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Looking for Investment Ideas Across Asia, LatAm or EEMEA?

***Below are our latest thoughts on the key economies throughout Asia, Latin America and EEMEA. Please feel free to email us if you'd like to dig into a specific economy further or if you'd like to request analysis on a country not mentioned below.***

 

 

In China, officials continue to push back on a material devaluation of the CNY while concomitantly defending the currency with near-peak FX reserve deployment and incremental capital controls. While we remain explicitly bearish on China’s intermediate-to-long-term growth outlook, as well as the nation’s capital and currency markets, we continue to believe the path lower will remain piecemeal in nature, rather than sharp and/or sudden. To the extent that expectation is proven correct, we think the best way to profit from our view will be through shorting Chinese stocks and regional peer currencies – rather than the yuan itself – because the bearish overhang of CNY devaluation risk is set to persist indefinitely. Contrary to growing consensus among investors, we still believe the Chinese yuan is unlikely to go the way of the Thai baht, Philippine peso, Malaysian ringgit, Indonesian rupiah or South Korean won circa 1997-98. It’s decline will more than likely resemble that of an advanced economy’s currency – which means credit expansion and broader economic growth will continue to meaningfully decelerate amid tighter-than-necessary financial conditions on the mainland. That outcome will surely put Chinese corporate balance sheets and Beijing’s desire for incremental bail-outs to the test. All told, slower-for-longer in China = structurally-depressed-for-longer with respect to commodity prices, as well as the respective outlooks for global growth and inflation.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - China


In Japan, the introduction of NIRP has backfired aggressively with the Nikkei 225 down -9.4% WoW and the JPY up +4.2% WoW vs. the USD amid growing concerns about the efficacy of Abenomics. Complicating matters is the stagflationary #Quad3 setup implied by the preponderance of key high-frequency economic data, which is squeezing Japanese consumers at the margins. The BoJ will likely look to do more, but with JGBs yielding negatively across the curve through the 10Y maturity and select corporate bond issues following suit, you have to wonder about the efficacy and impact of further easing on risk assets in Japan. With their reputations and credibility at stake, look for Kuroda and Abe to materially ratchet up the scope of monetary easing in Japan over the next few months. But with the growing risk of a complete and recognized failure of Japanese monetary policy, we remain comfortably on the sidelines for now, having tactically (and appropriately) avoided much of the Abenomics unwind trade seen in recent weeks.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Japan


In India, liquidity continues to dry up amid RBI support of the INR. This tightening of domestic financial conditions has not been well-received by the nation’s capital and currency markets – which themselves continue to price in the stagflationary #Quad3 setup implied by the preponderance of key high-frequency economic data. All told, we reiterate our bearish bias on India’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - India


In South Korea, the preponderance of key high-frequency economic data implies a deflationary #Quad4 setup. That, in conjunction with the advent of NIRP weighing on sovereign yields across Europe and Japan appears to be underpinning dovish expectations for the BoK, which, in turn, appear to be driving foreign portfolio flows into South Korea’s bond market. That said, however, we are comfortable fading the recent positive deltas seen in Korean stocks and the KRW, as the fundamentals (i.e. #Quad4), nor sentiment (i.e. bearish CNY overhang) appear set to materially inflect anytime soon.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - South Korea


In Australia, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup. With the RBA effectively guiding to a #Quad3 outcome per its recent Q4 Monetary Policy Statement, we think this divergence is potentially being priced into the AUD. Like South Korea, the Aussie rates curve may be benefitting from foreign portfolio flows emanating from NIRP and NYSD (i.e. “Negative-Yielding Sovereign Debt”) in Europe and Japan. The All-Ordinaries Index looks most mispriced relative to the country’s depleted structural growth outlook, pervasive commodity price deflation and an overreliance on wholesale funding across the Aussie banking industry. As such, we anticipate more downside.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Australia


In Taiwan, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup, which is positively impacting the TWD. We expect this relative currency stability to continue and for it to positively impact Taiwanese stocks – at least on a relative basis vs. peer economies. That said, however, the bearish CNY overhang is a key risk for Taiwan’s capital and currency markets given the strength of the TWD on a nominal effective exchange rate (i.e. NEER) basis and the structural weakness in Taiwanese industrial production and export growth. As such, we think it’s best to adopt a neutral approach here.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Taiwan


In Indonesia, the preponderance of key high-frequency economic data implies a bullish #Quad1 setup, which itself is being priced into Indonesian financial markets with both the IDR and JCI up on a 1-3 month basis. Indonesia is a current account deficit economy, so its sovereign debt market is also reacting accordingly to the aforementioned positive economic news, as well as BI’s recent -25bps cut to the policy rate. With the DXY still bullish from an intermediate-term TREND perspective, we don’t think it pays to be naked long of any emerging market asset. That said, however, we want to be positively exposed to Indonesia’s capital and currency markets on a relative basis within EM. A breakdown in the USD would make us explicitly bullish from an absolute return perspective as well.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Indonesia


