Daily Macro: 2019 Equity Market Outlook and more

In this briefing:

1. 2019 Equity Market Outlook
2. Wanted: A 21st Century Monetary Theory
3. Vietnam: Economic Prestidigitation
4. India Policy Rates – Case For A Cut Builds
5. Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges

1. 2019 Equity Market Outlook

• The equity market in the fourth quarter of 2018 was throwing off recession-like signals with the 19.8% drop in equity prices from the S&P 500’s all-time high through the near-term trough of December 24, 2018.  We see the decline as a correction from an overvalued position in late September rather than as point to an impending recession.
• Key to the outlook for equities and the economy are economy-wide profit margins (share of nonfinancial corporate profits in output).  It appears the balance between price increases and productivity-adjusted labor costs has improved as productivity has accelerated despite a pickup in the growth of labor compensation.  The corporate tax cut has spurred post-tax margins close to record highs.
• We expect nonfinancial corporate profit growth of 7% on average over the next two years, which should support equity prices.   However, the scope for a strong further rebound in equity prices is challenged by our outlook for rising corporate bond yields (our valuation model suggests rising profits and higher yields roughly cancel each other out in our valuation model). 

2. Wanted: A 21st Century Monetary Theory

The globe is facing more than an ordinary business cycle.

Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.

3. Vietnam: Economic Prestidigitation

On Thursday 27 December 2018 the General Statistics Office (GSO) in Hanoi announced that Vietnam had grown by 7.08% (7.1% to us mere mortals) for full year 2018. Magically, this was exactly the same number as that forecast by the Asian Development Bank in April, long before the travails that affected the rest of the region in the second half of the year. It was also an outlier among economic forecasters (with the IMF in July projecting just 6.6% for last year). Even more magically, the GSO was able to produce this number just before the end of the year when, officially, money supply data were only available up to September and credit data to July. Hey presto, economic statistics are magic!

Truth be told, Vietnam is an object lesson in the worth of most macroeconomic statistics collected by governments at the insistence of the IMF: pinches of salt should be handed out with each release.

Economic data are manipulated around the world by governments. True economic conditions are apparent to anyone who is on the ground (which makes life difficult for fund managers who are not visiting countries they invest in regularly). And in Vietnam, after one day of meetings, we would conclude that, even if the 7.1% number is just pie-in-the-sky, economic growth and general economic conditions are very good.

4. India Policy Rates – Case For A Cut Builds

A cut in interest rates is coming. The case is compelling. Headline inflation is easing and is now running well below the RBI’s forecasts. System non-performing loans have peaked while the trade deficit is narrowing meaning the central can afford some largess. Given where real lending rates are and the fragility of the corporate profit cycle, lower policy rates would welcome and a positive of the India growth story. We reiterate our overweight Indian equities call.

5. Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges

BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes.  Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy.  Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform.  Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation.   A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%.  Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT. 

Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade.  Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy.  Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants.  The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices.  Widodo unveiled a plan for a National Legislative Center (Puslegnas).  The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2).  The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15).  Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor.  At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16). 

Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage  points in late December.  It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support.  The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17). 

Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta.   A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).   

Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit.  In part, the deficit reflects Indonesia’s considerable economic momentum.  Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).