In this briefing:
- This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain
- India Banks – Record High LDR
- Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp
- Ten Years On – Asia Outperforms Advanced Economies
- Asian Credit Monitor: 2019 Portfolio Strategy, US Rate Trajectory, China Reform Pause
1. This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain
The year 2018 was not the brightest for cryptocurrencies; Bitcoin (XBTUSD CURNCY) fell around 70% during 2018 and top altcoins like Ethereum (ETH BGN CURNCY), Ripple and Bitcoin Cash were also down around 80%, 85% and 95% respectively during last year. While it is difficult to pinpoint a single reason for this, a number of factors including, rising security concerns, increased scrutiny, failed institutional support and Bitcoin Cash hash wars have collectively contributed to this bearish sentiment in the cryptocurrency markets last year.
In this note we take a look at several top cryptocurrency and blockchain developments from last year, to see how they would fare going into 2019.
This is a collaborative report between Douglas Kim and myself.
2. India Banks – Record High LDR
A surging loan-to-deposit ratio (LDR) for India’s banks is a concern. It suggests liquidity conditions are worsening for banks; there may be considerable supportive lending; and should deposit flight ensue, there are increased knock-on credit risks. The fact that LDRs are rising concurrently with sharply higher NPLs is especially worrisome.
3. Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp
- Global and Asia headwinds still rattle the gaming sector, but these three companies remain undervalued despite market sentiment.
- Macau’s solid year end performance continues to defy projections, producing a 14% y/y GGR increase.
- Galaxy will benefit disproportionately from the HKMB bridge traffic growth, MGM’s single digit market share will ramp up to double digits and Nagacorp may be the single most siloed gaming operator in all of Asia.
4. Ten Years On – Asia Outperforms Advanced Economies
You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.
5. Asian Credit Monitor: 2019 Portfolio Strategy, US Rate Trajectory, China Reform Pause
If we had to make a base observation for Asia credit markets over 2018, it was certainly caught “wrong-footed” like most of its other risky asset counterparts. The combination of a more hawkish Fed in 2018, global quantitative tightening, late-cycle economic conditions, volatility and a strong USD have all served to impact almost all the asset classes negatively. According to some asset allocators, the only asset class which returned positive in 2018 was cash, every other traditional asset class saw losses.
USD direction will further dictate the impact on overall Asian risk, in our view, with many undervalued Asian currencies following their sharp declines in 2018. One of our scenarios includes a range-bound USD in 1H19, followed by a possible reversal in 2H19 on any dovish Fed policy/US economic weakness. In this case, it has the potential to attract incremental portfolio inflows back into Asian risk. We expect a slightly tighter bias in monetary policy in most Asia ex-Japan nations which is supportive for their respective currencies.
In 2019, risk-reward dynamics have improved particularly for Asian investment grade (“IG”) where we see more limited MTM pressure. We expect a more defensive market at least in 1H19 which supports our heavier IG bias. We suspect larger investors would continue to reallocate depending on the outcomes of the China-US trade dispute and their view on US risk (arguably near its last late-cycle expansion legs). We continue to be extremely selective in Asian high yield (“HY”) which have been impacted by idiosyncratic situations including credit deterioration and rising defaults. Exogenous factors such as the potential for “fallen angel” risk (i.e. a migration from issuers on the cusp of IG, “BBB-” into HY) as well as net portfolio outflows from HY, EM and leveraged loan funds are ongoing concerns. Despite cheaper valuations in Asian HY, we still see skewed risk-reward (with larger potential risks).
In the US, our base case expects the Fed to hike 1-2 times (quarter point each) for 2019, premised on still below-trend inflation and external factors. We think it is near the tail-end of its current tightening cycle, but we would continue to monitor the US supply-side (labour markets, employment gaps, prices) for further clues. A sustained upshot to the previous factors may have the potential to prolong the Fed’s tightening cycle.
On China’s side, we have seen a critical reversal in policy towards selective expansion/accommodation again as economic reforms instituted 3 years ago have been reprioritized. China’s difficult task to balance growth targets and restructure its economy is a perennial issue. We would also expect defaults to remain elevated domestically/internationally as a new paradigm of credit investing takes root in China.
Finally, we would like to wish our readers luck in investing and trading in the year ahead.
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