Weekly Asia Risk Monitor: Stress-Testing Asian Risk

Conclusion: Both Chinese and Indian equities look to test critical levels of resistance (TREND) in the coming trading days. India, in particular, will be in the spotlight next week amid various regional equity market closures. While we are long one and short the other, the data is starting to suggest both markets are potentially due for a breakout.


Virtual Portfolio Positions in Asia: Long Chinese equities (CAF); Short Indian equities (INP).



All % moves week-over-week unless otherwise specified.

  • EQUITIES Median: +2.1%; High: Vietnam +5.3%; Low: Malaysia flat; Callout: India +10.3% over the past month
  • FX (vs. USD) Median: +1.1%; High: Indonesian rupiah +2.6%; Low: Chinese yuan -0.2%; Indian rupee +5.6% YTD
  • S/T SOVEREIGN DEBT (2YR) High: Malaysia +2bps; Low: Indonesia -47bps; Callout: Indonesia -42bps YTD
  • L/T SOVEREIGN DEBT (10YR) High: Japan +4bps; Low: Indonesia -57bps; Callout: Hong Kong +19bps over the past two months
  • SOVEREIGN YIELD SPREADS High: Philippines +27bps; Low: Indonesia -10bps; Callout: Hong Kong +17bps wider over the past two months vs. a regional median of -6bps
  • 5YR CDS High: New Zealand -3.3%/-3bps; Low: Indonesia -6%/-13bps; Callout: Japan +17%/+20bps over the past two months vs. a regional median of -7.1%
  • 1YR O/S INTEREST RATE SWAPS High: India +17bps; Low: Indonesia -25bps; Callout: China -25.2% narrower over the past six months to a price of -45bps below the PBOC’s 1yr Household Deposit Rate
  • O/N INTERBANK RATES High: Australia +7bps; Low: China -116bps; Callout: China -39.1% tighter over the LTM, which is bullish, on the margin for YoY credit growth in the face of the PBOC’s continued “selective easing” measures
  • CORRELATION RISK Growth expectations are a key driver of recent strength in Asian equities; the MSCI All-Country Asia Index is +92% correlated to the CRB Raw Industrials Index on a six-week basis

Full price and performance tables can be found at the conclusion of this note.



Inflation in India slowed well-beyond our most aggressive estimates, which forced us to reevaluate and re-weight the probabilities in our scenario analysis. The RBI’s +6-7% MAR ’11 target is definitely now in-play, which now takes them out of the “box” and gives them headroom to ease monetary policy.


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A breakout in the SENSEX above its TREND line would be an explicit signal that our bearish bias on Indian equities was too long in the tooth (initiated 11/9/10).


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While China’s stock market is closed all of next week, we look to the following week as an important week for economic data (PMIs released), which may bring forth a test of China’s TREND line of resistance. A breakout above would only increase our conviction in being long of Chinese equities.


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On Tuesday, we published an in-depth update on China’s growth/inflation/policy outlook. The comments below pick up where that analysis left off. As always, we aim to be concise with our remarks; please email us if you’d like to follow up in more detail.


Growth Slowing’s Bottom:

  • China: According to insiders, the PBOC will allow the 5 largest banks to increase lending by about +5% YoY in 1Q12 (which would be up from -13.2% YoY in 1Q11). Additionally, the regulator will delay the implementation of tighter capital standards and may also lower the risk-weighting of SME loans. That latter maneuver could potentially alleviate the SME credit crunch on the margin as banks become incentivized to hold more of those assets. Additional signs of such “policy fine-tuning” were demonstrated this week when the PBOC lowered RRR in the Guizhou province.
  • China: HSBC Flash PMI accelerated slightly in DEC to 48.8 vs. 48.7 prior… slowing at a slower rate.
  • Japan: Consumer Confidence ticked up marginally in DEC to 38.9 vs. 38.1 prior.
  • Singapore: Non-Oil Domestic Exports growth accelerated in DEC to +9% YoY vs. +1.4% prior. Alongside Hong Kong, the manufacturing and trade data out of Singapore remains a key leading indicator for global growth.
  • Thailand: Exports accelerated in DEC to -2% YoY vs. -12.4% prior.
  • Australia: Westpac’s Consumer Confidence Index ticked up in JAN to 97.1 vs. 94.7 prior.
  • New Zealand: ANZ’s Consumer Confidence Index ticked up in JAN to 116.1 vs. 108.4 prior.

Deflating the Inflation:

  • India: In a shock to our bearish intermediate-term thesis on India, WPI slowed dramatically in DEC to +7.5% YoY vs. +9.1% prior. This reading is 80bps below the most aggressive scenario in our models and forced to reevaluate and re-weight the probabilities in our scenario analysis. The RBI’s +6-7% MAR ’11 target is definitely now in-play, which now takes them out of the “box” and gives them headroom to ease monetary policy. Expect the RBI to communicate such in next Tuesday’s monetary policy announcement. Should the RBI pander to dovish policy speculation, we would expect to see the SENSEX break out above its TREND line – an explicit signal that our bearish bias on Indian equities was too long in the tooth (initiated 11/9/10). We maintain our bearish bias on the rupee and view the recent trend of appreciation on the strength of record-setting international fixed-income flows as an eventual short-selling opportunity.
  • Japan: PPI slowed in DEC to +1.3% YoY vs. +1.6% prior.
  • New Zealand: CPI slowed in 4Q to +1.8% QoQ vs. +4.6% prior.
  • Malaysia: CPI slowed in DEC to +3% YoY vs. +3.3% prior.

