- 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
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
- "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
- "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
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
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
- "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
- "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
- "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
China 2H10 Outlook: Policy’s Bottomed, So Will the Market
- Equity market near the bottom "Policy headwinds that had caused turbulence in the market are finally settling, along with downward trending economic growth. Policy overhangs and a growth slowdown are key downside risks in 2H."
- Signs of market stabilization "Macro indicators in general are supportive for the market. The margin squeeze has probably reversed softening commodity prices, currency appreciation, and still elevated CPI inflation. Liquidity stretch is likely near its end. Economic slowdown is a risk, but often lagging the market. We expect growth to bottom in 4Q this year or 1Q next year."
- Market trend "The Shanghai A-share market has tested the 2200-2500 range recently as expected. The market may remained mixed in the near term before a liquidity rally is formed. We expect the Shanghai A-share index to touch the range of 2800-3100 before year-end, likely outperforming the H-share market in the second half of the year."
- Sectoral preference "The market will likely remain selective. In general, we overweight consumer, insurance, transportation, healthcare, autos, techs, and electrical machinery & equipment, while we underweight property, banks, and materials."
- Multi-Strategy: Support for China market "1) HSCEI has remained flat since mid-
May 2010, 2) Liquidity should ease, 3) Rates curve suggests little hikes, 4) HSCEI IVOL term structure shows the market is expected to be less volatile going forward, and 5) the USD rally appears to be over."
Citigroup China Equity Strategy 20100726
- Signs of market stabilization "Macro indicators in general are supportive for the market. The margin squeeze has probably reversed softening commodity prices, currency appreciation, and still elevated CPI inflation. Liquidity stretch is likely near its end. Economic slowdown is a risk, but often lagging the market. We expect growth to bottom in 4Q this year or 1Q next year."
- Market trend "The Shanghai A-share market has tested the 2200-2500 range recently as expected. The market may remained mixed in the near term before a liquidity rally is formed. We expect the Shanghai A-share index to touch the range of 2800-3100 before year-end, likely outperforming the H-share market in the second half of the year."
- Sectoral preference "The market will likely remain selective. In general, we overweight consumer, insurance, transportation, healthcare, autos, techs, and electrical machinery & equipment, while we underweight property, banks, and materials."
- Multi-Strategy: Support for China market "1) HSCEI has remained flat since mid-
May 2010, 2) Liquidity should ease, 3) Rates curve suggests little hikes, 4) HSCEI IVOL term structure shows the market is expected to be less volatile going forward, and 5) the USD rally appears to be over."
Citigroup China Equity Strategy 20100726
Using CAPE to place a 'through-cycle' value on Asian markets and sectors
- "We are often asked the question of are markets cheap or expensive at the moment. The answer of course depends on what earnings metric is used."
- "The problem with using forecast earnings for the region right now is that they quite simply look too high. They are currently higher than when they peaked in ’08 and the outlook implied by aggregate notional earnings right now is that earnings will be greater next year than ever before – has the earnings outlook really ‘never been better’?"
- "But if we turn to use historical earnings for our market PE, then we are going to be using numbers that are rather depressed by recent trend standards – biasing valuations to look more expensive."
- "An alternative is to use a Cyclically Adjusted PE (CAPE, as first written about by Graham & Dodd some 70 years ago) which use an average of actual earnings typically over the prior 10 years."
- "A 10-year CAPE currently is at about the same level that we get using a ‘low-cycle’ regression basis and is arguably best used to remove the exaggerated ‘bubble period’ for earnings in and around 2008."
- "We suspect that the through-cycle earnings for Asia are in fact somewhere between the 5-year and 10-year averages and have valued countries and sectors in the region accordingly."
- "On this basis we flag the cheap and expensive countries and sectors summarised in the table to the right."
JPMorgan Cyclically Adjusted Valuations 20100727
- "The problem with using forecast earnings for the region right now is that they quite simply look too high. They are currently higher than when they peaked in ’08 and the outlook implied by aggregate notional earnings right now is that earnings will be greater next year than ever before – has the earnings outlook really ‘never been better’?"
