2018: A scorecard (what we got right and what we got wrong)

Transcription

1 Economics & Strategy Weekly 2018: A scorecard (what we got right and what we got wrong) DBS Group Research 14 December 2018 Taimur Baig Chief Economist taimurbaig@dbs.com Radhika Rao Economist radhikarao@dbs.com Despite optimism about growth, we felt the good news was fully priced in with respect to asset markets. Our view was that a goldilocks 2017 was going to be a tough act to follow, whether it was equities or fixed income. Indeed, for all asset classes, it has been a challenging year. We expected volatility to bounce back in 2018, which took place in two phases (February-April, and since October), reflecting a variety of geopolitical events, steady tightening of liquidity, and concerns about an impending slowdown in We expected the USD to recover in 2018 after its weak performance in 2017, which turned out to be prescient, with the DXY rallying by nearly 10% since the mid-february bottom. Please direct distribution queries to Violet Lee violetleeyh@dbs.com We take stock of our calls made a year ago. We were right to expect strong growth momentum to persist for most of the year; our long USD and short rates duration calls were right. We were too optimistic about equities and too sanguine about INR and IDR. This is our last Weekly in We wish you happy holidays and all the best for the new year. What we got right; what we got wrong Here at Economics and Strategy, we tend to be forward looking, but as this eventful year draws near its end, it is time for us to take stock. What was our thought-process a year ago; what did we get right and what did we get wrong? Looking at our December 2017 outlook, Strong Tailwind, we make the following observations: We were optimistic about growth, expecting the US tax cut momentum to boost demand further in If anything, our 2.5% forecast for the US has turned out to be too conservative, with the largest economy in the world poised to deliver 3% growth this year. Global growth is slated to print over 3.5%, same as 2017, despite a sharper-than-expected slowdown in China and some momentum loss in EU and Japan. We thought that blessed with strong balance sheets, Asian FX would do better than EMFX in general even as oil and rates climbed. This turned out to be only somewhat right, as the Indian rupee succumbed to current account concerns, and is on course to be one of the worst performing EM currencies in The Indonesian rupiah also underwent considerable volatility around commodity price fluctuations. At the same time, a number of Asian currencies were the best performers (in relative terms) among EMFX, particularly the THB, SGD, MYR, and TWD. Our concerns about a likely crisis in credit markets thankfully did not materialise, although AUMs of credit funds fell sharply, and returns were negative. We remain worried about wider credit distress going into 2019, both in EM and DM. We got our Asian equities call wrong, as trade wars in particular and China concerns in general weighed heavily on Asia s markets. Indeed, the sell-off has been so deep that we think 2019 will bring back value-seeking investors to Asia. For more, read our 2019 Outlook: Fading Momentum Taimur Baig Refer to important disclosures at the end of the report

