When the facts change

- "Weaker data, led by jump in claims, trigger US forecast downgrade"
- "Fed, BoE now expected to renew government bond-buying programs"
- "US, European core price disinflation to continue amid subpar growth"
JPMorgan Global Data Watch 20100820

Talking About MY Generation

- Demographics impact economies; as such, they also impact market — "The MY (middle age to young) ratio has often been used as a predictive tool for equity markets. While it shows a relationship in certain developed markets, its relevance is less obvious in Asia ex-Japan. For ASEAN in particular, the MY ratio and equity markets are unrelated. Where there have been many shocks − political and economic, among others − demographics are less important."
- The MY ratio works best in the mid-long term. Short term, it is useless. — "Demographics are slow moving; hence, they contains information but make no noise. Demographics can be used as a forecasting tool 5-8 years out, but they tell us nothing regarding market performance over the next week or month. In general, sectors with a high degree of industrial concentration have benefitted with a rising MY ratio more than sectors where fragmentation is high."
- The MY ratio is set to grow most in Indonesia, Taiwan and India. Least in Singapore and HK — "Indonesia will see its MY ratio expand by 2.2% p.a over the next decade, followed by Taiwan at 1.7% and India at 1.1%. Singapore shows the biggest contraction (-4.5% p.a.), ahead of Hong Kong (-1.1%) and Korea (-0.3%). In the latter markets, non-demographic factors will have to play a larger role in generating demand."


Lowering rate forecasts

- JGB yields less likely to rebound — "We have lowered our forecasts for the current 10-yr JGB yield from 1.00% to 0.95% for end-September, from 1.20% to 1.10% for end-December, and from 1.35% to 1.10% for end-March 2011. We now believe that upside and downside risks to our forecasts are basically in balance."
- "Financial deflation" worsening — "The impact of "financial deflation" looks set to be a key market theme over the next three to five years or possibly even longer, with balance sheet adjustments by governments and private-sector financial institutions—particularly in Europe—likely to remain a drag on global economic growth."
- Fiscal rebuilding strategies to be rethought — "While fiscal rebuilding throughout the world's developed economies is likely to continue, we expect to see at least some recalibration as concerns over worsening economic conditions highlight the need for safety net measures."
- Additional easing a matter of time — "The Bank of Japan opted not to hold an emergency monetary policy meeting last week, but will probably be forced to take some sort of action as the government prepares to submit a supplementary budget (required to fund additional stimulus measures) to the extraordinary Diet session in autumn."


How big is your balance sheet?

- "Central bank balance sheets have grown significantly throughout the financial crisis. The Fed’s has nearly tripled, while it more than doubled in the UK and almost doubled in the euro area. But discrepancies are emerging."
- "Whereas the Fed made a pro-active decision this month to effectively maintain the size of its balance sheet, the ECB’s balance sheet has shrunk recently. In large part that’s because the architecture of the ECB’s unconventional measures means that these shrink the balance sheet when they are allowed to run their course. And that’s exactly what happened when the 12-month LTRO rolled off a couple of months ago."
- "That reduction in the balance sheet has been associated with a small rise in short-term interest rates. So in effect the ECB is very marginally tightening inasmuch as it has not made a pro-active decision not to do so. Although the ECB is likely to maintain the current provision of liquidity into the new year, a gradual reversion back to variable-rate tenders in 2011, ahead of an increase in rates by the middle of the year, is possible."
- "In contrast to both the ECB and the Fed, the nature of the Bank of England’s quantitative easing programme means the MPC needs to make a conscious decision to reduce the size of its asset purchases and, consequently, its balance sheet. Such a decision still seems some way off."
- "But, one potential issue for the BoE’s balance sheet next year is the expiry of the Special Liquidity Scheme from April 2011, when over £200bn of assets will return to their originating banks (having been swapped for up to three years for Treasury bills). The SLS was an off-balance sheet operation for the BoE, but the Bank has already put in place the architecture to cope with greater demand for funding when the SLS expires. In particular, its new index-linked LTROs (for three and six months) can accept a broad range of collateral. Its
early operations suggest banks are prepared to pay up to refinance collateral that the market may still be unwilling to fund."