- "But if we turn to use historical earnings for our market PE, then we are going to be using numbers that are rather depressed by recent trend standards – biasing valuations to look more expensive."
- "An alternative is to use a Cyclically Adjusted PE (CAPE, as first written about by Graham & Dodd some 70 years ago) which use an average of actual earnings typically over the prior 10 years."
- "A 10-year CAPE currently is at about the same level that we get using a ‘low-cycle’ regression basis and is arguably best used to remove the exaggerated ‘bubble period’ for earnings in and around 2008."
- "We suspect that the through-cycle earnings for Asia are in fact somewhere between the 5-year and 10-year averages and have valued countries and sectors in the region accordingly."
- "On this basis we flag the cheap and expensive countries and sectors summarised in the table to the right."
JPMorgan Cyclically Adjusted Valuations 20100727
China Interbank Liquidity Monitor
- PBoC withdrew liquidity last week: "After eight consecutive weeks’ (since late May) liquidity injection, totaling Rmb957bn, the PBoC drained Rmb101bn of net liquidity from the market last week (Exhibit 1)."
- Light redemption pressures explained the net withdrawal: "The PBoC issued Rmb125 bn of bills (Rmb45 bn of 1-year bills last Tuesday and Rmb80 bn of 3-month bills last Thursday), substantially below the issuance (Rmb240 bn) of the week before last. Much
lighter redemption pressure (Rmb39 bn last week vs. Rmb190 bn in the week before last) resulted in a net liquidity withdrawal of Rmb86 bn from bill issuance last week (Exhibit 3). Meanwhile, the PBoC sold Rmb50 bn of 91-day repo. Given Rmb35 bn of matured repo, the
PBoC drained a further Rmb15 bn of liquidity from repo operations. The reference yields of 3-month and 1-year PBoC bills remained unchanged at 1.57% and 2.093%, respectively (Exhibit 4). Largely bound by the reference yield of the 3-month bill rate, the 91-day repo rate stayed constant at 1.57% as well (Exhibit 6)."
- Further easing liquidity: "Interbank liquidity has continued to ease, with the 1-month SHIBOR sliding to 2.301% from the recent peak at 4.053% (Exhibit 2). This noticeable correction may have reflected the following factors: 1) liquidity injection by the PBoC; 2) completion of mid-year inspection on loan/deposit ratio; and 3) possible return of capital inflows."
- What’s next: "Given the relatively light redemption pressures, the scale of bill issuance and repo sales should be modest in the coming weeks (Exhibit 7). In light of the improved market liquidity situation, we expect the PBoC to continue with mild liquidity drainage in coming weeks to help stabilize the money market rates."
Morgan Stanley China Economics 20100726
- Light redemption pressures explained the net withdrawal: "The PBoC issued Rmb125 bn of bills (Rmb45 bn of 1-year bills last Tuesday and Rmb80 bn of 3-month bills last Thursday), substantially below the issuance (Rmb240 bn) of the week before last. Much
lighter redemption pressure (Rmb39 bn last week vs. Rmb190 bn in the week before last) resulted in a net liquidity withdrawal of Rmb86 bn from bill issuance last week (Exhibit 3). Meanwhile, the PBoC sold Rmb50 bn of 91-day repo. Given Rmb35 bn of matured repo, the
PBoC drained a further Rmb15 bn of liquidity from repo operations. The reference yields of 3-month and 1-year PBoC bills remained unchanged at 1.57% and 2.093%, respectively (Exhibit 4). Largely bound by the reference yield of the 3-month bill rate, the 91-day repo rate stayed constant at 1.57% as well (Exhibit 6)."