In Thailand, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup, which itself is being priced into Thai financial markets with both the THB and SET up sharply on MoM basis. We also highlight the sharp bull flattening seen in the country’s sovereign debt market as evidence of a reversal in foreign portfolio flows. Much like in Taiwan, however, the bearish CNY overhang is a critical risk given the strength of the THB on a NEER basis and the structurally depressed nature of Thai export growth. As such, we think it’s best to adopt a neutral approach with respect to Thailand’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Thailand


In Brazil, the preponderance of key high-frequency economic data implies a stagflationary #Quad3 setup, but the Bovespa and BRL are daring investors to chase the recent pullback in the DXY. Don’t – at least not in Brazil. The divergence between short-term sovereign debt yields and OIS spreads and long-term breakeven rates implies the country’s political dysfunction has yet to crescendo. Moreover, with BCB out to lunch with respect to its 2016 inflation forecast, there is a fair amount of risk that Brazilian policymakers have to aggressively tighten throughout 2016. Whether or not the political environment allows for that is beside the point. Both outcomes (i.e. tightening or political dysfunction that delays necessary cyclical responses and/or structural reforms) should continue to be bad for Brazil’s capital and currency markets – which we remain resoundingly bearish of.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Brazil


In Mexico, Banxico has shifted its attention from “keeping up with the Joneses” (i.e. monetary tightening by the Federal Reserve) to focusing on its own issues – which predominately include a currency that’s crashed to all-time lows on a NEER basis; we are adding the obvious stagflationary #Quad3 setup being implied by the preponderance of key high-frequency data to that equation as well. The obvious risk to investors here is that Banxico follows through on its incremental guidance and steps up the pace of tightening. While that might provide some short-term reprieve to the MXN, we can’t see how the MXN-dominated assets respond well to the rising probability of that outcome. As such, we feel comfortable reiterating our bearish biases on Mexico’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Mexico


In Russia, the preponderance of key high-frequency economic data implies a deflationary #Quad4 setup. Moreover, the fact that Russian policymakers are out shopping global banks for international debt placement that will help plug the country’s widened fiscal deficit amid international sanctions and a rising cost of capital shines light on just how dire the country’s economic situation remains. Nothing has changed here fundamentally and Russia’s capital and currency markets are generally responding appropriately. As such, we feel comfortable reiterating our bearish bias on both.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Russia


In South Africa, it’s probably too soon to suggest that economic growth has sustainably inflected. That said, however, “green shoots” imply the country may be moving from a stagflationary #Quad3 setup to a hawkish #Quad2 setup. The SARB board has certainly responded in kind with a +50bps hike late last month. This incremental soundness has benefited the ZAR, on the margin; it’s “only” down -3.7% YTD after falling -15.7% in the final six weeks of 2015 alone. While we commend South African policymakers for finally getting serious in their response to the country’s currency crash to all-time lows on a NEER basis, the outlook for accelerated tightening is likely to quash the nascent recovery in growth and weigh incrementally on the prices, liquidity and valuations of ZAR-denominated assets. As such, we find it prudent to reiterate our bearish bias on South Africa’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - South Africa

 

In Turkey, the preponderance of key high-frequency economic data implies a hawkish #Quad2 setup, which itself is being priced into the TRY in recent weeks. While we are predisposed to have a bullish bias on a country that is recording a sustained positive inflection in economic growth, narrowing spreads in the OIS market and a bull flattening in the country’s sovereign yield curve would seem to suggest Turkish policymakers aren’t serious about deferring to the improved growth backdrop as cover to promote a commensurate (i.e. sustained) recovery of the TRY from its effective all-time lows on a NEER basis. As such, feel comfortable reiterating our bearish bias on Turkey’s capital and currency markets.

 

Looking for Investment Ideas Across Asia, LatAm or EEMEA? - Turkey

 

Enjoy the rest of your respective evenings,

 

DD

 

Darius Dale

Director


Cartoon of the Day: Head In The Sand

Cartoon of the Day: Head In The Sand - Fed ducks in a row

 

Our Macro team has been highlighting the increasing likelihood that the U.S. economy slips into recession this year. The Fed is completely oblivious to the slowdown. "Every time the Fed misses calling the recession, they reverse to panic policy then consensus panics," Hedgeye CEO Keith McCullough wrote today. 


JT Taylor: Another Test For Donald Trump... Don't Rule Out Rubio

Takeaway: Donald Trump leads in New Hampshire and battle for second place between Bush, Kasich, Christie, and Rubio is heating up.

Editor's Note: Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning. 

TRUMP'S TEST TAKE II:

JT Taylor: Another Test For Donald Trump... Don't Rule Out Rubio - trump 55

 

Heading into today's primary, Donald Trump leads the field by the same 15-20% polling margin he's maintained for the last six months. He's been downplaying the expectations set by his numbers -- the absence of a solid ground game could hurt him today, as it did in Iowa.

