Have Asian Markets Finally Turned? December 2013 A very challenging - PowerPoint PPT Presentation

Have Asian Markets Finally Turned? December 2013

A very challenging summer

Asia has suffered a massive de-rating – and being a growth investor in markets that are de-rating is no fun Source: GaveKal Capital Limited 3 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

At the same time, over the past year, diversification across asset classes did not work Source: GaveKal Capital Limited 4 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Does Asia’s deserve its de -rating?

Asia – A out-of-favor region Three major concerns: 1. Is Abenomics over? 2. Is the much-talked-about hard landing in China imminent? 3. Are other Asian economies heading into a crisis? Source: GaveKal Capital Limited 6 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

The first arrow is still on … Japan’s monetary base continues to skyrocket Source: GaveKal Capital Limited 7 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Cyclical recovery continues Net Capex Ratio (% Sales) and Nikkei Average Industrial Production and Shipments BoJ Tankan Survey (Business Conditions DI) Average Outstanding Bank Lending (Banks and Shinkin Banks) Source: GaveKal Capital Limited 8 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Cyclical recovery continues Retail Sales CPI Average Office Vacancy Rates New Housing Started Source: GaveKal Capital Limited 9 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

The third arrow – A free option • ¥2 trillion tax breaks capital investment and corporate income • Encourage industrial consolidation which includes consolidation of capacity and retrenchment of labors • Trade liberalization which leads to more efficient land use; possible rice subsidies cut on Trans- Pacific Partnership (“TPP”) deal • Deregulation of property investment and medical services in major urban areas • Creation of NISA accounts could lead to large flows into equities Source: GaveKal Capital Limited 10 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

China : Again No Hard Landing

Again no hard landing Source: GaveKal Capital Limited 12 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Inventory restocking Source: GaveKal Capital Limited 13 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Export recovery : G3 demand for China exports Source: GaveKal Capital Limited 14 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Why this downturn is no worse than previous ones? Source: GaveKal Capital Limited 15 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Simultaneously, no more excessive credit-driven cycle Source: GaveKal Capital Limited 16 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Market outlook : Expect re-rating of MSCI China in coming 6 months on growth acceleration and reforms Source: GaveKal Capital Limited 17 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Is reform dead? No Reform • #1 Deregulation Providing private firms with much greater access to financing and lower funding costs (by 5-6ppts) • Raising SOE’s net dividend payout ratio from 0.4% to about 30% • Opening up trans- pacific partnership (“TPP”) #2 Domestic Reforms • #3 Financial Liberalization Interest rate deregulation • Capital account liberalization – achieving basic convertibility in 3-5 years and other financial reforms • #4 Land and Hukou Reforms Granting titles of land use rights to all rural families in the coming five years • #5 SOE Reforms Breaking up large SOEs by separating their social functions from commercial functions • #6 Property Tax Stabilizing property market • #7 Social Security Reforms Consolidating the civil servant pension system with the enterprise pension system • Developing a municipal bond market – addressing LGFV risk #8 Municipal Bond Market Source: GaveKal Capital Limited 18 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Other Asian Markets : Some Adjustments But No Crisis

Another liquidity shock ... Source: GaveKal Capital Limited 20 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

But Asia is in much better shape Source: GaveKal Capital Limited 21 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

... With external positions mostly well covered Source: GaveKal Capital Limited 22 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Adjustments through currency devaluation Asian Currencies 2013 Performance (vs US$) JPY AUD KRW SGD INR MYR IDR THB PHP -16 -14 -12 -10 -8 -6 -4 -2 0 2 (%) Asian Currencies 2013 Performance (vs US$) Source: Bloomberg (YTD as of 5 Nov 2013) Source: GaveKal Capital Limited 23 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

But stock markets hold up in local currency terms Asian Stock Markets 2013 Performance (Local currency term) TOPIX INDEX (TOKYO) S&P/ASX 200 INDEX KOSPI INDEX Straits Times Index STI HANG SENG INDEX HANG SENG CHINA ENT INDX NSE CNX NIFTY INDEX FTSE Bursa Malaysia KLCI JAKARTA COMPOSITE INDEX STOCK EXCH OF THAI INDEX PSEi - PHILIPPINE SE IDX -10 -5 0 5 10 15 20 25 30 35 40 (%) 2013 Performance (Local currency term) Source: Bloomberg (YTD as of 5 Nov 2013) Source: GaveKal Capital Limited 24 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

An under-estimated development which will have a massive impact on the region: the internationalization of the RMB

The RMB is the best performing currency of past three years Source: Bloomberg (YTD as of 9 Nov 2013) Source: GaveKal Capital Limited 26 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Dim-Sum bonds have been a beacon of stability – In fact, RMB bonds remain the asset of choice to diversify risk GCFIF (USD) Since Inception 115 110 105 100 95 90 Feb-12 Jun-12 Jul-12 Aug-12 Jan-13 Feb-13 Jun-13 Jul-13 Aug-13 Mar-12 Apr-12 May-12 Sep-12 Oct-12 Nov-12 Dec-12 Mar-13 Apr-13 May-13 Sep-13 Oct-13 GCFIF (USD) HSBC Offshore RMB Investment Grade Total Return (USD) Barclays US Aggregate Government -Long - Index Source: GaveKal Capital Limited 27 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

First, there was the trauma of the 2008-09 crisis – a wake-up call for China on its dependency on the US$ Source: GaveKal Capital Limited 28 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

China’s goal is also to move up the value chain – this is another deflationary force. China is allowing emerging markets to industrialize on the cheap! Source: GaveKal Capital Limited 29 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

As a result, RMB is already in top 10 currencies… while capital controls are still on! Source: GaveKal Capital Limited 30 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

As China tries to replicate within the emerging market world what Germany did in Europe in the 1970s, RMB bonds are to portfolios what the Bunds of the 1970s Source: GaveKal Capital Limited 31 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

Of course, this means more currency volatility… Source: GaveKal Capital Limited 32 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

But it also makes for a great risk-reward trade Source: GaveKal Capital Limited 33 Confidential to recipient; not for reproduction or redistribution. Please refer to final pages for Important Disclosures.

From front-running the Chinese to front-running the Japanese?