Position: Long Singapore via the etf (EWS); Bullish on SGD-USD.
Conclusion: As part of our call that growth will slow globally in 2H10, we want to be long currency and equity markets that are poised to accelerate domestic consumption. Singapore is one of those economies and, as a result, is one of Hedgeye’s top Macro investment ideas.
Based on recent strength in manufacturing and exports Singapore posted a 2Q10 GDP growth number of 19.3% Y/Y. The record gain was fueled by strong industrial production growth, which accelerated in May to +58% Y/Y. Manufacturing in Singapore has grown by an average of 45% in the first five months of 2010, led by strong output in the pharmaceutical and electronic sectors – two of Singapore’s largest export bases.
Despite the EU’s sovereign debt issues, the large growth in exports during the 2nd quarter, the net of which compromised 25% of GDP in 2009, is an incrementally bullish read-through in conjunction with the 2Q GDP release. Singapore’s non-oil, domestic exports accelerated on the margin in June to +29% Y/Y vs. +24% Y/Y in May. Upon further scrutiny, however, we find that European austerity and economic stagnation in the U.S. paints a more sober picture of the intermediate term trade outlook for the $182 billion economy. Today, the Trade Ministry of Singapore stated:
“In the European Union, domestic demand remains depressed as concerns over the sovereign-debt crisis persist… The implementation of fiscal austerity measures in some of the economies may further weaken their domestic demand. The weakening of the euro against key trading partners will also dampen import demand in the European Union. Signs of a slowdown in the labor market in the U.S. have affected consumer confidence, and sluggish final demand from the world’s largest economy as well as Europe has led to a moderation in manufacturing in Asia.”
The consensus belief that European Austerity may negatively negative impact Singapore’s exports has upside risk. Nominal exports to the EU are less than 8% of the total with the economically healthy Germany compromising 20% of that share. That said, just last week, the EU Delegation to Singapore plainly stated that trade between the two entities would remain vigorous in 2H10, despite austerity measures.
Breaking down the most recent trade numbers in more granularity, we find that growth of non-oil, domestic exports (NODX) to the EU accelerated in June (+75% Y/Y vs. +5.7% Y/Y in May) due to a favorable inventory cycle for pharmaceuticals, electrical machinery, and computer parts. This is likely to moderate going forward, as Singapore PMI slowed in June (though still showing expansion in all major categories: total, new export orders, new orders, and order backlog). The takeaway from this is that, while cause for concern, European austerity fears should not be overstated in an analysis of Singapore’s trade outlook.
Trade Outlook: Moderate
In fact, the majority of Singapore’s exports go to Asian economies, with the largest recipients being: Hong Hong (11.6%), Malaysia (11.5%), China (9.7%), Indonesia (9.7%), and Japan (4.6%) (CIA Factbook, 2009). The U.S. is a destination for roughly 11% of Singapore’s nominal exports, so continued weakness (Y/Y growth flat sequentially from May to June) from that market – which we expect – may continue to weigh on Singapore’s export growth throughout the remainder of this year. Conversely, bullish demand from China – supported by government stimulus and recent wage growth – may help offset any potential declines in exports caused by the U.S., which we’re already seeing evidence of. While growth of NODX to both China and Hong Kong slowed marginally in June, the Singapore Trade Ministry has credited one or both of these markets as the largest contributors to overall export growth in every month this year except February. Even then, Taiwan and Indonesia picked up the slack in February as two of the largest contributors to growth. Asian markets will likely be the key drivers to Singapore’s export growth going forward and the recently launched China-ASEAN Free Trade Area agreement holds the potential to greatly accelerate intra-regional trade.
All said, Singapore’s export growth is still likely to moderate from here and, like many world economies, will slow in 2H10. Despite this, we contend that the economy is in a bullish setup supported by internal demand, as supported by the Ministry of Trade’s third upwardly-revised 2010 GDP estimate today (+13-15% Y/Y vs. previous forecast of +7-9%).
Domestic Consumption Outlook: Bullish
At a mere 2.2% in 1Q10, Singapore’s latest unemployment rate is at its lowest level in 18 months, thanks to private and public efforts to bolster the services sector the Southeast Asian economy. The opening of two casino resorts by Genting Singapore Plc and Las Vegas Sands contributed to a net addition of 36,500 jobs in the quarter and record tourism for the sixth consecutive month (+30% Y/Y in May and driven by intra-Asian visitation). Singapore has a resident population of roughly only 5 million, so 36,500 job adds and high tourism rates will have an measured impact on the economy. Further, Singapore also has an open policy of importing highly-skilled labor to meet its growing demands (1.5 million immigrants from China, India, and Malaysia).
