& strategy research dbs monthly damage assessment...monthly 25 may 2018 gap in revenue...
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Group Research
30
25 May 2018
Economics & Strategy Research
DBS Monthly
Damage assessment
Taimur Baig Chief Economist [email protected]
Irvin Seah Economist [email protected]
Please direct distribution queries to Violet Lee +65 68785281 [email protected]
• Economics: Growth divergence among
developed economies (with the US pulling
away from EU and Japan) is guiding flows.
With the USD and US rates heading up,
emerging market economies with large
external funding needs are under considerable
pressure; we expect no near-term respite. In
Asia, India, Indonesia, and Malaysia are the
most vulnerable to capital outflows, in our
view. The policy makers of these economies
would have act judiciously and expeditiously to
mitigate macro risk.
• Rates: Asia fixed income is facing pressure with
total USD returns largely in negative territory.
Central banks are not keen to follow the Fed,
but we see some capitulation ahead.
• FX: The worst is not over in the euro and
emerging Markets currencies. While not
immune, Asian currencies have proven
resilient. Yet, there little room for complacency
at a time when markets prefer decisiveness
over denials in addressing macro-stability risks
• Credit: We maintain our recommendation to
focus on high quality credits and on relatively
shorter tenors.
• Equities: Asia markets total return outlook will
be eroded by a strong USD. For now, we believe
that it is too early to conclude that the worst is
over as we expect the USD to strengthen
further, and EM ASEAN equities are likely to
bear the brunch of further de-risking
Monthly 25 May 2018
Page 2
Economics: USD funding needs under focus
It has been a bruising month for global markets, with no
respite in view in the near-term. The factors that led the
period of stress to begin, geopolitical tension, trade wars,
rising rates, rising oil price, and strengthening USD,
continue to play out. On the growth front, the ongoing
divergence between the US (which is tracking a strong
2Q) and EU/Japan (both faltering) is supportive of
continued strengthening of the USD.
We had anticipated the move in USD and US rates (See
our April Monthly), but the developments have been
striking nonetheless. No Asian currency has managed to
appreciate against the USD since the last week of April
(see chart below), with the Indian rupee and Indonesian
rupiah the weakest. The Philippine peso, under pressure
from the beginning of the year, has in fact pulled away
from the weak part of the spectrum in the past month.
We credit this to its greater resiliency to the Philippines
authority’s prudent energy pricing policy (of full price
passthrough). Meanwhile, concerns about deficits (fiscal
and current account), subsidy, inflation volatility (timing
and magnitude of fuel price hike) have inevitably hurt the
rupee and the rupiah. Due to its election related
developments and associated policy uncertainty, the
Malaysian ringgit has also been sold recently, although it
is still up for the year. Tellingly, two of the strongest
currencies this year, the Chinese renminbi and Japanese
yen, also joined the depreciation fray this month.
USD strikes back
Source: Bloomberg, DBS
Looking at the ongoing financial market pressure on
Argentina and Turkey, clearly the markets are worried
about economies with large USD funding needs at a
time when the USD and US rates are heading up. Here in
Asia, USD funding reliance is not as acute as the
countries under severe pressure, but the needs are not
trivial by any means. The following chart shows USD
denominated bonds and loans falling due this year and
next for selected Asian economies. We scale the
obligations by central bank FX reserves to make
comparison easier. By this metric, Indonesia and
Malaysia have the largest burden to deal with in Asia.
USD-denominated debt due in 2018-19
Note: Bonds and loans owed by public sector, as well as
financial and non-financial corporations. Source: IIF, DBS
The case of Malaysia is particularly important. Even
without political noise, the economy would have faced
refinancing risks this year, and now the matter is
complicated further. Among Asian emerging market
economies, only Malaysia’s financial sector has
substantial loans from abroad (40% of total refinancing
requirement). Given that banks are the key source of
intermediation for the economy, the disproportionately
large reliance on external debt poses considerable risk
at this juncture.
Malaysia’s saving grace could be a still-buoyant exports
sector, helped by rising oil prices. Some policy slippage
could therefore be accommodated by the markets, but
the margin of error is going to be tight for most
economies in these challenging circumstances.
Taimur Baig
Monthly 25 May 2018
Page 3
Malaysia: Post election challenges
Uneven growth in 1Q18
The Malaysia economy grew 5.4% YoY in 1Q18, exactly in
line with our forecast and below the 5.6% consensus.
However, it is not the pace of growth that is of concern
but rather, the quality of growth that is worth noting.
Growth has turned out to be less broad-based and the
outlook now appears uncertain after factoring in the
impact of post-election policy changes.
Limited boost to consumption from ending GST
Private consumption remained a key driver of growth.
Growth was relatively stable at 6.9% YoY in 1Q18 vs 7.0%
in the previous quarter. Consumers loosened their purse
strings amid an improving labour market and a slew of
generous budget measures introduced ahead of the
general election.
