Monday, January 14, 2013

2013 Non-Predictions No. 3 & No. 4

Europe - Well TMM read that one wrong and regret our move against our big trend thoughts in trying to finesse the thinking that the market had got a little ahead of itself on its path back to a new normal from one of abject doom. Nevertheless, for those with ammo, adding to existing Euribor longs (or if lucky enough not to already have them, adding one) doesn't seem like a terrible idea. Either way, it appears that together with the market, we a can add someone else to the "getting a bit cocky" box. Dr. Aghi's performance was verging on the valedictory and though we detested the blinkered old bureaucracy that was the Trichet/Duisenberg ECB, the cult of personality appears to be infecting Mario. First symptom? Casting opinion on matters that aren't his to cast opinion on. Don't go all Greenspan on us now Dottore!

TMM like to think that we have seen a 3 stage capitulation on short risk positions over the last couple of weeks. First came the improving Chinese data (though many are again questioning its validity), then came the ironing out of the cliff to a hump and finally Draghi announces Europe cured (well not quite, but that appears to be the market response). With such a huge collective sigh of relief and resurgence of media coverage of upside even TMM (with their view of recovery) are wondering if in the short term things are a little ahead of themselves to the point of having bought puts in SPX on Friday looking for a turn lower in direction and higher in VIX. Much like our languishing USD/JPY puts, this is a shorter term hedge against our longer term trend expectations.

But on to more pressing things - TMM's third Non-Prediction of 2013:

3) EM equities will NOT be able to resist the improving domestic growth & inflation mix as well as the lift in the global manufacturing cycle and should handily outperform their DM counterparts.

Continuing the theme of the past few months, TMM reckon EM Equities have a lot further to go, based upon a combination of:

1. The turn in the global manufacturing cycle driven by a combination of the US consumer & pent-up CapEx-related demand from corporates.

2. Monetary & fiscal stimulus in China.

3. Reduced drag from Europe after the recent stabilisation of the PMIs (last month's dire IP numbers notwithstanding).

4. Food inflation risks overstated, particularly given upcoming reweighting in the Chinese CPI basket, meaning that the easing cycle of the past 12-18months should still be supportive of both liquidity conditions & growth.

5. A return of capital flows into EM (and Asia in particular) as real money underweights enacted in early/mid-2011 on the back of EMU-break up fears are reversed.

The below chart shows the YoY change in MSCI EM vs. DM vs. a proxy for the growth & inflation mix based upon a bunch of PMIs, export figures, money supply & inflation prints and is showing a reasonable divergence right now. TMM would argue that the divergence in 2006-8 can be explained by the BRIC-lovefest which subsequently unwound, and that of 2009 by non-linearities uncaptured by the model. The current gap looks to be around 15-17%, and as discussed above, likely a function of the very strong risk aversion of summer/autumn 2011.

Real exports from the big-3 in Asia (ex-China, ex-Japan) have picked up momentum over the past few months, driven presumably by robust US consumer demand. Post the fiscal cliff agreement, the CapEx rebound TMM have been talking about for a while should provide further gains here as pent up demand is released (though, admittedly, the debt ceiling deadline next month may postpone some of this).

Since late summer, fund flows (see below chart, courtesy of TMM's mates at Nomura) have picked up significantly, powered by the turn in exports, a resumption of appreciation pressures on the CNY - partially due to the PBoC calming market fears of capital outflows & partly due to China's soft landing. Given the real money underweight, above valuation & signs of fundamental strength these should continue to pick up pace.

