Asia

Puntos destacados El acuerdo comercial interino de "fase 1" alcanzado la semana pasada representa un avance significativo hacia una distensión en la guerra comercial entre China y EE. UU. Independientemente de lo que ocurra después en las negociaciones del Brexit, se evitará una salida dura. Mantener posición larga en la libra. Es probable que el crecimiento de los beneficios en EE. UU. sea plano en el tercer trimestre, en contraste con las expectativas "bottom-up" de una caída interanual. El crecimiento de los beneficios debería repuntar a medida que el crecimiento global vuelva a acelerarse hacia fin de año. Un crecimiento global más fuerte presionará a la baja al dólar estadounidense. Mantener sobreponderación en acciones globales respecto a los bonos en un horizonte de 12 meses. Las acciones cíclicas deberían comenzar a superar a las defensivas. El sector financiero finalmente tendrá su momento de gloria. Vientos favorables del comercio En nuestra Perspectiva estratégica del cuarto trimestre publicada hace dos semanas, argumentamos que las acciones globales habían entrado en una fase de "demuéstramelo", lo que significa que sería necesaria evidencia tangible de una desescalada en la guerra comercial y una recuperación del crecimiento global para que los índices bursátiles subieran.1  Recibimos algunas noticias positivas en el frente comercial el pasado viernes. A cambio de suspender la subida prevista de aranceles del 15 de octubre del 25% al 30% sobre $250 mil millones de importaciones chinas, China acordó comprar entre $40 y $50 mil millones de dólares de productos agrícolas estadounidenses por año, mejorar el acceso al mercado para las empresas de servicios financieros de EE. UU. y aumentar la transparencia en la gestión del tipo de cambio. Admitimos que aún queda mucho por hacer. El texto del acuerdo aún no se ha finalizado. Ambas partes apuntan a concluir el pacto para la cumbre de la APEC en Santiago, Chile, los días 16 y 17 de noviembre. Teniendo en cuenta que quedan sin resolver una serie de cuestiones clave, incluyendo qué tipo de mecanismos de cumplimiento y resolución se incluirán en el acuerdo, son posibles más retrasos o incluso un colapso en las conversaciones. El acuerdo interino pactado la semana pasada también aplaza la espinosa cuestión de cómo manejar las protecciones de propiedad intelectual a una "fase 2" de las negociaciones programada para comenzar poco después de que se cierre la "fase 1". Según la independiente y bipartidista Comisión sobre el robo de la propiedad intelectual estadounidense, los productores de EE. UU. pierden entre $225 y $600 mil millones anuales por el robo de PI.2 China a menudo ha sido considerada entre los peores infractores. Dada la importancia del tema de la PI, será necesario un progreso significativo para asegurar que no se introduzcan aranceles del 15% sobre aproximadamente $160 mil millones de importaciones chinas el 15 de diciembre. Trump quiere un acuerdo A pesar de los muchos obstáculos que quedan, los acontecimientos de la semana pasada aumentan significativamente las probabilidades de una distensión en la guerra comercial de 18 meses. Como autoproclamado "maestro negociador", el presidente Trump ha puesto en juego su credibilidad al describir las negociaciones como un "festival de amor", llamar al pacto comercial "el mayor y mejor acuerdo jamás hecho para nuestros grandes y patrióticos agricultores" y decir que tiene "poca duda" de que se alcanzará un acuerdo final. Al igual que hizo con el sucesor del TLCAN, el USMCA —un acuerdo que es sustantivamente similar al que reemplazó— es probable que Trump pase a modo de promoción, pregonando el nuevo acuerdo "tremendo" que ha negociado en nombre del pueblo estadounidense. Desde el punto de vista político, esto tiene perfecto sentido. Con razón o sin ella, los votantes valoran más a Trump por su manejo de la economía que por cualquier otra cosa (Gráfico 1). Una guerra comercial prolongada socavaría la economía estadounidense y, por tanto, dañaría las perspectivas de reelección de Trump. Gráfico 1 Trump recibe calificaciones relativamente altas por su manejo de la economía, pero no por mucho más Kumbaya Kumbaya Gráfico 2 Las empresas chinas no están soportando la mayor parte de los aranceles Kumbaya Kumbaya A pesar de sus afirmaciones en sentido contrario, la evidencia sugiere firmemente que son los consumidores estadounidenses, más que las empresas chinas, quienes están pagando la mayor parte de los aranceles. Gráfico 2 muestra que los precios de importación de EE. UU. desde China apenas han disminuido, aun cuando las tasas arancelarias sobre las importaciones chinas han aumentado. En la medida en que las últimas rondas de aranceles se centran en bienes chinos para los que hay poca competencia en EE. UU. o en terceros países, la capacidad de los productores chinos para repercutir el coste de los aranceles solo aumentará. Si se implementaran todas las subidas de aranceles anunciadas, la tasa arancelaria efectiva sobre las importaciones chinas subiría desde alrededor del 15% a finales de agosto hasta un máximo del 25% en diciembre (Gráfico 3). Tal tasa arancelaria reduciría los ingresos disponibles de los hogares estadounidenses en más de $100 mil millones de dólares, borrando la mayor parte de las ganancias de los recortes fiscales de 2017. Trump no puede permitir que la guerra comercial llegue a ese punto. Gráfico 3 Las sucesivas rondas de aranceles han empezado a acumularse Las sucesivas rondas de aranceles han empezado a acumularse. Las sucesivas rondas de aranceles han empezado a acumularse. ¿China adoptará una postura dura? Un riesgo para una resolución favorable de la guerra comercial es que China vea cada vez más a Trump como desesperado por cerrar un acuerdo. Esto podría llevar a los chinos a adoptar una postura dura en las negociaciones. Aunque no se puede descartar este riesgo, lo atenuamos por tres razones: Primero, aunque los exportadores chinos han podido mantener cierto poder de fijación de precios durante la guerra comercial, los volúmenes comerciales han sufrido, con las exportaciones a EE. UU. cayendo casi un 22% interanual en septiembre. Segundo, como han demostrado las sanciones paralizantes contra ZTE, China sigue siendo muy dependiente de las tecnologías estadounidenses. Esto le da a Trump mucha palanca en las negociaciones comerciales. Gráfico 4 ¿Quién ganará la nominación demócrata de 2020? Kumbaya Kumbaya Tercero, como al propio Trump le gusta decir, a China le resultará más fácil negociar con él durante su primer mandato que en un segundo. Esperar que Trump perdiera su intento de reelección podría haber tenido sentido para China hace unos meses cuando Joe Biden iba por delante en las encuestas; pero ahora que Elizabeth Warren ha emergido como la favorita para asegurar la nominación demócrata, esa esperanza se ha desvanecido (Gráfico 4). Como señalamos hace varias semanas, es probable que China encuentre a Warren no menos problemática en asuntos comerciales que a Trump.3  Todo esto sugiere que