The removal of the 6% Goods and Services Tax (GST), with
effect from 1 June, have lifted hopes for more
consumption. However, we may need to temper
expectations here; consumers may not necessarily
frontload their expenditure in response to a permanent
tax cut.
Besides, any lift from higher private consumption growth
on GDP would also be transient due to base effect. And
Malaysia’s high household debt to GDP ratio of 84.3%
could also temper the propensity to consume.
Furthermore, government spending growth has already
slowed to just 0.4% in 1Q18 from 6.8% in the previous
quarter. Some negative spillover into consumption is also
likely from incoming efforts to reduce government
spending to make up the shortfall in GST revenue.
Investment remains a drag on growth
Concerns have also emerged over the drag from
investment on GDP growth. Sharp inventory destocking
and moderation in Gross Fixed Capital Formation (GFCF)
to 0.1%, from 4.3% previously, have led to a decline in
investment (-9.1%). The downside risks from a high base
last year will be particularly evident in public investment.
Though stronger consumption growth could spur private
investment, the need to plug the fiscal gap from the
removal of the GST could impact public sector investment
adversely. The government will be reviewing the existing
pipeline of infrastructure projects and is expected to
tighten the belt on some government agencies in a bid to
make up for the shortfall in the loss of GST revenue. This
could imply immediate delay in disbursement of fund and
potentially even cut back in public investment. The
impact could be significant given the huge fiscal gap to be
filled.
The GST added MYR 44.3bn to the official coffers in FY17
with another MYR 43.8bn projected for FY18. The
reintroduction of the Sales and Services Tax (SST) will not
be able to offset this shortfall. Before the introduction of
the GST in 2015, the SST contributed MYR 17.2bn in tax
revenue in 2014. Assuming that the SST adds some MYR
20.8bn to revenue this year, there could still be a shortfall
of around MYR 23bn (or 10.6% of total revenue based on
budget FY17).
0
5
10
15
20
25
30
35
40
45
50
2010 2011 2012 2013 2014 2015 2016 2017
GST Sales and Services Tax combined
Gap in revenue contribution
Potential shortfall of
MYR 23.5bn (10.6 of total revenue)
Refer to important disclosures at the end of this report.
70
72
74
76
78
80
82
84
86
88
90
2010 2012 2014 2016
Household debtto GDP
Household debt to GDP ratio eased but still high
%
Monthly 25 May 2018
Page 4
To achieve the fiscal deficit of 2.8% of GDP, the
government will need to cut back public investment and
spending. In doing so, GDP growth could be affected.
Fiscal boost from higher oil prices tempered by possible
increase in fuel subsidies
Oil prices have recently hit a multi-year high of
US$74/bbl, well above US$52 assumed in Budget FY18.
We estimate that this could add another MYR 5.4bn to
the official coffers.
Yet, another campaign promise is the reintroduction of
the fuel subsidy to ease the pain of the people from high
oil prices. This could potentially erode an expected
windfall from petroleum tax revenue collection. The
timing of the policy change will have bearing on the fiscal
position. Ideally, the fuel subsidy should only be
introduced when fiscal rationalisation associated with
the removal of the GST is sufficiently addressed.
Don’t pin too much hopes on net exports
While the spike-up in net exports in 1Q18 has buttressed
overall GDP growth, the boost came largely from a
decline in imports (-2%) even as exports moderated to
3.7% versus 6.7% previously. Although higher oil prices
and a potentially weaker MYR could boost export
performance, the price effect may not be manifested in
real GDP growth. Global economic conditions are also
normalizing, implying limited upside on external demand.
Furthermore, ongoing trade tension and financial
volatility could also throw a spanner into the works on
the external front.
Conclusion: an uncertain outlook
Barring external risks, uncertainties have now emerged
with the latest changes in government policies. Any
upside in consumption resulting from the zero rating of
the GST could potentially be eroded by lower public
spending and investment. Focus will now be on the fiscal
rationalization process and expectation is that there
could be more policy changes ahead. The timing of
subsequent policy changes would also be crucial in
determining the impact on the fiscal position and growth.
Until we get more clarity and details of the incoming
policy changes, we are maintaining our below consensus
forecast for GDP growth to slow to 5.0% in 2018-19.
Irvin Seah
20
30
40
50
60
70
80
90
100
110
120
2014 2015 2016 2017 2018
Oil prices - brent
USD/bbl
Latest: Apr18
USD 52/bbl
(Budget assumption)
Oil price rising
Monthly 25 May 2018
Page 5
Will the Sino-US trade negotiations hurt S Korea and
Taiwan?