 

He's locked in his eclectic ~25% of the electorate, but he also has a ceiling; for every Trump vote there's another anti-Trump vote. With so many players still on the field though, that's likely enough for him to win. The latest post-debate tracking poll has Trump at 34%, and Bush/Kasich/Christie/Rubio at a combined 38% -- with some polls showing a late-breaking Bush surge into second place. 

DON'T RULE OUT RUBIO:

JT Taylor: Another Test For Donald Trump... Don't Rule Out Rubio - rubio christie

 

Despite last week's debate performance, Rubio is still in position for a good showing in today's vote. He risks real damage though if similar flubs, like at a rally last night, keep happening -- there's a fine line between being "on message" and "on repeat." He has to be less risk-averse and can't look like he's retreating to a script. Christie's line of attack on Rubio's "Obama Problem" is sure to come around again, and Rubio will have to show something new when it comes around again at the CBS debate this Saturday.


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McCullough: ‘Watch Volatility, It’s An Expression Of Fear Or Anxiety’

In this brief excerpt of The Macro Show this morning, Hedgeye CEO Keith McCullough explains why it’s becoming increasingly likely we’ll have big down days, as opposed to rallying off the lows.

 


VIDEO | Earnings In 60 Seconds Or Less: McDonald's, Ralph Lauren, LinkedIn, Yelp

Takeaway: These four video shorts provide instant, post-earnings insights on companies MCD, LNKD, YELP and RL.

Below are four videos via HedgeyeTV with updates on some of our analysts' top long and short ideas following quarterly earnings. Each provides the key takeaways from the quarter in sixty seconds or less. (Click here to subscribe to our YouTube channel.)

 

1. McDonald's

 

Our Restaurants analyst Howard Penney's favorite long call in the sector, McDonald's (MCD). Penney made the bold call back in August that MCD would never trade below $100 again. That's proven prescient. The stock is up +17% since versus down -12% for the S&P 500.

 

 

2. Ralph Lauren 

 

Retail analyst Brian McGough said in a recent research report that Ralph Lauren (RL) is "uninvestable at almost any price." It remains on McGough's Long bench because "it might take a while to get paid" ahead of "yet another restructuring."

 

 

3. LinkedIn 

 

LinkedIn (LNKD) was on Hedgeye Internet & Media analyst Hesham Shabaan's long side but after noting "a deteriorating selling environment and expecting light guidance for 2016" he added it to the short side. Smart move. Earlier in the month, LNKD fell off a cliff and is about 50%. Here's what you need to know now. 

 

 

4. Yelp

 

Another Shabaan short call, Yelp (YELP) "is still chasing consensus estimates while its model continues to unravel. Apparently it hasn't learned much from its mistakes in 2015." The stock is down -45% year-to-date.

 


[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16

Takeaway: In continued risk aversion, investors are piling into tax-free municipal bonds.

Editor's Note: This is a complimentary research note which was originally published February 4, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

* * *

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending January 27th, investors returned to making contributions to equity ETFs with a +$2.0 billion net subscription and international equity funds also saw some interest with a +$1.3 billion inflow. However, the exodus from domestic equity funds continued with a -$6.2 billion outflow last week, negating total net inflows to the total equity category. Additionally, taxable bond funds continued to give up AUM, losing -$1.8 billion to withdrawals. The category has been taking it on the chin recently and has had only 23 weeks of positive inflows in the last 52 weeks. However, investor interest continues in tax-free bonds with investors making a positive contribution of +$856 million. Weekly average contributions in tax-free bonds are up over +200% in 2016, with a mean weekly contribution of +$1.1 billion thus far in the New Year versus the 2015 weekly average of +$314 million. Money funds saw a +$14 billion inflow during the week as investors also shored up cash.


[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI1 large 2 9 16

 

In the most recent 5-day period ending January 27th, total equity mutual funds put up net outflows of -$4.9 billion, trailing the year-to-date weekly average outflow of -$3.2 billion and the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$1.3 billion and domestic stock fund withdrawals of -$6.2 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 6 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$917 million, trailing the year-to-date weekly average outflow of -$834 million and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$856 million and taxable bond funds withdrawals of -$1.8 billion.

 

Equity ETFs had net subscriptions of +$2.0 billion, outpacing the year-to-date weekly average outflow of -$4.8 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$5.3 billion, outpacing the year-to-date weekly average inflow of +$2.7 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI2

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI3

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI4

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI5

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI12

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI13

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI14

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI15

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI7

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the defensive utilities XLU and long treasuries TLT ETFs experienced the largest percentage inflows last week of +3% or +$180 million to the XLU and +3% or +$226 million to the TLT.

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI17

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$7.3 billion spread for the week (-$2.9 billion of total equity outflow net of the +$4.4 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$437 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | Tax-Free Municipal Flows Up Over +200% to Start '16 - ICI11 


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