2020 global economic and foreign exchange outlook · 2019. 12. 24. · even keanu reeves is dating...

2020 Global Economic and Foreign Exchange Outlook

Welcome to Shanghai Commercial Bank Limited’s website

Ryan Lam, CFA

Head of [email protected]+852 2841 5283

Evelyn Huang

[email protected]+852 2841 5450

Published In December 2019

Contents3 Theme#1 Is the Recession About to Come, Finally?

6 Theme#2 The Last Mile Is the Hardest

9 Theme#3 On the End of Monetarist Era

13 Theme#4 In Gold We Trust

15 Theme#5 What Should We Know About US Presidential Parade

2

2020 Global Economic and Foreign Exchange OutlookAs hard as it may be to recall now, there was a time, about a year ago, everyone was talking about cash is king. That is, of course, drastically different from the world we are living in right now.

Contrary to the then-pervasive pessimism at the end of last year, rush for risk is on. Global equities are flirting with fresh peaks. The once-inverted yield curve, an omen of recession returns, has righted itself. Investors of all stripes are raking in profits (Exhibit 1) – an unthinkably rare event. Even Keanu Reeves is dating again!

Exhibit 1: Total Return of Stocks and Bonds (1st Jan 2017 = 100)

80

90

100

110

120

130

140

150

2018-01 2019-072019-012018-07

US Bond Index (Barclays) Europe Bond Index (Barclays) Dow Stoxx 50

Source: Barclays, Bloomberg, Shanghai Commercial Bank

We all need no further reminder that the real world is hideously complex. Countless possibilities lie ahead if one stares at his crystal ball hard enough. Yet we have more than wild-guessing and dart-throwing to offer. While suggestive not diagnostic, on the following pages we have mapped out how our checkered future looks like. Let us make sail.

3

Theme#1 Is the Recession About to Come, Finally?“What goes up must come down,” as Sir Isaac Newton wisely observed. Our decade-long recovery breaks old record and keeps setting a new one (Exhibit 2). Wrestling with the ticking clock, this seems all the more reason to stay alert.

Exhibit 2: Duration of the US Recovery (Month)

0

20

40

60

80

100

120

140127

120

106

92

73

58

39 36

24

12

Jun

09 -

pres

ent

1991

.3 -

2001

.3

1961

.2 -

1969

.12

1982

.11

- 199

0.7

2001

.11

- 200

7.12

1975

.3 -

1980

.1

1954

.5 -

1957

.8

1970

.11

- 197

3.11

1958

.4 -

1960

.4

1980

.7 -

1981

.7

Source: NBER, Shanghai Commercial Bank

Exhibit 3: Global Purchasing Manager’s Index

2010

-01

2011

-01

2012

-01

2013

-01

2014

-01

2015

-01

2016

-01

2017

-01

2018

-01

2019

-01

45

47

49

51

53

55

57

59

Manufacturing Service

Source: CEIC, Shanghai Commercial Bank

Let’s not lose sight of forest for trees. Expansions don’t die because they’re aged. They die only because of bubbles or external shocks. Flash back to 2007, it was the housing bubble and the chronic saving shortfall. “The longer you can look back,” in Churchill’s telling, “the farther you can look forward.” Go further back to 2001, vulnerabilities were woven into overly aggressive business spending.

At present, the list for investors to worry about appears to be endless: sputtering manufacturing engine (Exhibit 3), the vagaries of trade disputes, the invincible rise of populism, and withering power of rate cuts. These warnings are flashing like a Christmas tree under our radar. Is the day of reckoning, after years of false alarms, about to arrive finally?

4

Consumers party onGood forecasters always keep a close eye to base rates. So checking the pulse of the world biggest economy is perhaps a promising start of our journey.

The untold story is that America has a two-speed economy. While the Rust Belt has stumbled this year, thanks to waning sugar rush from Trumpian tax cuts, ordinary consumers hold up just fine. The key question then boils down to whether or not hoi polloi can remain isolated from the manufacturing slump.

U.S. consumers, in our estimate, will keep the upswing alive. The slowdown in job creation is well documented, but what’s missing in this seemingly bleak picture – and it is a critical omission – is wage growth. Zooming in, salaries are climbing at an eye-popping clip of around 3% (Exhibit 4), outpacing the sub-2% inflation despite recurring recession scares.

