2019 Outlook for Shipping Industry: Beyond the trade war

Transcription

1 219 Outlook for Shipping Industry: Beyond the trade war Alicia Garcia Herrero Chief Economist Asia Pacific April 219

2 TAKE AWAYS 1. GLOBAL OUTLOOK: LOWER DEMAND BUT ALSO LOWER COST OF FUNDING 2. ASIA CYCLICALLY WEAK BUT STRUCTURALLY STRONG NOTWITHSTANDING THE TRADE WAR 3. KEY RISKS GLOBALLY: CHINA AND THE USD 2

3 1 GLOBAL OUTLOOK: LOWER DEMAND BUT ALSO LOWER COST OF FUNDING 3

4 219: Can t get hurt falling out of the basement Global growth decelerates but stays above potential Political risks at the forefront but tensions easing Central Banks turning dovish Volatility to persist but too early for an equity bear DXY weakens, providing respite for EM US exceptionalism ending and global synchronization of slower GDP Trade-tensions easing short-term No hard Brexit Italian risk still vivid European Parlament elections Fed does not hike any more Asian central banks pause China with larger monetary stimulus BOJ keeping rates low ECB considering new TLRO No bear market yet Defensives vs Cyclicals, OW Quality, OW Big Caps Higher volatility regime Weaker USD Stronger EUR Resilient EM FX 4 April 19

5 Global growth engine decelerates (some contracting) US losing its exceptionalism Global activities are slowing CH EU US S S Source: Bloomberg, Natixis

6 US: On track for a soft landing US ISM composite series and real GDP growth Business surveys (ISM manufacturing / nonmanufacturing composite) - L GDP growth - R Sources: BEA, ISM,

7 FED pausing but balance sheet reduction to continue which will reduce USD liquidity globally 3.5 US and Treasury Yield (%) FED Rate 1Y Treasury Yield Natixis FED Rate Forecast Natixis 1Y Treasury Yield Forecast US: Fed's balance sheet ($Bn) Securities held outright Reserves QE3 Balance sheet reduction QE1 QE2 Twist Source: Natixis, Bloomberg.5. 1 Sources : Fed

8 Apr-19 Euro area s growth has stagnated since beginning of 218 Europe GDP Germany France Italy Spain UK Source: Natixis, Bloomberg

9 Apr-19 ECB moving from pre-announced tightening to keeping status quo ECB Policy Rate Source: Natixis, Bloomberg 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, Source: Natixis, Bloomberg ECB Balance Sheet Size EUR/Billion

10 Apr-19 All in all, we expect the USD to remain soft against the euro but also other currencies EUR/USD and DXY Index EURUSD EURUSD Forecast DXY Index Source: Natixis Forecast, Bloomberg

11 2 ASIA CYCLICALLY WEAK BUT STRUCTURALLY STRONG NOTWITHSTANDING THE TRADE WAR 11

12 Trade data decidedly ugly especially for China/Asia region Trade in goods(%yoy) China export to key region (USD, YoY, %) Exports Imports US EU ASEAN Sources : NBS, Natixis Source: WIND, Natixis

13 Jan18 Feb18 Mar18 Apr18 May18 Jun18 Jul18 Aug18 Sep18 Oct18 Nov18 Dec18 Jan19 Feb19 Mar19 Is Asia s trade slowdown mainly due to trade war? Not so much directly but indirectly But especially indirectly due to much worse sentiment Shipping clearly affected Asia PMIs Baltic Dry Index (BDI) 53 China Asia Source: Natixis, Bloomberg Source: Natixis, Bloomberg 13

14 Why such a negative sentiment?: Much more than a trade war Type of Product Rules Solar panels/ Steel / Intellectual Property Intellectual Property Washing machines Aluminum (112 products valued at USD 5bn) (631 products valued at USD 2bn) Section 21 Section 232 Section 31 Section 31 Import Relief for Domestic Industries National security Intellectual property law s Intellectual property law s Effective Date Feb 7th, 218 Mar 23rd, % additional duty effective on July 6th for 818 products (w orth 34bn) included in the proposed list on Apr 6th, 218, and 284 products (w orth 16bn) effective on Aug 23rd, 218 Sep 24th, 218, and increased to 25% on Jan 1st, 219 Exemption GSP-Eligible developing nations 1 Australia, Argentina, Brazil and South Korea 2 Targeted at China Targeted at China Applied to China Retaliation from China N/A Tariffs on $3 billion of 128 products including pork, fruit, nuts and w ine of up to 25% 25% duty effective on July 6 for 545 products valued at about $34 billion and 114 products valued at about $16 billion w ith no effective date announced Tariffs on $6bn US imports Truce agreed to negotiate On Dec 1st 218 at the G2 sidelines, additional tariff from 1% to 25% w as deferred for 9 days. On Feb 24th 219, additional tarrif orgiinally scheduled to start on March 1st 219 w as deferred. The settlement of deal w as delayed from end of MarcH to end of April. N.B. 1 Philippines and Thailand are not excluded, even though they are GSP-Eligible. 2 Exclusions from US steel and aluminum tariffs may take 9 days Source: Natixis, U.S. Government 14