- Further easing liquidity: "Interbank liquidity has continued to ease, with the 1-month SHIBOR sliding to 2.301% from the recent peak at 4.053% (Exhibit 2). This noticeable correction may have reflected the following factors: 1) liquidity injection by the PBoC; 2) completion of mid-year inspection on loan/deposit ratio; and 3) possible return of capital inflows."
- What’s next: "Given the relatively light redemption pressures, the scale of bill issuance and repo sales should be modest in the coming weeks (Exhibit 7). In light of the improved market liquidity situation, we expect the PBoC to continue with mild liquidity drainage in coming weeks to help stabilize the money market rates."
Morgan Stanley China Economics 20100726
A Rocky Road Towards Asia FX Appreciation
- Asia FX in a range: NT negative headwinds are offset by other (4) factors — "With market/Asian CBs adjusting for slower growth momentum, and no real catalyst to reverse sentiment, we think near-term (NT) headwinds for Asian FX will remain high. However, the presence of medium-term support factors should help provide offsetting bids to Asia FX, translating to more meaningful appreciation once double-dip fears ease and risk stabilizes."
- No 1#: Asia’s strong public finances support debt-related capital inflows —
"Inflows into Asian credits and LC bonds have been very resilient despite periods of risk aversion, and these trends should continue. Asia’s fiscal and external liquidity trends should remain relatively solid, prompting more upward ratings momentum (e.g. CH, HK, ID, IN (LC rating), and SL) vs. downgrade momentum in Europe."
- No 2#: Positive and rising rate differentials should be supportive of Asian FX —
"Asian CBs will likely continue to gradually de-link from the Fed given growth dynamics, lack of deflationary forces, unimpaired financial sector (credit growth still picking up in IN, ID, MY, SG, and TW), and bias by some CBs to use monetary policy to address asset bubbles. China is an exception - we now expect no hike this year."
- No 3#: Asia growth outperformance should continue to boost capital flows —
"While growth momentum in the Asia region is slowing, relative growth differential vs. rest of the world is unlikely to meaningfully change – net direct investment to the region is forecast to recover significantly this year, while inflows into EM funds (vs. developed markets) have remained resilient."
- No 4#: Asia FX undervaluation persists as external surpluses to grow — "Asia’s
official FX reserves are still close to their historic highs (despite revaluation loss on EUR in May) and will likely resume their climb in 2H 2010. Cost/risks of suppressing currencies will likely rise over time and pressure on China towards faster RMB appreciation is unlikely to cease."
- Macro Strategy — "1) Asia FX – we prefer IDR (high carry, low vol), KRW (cheap) and remove long SGDMYR (SGD at topside of the NEER band); 2) Asia rates – see some room for curve flattening in Indonesia; 3) Asia (sovereign) credits – look for opportunities to go long Sri Lanka$ amid expectations of new supply as a catch-up play vs. the strong rally in Indon$ and ROP$s."
Citigroup Asia Macro Strategy Outlook 20100723
- No 1#: Asia’s strong public finances support debt-related capital inflows —
"Inflows into Asian credits and LC bonds have been very resilient despite periods of risk aversion, and these trends should continue. Asia’s fiscal and external liquidity trends should remain relatively solid, prompting more upward ratings momentum (e.g. CH, HK, ID, IN (LC rating), and SL) vs. downgrade momentum in Europe."
- No 2#: Positive and rising rate differentials should be supportive of Asian FX —
"Asian CBs will likely continue to gradually de-link from the Fed given growth dynamics, lack of deflationary forces, unimpaired financial sector (credit growth still picking up in IN, ID, MY, SG, and TW), and bias by some CBs to use monetary policy to address asset bubbles. China is an exception - we now expect no hike this year."
- No 3#: Asia growth outperformance should continue to boost capital flows —
"While growth momentum in the Asia region is slowing, relative growth differential vs. rest of the world is unlikely to meaningfully change – net direct investment to the region is forecast to recover significantly this year, while inflows into EM funds (vs. developed markets) have remained resilient."