Exhibit 4: U.S. Average Hourly Earnings (% YoY)

03/201903/201703/201503/201303/201103/200903/2007

0%

1%

2%

3%

4%

5%


Exhibit 5: U.S. Personal Saving Rate (%)

01/201901/201701/201501/201301/201101/200901/2007

0

2

4

6

8

10

12

14


What if wage growth grinds to a halt? The sky will not fall neither. Americans are currently saving up 8.3% of their income for future (Exhibit 5). With a sizable nest egg, consumers need not to tighten their belts as they would otherwise when shock hits the shore. It runs diagonally to that of the last recession, when their meagre savings failed to work as a circuit breaker against the death spiral.

“The time to repair the roof is when the sun is shining”, as John F. Kennedy underscored. The U.S. recovery may not be picture-perfect, but the spare nickel will be the glue that holds the country together if things go wild. Until the feel-good vibe vanishes, the U.S. is hardly on the cusp of recession. Nothing spectacular, but not too bad for an economy going through a record-long expansionary phrase.

5

Heal the worldWe have depicted the U.S. as a fallen angel who is expelled from heaven. The fate awaits other countries looks rather different. They’re more like a rubber band gets overstretched – it bounces back.

Europe: The German auto shakeout is, we think, mostly about inventory overhang not supply chains crash, and therefore inherently self-healing. Moreover, people seems oblivious to the sky-high household saving rate of 13% within the continent. Being said that, European consumers have the wherewithal to spend if they choose to.

UK: Like it or not, Brexit saga will continue to hog the headlines. Conservatives and Labour may reconsider their extremism after repeated failure. They will likely to accept a watered-down Brexit deal that voters originally treated with disdain. It might well be less positive than May’s deal would have been, but business community just loves a deal, any deal.

Japan: Japan is, wryly, the only developed country escapes unscathed from the blizzard of Japanification. Its activity will perk up following the one-off October hike in consumption tax. Praying for a return to normalcy isn’t Abe’s first instinct neither. His government is bound to approve supplementary fiscal measures, with its impact reaching 0.3% of GDP.

China: Manufacturing PMI has been below the level of 50 for a few months. We feel a sense of déjà vu, as the country was trapped in a similar position before, in 2015-16. Then, as now, the solution was to open credit floodgate. In China, leverage always rolls over. If China pulls off the same trick again, the air of pessimism should be lifted in short order.

The conclusion?

As 2020 dawns, fog is lifting. The renewed optimism will make its own reality, and markets outside US may offer fertile hunting ground. Be mindful that re-risking starts from a high starting point as cash remains rock bottom by historic standards. So the entry point, as with many investment opportunities, are unlikely to present themselves in a straightforward fashion.

Exhibit 6: GDP Growth and Rate Forecasts

GDP growth (% YoY) Key policy rate (% year end)

2017 2018 2019F 2020F 2017 2018 2019F 2020F

US 2.2 2.9 2.3 1.4 1.25-1.50 2.25-2.50 1.75-2.00 1.75-2.00

Eurozone 2.4 1.8 1.2 1.1 –0.40 –0.40 –0.50 –0.50

UK 1.8 1.4 1.2 1.3 0.50 0.75 0.75 0.50

Japan 1.9 0.8 0.8 0.6 –0.10 –0.10 –0.10 –0.20

China* 6.9 6.6 6.2 5.8 4.35 4.35 4.35 4.35

Hong Kong^ 3.8 3.5 –1.1 0.7 5.00 5.125 5.125 5.125

*1-year lending rate, ^Prime rate

Source: Bloomberg, Shanghai Commercial Bank

6

Theme#2 The Last Mile Is the HardestAmongst all the gale-force political winds blowing globally, the Sino-US trade war remains the stiffest one.

The markets are celebrating an uneasy peace between Trump and Xi and a bullet dodged. Behind euphoria, the détente is a big nothing burger with vague promises. Analysts are thus abuzz with a follow-up question: How long will this goodwill gesture last?

