Turmoil and Hope -APAC, Japan & ASEAN Trends – Sept. 20th 2015

Turmoil and Hope -APAC, Japan & ASEAN Trends – Sept. 20th 2015

While the Asian financial storm is far from being over, the FED recently decided not to hike up the interest rates as the conditions in the global economy have changed dramatically since the last Federal Open Market Committee meeting.

 Federal Funds Rate vs. Bank of  England  Base RateRates

The Shanghai Stock Exchange Index (SSE) keeps maintaining its downward trend, losing up to 15% in the last 30 days, reaching the lowest value of 2927.25 in Aug 26. Following the strong financial measures adopted from the Chinese government along with a positive response from the US regarding the interest rates, analysts would have expected a slight upward change in the Chinese stock market that, however, did not happen, highlighting investors’ concerns about China slowdown and Yellen’s warnings about weaker global growth perspectives. A Fed interest rate hike would increase the attractiveness of US dollar denominated assets and thus generate capital outflows from the China and Emerging Markets towards Wall Street.

 Shanghai 1 M

Japanese counterparts seems to be reluctant to changes as Abe gets reelected and uncertainty regarding structural reforms (Abenomics’ third arrow) still persists. This position is shared by Standard & Poor’s who, on Sept 16, downgraded Japan from AA- to A+. The uncertainty is shown as well in the NIKKEI, where high volatility was registered  in the last weeks (+7,5% Sept 9). The USD/JPY pair, In the last month, traded in the ¥ 120-123 range and at the moment one dollar is worth  ¥ 120.07. The release of the Japanese National Consumption Index due the next week, might affect the exchange rate, and, if the preliminary results for inflation of 0,1% (against the 2,0% target) were to be confirmed, further stimulus from the BoJ might become reality. This scenario will involve a further weakening of the JPY.

 Tokyo, Nikkei  225 1Y PerformanceN225

Looking beyond those two giants, other Asian countries are on the rise. In fact, several experts strongly believe that the ASEAN (Association of Southeast Asian Nations) will be the new BRICS. While BRICS economies struggle, as Brazil was recently downgraded to junk bond (BB+) from S&P along with the Russian Ruble losing more than half of its value (USD/RUB +70% 1y), one of the most prominent ASEAN’s country, Malaysia, gained a + 6,02% (1M) in FTSE Bursa Malaysia KLCI Index. This negative correlation ( Shanghai Index 1 M -18.34%, KLCI Index 1 M +6%) shows how ASEAN economies are getting more and more independent from other emerging markets.

Kuala Lumpur, FTSE KLSE, 1Y PerformanceKLSE

Furthermore, recent political and economic reforms strongly support this view as well. In fact, ASEAN countries have recently established an “Asian Region Funds Passport” that will provide a multilaterally agreed framework to facilitate the cross border marketing of managed funds across participating economies in the Asia region. This partnership will enhance the expansion of the asset management industry in the region and further tighten the connections between these rising economies.

By

Ludovico Buffo, Master Student

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The Chinese Turmoil: Intervention or Resurrection?

The Chinese Turmoil: Intervention or Resurrection?

China, the leading country of the BRICS , seems to be experiencing a slowdown.  Despite many experts claim that China’s GDP will rise by $7 trillion in the next decade (the equivalent of “two more Chinas”), Chinese manufacturing was dragged down by a weaker demand for Chinese exports down to the 12 months lowest level of 49.2 in April 2015. However, the main questions remains: how does this correlate with the recent Chinese stock market crash? Economists say it does not.

Shanghai and Shenzhen, the two Chinese stock markets, strongly differs from their global counterparts in terms of investors. In fact, Individual investors account for the 80% of the stock markets, as there is a weak presence of institutional investors. The rising Chinese middle class preferred to invest its savings into the bullish Chinese stock markets as stocks prices have constantly appreciated in the last years. (CSI 300 Index + 84,12% 5 yr). These peculiarities of the market along with the spread use of margin trades (Borrowing money to invest in the stock exchange), makes it clear that the Bubble had to burst soon.

With the Chinese stock markets losing up to $4 Trillion (15 times Greece’s GDP) and going down by 34% from its peak in June, a strategy was needed. After blaming US Investment Banks for bearish recommendations on Chinese stocks, China’s government, central bank and regulators have closely worked upon measures to prop up the stock prices in a very rapid way. On the first place, an unexpected interest-rate cut took place in order to stimulate the liquidity as well as an order for national brokers to pump up government-backed funds in the markets. These financial measures along with a freeze on new IPOs and a stricter regulation on margin trades, although, had only a marginal effect in the CSI 300 index that caught up only by 3,5% from its lowest peak of July 8, while reporting, last week on July 27, the biggest day drop since 2007, -8.43%.

