Asia

Highlights So what? EM elections bring opportunities as well as risks. Why?   Emerging market equities will benefit as long as China’s stimulus does not fizzle. Modi is on track to win India’s election – which is a positive – though risks lie to the downside. Thailand’s next cycle of political instability is beginning, but we are still cyclically overweight. Indonesia will defy the global “strongman” narrative – go overweight tactically. Populism remains a headwind to Philippine and Turkish assets. Wait for Europe to stabilize before pursuing Turkish plays. Feature Chart 1Risks of China's Stimulus Have Shifted To The Upside China’s official PMIs in March came at just the right time for jittery emerging market investors awaiting the all-important March credit data. EM equities, unlike the most China-sensitive plays, have fallen back since late January, after outperforming their DM peers since October (Chart 1). This occurred amid a stream of negative economic data and policy uncertainties: China’s mixed signals, prolonged U.S.-China trade negotiations, the Fed’s extended “pause” in rate hikes, the inversion of the yield curve, Brexit, and general European gloom. We have been constructive on EM plays since February 20, when we determined that the risks of China’s stimulus had shifted to the upside. However, several of the EM bourses that are best correlated with Chinese stimulus are already richly valued (the Philippines, Indonesia, Malaysia, etc). The good news is that a series of elections this spring provide a glimpse into the internal politics of several of these countries, which will help determine which ones will outperform if we are correct that global growth will find its footing by Q3.  First, A Word On Turkey … More Monetary Expansion On The Way Local elections in Turkey on March 31 have dealt a black eye to President Recep Tayyip Erdogan. His ruling Justice and Development Party (AKP) has lost control of the capital Ankara for the first time since 2004. Erdogan has also (arguably) conceded the mayoralty of Istanbul, the economic center of the country, where he first rose to power in 1994. Other cities also fell to the opposition. Vote-counting is over and the aftermath will involve a flurry of accusations, investigations, and possibly unrest. Erdogan’s inability to win elections with more than a slim majority is a continual source of insecurity for him and his administration. This weekend’s local elections reinforce the point. The AKP alone failed to cross 45% in terms of popular votes. Combined with its traditional ally – the Nationalist Movement Party (MHP) – it received 51.6% of the total vote (in the 2015 elections, the two parties combined for over 60% of the vote). While losing the local elections will not upset the balance in parliament, it is a rebuke to Erdogan over his economic policy and a warning to the AKP for the future. Erdogan does not face general elections until 2023. But judging by his response to the first serious challenge to his rule – the Gezi Park protests of May 2013 – his reaction will be to double down on unorthodox, populist economic policy. Chart 2Erdogan Will Respond With Populist Politics Back in 2013, the government responded to the domestic challenge through expansive monetary policy. The central bank gave extraordinary liquidity provisions to the banking system. Chart 2 clearly shows that the liquidity injections began with the Gezi protests. These provisions only paused in 2016-17, when global growth rebounded on the back of Chinese stimulus and EM asset prices rose, supporting Turkey’s currency and enabling the central bank to hold off. Today, the severe contraction in GDP (by 3% in Q4 2018), with a negative global backdrop, will likely end Erdogan’s patience with tight monetary policy.1 To illustrate how tight policy has been, note that bank loan growth denominated in lira is contracting at a rate of 17% in real terms. Given the authorities’ populist track record, rising unemployment will likely lead to further “backdoor” liquidity easing. A new bout of unorthodox monetary policy will be negative for domestic bank equities, local-currency bonds, and the lira. As one of the first EM currencies and bourses to begin outperforming in September 2018, Turkey has been at the forefront of the EM mini-rally over the past six months. But with global growth still tepid, this mini-cycle is likely to come to an end for the time being. Watch for the bottoming in Chinese followed by European growth before seeking new opportunities in Turkish assets. Erdogan’s domestic troubles could also prompt him to renew his foreign combativeness, which raises tail risks to Turkish risk assets, such as through U.S. punitive measures. Last year, Erdogan responded to the economic downswing by toning down his belligerent rhetoric and mending fences with Europe and the U.S. However, a reversion to populism may require him to seek a convenient distraction. The U.S. is withdrawing from Syria and the Middle East, leaving Turkey in a position where it needs other relationships to pursue its interests. Russia is a key example. Currently Erdogan is bickering with the U.S. over the planned purchase of a missile defense system from Russia. But the consequence is that relations with the U.S. could deteriorate further, potentially leading to new sanctions. Bottom Line: Turkey is still in the grip of populist politics and will respond to the recession and domestic discontent with easier monetary policy which would bode ill for the lira and lira-denominated assets. The stabilization of the European economy is necessary before investors attempt to take advantage of the de-rating of Turkish assets. India: Focus On Modi’s Political Capital We have long maintained that Modi is likely to stay in power after India’s general election on April 11-May 19. His coalition has recovered in public opinion polling since the Valentine’s Day attack on Indian