Conclusion: With the U.S. facing the Consumption Cannonball and Jobless Stagflation, China, India, and Australia tightening monetary policy, and Western Europe fully implementing austerity measures, we think many Asian equity markets are due for a meaningful correction over the intermediate-term TREND. Supporting this outlook are increased signs of slowing growth and accelerating inflation throughout the region.
Positions: Long Chinese Yuan (CYB); Short Japanese yen (FXY); Short Emerging Market Equities (FFD); Bearish on Japanese Equities; Bearish on Indian Equities
There has been a slew of economic data coming out of Asia over the last few days – some good, some bad, and some ugly. Rather than belabor the point(s) with excessive prose, we’ll just highlight the meaningful deltas and inflection points in the call-outs and charts below.
- China’s PMI accelerated in October to 54.7 from 52.9 in September.
- China granted the Hong Kong Monetary Authority a Qualified Foreign Institutional Investor license, which gives the city-state the right to invest Chinese stocks and bonds in an effort to diversify its $266 billion in reserves. This is yet another step in the yuan’s march up the global currency totem pole. Furthermore, today’s announcement gives rise to speculation that the HKMA will shift the Hong Kong dollar’s exchange rate peg to the yuan from the U.S. dollar in the coming years.
- Japan’s Unemployment Rate ticked down in September to 5% from 5.1% in August.
- Singapore’s Industrial Production growth accelerated substantially in September to +26.2% YoY from +8.1% YoY in August. We continue to be bullish on Singapore’s equity market and currency from a long-term TAIL perspective due to reasons outlined in a July 14th report titled: The Singapore Sling – Why We Are Long of Singapore (email us if you need a copy). We, however, don’t have be bullish at every price as there is a fundamental difference between liking an investment and actually being invested in it.
- Singapore’s PMI accelerated in October to 50.7 from 49.5 in September.
- Singapore’s Unemployment Rate ticked down in 3Q10 to 2.1% from 2.2% in 2Q10.
- Korea’s Export growth accelerated in October to +29.9% YoY from +16.5% YoY in September.
- India’s Export growth accelerated in September to +23.2% YoY from +22.5% YoY in August.
- Thailand’s CPI slowed in October to +2.8% YoY from +3% YoY in September.
- Australia’s CPI quickened in 3Q10 to +0.7% QoQ from +0.6% in 2Q10.
- Japan’s Personal Income growth slowed in September to +1.5% YoY from +1.8% YoY in August. Concurrently, overtime hours at manufacturers, a leading indicator for earnings, fell (-2.9%) MoM in September.
- Japan’s Core CPI slowed in September to (-1.1%) YoY from (-1%) YoY in August. Deflation continues…
- Thailand’s Export growth slowed in September to +21.8% YoY from +23.6% YoY in August.
- Thailand’s Industrial Production growth slowed in September to +8.1% YoY from +8.4% YoY in August.
- China’s Ministry of Foreign Affairs rebuffed U.S. Secretary of State Hillary Clinton’s offer to mediate a territorial dispute between China and Japan over the Diaoyu Islands, saying “[the islands] are Chinese territory, and the dispute over the islands with Japan is a matter between China and Japan… Clinton’s position is extremely wrong and the U.S. should correct its wrongful stance immediately.” This aggressive commentary out of China is the latest in a series of growing bravado towards the U.S. and Japan out of the Asian power.
- Japan recalled its ambassador to Russia in response to a renewed territorial dispute with Russia over inhabited islands between the nations’ boarders. The islands, known as the Southern Kurils to Russia and the Northern Territories to Japan, are now in question following Dmitry Medvedev’s visit to the territory yesterday (he is the first Russian president to do so). Japan can now add another check mark next to “geopolitics” in its growing list of economic headwinds.
- China’s Input Price PMI accelerated meaningfully in October to 69.9 from 65.3 in September. As we have been calling out for months, QE2 = global inflation.
- Japan’s Retail Sales growth slowed in September to +1.2% YoY from +4.3% YoY in August. Further along the consumer front, Japan’s Registered Auto Sales tanked in October, in line with our call, due to the unwinding of stimulus tailwinds: down (-26.7%) YoY from (-4.1%) in September. As we have learned for the greater part of the last two decades, this is not an economy that is able to support itself, relying exclusively on government intervention and global consumer demand to drive the paltry 80bps of average YoY GDP growth over the last 17 years.
