Brighten

As per the CSO, gross fixed capital formation (GFCF) has grown above nominal GDP for 4 consecutive quarters now (latest data for September quarter). This, after GFCF grew slower than nominal GDP in 20 of the preceding 21 quarters. Capex cycle is thus picking up. And there are good reasons to expect this continue in the foreseeable future. Capacity utilisation is increasing in a broad-based manner. Liquidity conditions have improved, and cost of capital is likely to fall. Corporate profit cycle is no longer a headwind, although it is not yet a strong tailwind. The nascent signs of a recovery in the capex cycle are thus likely to get stronger in the months ahead.

3. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

4. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon

Following the release of the December US retail sales report, recession doomsayers have become much more vocal and their calls will invariably become louder as economic deceleration unfolds.

There are currently no major signs of excesses in important sectors of the US economy to unhinge the flat Phillips Curve, while structural shifts over time have made forecasting inflexion points in the business cycle much more difficult.

Meanwhile, although the Federal Open Market Committee (FOMC) is concerned about externally-sourced headwinds, members seem content with the current behaviour of the domestic economy, at least for the time being.

The Trump Administration will be keen to ease fiscal policy again to prevent a 2020 recession if growth slows significantly this year, while the Democrats would face a tricky task obstructing if there was a sizeable infrastructure spending component included as part of the measures.

Meanwhile, some Democratic politicians have been exploring deploying Modern Monetary Theory to facilitate the greater provision of free government services, but financial markets would baulk at this prospect, particularly bond market vigilantes.

The behaviour of the bond market vigilantes have highlighted the problems facing the Fed in trying to raise the policy rate significantly above zero, but they have at least provided the FOMC with an interest rate buffer to counter economic slowdown, something conspicuously absent in the Eurozone and Japan.

5. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

In this briefing:

1. India: Outlook on Capex Recovery Continues to Brighten
2. BoJ Steps in as ECB Exits
3. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon
4. Japan: Upcycle Intact
5. Free Money Has Flown

1. India: Outlook on Capex Recovery Continues to Brighten

As per the CSO, gross fixed capital formation (GFCF) has grown above nominal GDP for 4 consecutive quarters now (latest data for September quarter). This, after GFCF grew slower than nominal GDP in 20 of the preceding 21 quarters. Capex cycle is thus picking up. And there are good reasons to expect this continue in the foreseeable future. Capacity utilisation is increasing in a broad-based manner. Liquidity conditions have improved, and cost of capital is likely to fall. Corporate profit cycle is no longer a headwind, although it is not yet a strong tailwind. The nascent signs of a recovery in the capex cycle are thus likely to get stronger in the months ahead.

2. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

3. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon

Following the release of the December US retail sales report, recession doomsayers have become much more vocal and their calls will invariably become louder as economic deceleration unfolds.

There are currently no major signs of excesses in important sectors of the US economy to unhinge the flat Phillips Curve, while structural shifts over time have made forecasting inflexion points in the business cycle much more difficult.

Meanwhile, although the Federal Open Market Committee (FOMC) is concerned about externally-sourced headwinds, members seem content with the current behaviour of the domestic economy, at least for the time being.

The Trump Administration will be keen to ease fiscal policy again to prevent a 2020 recession if growth slows significantly this year, while the Democrats would face a tricky task obstructing if there was a sizeable infrastructure spending component included as part of the measures.

Meanwhile, some Democratic politicians have been exploring deploying Modern Monetary Theory to facilitate the greater provision of free government services, but financial markets would baulk at this prospect, particularly bond market vigilantes.

The behaviour of the bond market vigilantes have highlighted the problems facing the Fed in trying to raise the policy rate significantly above zero, but they have at least provided the FOMC with an interest rate buffer to counter economic slowdown, something conspicuously absent in the Eurozone and Japan.

4. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

5. Free Money Has Flown

The world will soon discover that debt matters.

The announcement of each round of QE increased asset prices, but the effect on Treasury bond prices began to fade when central bank purchases began. This unexpected behaviour revealed a little-known fact: asset prices react more to the expectation of changes in liquidity than to the experience of greater liquidity in financial markets. By contrast, economic growth is subject to the fluctuating standards of commercial bank lending, which follow variations in the demand for credit. Consequently, financial markets lead the economy. Meanwhile, central banks focus on lagging indicators, so they’re followers, not leaders. Bond markets usually predict more accurately than stock markets. To work, central bank easing policies require real risk-adjusted interest rates. However, with those rates below zero in many countries, further reductions would penalise lenders without helping borrowers. Thus, only rising inflation can save stressed debtors.