- No 4#: Asia FX undervaluation persists as external surpluses to grow — "Asia’s
official FX reserves are still close to their historic highs (despite revaluation loss on EUR in May) and will likely resume their climb in 2H 2010. Cost/risks of suppressing currencies will likely rise over time and pressure on China towards faster RMB appreciation is unlikely to cease."
- Macro Strategy — "1) Asia FX – we prefer IDR (high carry, low vol), KRW (cheap) and remove long SGDMYR (SGD at topside of the NEER band); 2) Asia rates – see some room for curve flattening in Indonesia; 3) Asia (sovereign) credits – look for opportunities to go long Sri Lanka$ amid expectations of new supply as a catch-up play vs. the strong rally in Indon$ and ROP$s."
Citigroup Asia Macro Strategy Outlook 20100723
The global air transport sector – emerging like a phoenix from the ashes
- "The image of phoenix, the mythical bird that burns to ashes and then re-emerges again and again, has already been cited frequently and is therefore undoubtedly far from original. It does, however, perfectly describe recent developments in the global air transport sector. After all, the industry has recovered from its severe crisis with impressive speed, is posting high growth rates once again and has in the meantime even broken previous traffic volume records. Nevertheless, not all is rosy in the garden as the aviation sector continues to face serious problems despite the economic upturn."
DeutscheBank Talking Point 20100726
DeutscheBank Talking Point 20100726
Readings
'Systemic risk' theory gains in stature as way to prevent the next bubble - WaPo
Marc Faber: Sit Still, This Is Going to Hurt - Motley Fool
Cash as the real real option, to do anything - Worthwhile Canadian Initiative
Cash piles - Free Exchange
Analysis: New safe-haven currencies shine amid debt fears - Reuters
Temp Jobs Gain as Uncertainty Reigns - Wall Street Journal
The folly of the anti-stimulus consensus - Guardian
The Budget Deficit Chicken Hawks - Truthout
Is America facing an increase in structural unemployment? - Economist
New autoworkers make half as much as veterans in same plant - WaPo
The political genius of supply-side economics - FT Wolfexchange
Marc Faber: Sit Still, This Is Going to Hurt - Motley Fool
Cash as the real real option, to do anything - Worthwhile Canadian Initiative
Cash piles - Free Exchange
Analysis: New safe-haven currencies shine amid debt fears - Reuters
Temp Jobs Gain as Uncertainty Reigns - Wall Street Journal
The folly of the anti-stimulus consensus - Guardian
The Budget Deficit Chicken Hawks - Truthout
Is America facing an increase in structural unemployment? - Economist
New autoworkers make half as much as veterans in same plant - WaPo
The political genius of supply-side economics - FT Wolfexchange
European Banks Stress Tests: Delight in Details, Headlines Underwhelm
- Headlines vs. Details – "CEBS Stress Tests were announced 23 July. The headlines – number of weak banks (7 out of 91), capital deficit (€3.5 billion), definition of capital (Tier 1 not equity Tier 1), stress of the trading book only for government bonds – are underwhelming. But positives are in the details: CEBS provided a lot of data, in a systematic way, including on banks' sovereign exposures. And aggregate credit loss assumptions and pre-provision profits look sensible."
- Winners & Losers – "Looking at the change in Tier 1 capital ratios between the reported 2009 and the 2011 stressed result, the best performing big banks are from the UK, Spain and the Nordic region. Barclays leads the large caps, with Santander and BBVA high up in the table. Nordea, Intesa, Lloyds and BNP Paribas round out the large caps in the top quartile. If we use absolute stressed Tier 1 levels, the UK and Nordic banks again feature at the top of the table. And French are best of the Euro area."
- Stressing Sovereign Risks – "One obvious omission in the CEBS test is that it explicitly only considers sovereign shocks in the trading book. But the data on sovereign exposure provided by CEBS allows us to carry out our own stress test: capital deficit increases to €15 billion at 24 banks. If we were to use a 6% equity Tier 1 ratio (which is harsher that the US tests’ 6% T1 and 4% equity T1) the capital deficit rises to €63 billion. Note that six of the 91 banks did not give us their sovereign exposures, all from Germany, including Deutsche Bank."