China, al igual que Trump, buscará formas de enfriar las tensiones comerciales en las próximas semanas. ¿Avance en el Brexit? Cuando se cierra esta edición, las perspectivas de un acuerdo del Brexit han mejorado. Aunque los detalles aún no se han publicado, el acuerdo propuesto pondría efectivamente a Irlanda del Norte en una verdadera superposición cuántica donde está tanto en el mercado común europeo como en el Reino Unido al mismo tiempo. Esta hazaña se conseguiría manteniendo a Irlanda del Norte dentro de la jurisdicción política del Reino Unido pero aún alineada con las normas regulatorias de la UE. Las negociaciones aún podrían torcerse. A pesar de la garantía del primer ministro Boris Johnson de que logró "un gran nuevo acuerdo", el socio de coalición de los conservadores, el Partido Unionista Democrático de Irlanda del Norte, todavía está reteniendo su apoyo al pacto. El líder laborista Jeremy Corbyn también ha rechazado el acuerdo, diciendo que es aún peor que el pacto originalmente propuesto por Theresa May. Independientemente de lo que ocurra en los próximos días, seguimos pensando que se evitará un Brexit duro. A lo largo de todo el calvario del Brexit, hemos sostenido que no existía suficiente apoyo político dentro de la clase dirigente británica para un Brexit sin acuerdo. Esa convicción solo se ha reforzado a medida que los datos de opinión han revelado que una mayor proporción de votantes elegiría permanecer en la UE si se celebrara otro referéndum (Gráfico 5). Hemos mantenido una posición larga en la libra frente al euro desde el 3 de agosto de 2017. La operación ha ganado un 6.6% en este periodo. Los inversores deberían mantener esta posición. Basándonos en los diferenciales de tasas de interés reales, GBP/EUR debería cotizar cerca de 1.30 en lugar del nivel actual de 1.16 (Gráfico 6). Esperamos que el cruce se mueva hacia su valor justo a medida que disminuyan aún más los riesgos de un Brexit duro. Gráfico 5 Angustia por el Brexit: un caso de arrepentimiento por Brexit Angustia por el Brexit: Un caso de Bremorse Angustia por el Brexit: Un caso de Bremorse Gráfico 6 Importante potencial alcista en la libra Potencial Alcista Sustancial en la Libra Potencial Alcista Sustancial en la Libra   Mejoran las perspectivas de crecimiento global Gráfico 7 La desaceleración del crecimiento ha sido más pronunciada en los datos blandos La desaceleración del crecimiento ha sido más pronunciada en los datos suaves La desaceleración del crecimiento ha sido más pronunciada en los datos suaves Gráfico 8 La producción manufacturera se recupera en medio del desplome del ISM La producción manufacturera se recupera en medio de la caída del ISM La producción manufacturera se recupera en medio de la caída del ISM Una distensión en la guerra comercial y una resolución de la saga del Brexit deberían ayudar a sostener el crecimiento global. La debilidad en los datos económicos ha sido mucho más pronunciada en las medidas denominadas "blandas", como las encuestas empresariales, que en las medidas "duras" como la producción industrial (Gráfico 7). Notablemente, la producción manufacturera estadounidense se ha estabilizado en los últimos tres meses, aun cuando el índice manufacturero ISM se ha desplomado (Gráfico 8). A medida que el sentimiento se recupere, los datos blandos deberían mejorar. Las condiciones financieras globales se han relajado significativamente en los últimos cinco meses, en gran parte gracias al giro acomodaticio de la mayoría de los bancos centrales (Gráfico 9). El número neto de bancos centrales que recortan tasas suele adelantar al PMI manufacturero global entre 6 y 9 meses (Gráfico 10). Además, la decisión de la Fed de volver a comprar bonos del Tesoro aumentará la liquidez en dólares, contribuyendo así a unas condiciones financieras más laxas. Gráfico 9 Condiciones financieras más fáciles impulsarán el crecimiento global Condiciones financieras más favorables impulsarán el crecimiento mundial Condiciones financieras más favorables impulsarán el crecimiento mundial   Gráfico 10 Los efectos de la relajación de la política monetaria deberían filtrarse pronto a la economía Los efectos de la flexibilización de la política monetaria deberían llegar pronto a la economía. Los efectos de la flexibilización de la política monetaria deberían llegar pronto a la economía. Un estímulo chino reforzado también debería ayudar a activar el crecimiento global. El crecimiento del dinero y del crédito en China superó las expectativas en septiembre. El PBoC ha estado recortando los requisitos de reservas, lo que ha contribuido a reducir las tasas interbancarias. Es probable que se realicen nuevos recortes a la facilidad de financiación a medio plazo durante el resto de este año. Los cambios en el crecimiento del crédito chino adelantan al crecimiento global en aproximadamente nueve meses (Gráfico 11). Gráfico 11 El crédito chino debería apoyar la recuperación del crecimiento global El crédito chino debería respaldar la recuperación del crecimiento mundial El crédito chino debería respaldar la recuperación del crecimiento mundial Mantener sobreponderación en acciones globales Aunque el camino para finalizar un acuerdo de "fase 1" a tiempo para la cumbre de la APEC probablemente será accidentado, reiteramos nuestra recomendación de que los inversores sobreponderen acciones globales frente a bonos en un horizonte de 12 meses. Esperamos mejorar la valoración de las acciones de mercados emergentes (EM) y europeas en las próximas semanas una vez que veamos más evidencia de que el crecimiento global está tocando fondo. En última instancia, la trayectoria de las acciones dependerá de lo que ocurra con los beneficios. La temporada de resultados en EE. UU. comenzó esta semana. Hasta la semana pasada, los analistas esperaban que las EPS del S&P 500 disminuyeran un 4.6% en el tercer trimestre respecto al mismo trimestre del año anterior, según datos compilados por FactSet. Tenga en cuenta, sin embargo, que el crecimiento de las EPS ha superado las estimaciones en alrededor de cuatro puntos porcentuales desde 2015 (Gráfico 12). Por tanto, una apuesta razonable es que los beneficios estadounidenses se mantendrán planos este trimestre, superando una baja barrera de expectativas. Gráfico 12 Las EPS reales generalmente han superado las estimaciones Kumbaya Kumbaya Gráfico 13 Los beneficios y el PIB nominal tienden a moverse al unísono Las ganancias y el crecimiento del PIB nominal tienden a moverse al unísono Las ganancias y el crecimiento del PIB nominal tienden a moverse al unísono El hecho de que el 83% de las 63 empresas del S&P 500 que han informado beneficios hasta ahora hayan superado las estimaciones —mejor que la media histórica del 64%— respalda la opinión de que las estimaciones actuales para el tercer trimestre son demasiado pesimistas. Mirando hacia adelante, el crecimiento de los beneficios debería mejorar a medida que se acelere el crecimiento del PIB nominal (Gráfico 13). Las acciones europeas y de mercados emergentes generalmente superan al referente global cuando el crecimiento global mejora (Gráfico 14). Esto se debe a la naturaleza más cíclica de sus mercados bursátiles. Además, como moneda contracíclica, el dólar tiende a debilitarse en un entorno de crecimiento más rápido. Un dólar más débil beneficia de manera desproporcionada a las acciones cíclicas (Gráfico 15).   