- Japan’s Industrial Production growth slowed in September to (-1.9%) MoM from (-0.5%) MoM in August.
- Japan’s PMI slowed in October to 47.2 from 49.5 in September.
- Japan’s PCE growth slowed in September to flat YoY from +1.7% YoY in August. One of the core tenants to our Japan’s Jugular thesis is that a slowdown in manufacturing and exports will resonate throughout Japan’s economy and exert downward pressure on GDP growth.
- Japan’s Construction Orders growth slowed in September to (-15%) YoY from flat YoY in August.
- Japan’s Prime Minister Naoto Kan’s approval rating dropped in October to 36.4% from 48.5% in September. This latest survey is a public vote of no-confidence in the face of the recently announced ¥6.6 TRILLION worth of stimulus. The Keynesian end-game seemingly draws closer with every passing day in Japan.
- Indian companies are paying the highest short-term borrowing costs in 19 months, due to a series of rate hikes by the central bank to combat inflation, which is running at double the target rate (per the Indian Finance Ministry). Three-month funds have nearly doubled this year to 8.25%, putting pressure on corporate profitability within India. Anyone who says Indian equities are “cheap” on a NTM P/E basis relative to their 2007 peaks is likely using the wrong earnings forecast.
- Korea’s GDP growth slowed significantly in 3Q10 to +4.5% YoY from +7.2% YoY in 2Q10. The slowdown in growth here is representative of a broader slowdown in growth we’ve seen across Asia over the last couple of months. More specifically for Korea, the 3Q10 print lapped the last of the easy YoY comps. In 4Q10 and 1Q11, Korean GDP has to comp against +6% and +8.1%, respectively.
- Korea’s CPI quickened in October to a 20-month high of +4.1% YoY. Korea’s central bank has been reluctant to follow its Asian neighbors in aggressively combating inflation, opting for lip service regarding capital controls instead. The lip service has been unsuccessful to date, as the Korean economy is experiencing Marginal Stagflation (slowing growth; accelerating inflation).
- Both Australia and India raised their benchmark interest rates 25bps today in an effort to combat rising inflation brought on by global speculation that is being driven by dollar-debasement ahead of QE2 in the U.S. Furthermore, Australia’s largest home lender will raise its standard mortgage rate 45bps on Nov. 5th and India’s central bank proposed capping home loan-to-value ratios at 80% in an effort to cool domestic real estate speculation that has spread throughout the region (China, Australia, Singapore, Hong Kong, etc.).
With the U.S. facing the Consumption Cannonball and Jobless Stagflation, China, India, and Australia tightening monetary policy, and Western Europe fully implementing austerity measures, where will global demand growth for Asia’s exports come from over the next 3-6 months? To whom will Asia ship its products? Keep in mind the following stats as you ponder the next moves in GDP growth and equity markets throughout Asia:
- Exports account for roughly 40-45% of Asia’s GDP;
- The U.S. and E.U. combine for roughly a third of Asia’s export destinations; and
- 40-50% of intra-regional trade within Asia is basic and intermediate goods meant for re-export outside of the region.
Today we covered our short position in the U.S. Dollar (UUP) for a 14% gain, after having top-ticked it on June 7th. In that same time period, many Asian equity markets are up multiples of that, driven higher by reflationary inflows of yield-chasing capital. As evidenced by our most recent move in this globally interconnected chess match, we think the music stops here (much to Barton Bigg’s displeasure – see his bullish commentary on emerging markets from this morning).
Should the dollar break out for a sustained period of time, we think the deteriorating fundamentals in Asia will be exposed, as growth in the region set to slow meaningfully over the next 3-6 months.
For reference, we outline below three factors we think could cause the dollar to break out:
- Hawkish fiscal rhetoric from the likely-to-be Republican Congress (we forecast a +65 seat gain by Republicans in the House and a potential tie in the Senate after today’s elections);
- Mean reversion; and
- A QE2 announcement shy of consensus expectations could trigger widespread reflexive declines in equities and commodities globally, which should support the need for increased liquidity as investors shift to cash on the margin.
Buckle up; it’s likely to be a bumpy ride.