Exhibit 7: What Trump Has Done So Far

Date Remark

Jan-2018 The White House approved global-wide tariffs on USD8.5 billion of imported solar panels

Mar-2018 Tariffs of 25% and 10% were slapped on steel and aluminum, respective, under the name of national security

Jul-2018 Trump started to subsidize American farmers for up to USD12 billionPunitive tariffs on USD34 billion of Chinese imports went into effect

Aug-2018 Washington imposed 25% tariff on USD16 billion of Chinese goods

Sep-2018 An additional 10% tariff was levied on USD200 billion of Chinese goods

Jan-2019 U.S. and China struck a 90-day ceasefire

Feb-2019 Trump extended the March deadline

Jun-2019 Trump and Xi agreed to resume negotiations

Aug-2019 US ramped up tariffs to 10% on USD300 billion of Chinese goodsChina unveiled 5%-10% retaliatory tariffs on USD75 billion of US goods

Oct-2019 Trump called off its planned October tariff hike

Dec-2019 Trump reached phase one deal with China

Source: Shanghai Commercial Bank

7

Borrowed time with peaceA word of caution from us: 2019 isn’t the watershed year the trade war would end. Carrots are better than sticks for your health for sure. But drawing on the distressing commons listed below, trade war is, we afraid, mushrooming into multi-year clash of civilizations:

China chooses NOT to rise to the bait. China has long embraced the “shopping-list” approach – tossing concession here and there (buying more soybeans and aircrafts for instance) – when it comes to defusing trade tensions. Keeping doling out the age-old handouts conveys a clear message that China is not going to yield an inch under pressure.

Differences are intractable, still. Tough nuts such as intellectual property protection, forced technology transfer, human rights concerns and enforcement mechanism are essentially untouched in the armistice. This silence carries heavy overtone.

This groundswell of yearning highlights Trump’s intention to throttle China’s advancement towards superpower status. China knows exactly what’s happening under its nose. In effect, Chinese top brass are prohibiting well-meaning bureaucrats from engaging in give-and-take with the Trump administration. “Win-win scenarios”, in Xi’s own words, “can also be realized through struggles.”

The table is turning. China’s state capitalism is not quite as vulnerable as many thought. If anything, China may feel emboldened to harden its position as the US exceptionalism is coming to an end (see Theme#1).

It is Trump first, not America first. A year ago, the trade hawks in Washington felt like they had Beijing on the mat. It has always been pure fantasy at best, or deliberate fabrication at worst. Dealmakers know when to cut their losses. Wouldn’t the Trump administration draw the right lessons from its futile negotiations?

An ironclad rule of U.S. politics is “never admit you were wrong”. Frankly, if not Trump, who else? He has nothing to lose either he wins or loses the re-election. War is, in a sense, better than trade. We may expect his revenge should negotiations head to a bitter end.

8

How to trade the trade warThe current primrose path is leading to nowhere. We don’t expect much headway to be made in trade negotiation going forward. Later phase accord may never see the light of day.

If so, exposing yourself to risk seems like playing with fire. Not so fast. Getting the timing wrong and missing out on another leg up in equities is equally unappetizing. What do we do?

Next spring, TINA (There is No Alternative) and FOMO (Fear of Missing Out) are expected to take hold. More shorts will be buried, propping equities and high-yielding currencies up.

Rupture will then come to light, in our best guess, April next year as Trump did this year. Sentiment will react in a similar manner to the response of Mike Campbell, a Hemingway’s character in The Sun Also Rises, when being asked how he went bankrupt: “Gradually, then suddenly.”

“If you’re going through hell,” as Winston Churchill suggested, “keep going.” From a sector perspective, automobile, metals, tech, telecoms and transportation sectors would be hardest hit by the chilly trade winds. On a tactical basis, the shaky ground prompts us to switch into range-bound trading as we step into 2Q20. Frequent profit-taking may not be the strategy brings us glory, but this leaves us more downside protection and thus the one we still advise.

9

Theme#3 On the End of Monetarist EraWe are getting numb to stocks with so-so earnings were sold like unicorns. Nothing real is necessary, as the argument goes, because easy money will do the job. Can markets repeat the euphoria last seen in 2016-2018?

How central bank lost its wayIt seems implausible to us. Concerted monetary easing was once hailed as an overwhelming force during the 2016-2018 upturn, and rightly so. In 2020, central bankers will turn this force on its head.

The Fed would be the first to reckon that the prowess of monetary tools has reached its limits. In both 1995 and 1998, the central bank slashed rates three times to provide insurance to the economy. With three rate cuts under its belt (Exhibit 8), further cut would inevitably be interpreted as recession-induced. To lavish an extra 25bps in rate is therefore expensive at the price, we contend Chair Powell is not ready to cross the red line.

