Greater China Chartbook: Q2-2010

- Growth "China’s investment-led recovery is slowing, but wage and consumer growth still look very strong. Activity levels in the real-estate sector still look reasonably strong. We look for a mild loosening of policy in Q4 or Q1 2011, depending on the Q3 data. We look for 10% real growth in 2010, 8.5% in 2011."
- Investment "Growth in government approvals of infrastructure projects has slowed, and the rationing of bank credit has also had an effect. However, activity levels remain elevated."
- Consumption "Incomes are rising across China in real terms, and that is supporting strong consumption growth countrywide. Incomes seem to be rising for everyone, even if the rich are benefiting the most."
- Money "Credit growth has slowed to a less worrying rate, but there is still a lot of liquidity around, and real interest rates are still negative. This creates an environment where asset bubbles grow easily."
- Trade "We expect exports to rise by 30% this year, though the trade surplus will fall moderately, to around USD 180bn. China’s share of world exports continues to grind higher. We reduce our forecast for the 2010 current account surplus to 4.8% of GDP from 5.2%. We look for the C/A surplus to trend mildly up again in 2011-12."
- Inflation "Price pressures appear to be moderating, though we could still have a pork price shock in H2. Stable commodity prices will help a lot over the next 12 months. We revise down our CPI inflation forecast for 2010 to 2.5% from 3.5%, and raise our 2011 forecast to 3.5% from 3.0% to take account of increased food-price inflation."
- CNY "The Chinese yuan (CNY) has de-pegged, again, and we look for a 3-4% appreciation against the US dollar over the next 12 months, to 6.35 by end-2011. China remains a buyer of US Treasuries but has been actively buying other countries’ bonds too."
- Housing "After the April market-cooling measures by the State Council, land prices and transaction volumes have corrected downwards, but apartment prices have generally not budged. We expect home prices to fall moderately in H2, but do not foresee a rout."
- Fiscal policy "The government has been withdrawing stimulus over the last three quarters. Fiscal revenues are now booming again. Central government debt is not a concern, but local government debt is. The government appears to be preparing to boost central funding of education, health care and low-income housing construction."
- Energy "China’s coal consumption has plateaued, while its thirst for oil continues to grow; oil consumption is on track to reach our estimate of 9.2 mn barrels/day for 2010, up 7.6% on 2009. The filling of stage two of the Strategic Petroleum Reserve is underway."
- Metals and food "The infrastructure slowdown has impacted iron ore imports and steel prices. Less home-building will hit copper demand. Soy demand still looks super-strong, on the back of strong meat and oil consumption growth."
- Hong Kong "Strong consumption underpins our GDP growth call of 5.4% for 2010. Inflation is not a big concern – and we do not think there is a property bubble. The CNY market appears to be on the verge of significant development."
- Taiwan "Consumption is strong, unemployment is falling, and the central bank is normalising rates. Even so, we do not think inflation is much of a risk."
StandChart Greater China Chartbook 2010Q2

Looking into the Second Half

- "In our final weekly before a brief summer break, we look back over the year so far and
forward to the second half of the year and the market themes and questions that we think will dominate there. While the year has proceeded in distinct phases – from US growth upgrade to European sovereign risk to US slowdown worry – many assets are not far from where they begun 2010."
- "In thinking about this evolution and the path forward, we find it helpful to think about three sources of risk exposure. The first is US growth risk and the issue of whether the market has priced enough of a slowing. The second is non-US growth risk broadly speaking and whether the market is too optimistic or too pessimistic there. Running around this issue is whether it is possible to see slowing in the US without seeing more serious slowing elsewhere (the ‘decoupling’ debate returns!). The third is the kind of systemic risk that has reappeared with
worries about sovereign exposures and the banking system."
- "We think the second half of the year will be dominated by a set of judgments that relate to these three areas. First, how deep a US slowing and what kind of policy response might be forthcoming? Second, how much decoupling is possible (and will China’s policy shift meaningfully)? Third, will sovereign and systemic risks intensify again or settle? Our own forecasts envisage a period of some muddiness in the near-term that ultimately resolves towards a more positive global view. But given the fragilities in the system, we will be watching our various proprietary tools (GLI, FSI, FCIs) and trying to stay open-minded."
GoldmanSachs Global Economics Weekly 20100728

India’s Rising Labour Force

- "India will likely provide the largest increase to the global labour force over the next decade—we estimate an additional 110 million by 2020."
- "Key demographic trends driving the labour force are urbanization, more women in the work-force, and a large increase in the 30-49 age group."
- "Demographics alone may contribute about 4 percentage points of annual GDP growth over the next decade."
- "Demographics will affect consumer spending patterns. Spending on services such as health and education may increase five-fold by 2020."
- "The age structure of the population is favourable for flows into equities and bonds, and less favourable for bank deposits."
- "India’s manufacturing sector has the potential to create the necessary jobs due to recent policy changes, low unit labour costs, infrastructure build-out, prospective lowering of effective tax rates, and rising productivity trends."
- "For potential to meet reality, however, India would need to reform its archaic labour laws and invest heavily in education and skills training."
GoldmanSachs Global Economics Paper 20100728