Gráfico 14 Las acciones de EM y de la zona euro suelen superar cuando mejora el crecimiento global Las acciones de los mercados emergentes y de la zona del euro suelen tener un mejor rendimiento cuando mejora el crecimiento global. Las acciones de los mercados emergentes y de la zona del euro suelen tener un mejor rendimiento cuando mejora el crecimiento global. Gráfico 15 Las acciones cíclicas superarán si el dólar se debilita Las acciones cíclicas tendrán mejor desempeño si el dólar se debilita Las acciones cíclicas tendrán mejor desempeño si el dólar se debilita Incluiríamos a los financieros en nuestra definición de sectores cíclicos. A medida que mejore el crecimiento global, los rendimientos de los bonos a largo plazo aumentarán en el margen. Dado que los bancos centrales no tienen prisa por subir las tasas, las curvas de rendimiento se empinarán. Esto impulsará los beneficios bancarios y los precios de las acciones (Gráfico 16). Las acciones cíclicas están actualmente bastante baratas en comparación con las defensivas (Gráfico 17). Del mismo modo, las acciones no estadounidenses son relativamente baratas en comparación con sus homólogas estadounidenses, incluso si se ajusta por diferencias en la composición sectorial entre regiones. Mientras que las acciones estadounidenses cotizan a 17.5 veces las ganancias a futuro, las acciones internacionales cotizan a un PER a futuro más atractivo de 13.7. La combinación de mayores rentabilidades por beneficios y tipos de interés más bajos en el extranjero implica que la prima de riesgo de la renta variable es aproximadamente dos puntos porcentuales más alta fuera de Estados Unidos (Gráfico 18). Gráfico 16 Curvas de rendimiento más empinadas beneficiarán a los financieros Curvas de rendimiento más pronunciadas beneficiarán al sector financiero Curvas de rendimiento más pronunciadas beneficiarán al sector financiero Gráfico 17 Las acciones cíclicas son más atractivas que las defensivas Las acciones cíclicas son más atractivas que las defensivas Las acciones cíclicas son más atractivas que las defensivas   Gráfico 18 La prima de riesgo de la renta variable es bastante alta, especialmente fuera de EE. UU. La prima de riesgo de las acciones es bastante alta, especialmente fuera de Estados Unidos. La prima de riesgo de las acciones es bastante alta, especialmente fuera de Estados Unidos. Esperamos mejorar la valoración de las acciones de mercados emergentes (EM) y europeas en las próximas semanas una vez que veamos más evidencia de que el crecimiento global está tocando fondo.   Peter Berezin, Jefe de Estrategia Global Estrategia Global de Inversiones peterb@bcaresearch.com Notas al pie 1Consulte Estrategia Global de Inversiones, “Perspectiva estratégica del cuarto trimestre de 2019: un mercado 'muéstrame',” con fecha 4 de octubre de 2019. 2 “Actualización del Informe de la Comisión sobre el Robo de la Propiedad Intelectual: El informe de la Commission on the Theft of American Intellectual Property,” The National Bureau of Asian Research, 2017. 3Consulte Global Investment Strategy Weekly Report, “Elizabeth Warren y los mercados,” con fecha 13 de septiembre de 2019. Estrategia & tendencias del mercado Modelo MacroQuant y puntajes subjetivos actuales Kumbaya Kumbaya Recomendaciones estratégicas Operaciones cerradas

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Today we are also publishing a Special Report titled Chinese Auto Demand: Time For A Recovery? Highlights India is the third-largest world consumer of crude oil. Hence, fluctuations in its oil consumption is a non-negligible factor behind global oil prices. India’s petroleum demand growth is slowing cyclically due to the domestic demand slump and a dramatic drop in vehicle sales. This, combined with China’s ongoing slowdown in petroleum product demand, will have a non-trivial impact on oil prices in the next six months. From a structural perspective, India’s long-term demand growth for petroleum is decelerating as well. Feature India’s petroleum products consumption growth is slowing. Chart 1India Is The World's Third Largest Crude Oil Consumer India is the world’s third-largest consumer of crude oil, guzzling 5% of global consumption (Chart 1). Hence, fluctuations in India’s crude oil/petroleum consumption is a non-negligible factor affecting global oil prices. India’s petroleum products consumption growth is slowing. This comes on top of China’s ongoing petroleum demand deceleration. Together, the two countries account for 19% of the world’s oil intake. Therefore, deceleration in their oil consumption growth will have a considerable impact on the outlook for global oil demand growth. A Pronounced Cyclical Oil Demand Slump Indian petroleum consumption growth has decelerated significantly on the back of slumps in Indian domestic spending and economic activity (Chart 2). Please click on this link for an in-depth analysis on the domestic demand slump in India. Chart 2Indian Petroleum Consumption Growth Has Been Dwindling Specifically, vehicle purchases and industrial sectors have been hit hard. These sectors are critical for Indian petroleum consumption, since transportation demand accounts for 50% and industrial activity for around 25% of total petroleum consumption (Chart 3). Indian vehicle sales have been in freefall. Chart 3Transportation & Industry Guzzle The Most Fuel In India Chart 4Indian Vehicle Sales Are In Deep Contraction Indian vehicle sales have been in freefall. Chart 4 shows passenger car sales are shrinking at 30% and sales of two and three-wheeler units are contracting at 20% from a year ago. Moreover, commercial vehicles and tractor unit sales are falling at annual rates of 35% and 10%, respectively. Chart 5 illustrates that the number of registered vehicles is expanding at a lower rate than before – i.e., its second derivative has turned negative. This signals a further growth slowdown in gasoline and diesel consumption. We use the second derivative in this analysis because registered vehicles are a stock variable. However, we are trying to explain changes in petroleum consumption which is a flow variable. Therefore, the second derivative of a stock variable (the number of registered cars on the road) explains the first derivative of a flow variable (the growth rate of oil consumption). Looking ahead, vehicle sales will remain in the doldrums because of a lack of financing. In particular, the impulse on auto loans issued by commercial banks is negative (Chart 6). Chart 5Slowing Growth Of Vehicles On The Road = Weaker Pace Of Fuel Consumption Chart 6Indian Banks: Negative Vehicle Loan Impulse More worrisome is the ongoing turmoil in India’s non-bank finance sector (NBFCs), which