stagflation in asia - northfield information services · cpis have barely peaked and real inflation...

Asianomics outlook: Stagflation in Asia?

Dr Jim Walker October 2011

Copyright © Asianomics Limited IMPORTANT: All information, advice and comments in this presentation are given in good faith but without legal responsibility. Our full disclaimer, privacy statement and terms of use are available on our website at www.asianom.com

Asianomics Global Investment Strategy (2nd Half 2011)

2

Source: Asianomics Limited

Recommendation 13-‐May-‐11 30-‐Sep-‐11 Asianomics Performance

Short Spanish government bonds and equities

10-‐year bond at 5.21% 10-‐year bond at 5.14% +0.6% (including yield)

IBEX 35 at 10488 IBEX 35 at 8547 +18.5%

Short Aussie dollar and equities

US$1.0629/AUD1 US$0.9662/AUD1 +10.7%

S&P/ASX 200 at 4696 S&P/ASX 200 at 4009 +14.6%

Short the euro EUR 1.419/US$1 EUR 1.339/US$1 +5.7%

Short/underweight the Bovespa

Bovespa at 64003 Bovespa at 52324 +18.2%

Long 3-‐month Treasury 3-‐month T bill at 12.43% 3-‐month T bill at 11.18% +ve (no price data available)Long gold Short copper

GOLDS at US$1505/oz HGA at US$398/lb

GOLDS at US$1624/oz HGA at US$315/lb

+7.9% +20.9%


America and Eurozone round-up

�  Efforts to shore up the eurozone periphery will fail. Greece, Ireland, Portugal, Spain and Italy are all in deep trouble

�  The US labour market is looking more like a recession case than a year-three recovery patient

�  The yield curve, the best indicator of future US growth prospects, looks in good shape but is badly distorted by Fed policy. The Trahan Curve looks terrible

�  Monetary policy signals are confusing the private sector and leading to stagnating capex

3


Without job growth the US will double-dip

This is a Year-Three recovery? 4

Source: Haver Analytics Source: Haver Analytics

-3

-2

-1

0

1

2

3

4

5

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

US Real Average Hourly Earning

(% YoY)

135000

140000

145000

150000

155000

160000

Jan-

01

Sep-

01

May

-02

Jan-

03

Sep-

03

May

-04

Jan-

05

Sep-

05

May

-06

Jan-

07

Sep-

07

May

-08

Jan-

09

Sep-

09

May

-10

Jan-

11

Sep-

11

Civilian EmploymentCLF with normal growthCivilian Labour Force

Official Ue = 9.1%

Ue = 11.7%(Thous)


No official recession signal but the Trahan Curve says otherwise

The US yield curve revisited 5

0.98

0.99

1.00

1.01

1.02

1.03

Jan-

61Ja

n-63

Jan-

65Ja

n-67

Jan-

69Ja

n-71

Jan-

73Ja

n-75

Jan-

77Ja

n-79

Jan-

81Ja

n-83

Jan-

85Ja

n-87

Jan-

89Ja

n-91

Jan-

93Ja

n-95

Jan-

97Ja

n-99

Jan-

01Ja

n-03

Jan-

05Ja

n-07

Jan-

09Ja

n-11

5Yr - 1Yr Treasury Ratio

(Ratio)

Source: Asianomics Limited Source: Asianomics Limited

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

Jan-

61Ja

n-63

Jan-

65Ja

n-67

Jan-

69Ja

n-71

Jan-

73Ja

n-75

Jan-

77Ja

n-79

Jan-

81Ja

n-83

Jan-

85Ja

n-87

Jan-

89Ja

n-91

Jan-

93Ja

n-95

Jan-

97Ja

n-99

Jan-

01Ja

n-03

Jan-

05Ja

n-07

Jan-

09Ja

n-11

5Yr - 1Yr Treasury Ratio with inflation proxy

(Ratio)


Investment not responding to profits – an unnatural tale

EU and US profit margins peaked? 6


6

7

8

9

10

11

12

13

Q1-

75

Q2-

77

Q3-

79

Q4-

81

Q1-

84

Q2-

86

Q3-

88

Q4-

90

Q1-

93

Q2-

95

Q3-

97

Q4-

99

Q1-

02

Q2-

04

Q3-

06

Q4-

08

Q1-

11

US Pretax Corporate Profit as a % of GDP

US Capital Equipment & Software as a % of GDP

(%)