security forces in Indian Kashmir (Chart 3). The government responded to the attacks by ordering airstrikes on February 26 against Pakistani targets in Pakistani territory for the first time since 1974. The attack was theatrical but the subsequent rally-around-the-flag effect gave Modi and his Bharatiya Janata Party (BJP) a badly needed popular boost. The market rallied on the back of Modi’s higher chances of reelection. Modi is the more business-friendly candidate, as opposed to his chief rival, Rahul Gandhi of the Indian Congress Party. Nevertheless, election risks still lie to the downside: Modi and his party are hardly likely to outperform their current 58% share of seats in the lower house of parliament, since the conditions for a wave election – similar to the one that delivered the BJP a single-party majority in 2014 – do not exist today. While the range of outcomes is extremely broad (Chart 4), the current seat projections shown in Chart 3 put Modi’s coalition right on the majority line. Meanwhile his power is already waning in the state legislatures. Thus Modi’s reform agenda has lost momentum, at least until he can form a new coalition. This will take time and markets may ultimately be disappointed by the insufficiency of the tools at his disposal in his second term. Indian equities are the most expensive in the EM space, and only more so after the sharp rally in March on the back of the Kashmir clash and Modi’s recovering reelection chances (Chart 5). Additional clashes with Pakistan are not unlikely during the election season, despite the current appearance of calm. This is because Modi’s patriotic dividend in the polls could fade. Since even voters who lack confidence in Modi as a leader believe that Pakistan is a serious threat (Chart 6), he could be encouraged to stir up tensions yet again. This would be playing with fire but he may be tempted to do it if his polling relapses or if Pakistan takes additional actions. Chart 5...And Lofty Valuations Further escalation would be positive for markets only so long as it boosts Modi’s chances of reelection without triggering a wider conflict. Yet the standoff revealed that these two powers continue to run high risks of miscalculation: their signaling is not crystal clear; deterrence could fail. Thus, further escalation could become harder to control and could spook the financial markets.2 Even if Modi eschews any further jingoism, his lead is tenuous. First, the economic slowdown is taking a toll – even the official unemployment rate is rising (Chart 7) and the government has been caught manipulating statistics. There is no time for the economy to recover enough to change voters’ minds. Opinion polls show that even BJP voters are not very happy about the past five years. They care more about jobs and inflation than they do about terrorism, and a majority thinks these factors have deteriorated over Modi’s five-year term (Chart 8). Chart 7Manipulated Stats Can't Hide Deteriorating Economy   If the polling does not change, Modi will win with a weak mandate at best. A minority government or a hung parliament is possible. A Congress Party-led coalition, which would be a market-negative event, cannot be ruled out. The latter especially would prompt a big selloff, but anything short of a single-party majority for Modi will register as a disappointment. Bottom Line: There may be a relief rally after Modi is seen to survive as prime minister, but his likely weak political capital in parliament will be disappointing for markets. The market will want additional, ambitious structural reforms on top of what Modi has already done, but he will struggle to deliver in the near term. While we are structurally bullish, in the context of this election cycle –  which includes rising oil prices that hinder Indian equity outperformance – we urge readers to remain underweight Indian equities within emerging markets. Thailand: An Outperformer Despite Quasi-Military Rule A new cycle of political instability is beginning in Thailand as the country transitions back into civilian rule after five years under a military junta. However, this is not an immediate problem for investors, who should remain overweight Thai equities relative to other EMs on a cyclical time horizon. The source of Thai instability is inequality – both regional and economic. Regionally, 49% of the population resides in the north, northeast, and center, deprived of full representation by the royalist political and military establishment seated in Bangkok (Map 1). Economically, household wealth is extremely unevenly distributed. Thailand’s mean-to-median wealth ratio is among the highest in the world (Chart 9). Eventually these factors will drive the regional populist movement – embodied by exiled Prime Minister Thaksin Shinawatra and his family and allies – to reassert itself against the elites (the military, the palace, and the civil bureaucracy). New demands will be made for greater representation and a fairer distribution of wealth. The result will be mass street protests and disruptions of business sentiment and activity that will grab headlines sometime in the coming years, as occurred most recently in 2008-10 and 2013-14.   