According to the result of the latest round of Sino-US
trade talks concluded in Washington on 20 May, China
will “significantly increase” its purchases of American
goods and services to reduce the trade imbalance with
the US. The agreement lowers the risk of US and China
imposing tariffs on each other’s exports, which alleviates
the earlier concerns about an indirect decline in South
Korea’s and Taiwan’s exports as a result of falling Chinese
exports. Having said that, China’s commitment to
increase imports from the US raises new questions as to
whether South Korean and Taiwanese exporters will be
squeezed by the US counterparts in the Chinese market.
China may need to divert some imports from other
trade partners to the US, if required to address trade
imbalance with the US by a large amount within a short
period. Stimulating domestic demand and enlarging the
overall size of imports carry the risks of aggravating
China’s debt problems and causing overheating.
Meanwhile, given the sharp narrowing in China’s current
account surplus (1.3% of GDP in 2017), spurring domestic
demand and boosting total imports would also put
stresses on the external balance and the RMB.
On the surface, diverting imports from South Korea and
Taiwan to the US will be an effective way to help China
reduce trade imbalance with the US. While China enjoys
a trade surplus worth about USD 300bn with the US, it
runs large trade deficits with Asia’s advanced economies
at the same time. The annual trade deficit with Taiwan
amounted to USD 111bn in 2017, while that with South
Korea was also large at USD 75bn.
A closer look, however, suggests that it may not be easy
for China to substitute imports from South
Korea/Taiwan with US products in the short term.
China’s trade deficits with South Korea and Taiwan
largely stem from the high-tech sector. South Korea and
Taiwan are China’s biggest suppliers of machinery and
electrical equipment, accounting for 18% and 16%,
respectively, in China’s related imports. This is far above
the US’s share, which stands at only 5%.
Note that China’s tariffs on electronics imports are
already close to zero today, thanks to the trade
liberalisation under the WTO framework. China’s high
reliance on electronics imports from South Korea and
Taiwan is partly structural, owing to their geographic
proximity, close investment ties, and the establishment
of an intertwined and sophisticated regional electronics
supply chain over decades. It is also a reflective of the
intra-company supplies, i.e., the purchases of key
components by the South Korean/Taiwanese electronics
firms based in China from their parent companies.
Meanwhile, the US’s relatively low share in China’s
electronics imports is partly due to its intended
restrictions on high-tech exports to China, amidst the
concerns over national security and technology transfer.
Should China further remove trade barriers to facilitate
the US imports, the impact would be largely reflected in
Refer to important disclosures at the end of this report.
-150
-100
-50
0
50
100
150
200
250
300
2000 2003 2006 2009 2012 2015
US EU Japan
Korea Taiwan ASEAN
USD bn
China: Trade balance with key partners
0
2
4
6
8
10
12
14
16
18
20
Taiwan Korea Japan Germany US
China: Imports of machinery and electrical equipment,
by source
% share
Monthly 25 May 2018
Page 6
non-electronics products. These may include footwear,
textiles, fuels, agricultural goods and metals – the US-
made products are subject to relatively high effective
tariffs in the Chinese market at present (Table below).
These are not the key items that China imports from
South Korea/Taiwan (10%/5%, vs the 55%/70% share of
machinery and electrical equipment). As such, the
substitution effect should be limited.
For the time being, the amount and the timeframe of
China’s planned increases of US imports remain unclear.
The earlier media reports showed that the US has
requested China to reduce bilateral trade imbalance by
USD 200bn by the end of 2020. But China denied that it
has accepted the US’s request. Product-wise, China has
so far reached consensus with the US to increase the
purchases of agricultural and energy goods. The high-
tech products were not mentioned. Regarding whether
and how much South Korea and Taiwan would be
affected, much will still depend on the concrete details of
the ongoing Sino-US negotiations.
Ma Tieying
Table: China’s imports from the US and the world, by product (2016) US World
Value (USD bn)
Share in Total
Imports (%)
AHS Weighted Average
Tariffs (%)
Value
(USD bn)
Share in Total
Imports (%)
AHS Weighted Average
Tariffs (%)
All products 135 100 6.3 All products 1588 100 3.5
Mach and Elec 29 21.1 2.9 Mach and Elec 553 34.8 1.7
Transportation 27 20.2 13.2 Fuels 177 11.1 0.9
Vegetable 17 12.4 4.1 Chemicals 109 6.8 4.5
Chemicals 13 9.7 5.9 Minerals 99 6.2 0.1
Plastic or Rubber
7 5.3 7.3 Transportation 97 6.1 14.8
Metals 5 3.4 5.5 Metals 79 5.0 3.5
Animal 3 2.1 10.8 Plastic or Rubber 75 4.7 6.1
Food Products 3 2.0 13.0 Vegetable 62 3.9 4.9
Fuels 2 1.8 4.9 Textiles and Clothing
28 1.8 7.8
Minerals 1 1.1 0.4 Animal 22 1.4 8.3
Textiles and Clothing
1 1.0 10.6 Food Products 20 1.2 11.5
Footwear 0.1 0.1 15.8 Footwear 3 0.2 6.8
Sources: World Bank, DBS
Monthly 25 May 2018
Page 7
Rates: Waning risk appetite
Risk appetite across the emerging market space has
waned as USD rates stay high. With US inflation gauges
closing in or above 2%, the market has become
increasingly convinced that the Fed will be able to deliver
another rate hike in June. As yield differentials come back
into play, the USD has rebounded contributing to the
challenging environment facing emerging market bonds.