15 The trade war is not a trade war but the US trying to contain China s economic development The first USD 5 billion package aimed at containing China from exporting higher end products which compete with US The second focusing on moving value chain away from China (reshoring or delocalization in other geographies) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % A comparison of the US-China targeted products released in June and July (%) Very High High Medium Low US June (5bn) US July (2bn) Source: Natixis, USITC, UN Comtrade 68 China (5bn) China (6bn) Decomposition of US' imports from China under the 2 billion tariff list Intermediate goods 48% Source: Natixis, USTIC Not Classified 1% Capital goods 29% Consumption goods 22% 15 15

16 Pressure not only from US but also from European Union Out of the ten key points, signs of more difficult trade between EU and China EU calling on reducing subsidies and, more generally, role of SOEs, as well as forced technological transfer 16

17 Hong Kong could be squeezed between US and China as HK has long served as entrepot for Chinese s trade with the US and increasingly so since the trade war Source: Natixis, CEIC Hong Kong: Higher domestic exports to China in products hit by Chinese tariffs (3mma %YoY) Plastics Metalliferous Ores & Metal Scrap (rhs) Hong Kong: Re Exports Pair by Origin of Goods (218 Jan-Nov, HKD bn) M.China to M.China Taiwan to M.China M.China to US Korea to M.China Japan to M.China Malaysia to M.China M.China to Japan M.China to India US to M.China M.China to Germany Source: Natixis, CEIC *M.China refers to mainland China

18 HK s role is especially important for imports of sensitive technology products from US but the US is starting to crack down on such exports to HK Asia: Imports from US Export License (217, USD m) Asia: Percentage of Total Trade and Approval Rate for US Export License % of Total Trade Approval rate (rhs, %) JP SG CN KR TW HK IN. SG TW JP IN HK KR CN 65 Source: Natixis, US Bureau of Industry and Security Source: Natixis, US Bureau of Industry and Security 18

19 Notwithstanding the headwinds in the short run, Asia is becoming increasingly relevant Contribution to world growth In USD trillion In USD billion Change (21%) (18%) 8.3 (1%) 4.6 (6%) 2.7 (1% ) (4.7%) 21 (.9%) China India US Europe Japan Source: Natixis

20 Asia is also the leading in manufacturing, led by China, and with a growing role for the rest of Asia Asia s manufacturing output share of world production Share of world growth Asia Latin America and Caribbean Rest of world India World Euro area North America China Rest of Asia Asia Sources: Natixis

21 Also Asia hosts the largest share of large companies globally, most of them Chinese 25 Number of Fortune 5 companies Total Rest of Asia US Europe Asia Rest of Asia 24 Japan 67 China US Europe Asia Japan 52 China 12 Source: Fortune 5, Natixis Source: Fortune 5, Natixis 21

22 Asia s region as largest external creditor, led by Japan, China, Taiwan, Hong Kong, Singapore and Korea International Investment Position (USD bn) 8, 6, 4, Europe 8, 6, 4, 2,82 APAC 5,814 8, 6, 4, US Direct Investment Portfolio Investment Banking Flow (Other Investment) Reserves 2, 2, 2, -2, -4, -1,998-1,529-2, -4, -2, -4, -1,868-6, -6, -6, -8, -8, -8, -7,338-1, , ,

23 Share of middle class growing fast globally Political Reasons Expanding NB: Based on PPP-adjusted 21 USD; Poor and Low Income (<USD5,), Low Middle Class (USD5,-15,), Medium Middle Class (USD15,-25,), High Middle Class (USD25,-4,), Affluent (>USD4,). See the annex for further information about the methodology. Source: BBVA Research, UN, WB, IMF 23

24 Already today, Asia concentrates the largest share of the middle class and many more million will be added by

25 3 KEY RISKS GLOBALLY: CHINA AND THE USD 25

26 China s decelerating structurally and even cyclically but the government coming to the rescue 26

27 Despite multiple RRR cuts, bottleneck in monetary transmission mechanism dragging growth as private sector lacks access to credit Total Social Financing (%YoY) Loan Interest Rate (%) Shadow Banking Loan Total Weighted Average Interest Rate of Bank Loans Wenzhou index of Private Lending Interest Rate (rhs) Source: Natixis, WIND Source: Natixis, WIND 27

28 Private companies access to bond market also limited and with a much more limited reduction in the cost of funding Net Bond Issuance by Firm Type (RMB bn) Natixis China Onshore Bond Indexes (Yield) 1,8 1,6 SOE POE 1,8 1,6 7 Spread (POE - SOE, bps, rhs) POE SOE 2 1,4 1,2 1,4 1, , 8 1, Source: Natixis, WIND Source: Natixis, Bloomberg 28