Exhibit 8: Key Policy Rate

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2015-01 2015-07 2016-01 2016-07 2017-01 2017-07 2018-01 2018-07 2019-01 2019-07

US Australia Eurozone Japan New ZealandUK


Or take ECB. Any hopes for the ECB to start a paradigm shift are destined to be dashed. Ms. Lagarde did say policy rates “are not at that bottom at this point,” but the banking-focused hawks insist on an adjustment in inflation target band, if that’s what it takes.

For PBoC, hands are tied as much ink has been spilled on pork-led inflation. BoJ’s reluctance on cutting its rate deeper is equally salient.

What about a fresh round of coordinated QE? Even if policymakers agree to turn on the spigot, the QE doesn’t have the same oomph as it once did. Little more juice can be extracted when the entire yield curve is trading at depressed levels. Supply is another elephant in the room. A deluge in additional Treasuries issuance, up to USD600 billion annually, is more than enough to blunt any QE program intended.

10

Exhibit 9: Central Bank’s Asset Size (% of GDP)

0%

50%

100%

150%

200%

250%

300%

350%

3/2008 3/2010 3/2012 3/20183/20163/2014

Fed BoE BoJ ECB


Riding on the unloved rally for bondsIn the year ahead, we are largely on our own. What should we make of this tectonic shift? The answer is more nuanced than many expect:

Stay nimble. Fiscal authority should now take the baton from central banks. Going large on belated fiscal stimulus, back-end bonds are more prone to supply shock. We favour short-end note.

Prefer EU over U.S. on tactical basis. The term premium of US Treasuries remains well below early summer levels even after the recent rally (Exhibit 10). On the other hand, the ECB’s deliverables may exceed market expectations. This difference in re-pricing should be most acutely felt in 2H20.

Embrace sporadic spike. The world is losing its anchor of stability. In fact, we are of the view that the funding squeeze we witnessed in September was a small taste of what is yet to come. This will present us buy-dip opportunity from time to time.

11

Be selective. Bifurcation in corporate credit is phenomenal. Whilst thin liquidity casts a long shadow over CCC-rated bonds, little fear from global insurers was projected on BB-rated credit (Exhibit 11).

Our thesis is that this bifurcation will likely to be further extended. Snow melts from the edge. In junk bond market, each sale is resetting prices with half-hearted opposing price action. You cannot turn burnt toast back into bread, so expect no love for junk bond. Alternatively, investor’s unquenchable desire for yield in higher-quality issuers won’t be interrupted easily amid managed default risk. Property name is expected to hold bids.

Exhibit 10: Component of 10-year US Treasury (%)

Exhibit 11: Yield Across Risk Spectrum (%)

04-Ja

n-20

16

24-Ju

n-20

16

16-D

ec-2

016

12-Ju

n-20

17

01-D

ec-2

017

25-M

ay-2

018

16-N

ov-2

018

14-M

ay-2

019

04-N

ov-2

019

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Risk-free rate Term premium

2010

-01

2011

-01

2012

-01

2013

-01

2014

-01

2015

-01

2016

-01

2017

-01

2018

-01

2019

-01

AAA AA A BBB BB B CCC or below

0

5

10

15

20

25

Source: New York Fed, Shanghai Commercial Bank Source: Wind, Shanghai Commercial Bank

How to think about FX market

USD Overweight

Neutral

Underweight

‘Risk on, dollar off’ would be a recurring theme for 1Q20. Dollar bulls come to term with the reality that the dollar is overvalued following aggressive Fed easing. It sets stage for a 3% front-loaded depreciation. If trade talk goes awry as we expect however, the USD’s superior yield appeal makes it king again in 2H20. The rally would be dwarfed by the throat-cutting presidential election (see #Theme 5).

EUR Overweight

Neutral

Underweight

Most active investors are EUR-short given the trifecta of Brexit concerns, German auto downturn and never-ending political risks in Italy. This is to say the hurdle for upside surprise is extremely low. We now see a euro smile: either a liquidation of EUR-funded carry trade or a realization of long-sought global convergence. The risk-reward favours positioning for a modest EUR recovery.