The demand for highly-skilled labor is particularly prevalent in the financial services, construction and energy sectors. For the third consecutive year, the World Bank has ranked Singapore as the easiest place in the world to do business and the fundamentals behind that calculation make Singapore a likely destination for relocated financial services as a result of global industry regulation. Singapore is already Asia’s leading OTC commodity derivatives hub with more than 50% of the region’s volume. According to Singapore’s Ministry of Trade and Industry, increased intra-regional trade will likely result in the need for upwards of $8 trillion of infrastructure and insurance investment over the next decade, so the government has been busy making concessions to accommodate this growth. In the construction sector, the government has set aside 25% ($250 mil.) of the National Productivity Fund for manpower development and technology adoption. In the energy sector, Singapore is developing a facility to store liquefied natural gas to reduce dependence on imports from neighboring countries where the pricing outlook is uncertain. All in all, Singapore is making moves in line with our TAIL thesis that Asian markets will continue to take share from the U.S. and the EU in the global economy.
Risks: Moderate in the Absolute; Negligible Relative to the Downside Risks of Other Advanced Economies (U.S., Spain, France, Greece, Mexico)
So what are the downside risks to the bullish case on Singapore’s economy? With the equity market up only 1.9% YTD and far from the top of the performance leaderboard, this leading indicator suggests there are risks associated with this thesis. Those risks include: an expedited move in the Singapore Dollar vs. the U.S. Dollar, which would further dampen export prospects to that market; and a potential for a hiccup in pharmaceutical manufacturing, which itself is a very volatile industry subject to large production swings by big companies such as Sanofi-Aventis SA.
With 19% Y/Y GDP growth and CPI currently running at the highest level since Dec. ’08 (+3.24% Y/Y), the Singapore Dollar is in a hawkish setup ahead of the next Monetary Authority of Singapore policy review in October (the Monetary Authority uses the Singapore Dollar instead of interest rates to manage inflation). The currency rose as much as 1.2% on the day of the last MAS meeting back in April when the board allowed a revaluation of the Singapore Dollar and shifted to a stance of gradual appreciation. If the currency continues to strengthen against the U.S. Dollar from here, export competitiveness to the U.S. market may come under pressure. SGD-USD has gained 1.5% against the last two weeks alone and our Short the US Dollar thesis makes this trend likely to continue. If the euro appreciates further from here, however, relative strength in that currency may offset a portion of this pressure. Fifty-eight percent of the U.S. Dollar Index is Euros, further U.S. Dollar debasement from here will provide reasonable support for the EUR-USD, which is teetering on a TREND line breakout above $1.28. SGD-EUR supports this view, down (-0.3%) in the last two weeks.
A second risk to Singapore’s go-forward outlook is the prospect of an eventual overheating in the housing sector. An alarming report by CIMB suggests that overall housing affordability in Singapore is now inching closer to the banks’ mortgage-to-income threshold ratio, after a 10% YTD increase in private home prices which has elevated those levels above the 1996 peak. While appropriate cause for alarm, further analysis suggests that housing prices are far from a China-like bubble. First, housing CPI (the largest component of the consumer price index) has lagged overall inflation for the past 12 months. From the November 2008 peak-of-peaks, housing CPI has experienced a (-4.2%) decline. Furthermore, a marginal deceleration of Y/Y growth in the latest housing CPI reading suggest that concerns are likely overdone for now. In the event that they aren’t, however, expedited appreciation in Singapore’s housing market will likely put more pressure on the MAS to raise the value of the currency – which would further augment our bullish consumption thesis. Moreover, immigration policies designed to expand Singapore’s population by over 50% in 10 years suggest there won’t be any “ghost towns” on the island anytime soon.
Conclusion: Long EWS; Long SGD-USD
In summary, we like economies in the back half of 2H10 and 2011 that are setup to accelerate domestic consumption to offset a decline in global trade and industrial production (China, Brazil, Singapore). Keep in mind, however, that every market and currency has its price and with growth poised to slow globally, relative economic performance will matter even more in 2H10. We are no longer in a “rising boat lifts all tides” investment environment, so we’re waiting for price confirmation in markets like China and Brazil on the long equity side. From a quantitative standpoint, Singapore’s price is right. We expect Singapore’s FTSE Straits Times Index to outperform many global equity markets throughout the remainder of the year. From a currency perspective, Singapore’s hawkish economic setup and low deficit-to-GDP ratio (2.6% in 2010) makes the Singapore Dollar a strong FX play - particularly relative to the $USD.
