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ECOGNOSISADVISORYLTDFromtheGreek:OIKONOMIKHΓNΩΣΙΣ(EkonomikiGnosis,KnowledgeofEconomics).Ecognosisisaglobalfinancial,economicadvisoryandinformationservice,coveringeconomicandfinancialdevelopments,equities,fixedincome,forex,commoditiesandotherassets.EconotesisaresearchpublicationavailablefreeonourinternetsiteandtothepublicinHongKong.Itisnotasolicitationforbusinessandneitherdoesitcontaininvestmentsuggestionsonspecificandnamedsecuritiesincludinganybuy,sellorholdadvice.ItiswrittenbyDr.AndrewF.Frerisbasedon48yearsofmarketexperiencewhichincludesseniorpositionswithGTCapital,SalomonBrothers,BankofAmericaandBNPParibasaswellassenioracademicpostswithuniversitiesinLondonandinHongKong
8/F, 2 Exchange Square, 8 Connaught Place, Central, Hong Kong. Tel: 852 3167 4591, Mob 852 9738 0944 Email: [email protected] Website: www.ecognosisadvisory.com
ECONOTENo.55:Thailand,RussiaandBrazil(Oh,andanoteontheUSelection/Trump) 6/11/2016
Summary InvestmentConclusions
Aha!Periodsofuncertaintyyousay!USelections, theFedonholdtillXmasandtheG2stillunattractive.Thethreeeconomiesfeaturedherehad,andstilldo,astrongdoseof“negative”politicsbutseemtobedoingOKandcouldcontinuetodosobothpost-Trumpandpost-Fed.WehavetriedtomovefromaUS-centricview,andhavemaintainedthattheUSisimportantbutnothalfasimportantasitisbelievedtobe,andthatincludestheUSelectionsandtheFed.Ourchoice of small Asian equity markets Taiwan, Thailand, IndonesiaandtoalesserextentS.KoreaandthePhilippinesprovedcorrectinthattheyhaveperformedYTDinUSDquitewellandweexpectournewadditions,BrazilandRussiawillcontinuetodoso.
Thailand and Brazil have in common political upheavals, inBrazil via votes and in Thailand through an army coupwiththedeathof theKingaddinguncertainty.Russiahaspoliticsofadifferentkind,thethrustingPutin,butallthreeappeartobe able to shrug off the impact of politics. It might soundinsensitive todemocracybut IBOVESPA’sspectacular79.0%,MICEX’s27.0%andSET’s19.0%all YTD,USDperformancescanaddusefulreturnstoanotherwisedireequityspace.Asfor theusual suspectsof theG3equities,andespecially theUSTandS&P500,theelectionsandtheFedwillcontinuetospoilthe,very,quietparty.
Theuselessnessofpre-electioninvestmentadvice
And has c
including Thailand.As for theG3, theoutlook formonetarypoliciesremainasdiverseaseverwiththeBoJandECBonQEmodewithassetpurchasesinplace,andnotmuchelse.UK’sBrexit is going to get extremelymessy,with the ParliamenthavingasayandwiththeBoE undecidedwhethertocutorhikebut stayingwithQE.Nowonder theG3equitymarketshave performed poorly YTD in USD : S&P500 +2.0%,EuroStoxx50-7.0%,Nikkei+3.7%andFTSE100-9.0%.
