Brief Macro: Buy or Sell/Europe/Trade War/Huawei/Financial Services and more

In this briefing:

1. Buy or Sell/Europe/Trade War/Huawei/Financial Services
2. Bull Or Bear? Latest Global Liquidity Readings
3. 18pt Lead Mitigates Prabowo-Related Risk / Islamic Parties Declining / PRC Textile Plan / 4th Debate
4. Vietnam Picks up the China Baton
5. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

1. 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

2. 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

3. 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). 

4. 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.

5. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.