GBP Overweight

Neutral

Underweight

For the first time since the 2016 referendum, there’s light at the end of the Brexit tunnel. Lifting GBP hedges in unison under Conservative majority means 1.35 is within reach. The pair will meet with stubborn resistance above 1.35, as long as the risk of another cliff-edge lingers at the end of 2020.

12

RMB Overweight

Neutral

Underweight

Phase-one deal has already fully baked in and another leg up needs additional dose of adrenaline. But we see no escape from Thucydides trap and hence warn against jumping on the bandwagon. Weaponising its currency becomes even more tempting as capital flow now stabilises. We project the pair to revisit 7.20s.

JPY Overweight

Neutral

Underweight

The punitive-carry tends to reduce the JPY as an afterthought. Japanese investors will seek to place capital abroad if the constructive environment lasts into 1Q20. It’s far from a one-way travel though. JPY’s as a hedging tool will keep the undervalued JPY afloat at some point in 2Q20. Range-bound trading is the new black.

AUD Overweight

Neutral

Underweight

As tariffs rollback on China, the beaten-up Aussie is supposed to outrun the market. Yield seekers, however, seem reluctant to hop onto this train under the shadow of its own housing slump. Pouring salt in the wounds, the RBA’s QE program looks set to carry the load and eat into Aussie’s yield advantage. Its first foray into asset purchases could be a game changer.

NZD Overweight

Neutral

Underweight

NZD, likewise, faces pronounced country-specific challenges. The country runs one of the largest current account deficit among its peers, not to mention the central bank faces the risk of inflation falling below its 1-3% target range. Scope for a “melt-up” is limited.

>1% within 3 months

+/-1% within 3 months

<-1% within 3 months

Exhibit 12: Foreign Exchange Outlook

Year end target

Current 2019F 2020F

EUR/USD 1.11 1.12 1.14

GBP/USD 1.30 1.30 1.34

USD/JPY 109 109 107

USD/CNH 7.00 7.01 7.20

AUD/USD 0.68 0.68 0.67

NZD/USD 0.64 0.64 0.64


13

Theme#4 In Gold We TrustLeaving no stone unturned, finally we come to gold. Piling up bullion was once a no-brainer, considering the paucity of return from cash and government bonds. All the enthusiasm disappears in time, like tears in rain, when optimism fills the air (Exhibit 13). Has the yellow metal lost its shine already?

Exhibit 13: Gold Price (USD per ounce)

1,200

1,300

1,400

1,500

1,600

01/2019 03/2019 05/2019 07/2019 09/2019 11/2019


As explorer Christopher Columbus is reputed to said, “Gold is a treasure, and he who possesses it does all he wishes to in this world.” Five centuries after his epochal voyage, we are still not ready to call an end of gold fever.

Investors are ho hum about recession risk, but the risk never goes away. The fear had haunted markets for the better part of 2019, and will come back to fore as soon as incoming data shows the fragile ground the current recovery rested on. We can’t say we are not warned. The question is do we have wood when winter arrives.

But what type of wood? Buys and then rolls put options on equities is prohibitively extravagant during peaceful times. What about purchasing US Treasuries? The problem is that it is not as recession-proof as once thought. With the demise of monetary dominance, the bond-equity correlation may change, rendering this strategy a quack remedy. Case for holding gold as a viable hedge is thus comparatively solid.

14

When uncertainties reign, potentially as early as in April (see Theme#2), gold will glitter. We prefer to keep our powder dry for a while since the speculative positioning on gold is becoming stretched (Exhibit 14). The gold price tends to fall with such speculative excesses. This selloff leaves us opportunity to harvest the high-low difference.

Exhibit 14: Speculative Net Positioning on Gold (No. of Contracts)

(100,000)

(50,000)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2015-1 2016-1 2017-1 2018-1 2019-1

Source: CFTC, Wind, Shanghai Commercial Bank

15

Theme#5 What Should We Know About US Presidential ParadeLess than a month away, 2020 brings with it the next US presidential election. We have already seen how the 2016 presidential election upended the financial world that we knew. We better be prepared this time, no matter who passes through the White House gates.

Exhibit 15: The Road to Presidential Election

Date Event

3-Feb Iowa Caucus

11-Feb New Hampshire Primary

3-Mar Super Tuesday

13-16 Jul Democratic National Convention

24-27 Aug Republican National Convention

10-Sep First Presidential Debate

15-Oct Second Presidential Debate

22-Oct Third Presidential Debate

3-Nov Election Day


Did investors care party label?We list how US dollar index, S&P 500 and 10-year US Treasury yield fared over the US presidential elections since 1984.