CreditSuisse European Economics 20100824

Crude Reality

- China demand slowing down in July and stays on 6+% demand growth trajectory "July 2010 total demand was 35.6 mn tones for the month. This is equivalent to 8.5 mn BOPD, up only 0.2 mn BOPD on July last year and down 0.5 mn BOPD on June 2010. YTD demand is up 12.4% on same period last year, while if we look at previous years' demand levels (Jan-July YTD) total demand is up around 6.5% CAGR relative to 2006, 2007 and 2008. This is equivalent to around 0.6x GDP growth rates in the same period. Diesel demand, IP and power demand are all less than 15% up y/y now and there are ever more indications of a slowdown in China. This is partially due to government action but data also look weaker now as we have much a more difficult comparison from June 2009. Diesel demand growth is now close to zero y/y, while gasoline still lingers only barely above zero. Even “Other” products categories are nearing zero growth y/y due to the slowdown in Chinese activity. China LNG imports have also come down from the record April month (1.2 mn tones), importing 1.05 mn tones of LNG in July, with average cost at US$5.6/mmBTU (down from US$7.40/mmBTU in May 2010)."

JPMorgan Asia Oil Gas 20100824

China: A volatile bottoming process ahead

- Reviewing our calls in July: "(1) We predicted a near-term rebound of MSCI-China on the back of monetary loosening expectations. (2) We expected more volatility after the near-term rebound due to concerns about continued downward earnings revision risk. (3) Among others, we identified investment opportunities in: (a) China’s mid-cap consumer space; (b) beneficiaries of western China development strategy; (c) and China's visible railway capex (such as China Railway Group). Looking back, the rebound did occur, with MSCI-China rising 4.1% in July FY10. Yet, the rally was much shorter than we expected, with MSCI beginning to correct on August 10 on renewed slowdown concerns."
- Bottom building amid volatilities: "We expect China’s equity market to experience more volatility in the coming months due to downward earnings revision pressure as the economic slowdown ripples through the whole economy, but recommend buying on dips because: (1) China’s real GDP growth, on a sequential basis, may have bottomed out at 7.2% QoQ in 2Q10. Yet we believe China’s final demand growth will not bottom out until late FY10, because the modest sequential rebound in GDP in 3Q will be driven by a slowdown in de-stocking and the widening of the trade surplus on sharply falling imports, rather than by a decent recovery in final demand; (2) improving liquidity conditions – (a) China’s M2 growth (which tends to lead H-shares performance), on sequential terms, is expected to bottom out, with trend growth reaching a trough of 11.8% 3m/3m, saar in September before rising to 16.8% in December; (b) we estimate new loans made by Chinese banks in 2H10 will reach around Rmb3 trillion, up 37% YoY; (3) we believe the worst of the policy tightening environment may be behind us."
- Key investment risks: "(1) The market may be concerned about a return of government tightening measures, if CPI continues to surprise on the upside. (2) Asset-inflation risks, mainly on the property front. (3) China’s A-share market to face potential supply side pressure in 4Q10."
- Sector views: "In our model portfolio, we are overweight on (1) mid-cap consumer names in the staple, low-end discretionary, and service areas, (2) menswear, (3) beneficiaries of western China development strategy and China’s visible railway capex, (4) insurance, and (5) mid-cap banks. We stay neutral on telcos, and underweight on commodities, energy, and property. We reduce our weighting in IPPs from OW to UW."

Hey, There’s M&A!