has also significantly hit auto sales. In the past, the NBFC sector played a major role in funding Indian auto purchases. For instance, according to the ICRA, an independent rating agency in India, NBFCs have helped fund the purchases of 65% of two-wheelers, 30% of passenger cars and around 55% of commercial vehicles – both new and used. Given these non-bank finance companies are currently facing formidable funding and liquidity pressures amid rising NPLs (Chart 7), they are being forced to shrink their balance sheets. This is damaging to auto sales. Please click here for an in-depth analysis on the Indian banking and non-bank finance sectors. Chart 7Major Asset-Liability Mismatches Among Indian Non-Bank Finance Sector Chart 8India's Capex Has Been Weak Turning to the industrial sector, overall Indian capital spending has been weak. India’s real gross fixed capital formation has rolled over, the number of capex projects underway is nosediving and both capital goods imports and production are contracting by 7% and 12% on an annual basis (Chart 8). Falling industrial activity has taken a toll on the consumption growth of petroleum products with industrial applications, such as bitumen, naphtha and petroleum coke, etc. The growth rate in demand for these products is dropping — a significant development since they account for 25% of overall petroleum consumption in India.1  Bottom Line: India’s petroleum consumption growth has been slowing drastically from a cyclical perspective. And Moderating Structural Oil Demand Growth It appears there are structural factors at play that will also reduce India’s long-term demand for petroleum. On top of the cyclical demand slowdown, it appears there are structural factors at play that will also reduce India’s long-term demand for petroleum: Chart 9Impressive Efficiency Gains In India's Vehicle Fleet The fuel efficiency of India’s vehicle fleet is markedly improving (Chart 9). Additionally, since 2015-16 the Indian government has been proactively pursuing new emission/fuel efficiency standards. For instance, emissions standards for new passenger vehicles will fall to 4.2 L/100 KM by 2023 down from its current level of 4.6 L/100 KM. This will lead to a 7% reduction in auto fuel consumption. While this is not a large reduction, the government has the scope to implement even stricter standards since Indian car makers are easily meeting these targets. Finally, the Indian government has been aggressively promoting electric vehicles (EVs) as an alternative to traditional autos. It has made the advancement of this sector a priority. Ownership of EVs is currently negligible in India. However, the government is pushing for EVs to make up 30% of vehicle sales by 2030. In addition, it has been providing incentives such as sales tax cuts and subsidies to the sector. Finally, Mahindra and Tata Motors are already establishing a lead in the EV industry and are developing new EV models in collaboration with foreign automakers.  Bottom Line: The pace of India’s structural demand for petroleum will also be downshifting. Oil Inventory Not A Critical Factor Chart 10China: Oil Inventory Drives Oil Imports Inventory accumulation and destocking can play an important role in oil price fluctuations. For example, inventory accumulation plays a key role in driving Chinese crude oil imports (Chart 10). There is a dearth of data on Indian oil inventories to make a strong inference about its de- and re-stocking cycles. However, we have the following observations: India has the capacity to store 5.33 million tons worth of strategic oil reserves - equivalent to around 10 days of its crude oil consumption. It is not clear whether or not these reserves are at full capacity. However, even if we assume they are only 50% full and the government decides to fill its reserves all at once, this would require the importation of an additional 2.67 million tons of oil, equivalent to only 1.2% of Indian crude oil imports and 0.05% of global crude oil demand. This is a negligible amount, and is unlikely to have any impact on global oil prices. Furthermore, while the Indian government is planning to expand its storage capacity by an extra 6.5 million tons, this will only take place in the next six to eight years. Thus, it will not meaningfully affect oil imports in the medium term. Chart 11India: Oil Consumption Drives Oil Imports Finally, India’s crude oil imports are strongly correlated with its petroleum final consumption (Chart 11). Therefore, it is reasonable to assume that Indian consumption – not the oil inventory cycle – is relevant for crude imports, and by extension for oil prices. Bottom Line: India’s petroleum product and crude oil inventory fluctuations are too small to influence the nation’s crude imports and hence global oil prices. Investment Conclusions From a cyclical perspective, Indian final demand for crude oil has been weakening. A major re-acceleration in economic growth and hence oil demand is not imminent. We discuss the outlook for China’s auto sales in a separate report published today. Together India and China consume 19% of world oil, and therefore a deceleration in their oil consumption growth will have a non-trivial impact on the pace of global oil demand growth. Chart 12Expansion Pace Of Vehicles On The Road Has Downshifted In India & China Our estimations for annual growth in cars on the road (excluding 2-wheelers) has dropped to 5.8% in India and 10.5% in China (Chart 12). This entails a slower pace of oil demand growth than in the past. Besides, if one rightly assumes petroleum consumption per car is declining for structural reasons due to technological advancements by car manufacturers and enforcement of stricter efficiency standards by governments, oil consumption growth will be considerably slower going forward relative to the past 20 years. Together India and China consume 19% of world oil, and therefore a deceleration in their oil consumption growth will have a non-trivial impact on the pace of global oil demand growth. This presents a major risk for crude prices in the next 6 months or so. Beyond the cyclical horizon, the long-term demand outlook for oil is also downbeat. Please note that this is the view of BCA’s Emerging Markets Strategy team, and differs from that of BCA’s house view, which is bullish on oil. Chart 13India’s Relative Equities Performance Benefits From Lower Oil Prices In turn, low oil prices are positive for the relative performance of Indian stocks versus the EM equity benchmark (Chart 13). This was among the primary reasons why we upgraded the allocation to this bourse within an EM equity portfolio to neutral from underweight on September 26, 2019. In absolute terms, the outlook for Indian share prices remains downbeat, as discussed in the same report. Finally, to express our negative view on oil prices, we are reiterating our short oil and copper / long gold position recommended on July 11, 2019. Industrial commodities such as copper and oil will continue to underperform gold prices in the medium term (the next six months). Ayman Kawtharani, Editor/Strategist ayman@bcaresearch.com   Footnotes 1      Diesel consumption will also be impacted. While the latter is mostly consumed by the transportation sector in India, diesel does have some industrial applications as well. Equities Recommendations Currencies, Credit And Fixed-Income Recommendations