On average, stock returns over the past election years are mediocre, and yields tend to fall (Exhibit 16). No one should be frustrated by such anemic outcome, on the self-evident ground that bickering and its attendant uncertainty dampen investment and growth.

16

What’s more striking is that it doesn’t matter which party is in power. Difference between Republican presidency and Democratic presidency is all but trivial. That said, investors vote with ballots, not portfolios.

Exhibit 16: Asset Performance During Election Year

Return Over Election Year

Election Date President DXY SPXUS 10-year Treasury

6-Nov-1984 Reagan (R) 14.9% 1.4% –0.3ppt

8-Nov-1988 H.W. Bush (R) 8.3% 12.4% 0.3ppt

3-Nov-1992 Clinton (D) 10.6% 4.5% –0.0ppt

5-Nov-1996 Clinton (D) 4.0% 20.3% 0.8ppt

7-Nov-2000 W. Bush (R) 7.5% –10.1% –1.3ppt

2-Nov-2004 W. Bush (R) –7.0% 9.0% –0.0ppt

4-Nov-2008 Obama (D) 6.0% –38.5% –1.8ppt

6-Nov-2012 Obama (D) –0.5% 13.4% –0.1ppt

6-Nov-2016 Trump (R) 3.6% 9.5% 0.2ppt

Average (election year) 5.3% 2.4% –0.3ppt

Average (Democrat presidency) 5.0% –0.1% –0.3ppt

Average (Republican presidency) 5.5% 4.4% –0.2ppt


Closeness holds the keyWhat, then, should we do? Look at the closeness of contest instead. It leaves a bigger footprint in asset markets.

In a neck-and-neck race, we see more range-bound equity markets than ones where the outcome was more certain (Exhibit 17). Consider the 1996 lopsided competition, in which Bill Clinton’s polling margin over Bob Dole stayed comfortably at double digits through thick and thin; S&P 500 skyrocketed by 20.3% during the election year. 2016 was, on the other hand, a rough and tumble fight. Trump’s polling deficit against Hillary Clinton was mostly 3%-ish. US stocks raced up 9.5% during that year.

On average, excluding the 2008 episode, one-horse races see S&P 500 rallied by 9.6%; elections that are grueling only see 5.4% gains.

17

Exhibit 17: Average Return During Election Year

Close race Non-close race (ex 2008)

US Dollar Index S&P 500

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


What to watchWe’ll see fistfight in swing states that were hotly contested in 2016. Key among them are states Trump flipped such as Michigan, Pennsylvania and Wisconsin, along with Florida. It is where we shall gaze at.

What if Trump hold onto the White House?Most people insist Trump stands no chance of getting re-elected. The 2016 election should serve as a cautionary tale. With no serious primary challengers, voters could overlook Trump’s misdeeds under the veil of “witch hunt”. If the unemployment, stock market, and his approval rating are about the same a year from now as today, a diverse set of models predicts it would carry him to get re-elected.

If it realises, what’ll happen?

Presumably for Trump, as for France’s Louis XIV, “l’état, c’est moi” (“I am the state”). Unshackled from re-election worries, the freewheeling President will let his erratic instincts on diplomacy run wild. Domestically, he tweets 5 times a day about how reckless Jay Powell is. To slow the bleeding from his self-inflicted wounds, he may give Larry Kudlow one more chance to pitch a middle-class tax cut.

18

What if Democrats rise to the top?The Democratic nominee may only be known as late as the mid-July National Convention. If the Democrat turns the table, what will they deliver?

Exhibit 18: Democratic Primary Polls

0

5

10

15

20

25

30

35

40

45

9/12/2018 9/3/2019 9/6/2019 9/9/2019

Biden ButtigiegWarren YangHarrisSanders

Source: RealClearPolitics, Shanghai Commercial Bank

Joe Biden: The former vice-president has dominated the primary’s moderate lane. He despises the “corporate greed” of corporate America and pledges to undo Trump’s tax cuts. Whilst he is equally-hard protectionist, the centrist hasn’t really touched on turning the dollar into a weapon, much akin to the laissez-faire policy during Obama-era.