For now, the market is largely focused on the selloff in
Argentina and Turkey. In both cases, the central banks
were forced to hike rates aggressively to defend their
currencies. While idiosyncratic reasons have been
plaguing these two economies, these large financial
market adjustments are having spillover impact unto the
rest of the EM complex. The past three months have
been tough for EM bonds, but we are not convinced that
the worst is over just yet.
Asia fixed income is facing similar pressures with total
returns (in USD terms) largely in negative territory.
India, Indonesia and the Philippines (three of the highest
yielders) bore the brunt of the selloff. The specifics
impacting each country differ (budget, external funding,
or overheating risks) but the policy implications point in
the same direction – there is greater pressure on these
central banks raise policy rates (the Philippines hiked
rates for the first time since 2014). Investors are now less
tolerant of macroeconomic risks and are keeping an eye
out on interest rate differentials with the US. On a
separate note, Malaysia kept policy rates steady amidst
political uncertainty after the opposition took power in
the General Elections.
Amongst the markets we track, only three (China, Korea
and Japan) registered positive total returns (using each
economy’s respective iBoxx index) in USD terms. The
outperformance of Chinese government bond is perhaps
not surprising given that the People’s Bank of China cut
the reserve requirement ratio in late April, leading to a
level shift lower in the yield curve. However, yields at
current low levels are unlikely to be sustained. For Korea,
easing geopolitical tensions and a realization that the
Bank of Korea (BoK) may not be in a hurry to raise rates
have benefited KTBs. Lastly, the Bank of Japan’s (BOJ)
hold on the yield curve has not wavered despite the
selloff across global bonds this year.
The outlook for EM sovereigns remains challenging. The
populist stance from the new Italian government and
worries about the Turkish elections in June are going to
weigh on already weak risk appetite. On balance, room to
keep rates low is narrowing. While longer-term EM rates
have generally underperformed, shorter-term rates are
already follow higher as domestic rate hike expectations
get priced in. Against this backdrop, the beneficiaries are
going to be the traditional safe havens of USTs, German
Bunds and JGBs for the short term. Beyond the bout of
volatility, we still think that interest rates (especially
those in the G3) are likely to grind higher. The Eurozone
and Japan would likely embark on their own monetary
normalisation path, joining the US in dragging the centre
of gravity for developed market interest rates higher.
Eugene Leow
-10
-8
-6
-4
-2
0
2
4C
NY
KRW
USD PH
P
HK
D
MYR JP
Y
SGD
AU
D
GER
THB
INR
IDR
FX return in USD
Bonds total return (lcy)
% chg
3M Total Return Indices & FX Returns (vs USD) For Sovereigns
Dated: 25 May 2018
Source: Bloomberg, DBS transformation
80
85
90
95
100
105
2.00
2.25
2.50
2.75
3.00
3.25
Jan-17 Jul-17 Jan-18
Rising US yields & strong USD is bad for sentiment
% pa
DXY Index (rhs)
10Y UST Yield
Index
Source: Bloomberg
Monthly 25 May 2018
Page 8
FX: chills in Europe and Emerging Markets
The euro is not out of the woods yet. The situation
appears to have reversed for euro bulls. About the same
time a year ago, the euro was recovering with the
economic growth in the Eurozone after the French
presidential elections (on 23 April and 7 May) rejected
the far-right opposition. Speculators were at the cusp of
turning their net short euro positions into record longs
then, which in turn, led euro to its three-year high around
1.25 in the first quarter of this year.
Over the past month, the euro has sharply retreated
from 1.24 to below 1.18 on a downward adjustment in
the bloc’s growth outlook for 2018. In the past week, the
anti-establishment Five Star Movement and the
ultranationalist League has come together to form a
populist and Eurosceptic coalition government in Italy.
With its “Italy First” agenda resembling Brexit and
Trump’s policies, the new Italian government is set to
put Europe’s third largest economy and second most
indebted country on a collision course with the
European Union.
Emerging market (EM) currencies get the chills. Higher
US interest rates and rising oil prices are not the only
factors responsible for the misfortunes in the three
hardest hit currencies this year – the Venezuelan Bolivar,
the Argentinian peso and the Turkish lira.