2 Rates: to be continued in 2019 FX: USD underpinned on slower global growth 2018 will be remembered as a challenging year with most asset classes registering negative returns. US Treasuries, the traditional safe haven, did not quite perform up to the mark as the market frets about Fed hikes. Emerging market govvies did badly as a combination of higher USD rates and a stronger USD bite. In Asia, twin-deficit economies (India, Indonesia and the Philippines) were compelled to hike rates aggressively to maintain financial stability. Credits and Equities were also not spared as the hangover from a frothy 2017 continued. Heading into 2019, the market will face similar lingering concerns Fed hikes & China-US trade tensions. Add a still-strong but slowing US economy into the mix and it is likely that volatility is here to stay. For Asia, the silver lining is that real rates are no longer overly low and oil prices have corrected sharply. Even as the Fed continues to normalise policy, Asia will not have to match the same pace of rate hikes. With the bulk of Asia tightening likely behind us, value-hunting is likely to kick in, probably capping yields close to their recent highs. Total returns for Asia govvies (in general) should be better in 2019 compared to That said, political risks bear watching as India, Indonesia, Thailand and the Philippines head for elections. Within the DM space, rates are all somewhat low given a prolonged period of risk aversion. USD rates are probably underestimating the Fed (pricing in just one hike in 2019). EUR rates are held down by multiple bouts of political tensions (Italy, Brexit and now France) even as the European Central Bank (ECB) scales down asset purchases. Any whiff of less-bad news would probably drive EUR rates higher. Lastly, we expect the Bank of Japan (BOJ) to continue dialling back bond purchases. Further tweaks in the 10Y yield target will be slow, but the bias is clearly towards the upside. Eugene Leow We expect the US dollar to remain supported in 2019 but its climb has become more arduous due to premature US recession fears. The flat US treasury curve (10Y vs 2Y spread) has not inverted, and even if it does, is only likely to convince the Fed of a slowdown. Unless it signals otherwise, the Fed probably prefers the terminal rate for the Fed Funds Rate (FFR) to be above 3%, in the upper half of its % neutral range. At the end of past hike cycles, the FFR was % above core inflation. Based on our forecast for US growth and CPI inflation to hold at 2.5% next year, we see more Fed hikes lifting the USD Index (DXY) above 100 in In our view, 2019 is less about a strong USD than it is about weaknesses in the DXY s main components the euro, the British pound and the Japanese yen. Apart from slower-than-expected growth, the euro is increasingly plagued by political uncertainties in its largest economies Italy, Germany and France. While the European Central Bank and the Bank of Japan have no intention to further ease policy, they have shown no urgency to lift rates in 2019 either. In the UK, the stalemate between Prime Minister Theresa May and the House of Commons has increased the odds for a disorderly Brexit in May Hence, the euro and the pound are expected to depreciate into lower ranges of and respectively. We also the see the yen weaker between 115 and 120. Two major concerns Fed hikes and China-US trade tensions will continue to worry Emerging Asian (EA) currencies in We remain more cautious than optimistic that world s two largest economies would resolve their trade differences after three months of talks. Our stress test shows that if talks fail, US tariffs could weaken the yuan to 7-8. Apart from this, export-led EA countries have become less complacent about global growth because of the slowdown in the world s largest economies US, China, Eurozone and Japan. Hence, stay defensive on EA currencies especially when trade data start to surprise on the downside. Philip Wee Page 2

3 Equities: Singapore market can still outperform The Singapore market still hovers at depressed valuation levels as it confronts a wall of worry. A global growth slowdown, the pace of Fed hikes, the end of a US market bull market and geopolitical tensions could derail the return of risk appetite for the little red dot. The Singapore economy is highly cyclical, and since the best years for global growth are already behind us, investors would have to manage their expectations accordingly. Earnings growth is likely to be at low single digits, and a PE re-rating is unlikely in this environment. We look for the STI (currently at 3111) to range between 2850 and 3250 in 1H19, mostly depending on how the China-US trade war plays out. Sectors with a defensive profile such as Consumer Goods, Plantations, REITs and Telcos should outperform in this environment. We expect FY19F earnings for the Consumer Goods sector to grow at 8-10%, driven by a mix of lower base, revenue and margin expansion. Currently trading at 30% discount to its 5-year average, we believe the sector offers stock picking opportunities for undervalued stocks with defensive earnings and strong cashflow/balance. Plantations stocks should also be supported by higher CPO prices (+6%) in the next two years. Modest CPO output expansion in Malaysia and Indonesia in 2019, post bumper crops in 2018 will help normalise the currently high CPO stockpile while CPO affordability relative to soybean oil should boost food and biofuel demand. Indonesia s B20 biodiesel programme volume delivery could provide the key upside risk to our CPO price forecast for next year. We recommend planters with a strong CPO yield outlook that should bode well for sound revenue growth and profitability performance. Singapore REITs (S-REITs) currently trade at a forward FY19/20F yield of c.6.3% with a yield spread of c.3.8%, which is in line with the historical average yield. The high absolute yield, in our view, remains attractive given the prevailing uncertainty on the macro front. Our preference is for retail and industrial sector REITS. In the near term, we expect the retail sector to deliver the fastest growth owing to the impact of inorganic growth from acquisitions and the benefits of assetenhancement initiatives. Industrial REITs, due to their higher absolute yields, provide a better buffer against the impact of rising interest rates. S-REITs should also face less pressure from oversupply. On the back of an improvement in spot rents and impact from over S$8bn worth of acquisitions made in 2018, we expect the S- REITs sector to deliver steady 2% DPU (distribution per unit) growth in 2019 and increasing by a further 2.6% thereafter. We like the Telco sector for its high dividend yield of >5%. Positive earnings surprise could come from the mobile and Pay-TV business, as well as accelerated fibre migration. Concerns over competition for the existing three Singapore telco companies should ease as the entry of the 4th player is unlikely to be a major player given its low capex spend. Incumbents may have the chance to raise pricing should the new player fail to perform. The Pay-TV business model hasn t been working well due to high contract costs paid for content and the model could change to work better for the Telcos if the content cost is changed to subscriber-based. Singapore 12-month forward PE Source: IBES global aggregate, Thomson Reuters. Note: Red lines are +1SD, average and -1SD bands Joanne Goh Page 3