Shanghai

At the moment, the problem regards the stock market only but there is a huge risk that it might turn into a new financial crisis. In fact, so many investors took out loans with financial brokers using stocks as collateral (margin trading) and this trend could affect their capability to pay off their loans. For this reason, 1400 companies were given permission to suspend trading in their shares in order to preserve their value.

Signals of a weakening momentum in the Chinese real economy came in the weekend from the Purchasing Manager Index, which measures the manufacturing activity. The PMI settled July at 50.0 below the consensus at 50.2 and on top of the benchmark at 50.0 that distinguish expansion from contraction. All those signals are driving down all the major global commodities, Copper and Oil on top of the list, while all the commodity currencies are experiencing a brutal depreciation against the dollar, threatening global growth projections.

Chinese PMI

By:

Ludovico Buffo, Master Student

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A bubble about to burst? – APAC Overview

A bubble about to burst? – APAC Overview

The monetary expansion policy of the People’s Bank of China fueled the Shanghai, Shenzhen, and ChiNext indices of 95%, 198%, and 383%, respectively, since January 2013. Chinese stock-market capitalization grew from 44% of GDP at the end 2012 to 94% of GDP earlier this month[1], but at the same time the Chinese GDP growth, equal to 7,4%, has slightly slowed at the lowest level since the 1990 and the average ratio price to earnings is 26.

It seems clear that there are enough evidences that prove the presence of financial factors that are threatening the economical rebalance of Chinese economy: from export oriented economy to consumptions. This is the issue. At the beginning of financial crisis, the Chinese political establishment chose to fuel the economy by increasing the public spending and making easier to borrow money.

Therefore, the private debt raised from 100% in 2002 to 200% in 2014[2] and the PBOC tried to stop it by raising the refinancing interest rate until started the first bankruptcies and the slowdown of Chinese economy. The PBOC knows that the economy needs a monetary stimulus but the more the money supply increase the more grows the probability to create a financial bubble.

In order to minimize the possible negative effects of a hard slowdown, the Government is trying to boost the economy by cutting the refinancing interest rate (from 6.5% to 5.0%), deregulating the financial markets (e.g. exchange rate fluctuating) and privatizing most of public companies. The issue is that the more the money supply increase the more the financial bubble grow.

It is sure that the Government will have to face the dichotomy between autocracy and capitalist markets, but how it will face the issue will determine the feature of the Chinese economy slowdown[3]. Anybody should not underestimate the huge challenge to change the Chinese economy into a fully capitalist system, as the MSCI index committee decision to do not list the Shenzhen A shares (for some regulatory framework) show.

Last but not least, the main market mover it will be the dual listing between Shenzhen and Hong Kong stock exchange.

ChiNext

PBOC Interest Rate

By:

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Roberto Vacca, Master Student

[1] Cf. “Channeling China’s Animal Spirits”, by Xiao Geng and Andrew Sheng 26/05/2015, available on http://www.project-syndicate.org/commentary/china-economic-growth-by-andrew-sheng-and-geng-xiao-2015-05
[2] See “China’s debt-to-GDP level”, by S.R. 16/07/2014, available on http://www.economist.com/blogs/freeexchange/2014/07/china-s-debt-gdp-level
[3] See “Nouriel Roubini: China Slowdown May Be Sharp”, by Bloomberg 04/02/2015, available on http://www.bloomberg.com/news/videos/2015-02-04/china-slowdown-may-be-sharp-nouriel-roubini

Is Japan economy really catching up? – APAC Overview

Is Japan economy really catching up? – APAC Overview

While Europe is still at the center of the financial news as Grexit slowly becomes more probable, many strong positive signals are coming from the third biggest world economy, Japan.  Following the great crisis, Japanese economy did face a period of deflation due to steady prices and shortage of investments.

In order to improve the economic outlook, Shinzo Abe, Japan’s Prime Minister, elaborated an economic plan to face deflation. The so-called “Abenomics” is based upon three arrows: fiscal stimulus, monetary easing and structural reforms. An increase in taxation along with a massive monetary QE followed by important reforms are the way in which Japan is trying to comes out from the internal economic crisis. While there is a consensus for the modus operandi chosen for the first two “arrows”, very few information are known about how Abe would like to proceed with the structural reforms.

This piece of information ought to be important for investors who focus on the long term, including but not limited to pension funds. In fact, worldwide analysts from the major banks believes that the recent GDP growth has to be accounted mainly to the monetary policy instead than to a new economics cursus. In fact, at the moment, QE amounts to nearly 60% of Japan GDP and this situation seems not to be sustainable in the long term.

The NIKKEI, last week, touched its 15 years peak as the stock market is absorbing the huge amount of liquidity, but are we in front of a new financial bubble? What are the risks of such a spread use of monetary QE among the major economies? Nobody knows.

Nikkei

By

Ludovico Buffo

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