Ziyuan Huang
Senior Analyst
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EM Domestic Bonds: Turbulence Before An Opportunity
EM local bonds face near-term turbulence from rising inflation, global risk aversion, and currency weakness. Use the sell-off to build exposure: medium- and longer-term fundamentals remain favorable.
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China And EM Profitability: A Floor, Not A Launch Pad
Outside semiconductor stocks, EM/China profitability has been well below both their US peers and the levels that prevailed during the EM structural bull market in the 2000s. Over a 3- to 5-year horizon, EM/China relative equity performance versus global will be range-bound.
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A ‘Gangnam Style’ Korean Equity Tantrum
Korea’s recent equity market tantrum is a warning signal for global risk assets. We are booking profits on the long Asian semiconductor stocks / short US hyperscalers trade and downgrading Korea from overweight to neutral in an EM equity portfolio.
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EM Corporate Profitability: A Glass Half-Empty
Outside Asian semiconductor producers, EM corporate earnings and profitability have seen little improvement. Despite the ceasefire in the Middle East, the medium-term outlook for EM stocks is still unattractive.
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The Yen Carry Trade: A Ticking Time Bomb
The yen carry trade will unwind this year. However, it will be triggered by a drop in “carry asset” prices and a spike in the JPY/USD, rather than by Japan’s improving interest rate differentials. Go long JPY against the USD.
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Charts That Matter: Little Dry Powder On The Sidelines
Contrary to widespread narratives, there is little cash on the sidelines. The aggregate amount of investable funds-to-equity market cap ratio is at an all-time low in the US and very low in other developed markets.
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Korean Markets: At A Tipping Point
Go long KRW versus USD. Within an EM equity portfolio, overweight Korean tech and stay neutral on Korean non-tech. However, we are not bullish on the Korean bourse's absolute performance.
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China: Will Anti-Involution Reverse Deflation?
China's anti-involution policies will not end deflation or boost corporate profits on a sustainable basis. Authorities will be reluctant to cut industrial capacity as doing so would lead to layoffs. Consequently, production will continue to exceed demand, and price deflation will persist.
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US Profit Margins: Miracle Or Fluke?
The resilience of US non-tech companies' profitability has not been driven by top-line growth but by falling costs, which safeguarded profit margins. Presently, risks in US stocks outweigh the potential rewards – margin sustainability is uncertain while equity valuations are very stretched.
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Korea: A Deflationary Shock Ahead
A deflationary shock from shrinking exports will ripple throughout the Korean economy. We are downgrading the KOSPI from overweight to neutral and reiterating a long position in 10-year domestic bonds, currency unhedged.