Elizabeth Warren: A female candidate from Massachusetts is typically a jinx to run away from in terms of election. Not for Elizabeth Warren. Her unapologetically progressive plan strikes a chord with public. If Sanders drops from the race, she would consolidate the far left vote and march forward as the frontrunner in the primary (Exhibit 18).

Her signature initiative is the introduction of “Ultra-Millionaire Tax” – a 2% levy on every dollar of net worth for households over USD50 million and 6% on every dollar over USD1 billion. She also champions idea of protectionism. Her government will “actively managing our currency value”. Overall, a business-hostile environment under Warren presidency may spook dollar investors more than any pro-growth reform she touts.

Bernie Sanders: Another torch carrier for the Left, his plan would blow a huge hole in public coffer. The self-declared democratic socialist proposes to levy estate taxes, but his all-encompassing spending plans, including cancellation of student debt, grants for clean energy infrastructure, and the elimination of public tertiary tuition fees, are even more ambitious. When asked how the shortfall will be funded, his answer – “I don’t think I have to do that right now” – is plain jaw-dropping.

19

Implications for marketsHow do we stitch everything together? Three overarching points stand out:

• One should not anticipate a better trade backdrop. Contenders from all walks of life will ride on the grievance against the unfair trade system. Assets in Taiwan and Vietnam have chance to outperform when a Sword of Damocles hangs over our heads;

• Neither party has “three of a kind” – White house, the Senate and the House of Representative – in their hands. Without fiscal thrust, the election is not likely to counteract the late-cycle narrative. The dollar will be benefited from flight-to-quality flows in 2H20;

• Its role as safe haven could be hampered by Democratic presidency, a perceived chaos agent, though (Exhibit 19).

Exhibit 19: Presidency & Dollar

Tight

Easy

Strong

Currency Management

Fiscal Policy

Weak dollarWarren

Neutral dollarBiden

Strong dollarTrump

Neutral dollarSanders

Loose


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Disclaimer – Investment Involves Risk

Investment Risk Disclosure

• The following risk disclosure statement cannot disclose all the risks involved and does not take into account any circumstances that are unknown to Shanghai Commercial Bank Limited (the “Bank”). Investment involves risks. Securities, Investment fund and Bonds are investment products. The price of investment products may go up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying or selling investment products. Any past performance figures shown are not indicative of futures performance. Part of the investment may not be able to liquidate immediately under certain market situation. Customers should refer to relevant offering documents for detailed information, including but not limited to Risk Disclosures, prior to any investment subscription. The products described herein may not be suitable for all people. The decisions to invest are made by customers and customers should not invest in investment products unless the intermediary selling them has explained to them that the product is suitable for them having regard to customers’ financial situation, investment experience and investment objectives. Customers should not make any investment decisions based on this document alone. Customers must make their own assessment of the information provided in this document. Customers should carefully consider whether any investment products or services mentioned herein are appropriate for them in view of their financial situations, investment experiences and investment objectives. If customers have any doubt about this material or any relevant offering document, they should consult their own independent advisers on the legal, regulatory, tax, investment and financial implications of the investments (including but not limited to estate duty and withholding tax and other tax obligations which may arise from local or foreign investment) as they deem appropriate to ensure that they understand the nature of the investments in order to consider whether the investments are suitable investments for them.

• Investment Risk in Securities: The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Investment involves risks. Any past performance figures shown are not indicative of futures performance. Part of the investment may not be able to liquidate immediately under certain market situation. Customers must ensure to read and understand the information of Shanghai and Shenzhen Connect A-shares trading of the Bank including relevant details, trading rules, risk, fees, restriction and notices before investing in Shanghai and Shenzhen Connect A-shares trading.

