Conclusion: The slowdown across SE Asia is both supportive of our bearish outlook for the global economy and a leading indicator for slower growth in advanced economies, such as the U.S.
Since early-October, we’ve been beating the drum on three themes that have us generally bearish on equities globally (not to be confused with ALL equities globally; we are bullish on Germany’s DAX, for example). Those themes are:
- Growth is slowing;
- Inflation is accelerating; and
- Interconnected risk is compounding.
We were admittedly early in calling for a correction in October; by that same token, we are not at all surprised by the recent weakness in many equity markets and commodities globally, as incremental data that supports the above theses continues to trickle in.
Over the weekend, we received 3Q10 GDP reports from SE Asia’s four largest economies that support our three-pronged bearish outlook, as growth slowed sequentially in Indonesia, Thailand, Malaysia, and Singapore – the world’s 16th, 25th, 31st, and 45th largest economies, respectively.
While it’s important to note that each economy is still growing at an enviable pace in 3Q10, the marginal deterioration is cause for alarm in our models. From an economic standpoint, the delta from “great” to “good” is equally as bearish as the delta from “good” to “bad”. Considering, we highlight sequential slowdowns like these as leading indicators for depressed growth in the coming quarters.
Using our Growth-Inflation Delta Analysis (GIDA), we are able to see quite vividly points one and two from above:
Indonesia: In 3Q10, Real YoY GDP growth slowed -38bps and Inflation (CPI YoY % Change) accelerated 75bps on a quarterly basis.
Thailand: In 3Q10, Real YoY GDP growth slowed -251bps and Inflation (CPI YoY % Change) accelerated 5bps on a quarterly basis.
Malaysia: In 3Q10, Real YoY GDP growth slowed -358bps and Inflation (CPI YoY % Change) accelerated 29bps on a quarterly basis.
Singapore: In 3Q10, Real YoY GDP growth slowed -891bps and Inflation (CPI YoY % Change) accelerated 118bps on a quarterly basis.
While most U.S.-based investors wouldn’t care to read more than a single sentence regarding SE Asian economies, we flag these as important data points you should be cognizant of – particularly in the context of the three-pronged outlook outlined above.
Further, upon considering that these four economies’ share of global exports is nearly 2x (1.78) their share of global GDP, we posit that a slowdown in this region is a leading indicator for a slowdown in the inventory cycle of advanced economies. Positive inventory adjustments have accounted for 63% of U.S. GDP growth YTD, so a slowdown across the SE Asian region may be a stealth leading indicator for inventory adjustments being a drag on U.S. GDP growth in 2011.
Lastly, it’s important to keep in mind the following stats, when considering the merits of Asian trade data:
- 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.
All told, the slowdown we are seeing across Asia’s export economies continue to flash bearish signals as it relates to global growth. With each passing day, it grows increasingly likely that the easy reflation money brought on by QG has been made. Now, investment professionals will have to once again “earn” their performance. Given the recent run-up in equity and commodity prices globally, we feel most of the opportunities for alpha will be found on the short side for the next 3-6 months, as growth slows globally, inflation continues to afflict economies globally, and interconnected risk (cross-asset correlation risk; Housing Headwinds; Sovereign Debt Dichotomy; U.S. State & Local Government headwinds) compounds.