Chart 10Social Spending Did Not Hinder Populism The seeds of the next rebellion are apparent in the results of the election on March 24. The junta has sought to undercut the populists by increasing infrastructure spending and social welfare (Chart 10), and controlling rice prices for farmers. Yet the populists have still managed to garner enough seats in the lower house to frustrate the junta’s plans for a seamless transition to “guided” civilian rule. The final vote count is not due until May 9 but unofficial estimates suggest that the opposition parties have won a majority or very nearly a majority in the lower house. This is despite the fact that the junta rewrote the constitution, redesigned the electoral system to be proportional (thus watering down the biggest opposition parties), and hand-picked the 250-seat senate. Such results point to the irrepressible population dynamics of the “Red Shirt” opposition in Thailand, which has won every free election since 2001. Nevertheless, the military and its allies (the “Yellow Shirt” political establishment) are too powerful at present for the opposition to challenge them directly. The junta has several tools to shape the election results to its liking in the short run.3 It would not have gone ahead with the election were this not the case. As a result, the cycle of instability is only likely to pick up over time. Investors should note the silver lining to the period of military rule: it put a halt to the spiral of polarization at a critical time for the country. The unspoken origin of the political crisis was the royal succession. The traditional elites could not tolerate the rise of a populist movement that flirted with revolutionary ideas at the same time that the revered King Bhumibol Adulyadej drew near to passing away. This combination threatened both a succession crisis and possibly the survival of the traditional political system, a constitutional monarchy backed by a powerful army. With the 2014 coup and five-year period of military rule (lengthy even by Thai standards), the military drew a stark red line: there is no alternative to the constitutional monarchy. The royalist faction had its bottom line preserved, at the cost of an erosion of governance and democracy. The result is that going forward, there is a degree of policy certainty. Chart 11Thai Confidence Has Bottomed Chart 12Strong Demand Sans Risk Of Being Overleveraged The long-term trend of Thai consumer confidence tells the story (Chart 11). Optimism surged with the election of populist Thaksin in the wake of the Asian Financial Crisis in 2001. The long national conflict that ensued – in which the elites and generals exiled Thaksin and ousted his successors, and the country dealt with a global financial crisis and natural disasters – saw consumer confidence decline. However, the coup of 2014 and the royal succession (to be completed May 4-6 with the new king’s coronation) has reversed this trend, with confidence trending upward since then. Revolution is foreclosed yet the population is looking up. Military rule is generally disinflationary in Thailand and this time around it initiated a phase of private sector deleveraging. Yet the economy has held up reasonably well. Private consumption has improved along with confidence and investment has followed, albeit sluggishly (Chart 12). The advantage is that Thailand has had slow-burn growth and has avoided becoming overleveraged again, like many EM peers. Chart 13Thailand Outperformed EM Despite Military Interference Furthermore, Thailand is not vulnerable to external shocks. It has a 7% current account surplus and ample foreign exchange reserves. It is not too exposed to China, either economically or geopolitically: China makes up only 12% of exports, while Bangkok has no maritime-territorial disputes with Beijing in the South China Sea. In fact, Thailand maintains good diplomatic relations with China and yet has a mutual defense treaty with the United States (the oldest such treaty in Asia). It is perhaps the most secure of any of the Southeast Asian states from the point of view of the secular U.S.-China conflict. Finally, if our forecast proves wrong and political instability returns sooner than we expect, it is important to remember that Thailand’s domestic political conflicts rarely affect equity prices in a lasting way. Global financial crises and natural disasters have had a greater impact on Thai assets over the past two decades than the long succession crisis. Thailand has outperformed both EM and EM Asia during the period of military interference, though democratic Indonesia has done better (Chart 13). Bottom Line: Thailand’s political risks are domestic and stem from regional and economic inequality, which will result in a revived opposition movement that will clash with the traditional military and political elite. This clash will eventually create policy uncertainty and political risk. But it will need to build up over time, since the military junta has strict control over the current environment. Meanwhile macro fundamentals are positive. Indonesia: Rejecting Strongman Populism We do not expect any major surprises from the Indonesian election. Instead, we expect policy continuity, a marginal positive for the country’s equities. However, stocks are overvalued, overexposed to the financial sector,4 and vulnerable if global growth does not stabilize. The most important trend since the near collapse of Indonesia in the late 1990s has been the stabilization of the secular democratic political system and peaceful transition of power. That trend looks to continue with President Joko Widodo’s likely victory in the election on April 17. President Jokowi defeated former general Prabowo Subianto in the 2014 election and has maintained a double-digit lead over his rival in the intervening years (Chart 14). Prabowo is a nationalist and would-be strongman leader who was accused of human rights violations during the fall of his father-in-law Suharto’s dictatorship in 1998. Emerging market polls are not always reliable but a lead of this size for this long suggests that the public knows Prabowo and does not prefer him to Jokowi. In fact he never polled above 35% support while Jokowi has generally polled above 45%. The incumbent advantage favors Jokowi. Household consumption is perking up slightly and consumer confidence is high (see Chart 11 above). Wages have received a big boost during Jokowi’s term and are now picking up again, in real as well as nominal terms and for rural as well as urban workers. Jokowi’s minimum wage law has not resulted in extravagant windfalls to labor, as was feared, and inflation remains