Consider the following points: (1) There are only twocandidates in the US election with roughly equal chances ofbeingelected(butseebelow)(2)Clinton’spoliciesarelikelytobe familiaranda continuationofpresentones,Trump’s verypossibly will be neither (3) It would now follow that a“cautious” investor would not adjust 50% of the portfoliomanaged as that would preserve the current state ofknowledgeandrisktaste,whilehe/shewouldadjusttheother50%toallowforthe“Trumprisk”includinglowerbondprices(Trumpplanstowidenthedeficit)andaweakerUSD(Trumpwould renegotiate allmajor trade deals).Itwould also followthat post-election, 50% of the portfoliowould be incorrectlypositioned The 50% allocation is based, crucially, on pollforecasts which in a closely run election can be notoriouslyinaccurate. The last Bush election was “won” on a tinymajority and after inconclusive recounts, and the last UKConservativeelectionvictoryplustheBrexitreferendumwereboth totally “unforecastable”.So thepre-electionadvice toaUS investorwill be, at worst widelywrong, or at best “a donothing”realisticadvice.Andwhat has this to do with Thailand, Russia and Brazil? Agreat deal in fact, as these three markets beset by politics(admittedlyoftheknownkind),arestilldoingreasonablywellequities-wise. We add Brazil and Russia to our preferredportfoliowhichconsistedofsmallAsianequitymarketsonly,
Fig.1:Thailand,SET(violet),C/A(yellow),GDP(red),
Sentiment(blue)2007-2016
Source: Bloomberg
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ECOGNOSISADVISORY–November2016
ECONOTENo.55
BacktoThailand,RussiaandBrazil Fig3:Brazil:GDP(red),PMI(blue),Deficit%(brown),C/A(gr)zzz((brown),china
AsthedatainFig1show,themilitarycoupinThailandandtheroyal death had variable impacton sentimentwhich remainsgood.GDP growth is on a rising trend and fiscalpolicieswillsupportthis,whilethestateofthecurrentaccountsurpluswillhelp keep the THB steady after the recent volatilty.The SETcontinues to register the secondhighest performance inAsiaYTD.Theabsenceofanyprogresstopoliticalstabilisationhas,clearly,notimpactedthemarketssofar.Withresistancetothemilitary appearing subdued, till at least the royal successionhas been effected, there is no reason to expect that purepolitical events will impact current economic and financialperformances. Russia is amore complex case because of itscontinuingpresence inmilitarypolitics. Itsbudgetarypositionhasnotrecovered,withastillwideningdeficit(Fig.2).Howeverwithimprovinginflationandabottoming-outoftheshrinkingGDP growth, the situation is improving as reflected in thebottomingof
Source : Bloomberg
Fig.2:Russia(*)2007-2016
Therehavetobesomeconclusions!
issueofthescandal-riddenPetrobraswillrequiremoretimetoresolve.Brazil can be bought noton current performance butonthepromiseofaconservativeadministrationtryingtobringfiscalandlegalorder inaneconomyblessedwithhugenaturalresources, big industrial and agricuturall sectors and a bigdomesticmarket.Foralongtimenow,Econoteshadbeenharpingonthethemethat there isnoglobaleconomybuta seriesofeconomies farlessinterdependentthanpreviouslyimaginedandNOTbecauseofa looseningofglobalisation,butbecausethehistoricextentofinterdependencehadbeenwidelyexaggerated.Examplesareplenty,butwecanstartwiththelongtermdelinkingoftheUSDfrom Asian currencies, bar Hong Kong, and the completeoverestimation of the role of China in this “global economy”.OnecannotblametheeconomicslowdownintheG3onChina,andhenceexpecttherecoverytostartfromChinaaswell.Thebest single cure for this overestimation is to enumerate thefinancialcriseswhichtookplace inAsiaafter themeltdownofthebankingandfinancialsystemoftheUS in2007-9.Preciselynone.Case restson the interdependence.Hopefully thisplacesTrumpandhispotentialthreattotheuniverseasweknowitinsome perspective, and themerit of thinking small, as we do,and keeping to some obvious areas. This is not about beingcleverandright(noneofwhichwe,evenremotely,are)butitisabout lookingslowlytoa fewfactsandthenactontheminmodest and slow fashion.Simple. Andrew Freris ( writingcompleted6/11/2016)
Source:Bloomberg.(*)GDP(red),Budgetbalance(blue),C/A(brown),Retailsales(green)
reflected in the bottoming of retail spending shrinkage. Thepooroutlookforoil,westayoilbears,willnothelpthecurrentaccount.Howeverthecentralbank,afterthesharpratehikes,seems now prepared to ease in 2017 as inflation has fallen,andthiswilladdsupporttotheotherwisegoodperformanceof equities. Last but not least, isBrazil, where the ouster ofpresidentRusseffwasgreetedenthusiasticallybythemarketsas registered by the excellent performance of equities, thesharp uptick in expectations and the relative stability of theReal.GDPgrowthisstillshrinking(Fig.3)butseemstohavebottomed. The still growing budget deficit is likely to bebrought under control under the recentmeasures passed toreform, among others, social security related payments. Theremaining is issue of the scandals and of the plundering ofPetrobraswilltakealotmoretimetoresolve
ECOGNOSISADVISORY–November2016