Weekly Asia Risk Monitor: Nailing Divergences

Conclusion: In what was a soft week from an equity performance perspective, we saw a couple key positive divergences where we expected them in – Chinese equities and Indonesian equities. On the currency side, a negative divergence from the AUD suggests prices may begin to support our bearish thesis.


This is the second installment of our now-weekly recap of prices, economic data, and key policy action throughout Asia. We’re aiming to keep our prose tight here, so if you’d like to dialogue more deeply regarding anything you see below, please reach out to us at .




In what was a soft week from an equity performance perspective, we saw a couple key positive divergences where we expected them in – Chinese equities and Indonesian equities. On the currency side, a negative divergence from the AUD suggests prices may begin to support our bearish thesis. From a credit perspective, Asian CDS didn't buy the hype associated with the European "stress" tests and backed up accordingly.


Weekly Asia Risk Monitor: Nailing Divergences - 1


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China: YoY CPI (+6.4%) and PPI (+7.1%) accelerated in June (the former to a 3yr-high). We remain bullish on Chinese equities as CPI and monetary tightening expectations recede in 2H. China’s decision to incrementally invest in agricultural and pork supplies is incrementally bearish for CPI (137bps of June’s headline increase was due to rising pork prices). Copper imports rose for the first time in three months in June – supportive of China’s solid June/2Q economic data.


Japan: PPI accelerated to +2.5% YoY and, not surprisingly, the BoJ responded by keeping interest rates at zero percent. We continue to believe ZIRP has many unintended consequences over the long-term TAIL – not the least of which is structurally depressed growth rates. Despite nearly two decades of aggressive easing, Japan’s average YoY Real GDP growth has trended at a 0.85% pace. Email us for our Japan’s Jugular presentation if you also believe this time is NOT different.


India: The IPO market has slumped -80% YoY largely due to weakness in the equity market, which we are becoming incrementally more positive on after having been appropriately bearish since early November. As it relates to our outstanding concerns, this week provided a lot of clarity and pushes them closer to the rear-view mirror. Among them were Chief Economic Advisor C Rangarajan’s near-capitulation on India achieving its deficit reduction target in the current fiscal year, as well as a sequential slowing of YoY Industrial Production growth in May. Headline inflation via the WPI series accelerated in June to +9.4% YoY. We expect it to peak in August, but remain sticky and much higher than the government and the central bank’s official +6% target by March 2012.


South Korea: The Unemployment Rate held flat at 3.3% in June as Household Credit growth accelerated in the same month to +6.1% YoY, supporting a positive near-term view for Korean consumption growth. Slowing Discount and Department Store Sales growth in June pares back any optimism on his front, however. Also, Money Supply (M2) growth at a seven-year low in May (+3.7% YoY) suggests there is perhaps more cause for concern as it relates to aggregate economic activity going forward. That is among the reasons the Bank of Korea kept its Benchmark Policy Rate flat at 3.25% - in addition to lowering its 2011 GDP forecast -20bps to +4.3% and increasing its 2011 CPI forecast to +10bps to +4%.


Australia: Prime Minister Julia Gillard released the details of her controversial carbon emissions tax and, as expected, it was not well-received by the private sector. As Australian growth looks to slow, we think unpopular policies like these may ultimately cost the now-unpopular Gillard her job. To the former point, falling Consumer Confidence (July 92.8 vs. 101.2 prior), sequentially slowing Business Confidence (0 in June vs. 6 prior), slowing Corporate Investment (Corporate Deposit-to-Loan Ratio up to 1.25x vs. 1.15x prior), and a downwardly-sloping House Price Outlook (from +0.6% NTM in 1Q to -1.4% NTM in 2Q) all suggest the economy is headed into a protracted slowdown. We’ve been early and right on the slope of Aussie economic growth and as our Deflating the Inflation theme plays out globally, we expect the Aussie dollar (AUD) to experience a decent correction. The interest rate futures market is now pricing in an RBA rate cut as early as December. When we turned bearish from a research perspective, traders were pricing in a rate hike as early as last month.


New Zealand: Nearly the polar opposite of Australia from a data perspective, New Zealand’s REINZ House Price Index accelerated in June to +14.8% YoY vs. +10.8% YoY prior. Further, strong (albeit lagging) 1Q11 GDP data (+0.8% QoQ vs. +0.5% QoQ prior) was a positive for the Kiwi dollar (up +0.9% week-over-week). Declining Consumer Confidence is a cause for concern here, with the ANZ Index ticking down in July to 109.4 vs. 112.5 prior.


Thailand: The Pheu Thai continues to make headlines with its populist policy objectives, as an unnamed source in the Ministry of Finance leaked that the party is looking to increase the current year’s fiscal deficit by +14.8% in short order. The Bank of Thailand responded appropriately and hiked rates +25bps to 3% and officially cited the new government’s planned fiscal spending and minimum wage initiatives as reasons to front-load the taming of inflationary expectations. From a long-term TAIL perspective, we think they are just getting started.


Singapore: As we expected, Singapore’s 2Q GDP report was a bomb. Growth on both a YoY basis and QoQ basis slowed dramatically to +0.5% and -7.8%, respectively. Each of the three main components (Manufacturing, Construction, and Services) slowed sequentially on a YoY basis, indicating broad-based weakness throughout the economy. Additionally, slowing Private Home Sales growth (-25% MoM in June) suggests the government’s YTD efforts to reduce property prices are having an effect on the supply/demand dynamics of this market.


Indonesia: Bank Indonesia (the nation’s central bank) kept its Benchmark Policy Rate flat at 6.75% and stated that inflation may end the year below 5% - exactly what our models have been telling us. We remain bullish of Indonesian equities as growth looks to bottom out in 2Q/3Q alongside the potential for interest rate cuts.


Darius Dale


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