4 Credit: Support for Chinese credits The past week in Asian credit was mostly around China, with primary markets continuing to be active, fairly unusual for this time of the year. Issuers took advantage of relatively benign market conditions, with issuance also driven by quotas, which would not automatically be carried forward into next year. Meanwhile, Chinese credits received support from the National Development and Reform Commission (NDRC), which announced that it would encourage AAA rated onshore corporate bond issues. The criteria laid out by the NDRC also limit the policy to companies that are better than average in the respective sectors. For example, in the property sector, eligible companies will need to have more than CNY 150 bn of assets, more than CNY 30 bn of annual revenue and debt ratios of less than 85% (liability/asset)). In addition, all companies will need a default-free track record in the last three years, no negative audit opinion in the financial statement in the report period and no violation of laws and regulations. Companies that meet the criteria can apply for a unified quota, valid for up to two years, to issue bonds. The bond issues cannot exceed 40% of the net assets of the companies. While there is no explicit mention of refinancing as a use of proceeds, we see the new policy as supportive of Chinese credits as it increases onshore funding access. Directly or indirectly, it should reduce refinancing concerns and reduce companies dependence on the offshore markets (USD bonds), at least for the leading Chinese high yield credits. It also indicates that Chinese policy makers would fine tune policy to avert major credit risks, even though such decisions may be less than ideal from a macro / sovereign perspective (e.g. delayed deleveraging). That said, while the stronger high yield Chinese credits would be better placed to raise financing, we see the weaker credits continuing to face challenges. As discussed in our 2019 outlook piece, the wall of maturities in Chinese high yield will be a key issue for markets in Despite favourable policy, it is likely that we would see greater credit stress and higher default rates in the sector next year. Neel Gopalakrishnan Page 4

5 An effective link between US tariffs and CNY China-US trade talks resume Chinese President Xi Jinping and US President Donald Trump agreed, at the G20 Summit on December 1, to a 90-day ceasefire on their tit-for-tat trade tariff war. To facilitate trade negotiations, both countries will refrain from increasing tariffs on each other s goods until March 1, The US has effectively suspended its original plan to lift the US tariff rate on USD200bn of Chinese goods to 25% from 10% from 1 January Trump has also toned down his threat to impose tariffs on the remainder USD267bn worth of China s goods. In the spirit of stress testing the impact of tariffs, already implemented or in the realms of possibility, we have devised a simple model. Back-of-the-envelope calculation on the impact of US import tariffs on the CNY Let s start with the three tranches of Chinese goods (USD50bn, USD200bn and USD267bn) that Trump has allocated for his import tariffs. The weighted tariff of each tranche is the product of its share of all goods and its respective tariff rate, which together, produce an effective tariff rate for all tranches. The base rate used to calculate the exchange rate needed to offset the impact from the effective tariff rate is 6.51, the end-2017 level for USD/CNY. US tariff on Chinese goods Phase 1 Imposed on China's goods US tariff rate USD bn % of total Actual Weighted (a) (b) (c) (d) = (b) x (c) 50 10% 25% 2% % 0% 0% % 0% 0% % Effective rate 2.4% Implied USD/CNY rate* 6.66 * calculated from 6.51, the end-2017 USD/CNY rate During Phase 1, Trump hit USD50bn of Chinese goods with a 25% tariff rate. According to the above table, this would translate into an effective tariff rate 2.4%. To hypothetically offset the impact of the tariff, USD/CNY would need to rise to Coincidentally, USD/CNY was around 6.64 on 6 July, the day the tariff took effect on the first USD34bn of goods. USD/CNY has risen with US tariffs on Chinese goods % US tariff on USD200bn of Chinese goods Similar results emerged when we back-tested Phase 2. USD/CNY averaged 6.92 after Trump hit an additional USD200bn worth of Chinese goods with a 10% tariff rate from 25 September. Uncannily, the implied USD/CNY rate was also 6.92 from the effective tariff rate of 6.3% for cumulative USD250bn of goods. USD/CNY to surpass 7 when trade talks fail If the China-US trade talks fail to produce a deal after 90 days of negotiations, US President Trump will make good his pledge to become Tariff Man again. 25% US tariffs on USD50bn starts US announced 10% tariffs on USD50bn of CN goods 6.20 Jan-18 Apr-18 Jul-18 Oct-18 Sources: DBS Research, Bloomberg data US tariffs on Chinese goods Phase 2 Imposed on China's goods US tariff rate USD bn % of total Actual Weighted (a) (b) (c) (d) = (b) x (c) 50 10% 25% 2% % 10% 4% % 0% 0% % Effective rate 6.3% Implied USD/CNY rate* 6.92 * calculated from 6.51, the end-2017 USD/CNY rate US tariff on Chinese goods Trade talks fail Imposed on China's goods US tariff rate USD bn % of total Actual Weighted (a) (b) (c) (d) = (b) x (c) 50 10% 25% 2% % 25% 10% % 0% 0% % Effective rate 12% Implied USD/CNY rate* 7.29 * calculated from 6.51, the end-2017 USD/CNY rate The first step would be to reinstate the original decision to lift the tariff rate on USD200bn of Chinese goods to 25% from 10% from 1 March This would double the effective tariff rate to 12% for the cumulative USD250bn of goods and imply a USD/CNY rate near Page 5

