In today’s briefing:
- How To Trade This Market Eruption
- A New Capital Spending Cycle Is Set to Boost Asian Exports
- Malaysia: Imminent Political Realignments Raise Uncertainty over Electoral Outcomes
- United Kingdom: Inflation Without Benefits
- Value of Euro as a Hedge for EM Currencies in Times Like These
How To Trade This Market Eruption
- Markets have moved sharply year-to-date, and in one clear direction: short Cathie Wood and Bitcoin, long cyclicals (banks & oil)
- There are good macro reasons for the downside move in high-beta, high-multiples but much less so for the long cyclical move to continue its upside move
- My credit impulse metric suggests earnings and inflation are going to disappoint consensus
A New Capital Spending Cycle Is Set to Boost Asian Exports
- There are good reasons to expect a revival in global investment: as the global economy recovers, confidence will return and unleash both pent-up demand as well as secular new demand.
- The hard data on capital goods orders is beginning to support this view. Announcements by companies on capital spending plans also provide support.
- Within Asia, Singapore, Taiwan, South Korea, and Malaysia are particularly likely to benefit from the capital spending upturn.
Malaysia: Imminent Political Realignments Raise Uncertainty over Electoral Outcomes
- Malaysia is entering a period of greater political tumult. New parties are forming and new alliances taking shape. A big loser from this appears to be the Pakatan Harapan coalition.
- The government’s image has taken a beating because of poor management of the terrible floods in December, alongside allegations of corruption against the head of the anti-corruption agency.
- In the coming months, incumbent political parties will hold their annual meetings, offering a chance for leadership renewal. State elections in Johor will also provide more clarity moving forward.
United Kingdom: Inflation Without Benefits
- UK consumer demand remains modest, particularly for services, and will run into numerous headwinds in coming months, including an erosion in real earnings and tax and energy price hikes.
- Sizeable bank deposits, which rose £259bn between February 2020 and November 2021, should provide a cushion to demand but are no panacea given wealthy households’ low propensity to spend.
- This will not stop Bank of England hiking its policy rate further this year but this may do little to bring down cost-push CPI-inflation. Expect some Sterling volatility.
Value of Euro as a Hedge for EM Currencies in Times Like These
- The US dollar has started appreciating again on the back of a safe-haven bid with risk aversion rising due to the Fed’s upcoming rate-hiking cycle and the Russia-Ukraine tensions.
- Given my expectation of rising dollar volatility, I had recommended hedging a diversified EMFX portfolio with the euro. Indeed, the euro hedge has worked well over the past three months.
- I continue to prescribe maintaining the euro hedge. If the dollar remains volatile, I don’t expect the low volatility of EM currencies – dragged lower by Asia – to persist.
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