under control (Chart 15). Government spending has been ramped up ahead of the vote (and yet Jokowi is not profligate). All of these factors support the incumbent. Real GDP growth is sluggish but has trended slightly upward for most of Jokowi’s term. Chart 15Favorable Economic Conditions Support Incumbent Jokowi Jokowi has been building badly needed infrastructure with success and has been attracting FDI to try to improve productivity (Chart 16). This is the most positive feature of his government and is set to continue if he wins. A coalition in parliament has largely supported him after an initial period of drift. The biggest challenge for Jokowi and Indonesia are lackluster macro fundamentals. For instance, twin deficits, which show a lack of savings and invite pressure on the currency, which has been very weak. The twin deficits have worsened since 2012 because China’s economic maturation has forced a painful transition on Indonesia, which it has not yet recovered from. There is some risk to governance as Jokowi has chosen Ma’ruf Amin, the top cleric of the world’s largest Muslim organization, as his running mate. Jokowi wants to counteract criticisms that he is not Islamic enough (or is a hidden Christian), which cost his ally the governorship of Jakarta in 2017. However, Jokowi is not a strongman leader like Erdogan in Turkey, whose combination of Islamism and populism has been disastrous for the country’s economy. As mentioned, Jokowi will be defeating the would-be strongman Prabowo, who has also allied with Islamism. In fact, Indonesia is a relatively secular and modern Muslim-majority country and Amin is the definition of an establishment religious leader. The security forces have succeeded in cracking down on militancy in the past decade, greatly improving Indonesia’s stability and security as a whole (Chart 17). Governance is weak on some measures in Indonesia, but Jokowi is better than the opposition on this front and neither his own policies nor his vice presidential pick signals a shift in a Turkey-like, Islamist, populist direction. Bottom Line: We should see Indonesian equities continue to outperform EM and EM Asia as long as China’s stimulus efforts do not collapse and global growth picks up as expected in the second half of the year. Peaceful democratic transitions and economic policy continuity have been repeatedly demonstrated in Indonesia despite the inherent difficulties of developing a populous, multi-ethnic archipelago. Nationalism is a constant risk but it would be more virulent under Jokowi’s opponent. The Philippines: Embracing Strongman Populism The May 13 midterm elections mark the three-year halfway point in President Rodrigo Duterte’s presidential term. Duterte is still popular, with approval ratings in the 75%-85% range. These numbers likely overstate his support, but it is clearly above 50% and superior to that of his immediate predecessors (Chart 18). Further, his daughter’s party, Faction for Change, has gained national popularity, reinforcing the signal that he can expand his power base in the vote. The senate is the root of opposition to Duterte. His supporters control nine out of 24 seats. But of the twelve senators up for election, only three are Duterte’s supporters. So he could make gains in the senate which would increase his ability to push through controversial constitutional reforms. (He needs 75% of both houses of parliament plus a majority in a national referendum to make constitutional changes.) In terms of the economy, we maintain the view that Duterte is a true “populist” – pursuing nominal GDP growth to the neglect of everything else. His fiscal policy of tax cuts and big spending have supercharged the economy but macro fundamentals have deteriorated (Chart 19). He has broken the budget deficit ceiling of 3%, up from 2.2% in 2017. His reflationary policies have turned the current account surplus into a deficit, weighing heavily on the peso, which peaked against other EM currencies when he came to power in 2016 (Chart 20). Inflation peaked last year but we expect it to remain elevated over the course of Duterte’s leadership. He has appointed a reputed dove, Benjamin Diokno, as his new central banker. Chart 19Reflationary Policies Created Twin Deficits...   Chart 20...And Twin Deficits Weigh On The Peso Rule of law has deteriorated, as symbolized by the removal of the chief justice of the Supreme Court for questioning Duterte’s extension of martial law in Mindanao. Duterte also imprisoned his top critic in the senate, Leila de Lima, on trumped-up drug charges. He tried but failed to do so with Senator Antonio Trillanes, a former army officer and quondam coup ring-leader who has substantial support in the military. The army is pushing back against any prosecution of Trillanes, and against Duterte’s ongoing détente with China, prompting Duterte to warn of the risk of a coup.   Duterte’s China policy is to attract Chinese investment while avoiding a conflict in the South China Sea. His administration has failed to downgrade relations with the U.S. thus far, but further attempts could be made. This strategy could make the Philippines a beneficiary of Chinese investment if it succeeds. However, China knows that the Philippine public is very pro-American (more so than most countries) and that Duterte could be replaced by a pro-U.S. president in as little as three years, so it is not blindly pouring money into the country. Pressure to finance the current account deficit will persist. If pro-Duterte parties gain seats in the senate the question will be whether he comes within reach of the 75% threshold required for constitutional changes. His desire to change the country into a federal system has not gained momentum so far. He claims he will stand down at the end of his single six-year term but he could conceivably attempt to use any constitutional change to stay in power longer. If the revision goes forward, it