Dear Client, In lieu of our regular Weekly Report this week, tomorrow we will be publishing a joint Special Report on the Chinese automobile industry outlook with our Emerging Markets Strategy service, authored by my colleague Ellen JingYuan He. Best regards, Jing Sima China Strategist Feature Chart 1Chinese Economy Likely To Bottom In Q1 President Trump announced last Friday the first phase of a potential trade agreement with China. For now, the most concrete aspect of the announcement has been the deferral of an increase in tariffs that had been scheduled to occur this week, in exchange for agriculture purchase commitments from China. Market participants initially reacted with caution to the news, given the U.S. administration’s about-face in early-May and given signs from Beijing that China “needs time” to finalize a deal. However, Chinese policymakers have subsequently played up the progress made during the negotiations, and characterized both sides as being on “the same page”. We noted in last week’s report that China’s economy was likely to stabilize in Q1 of next year (Chart 1), but that a further shock to China’s external sector and/or internal policy missteps could easily tip the Chinese economy into a deeper growth slowdown.1 This, to us, justified a tactically bearish stance towards Chinese stocks, despite our positive cyclical bias. Indeed, following our tactical underweight call initiated on July 24,2 relative to global stocks, Chinese investable stocks dropped nearly 3% in the months of August and September in reaction to intensified trade tension. Chart 2Chinese Stocks Have Been Underperforming Since Late April While it is not yet clear how substantive the final deal between the U.S. and China will be, it is our judgment that the odds of a further escalation in the trade war have legitimately fallen over the past week. Both sides of the negotiating table have strong incentives to reach a deal (particularly the U.S.), and both U.S. and Chinese policymakers may finally be acting in a way that is consistent with each side’s respective constraints. As such, we no longer feel that a tactical underweight stance is warranted, and we recommend that clients maintain a neutral stance towards Chinese stocks over the near term. The potential for the talks to collapse once again is keeping us from recommending an outright overweight tactical stance, as well as the small but still non-trivial chance that the final deal is not meaningful enough to help revive economic activity. Cyclically, a substantive trade deal would be bullish for Chinese stocks, as the relative performance of both the investable and domestic markets are meaningfully below their late-April highs (Chart 2). The stimulus that policymakers have already provided should be enough to stabilize Chinese domestic demand, and a trade deal should help reinforce a stabilization in sentiment and activity over the coming year. However, one risk to our cyclical positioning is that the removal of uncertainty for China’s exporters strengthens the will of Chinese policymakers to curb “excess” credit growth. For now, this remains “a story for another day”, as investors will almost certainly bid up Chinese stocks (particularly the investable market) in reaction to a deal. But the behavior of China’s credit impulse following the surge in Q1 of this year underscores that policymakers are very serious about preventing another significant rise in the macro leverage ratio. This could lead to a less optimistic outlook over the coming 6-12 months than we originally expected when we recommended upgrading Chinese stocks earlier this year, and is a risk that we will be continually monitoring over the coming months. Stay tuned!   Jing Sima China Strategist JingS@bcaresearch.com   Footnotes 1      Please see China Investment Strategy Weekly Report, “Mild Deflation Means Timid Easing”, dated October 9, 2019, available at cis.bcaresearch.com 2      Please see China Investment Strategy Weekly Report, “Threading A Stimulus Needle (Part 2): Will Proactive Fiscal Policy Lose Steam?”, dated July 24, 2019, available at cis.bcaresearch.com   Cyclical Investment Stance Equity Sector Recommendations

Highlights Geopolitical risks are starting to abate as a result of material constraints influencing policymakers. China needs to ensure its economy bottoms and a debt-deflationary tendency does not take hold. President Trump needs to avoid further economic deterioration arising from the trade war. The U.K. is looking to prevent a recession induced by leaving the EU without an agreement. Iran and the risk of an oil price shock is the outstanding geopolitical tail risk. Feature Readers of BCA’s Geopolitical Strategy know that what defines our research is our analytical framework – specifically the theory of constraints. Chart 1The Electoral College – An Overlooked Constraint The theory holds that policymakers are trapped by the pressures of their office, their nation’s global position, and the stream of events. These pressures emerge from the material world that we inhabit and as such are measurable. If a leader lacks popular approval, cannot command a majority in the legislature, rides atop a sinking economy, or suffers under stronger or smarter foreign enemies, then his policy preferences will be compromised. He will have to change his preferences to accommodate the constraints, rather than the other way around. Case in point is the U.S. electoral college: it proved an insurmountable political constraint on the Democratic Party in 2016. The college is intended to restrain direct democracy or popular passions; it also restrains the concentration of regional power. In 2012, Barack Obama won a larger share of the electoral college than the popular vote, while in 2016 Hillary Clinton won a smaller share (Chart 1). Clinton’s lack of appeal in the industrial Midwest turned the college and deprived her of the prize. The rest is history. In this report we highlight five key constraints that will shape the direction of the major geopolitical risks in the fourth quarter. We recommend investors remain tactically cautious on risk assets, although we have not yet extended this recommendation to the cyclical, 12-month time frame. China’s Policy: The Debt-Deflation Constraint We have a solid record of pessimism regarding Chinese President Xi Jinping’s willingness and ability to stimulate the economy – but even we were surprised by his tenacity this year. His administration’s effort to contain leverage, while still stimulating the economy, has prevented a quick rebound in the global manufacturing cycle. The constraint limiting this approach is