Monday, October 5, 2015

some macro pitches

Long Mexico (EWW)

·          It's sold off hugely due to oil (it's an oil producer), but it's overdone since the government fully hedges its oil exposure (rumors are that the gov't sold futures near $100, basically locking in that price for its oil sales for the medium term). This should preserve gov't finances for this year at least.

·          In the long term, as Chinese labor gets richer and therefore costlier, more manufacturing should localize and move to Mexico to take advantage of its cheaper labor force (a MX auto worker cost 20% of his American equivalent) and its infrastructure and trade ties with the US and the rest of the world (Mexico has the most FTA free trade agreements in the world after Israel).

·          Thus it's levered to the strong US recovery, albeit with a lag.

·          Capital inflows and foreign investment are growing, with Mexico privatizing and selling off its oil assets for the first time in decades (auction results have been a bit disappointing however, need to watch this closely).

·          Auto manufacturers have announced plans to start plants in Mexico (including German car co's such as VW, BMW, Mercedes and Japanese car co's like Toyota, Honda, Nissan). This will also be supportive for the currency, which has been a victim of the indiscriminate Latam selloff since oil prices fell late last year.

·          MXN been used a liquidity proxy as one of the most liquid EM FX and has deviated too much from fundamentals. Lower cost of carry vs. other FX like BRL.


Short Brazil (BZF)

·          Perfect storm of several factors: stagflation (recession at the same time as high inflation of 9.5% vs. 4.5% target), too much debt/deficit yet they're at a bureaucratic impasse to pass budgetary austerity measures, no political support and significant political uncertainty, BCB is conflicted and already has very high rates (raising would mean deeper recession but less inflation and stronger currency), BoP deficit and choice of impossible trinity trade-offs means weakening FX, CB FX swap interventions are ineffectual

·          Classic case of Dutch Disease, in which a country's over-reliance on natural resources creates upward pressure on its domestic currency, reducing the attractiveness of the country's exports from other sectors, such as manufacturing. This creates a feedback loop in which non-resource sectors fail to attract investment or jobs, and the country becomes even more reliant on natural resource exports. For the past decade, however, the commodity price boom has hugely beneficial for those who have depended on its high prices for economic prosperity. However, like all good things, the commodity super-cycle has come to an end.

·          Many countries have dealt with Dutch Disease by nationalizing and saving its export revenues, usually through a sovereign wealth fund. This is not something that Latin America has done, however. Unfortunately, much of the wealth from these export surpluses were squandered through gov't handouts rather than investment and infrastructure.

·          The result is textbook reforms: this will be a painful adjustment to better fit reality: they need to be able to provide value-added goods and services and not rely on nat resources. 

·          Political realities are tough: President Dilma might get impeached, FM Levy can't pass a budget, 90% budget is non-discretionary


Long China/Asia (ASHR, GXC, GMF, AAXJ)

·          China is becoming more regionally active. Carrot and stick, China has a lot of carrots. Unlike the US, China is extremely pragmatic and morally agnostic, having no qualms with working with Muslim or authoritarian states if they have something that China wants. Willing to spend and invest huge sums, exceeding US foreign aid.

·          $100bn Asian Infrastructure Investment Bank (AIIB) is China's vision of a "new world order" led by Asia with China on top. This would supersede the post-Bretton Woods status quo of US-led IMF/World Bank/ADB/TPP international financial system. This could channel $20bn/yr of foreign investment into Asia, which would boost GDP, equities and currencies. Prominent proponents include Larry Summers and Hank Paulson have criticized the administration's stance towards AIIB, which many US allies have joined. Bernanke says it's because the US blocked a 2010 IMF agreement to shift 6% of quota/voting rights to EM.

·          CNY is now fairly valued. Bernanke emphasized that AIIB and CNY internationalization is mostly a symbolic and nationalist prestige issue rather than having any large practical economic implications.

·          For example, China-Pakistan Economic Corridor (CPEC): part of the Silk Road. It's a series of 50 projects totalling $46bn to connect Gwadar Port in Balochistan, Pakistan with Xinjiang, China. This creates a new, direct route for China to import oil from the Arabian Sea, bypasses the current much longer and less secure route which requires ships to pass through the Indian Ocean, the Strait of Malacca and the South China Sea, which are all geopolitical hotspots for China.

