Brief Macro: Vietnam: The One and more

In this briefing:

1. Vietnam: The One
2. UK: 1Q19 GDP Growth Tracking up to 0.5%
3. Defying Doomsayers: Making the Case for Continued US Economic Growth
4. Indian Election Antics
5. Brexit: No Soft-Touch Extension

1. Vietnam: The One

In Vietnam Picks up the China Baton, we said that Vietnam was ready to take off with the China trade baton. Outside of China/Hong Kong/Taiwan, the VN Index, up 10.3% year to date, is the best performing market in the Asian region. But is the economy on the ground in Vietnam as good as the data suggests? We are upbeat  although there are some concerns about its EU style paradox – a two tier economy that could create problems down the road. If you can buy Vietnam, it is well worth doing so.

2. UK: 1Q19 GDP Growth Tracking up to 0.5%

• UK monthly GDP stayed surprisingly strong in Feb-19, growing 0.2% m-o-m after 0.5% in Jan-19. Services matched my bullish forecast and show no signs of matching the collapse in the PMI, but finance’s downward trend looks to be re-establishing.
• Manufacturing and construction caused the upside surprise and are set to be highly supportive of GDP growth. With the economy firing on all cylinders, despite the prophecies of doom, I raise my bullish 1Q19 GDP growth forecast by 0.1pp to 0.5%.

3. Defying Doomsayers: Making the Case for Continued US Economic Growth

Despite the recent and transient inversion of the yield curve, incoming US economic data suggests continued growth as the most likely baseline outlook for risky assets.

Easier financial conditions due to the Fed’s dovish tilt  in 2019 should be supportive for the real economy and risky assets, but they have not prevented a decline in real yields on Treasury Inflation Protected Securities (TIPS) and a flatter yield curve.

Hitherto, despite a flattening yield curve, US bank lending standards have not tightened significantly due to a rise in net interest margins, an outcome at variance with recent history.

US corporate bond market and leverage loan conditions have improved since 2018 Q4, thereby easing concerns about the credit cycle, while legislative changes in Japan could impact liquidity in the AAA-rated collateralised loan obligations (CLO) market.

President Trump continues to exert pressure on the Fed by demanding an immediate policy shift towards easing, as well as nominating political allies to serve on the Board of Governors, thereby raising the ante on Chair Powell.

4. Indian Election Antics

India is in an election year. Sensibility has gone out of the window, replaced by fantastical promises and irresponsible spending. If the Modi government is desperate hold on to power, the Congress Party is equally determine to wrest power away. And then there is the RBI, which working hand in glove with the government, cut policy rates again this month. We hope that cooler heads and more importantly objectivity will prevail once the elections are over, but further interest rate cuts cannot be ruled out at this stage. It follows that the rupee is vulnerable. We reiterate our underweight Indian equities call.

5. Brexit: No Soft-Touch Extension

• The European Council will consider the UK’s latest request for an extension at its 10 April meeting. It is not a soft touch seeking to reward failure, so I expect an extension to be longer and conditional on passing a substantive vote soon.
• Fundamental market-relevant factors have changed little over the past fortnight, in my view, despite all the domestic political noise. I still subjectively see the routes and relative probabilities of a deal, no deal, and no Brexit at 45:35:20.