- Sensible Assumptions on Credit, PPP – "While the macro-economic assumptions do not appear to be too tough, the credit loss assumptions do seem sensible. A stressed loss assumption of about double our 2010-11 base case forecast and more in-line with the c4ppt GDP drop in 2009 than the less than c1ppt cumulative drop assumed for 2010-11 stressed. And the aggregate CEBS stressed loss number is almost identical to our early June stress test of a dozen Euro banks. Similarly, CEBS' aggregate stressed pre-provision profit for these dozen banks is almost identical to our modelling."
- Rallying Into The Release – "Euro Area bank stocks are up c25% from their early June lows, while bank credit, as measured by iTraxx indices, have recovered about two-thirds of their sell-off during 2Q10. The positive recent momentum may be reinforced by the CEBS Stress Test release, especially due to the positives on information and transformation. We would look to Euro area stocks which have been laggards ytd and score well in the CEBS test, such as SocGen, Intesa and BBVA (all down c25% despite the recent bounce). Others are up more sharply recently, such as the Greeks, mid-cap Spanish and Santander, where we would
worry more about travelling and arriving."
Citigroup European Banks Stress Tests 20100726
- Winners & Losers – "Looking at the change in Tier 1 capital ratios between the reported 2009 and the 2011 stressed result, the best performing big banks are from the UK, Spain and the Nordic region. Barclays leads the large caps, with Santander and BBVA high up in the table. Nordea, Intesa, Lloyds and BNP Paribas round out the large caps in the top quartile. If we use absolute stressed Tier 1 levels, the UK and Nordic banks again feature at the top of the table. And French are best of the Euro area."
- Stressing Sovereign Risks – "One obvious omission in the CEBS test is that it explicitly only considers sovereign shocks in the trading book. But the data on sovereign exposure provided by CEBS allows us to carry out our own stress test: capital deficit increases to €15 billion at 24 banks. If we were to use a 6% equity Tier 1 ratio (which is harsher that the US tests’ 6% T1 and 4% equity T1) the capital deficit rises to €63 billion. Note that six of the 91 banks did not give us their sovereign exposures, all from Germany, including Deutsche Bank."
- Sensible Assumptions on Credit, PPP – "While the macro-economic assumptions do not appear to be too tough, the credit loss assumptions do seem sensible. A stressed loss assumption of about double our 2010-11 base case forecast and more in-line with the c4ppt GDP drop in 2009 than the less than c1ppt cumulative drop assumed for 2010-11 stressed. And the aggregate CEBS stressed loss number is almost identical to our early June stress test of a dozen Euro banks. Similarly, CEBS' aggregate stressed pre-provision profit for these dozen banks is almost identical to our modelling."
- Rallying Into The Release – "Euro Area bank stocks are up c25% from their early June lows, while bank credit, as measured by iTraxx indices, have recovered about two-thirds of their sell-off during 2Q10. The positive recent momentum may be reinforced by the CEBS Stress Test release, especially due to the positives on information and transformation. We would look to Euro area stocks which have been laggards ytd and score well in the CEBS test, such as SocGen, Intesa and BBVA (all down c25% despite the recent bounce). Others are up more sharply recently, such as the Greeks, mid-cap Spanish and Santander, where we would
worry more about travelling and arriving."
Citigroup European Banks Stress Tests 20100726
Don't knock the Stress Test, but capital raising opportunity missed
- "The CEBS stress test result is of limited value to us as expected by the market. However, it offers new input data transparency especially on sovereign risk exposure - this is positive. Hence, with CEBS data we are able to build a JPMC Acid Test for 35 banks incl. banking book
sovereign haircut with 13 out of 35 banks falling below core T1 6% in 2011E with €8.7bn capital deficit without adjusting for €35bn of gov’t support."