will be a hugely divisive and unproductive use of political capital. Bottom Line: The Philippine equity market is highly coordinated with China’s credit cycle and so should benefit from China’s stimulus measures this year (as well as the Fed’s backing off). Nevertheless, Philippine equities are overvalued and macro fundamentals and quality of governance have all deteriorated. Duterte’s emphasis on building infrastructure and human capital is positive, but the means are ill-matched to the ends: savings are insufficient and inflation will be a persistent problem. We would favor South Korea, Thailand, Indonesia, and Malaysia over the Philippines in the EM space. Investment Implications We expect China’s stimulus to be significant and to generate increasingly positive economic data over the course of the year. China is a key factor in the bottoming of global growth, which in turn will catalyze the conditions for a weaker dollar and outperformance of international equities relative to U.S. equities. Caveat: In the very near term, it is possible that China plays could relapse and EM stocks could fall further due to the fact that Chinese and global growth have not yet clearly bottomed. We are structurally bullish India, but recommend sitting on the sidelines until financial markets discount the disappointment of a Modi government with insufficient political capital to pursue structural reforms as ambitious as the ones undertaken in 2014-19. Go long Thai equities relative to EM on a cyclical basis. Stay long Thai local-currency government bonds relative to their Malaysian counterparts. Go long Indonesian equities relative to EM on a tactical basis. Maintain vigilance regarding Russian and Taiwanese equities: the Ukrainian election, Russia’s involvement in Venezuela, and the unprecedented Taiwanese presidential primary election reinforce our view that Russia and Taiwan are potential geopolitical “black swans” this year.   Matt Gertken, Vice President Geopolitical Strategy mattg@bcaresearch.com   Footnotes 1      See BCA Emerging Markets Strategy, “Turkey: Brewing Policy Reversal?” March 21, 2019, available at www.bcaresearch.com. 2      See Sanjeev Miglani and Drazen Jorgic, “India, Pakistan threatened to unleash missiles at each other: sources,” Reuters, March 16, 2019, available at uk.reuters.com.  3      The junta can disqualify candidates and rerun elections in the same district without that candidate if the candidate is found to have violated a range of very particular laws on campaigning and use of social media. Also, the Election Commission is largely an instrument of the Bangkok establishment and can allocate seats according to the junta’s interests. 4      See BCA Emerging Markets Strategy, “Indonesia: It Is Not All About The Fed,” March 7, 2019, available at www.bcaresearch.com.   Geopolitical Calendar

Highlights The meaningful improvement in the March manufacturing PMIs (both Caixin and official) all but confirms that a rebound in Chinese economic activity is forthcoming. The odds that investors will look through any near-term economic and/or earnings weakness are directly related to the likely magnitude of the expansion in credit over the coming year, and our research points to the need for the recent pace of credit growth to be sustained in order to stabilize the outlook for earnings. Barring a substantial breakdown in trade talks between China and the U.S., a strong March total social financing release would likely tip the scales in favor of a recommendation to increase Chinese investable stock exposure within a global equity portfolio to overweight. Feature Tables 1 and 2 highlight key developments in China’s economy and its financial markets over the past month. On the growth front, coincident economic activity has sharply converged with our leading indicator for China’s economy, which we highlighted was likely to occur. Looking forward, while we await the March total social financing release later this month for a better sense of the likely magnitude in credit growth over the coming year, the meaningful improvement in the March manufacturing PMIs (both Caixin and official) all but confirms that a rebound in Chinese economic activity is forthcoming. Table 1China Macro Data Summary Table 2China Financial Market Performance Summary​​​​​​​ The likely magnitude of the uptrend in credit is important from an investment strategy perspective, as we have highlighted that weak coincident activity raises the risk of a lagged but meaningful further decline in Chinese earnings per share over the coming few months. The odds that investors will look through any near-term economic and/or earnings weakness are directly related to the ultimate size of the expansion in credit, and our research points to the need for the recent pace of credit growth to be sustained in order to stabilize the outlook for earnings. But the bottom line for investors is that we recently placed Chinese investable stocks (i.e. the MSCI China Index) on upgrade watch, and the March PMI is a step in the direction of a recommendation to increase equity allocation to overweight within a global stock portfolio. Investors should closely watch the March total social financing data (due to be released in mid-April); a strong release, barring a substantial breakdown in trade talks between China and the U.S., would likely tip the scales in favor of a move to overweight. In reference to Tables 1 and 2, we provide several detailed observations concerning developments in China’s macro and financial market data below: Chart 1 shows that coincident economic activity sharply converged in January and February with our leading indicator for China’s economy, as we had argued many times over the past several months was likely to occur. In our view, most if not all of the previously beneficial tariff front-running effect has probably washed out of the data, implying that future changes in activity