Given the policy stimulus in China, TMM believe the best place to be is Asia, and within that region, their favourite pick is Korea (but also have the usual MSCI EM vs. DM). Obviously, the recent move in Samsung vs. Apple has been large, but more broadly, Korea seems best place in Asia to pick up inflows (given the currency has become dominated by sticky bond flow it is now far less volatile and thus less risky for equity investors). Moreover, its strong manufacturing & electronics bias make it the perfect candidate for the turn in the manufacturing/services cycle and the coming CapEx ramp up in the US. The one fly in the ointment is, of course, KRW/JPY which has had quite a large move. But as per TMM's first Non-Prediction, we reckon that Japan has permanently lost market share, so 15% on the exchange rate is certainly not going to help them (or hurt Korea) too much - at least not in the coming year.

Trading at just 9.6x 2013's earnings, it is amongst the cheapest of the liquid EM markets (H-Shares only beating it at 9x). In terms of price targets, TMM think the trade has about 15%-20% in it, which corresponds to the overall EM/DM mismatch in the first model chart & the underperformance vs. the S&P 500 since summer 2011:

We will be following up soon with a couple more predictions but for now we really have to add Non-Prediction No.4:

4) The UK media will NOT recognise the difference between Captain Oates' famous walk to oblivion in the South Pole and the minor inconvenience of having to commute to work in a light dusting of snow.


Charles Butler said...

The Spanish Ministry of Public Works will not realize that if you:

1). Define 'housing stock' as completions less new sales, and

2). Define a new home as one 'less than two years old' for the purposes of calculating sales

that the stock of unsold new homes cannot possibly disappear - ever.

Thank you for making possible this public service message.

Leftback said...

LB is going outside now, TMM, and he may be gone for some time.

Thanks for the analysis on EMs. Useful and timely.

marcusbalbus said...

what a dullard

Leftback said...

A tempting pairs trade set up is developing, as FB has massively outperformed AAPL for 3 months or more:


Now, neglecting recent momo trends for a second and applying the concepts of value investing and mean reversion to this, who thinks the pair might turn around?

abee crombie said...

you think a 15% move in the JPY/KRW is meaningless? The Koreans have taken share but I doubt they let thier currency keep appreciating.

And so start the currency wars.

abee crombie said...

check out the beta of JPYKRW to 5411 JT

vapour_trail said...


Longtime fan here, many thanks for the education and entertainment over the years. I agree with your positive view on the Korean index. In fact, I had been planning on writing it up for my newly created blog (, but you guys beat me to the draw. My rationale is similar, although I wanted to add a few more country-specific points:

-Korean domestic demand has been soft, and presidential campaign promises (for both parties) were centered around increasing fiscal spending (including an expanded safety net), which will be incremental money going into the economy versus the previous government which ran a tight ship from a fiscal standpoint. Sell-side expectations feel modest.

-The KOSPI typically outperforms in the year following an election, with a +28% average return over the past 5 cycles (+45% if you exclude 2008).

-Inflation printed +1.6% and +1.4% in Nov and Dec (average +1.6% over H2'12), below the BoK's target range of +2.5-3.5%. While one could argue that inflation was held down before/during the election due to soft price controls, and will likely recover in January (which has been anecdotally confirmed), this still leaves room for the BoK to take action. Also have to take into consideration that Korea has very high levels of consumer debt, which makes inflation more socially acceptable.

-Despite the massive move in the KRWJPY, I generally agree with the thought that lost market share is difficult to recover. I see the share gains in consumer electronics as being pretty sticky. I am more concerned about autos, which is a somewhat price-driven purchase, plus Hyundai/Kia have to face a recovering Toyota and the fuel mileage fiasco. Regardless of the real impact of the FX move, I feel it is very likely that corporate leaders are howling for the new President-elect to take action.

-Given the two points above, I believe that it is likely that we could see more cuts from the BoK, perhaps 50bps in two increments over the next 6-9 months, greater than what has been priced into the curve. I also think that the lack (so far) of an American scolding for Abe's yen joyride may embolden the BoK.

Anonymous said...

C Says'
I think you and I shall end up on different sides for some of those 2013 projections.

Anonymous said...

I beg to disagree on some of the points mentioned but that's my personal view. As Ozzy said: "See you on the other side".