6 Hence, we have maintained our forecast for USD/CNY to hit 7.20 in mid At this juncture, it is prudent to be more cautious than optimistic about the trade talks between the world s two largest economies. Our forecast is also based on our expectation for three cuts in the reserve requirement ratio totaling bps. Worst-case scenario sees USD/CNY above 8 Trump has not rescinded his threat to impose tariffs on the remainder USD265bn of Chinese goods. Assuming no desire for future trade talks with China, the risk for Trump to the final tranche with a 25% tariff cannot be discounted. both in direction and magnitude. The yuan s correlation with the EA currencies has been particularly high at 94% in 2017 and 99% this year. That said, the correlation with DM currencies has also been meaningful at 87% in the past two years. This was easily explained by China s position as the top trading partner in most Asian countries and many DM countries. Philip Wee US tariff on Chinese goods Full-blown trade war Imposed on China's goods US tariff rate USD bn % of total Actual Weighted (a) (b) (c) (d) = (b) x (c) 50 10% 25% 2% % 25% 10% % 25% 13% % Effective rate 25% Implied USD/CNY rate* 8.13 * calculated from 6.51, the end-2017 USD/CNY rate To offset the 25% tariff on all USD517bn headed to America, USD/CNY would hypothetically need to rise to If this worst-case scenario materializes, the outlook for the yuan and other Asian currencies would need to be downgraded. Imposing tariffs on all of China s goods is expected to accelerate the slowdown in its economy. Currency manipulation? The above simulations do not imply that China is a currency manipulator. The yuan s one-off devaluation in August 2015 helped to realign it to the USD s resurgence. USD/CNY is increasingly aligned with global USD trends Indexed to previous year-end levels USD Index (DM) 90 USD Index (EA) DM: Developed Markets 85 USD/CNY EA: Emerging Asia Jan-16 Jan-17 Jan-18 Sources: DBS Research, Bloomberg data Since then, USD/CNY has been tightening its relationship with the major USD indices in DM and Emerging Asia (EA), Page 6

