Conclusion: A rigorous analysis of the recent trade data coming out of Asia, as well as a quantification of the region’s capital exposures by source grant us conviction in the following two viewpoints: 1) global growth is still slowing; and 2) Asian currencies remain at risk of further declines.
China’s Nasty Trade Data
Over the weekend, China put up another sour trade report (Nov) which was highlighted by growth in exports slowing to +13.8% YoY vs. +15.9% in the month prior. Excluding the Feb ’09 Lunar New Year distortion, the +13.8% yearly gain is the lowest rate of growth since Dec ’09. Underneath the hood, we saw exports to the E.U. slow to +5% YoY vs. +7.5% prior and greater than +22% as recently as Aug. The weak E.U. figure compares to growth in China’s exports to the U.S. accelerating to +17.2% YoY in Nov vs. +13.9% prior. China’s exports to Germany fell -1.6% YoY in Nov; exports to Italy from China fell -23% YoY in Nov.
While we don’t buy the U.S. is going to decouple completely from the interconnected risks associated with the global economy, it is clear that Europe’s Sovereign Debt Dichotomy and banking crisis are having a disproportionately ill effect on European demand relative to the world’s other principle economic bloc. This is in-line with our intermediate-term outlooks for both regions and fundamental positioning:
- King Dollar: Bullish on the USD;
- Deflating the Inflation: Bullish on select U.S. consumption names and sectors (XLY, XLV);
- European Stagflation: Bearish on France, bearish on the Euro;
Both data and quantitative setups continue to strongly support our views here.
Asian Trade Data Portends Negatively For E.U., Global Growth
Taking a step back from China specifically, we see that Asian trade data is sending some bearish signals as it relates to the slope of global demand. We’ve taken the liberty to create a proprietary index that captures the slope of Asia’s aggregate export and import growth. The index is a weighted average of the following countries’ export and import statistics: China, Japan, Hong Kong, South Korea, Singapore, Thailand, Taiwan, India, Indonesia, Malaysia, Philippines and Vietnam.
Using this index, we see that Asian export growth slowed to +7.9% YoY in Nov vs. +12.8% in the month prior. The +7.9% YoY growth rate is the slowest pace since Nov ’09 and the first breakdown into single digit growth since Oct ’08. Asian import growth actually accelerated in Nov to +19.6% YoY vs. +18.3% in the month prior.
As we have concluded in prior notes, “If the velocity of Asia’s production and shipment of goods is slowing, then Western demand for those goods is also slowing. Expect to see this slowdown in Asian manufacturing and exports show up in headline growth statistics throughout the developed world on a lag.”
Covering AYT Trade Update
The aforementioned acceleration in Asian import growth in the month of Nov can be attributed to further weakness in Asian currencies and resilience in global raw materials and energy prices. Asian central banks, which have started or are in the process of starting monetary easing cycles are seeing the result of the rapid decline in their exchange rates (vs. the USD) show up in marked-to-market import and consumer price inflation.
While Keith used today’s weakness to cover our short position in a basket of emerging Asian currencies in the Virtual Portfolio this afternoon, the immediate-term bearish thesis is still very much intact:
- Slowing growth and peaking/slowing inflation will force Asian policymakers into a cycle of monetary and [potentially] fiscal easing;
- Waning demand for Asian goods and services in key export markets (particularly E.U.) will reduce demand Asian currencies on the international foreign exchange market; and
- A slowing of inflows or outright repatriations of capital from the region will also weigh on Asian currencies.
A Look at Asian Capital Flows
To the latter point above, Asia is highly reliant on E.U. capital to finance its growth, meaning that a continuation or deepening of Europe’s banking crisis should continue to weigh on Asian capital inflows. European banks finance a larger share of Asian domestic credit relative to their U.S. counterparts in each of the 11 countries we have data for; declining trade financing throughout the region remains an acute risk as a result. From a portfolio investment perspective, agents within the European Union provide roughly 2/3rds to 3/4ths the capital U.S. agents supply to the region.
All told, a rigorous analysis of the recent trade data coming out of Asia, as well as a quantification of the region’s capital exposures by source grant us conviction in the following two viewpoints: 1) global growth is still slowing; and 2) Asian currencies remain at risk of further declines.
Economic gravity is weighing on Asia.