39.0

39.5

40.0

40.5

41.0

41.5

13.5

14.0

14.5

15.0

15.5

16.0

Q1-

00

Q1-

01

Q1-

02

Q1-

03

Q1-

04

Q1-

05

Q1-

06

Q1-

07

Q1-

08

Q1-

09

Q1-

10

Q1-

11

EA 16: Non-residential Investment

EA 16: Gross Operating Surplus [RHS]

(% of GDP) (% of GDP)


Asianomics Asian investment strategy (2nd Half 2011)

7


Country Agg. PE Forensic Asia Recommendations 13-‐May-‐11 30-‐Sep-‐11 Asianomics Performance Score

China 13.3 5.7 Underweight CSI 300 at 3098 2581 Outperform(esp. consumer plays) -‐16.7%

Hong Kong 7.8 5.3 Upgrade to Overweight HSI at 22972 17592 Underperform(11 Oct 11) -‐23.4%

India 14.4 5.7 Upgrade to Neutral Sensex at 16677 16453 Outperform(6 Sep 11) (6 Sep 11) -‐1.3%

Indonesia 14.8 4.3 Neutral (underweight JCSE at 3822 3549 Outperformcommodity counters) -‐7.1%

Japan 16.0 4.4 Strong underweight Topix at 837 761 Underperform-‐9.1%

Korea 11.6 5.0 Downgrade to Neutral Kospi at 1880 1769 Outperform(6 Sep 11) (6 Sep 11) -‐5.9%

Malaysia 14.5 4.2 Overweight KLCI at 1538 1387 Outperform-‐9.8%

Philippines 13.3 5.1 Overweight PSE at 4292 4000 Outperform-‐6.8%

Singapore 7.3 5.4 Overweight STI at 3139 2675 Underperform-‐14.8%

Taiwan 13.4 4.5 Downgrade to Strong Taiex at 7741 7225 OutperformUnderweight (6 Sep 11) (6 Sep 11) -‐6.7%

Thailand 10.6 4.5 Overweight SET at 1088 916 Underperform-‐15.8%

Asian average 13 May -‐ 30 Sep -‐12.9%(Unweighted) 6 Sep -‐ 30 Sep -‐4.6%


Asian round-up

� Asian PMIs are signaling that expansion is losing momentum

�  Industrial production across the region has turned down decisively

�  Inflation of money and credit is still an issue

� Asian interest rates have more upside

� Watch out for weakening growth in India and a fiscal blowout

8


China, Taiwan and Singapore manufacturing PMIs contracting as is Thai IP 9

Asian PMIs and industrial production indicate slower growth ahead

Source: Bloomberg & Haver Analytics Source: Haver Analytics

% YoY Sep Aug July June

Japan manufacturing 49.3 51.9 52.1 50.7

China Official manufacturing

51.6 50.9 50.7 50.9

HSBC China manufacturing

49.9 49.9 49.3 50.1

HSBC China services

53.0 50.6 53.5 57.0

India manufacturing 49.8 52.6 53.6 55.3

Taiwan manufacturing

44.5 45.2 46.1 49.9

Korea manufacturing 47.5 49.7 51.3 51.1

Hong Kong overall 45.9 47.8 51.4 50.3

Singapore overall 48.3 49.4 49.3 50.4

-35

-25

-15

-5

5

15

25

35

45

55

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Thailand IP Korea IP

Taiwan IP Malaysia IP

(% YoY)


CPIs have barely peaked and real inflation is picking up

It is not such good news on the inflation front

10


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10

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May

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May

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Sep-

09

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-10

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10

Jan-

11

May

-11

Sep-

11

Thailand CPIKorea CPITaiwan CPIMalaysia CPI

(% YoY)

-3

0

3

6

9

12

15

18

21

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Taiwan Credit Malaysia Credit

Korea Credit Thailand Credit

(% YoY)


Easy money and policy minefield – no safe bets 11

Is stagflation a possibility?

Source: Haver Analytics, Bloomberg & Asianomics Limited

Notes: India average deposit rate; China 1-year deposit rate; Hong Kong savings deposit rate; Indonesia 3-month average deposit rate; Korea 91-day deposit rate; Malaysia 3-month CD; Philippines short-term deposit; Singapore 3-month deposit rate; Taiwan 3-month deposit rate; Thailand 3-month time deposit rate; US 3-month CD; Japan ordinary savings rate & Vietnam 3-month deposit rate.