measures are now more likely to reflect actual changes in underlying economic circumstances. Chart 1A Convergence That We Predicted The components of our LKI leading indicator continue to point to divergent outcomes for the Chinese economy (Chart 2). Monetary conditions have weakened somewhat over the past few months, but remain quite easy relative to history. The credit components bounced in January but are still weak relative to their history, whereas money growth is extremely weak and has shown no sign of improvement. Barring a major rise in the RMB, a continuation in the recent pace of credit growth would likely be enough to cause our leading indicator to trend higher, particularly if money growth begins to pick up. Chart 2An Uptrend In Credit Growth Will Push Our Leading Indicator Higher We noted in our March 13 Weekly Report that growth in residential floor space started was unsustainably strong,1 and the January/February data update confirmed this view. Growth in starts has decelerated by 10 percentage points from December to February, highlighting that housing construction cannot permanently decouple from sales volume and that a further deceleration is possible unless sales growth (which is currently negative) begins to pick up. The PMI rebound in March registers as one of the most important macro developments since the release of the January total social financing data. Both the Caixin and official manufacturing PMI data came in solidly positive for March, rising relative to their February values and surprising consensus expectations to the upside. Chart 3 highlights that the March Caixin data has pushed the series above its post-2010 median, whereas the official PMI has risen to its 40th percentile from essentially its lowest point in the past decade. In our view, the PMI rebound registers as one of the most important macro developments since the release of the January total social financing data, in that it all but confirms that a rebound in (still depressed) Chinese economic activity is forthcoming. Chart 3A Very Sharp Rebound In Both Manufacturing PMIs Despite having rallied significantly from their low, Chinese stocks (both investable and domestic) remain approximately 20% below their early-2018 high in US$ terms. This is in contrast to global stocks, which are only 7% shy of their 2018 high. If Chinese equities can avoid a major earnings recession, this discrepancy underscores that there is further upside for stock prices in relative terms over the coming 6-12 months. For the A-share market, however, Chart 4 highlights a potential near-term roadblock for continued outperformance versus global stocks. The chart highlights that the relative performance trend is now bumping up against the upper end of a declining trend channel that has been in place for almost 4 years, a bearish pattern that is in stark contrast to that of the investable market. Conversely, a break outside of this channel would warrant attention, as it could signal a secular change in trend for the domestic equity market. Chart 4Is The Four Year Downtrend In A-Share Relative Performance Over? Chart 5 highlights that the strange combination of consumer staples and real estate stocks have been the clear sector winners over the past month, both in the investable and domestic markets. Signs of stabilization in consumer spending explains staples outperformance, but the rally in real estate stocks is more difficult to explain given the weakness in housing fundamentals referenced above. For now, our bias is to believe that real estate stocks are benefitting as a value play, given their deep discount relative to both their respective broad markets and their global peers. Chart 5A Sharp Rebound In Staples And Real Estate Stocks China’s 7-day interbank repo rate has increased somewhat over the past month, raising speculation that the PBOC may soon proceed with a generalized cut to the reserve requirement ratio. In our view, the trend in the 3-month interbank repo rate has been more important over the past few years, as it has closely correlated since late-2016 with average interest rates in the economy and sharp declines in the rate last year preceded the pickup in credit growth observed in January. Still, additional easing from the PBOC could be significant for market participants, as it would likely be greeted positively by investors and could further stoke the belief that Chinese credit growth may overshoot to the upside over the coming 6-12 months. A stronger RMB versus the euro will be welcome news for European exporters. In contrast to a significant improvement in domestic equity prices and investor sentiment, Chinese onshore corporate bond spreads have actually inched higher over the past month. While the rise has been comparatively small (8 basis points), spreads now stand at roughly a third of their 12-month range. A rising trend in onshore corporate bond spreads is not consistent with a slower pace of defaults over the coming 6-12 months, suggesting that at least some headwinds facing the Chinese economy will remain over the coming year if the recent trend in spreads continues. While CNY-USD has been largely flat over the past month, CNY-EUR has continued to rise and is now within striking distance of its 2018 high (Chart 6). This is not likely welcome news for Chinese exporters with close ties to Europe, but it may help provide a much-needed trade boost to the European economy over the coming year, whose manufacturing PMI has recently fallen to a six-year low. Chart 6A Stronger CNY-EUR Cross Will Help Boost Chinese Imports From Europe   Jonathan LaBerge, CFA, Vice President Special Reports jonathanl@bcaresearch.com Footnotes 1 Please see China Investment Strategy Weekly Report, “China Macro And Market Review”, dated March 13, 2019, available at cis.bcaresearch.com Cyclical Investment Stance Equity Sector Recommendations

特別レポート