King Dollar:

  • China: We continue to see signs of capital creeping out of China on a diminished outlook for yuan appreciation, as Foreign Direct Investment growth slowed in DEC to -12.7% YoY vs. -9.8% prior. Interestingly, Chinese Premier Wen Jiabao has pledged to prevent capital from leaving the country due to speculative activity. One of the ways we believe his regime will attempt to achieve this goal is by funneling foreign investors into China’s equity market. In DEC, the China Securities Regulatory Commission granted 14 new QFII licenses – dramatically higher than the typical 1-4 per month pace we’ve seen since the start of the program.
  • Philippines: Bangko Sentral ng Pilipinas lowered the country’s Benchmark Interest Rate -25bps to 4.25%. Speculation around their easing has been particularly bullish for the PSEI (up +5.3% over the last six months vs. median -8.9% loss throughout Asia) and we’re seeing all-time high international inflows in to Filipino equities ($1.1B over the past two months alone). We remain bullish on this asset class over the intermediate term. Refer to our 8/31 note titled: “Philippines: One of the Better Stories in Global Macro” for more details.


  • Taiwan: Taiwanese growth continued on its established trend down in DEC. Both Industrial Production and Export Orders growth slowed to -8.2% YoY (vs. -4.7% prior) and -0.7% YoY (vs. +2.5% prior), respectively.
  • South Korea: This week brought forth hawkish commentary, on the margin, out of the Bank of Korea. Per Governor Kim Shoong Soo: “Interest rates are still below policy makers’ desired level and that discrepancy cannot be left for long. We still think our monetary policy is accommodative; by that what I mean is that in the market there still exists a little excess liquidity. Our basic policy direction is to normalize our interest rates compatible with our demand pressures and pressures for inflation.” The muted wk/wk impact in the bond and interest rate markets suggests this view was already priced in.
  • Australia: The Aussies reported some fairly hot (on the margin) inflation data this week: TD Securities Unofficial CPI accelerated in DEC to +2.4% YoY vs. +2.1% prior; the RBA’s Consumer Inflation Expectation Survey accelerated in DEC to +2.8% YoY vs. +2.4% prior; Import Prices accelerated in 4Q to +2.5% QoQ vs. flat prior. Our models still see Aussie inflation slowing over the intermediate term, but the obvious impact of 1Q11 natural disasters should boost growth statistics in the near-term and may limit the urgency to pursue dovish monetary policy out of Glenn Stevens and Co., which is bullish (on the margin) for the Aussie dollar. Increased bullish sentiment towards China is also supportive of the AUD as well.


  • China: Home prices posted their worst performance of the year in DEC, with only two of the 70 cities posting MoM gains. Further, China’s Real Estate Climate Index ended 2011 at a 29-month low of 98.9 (-4.2% YoY). The other key real estate metrics we track (Commercial & Residential Floor Space Started, Land Area Purchased, Source of Funds for Real Estate Investing) are all at/near 2-3yr lows. We believe China’s property market will remain under official assault by policymakers; that will continue to act as a governor on Chinese (and global) growth. 
  • Japan: The Bank of Japan will delay by 2yrs a plan to divest its equity stakes in Japanese financial institutions (acquired in 2002 amid systematic deleveraging and capital raises). Originally scheduled for MAR ‘12, this is negative for the yen on the margin, as it maintains the size of the BOJ’s bloated balance sheet relative to expectations.
  • Hong Kong: Both CPI and the Unemployment Rate were unchanged in DEC at 5.7% YoY and 3.3%, respectively.
  • Australia: In 2011, the Aussies saw the slowest yearly employment growth since 1992 – a shock to the RBA’s baseline model that investment in energy and mining production will fuel labor market tightness over the long-term. In DEC, payrolls growth slowd to -29.3k MoM vs. -7.5k prior; the Unemployment Rate held flat at 5.2% as the Labor Force Participation Rate ticked down -30bps to 65.2%.
  • Taiwan: Ma Ying-jeou won a second 4yr term as president of Taiwan in last Sunday’s election – a clear voter referendum for increased cross-border trade and investment flows with the mainland.


Key economic data releases and policy announcements:

  • THIS WEEKEND: Australian PPI;
  • MON: Reserve Bank of India Quarterly Economic Report
  • TUES: Bank of Japan Monetary Policy Announcement; Japanese Trade Data; Reserve Bank of India Monetary Policy Announcement; Australian CPI
  • WED: South Korean GDP; Singaporean CPI; Bank of Thailand Monetary Policy Announcement; Reserve Bank of New Zealand Monetary Policy Announcement
  • THURS: Japanese CPI and Retail Sales; Hong Kong Trade Data; South Korean Business Surveys and Consumer Confidence; Singaporean Industrial Production
  • FRI: Thai Industrial Production
  • OTHER: The Lunar New Year will see various closures of Asian equity markets: China and Taiwan are closed all week; Hong Kong is closed Mon-Wed; South Korea is closed Mon-Tues; and Australia is closed Thursday for Australia Day.

Darius Dale



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