Country Bank deposit rate Consumer price inflation (% YoY)

Real deposit rate Interest rate outlook Exchange rate outlook

Vietnam 14.0 22.6 (8.6) Up ++ Deval

Hong Kong 0.0 5.8 (5.8) Stable Stable

Singapore 0.2 5.7 (5.5) Stable App

United States 0.4 3.8 (3.4) Stable _

China 3.5 6.3 (2.8) Up +++ Slow App

India 8.5 10.9 (2.4) Up Dep

Thailand 2.1 4.0 (1.9) Up Stable

Philippines 3.1 4.8 (1.7) Up Slow App

Korea 3.6 4.3 (0.7) Up App

Taiwan 0.9 1.3 (0.4) Up Stable

Malaysia 3.0 3.3 (0.3) Stable Slow App

Japan 0.0 0.2 (0.2) Stable App

Indonesia 6.6 4.6 2.0 Up +++ Dep


The Fail of China 12

�  China’s growth model is centred on state-owned enterprises and ‘authoritarian capitalism’

�  In the last 20 years Beijing has succeeded in feeding the elites in Chinese society. Inequality is now reaching extremes

�  Its response to the Global Financial Crisis has made rebalancing the economy even more difficult. Policy now backed into a corner

�  Capital mispricing is at the heart of poor returns on investment and the malinvested nature of the economy


Work to do: 250-450 basis points of rate rises in 2011 13

China’s monetary explosion (real inflation)


0

2000

4000

6000

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10000

12000

14000

Jan-

00Au

g-00

Mar

-01

Oct

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Apr-0

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n-07

Aug-

07M

ar-0

8O

ct-0

8M

ay-0

9De

c-09

Jul-1

0Fe

b-11

Sep-

11

US M2

China M2

(US$ bn)

-6

-4

-2

0

2

4

6

Jan-

99

Sep-

99

May

-00

Jan-

01

Sep-

01

May

-02

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03

May

-04

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Sep-

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Sep-

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May

-10

Jan-

11

Sep-

11

China 1-Yr Real Deposit Rate

(%)


Too many liabilities, reliant on closed capital account

International reserve use is constrained 14


-500

0

500

1000

1500

2000

2500

3000

00 01 02 03 04 05 06 07 08 09 10

China Foreign Reserves

Reserves less External Debt

'Free' Reserves

(US$ bn)

0

1250

2500

3750

5000

6250

7500

8750

10000

11250

12500

Jan-

00Au

g-00

Mar

-01

Oct

-01

May

-02

Dec-

02Ju

l-03

Feb-

04Se

p-04

Apr-0

5No

v-05

Jun-

06Ja

n-07

Aug-

07M

ar-0

8O

ct-0

8M

ay-0

9De

c-09

Jul-1

0Fe

b-11

Sep-

11

China M2 in US$

China Foreign Reserves

(US$ bn)


Alternative credit measures suggest no easing any time soon

Has the inflation even been addressed? 15

-20

-10

0

10

20

95

100

105

110

115

120

125

130

00 01 02 03 04 05 06 07 08 09 10

Residual Actual Fitted

Res

idua

ls

Private C

redit as a % of G

DP

China Bank Credit Relative as a % of GDP, Jan 00 - Jun 11


Year Additional M2 (Rmb trn)

% of previous year’s GDP

Additional official credit (Rmb trn)


Additional Fitch-‐adjusted total societal funding (Rmb trn)


2008 7.3 27.5 4.0 15.0 6.5 24.5

2009 13.9 44.1 10.8 34.3 15.0 47.6

2010 12.1 35.0 8.8 25.5 16.5 47.8

2011* 7.2 17.9 8.1 20.2 18.0 44.9

Source: Haver Analytics & Fitch Ratings


India’s State of Confusion 16

�  Inflation signals are not good despite significant RBI tightening. Growth signals now mixed too

�  But fiscal policy is the real issue. The government is pursuing entitlement programmes rather than a growth strategy

�  We expect real GDP growth to dip below 7% in fiscal year 2012. Central government budget deficit will rise from 4.8% to 6%+

�  Ratings agencies likely to put India on watch list. Market is richly valued given the growth and policy outlook


Manufacturing WPI concerning, GDP growth softening 17

The RBI’s quandary – inflation or growth?


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Q1-

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Q3-

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Q2-

11

India Real GDP

India Real GFCF

(% YoY)

-2

0

2

4

6

8

10

12

Jan-

01

Sep-

01

May

-02

Jan-

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Sep-

11

Wholesale Price: All Items

Wholesale Price: Manufactured Products

(% YoY)

stagflation in asia - northfield information services · cpis have barely peaked and real inflation...

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