- "However, the CEBS stress test is also an opportunity missed, as EU member states could have encouraged banks to raise equity i) as core Tier I ratio remains low at 7.4% 2011E in our JPMC Acid Test, and ii) to demonstrate to the debt investor ability to access the equity capital markets."
- "Why do we equity holders need happy bank debt investors? The missed equity capital raising opportunity becomes even more relevant when focusing on the upcoming material refi calendar with €245bn senior debt refi remaining (35%) compared to total 2010 €707bn outstanding FY2010 senior refi. Senior debt redemptions remain high in Eurobanks at close to €690bn in each year 2011 and 2012. In addition, within the covered bond market we have €162bn refi remaining or 36% this year."
- "Time for bank differentiation post CEBS stress test: It is interesting to witness the credit market differentiating between quality of issuer whereas Eurobanks are mainly clustered close to 1.0x 2011E NAV. We expect CoE differentiation to start to take place slowly among banks with i) well capitalized banks re-valuing to over 1.0x, and ii) high cashflow generative
banks with low P/pre-provision profits to outperform. The CEBS Stress Test is on a static balance sheet, resulting in material RWAs due to credit migration increases, which is conservative, and helpful in our analysis to differentiate between bank valuations."
- "Within the Eurobanks our preference is for IB geared private banks over credit banks with Fixed Income rates volatility high, low sovereign and traditional credit risk exposure compared to traditional banks with ongoing concern and uncertainty in respect to European traditional credit provision run-rate in 2011E. Within credit banks we prefer high cashflow
pre-provision banks with preference for non-EU exposure. Hence our top picks are: CSG, UBS, DnBNor, HSBC, UCI, SG. We remain cautious on Spanish Banks."
JPMorgan European Banks 20100726
sovereign haircut with 13 out of 35 banks falling below core T1 6% in 2011E with €8.7bn capital deficit without adjusting for €35bn of gov’t support."
- "However, the CEBS stress test is also an opportunity missed, as EU member states could have encouraged banks to raise equity i) as core Tier I ratio remains low at 7.4% 2011E in our JPMC Acid Test, and ii) to demonstrate to the debt investor ability to access the equity capital markets."
- "Why do we equity holders need happy bank debt investors? The missed equity capital raising opportunity becomes even more relevant when focusing on the upcoming material refi calendar with €245bn senior debt refi remaining (35%) compared to total 2010 €707bn outstanding FY2010 senior refi. Senior debt redemptions remain high in Eurobanks at close to €690bn in each year 2011 and 2012. In addition, within the covered bond market we have €162bn refi remaining or 36% this year."
- "Time for bank differentiation post CEBS stress test: It is interesting to witness the credit market differentiating between quality of issuer whereas Eurobanks are mainly clustered close to 1.0x 2011E NAV. We expect CoE differentiation to start to take place slowly among banks with i) well capitalized banks re-valuing to over 1.0x, and ii) high cashflow generative
banks with low P/pre-provision profits to outperform. The CEBS Stress Test is on a static balance sheet, resulting in material RWAs due to credit migration increases, which is conservative, and helpful in our analysis to differentiate between bank valuations."
- "Within the Eurobanks our preference is for IB geared private banks over credit banks with Fixed Income rates volatility high, low sovereign and traditional credit risk exposure compared to traditional banks with ongoing concern and uncertainty in respect to European traditional credit provision run-rate in 2011E. Within credit banks we prefer high cashflow
pre-provision banks with preference for non-EU exposure. Hence our top picks are: CSG, UBS, DnBNor, HSBC, UCI, SG. We remain cautious on Spanish Banks."
JPMorgan European Banks 20100726
Happy now?: Four questions on the European banks’ stress test
- Question 1: Will the sector bounce strongly? "The US bank sector surged 70% around
the time of its stress test, but we do not think Europe will follow suit. The US stress test proved the catalyst for massive equity recapitalisations, coincided with an economic recovery, and was performed on a sector trading one-third below its long-run valuation. We believe the July 2010 European stress test is unlikely to lead to any meaningful capital raising, was released at a time of growing economic uncertainty, and has been conducted on a sector trading within 10% of its long-run valuation."