Higher oil prices did not prevent a meltdown in
Venezuela. Investor confidence was lost after the
government defaulted on some of its debt and resorted
to printing money and wage increases to gain support for
President Nicolas Maduro’s re-election on 13 May. The
bolivar has collapsed to 78,652 in May from 9.95 in
January. Inflation has soared to 13779% YoY in April.
Overheating worries have driven the Turkish lira down
20% ytd to a new record low of 4.71 on 24 May. This was
despite the unscheduled 300bps rate hike to 16.5% on 23
May. The economy suffers from twin (current account
and budget) deficits and double-digit inflation. Moody’s
cited “faltering institutional strength” for its single-
notch debt rating downgrade to Ba2 on 7 March. Other
rating agencies are also concerned about effective
policymaking under President Erdogan; many assume
that he would win the snap election on 24 June. Standard
& Poor’s has, on 1 May, brought its rating one notch
below Moody’s rating to “BB-”. Fitch may need to play
catch up with its rating currently at “BB+”. Turkey has
potential to hurt the euro. Some of the largest foreign
holders of its debt are EU countries.
Sharp rate hikes did not stop the Argentinian peso from
quickening its depreciation. The policy rate increased
thrice between 27 April and 4 May to 40% from 27.25%
but the peso fell to 24.3 from 21.7 thereafter. Fearing for
its economy, Argentina has requested an exceptional
Stand-By Arrangement with the International Monetary
Fund (IMF). If successful, Argentina will be an example
to Turkey and other EM countries that decisiveness (e.g.
reforms) and not denials (e.g. accusations of speculation)
will be required to address macro-stability risks.
While not immune, Asia ex Japan (AXJ) currencies have
been resilient to EM stress. The falls in the three weakest
currencies – the Indian rupee (24 May: -6.5% ytd), the
Philippine peso (-5.2%) and the Indonesian rupiah (-4.1%)
– are modest compared to Venezuela, Turkey and
Argentina.
Yet there is little room for complacency. Like its troubled
EM peers, India, Indonesia and the Philippines also suffer
from twin deficits. The Philippines needs to rein in
inflation back into its official 2-4% target. In India, higher
oil prices pressure the trade deficit and inflation. Rate
hikes in Indonesia and the Philippines this month did
not stop their currencies from falling to new year’s lows
past 14000 and 52 respectively. Neither will a rate
increase expected in India next month prevent the rupee
from falling to a new life-time low.
Overall, the factors that led Asian currencies stronger
throughout 2017 have weakened substantially. US
monetary policy normalization has become tighter-than-
expected with the US 10Y bond yield pushing higher
above 3%. Geopolitical risks have heightened in the
Middle East following America’s withdrawal from the Iran
nuclear deal, and with it, the possibility of an oil price
shock. Last year’s strong cyclical rebound is unlikely to be
repeated with downside risks from US-China trade
tensions. A peaceful resolution to the US-North Korean
nuclear crisis is still considered an aspiration rather than
an eventual reality. Sadly, seeking clarity on these
complicated issues have been difficult due to Trump’s
incoherent and inconsistent ramblings and outbursts.
Philip Wee
Monthly 25 May 2018
Page 9
Credit: stay short duration
Asian credit market sentiment was weak in May but
recovered somewhat in the second half of the month.
New issues pricing at substantial concession to secondary
did not help either. As these factors eased later in the
month, market tone recovered somewhat but sentiment
is still subdued.
We believe value has emerged selectively in Asian credit
following the recent correction. However, given the
potential for further moves in the UST and spread
widening, we maintain our recommendation to focus on
high quality credits and on relatively shorter tenors.
Moreover, credit events have become more frequent.
E.g. in May, there was a default on a USD bond by a
Chinese issuer (Hsin Chong), a restructuring of an
Indonesian high yield bond (MNC Investama), and more
reported defaults on onshore Chinese debt (e.g. CEFC
Energy), indicating default rates in Asia will likely pick up
going forward.
Key benchmarks
Sources: Bloomberg, Markit
Indonesian HY trip takeaways We met several Indonesian high yield corporates recently
in Jakarta. Following are our main conclusions:
Earnings outlook is mixed: Some companies face
challenging operating conditions, especially those in the
property sector and we could see some deterioration in
credit profile, The residential property market continues
to remain weak and some companies have increased land
sales in order to offset the drop in property sales. While
this is supportive of earnings and liquidity in the near
term, it could potentially open the door for more
competition in the longer term. Some of the industrial
companies are facing some pressure from rising input
costs (e.g. fuel, raw material) but these are not significant
yet to be of concern, in our view. Commodity related
issuers (e.g. coal miners, coal contractors), on the other
hand, have a stable to improving earnings outlook.
Despite the mixed earnings outlook, we believe key credit
drivers for the companies have not changed. Event risk
will also be in focus and could have a bearing on some
credits (e.g. decisions on capex / acquisitions as well as
asset sales).