What a difference 6 hours of trading makes…
- Intel (INTC) posts a blockbuster quarter, trades up +7% in the pre-market and is now only up +2.5% with TREND line resistance = $21.98
- SP500 (SPY) falls hard from pre-open futures indications, breaking down back below our critical long term TAIL line = 1096
- Volatility (VIX) continues to push higher (closed up on the day yesterday as well), trading convincingly above our long term TAIL = 23.69.
All that said, unless 1076 is violated to the downside on a closing basis, what was immediate term TRADE line resistance last week (1076) is now immediate term TRADE support. This is the most immediate term duration in our model, but it definitely matters.
Altogether, I say respect the math from here. A break of 1076 is now flashing no downside support to 991. In other words, I’d consider the SP500 trading in an intermediate term range of 991 to 1144 probable scenario that you should manage risk towards.
Short high, cover low.
Keith R. McCullough
Chief Executive Officer
Conclusion: The Mortgage Brokers Association reported that demand for loans to purchase homes sank to a 13-year low last week, which bodes poorly for demand and future price.
Josh Steiner and his team held a very thorough and thoughtful call on the U.S. housing market a few weeks ago (if you aren’t currently getting his Financial Sector Research, please email Jen Kane at ). Their conclusion was simply that consensus is not bearish enough on the next move in housing prices in the U.S.
The data points today from the Mortgage Bankers Association is another important supporting point in the Hedgeye Mosaic as it relates to our bearish view on housing. According to the survey, request for loans to purchase houses dropped 3.1% on a week-over-week basis in the week ending July 9th, which is adjusted for the holiday. Demand for refinancing fell similarly, and was down 2.9% on a week-over-week basis.
This was the lowest reading in this survey since December 1996. Just as a reminder, the prime interest rate, a proxy for where mortgage interest rates are at generally, was at 8.25% then versus today’s 3.25%.
If you are a housing bull today, you have to ask yourselves this: If people aren’t buying houses at all time lows in mortgage rates, when will they?
The obvious answer is when prices go lower. By a lot.
Daryl G. Jones
Nike Crushed It
Consumer Discretionary is clinging on for dear life. But athletic apparel sales for last week turned up sequentially. Nike crushed it. UA put in a nice dent as well. No one else came close.
Key observations from sports apparel sales for the first full week of July:
- Noticeable uptick after 3 disappointing weeks. As always, we look at the 3-week trend, which accelerated by 200bp.
- All channels improved sequentially, which in itself is rare based on the year-to-date trends. There does not appear to be a calendar shift issue or any major weather anomalies. In fact, the Northeast heat wave could have easily stunted sales last week, but it did not.
- New England, South Atlantic, Pacific/Mountain regions all showed the biggest uplift. If this is a sign of broader shopping patterns, it’ll be interesting to see how this triangulates with retailers like Payless who called the South/West as negative contributors last quarter (we’re meeting w PSS tomorrow).
- Nike had a HUGE week. I mean HUGE. Sales +28% with market share +626bps? That’s tremendous for a company that has 30% of the market.
- The next best share leader is UA, with 46bp. Might not sound as impressive, but given such a smaller sales base, it still translates to 10% sell-through growth. The recent trend of sales growth 2-3x the industry is holding for UA.
- Every other brand was a yawn/sleeper from a market share perspective. Adidas was particularly notable with sales -5.3% given its World Cup exposure. I guess not many Spain and Germany jerseys flew off the shelves last week in the U.S. despite selling nearly one-million Spanish jerseys following World Cup victory per our news run this morning.
Position: Long the British Pound via the etf (FXB); Short US Dollar (UUP)
“Put your hand on a hot stove for a minute, and it seems like an hour. Sit with a pretty girl for an hour, and it seem like a minute. THAT’s relativity.”
When discussing currencies it’s worth repeating that we’re betting on the “relative” strength of one currency versus another. Currently we are bullish on the British Pound (GBP) versus both the USD and EUR; we expressed this conviction by buying the etf FXB in our virtual portfolio on 7/12.