7 Gold: Look forward to a recovery path spurred by inflation Figure 1: Gold demand via ETFs and other products vs gold price Gold has likely passed this year s bottom. Gold showed some recovery since Sep, backed by i) increased physical demand enticed by lower gold prices (jewellery demand rose 8.9% y/y; bar & coin demand rose 28% y/y in 3Q18); ii) net inflow into gold-backed ETFs in Oct and Nov (vs. a net outflow in 3Q18); iii) a slight retreat in the US dollar in Sep and iii) weaker US stock market performance. Gold to see a modest rebound in 1Q19. Despite our forecast of US dollar remaining buoyant in 1Q19, we expect gold to gain more attention because of expected rising inflation. Historically, gold s price shows a positive correlation with US inflation (Figure 2). Higher volatility in the stock market and the recently building expectation of moderate interest hikes in 2019 would also be a positive for gold. Central banks gold reserves grew significantly in 3Q18 (+21.8% y/y) and according to the World Gold Council, more central banks are looking to increase their gold holdings. Accordingly, we revise up gold s price to average higher q/q at USD1,230/oz in 1Q19. Is gold a safe haven? As continued trade tensions between the US and China spur uncertainties and concerns over the global economy, subdued gold prices have caused some to question gold s long-known role as the safe-haven asset. As a physical asset, gold is considered a store of value and as such, its demand tends to increase during times of uncertain market conditions. However, gold prices are not directly in sync with market volatility. For example, when the VIX Index (a market fear indicator) saw an extreme surge at the outset of the 2008 financial crisis, we observed that gold s price initially weakened. However, we also observed that when market volatility persisted over the medium- to long-term with VIX index exceeding 20pts between mid-2007 to end- 2012, and from mid-2015 to mid-2016, gold staged a sustained rally, demonstrating its safe-have asset status (Figure 3) ETFs & other products (tonnes, LHS) Gold price (US$/oz, RHS) Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 Figure 2: Gold price vs US headline inflation 2,000 1,800 1,600 1,400 1,200 1, Gold Price (US$/oz, LHS) US Headline Inflation (%, RHS) 600 Jan-08 Jan-11 Jan-14 Jan-17 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1, Page 7

8 Table 1: DBS gold price forecasts (USD per ounce) 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F LBMA Gold Price (average) 1,329 1,306 1,212 1,215 1,230 1,240 1,250 1,270 y/y (%) 9.0% 3.9% -5.1% -4.7% -7.5% -5.1% 3.1% 4.5% q/q (%) 4.2% -1.8% -7.2% 0.2% 1.2% 0.8% 0.8% 1.6% Figure 3: Gold price vs VIX Index Eun Young Lee Highlights of the week: DBS Annual Chartbook: 2019 in 64 charts FX: Effective link between tariffs and CNY Chart of the Week: While the US is slowing, Europe is slowing faster India: Nexus of improving inflation and BOP but moderate growth Page 8

9 Key Forecasts GDP growth, % YoY CPI inflation, % YoY, ave f 2019f 2020f f 2019f 2020f China Hong Kong India* Indonesia Malaysia Philippines** Singapore South Korea Taiwan Thailand Vietnam Eurozone Japan United States*** * refers to year ending March ** new CPI series *** eop for CPI inflation Policy interest rates, eop 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 China* India Indonesia Malaysia Philippines Singapore** South Korea Taiwan Thailand Vietnam*** Eurozone Japan United States * 1-yr lending rate; ** 3M SOR ; *** prime rate Exchange rates, eop Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Thailand Vietnam Australia Eurozone Japan United Kingdom Australia, Eurozone and United Kingdom are direct quotes Page 9

10 Rates forecasts Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 US 3m Libor Y Y Y-2Y Japan 3m Tibor Y Y Y-2Y Eurozone 3m Euribor Y Y Y-2Y Indonesia 3m Jibor Y Y Y-2Y Malaysia 3m Klibor Y Y Y-3Y Philippines 3m PHP ref rate Y Y Y-2Y Singapore 3m Sibor Y Y Y-2Y Thailand 3m Bibor Y Y Y-2Y China 1 yr Lending rate Y Y Y-3Y Hong Kong 3m Hibor Y Y Y-2Y Korea 3m CD Y Y Y-3Y India 3m Mibor Y Y Y-2Y %, eop, govt bond yield for 2Y and 10Y, spread bps Page 10

11 Group Research Economics & Strategy Taimur Baig, Ph.D. Chief Economist - G3 & Asia taimurbaig@dbs.com Nathan Chow Strategist - China & Hong Kong nathanchow@dbs.com Masyita Crystallin, Ph.D. Economist Indonesia & Philippines masyita@dbs.com Joanne Goh Regional equity strategist joannegohsc@dbs.com Neel Gopalakrishnan Credit Strategist neelg@dbs.com Eugene Leow Rates Strategist - G3 & Asia eugeneleow@dbs.com Chris Leung Economist - China & Hong Kong chrisleung@dbs.com Ma Tieying, CFA Economist - Japan, South Korea, & Taiwan matieying@dbs.com Radhika Rao Economist Eurozone, India & Thailand radhikarao@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam irvinseah@dbs.com Samuel Tse Economist - China & Hong Kong samueltse@dbs.com Duncan Tan FX and Rates Strategist - Asean duncantan@dbs.com Philip Wee FX Strategist - G3 & Asia philipwee@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore Tel: Company Registration No E. Page 11