Daily Macro: The United States: 2019 Set Fair but Then? and more

In this briefing:

1. The United States: 2019 Set Fair but Then?
2. Philippines: The Hanjin Scare
3. FLASH: Brexit Deal Defeated by 230
4. Much Ado About Credit
5. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat

1. The United States: 2019 Set Fair but Then?

While Donald Trump amassed troops along the Mexican border in order to repel the migrant caravan from Honduras, it is really the caravan of policy problems lined up behind him that is more likely to disrupt his presidency. Fiscal promises relating to public-sector pensions, Medicaid and Medicare are set to grow exponentially over the coming years. And then there is the increase in nonfinancial corporate debt since 2010 which has been accumulated during a period of the most distorted capital-pricing in history. When the first wave of renewed economic problems hit all there will be to withstand them is, in the famous words of ex-Fed Chair Janet Yellen, “More of Plan A”. The next time around, and that time is coming soon, it is likely to prove to be a dud.

2. Philippines: The Hanjin Scare

• Knee-jerk market reaction to the disclosure last Friday (January 11, 2019) of Hanjin’s (Philippines) severe cash flow constraints including the local banks’ loan exposure, was understandable. However, the banks FCDU (foreign currency deposit unit) loan exposure of US$412mn (roughly Php21bn) to Hanjin was modest relative to the banking system’s FCDU (banks Hanjin loan exposure is about 1.1% of FCDU deposits), outstanding bank loans, capitalization ratios, etc. Officials of the big local banks have assured markets and investors of their financial ability to cover potential Hanjin loan losses. Banks consolidated NPL ratio is in the low, single-digit (1.8% in October 2018) that can easily absorb the FCDU hit.  

• Will the employment losses from Hanjin’s local subsidiary located in Subic bay, spawn regional demand-side risk particularly for Central Luzon—a key, emerging commercial/industrial hub in Luzon? Against recent regional GDP estimates (2016-17), we failed to detect any severe employment shock during the height of Hanjin’s job shedding. Down to 3,000 workers (peak of more than 30,000 in 2014-15), we have already been through the worst of the jobless impact of Hanjin’s business collapse. Central Luzon’s regional GDP grew by over 9% in real terms in 2017 and 2016 (vs national GDP growth of 6.9% in 2016 and 6.7% in 2017) despite the likelihood of Hanjin’s job losses. Central Luzon’s manufacturing output still managed to rise by 2-digit rates in 2016-17.On a per capita basis, Central Luzon’s per capita real GDP grew by close to 8% in 2016-17 despite perceived regional job market adjustments. Perhaps the fiscal stimulus programs including more infrastructure projects directed at the Central Luzon provinces allayed the worst of Hanjin’s macro shock.

• I believe the Hanjin event risk represents an opportunity to buy risk assets on any sustained adverse market reaction while safeguarding one’s liquidity position.

3. FLASH: Brexit Deal Defeated by 230

• The UK parliament rejected the Brexit deal by a historically substantial margin of 230 votes (432 vs 202). Presentation of a plan-B will probably occur on Monday.
• A vote of no confidence in the government will occur on 16 Jan. With eurosceptics and the DUP maintaining support, an early election should be avoided.
• Theresa May is signalling greater openness to opposition support, despite its unreliability, which the market has welcomed. A codicil that clearly clarifies the backstop’s non-permanence still looks like the most likely solution, in my view.

4. Much Ado About Credit

• Global financing conditions could tighten further
• Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
• A de-escalation in trade tensions and a Fed pause could ease the pain
• Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?

5. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat

We noted in   Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017.  Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.