- The investment community seems enthralled by a pickup in deal activity. "A few
friendly and hostile transaction announcements have energized investors, who are
almost desperately seeking some reason of late to be enthusiastic about stocks,
given macroeconomic uncertainties. Indeed, fund managers are seeking possible
takeout candidates even as the business outlook remains unclear and corporate
leaders may be unwilling to make such commitments en masse yet based on
preliminary work given out to law firms."
- Funding costs are down sharply and high yield issuance is soaring. "With money
flowing heavily into bond funds, the cost of doing a deal is fairly attractive given
the spread to cash flow yields, such that it may be challenging to not do accretive
transactions unless the prices paid get exorbitant. Moreover, there appears to be
a very willing buyer of new junk bonds being issued given poor yields elsewhere."
- M&A trends often lead stock prices, but more linked to big cap gains. "While
investors may perceive them to be coincident, there does seem to be respectable
correlation between M&A volume and future stock price direction. However, the
analysis shows that this is far more accurate for large cap indices rather than for
small cap stocks, despite arguments to the contrary. Should more deals transpire,
the S&P 500 is likely to be higher a year from now."
- Energy and Telecom Services have the widest cash flow yield to high yield spreads.
"When studying cash flow yields to high yield financing cost, it becomes evident
that both the Telecommunications Services and Energy sectors look the most
intriguing in terms of their acquisition potential given their widest spreads.
Regulatory issues and recurring capex requirements could explain the
- Industrials, Technology and Financials have the lowest spreads. "Several sectors
have the tightest spreads, making successful acquisitions harder as business plan
execution could make or break a deal’s potential for success. The IT, Industrials
and Financials sectors have the tightest spreads between cash flow yield and junk
bond yield, thereby providing much less margin for error. From a purely
fundamental approach, select industrials are preferred to technology names, from
our perspective."


The pirate inside us: In the depths of copyright

- "The tide of information online is rising inexorably. Second by second, terabyte upon terabyte of new images, songs, films and other forms of digital content are being uploaded onto the internet. New digital content is being created, consumed, modified, shared and disseminated virally with no loss in quality at low cost."
- "The internet is altering our requirements and our consumption habits. Many consumers find themselves faced with the question of whether to buy digital content stored on a physical medium or to simply download their preferred artists or favourite films online. While the sales of physical media are trending down, fans are using their computers to download individual songs or entire albums by their favourite bands."
- "The majority of files downloaded from the internet are pirated copies since they infringe copyright."
- "This is the fate being suffered by the music and film industries, along with the computer games and digital book markets."
- "Is this solely a threat or is it also an opportunity for change? Are creative minds and thus innovation online hindered or promoted by traditional intellectual property rights? Can free licensing models be an alternative to traditional copyright and help to broaden the knowledge commons with greater creative freedom?"

DeutscheBank Current Issues 20100824

Why The Yen Defies, Befuddles and Dazzles

- "Earlier this month, USD/JPY fell to 84.7 - its lowest level in fifteen years. The all-time low of
79.7 was reached in April 1995 and is now in sight (see chart). This comes in the face of the consensus of opinion consistently looking for yen weakness. Indeed, currently the consensus of analysts’ forecasts expects USD/JPY will trend higher, rather than reach new lows over the coming quarters. We have been looking for yen strength consistently since May 2009 (see FX Blueprint for Summer ’09, 12 May 2009). Part of this view was premised on US rates being low for long and the possibility of risk aversion. The link between US interest rates and the yen is well known and widely followed, however it is not the whole story for the yen. There are have been three important, but less well known developments that provide further support to the yen: the smaller gains for the yen in real terms than nominal terms, Japan’s growing income balance and foreigners being underweight JGBs. Taken all these factors together, we maintain our view of yen outperformace, and look for USD/JPY to reach 80 over the next six months, and possibly even 75."

DeutscheBank Exchange Rate Perspectives 20100824

Is it possible to explain the performances of exports to emerging countries?

- "In an environment where domestic demand in OECD countries will be subdued and where growth in emerging countries is set to be brisk, it is important for OECD countries to export as much as possible to emerging countries (and commodity-exporting countries). We will therefore try to understand the differences between large OECD countries’ performances in terms of exports to emerging and commodity-exporting countries (looking only at exports makes it possible to neutralise the country size effect, as we will see)."
- "These performances may depend on:
• price-competitiveness;
• size of the manufacturing industry (which itself depends on other variables);
• innovation drive; level of product range and labour skills;
• determinants of the supply of goods: tax burden, productivity gains."
- "We show that the capacity to export to emerging and commodity-exporting countries (which is significant in Japan, Germany and the Netherlands, but very weak in Canada and Spain) is linked to cost-competitiveness, the R&D drive and the weight of capital goods and transport equipment in total exports, which represents the product range level of exports."

Natixis Flash Economics 402 20100820