MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER

CONCLUSION: Our analysis of recent trends across a handful of key growth economies (using China, South Korea and Brazil as proxies in this note; there are many others) lends credence to our view that growth across Asia and Latin America continue to slow. More importantly, we are of the view that economic trends across each region will continue to deteriorate over the intermediate term – a conclusion strongly supported by our quantitative risk management models.


Q: What do Chinese equities, Korean equities and Brazilian equities all have in common?

 

A: Bearish Formations; cheap gets cheaper when growth is slowing.

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 1

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 2

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 3

 

With the latest reported growth generally slowing in each of those economies – on both a high-frequency and low-frequency basis – it’s fair to say that the recent rate cut cycles we’ve seen across China (-50bps), Korea (-25bps) and Brazil (-450bps) are merely indications that policymakers in each country are cognizant of the aforementioned trends and risks to growth globally (Europe; 112th  Congress).

 

Chinese growth – slowing:

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 4

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 5

 

South Korean growth – slowing:

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 6

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 7

 

Brazilian growth – slowing:

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 8

 

MONETARY EASING EX GROWTH = CHEAP GETS CHEAPER - 9

 

We highlight the following statements from policymakers from each country as supportive of our view that the negative trend in global economic growth has not turned the corner:

 

“Stabilizing economic growth is not only a pressing priority for China now, it is also a long-term arduous task.”

-Chinese Premier Wen Jiabao (JUL 11, 2012)

 

“The South Korean economy is growing less than expected and growth will be less than potential for a considerable time.”

-JUL 12, 2012 Bank of Korea Monetary Policy Statement

 

“The recovery of Brazil’s economy has been slower than anticipated… The world economy will have an impact that is either neutral or disinflationary on Brazilian consumer prices.”

-JUL 11, 2012 Central Bank of Brazil Monetary Policy Statement

 

As an aside, the Bank of Korea’s rate cut was a surprise to us as well as the market (KOSPI closed down -2.2% on the day; KRW/USD -0.9%). We titled our JUN 28 note: “WAIT ON SOUTH KOREA” as a coherent message that it wasn’t the right time to increase one’s exposure to the KOSPI Index. Judging by the market response since then (including today’s sell-off), that appears to have been a prescient call. More importantly, the “wait” has been extended in our view, as this new monetary easing cycle takes the relatively strong KRW story – a key component of our formerly-bullish, TREND-duration fundamental bias – off of the table for now.

 

Looking ahead, the next major catalysts on the growth front out of each country are as follows:

 

  • China:
    • TONIGHT: Chinese 2Q12 Real GDP, JUN Industrial Production, JUN Fixed Assets Investment and JUN Retail Sales data will be realized. Consensus expectations for China’s 2Q Real GDP growth have come in from +8.3% at the start of MAY to +7.7%, creating ample room for headline upside surprise risk. We are inclined to fade any/all associated rallies that do not eclipse TRADE resistance on the Shanghai Composite. Chinese policymakers have been guiding towards a negative slope of domestic economic growth since 1Q10; listen to them.
    • JUL 31: JUL Manufacturing PMI
    • AUG 2: JUL Services PMI
  • Korea:
    • JUL 25: 2Q12 Real GDP
    • JUL 29: AUG Business Sentiment Survey (Manufacturing and Services)
    • JUL 31: JUL Manufacturing PMI
  • Brazil:
    • AUG 1: JUN Industrial Production, JUN Trade Data and JUL Manufacturing PMI
    • AUG 3: JUL Services PMI
    • AUG 16: JUN Retail Sales
    • AUG 31: 2Q12 Real GDP; We’ve been calling for a bottom here and will look to confirm if there’s anything in the number that will cause us to revise down our 2H12 outlook for Brazilian economic growth.

 

All told, our analysis of recent trends across a handful of key growth economies (using China, South Korea and Brazil as proxies in this note; there are many others) lends credence to our view that growth across Asia and Latin America continue to slow. More importantly, we are of the view that economic trends across each region will continue to deteriorate over the intermediate term – a conclusion strongly supported by our quantitative risk management models.

 

Anecdotally speaking, in a 30-minute call earlier this morning with one of our sharper clients on the international equity investment front, neither he nor I could come up with a solid bull case for any of the major-to-mid-major economies across Asia or Latin America – the consensus “engines of global growth” per the overwhelming majority of sell-side economists and corporate CFOs. Either we’ve become contrarian indicators or the GROWTH/INFLATION/POLICY dynamics simply aren’t there to support an incremental investment(s) in either region at the current juncture. You know where we stand on that.

 

Darius Dale

Senior Analyst


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