Important Asia/EM Portfolio Strategy Update

***The roundup below is an example of our daily internal data-driven research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list.***


  • Key Takeaways:
    • It’s been a rough week for Asian equities, capped by a regional fireworks show on Friday. Specifically:
      • Japan’s Nikkei 225 Index declined -3% to close down -5.2% WoW;
      • Hong Kong’s Hang Seng Index declined -1.5% to close down -6.6% WoW;
      • Taiwan’s TAIEX Index declined -3% to close down -6.3% WoW;
      • India’s SENSEX declined -0.9% to close down -2.5% WoW;  
      • Korea’s KOSPI Index declined -2% to close down -5.4% WoW; and
      • China’s Shanghai Composite remained the pace horse, dropping another -4.3% overnight to close down -11.5% WoW.
    • Clearly the CNY devaluation put dour outlook for regional and global growth front-and-center of investor’s brains. On Friday, Chinese growth – in Manufacturing PMI terms – hit a 77-month low with the advent of the flash Caixin-Markit report for the month August. This contrasts with the continued recovery in Japanese growth, as most recently reiterated by a similar Nikkei-Markit flash PMI report.
    • Given, we can reasonably conclude that Japanese investors are worried about the outlook for corporate earnings given the headwinds to export growth stemming from Chinese #GrowthSlowing (Japan’s 2nd largest export market at 18.1%), the aforementioned yuan devaluation (see Japan FinMin Aso’s comments below) and the recent bout of defensive strength in the yen amid global contagion.
  • Portfolio Strategy Implications:
    • While we are still of the view that Japanese shares have material upside with respect to the long-term TAIL, we cannot and will not stay wed to the thesis at every price. For the Nikkei specifically, that price is our intermediate-term TREND line of 20,059. If the index cannot recapture that level over the next week or so of trading, we will be looking to book gains on the long side of the Japanese equities (DXJ) and the short side of the Japanese yen (FXY).
    • With respect to China, this latest sharp downtick in growth calls into question Beijing’s desire to stabilize the markets and the economy. On one hand, additional policy support measures will only further exacerbate the egregious imbalances ailing mainland equities and additional monetary easing is likely to have a limited effect in the near term and fiscal policy remains hampered by large levels of leverage throughout the economy (gross national debt = 260% of GDP – up 80ppts. since 2008). Additionally, further intervention calls into question policymakers’ commitment to their capital markets and capital account reform drives. 
    • On the other hand, however, the economic and political pressure to intervene grows by the day. Will they blink? While no one outside of the Forbidden City knows for sure, we do know they have considerable scope to ease and support sentiment in the near term. 
    • As such, we don’t want to assume the risk of a weekend RRR or rate cut(s), so we are opting to close all of our China-centric positions here. As of 1pm EST today, our short A-Shares (CAF)/long H-Shares trade has netted an [unrealized] gain of +278bps, our long CNY (CYB)/short commodity currencies (CCX) trade has netted an [unrealized] gain of +85bps, our short base metals (DBB) trade has posted an [unrealized] gain of +1103bps, our short copper (JJC) trade has posted an [unrealized]  gain of +991bps. Refer to our 7/16 presentation titled, "IS CONSENSUS RIGHT ON CHINA?" for more details on the aforementioned positions.
  • China
    • AUG flash Manufacturing PMI: 47.1 from 47.8 vs. est. of 48.2; lowest reading since MAR ‘09
      • Output 46.6 vs 47.1 in July
  • Japan
    • AUG flash Manufacturing PMI: 51.9 from 51.2
      • New orders 53.2 vs 50.9 in July
      • New export orders 50.5 vs 52.2 in July
      • Output 51.9 vs 52.2 in July
      • Commentary alongside the press release noted that "new orders from abroad rose at a slower pace, with reports of reduced sales volumes with China dampening international demand."
      • JUL Supermarket Sales: 1.9% YoY from 0.3%
    • Aso warns on yuan manipulation (StreetAccount)
      • Reuters cited statements from Japanese Finance Minister Taro Aso who warned authorities against frequently manipulating the yuan, saying that the Japanese government would "face a tough decision" on how to respond to the manipulations. 
      • He added that the government " must scrutinize various data to see if China's economy is indeed expanding at a pace of 7%."
  • India
    •  N/A
  • Korea
    • Tensions escalate on Korean peninsula (StreetAccount):
      • The KOSPI opened down more than 3% after reports said that North Korean leader Kim Jong-Un ordered his military to full combat readiness.
      • The move comes amid joint US and South Korean military drills, which run from 17-28 August, and follows reports of the two sides exchanging artillery fire along their western border yesterday. South Korean authorities warned of a strong retaliation to any attack, raised their WATCHCON alert level, and partially banned entry into the Kaesong industrial park that it runs with the North.
      • Reports noted that the South sees a possible provocation from the North coming after 17:00 local time on 22-August.
      • Additionally, reports of potentially a fresh MERS case was also being cited as an additional headwind for shares.
  • Australia
    •  N/A
  • Taiwan
    •  N/A
  • Indonesia
    •  N/A
  • Thailand
    •  N/A
  • Other Asia
    •  N/A
  • Brazil
    • AUG CPI: 9.6% YoY from 9.3%
  • Mexico
    • JUN Retail Sales: 5.4% YoY from 4.1%
  • Other LatAm
    •  N/A
  • Russia
    •  N/A
  • South Africa
    •  N/A
  • Turkey
    • AUG Consumer Confidence Index: 62.4 from 64.7
    • Erdogan Set to Send Turkey to Election on Nov. 1 as Markets Drop (Bloomberg):
      • President Recep Tayyip Erdogan is gearing up to declare a repeat election in Turkey after a 45-day period to form a coalition government did little but deepen political divisions and send markets into a tailspin.
      • Erdogan could call for a new vote immediately after the legal deadline passes at midnight on Sunday. Turkey’s interim Prime Minister Ahmet Davutoglu, who failed to agree on coalition terms with any of three opposition parties, called on parliament Thursday to announce plans for a second election before Erdogan acts.
      • In a break with political tradition, Erdogan declined to give the main opposition leader, Kemal Kilicdaroglu of the secular Republican People’s Party, the chance to form a government. Erdogan cited Kilicdaroglu’s refusal to meet the president at his newly built 1,150-room palace in the capital.
  • Other Emerging Markets
    •  N/A




DM Asia Investment Ideas Summary: 

Important Asia/EM Portfolio Strategy Update - DM Asia Idea Flow Monitor


Emerging Markets Investment Ideas Summary: 

Important Asia/EM Portfolio Strategy Update - EM Idea Flow Monitor


ETF Divergence Monitor: 

Important Asia/EM Portfolio Strategy Update - ETF Divergence Monitor




Important Asia/EM Portfolio Strategy Update - 1


Important Asia/EM Portfolio Strategy Update - 2


Important Asia/EM Portfolio Strategy Update - 3


Important Asia/EM Portfolio Strategy Update - 4


Important Asia/EM Portfolio Strategy Update - 5


Data Source: Bloomberg, unless otherwise noted.

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