Dear Client, Instead of our regular Weekly Report, this week we are sending you a Special Report written on February 20 by our Geopolitical Strategy service colleagues that discusses China’s recent stimulating efforts. We have only made a few minor revisions to account for the past month’s events. We trust that you will find this Special Report useful and insightful. Best regards, Anastasios Avgeriou, U.S. Equity Strategist   Highlights So What? China’s January-February credit data suggest that stimulus is here. Why? China’s early-year credit and fiscal policies suggest that stimulus risks are to the upside. January-February credit was a blowout number and fiscal spending is up. Equity bourses in South Korea and Russia are the most likely to benefit from Chinese stimulus. Industrial metals such as copper will also benefit – with a delay. Feature New credit data for China in January-February improves the chances that Beijing’s stimulus measures will overshoot this year, causing China’s economy to bottom in 2019 and jumpstart global growth. In our annual outlook for this year we argued that while China was stimulating the economy, the magnitude of stimulus would be the decisive factor for the global macro environment in 2019. We argued that the type of stimulus would remain primarily fiscal – tax cuts for households and small and medium-sized enterprises – and hence that it would be modest as fiscal easing would merely offset relatively weak credit growth. This view stemmed from our assessment of the Xi Jinping administration, highlighted in April 2017, as an “elitist” (not populist) administration. Its policy priorities are to discipline the Chinese economy, and in particular to contain systemic financial risk, which President Xi has cited as a national security threat. This view is not wrong, but the latest data clearly show that Xi has decided to pause these painful efforts at limiting leverage and rebalancing China’s economy. Witness January-February’s decisive uptick in both total social financing (total private credit) and local government bond issuance (Chart 1). Chart 1Higher Risk Of An Overshoot A massive spike in new credit is the single most important criterion in our “Checklist For A Stimulus Overshoot.” Thus, from a policy perspective, we are now at higher risk of an overshoot (Table 1). Not only credit as a whole but also informal lending saw a surge in January-February, implying that the government is relenting in its crackdown on the shadow banks. The approval of local government bond issuance for early in the year – and the People’s Bank of China’s announcement of a “Central Bank Bills Swap” program – reinforce this policy shift.1 Table 1Checklist For A Chinese Stimulus Overshoot In 2019   A stimulus overshoot is positive for Chinese demand in the short run but negative for potential GDP in the long run. A “traditional” credit surge of this nature cannot be surgically targeted at SMEs or households. It will go to state-owned enterprises, privileged corporations, property developers, and the like, which have always had the advantage in China’s financial system. SOEs have taken a much larger share of new loans than private companies in recent years,2 and the only silver lining of this trend was the possibility that tighter credit controls would discipline the SOEs. That silver lining is now fading, barring some new and surprising development on the reform front. China needs to create 26 trillion renminbi in new credit over the course of the year to avoid a corporate earnings contraction. These January-February numbers put China on track to do just that (Chart 2), assuming that President Xi and U.S. President Donald Trump agree to a short-term, framework trade deal this year. Chart 2On Track To Avoid An Earnings Contraction Of course, a few caveats are in order. First, January-February’s credit number is only one data point and credit growth is always abnormally strong in the first month of the year. Early in the year, banks seek to expand their assets rapidly in a bid to get as much market share as possible before administrative credit quotas kick in. Because of Chinese New Year, it is best to combine January and February data to get a sense of the rate of credit expansion in the first part of the year. This year’s January-February numbers are very strong relative to previous years (Chart 3) and the context is more accommodative than the 2017 January-February credit surge, when authorities were beginning to tighten rather than ease macroprudential policy. Still a rapid rate of credit expansion will have to be sustained in the coming months in order to meet the 26 trillion RMB requirement highlighted above. Second, there is some risk that China’s households and private businesses will not respond as positively today as in the past. The intensification of Communist Party control over the society and economy, President Xi’s cancellation of term limits, and the strategic confrontation with the United States have created a bearish sentiment in the private sector. Our Emerging Markets Strategy would point out that if the propensity to consume, and money velocity,3 do not accelerate, then a surge in new credit may fail to ignite a reacceleration in China (Chart 4). Chart 4Chinese Are Holding On To Their Money Still, what we now know is that Xi Jinping and his top economic adviser, Vice Premier Liu He, are not initiating the “assault phase of reform” that their predecessors initiated in the late 1990s in order to cleanse China’s economy of bad loans and zombie companies. Instead, they are likely reestablishing the “Socialist Put” in order to reverse the current deceleration, demonstrate China’s continued economic might and face down the United States’ threat of tariffs. Bottom Line: China’s stimulus measures are increasingly likely to overshoot, with positive implications for both Chinese and global growth. China is still facing a corporate earnings recession, but the odds of averting it