Impact of IDR depreciation varies but is generally
manageable: While most companies either have a
natural hedge (e.g. commodities) or have put in place
hedging (through call spreads with ranges adequate for
now in most cases), some property companies and
industrials have exposure. But there is no material near-
term cash flow impact (apart from higher coupon
payments), which is manageable for now.
Corporate governance/banking relationships remains
most important driver of bond performance: For bond
investors, corporate governance track record and
strength of local banking relationships will remain the key
consideration to retain / add exposure to Indonesian
corporates. This issue remains an overhang for a few
issuers. Companies that have improved their banking
access in the recent past have largely done so through
non-Indonesian banks with local banks still forming only
a small percentage of the funding structure. This will be a
key issue to monitor as primary bond market access gets
more challenging for weaker corporates and as bonds
come up for refinancing over the next few years.
Neel Gopalakrishnan
01-Jan-18 01-May-18 22-May-18
5Y UST yield (%) 2.21 2.81 2.90
10Y UST yield (%) 2.41 2.97 3.06
Indonesia 5Y CDS 85.3 103.7 122.7
Philippines 5Y CDS 65.1 71.4 85.5
Markit iBoxx China HY TRI 292.1 287.6 285.2
Markit iBoxx Indonesia HY TRI 247.5 239.0 237.0
Markit iBoxx India HY TRI 226.3 222.4 221.3
Monthly 25 May 2018
Page 10
Equities: Expect earnings downgrade
It’s earnings revision season. Within Asia, the strongest
downward revision (between March and May) was
recorded in Taiwan, and the strongest upward revision in
India. For Taiwan, the disappointments came from the
Tech sector after an exceptionally strong recovery last
year. As the global synchronised recovery starts to show
signs of fatigue, earlier high expectations that the
recovery is sustainable will have to be toned down. As for
India, we believe the strong earnings growth expectation
of 25.8% is too good to be true, judging from the past
record of downgrades throughout the year when analysts
tend to be overly bullish at the beginning of the year.
EM ASEAN countries including Malaysia, Thailand,
Indonesia and Philippines also recorded marginal
negative revisions. Upside earnings surprise is seen with
Singapore Banks, prompting us to upgrade the Singapore
Straits Times Index (STI) as a result. Companies in
China/Hong Kong generally met expectations.
Asia’s market cap composition suggests that about 12%
are exposed to the energy and materials sector which
should benefit from rising oil prices. Cyclical sectors
make up 41% of total market cap which means these
sectors are likely to be negatively affected by rising oil
prices. Higher interest rates should bode well for Banks’
net interest margin expansion in general, but the
negative sensitivity of high interest rates on loan growth
remains a concern. Save for some companies with a large
direct USD exposure due to asset/liability or
revenue/cost mismatch, the weakness in domestic
currencies is more of a macro concern affecting total USD
returns and foreign risk appetite, rather than having an
overall material impact on earnings.
In the near term, macro headwinds of volatility in the
currencies, oil prices, interest rates and trade wars
should pose further risks to Asia corporate earnings for
most sectors and we expect more downgrades by the
street in the second half.
We recommend investors to seek refuge in the oil & gas
and commodity sectors as earnings from these sectors
should stay resilient in view of the rising commodity
prices and USD. We are also positive on banks as selective
banks whose earnings are more sensitive to net interest
margin than loan growth, and those with higher CASA
ratios (ratio of current and savings account to total
deposits) for low costs of funds should benefit in a rising
interest rate environment.
In terms of valuations, Asia ex-Japan still trades at above
10-year historical average level, indicating that markets
still have room for risk premium to compress further.
Asia markets total return outlook will be eroded by a
strong USD. Hence, the turn of the USD will be a key
factor to watch for risk appetite to return and the current
volatility to be over. For now, we believe that it is too
early to conclude that the worst is over as we expect USD
to strengthen further, and EM ASEAN equities are likely
to bear the brunt of further de-risking.
Joanne Goh
Monthly 25 May 2018
Page 11
RECENT REPORTS
Focus pieces
• Malaysia: Post election challenge
• India’s slippery slope of oil
• GDP Nowcast update; decent 2Q start for China/India
• Malaysia: Beyond the election and politics
Weekly wrap / Flash notes
• USD Rates: Compressed term premium
• Will the Sino-US trade negotiations hurt South Korea and Taiwan?
• Weekly: The ride gets bumpier
• Japan: Recovery intact but faces more risks
• Malaysia: Flat interest rates again
• Hong Kong’s full-fledged economic upturn
• China’s slowing investment dynamic
• SGS: How Rich Is The 5Y?
• India: A rate hike is coming
• Weekly: Shocks galore
• Wind of change in Malaysia
• Four implications of a likely return of Iran sanction
• India’s bellwether state election
• China’s imperative to stronger ties with EU
• Indonesia: Global risk factors kick up dust
• USD Rates: How high? How flat?
