Asian Trade Data Exposes Facade of US Growth

Conclusion: The slowdowns we are seeing across Asia’s trade-heavy economies continue to flash bearish signals as it relates to the direction and amplitude of global growth.

 

Position: Short US equities via the etf SPY.

 

This morning, we saw some more negative economic data points out of Asia. Signs of a regional economic slowdown, which have largely been ignored by US investors for much of the last two months, are highlighted today by Thailand’s December trade data. Thailand’s YoY Export growth slowed sequentially by (-970bps) and YoY Import growth slowed sequentially as well, falling (-2,380bps). On the prospects of an economic slowdown, Thailand’s Commerce Minister, Porntiva Nakasai, affirmed today what we at Hedgeye have been saying since November:

 

“It is hard to replicate last year’s exceptional growth. China’s economy, which is the main growth driver in the region, is slowing, while Europe is still having financial problems.” 

 

Asian Trade Data Exposes Facade of US Growth - 1

 

Thailand’s share of world exports are roughly ~2.6x its share of global GDP, so Thailand could potentially be used as a proxy for the health of global trade. On a standalone basis, however, Thailand isn’t responsible for moving the needle on global growth or international trade. Considering, we’ve compiled an aggregated, weighted index of Asian trade data that does serve as a good proxy for the direction of global demand.

 

Asian Trade Data Exposes Facade of US Growth - 2

 

Asian Trade Data Exposes Facade of US Growth - 3

 

Further, upon considering that these ten economies’ share of global exports is nearly 25% larger than 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 in the three quarters through 3Q10, so a slowdown across Asia may be a stealth leading indicator for inventory adjustments being a drag on U.S. GDP growth in 2011.

 

Asian Trade Data Exposes Facade of US Growth - 4

 

In simple terms, consumption accounts for ~65-70% of the US economy and if factories in China and across Asia aren’t pumping out and shipping the apparel, harware, etc. that we buy with the same velocity, it means we aren’t buying it with the same velocity either. This leads to a building up of inventory and reduced demand for restocking domestically.

 

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 slowdowns we are seeing across Asia’s trade-heavy economies continue to flash bearish signals as it relates to global growth. Given the recent run-up in US equities, we feel most of the opportunities for alpha will be found on the short side throughout the next 3-6 months, as growth bulls are awoken by the pungent stench of global economic fundamentals.

 

Darius Dale

Analyst


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