#ASIANCONTAGION: SO FAR, SO GOOD*

Takeaway: July growth and inflation data out of emerging Asia lends overwhelming support to our #AsianContagion theme.

SUMMARY BULLETS:

  • On balance, economic growth across emerging Asia continues to slow, while various metrics of inflation are broadly accelerating across the region per this morning’s releases of the most recent (JUL) data.
  • As outlined in our #AsianContagion macro theme, the confluence of China’s cyclical and secular slowdown and #RatesRising should weigh on the growth rates of the Chinese demand-levered, capital intensive economies across emerging Asia, while #StrongDollar’s continued punishment of overvalued Asian exchange rates should auger positively for Asian CPI readings over the intermediate-to-long term.
  • All told, as it relates to our bearish bias on Asian equities, currencies and fixed income, when the facts (i.e. fundamentals) change, we’ll change. For now, however, we continue to see little-to-no signs of that occurring in the near term.
  • Akin to the conclusion from our China note from yesterday, investors should avoid the act of robotically parking client capital in Asian asset classes because they appear “cheap” (which they aren’t, BTW). Anyone who’s done the required work on #EmergingOutflows cycles knows full well that we are likely in the early innings of long-term relative underperformance and/or absolute declines for emerging Asia’s capital and currency markets. Email us if you’d like to review said work or would like to talk shop on a country-by-country basis; as always, we’re around to help.

On balance, economic growth across emerging Asia continues to slow, while various metrics of inflation are broadly accelerating across the region per this morning’s releases of the most recent (JUL) data:

  • Asian Growth (PMI) Data (sequential acceleration/deceleration, expansion/contraction):
    • China (+,+): JUL Manufacturing PMI: 50.3 from 50.1 vs. Bloomberg consensus estimate of 49.8
    • China (-,-): JUL HSBC Manufacturing PMI: 47.7 from 48.2 vs. Bloomberg consensus estimate of 47.7… The headline reading was the lowest reading since AUG ’12… The New Orders index fell to 46.6, which was the lowest since AUG ’12… The New Export Orders index contracted for a fourth-consecutive month… The Employment index slowed to the lowest level since MAR ’09.
    • India (-,+): JUL Manufacturing PMI: 50.1 from 50.3
    • Korea (-,-): JUL Manufacturing PMI: 47.2 from 49.4
    • Taiwan (-,-): JUL Manufacturing PMI: 48.6 from 49.5
    • Indonesia (-,+): JUL Manufacturing PMI: 50.7 from 51.0
    • Vietnam (+,-): JUL Manufacturing PMI: 48.5 from 46.4
  • Asian Inflation Data (sequential acceleration/deceleration):
    • China (+): JUL Input Prices: 50.3 from 50.1; a 4M-high
    • China (+): JUL China Real Estate Index System House Price Index (100 cities): +7.9% YoY from +7.4%; +0.9% MoM from +0.8%
    • Korea (+): JUL CPI: +1.4% YoY from +1%
    • Indonesia (+): JUL CPI: +8.6% YoY from +5.9%; a 4Y-high… effects of the JUN 22 fuel price hike (via removal of subsidies) filtering through the economy
    • Thailand (-): JUL CPI: +2% YoY from +2.3%

As outlined in our #AsianContagion macro theme, the confluence of China’s cyclical and secular slowdown and #RatesRising should weigh on the growth rates of the Chinese demand-levered, capital intensive economies across emerging Asia, while #StrongDollar’s continued punishment of overvalued Asian exchange rates should auger positively for Asian CPI readings over the intermediate-to-long term.

#ASIANCONTAGION: SO FAR, SO GOOD* - Economic Sensitivity to China

 

#ASIANCONTAGION: SO FAR, SO GOOD* - 10Y Rates

 

#ASIANCONTAGION: SO FAR, SO GOOD* - Investment as a   of GDP

 

#ASIANCONTAGION: SO FAR, SO GOOD* - REER

 

#ASIANCONTAGION: SO FAR, SO GOOD* - Asia CPI YoY

And while we don’t expect it to persist, Brent Crude Oil’s bullish TREND and TAIL setup only augments the latter view for the time being. While Bloomberg consensus expectations appear a bit frothy (Nonfarm Payrolls at +185k; Private Payrolls at +195k), a positive surprise in tomorrow’s US employment report (JUL) could cement the recent dead-cat bounces across Asia ex-Japan equities (AAXJ up +8.5% vs. its 6/24 cycle-trough) and, to a much smaller degree, Asian currencies as rear-view events.

#ASIANCONTAGION: SO FAR, SO GOOD* - AAXJ

 

#ASIANCONTAGION: SO FAR, SO GOOD* - OIL

Turing to China specifically, China’s official PMI data showed stabilization via a slight uptick on the headline reading. This is in line with the bevy of recent rhetoric out of Beijing which has promised to put a floor under current growth rates for the remainder of 2013.

#ASIANCONTAGION: SO FAR, SO GOOD* - China PMI Table

The latest on this front is this morning’s statement out of the State Council Information Office, which reiterated the official pledge to prevent growth from slipping below existing targets while also pledging to avoid artificially reflating economic growth: “The nation cant blindly stimulate economic growth, nor can it allow economic growth to decelerate to a level out of the reasonable zone.”

Interestingly, the HSBC PMI reading showed a pretty sharp deceleration in Chinese economic growth in the month of JUL, which is moderately confounding given the MoM easing of monetary conditions. While we generally overweight the official data in our analysis of Chinese growth trends, it can be strongly argued that the Politburo has a vested interest in showcasing economic stabilization. This certainly wouldn’t be the first time the Chinese government has been accused of making up the numbers!

At best, Chinese growth is trending sideways though 2H13 and structural growth headwinds remain for 2014 and beyond. We would not be surprised… in fact, we expect the Chinese government to take down their (not-yet-announced) 2014 and 2015 real GDP growth targets by -50bps and -100bps vs. 2013’s targeted +7.5% YoY rate.

#ASIANCONTAGION: SO FAR, SO GOOD* - China GDP Expectations

All told, as it relates to our bearish bias on Asian equities, currencies and fixed income, when the facts (i.e. fundamentals) change, we’ll change. For now, however, we continue to see little-to-no signs of that occurring in the near term.

Akin to the conclusion from our China note from yesterday, investors should avoid the act of robotically parking client capital in Asian asset classes because they appear “cheap” (which they aren’t, BTW). Anyone who’s done the required work on #EmergingOutflows cycles knows full well that we are likely in the early innings of long-term relative underperformance and/or absolute declines for emerging Asia’s capital and currency markets. Email us if you’d like to review said work or would like to talk shop on a country-by-country basis; as always, we’re around to help.

Darius Dale

Senior Analyst

#ASIANCONTAGION: SO FAR, SO GOOD* - EV to EBITDA