• South Korea: Growth eases; inflation picks up
Monthly 25 May 2018
Page 12
Growth, Inflation, Policy Rates & FX forecasts
GDP growth, % YoY CPI inflation, % YoY, ave
2016 2017 2018f 2019f 2016 2017 2018f 2019f
China 6.7 6.9 6.6 6.2 2.0 1.6 2.1 2.2Hong Kong 2.0 3.8 3.3 2.9 2.4 1.7 2.0 2.5India* 8.0 7.1 6.6 7.2 4.9 4.5 3.6 4.6Indonesia 5.0 5.1 5.3 5.4 3.5 3.8 4.0 4.5Malaysia 4.2 5.9 5.0 5.0 2.1 3.9 2.6 3.0Philippines** 6.9 6.7 6.7 6.7 1.3 2.9 4.2 3.5Singapore 2.0 3.6 3.0 2.7 -0.5 0.6 1.0 1.8South Korea 2.9 3.1 2.9 2.9 1.0 1.9 1.8 1.8Taiwan 1.4 2.9 2.8 2.4 1.4 0.6 1.3 1.0Thailand 3.2 3.9 4.0 4.0 0.2 0.7 1.5 1.5Vietnam 6.2 6.8 6.4 6.6 2.7 3.5 3.6 3.8
Eurozone 1.8 2.5 2.2 2.2 0.2 1.5 1.4 1.4Japan 0.9 1.7 1.1 0.9 -0.1 0.5 0.8 1.0United States*** 1.5 2.3 2.6 2.5 1.3 2.1 1.8 1.8* refers to year ending March ** new CPI series *** eop for CPI inflation
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19
China* 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35India 6.00 6.00 6.25 6.50 6.50 6.50 6.50 6.50Indonesia 4.25 4.50 4.75 4.75 4.75 5.00 5.00 5.00Malaysia 3.25 3.25 3.50 3.50 3.50 3.50 3.50 3.50Philippines 3.00 3.25 3.50 3.50 3.75 4.00 4.00 4.00Singapore** 1.40 1.65 1.90 2.15 2.15 2.40 2.40 2.65South Korea 1.50 1.50 1.75 2.00 2.00 2.25 2.25 2.25Taiwan 1.38 1.38 1.38 1.50 1.50 1.63 1.63 1.75Thailand 1.50 1.50 1.50 1.50 1.75 2.00 2.25 2.50Vietnam*** 6.25 6.25 6.25 6.25 6.50 6.50 6.75 6.75
Eurozone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10United States 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50* 1-yr lending rate; ** 3M SOR ; *** prime rate
Policy interest rates, eop
Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19
China 6.28 6.40 6.50 6.60 6.55 6.50 6.45 6.40Hong Kong 7.85 7.84 7.83 7.82 7.82 7.81 7.81 7.80India 65.2 68.5 69.0 69.5 70.0 70.5 71.0 71.5Indonesia 13728 14100 14150 14200 14250 14300 14350 14400Malaysia 3.86 4.00 4.10 4.20 4.18 4.15 4.13 4.10Philippines 52.2 53.0 53.5 54.0 54.5 55.0 55.5 56.0Singapore 1.31 1.34 1.36 1.38 1.37 1.36 1.35 1.34South Korea 1064 1100 1125 1150 1140 1125 1115 1100Thailand 31.2 32.2 32.9 33.6 33.3 33.0 32.7 32.4Vietnam 22775 22836 22903 22970 23022 23074 23246 23177
Australia 0.77 0.75 0.74 0.73 0.74 0.74 0.75 0.75Eurozone 1.23 1.18 1.17 1.16 1.17 1.18 1.19 1.20Japan 106 111 113 115 114 113 112 111United Kingdom 1.40 1.34 1.33 1.32 1.33 1.34 1.35 1.36Australia, Eurozone and United Kingdom are direct quotes
Exchange rates, eop
Monthly 25 May 2018
Page 13
Rates forecasts
2018 2019
Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4
US 3m Libor 2.31 2.30 2.50 2.75 3.00 3.25 3.50 3.75
2Y 2.27 2.60 2.75 2.90 3.05 3.20 3.35 3.50
10Y 2.74 3.00 3.10 3.20 3.30 3.40 3.50 3.50
10Y-2Y 47 40 35 30 25 20 15 0
Japan 3m Tibor 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.05
2Y -0.13 -0.12 -0.11 -0.10 -0.08 -0.05 -0.03 0.00
10Y 0.05 0.09 0.10 0.10 0.10 0.10 0.10 0.10
10Y-2Y 18 21 21 20 18 15 13 10
Eurozone 3m Euribor -0.33 -0.30 -0.30 -0.25 -0.20 -0.10 0.00 0.10
2Y -0.60 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30
