Conclusion: Recent trends and data points out of Asia lend support to our generally negative outlook for equities globally.
As a quick refresher, we are generally bearish on equities as an asset class over the intermediate-term TREND for these three reasons:
- Growth is slowing globally;
- Inflation is accelerating globally; and
- Interconnected Risk is compounding (Sovereign Debt Dichotomy, Housing Headwinds, and US State & Local Government Budget Headwinds).
The bulk of the latest data out of Asia supports this three-pronged investment thesis. Below we’ll go through each prong individually in an attempt to extrapolate data points in the context of key themes and trends.
- Chinese Export and Import growth slowed sequentially in December to +17.9% YoY and +25.6% YoY, respectively. While high-teens and mid-twenties growth rates is nothing to scoff it, they do represent meaningful slowdowns on the margin, falling (-1700bps) and (-1210bps), respectively.
- Chinese New Loan growth came in at +480.7B yuan in December; while a sequential slowdown, the December number confirms that Chinese loan growth exceeded the government’s full-year target of $7.5T yuan in 2010 by 426.9B yuan. The key takeaway as it relates to slowing growth is that Chinese monetary authorities will be more inclined to step up efforts to limit broad loan growth and monetary expansion going forward. We’re starting to see this implemented via Chinese regulators imposing bank-specific lending quotas w/ potential reserve requirement hikes for non-compliant institutions.
- Alcoa Inc. said yesterday that Chinese aluminum demand growth will fall (-600bps) to +15% YoY in 2011. This is a meaningful company-specific data point in that aluminum is widely used in property development and automobile manufacturing – two sectors that have helped buoy the Chinese economy since the end of the global recession.
- A proxy for Asian COGS, South Korean PPI accelerated in December to +5.3% YoY vs. +4.9% YoY in November.
- Indian Prime Minister Manmohan Singh convened a meeting with his cabinet today to brainstorm ways to corral accelerating food inflation that’s severely impacting roughly 66% of his citizenry (828 million Indians live on less than $2 per day). In the past 15 years, Indians have voted out two national governments primarily as a result of uncontained inflation. India holds elections in nine states over the next 18 months and the latest polls have Singh’s coalition losing 42 seats the upcoming general elections. This essentially translates to rising political pressure on the central bank to raise interest rates and rein in its liquidity expansion policies – the both of which would be headwinds to Indian growth over the intermediate term.
- The floods in Australia continue to worsen, adding supply-side inflationary pressure to the prices of coal, cotton and sugar globally.
Compounding Interconnected Risk:
- Yesterday, China came out in support of distressed Euro-area economies and debt issuers. Vice Premier Li Keqiang pledged accelerated purchases of Spanish debt to go alongside the blanket statement of support. This morning, Japan came out with a similar message, pledging to purchase upwards of 20-25% of the European Financial Stability Facility’s (EFSF) debt issuance that is to be auctioned this month. China and Japan’s affirmations of support are in line with the broader trend we are seeing across Asia of late; the region’s buyers accounted for 21.5% of the 5Y debt issued by the EFSF on January 5th, up from the ~4% average since December 2008. In spite of the positive market reaction, we caution that you avoid the media hoopla and realize this for what it is – rising bond yields are enticing marginal buyers. Everything has a price. As we have seen many of times before with “positive developments”, the PIIGS’s collective risk premium has not gone away. We recommend shorting any strength in the euro and in Spanish and Italian equity markets on this news.
All told, we’re seeing no signs of abatement from Asia regarding our three-pronged global macro outlook. At a point, the overwhelming complacency and suspension of disbelief that has driven US equity markets to cyclical highs will be replaced by actual fundamentals – the bulk of which we believe are deteriorating sequentially.