Ziyuan Huang
Senior Analyst
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
Reassessing EM Profits
The EM EPS recovery has been narrow, solely driven by TMT stocks in China, Korea, and Taiwan. EM corporate profits are set to contract in the next six to nine months. Unlike in the past, US dollar weakness will be deflationary, not reflationary, for EM share prices.