the need to avoid a debt-deflation spiral. This is a condition in which households and firms become pessimistic about the future and cut back their spending and borrowing. The general price level falls and drives up real debt burdens, which motivates further cutbacks. A classic example is Japan, which saw a property bubble burst, destroying corporate balance sheets and forcing the country into a long phase of paying down debt amid falling prices. China has not seen its property bubble burst yet. Prices have continued to rise despite the recent pause in the non-financial debt build-up (Chart 2). Looser monetary and fiscal policy have sustained this precarious balance. But the result is a tug-of-war between the government and the private sector. If the government miscalculates, and the asset bubble bursts, then it will be extremely difficult for the government to change the mindset of households and companies bent on paying down debt. It will be too late to avoid the vicious spiral that Japan experienced – with the critical proviso that Chinese people are less wealthy than the Japanese in 1990 and the country’s political system is less flexible. A Japan-sized economic problem would lead to a China-sized political problem. This is why the recent drop in Chinese producer prices below zero is a worrisome sign (Chart 3). Policymakers have loosened monetary and fiscal policy incrementally since July 2018 and they are signaling that they will continue to do so. This is particularly likely in an environment in which trade tensions are reduced but remain fundamentally unresolved – which is our base case. Chart 2China's Property Bubble Intact Chart 3China's Constraint Is Debt-Deflation Are policymakers aware of this constraint? Absolutely. If the trade talks collapse, or the global economy slumps regardless, then China will have to stimulate more aggressively. Xi Jinping is not truly a Chairman Mao, willing to impose extreme austerity. He oversaw the 2015-16 stimulus and would do it again if he came face to face with the debt-deflation constraint. Is China still capable of stimulating? High debt levels, the reassertion of centralized state power, and the trade war have all rendered traditional stimulus levers less effective by dampening animal spirits. Yet policymakers are visibly “riding the brake,” so they can remove restraints and increase reflation if necessary. Most obviously, authorities can inject larger fiscal stimulus. They have insisted that they will prevent easy monetary and credit policies from feeding into property prices – and this could change. They could also pick up the pace when it comes to reducing average bank lending rates for small and medium-sized businesses.1 In short, stimulus is less effective, but the government is also preferring to save dry powder. This preference will be thrown by the wayside if it hits the critical constraint. The implication is that Chinese stimulus will continue to pick up over a cyclical, 12-month horizon. There is impetus to reduce trade tensions with the U.S., discussed below, but a lack of final resolution will ensure that policy tightening is not called for. Bottom Line: China’s chief economic constraint is a debt-deflation trap. This would engender long-term economic difficulties that would eventually translate into political difficulties for Communist Party rule. If a trade deal is reached, it is unlikely alone to require a shift to tighter policy. If the trade talks collapse, stimulus will overshoot to the upside. Trade War: The Electoral Constraint The U.S. and China are holding the thirteenth round of trade negotiations this week after a summer replete with punitive measures, threats, and failed restarts. Tensions spiked just ahead of the talks, as expected. Immediately thereafter President Trump declared he will meet with Chinese negotiators to give a boost to the process and reassure the markets.2 Trump’s major constraint in waging the trade war is economic, not political. Americans are generally sympathetic to his pressure campaign against China. Public opinion polls show that a strong majority believes it is necessary to confront China even though the bulk of the economic pain will be borne by consumers themselves (Chart 4). Yet Americans could lose faith in Trump’s approach once the economic pain fully materializes. Critically, the decline in wage growth that is occurring as a result of the global and manufacturing slowdown is concentrated in the states that are most likely to swing the 2020 election, e.g. the “purple” or battleground states (Chart 5). Chart 4Americans To Confront China Despite The Costs? Chart 5Trump Faces Pressure To Stage A Tactical Trade Retreat Furthermore, a rise in unemployment, which is implied by the recent decline in the University of Michigan’s survey of consumer confidence regarding the purchase of large household goods, would devastate voters’ willingness to give Trump’s tariff strategy the benefit of the doubt (Chart 6). Wisconsin and Pennsylvania, two critical states, have seen a net loss of manufacturing jobs on the year. The fear of an uptick in U.S. unemployment will prevent Trump from escalating the trade war. An uptick in unemployment would be a major constraint on Trump’s trade war – he cannot escalate further until the economy has stabilized. And that may very well require tariff rollback while trade talks “make progress.” We expect that Trump is willing to do this in the interest of staying in power. As highlighted above, the Xi administration is not without its own constraints. Our proxies for China’s marginal propensity to consume show that Chinese animal spirits are still vulnerable, particularly on the household side, which has not responded to stimulus thus far (Chart 7). Since this constraint is less immediate than Trump’s election date, Xi cannot be expected to capitulate to Trump’s biggest demands. Hence a ceasefire or détente is more likely than a full bilateral trade agreement. Chart 6Waning Consumer Confidence On Big Ticket Items Foreshadows Rise In Unemployment Trump’s electoral constraint also suggests that he needs to remove trade risks such as car tariffs on Europe and Japan (which we expect he will do). We have been optimistic on the passage of the USMCA trade deal but impeachment puts this forecast in jeopardy. Chart 7China's Trade War Constraint? Animal Spirits   Bottom Line: Trump will stage a tactical retreat on trade in order to soften the negative impact on the economy and reduce the chances of a recession prior to the November 3, 2020 election. China’s economic constraints are less immediate and it is unlikely to make major structural concessions. Hence we expect a ceasefire that temporarily reduces tensions and boosts sentiment rather than a bilateral trade agreement that initiates a fundamental deepening of U.S.