The Debt Road
Taking a step back, yesterday in the Early Look Keith wrote: “This morning’s run of global macro news reminds me of three things:
1. Sovereign Debt issues are here to stay
2. American Austerity is on the way
3. Global growth is going to continue to slow”
In summary, these three points reflect much of what our macro team has focused on in our research over the last 6th months: unchecked government debt and deficit imbalances (globally) will come home to roost. Over the balance of this year the price action across global markets and multiple asset classes has swung considerably alongside fears of sovereign default in Europe, especially from those nations so affectionately named under the acronym “PIIGS” (Portugal, Italy, Ireland, Greece, and Spain) or “Club Med” states. We’ve track this fear in the form of bond yield spreads, CDS prices, currency moves, and equity market performance, and played Europe’s Sovereign Debt Dichotomy (our Q2 Theme) by shorting Spain (via the etf EWP) and being long Germany (EWG) in 1H10.
We now think that while Europe’s Sovereign debt issues are by no means rearview (Portugal’s debt was downgraded by Moody’s yesterday), the spotlight concerning the risk of a government piling debt up debt will move to the US, a position encapsulated by our Q3 macro theme of American Austerity. (Note: this position is very quickly becoming consensus).
As it translates to our view of global currencies, we believe the USD is setting up to give back much of its gains YTD. Should this be the case, and in light of the continued sovereign debt fears in Europe, we could see the Pound as the relative beneficiary of this currency trade.
Our bullish positioning on the Pound follows two main threads:
1.) The Austerity measures issued by the new UK government of PM Cameron and Chancellor of the Exchequer Osborne show their intention to rein in fiscal imbalances. We think fiscal austerity should boost investor sentiment and future growth in the UK despite meek growth prospects this year and next.
2.) For the intermediate term TREND we see continued political and economic headwinds in the US and throughout certain Eurozone countries; we believe the Pound stands to benefit on a relative basis from the downward pressure on the USD and EUR.
Bullish on the UK
We’re bullish of PM Cameron’s conservative government that took office in early May. The new tide of “austerity” that his government has issued, with initial measures proposed in an Emergency Budget released on June 22nd by the Chancellor of the Exchequer, George Osborne, spell significant spending cuts and incremental consumption tax hikes to trim fat and boost revenue in Britain. With a budget deficit (as a % of GDP) of some 11% in 2010, Britain is proverbially biting the bullet (now) to shore up its fiscal house, a move we believe will better position itself for future growth and appreciate the value of the Pound.
The UK’s main austerity measures include:
- A 25% cut in the budgets of government departments starting April 2011 through 2015 (a spending review is expected for released in October)
- Tax on banks with liabilities greater than £20 Billion (the tax is expected to generate approx. £2 Billion annually)
- Increase to the Value Added Tax (VAT) from 17.5% to 20% starting January 2011
- Increase in capital gains tax for higher tax bracket earners, to 28%. No change (18%) for low to middle income earners
- A 2 year wage freeze for all but the lowest paid among Britain’s 6 million public servants and a 3 year freeze on benefits paid to parents for rearing children
- Cuts to the housing benefit and disability allowance
- Decrease in corporate taxes, staggered over 4 years from 28% to 24%
We are by no means bullish on the UK economy across the board (it’s one of the main reasons we haven’t bought UK equities). The housing market is one particular area of concern. To the joy of many home sellers (and real estate agents), Cameron’s government did away with Home Information Packs (HIPs) in late May, documents required of homeowners to sell their properties that many complained simply increased the “cost and hassle of selling a home”. However, scrapping HIPs has increased the supply of homes on the market over the last months, and consequently dampened prices. Recent surveys from Hometrack and Nationwide corroborate the recent turn in prices (see chart below). Should the housing market take a second dip, we’d expect to see significant downward pressure on the consumer.
Secondly, the government’s go-forward relationship to the country’s all-important banking sector is still unclear. Cameron’s policy will need to find the appropriate balance between levying a bank tax (which the UK has spearheaded ahead of global backing) and guarding against excessive risk taking by banks while not running banks (and financial professionals) to tax friendly havens, like Switzerland. Decreasing corporate taxes is a start.
Growth: we don’t expect to see significant growth in the UK in the next year. GDP is projected at 1.2% in 2010 and 2.0% in 2011 by Bloomberg consensus, and we think that consenus is reasonable.
Unemployment: the UK’s nominal unemployment rate has shown improvement over the last two months, dropping 10bps to 7.8% in the latest reading.
Inflation: inflation pressures appear to be waning—CPI readings have come in over the last months, registering 3.2% in June Y/Y.
Currency: we’re bullish on the Pound outright because we think that capital and currency markets will favorably price the austerity measures Britain is taking to shave down the government’s budget deficit. We think the Pound-USD can continue to trend higher from its near-term bottom of $1.43 on 5/20 (see chart below).
Our TRADE line of support for the Pound-USD is $1.48 with TRADE resistance at $1.53.
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