Turbulence in the steel market

- "Radical changes in the iron ore market: shortening of contract periods and orientation to spot price as benchmark."
- "The changes will result in greater planning uncertainty and increased volatility for all industries along the value chain."
- "The steel industry feels it has no choice but to pass on the higher cost of raw materials to users and is seeking to boost steel prices."
- "The order upswing in steel-processing industries will be curbed by the rising price of steel."
- "Higher steel prices will be passed on to the end consumers of steel products."
- "While the related raw material prices have already peaked, steel price hikes will hinge on the development of the global economy."
DeutscheBank Research Briefing 20100729

Slowing global momentum: “minor” risks to Asian earnings

- Earnings outlook and context "Our regional earnings analysis supports our view that Asian earnings may be only modestly impacted by a slowdown in global, largely G3, growth. The 2Q reporting season has started well and sensitivity to the US/Europe is less than most believe. However, we are less confident about what the market will pay for those earnings, if concerns about G3 growth persist and global valuations remain under pressure."
Stressing regional earnings reveals moderate downside "Looking at the relationship between our GLI and Asian earnings, as well as the US/European exposure of Asian corporates, we feel a modest revision on the order of -2% might be necessary. Areas where
we have concerns vs consensus include metals/mining, bulk shipping, India IT and Korea autos."
Separating “minor” setbacks from “major” pullbacks "We look at major and minor index setbacks in the last 15 years and ensuing EPS change. We believe this episode will be ‘minor’ in terms of index risk and profit revisions, largely because starting valuations and EPS growth expectations were not elevated. That said, the ytd valuation decline may not be discounting specific Asian earnings risks, but concerns about medium term global growth, implying less room for valuations to rebound."
2Q has started on track; we look for potential surprises "10% of index cap has reported so far, and numbers are tracking 52% of full year estimates. We highlight potential upside and downside surprises based on margin and sales analysis, and our bottoms-up
analyst estimates."
GoldmanSachs Asia Pacific Portfolio Strategy 20100728

Leading Indicator Still Falling; Look for a Bottom in Aug/Sept

- The Citi LEI continues to fall, signaling slower growth ahead — "Our LEI leads the
OECD index by 5 months, suggesting that the period of sluggish growth isn't over yet. Our index has fallen further only 50% of the time when it has reached these levels, making a strong call either way difficult."
- Current Citi LEI reading vs. historical context — "Historically when our LEI reaches
these levels, growth has been in the low teens, EPS growth is in the high single digits and export prices have been negative. This would signify a reasonable change from current growth rates and price levels."
- China and Korea respond fastest to a turn in the Citi LEI — "Because of this, both
have suffered bigger negative earnings revisions than others – they keep falling for the whole region. We retain our view that Aug/Sept will see the worst of the earnings revisions and hence market performance."
Citigroup Asia Ex Strategy 20100728

Ireland: Cyclical rebound begins, structural problems remain

- "The Irish economy returns to growth, driven by a cyclical upturn in exports, though domestic demand remains weak.""
- "GDP expected to increase by 0.75% in 2010, before growing by 3.5% in 2011, as the recovery in domestic demand picks up pace."
- "Structural problem of overindebtedness remains and household deleveraging and
Government retrenchment will remain key themes for the next few years."
- "Unemployment is also expected to remain high as the economy restructures to a smaller
construction sector, although emigration of foreign migrants will ease transition."
DenDanske Irish Economic Outlook 20100726

Correlation, Correlation everywhere, but not a drop to sell…

- "Equity correlation is close or higher than its high levels scaled during the credit crisis. This has profound implications even for non-derivatives investors in that it indicates that stock-picking skills are less useful in the current environment."
- "While much of the variation in equity correlation is driven by equity volatility, from a long term perspective it appears to have had a secular increase in value."
- "Since 2005, equity correlation has had a close relationship with the increased ETF volumes relative to the volumes in the underlying stocks."
- "Option implied correlation, which has traditionally traded at a premium to realized, is currently trading at a discount which would indicate that the option market is loathe to believe that the current high correlation is likely to persist. However, the fact that long dated implied correlation is also equally high and almost equal to its short dated version appears to provide a conflicting signal."
Barclays Index Volatility Weekly 20100726

Turnabout is fair play

- "Western Europe accelerates into midyear displaying surprising resilience"
- "The global disinflationary trend remains intact"
- "European banks pass the stress test with considerable public sector support"
- "With EM Asia on track to slow to trend, Japan is likely to follow"
JPMorgan Global Data Watch 20100723