- Question 2: Is the test credible? "We give a qualified “yes”. Two year loan losses of 3.6%
represent 30-year highs for the sector but are dwarfed by the US’s 9% stressed level. Whilst such comparisons can be misleading, there does appear to be more individual bank “wiggle room” for European banks, which we see as disappointing. In addition, pre-provision profit assumptions feel optimistic. There are substantial differences by country; in Spain, for example, the assumption is for a cumulative decline in commercial property prices of 55%, yet for just 7% in Greece. This may reflect an element of delayed recognition in Spain. The absence of testing for full sovereign default is understandable, but new disclosure allows investors to conduct their own stress test."
- Question 3: Who was the stress test done for? "Our view is not for us in equities, but for the debt markets. Whilst the US test last year was conducted in the shadow of nationalisation risk, this test was prompted by a renewed funding crisis. Indeed shareholders’ equity has not even been tested. So what is the debt market likely to make of it? We see a “cautious welcome” as the likely view."
- Question 4: Will funding costs come down? "This is perhaps the key question. To the
extent that the market feared what it did not know, the full sovereign risk disclosure is likely to be a positive. However, much of the sector’s funding pressure is, in our view, structural: too many balance sheets (banks and sovereigns) chasing too few funds. With or without a stress test, Europe’s banks still have €1.5trn of debt maturing by 2012, as well as the need to repay over €500bn to central banks. Well-capitalised banks with limited exposure to SGIIP (Spain, Greece, Ireland, Italy, Portugal) sovereigns, such as HSBC and BNP Paribas, should continue to be best placed to benefit. Of the big caps in Europe, BBVA appears to us the weakest positioned. We suspect structurally higher overall funding costs – and the differential in costs among banks – are set to remain."
Barclays Equity Research 20100726
the time of its stress test, but we do not think Europe will follow suit. The US stress test proved the catalyst for massive equity recapitalisations, coincided with an economic recovery, and was performed on a sector trading one-third below its long-run valuation. We believe the July 2010 European stress test is unlikely to lead to any meaningful capital raising, was released at a time of growing economic uncertainty, and has been conducted on a sector trading within 10% of its long-run valuation."
- Question 2: Is the test credible? "We give a qualified “yes”. Two year loan losses of 3.6%
represent 30-year highs for the sector but are dwarfed by the US’s 9% stressed level. Whilst such comparisons can be misleading, there does appear to be more individual bank “wiggle room” for European banks, which we see as disappointing. In addition, pre-provision profit assumptions feel optimistic. There are substantial differences by country; in Spain, for example, the assumption is for a cumulative decline in commercial property prices of 55%, yet for just 7% in Greece. This may reflect an element of delayed recognition in Spain. The absence of testing for full sovereign default is understandable, but new disclosure allows investors to conduct their own stress test."
- Question 3: Who was the stress test done for? "Our view is not for us in equities, but for the debt markets. Whilst the US test last year was conducted in the shadow of nationalisation risk, this test was prompted by a renewed funding crisis. Indeed shareholders’ equity has not even been tested. So what is the debt market likely to make of it? We see a “cautious welcome” as the likely view."
- Question 4: Will funding costs come down? "This is perhaps the key question. To the
extent that the market feared what it did not know, the full sovereign risk disclosure is likely to be a positive. However, much of the sector’s funding pressure is, in our view, structural: too many balance sheets (banks and sovereigns) chasing too few funds. With or without a stress test, Europe’s banks still have €1.5trn of debt maturing by 2012, as well as the need to repay over €500bn to central banks. Well-capitalised banks with limited exposure to SGIIP (Spain, Greece, Ireland, Italy, Portugal) sovereigns, such as HSBC and BNP Paribas, should continue to be best placed to benefit. Of the big caps in Europe, BBVA appears to us the weakest positioned. We suspect structurally higher overall funding costs – and the differential in costs among banks – are set to remain."