• Investment Risk in investment funds: The prices of investment funds fluctuate, sometimes dramatically. The price of an investment fund may go up or down and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling investment funds. Investment involves risks. Any past performance figures shown are not indicative of futures performance. Part of the investment may not be able to liquidate immediately under certain market situation. Customers should refer to relevant investment fund offering documents for detailed information, including but not limited to Risk Disclosures, prior to any investment fund subscription. Customers should carefully consider whether any investment products or services mentioned herein are appropriate for them in view of their financial situations, investment experiences and investment objectives. Please refer to explanatory memorandum or relevant materials of the fund for further information. The subscription of investment fund is subjected to prevailing regulatory requirements and restrictions and relevant terms and conditions of the Bank. The Bank acts as a distributor of the funds managed by fund housed and the funds are the product of the third party fund houses. For distribution of funds – in respect of an eligible dispute (as defined in the Terms of Reference for the Financial Dispute Resolution Centre in relation to the Financial Dispute Resolution Scheme) arising between the Bank and the customers out of the selling process or processing of the related transaction, the Bank is required to enter into a Financial Dispute Resolution Scheme process with the customers; however any dispute over the contractual terms of the product should be resolved directly between the third party fund house and the customers.

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• Investment Risk in Bonds: Bond investments are not bank deposits and involve risks, including the possible loss of the principal amount invested. Customers should be aware of the risk of exchange rate fluctuations for bonds denominated in non-local currency, which may cause a loss of principal. Unless specified, these investments are not guaranteed by the Bank. The prices of bonds fluctuate, sometimes dramatically. The price of a bond may go up or down and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of subscribing and redeeming bonds. Investment involves risks. Any past performance figures shown are not indicative of future performance, which the Bank does not guarantee the existence of a secondary market for bonds. Part of the investment may not be able to liquidate immediately under certain market situation. Customers should refer to relevant bonds offering documents for detailed information, including but not limited to Risk Disclosures, prior to any bonds subscription.

• RMB is subject to exchange rate risk (only applicable to Individual Customers): RMB is currently not freely convertible. Customers should be aware that they can conduct conversion of RMB at CNH rate through bank accounts, for which it is subject to the requirements specified by the Relevant Authorities from time to time, the requirements specified by the Bank and/or the RMB position and commercial decisions of the Bank at that moment. RMB Conversion Limitation Risk (only applicable to Corporate Customers): RMB is currently not freely convertible. Corporate Customers should be aware that they can conduct conversion of RMB through bank accounts, for which it is subject to the requirements specified by the Relevant Authorities from time to time, the requirements specified by the Bank and/or the RMB position and commercial decisions of the Bank at that moment. RMB investments are subject to exchange rate fluctuations which may provide both opportunities and risks. The fluctuation in the exchange rate of RMB may result in losses in the event that the customer converts RMB into HKD or other foreign currencies. If the home currency of the customer is different from the Investment product currency or the Investment product’s reference currency, changes in currency exchange rates may erode the investment gains or widen the investment losses of the customer.

• The information of this document has not been reviewed by the Securities and Futures Commission of Hong Kong or any regulatory authorities in Hong Kong.

Important Notice/Disclaimer:

• This document is issued and solely owned by the Bank. This document is for general information and reference only and does not constitute any offer, solicitation, invitation, advice or recommendation to subscribe, trade, redeem or sell for any deposits or investments. No representation, guarantee or other assurance as to the outcome of any investment has been made or will be given to you by or on behalf of the Bank.

• This document contains information from third party, which may be incomplete or simplified. Although the information herein contained is obtained or compiled from sources the Bank believes to be reliable, it has not been independently verified. The Bank cannot and does not represent or warrant the accuracy, validity, reliability, timeliness or completeness of any such information (whether in whole or in part), and accepts no liability for any loss or damage howsoever arising from or in reliance upon the whole or any part of such information or opinions (unless due to the negligence or wilful default of the Bank, the Bank’s authorised officers, employees or agents). The Bank reserves the right to amend all or any part in this document, which all views, forecasts and estimates constitute judgments made before the publication date, and are subject to change without further notice. This document contains certain statements that may be deemed as forward-looking statements involving risks and uncertainties. Customers should be aware that actual results may differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements due to different factors, risks and economic situation.

• The information herein contained may not be reproduced, quoted, distributed, disclosed or published (whether in whole or in part) in any media for any purpose without prior express written consent from the Bank. The Bank accepts no liability for any loss arising from or in reliance upon such information or contents. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution would be contrary to the laws or regulations.

• The Bank and its affiliates or subsidiaries, and/or their officers, directors, agents and employees may have positions in and may trade for their own account in all or any of the securities or investments mentioned in this document. Companies within the Bank may have provided investment services or underwritten in relation to these securities. Commission or other fees may be earned by the Bank respect of the services provided by them relating to these securities or investments.

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