-China economic engagement. U.S. Policy: The Economic Constraint The 2020 U.S. election is a critical political risk both because of the volatility it will engender and because of what we see as a 45% chance that it will lead to a change in the ruling party governing the world’s largest economy. Will Trump be the candidate? Yes. If Trump’s approval among Republicans breaks beneath the lows plumbed during the Charlottesville incident in 2017 (Chart 8A), then Trump has an impeachment problem, but otherwise he is safe from removal. Judging by the Republican-leaning pollster Rasmussen, which should reflect the party’s mood, Trump’s approval rating has not broken beneath its floor and may already be bouncing back from the initial hit of the impeachment inquiry (Chart 8B). The rise in support for impeachment and removal in opinion polls is notable, but it is also along party lines and will fade if the Democrats are seen as dragging on the process or trying to circumvent an election that is just around the corner. Chart 8ARepublican Opinion Precludes Trump’s Removal Chart 8BRepublican-Leaning Pollster Shows Support Holding Thus Far How will all of this bear on the 2020 election? Turnout will be high so everything depends on which side will be more passionate. A critical factor will be the Democratic nominee. Former Vice President Joe Biden, the establishment pick, has broken beneath his floor in the polling. His rambling debate performances have reinforced the narrative that he is too old, while the impeachment of Trump will fuel counteraccusations of corruption that will detract from Biden’s greatest asset: his electability. According to a Harvard-Harris poll from late September, 61% of voters believe it was inappropriate for Biden to withhold aid from Ukraine to encourage the firing of a Ukrainian prosecutor even when the polling question makes no mention of any connection with Biden’s son’s business interest there. Moreover, 77% believe it is inappropriate that Biden’s son Hunter traveled with his father to China while soliciting investments there. With Vermont Senator Bernie Sanders’s candidacy now defunct as a result of his heart attack and old age, Elizabeth Warren, the progressive senator from Massachusetts, will become the indisputable front runner (which she is not yet). In the fourth primary debate on October 15, she will face attacks from all sides reflecting this new status. Given her debate performances thus far, she will sustain the heightened scrutiny and come out stronger. This is not to say that Warren is already the Democratic candidate. Biden is still polling like a traditional Democratic primary front runner (Chart 9), while Warren has some clear weaknesses in electability, as reflected in her smaller lead over Trump in head-to-head polls in swing states. Nevertheless Warren is likely to become the front runner. Chart 9Biden Polling About Average Relative To Previous Democratic Primary Front Runners The recession call remains the U.S. election call. Two further considerations: Impeachment and removal of President Trump ensure a Democratic victory. There are hopes in some quarters that President Trump could be impeached and removed and yet his Vice President Mike Pence could go on to win the 2020 election, preserving the pro-business policy status quo. The problem with this logic is that Trump cannot be removed unless Republican opinion shifts. This will require an earthquake as a result of some wrongdoing by Trump. Such an earthquake will blacken Pence’s and the GOP’s name and render them toxic in the general election. Not to mention that Pence’s only act as president in the brief interim would likely be to pardon Trump and his accomplices. He would suffer Gerald Ford’s fate in 1976. Which means that a significant slide in Trump’s approval among Republicans will translate to higher odds of a Democratic win in 2020 and hence higher taxes and regulation, i.e. a hit to corporate earnings expectations. We expect this approval to hold up, but the market can sell off anyway because … The market is overrating the Senate as a check on Warren in the event she wins the White House. It is true that relative to Biden, Warren is less likely to carry the Senate. Democrats need to retain their Senate seat in Alabama, while capturing Maine, Colorado, and Arizona (or Georgia) in addition to the White House in order to control the Senate. Biden is more competitive in Arizona and Georgia than Warren. But this is a flimsy basis to feel reassured that a Warren presidency will be constrained. In fact, it is very difficult to unseat a sitting president. If the Democrats can muster enough votes to kick out an incumbent and elect an outspoken left-wing progressive from the northeast, they most likely will have mustered enough votes to take the Senate as well. For instance, unemployment could be rising or Trump’s risky foreign policy could have backfired. Chart 10Business Sentiment Threatens Trump Re-Election In our estimation the Democrats have about a 45% chance of winning the presidency, and Warren does not significantly reduce this chance. The resilient U.S. economy is Trump’s base case for success. But Trump’s trade policy and the global slowdown are rapidly eating away at the prospect that voters see improvement (Chart 10). This speaks to the constraint driving a ceasefire with China above, but it also speaks to the broader probability of policy continuity in the U.S. As Warren’s path to the White House widens, there is a clear basis for equities to sell off in the near term. Bottom Line: Trump’s approval among Republicans is a constraint on his removal via impeachment. But the status of the economy is the greater constraint. The recession call remains the election call. While we expect downside in the near term, we are still constructive on U.S. equities on a cyclical basis. War With Iran: The Oil Price Constraint The Senate will remain President Trump’s bulwark amid impeachment, notwithstanding the controversial news that Trump is moving forward with the withdrawal of troops from Syria, specifically from the so-called “safe zone” agreed with Turkey, giving Ankara license to stage a larger military offensive in Syria. This abandonment of the U.S.’s Kurdish allies at the behest of Turkey (which is a NATO ally but has been at odds with Washington) has provoked flak from Republican senators. However, it is well supported in U.S. public opinion (Chart 11). Trump is threatening to impose economic sanctions on Turkey if it engages in ethnic cleansing. The Turkish lira is the marginal loser, Trump’s approval rating is the marginal winner. The withdrawal sends a signal to the world that the U.S. is continuing to deleverage from the Middle East – a corollary with the return of focus on Asia Pacific. While the Iranians are key beneficiaries of this pivot, the Trump administration is maintaining maximum sanctions pressure on the Iranians. The firing of hawkish National Security Adviser John Bolton did not lead to a détente, as President Rouhani has too much to risk from negotiating with Trump. Instead the Iranians smelled U.S. weakness and went on the attack in Saudi Arabia, briefly shuttering 6 million barrels of oil per day. The response to the attack – from both Saudi Arabia and the U.S. – revealed an extreme aversion to military conflict and escalation. Instead the U.S. has tightened its sanctions regime – China is reportedly withdrawing from its interest in the South Pars natural gas project, a potentially serious blow to Iran, which had been hyping its strategic partnership with China. This reinforces the prospect for a U.S.