Barclays Equity Research 20100726
European bank stress test results: A systemic positive, despite the oversights
- "We were biased to being long risk going into the tests: expectations were low, worst-case capital holes could, in our view, be filled within the scope of existing facilities, transparency would be a major positive, and weak banks would be forced to recapitalize. We believe the tests fell short in many respects, but we nevertheless have a positive view of the outcome. On the one hand, the tests exceeded expectations concerning disclosure of sovereign bond holdings. The majority of banks should be able to fund more cheaply. On the other hand, the tests were not stringent enough. Investors will perceive the banks that barely passed to be
undercapitalized; we expect poor spread performance from those names and they are likely to continue to face high funding costs."
- "In our view, the positives (creation of transparency) outweighs the negatives (too little forced capitalization). The majority of European financial risk in credit indices has been issued by banks that cleared the tests by a wide margin, where capitalization is not a concern, and where transparency is a key positive. The risk to our view is that, while systemic fears are likely to subside, the soft-handedness of the stress tests are likely to leave concerns over the capitalisation of some specific institutions – and that these idiosyncratic problems become so large that they overwhelm the systemic benefits."
Barclays Credit Research 20100726
undercapitalized; we expect poor spread performance from those names and they are likely to continue to face high funding costs."
- "In our view, the positives (creation of transparency) outweighs the negatives (too little forced capitalization). The majority of European financial risk in credit indices has been issued by banks that cleared the tests by a wide margin, where capitalization is not a concern, and where transparency is a key positive. The risk to our view is that, while systemic fears are likely to subside, the soft-handedness of the stress tests are likely to leave concerns over the capitalisation of some specific institutions – and that these idiosyncratic problems become so large that they overwhelm the systemic benefits."
Barclays Credit Research 20100726
First look at 2012
- Looking out to 2012 "We expect the global recovery to continue in 2012 and for the pace of growth to pick up."
- United States Further out: a brighter outlook "Near term there is some weakness but beyond the year ahead we see stronger growth."
- Europe The slow and hazardous road to recovery "Ongoing financial market tensions and restraining effects of fiscal consolidation are why."
- Japan Lowering forecasts "We now see 2011 growth of 1.5%, given increasingly difficult conditions for exporters."
- Asia Rebalancing in 2011-12 "We see strong domestic-led growth, with China growing more than 10% again in 2012."
- LatAm: Strong growth set to continue "We see growth in 2012 returning to trend after a weaker 2011."
- United States Understanding the ECRI "The ECRI index is signaling recession, other leading indicators are not. We explain why."
- United States Forecast dispersion and data surprises "For some indicators the dispersion of consensus forecasts contains information."
- South Korea Policy remains accommodative "We expect the BOK to keep hiking rates gradually, reaching 4% by H1 2012."
Nomura Global Weekly Economic Monitor 20100723
- United States Further out: a brighter outlook "Near term there is some weakness but beyond the year ahead we see stronger growth."
- Europe The slow and hazardous road to recovery "Ongoing financial market tensions and restraining effects of fiscal consolidation are why."
- Japan Lowering forecasts "We now see 2011 growth of 1.5%, given increasingly difficult conditions for exporters."
- Asia Rebalancing in 2011-12 "We see strong domestic-led growth, with China growing more than 10% again in 2012."
- LatAm: Strong growth set to continue "We see growth in 2012 returning to trend after a weaker 2011."
- United States Understanding the ECRI "The ECRI index is signaling recession, other leading indicators are not. We explain why."
- United States Forecast dispersion and data surprises "For some indicators the dispersion of consensus forecasts contains information."
- South Korea Policy remains accommodative "We expect the BOK to keep hiking rates gradually, reaching 4% by H1 2012."
Nomura Global Weekly Economic Monitor 20100723
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