Leftback said...

Tool of The Week?

Thriller in Palo Alto. Zuck has just revealed a new tool (drum roll), by which Facebook users can.... (drum roll) search Facebook..... (cymbals).

Someone explain to me how this helps them make money? No worries though, the P/E is only 218. (Yes, we are short this name...)

Anonymous said...

Making money on FB ? Simple... just sell some stocks to the greater fool. This is a tried and tested New Economy feat and obviously worked again. Oh yes, and don't forget to them them up again at or below 5 USD.


Anonymous said...

C Says'
Or quotes;

"Euro strength threatens Eurozone, Juncker says"
My prediction for 2013 is that I wll definitely sue someone for plagiarism ;)

Anonymous said...

C Says'
What are the potential outcomes when,in no particular order; UK,US EU,Japan,anybody pegged to the $,all want to have a competitively based FX relationship with their major trading partners ,and their trading partners are virtually wishing to do the same thing at the same time?

Anonymous said...

Then you sell AUD? ;)


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abee crombie said...


I am on the same page. So far its only the Russians making noise but my guess is you will start to see Latin countries (ex Brazil) join the chorus soon (Chile already devalued once i think).

The elephant is really China. They are driving world demand right now, IMHO. A shock, like a big WMP failure is something to watch out for.

Also I think it might be interesting to see if the economy in the US picks up but Big Brother Ben steps in front of the long end to halt mortgage rate increases. The ultimate loser would then be $USD and the real fun and games begin.

But either of those two are still a way off. In the meantime we can watch Japan. I mean if you really want to destroy your currency it is theoretically pretty easy, just ask our friend Robert M

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Anonymous said...

C Says'
Regardless of concerns about debt levels the unpalatable issue is with a global growth trend of closer to 2% than 3% the combination of fiscal and monetary policies worldwide are too tight.
The obvious conclusion is that Europe is desperately hoping that looser policies in China do the US will do the job for them. They stand to be wrong on that assumption if currency relationship don't work for them. Indeed ironically their tighter policy is being rewarded on the currency and govt debt fronts,but at what cost to the underlying competitive level they require to promote growth via exports?

We appear to be well into a circular spiral here. Too many majors requiring the same thing when it comes to growing via exports which is what a currency battle is really about.

Leftback said...

Between Juncker's comments this week and Lagarde talking ECB rate cuts today, it seems as though the run up in EURJPY and EURUSD may be getting a bit long in the tooth.

One last spurt this week to hit USDJPY 90 EURJPY 120 and EURUSD 1,30 all on the same day? Are you diagnosing a case of imminent Big Figureitis, TMM?

Leftback said...

Oh and there is a US 3-day weekend ahead of us, an almost perfect time for a switcheroo in FX trends?

LB is presently long but nervous. Show me a silly low volume rally tomorrow on equity Options Expiration, with a peak in investor sentiment and I might come over positively bearish for a while.

Anonymous said...

C Says'
You must have meant EURUSD 1.35 ?

Leftback said...

Exactly. 1,3500. Thanks, Cheltenham.

Today is probably a silly rally, and it is:

a) A great day not to be short the market.
b) A great day to be long the market.
c) A great day for selectively bearish thoughts.
d) A great day to look at inexpensive hedges.
e) All of the above.

Anonymous said...

f) A great day to take a little bit off some strong fundamental stories (coughnonagencycough), just in case pink flamingoes were to make a reappearance.


Anonymous said...

Sidenote, I would very much welcome AUD/AGBs opinions from educated folks. They look like optically cheap downside hedges but perhaps I am missing something


Bretton James said...

Anyone fancy the theory that Japan couldn't manufacture inflation if it tried?

Leftback said...

Casual inspection of the landscape does reveal the presence of a few flamingoes, DD. There are the social media flamingoes and the homebuilding flamingoes for a start. Whether they are absolutely flaming pink at this point remains to be seen.....

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