-China ceasefire even as it redoubles the economic pressure on Iran. As long as the U.S. maintains the crippling sanctions on Iran, there is no guarantee that Tehran will not strike out again in an effort to weaken President Trump’s resolve. The fact that about 18% of global oil supply flows through the critical chokepoint of the Strait of Hormuz is Iran’s ace in the hole (Chart 12). It is the chief constraint on Trump’s foreign policy, as greater oil supply disruptions could shock the U.S. economy ahead of the election. Trump can benefit from minor or ephemeral disruptions but he is likely to get into trouble if a serious shock weakens the economy at this juncture. Chart 11U.S. Opinion Constrains Foreign Policy Chart 12Oil Price Constrains U.S. Policy Toward Iran An oil shock does not have to originate in Hormuz shipping or sneak attacks on regional oil infrastructure. Iran is uniquely capable of fomenting the anti-government protests that have erupted in southern Iraq. The restoration of stability in Iraq has resulted in around 2 million barrels of oil per day coming onto international markets (Chart 13). If this process is reversed through political instability or sabotage, it will rapidly push up against global spare oil capacity and exert an upward pressure on oil prices that would come at an awkward time for a global economy experiencing a manufacturing recession (Chart 14). Chart 13Iran's Leverage Over Iraq Chart 14Global Oil Spare Capacity Constrains Response To Crisis Bottom Line: Iran’s power over regional oil production is the biggest constraint on Trump’s foreign policy in the region, yet Trump is apparently tightening rather than easing the sanctions regime. The failure of the Abqaiq attack to generate a lasting impact on oil prices amid weak global demand suggests that Iran could feel emboldened. The U.S. preference to withdraw from Middle Eastern conflicts could also encourage Iran, while the tightening of the sanctions regime could make it desperate. An oil shock emanating from the conflict with Iran is still a significant risk to the global bull market. Brexit: The No-Deal Constraint The fifth and final constraint to discuss in this report pertains to the U.K. and Brexit. We do not consider the October 31 deadline a no-deal exit risk. Parliament will prevail over a prime minister who lacks a majority. Nevertheless the expected election can revive no-deal risk, especially if Boris Johnson is returned to power with a weak minority government. Chart 15U.K.: Public Opinion Constrains Parliament And No-Deal Brexit While parliament is the constraint on the prime minister, the public is the constraint on parliament. From this point of view, support for Brexit has weakened and the Conservative Party is less popular than in the lead up to the 2015 and 2017 general elections. The public is aware that no-deal exit is likely to cause significant economic pain and that is why a majority rejects no-deal, as opposed to a soft Brexit. Unless the Tory rally in opinion polling produces another coalition with the Northern Irish, albeit with Boris Johnson at the helm, these points make it likely that a no-deal Brexit will become untenable when all is said and done (Chart 15). If Johnson achieves a single party majority the EU will be more likely to grant concessions enabling him to get a withdrawal deal over the line. We remain long GBP-USD but will turn sellers at the $1.30 mark. Investment Implications The path of least resistance is for China’s stimulus efforts to increase – incrementally if trade tensions are contained, and sharply if not. This should help put a floor beneath growth, but the Q1 timing of this floor means that global risk assets face additional downside in the near term. We continue to recommend going long our “China Play” index. U.S.-China trade tensions should decline as President Trump looks to prevent higher unemployment ahead of his election. China has reason to follow through on small concessions to encourage Trump’s tactical trade retreat, but it does not face pressure to make new structural concessions. We expect a ceasefire – with some tariff rollback likely – but not a big bang agreement that removes all tariffs or deepens the overall bilateral economic engagement. Stay long our “China Play” index. We remain short CNY-USD on a strategic basis but recognize that a ceasefire presents a short term (maximum 12-month) risk to this view, so clients with a shorter-term horizon should close that trade. We are long European equities relative to Chinese equities as a result of the view that China will stimulate but that a trade ceasefire will leave lingering uncertainties over Chinese corporates. U.S. politics are highly unpredictable but constraint-based analysis indicates that while the House may impeach, the Senate will not remove. This, combined with Warren’s likely ascent to the head of the pack in the Democratic primary race, means that Trump remains favored to win reelection, albeit with low conviction (55% chance) due to a weak general approval rating and economic risks. The risk to U.S. equities is immediate, but should dissipate. The U.S. is rotating its strategic focus from the Middle East to Asia Pacific, which entails a continued rotation of geopolitical risk. However, recent developments reinforce our argument in July that Iranian geopolitical risk is frontloaded relative to the China risk. This is true as long as Trump maintains crippling sanctions. Iran may be emboldened by its successes so far and has various mechanisms – including Iraqi instability – by which it can threaten oil supply to pressure Trump. This is a tail risk, but it does support our position of being long EM energy producers.   Matt Gertken, Vice President Geopolitical Strategist mattg@bcaresearch.com Footnotes 1 Please see BCA Research, China Investment Strategy Weekly Report, “Mild Deflation Means Timid Easing,” October 9, 2019, available at cis.bcaresearch.com. 2 China knows that Trump wants to seal a deal prior to November 2020 to aid his reelection campaign, while Trump needs to try to convince China that he does not care about election, the stock market, or anything other than structural concessions from China. Hence the U.S. blacklisted several artificial intelligence companies and sanctioned Chinese officials in advance of the talks. The U.S. opened a new front in the conflict by invoking China’s human rights abuses in Xinjiang, which is also an implicit warning not to create a humanitarian incident in Hong Kong where protests continue to rage. These are pressure tactics but have not yet derailed the attempt to seal a deal in Q4.