29 Chinese leadership coming to the rescue of the private sector, considered key for China to continue to grow Three arrows to support private firms Loan Banks to increase loans to private owned enterprises (POEs): Up to 1/3 of new loans of large banks in 219, 2/3 of new loans of small banks in 219 and no less than 5% of new loans in the whole banking system after 3 years Lower interest rates on lending to small-and-micro enterprises (SMEs): Reportedly 1 bps lower than the benchmark lending rate to SMEs Targeted medium-term lending facility (TMLF): The PBoC introduced a new facility to encourage banks to increase lending to small and private enterprises.. Debt Equity Issuance of credit risk migration warrants (CRMW) to be supported: The PBoC to provide RMB 1 billion as initial funds to China Bond Insurance Corporation to help issue CRMW to help private companies separate their credit risk and their income stream. Extension of collateral pool to access PBoC's medium-term lending facility (MLF): Include bonds issued by lower graded POEs. Share pledging relief fund: The Securities Association of China announced a relief fund with RMB 21 billion contributed by 11 securities firms as seed money and a final target to attract RMB 1 billion in total. Such fund should help firms to avoid the problem of falling equity prices on their ability to use shares as collateral. Multiple local governments also set up share-pledge-risk relief funds in collaboration with private equity. More products: CBIRC will allow insurers to issue products targeted to ease share pledging risk. Source: Natixis 29

30 US-China trade is now expanding to currencies with expectation from US government that RMB will need to strengthen The current fast appreciation could be read as such or, at least, as China s trying to prevent actions from US but for how long? RMB normalizing against USD RMB real effective exchange rate 15 CFETS RMB Index USDCNY Source: Natixis, Bloomberg Source: Natixis, Bloomberg 3

31 In the scenario of a no-deal, could China retaliate by selling US treasuries and putting pressure on USD? Even if China is reducing its holdings of US Treasuries, total amount of US treasuries held by foreigners growing. Hard for China to have an impact US Treasury holdings ( % of total foreign holding) US Treasury held by non-residents (bn USD) ,3 6,28 6,26 6,24 6,22 6,2 6,18 6,16 6,14 6,12 6,3 6,28 6,26 6,24 6,22 6,2 6,18 6,16 6,14 6,12 Sources: Natixis, TIC N.B. China(Augmented) include major offshore financial cernters: Bermuda. British Virgin Island, Cayman Islands, Jersey, Luxembourg and Mauritius Sources: Natixis, TIC 31

32 Risk to the USD in the short but specially medium term In the short run, too lax FED pushing for a weak USD but two weak also a problem In the medium run, the weaponization of the USD could go against its reserve currency role 32

33 Weaponizing the USD?: US sanctions Applied extraterritorially to an increasing number of countries: o o o o o o North Korea Iran Russia Cuba Sudan Turkey during lira crisis Recently also against China s tech giants o o Huawei ZTE 33

34 Weaponizing the USD?: Responses to sanctions If crucial for the economy, simply reduce dollar transactions. o The share of Russia s USD reserves has fallen to 22% in Dec 218 from 46% a year before. Try other currencies: what about HKD like Russian seem to be considering? Use special vehicles: Europe s proposal to set up SPVs for business with Iran More structurally, create payments infrastructure which is not controlled/overseen by the US: China s Cross-Border Interbank Payment System 34

35 Weaponizing the USD?: The US world of currency manipulation U.S. definition of currency manipulation Countries in the Monitoring List of Treasury: According to Trade Facilitation and Trade Enforcement Act of 215, currency manipulation occurs when a country: (1) have material current account surpluses; and (2) have significant bilateral trade surpluses with the United States; and (3) engaged in persistent one-sided intervention in the foreign exchange market China Korea Germany Japan India Switzerland 35

36 In the long run can we expect a multipolar world in terms of currencies? The RMB will not be ready even in the medium term. Hard to dismantle capital controls 5 Share as international payment currency (%) USD EUR GBP JPY CNY 5 12 RMB Offshore Deposits (bn) Hong Kong Singapore Taiwan UK Share as international Source: payment Bloomberg, Natixis currency (%) GBP JPY CNY 1 Source: SWIFT, Bloomberg, Natixis Source: SWIFT, Bloomberg, Natixis Source: SWIFT, Bloomberg, Natixis

37 Conclusions The world is decelerating which is bad news for the shipping industry but the cost of funding should remain low. Asia is suffering headwinds, partially because of the trade war but the long run is much more appealing. This is not only due to size of the economy but also the fast growing middle class and the increasingly relevant corporate landscape The key risks remain China and the USD For China, the ongoing stimulus has to work. Otherwise a too rapid economic deceleration could destabilize the country As for the USD, there are short and long run risks On the short run, a too weak dollar could be a problem In the medium term the weaponization of the USD can boomerang Even if not substituted the dollar can suffer as parallel payment system are being built During the transition, the world will be more unstable if the reserve currency status is dented. 37