10Y 0.50 0.80 0.90 1.00 1.13 1.25 1.38 1.50
10Y-2Y 110 110 110 110 113 115 118 120
Indonesia 3m Jibor 5.36 5.90 6.15 6.15 6.15 6.40 6.40 6.40
2Y 5.51 6.70 6.85 7.10 7.20 7.30 7.40 7.50
10Y 6.68 7.15 7.25 7.40 7.55 7.70 7.85 8.00
10Y-2Y 117 45 40 30 35 40 45 50
Malaysia 3m Klibor 3.69 3.65 3.90 3.90 3.90 3.90 3.90 3.90
3Y 3.45 3.70 3.80 3.85 3.85 3.85 3.85 3.85
10Y 3.94 4.20 4.25 4.30 4.35 4.40 4.45 4.50
10Y-3Y 50 50 45 45 50 55 60 65
Philippines 3m PHP ref rate 4.08 4.05 4.20 4.20 4.25 4.30 4.30 4.30
2Y 4.16 4.60 4.80 4.90 5.00 5.10 5.20 5.20
10Y 6.00 6.60 6.70 6.80 6.90 7.00 7.00 7.00
10Y-2Y 184 200 190 190 190 190 180 180
Singapore 3m Sibor 1.45 1.70 1.85 2.05 2.25 2.45 2.65 2.85
2Y 1.79 2.00 2.10 2.20 2.30 2.40 2.50 2.60
10Y 2.29 2.50 2.60 2.70 2.80 2.85 2.90 2.90
10Y-2Y 50 50 50 50 50 45 40 30
Thailand 3m Bibor 1.57 1.60 1.60 1.60 1.85 2.10 2.35 2.60
2Y 1.32 1.45 1.50 1.60 1.80 2.00 2.20 2.40
10Y 2.40 0.50 2.60 2.70 2.80 2.90 3.00 3.00
10Y-2Y 107 -95 110 110 100 90 80 60
China 1 yr Lending rate 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35
3Y 3.56 3.20 3.20 3.30 3.40 3.50 3.60 3.70
10Y 3.75 3.60 3.65 3.70 3.75 3.80 3.85 3.90
10Y-3Y 19 40 45 40 35 30 25 20
Hong Kong 3m Hibor 1.21 1.70 1.90 2.15 2.40 2.65 2.90 3.15
2Y 1.42 1.90 2.05 2.20 2.35 2.50 2.65 2.80
10Y 1.99 2.30 2.40 2.50 2.60 2.70 2.80 2.80
10Y-2Y 57 40 35 30 25 20 15 0
Taiwan 3m Taibor 0.66 0.66 0.66 0.74 0.74 0.81 0.81 0.89
2Y 0.45 0.60 0.60 0.68 0.68 0.75 0.75 0.83
10Y 0.99 1.15 1.25 1.35 1.45 1.55 1.60 1.65
10Y-2Y 54 55 65 68 78 80 85 83
Korea 3m CD 1.65 1.65 1.90 2.15 2.15 2.40 2.40 2.40
3Y 2.22 2.25 2.30 2.35 2.40 2.45 2.45 2.45
10Y 2.62 2.80 2.85 2.90 2.95 3.00 3.05 3.10
10Y-3Y 41 55 55 55 55 55 60 65
India 3m Mibor 7.48 7.00 7.00 7.15 7.15 7.30 7.30 7.30
2Y 6.85 7.25 7.30 7.40 7.50 7.60 7.70 7.80
10Y 7.40 7.70 7.80 7.90 8.00 8.10 8.20 8.30
10Y-2Y 55 45 50 50 50 50 50 50
%, eop, govt bond yield for 2Y and 10Y, spread bps
Monthly 25 May 2018
Page 14
Group Research Economics & Strategy
Taimur Baig
Chief Economist - G3 & Asia
+65 6878-9548 [email protected]
Nathan Chow
Strategist - China & Hong Kong
+852 3668-5693 [email protected]
Joanne Goh
Regional equity strategist
+65 6878-5233 [email protected]
Neel Gopalakrishnan
Credit strategist
+65 6878-2072 [email protected]
Eugene Leow
Rates Strategist - G3 & Asia
+65 6878-2842 [email protected]
Chris Leung
Economist - China & Hong Kong
+852 3668-5694 [email protected]
Ma Tieying
Economist - Japan, South Korea, & Taiwan
+65 6878-2408 [email protected]
Radhika Rao
Economist - Eurozone & India
+65 6878-5282 [email protected]
Irvin Seah
Economist - Singapore, Malaysia, & Vietnam
+65 6878-6727 [email protected]
Duncan Tan
FX & Rates Strategist - ASEAN
+65 6878-2140 [email protected]
Samuel Tse
Economist - China & Hong Kong
+852 3668-5695 [email protected]
Philip Wee
FX Strategist - G3 & Asia
+65 6878-4033 [email protected]
Disclaimer:
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Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations)