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Takeaway: With respect to the intermediate term, both Indonesia and New Zealand look good on the long side (kind of). Philippines looks like a short.

CONCLUSIONS:

  1. We’d like to see Indonesia (EIDO) break out above its TREND line (~3% higher) before we allocate capital here. The immediate-term TRADE was built to front-run the TREND, so we like our chances of this occurring in light of Indonesia’s 1H14 rather positive GIP outlook.
  2. Philippines’ sour GIP outlook would suggest selling/shorting the country (EPHE) at your leisure.
  3. We’d like to see New Zealand (ENZL) recapture its TRADE line (~1.5 to 2% higher) before we allocate capital. If the TREND line holds, we’d be comfortable allocating capital to New Zealand as somewhat of a call option on continued commodity reflation. Moreover, we want to be exposed to likely appreciation of the Kiwi dollar.

2014 has certainly been a interesting year with respect to my geographic regions of converge (i.e. Asia, LatAm and Emerging Markets). Only six of the 21 countries I follow closely have equity markets that are up for the YTD and, of those six, only three of them are broadly investable (i.e. excluding Argentina, Vietnam and Venezuela we’re left only with Indonesia, Philippines and New Zealand).

If you run global equity money, you know how important it is to get big in under-indexed names that subsequently go on to outperform the benchmark. With that in mind, we decided to go “squirrel hunting” in three of the more squirrely countries in the sample with the express intent on finding which country(ies) to overweight/get long of and which country(ies) to sell/short with respect to the intermediate term (i.e. 6-9M+).

GROWTH/INFLATION/POLICY

Indonesia: As of now, our proprietary GIP model has Indonesian real GDP growth accelerating modestly in 2014, with most of the juice coming in 1H14 where compares are easiest. We currently anticipate Indonesian CPI to accelerate modestly in 2014, though moderation in the back half of the year – where compares are toughest and import price pressures are likely to be the least – is also expected. Indonesia’s most recent quarterly real GDP growth and quarterly CPI readings have z-scores (trailing 3Y) of -2.0x and +1.8x, respectively. Lastly, we expect BI to maintain at least rhetorical hawkishness amid elevated rates of inflation and #EmergingOutflows.

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - INDONESIA

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - Indonesia GDP Comps

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - Indonesia CPI Comps


SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - IDR YoY

Philippines: As of now, our proprietary GIP model has Filipino real GDP growth slowing sharply (~170bps) in 2014 (after the best two-year period of growth in ~60 years), with most of the slowing coming in 1H14 where compares are toughest. We currently anticipate Filipino CPI to accelerate by ~100bps in 2014, with much of that acceleration coming in 1H14 where compares are easiest and import price pressures are the greatest. Philippines’ most recent quarterly real GDP growth and quarterly CPI readings have z-scores (trailing 3Y) of +0.4x and -1.0x, respectively. Lastly, BSP is likely to maintain its neutral bias for the time being (on hold since OCT ’12), though it will likely be feeling the pressure to tighten by 2H14. What they choose to do in an environment of slowing growth is beyond our ability to forecast at the current juncture. This conundrum is precisely why the policy response to Quad #3 on our GIP model says, “IN-A-BOX”.

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - PHILIPPINES

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - Philippines GDP Comps

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - Philippines CPI Comps

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - PHP YoY

New Zealand: As of now, our proprietary GIP model has New Zealand real GDP growth coming in essentially flat in 2014; a slight deceleration in 1Q14, where compares are toughest, is likely to be overshadowed by an acceleration in 2Q14.We currently anticipate New Zealand CPI to accelerate a noteworthy amount (~70bps) in 2014 due to easy compares that remain in place all year. Those are, however, offset by negligible, if not inverted, import price pressures throughout the balance of the year. New Zealand’s most recent quarterly real GDP growth and quarterly CPI readings have z-scores (trailing 3Y) of +0.7x and -1.0x, respectively. Lastly, with 1Y OIS trading at a ~90bps premium to the benchmark policy rate, RBNZ Governor Graeme Wheeler’s telegraphed hawkish rhetoric has been well understood by the marketplace; the swaps market now sees a ~90% chance +25bps hike by March.

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - NEW ZEALAND

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - New Zealand GDP Comps

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - New Zealand CPI Comps

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - NZD YoY

IDIOSYNCRATIC RISKS

Indonesia’s key idiosyncratic risk is its bloated current account deficit, which contributes to its rather poor Pillar I score on our propriety EM Crisis Risk Index. The results of July’s presidential election may serve to create consternation in the eyes of foreign investors; it could also lead to reform-minded admiration. Right now it’s too early to tell. From our purview, the key idiosyncratic risk to investing in the Philippines right now are its souring GIP trends and its lack of size/liquidity amid index-driven #EmergingOutflows. That said, however, its current account surplus and healthy score on our EM Crisis Risk index should protect it from experiencing material capital outflows. In New Zealand, the key idiosyncratic risk we see right now is the fact that the RBNZ may very well be the developed world’s most hawkish central bank over the intermediate term. While that may weigh on expectations for economic growth, it might also attract incremental capital flows that are very much needed to finance the country’s bloated current account deficit. Continued commodity reflation would also be a boon to New Zealand’s current account deficit financing (see our 1Q14 Macro Theme titled: #InflationAccelerating for more details).

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - Explaination Table

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - Summary Table

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - Pillar I

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - CAB to GDP

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - CRB Index

QUANTITATIVE SETUPS

Indonesia: Bullish TRADE/Bearish TREND. We’d like to see the EIDO ETF break out above its TREND line (~3% higher) before we allocate capital here. The immediate-term TRADE was built to front-run the TREND, so we like our chances of this occurring in light of Indonesia’s 1H14 rather positive GIP outlook.

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - EIDO

Philippines: Demonstrably broken from both a TRADE and TREND perspective. Philippines’ sour GIP outlook would suggest selling/shorting the EPHE ETF at your leisure.

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - EPHE

New Zealand: Bearish TRADE/Bullish TREND. We’d like to see the ENZL ETF recapture its TRADE line (~1.5 to 2% higher) before we allocate capital. If the TREND line holds, we’d be comfortable allocating capital to New Zealand as somewhat of a call option on continued commodity reflation. Moreover, we want to be exposed to likely appreciation of the Kiwi dollar.

SQUIRREL HUNTING WITH INDONESIA, PHILIPPINES AND NEW ZEALAND - ENZL

Best of luck out there risk managing the gong show that 2014 has morphed into!

DD

Darius Dale

Associate: Macro Team