·          ASEAN-China Free Trade Area (ACFTA) - largest FTA in the world in terms of population (3rd largest in NGDP).

·          China has "FOMO MOMO" momentum driven by fear-of-missing-out sentiment, real estate bubble, difficult transition from I to C, healthy consumer, "middle income trap", costlier labor. On other hand, capital stock per capita is low.

·          Asset prices and specifically, stocks, have implicit support from PBoC. Governor Zhou Xiaochuan said: "most enterprises raising capital through the stock market are real-economy enterprises, and this helps the real economy to develop".

·          China has the 2nd largest stock market cap in the world and half of the 10 biggest companies in the world are now Chinese. This isn't reflected in major indices & benchmarks, so funds are underallocated.

·          Lots of tools: RRR and lending rates are still quite high and have room to fall, inflation is 2 p.p. below target, which gives PBoC further room to ease. $1 trillion (which is 10% of GDP) in fiscal infrastructure spending was accelerated in a fast-track approval process in January.

·          On the other hand, real indicators have been all declining, reflecting an slowdown in GDP growth. This is natural and inevitable. The question is if and how the administration will manage it. Furthermore, the stock market has little correlation with economic growth.


Long India EPI

·          Reformist-minded PM, who made a success story of his region when he was governor, is elected in an inefficient bureacratic developing economy with a huge labor force.

·          Highest growth prospects in the EM world, although GDP numbers are a bit strange.

·          Hawkish UChicago CB head who gives mkts relative confidence (for an EM CB head) about FX, esp since inflation is low.

·          There is lots of low hanging fruit such as land sale reform, GST (general sales tax). States are getting more power to run their own fiscal policies.

·          However, GDP numbers are not credible. Nobody knows how they get them. High 7-8% growth, up from 5% in the old methodology.


Long Eurozone equities (HEDJ)

Short EUR (EUO)

·          Don't fight the Fed -> Don't fight the ECB.

·          ECB QE - low agg new net supply due to low fiscal deficits, low liquidity, low public capital mkts participation (only 35-40% of core EZ debt is held by active managers) are actually a plus, this means that portfolio rebalancing effect will be huge and will force banks to sell bonds and lend to corps and households

·          However, low fiscal debt, deficits and structural reform, monetary union without fiscal union, Juncker Plan, which is the EFSI European Fund for Strategic Investments, has been identified as the ONLY initiative in the EZ where aggregate fiscal stance is concerned. It has largely failed due to national self-interest

·          It's all about the banks. They have stopped deleveraging, but they need to lend to the real private economy: i.e. households and corps. Households are borrowing, corps still are not.

·          Euro project means core gets a weaker currency, peripherals get a lower interest rate. Outcome? Core surplus and peripheral deficits without a regional rebalancing mechanism. This means deflation in periphery to improve competitiveness.

·          Core-peripheral divergence - as long as Germany refuses to run a current account deficit, the rebalancing mechanism will be extremely painful for peripherals. Germany already at potential, UE rate very low

·          Chances of a more open-ended QE is likely: in the last meeting, the bond purchase issuance limit was raised from 25 to 33%, and new language was introduced which says to conduct QE to Sept 2016 "or beyond if necessary". On the other hand, core CPI is solid near 1% and they seem happy with this.


Long Japan (DXJ)
Short JPY (YCS)

·          Three arrows is really just 1 arrow: monetary

·          Chances of further QE has increased - unlikely to hit inflation target, weak wage growth, Tankan inflation expectations declined

·          On the other hand, there's been strong household spending and "core core"(ex-food and ex-energy) inflation

·          BoJ has signaled that they may have to get more "creative" in achieving its inflation target. Interpreted this as more ETF and J-REIT purchases. Kuroda has stated that the scale of their ETF/J-REIT purchases is "extremely small". Since economic growth or inflation has not picked up significantly, the likelihood of this has increased.

·          Don't bet on significant fiscal or structural measures

No comments:

Post a Comment