WWRR Vol.2.015

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Christopher Wood christopher.wood@clsa.com +852 2600 8516 Figure 2 FANG stocks index 210 190 170 150 (End 2016=100) FANG stocks index 50-day mov. avg. 200-day mov. avg. 130 110 90 70 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Note: Market cap weighted at the end of 2016. Include Facebook, Amazon, Netflix and Google/Alphabet. Source: CLSA, Bloomberg Figure 3 US BBB-rated corporate bonds outstanding as % of US investment-grade corporate bonds 3.0 2.5 2.0 1.5 1.0 0.5 (US$tn) (%) US BBB-rated corporate bonds outstanding as % of US investment-grade corporate bonds 50 48 46 44 42 40 38 36 34 32 0.0 30 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: Based on the Bloomberg-Barclays US Corporate Bond Index universe. Data up to 21 November 2018. Source: Bloomberg Still in the absence of a nasty asset deflation cycle, there is still no reason to expect a full-fledged recession in America next year while any weakness in Asian economies has, in GREED & fear’s view, been more than discounted by Asian equities’ sell-off this year. In this respect, GREED & fear agrees with the view outlined by CLSA’s head of economic research Eric Fishwick at last week’s CLSA India Forum, namely that the base case is that US growth is more likely to slow in 2019 to nearer the trend growth of 2.3% experienced during this ten-year upturn. CLSA’s economics team forecasts US real GDP growth to decelerate from an estimated 3.3% this year to 2.5% next year and 2.3% in 2020. For such reasons Fishwick also remains relatively sanguine about world trade growth and commodity prices even allowing for the risk of an intensifying US-China trade war (see Figure 4). The above is also GREED & fear’s base case. But the risks of an ugly asset deflation cycle are clearly rising, and all eyes should now be on credit spreads, most particularly in the US corporate area. On this point, US BBB-rated corporate bond spreads have risen by 36bp since early October to 167bp (see Figure 5). Moreover, the longer the Fed shows a determination to ignore negative market action, in terms of continuing to raise rates and shrink the balance sheet, the more bearish market sentiment will become. Still money markets are already betting that the Fed will back off. The Fed Thursday, 22 November 2018 Page 2
Christopher Wood christopher.wood@clsa.com +852 2600 8516 funds futures market is now discounting only a 35% chance of three 25bp rate hikes by the end of 2019, including one in December, down from 68% in early November. Figure 4 World trade volume growth vs commodity prices (%YoY 3mma) 40 (%YoY) (%YoY) 13 30 11 9 20 7 10 5 0 3 (10) Commodity prices LHS (20) World trade volume RHS (30) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: CLSA, Netherlands Bureau for Economic Policy Analysis (CPB), Datastream 1 (1) (3) (5) Figure 5 Bloomberg-Barclays US corporate bond spreads (BBB-rated bonds) 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 (ppt) Bloomberg-Barclays US Corporate BBB-rated bond spread 1.0 2014 2015 2016 2017 2018 Source: Bloomberg If US corporate debt is the area to focus on, as well as of course Italy, what about emerging market debt? GREED & fear is more relaxed in this area than many. First, it is a positive that the Treasury bond market has rallied on the recent bout of “risk off” action in equities and is now 20bp below the closely followed 37-year-old trend line (see Figure 6). While this, unfortunately, has reduced the prospects of the “risk parity”-driven algo trading models blowing up, the rally in Treasuries does provide support to emerging market debt. It is also the case that 34% of US dollar-denominated emerging market non-financial sector corporate bonds are in the energy sector (see Figure 7) and GREED & fear remains constructive on oil. Indeed the sharp sell-off triggered by Donald Trump’s U- turn on Iran sanctions should be viewed as a major buying opportunity. It is also interesting that fund inflows into emerging market debt have remained relatively well behaved so far this year. Thursday, 22 November 2018 Page 3
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07 th December 2018 What We Are Rea
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Prudent Policy Mix Is the Anchor of
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Steady Growth Expected in F2020 We
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Exhibit 9: Cyclical Component of In
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Exhibit 15: Saving Less Investment
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Risks: Skewed to the Downside, Main
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2019 Global Economic and Market Out
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Page 69 and 70: M Retail Model #3: The Hybrid Model
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Page 73 and 74: Agri-inputs / Automobiles India UDA
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Page 77 and 78: 12/5/2018 From India to US Election
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Page 87 and 88: Christopher Wood christopher.wood@c
Page 95 and 96: 12/5/2018 Why You Would Not Have In
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WWRR Vol.2.015

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