are increasing. Trade Deadline More Likely To Be Extended What of the trade war? First, we would warn clients that China’s annual credit origination is a much bigger factor for the global economy than China’s exports to the United States (Chart 5). The trade war can escalate from here and yet, if China’s stimulus works as it has in the past, the results will be manageable for China’s economy save for Chinese companies expressly exposed to the U.S. economy through exports. In reality, both the U.S. and China are now effectively stimulating their economies and in this sense global trade as a whole will benefit regardless of bilateral tariffs. Chart 5Watch China Credit, Not So Much The Trade War But it is possible that just as global equity markets ignored China’s economic slowdown and only sold off when the tariffs were levied (Chart 6), they may not continue to rally much on China’s credit data. Given the already considerable rally in global risk assets since October, markets may not be satisfied merely with one or two months of solid credit data out of China without a clear resolution to the trade conflict. After all, if a collapse in U.S.-China trade talks portends a new Cold War, then institutional investors may be justified in taking a wait-and-see approach despite China’s credit cycle upswing. Chart 6Will Equities Ignore China Data (Again)? In the past, we have highlighted that the U.S. and China are not economically prohibited from engaging in a trade war – the export exposure is too small – and China’s new stimulus reinforces this point. However, President Trump is concerned about causing a sell-off in the tech sector and hence the broad equity market which could translate into a bear market and raise the probability of a recession occurring prior to November 2020. Meanwhile, in China, given Beijing’s reported trade concessions, there is apparently a desire to pacify the relationship and discourage U.S. unilateral tariffs and sanctions that could become seriously destabilizing for the Chinese economy and society. The need to have a happy 2021 centenary celebration for the Communist Party may factor into policymakers’ thinking. The latest news flow is mildly positive for the odds of getting a framework deal sometime this year. President Trump visited the Chinese negotiators in Washington, D.C. while President Xi reciprocated with the American negotiators in Beijing. A new round of two-week shuttle diplomacy is beginning. Trump has extended the tariff ceasefire and the two sides reportedly have arrived at an agreement on currency and are drafting written agreements on other areas of dispute. China’s National People’s Congress has passed a new Foreign Investment Law that ostensibly guarantees many of the American demands on forced tech transfer, intellectual property theft, and discriminatory treatment of U.S. companies (Table 2). Table 2New Foreign Investment Law Would Be A Positive For U.S.-China Negotiations However, Presidents Trump and Xi have yet to schedule a new summit, which is probably necessary for a final deal. And there are murmurs from the press suggesting that China’s new law and other concessions are not going to satisfy the U.S. negotiators on the critical point of “structural changes” and a verification process. This leaves us inclined to change our trade war probabilities to increase the odds of an extension (Table 3). The improvement in U.S. financial conditions and China’s stimulus, if anything, make it more likely that negotiations will be extended, as both sides feel their economic and financial constraints less acutely. Table 3Updated Trade War Probabilities Bottom Line: Global and Chinese risk assets should rally on China’s credit uptick, but the lack of resolution of the trade war could continue to inhibit animal spirits – and the odds of a March 1 resolution are declining. Who Are The Equity Winners Of China’s Stimulus? China’s strong January-February credit number is supportive of global equity markets. That much is obvious. But which equity markets will benefit the most? In what follows we examine the relationship between Chinese credit and MSCI equity returns of various countries. We find that Malaysian, Australian, South Korean, and Indonesian equities are the most highly correlated with Chinese credit growth and are thus most likely to benefit from the recent upturn (Chart 7). On the other hand, France and Italy stand out as countries whose bourses are more insulated. Out of the markets that are positively correlated, South Korea and Russia stand out as relatively cheap (Chart 8). Thus we expect these equities to do especially well. By contrast, while Indonesia and the Philippines are highly leveraged to China, these markets are currently relatively expensive. BCA’s Emerging Markets Strategy is currently overweight Korean and Russian equities within the EM space, neutral Turkey (although recently upgraded from underweight), and underweight Indonesia and the Philippines. In addition to credit stimulus, we expect Chinese household consumption to also gain support going forward. This will likely be driven by policy stimulus targeting the consumer specifically and is best exemplified by the recently announced tax cuts (Chart 9), which we expect to trickle down to greater consumer demand and growth in retail sales. Our base case calls for 8%-10% growth in household consumption over the coming 12 months, up from the current 3.5%. However, consumer sentiment in China is weak. BCA’s Emerging Markets Strategy’s proxy for household marginal propensity to spend ticked up recently, after falling since early last year (see Chart 4 above). A resumption in the decline would highlight that households are increasingly unwilling to spend, which would translate into weaker retail sales despite policy efforts to boost consumption. Such a scenario – in which credit growth accelerates without a substantial uptick in consumer spending – is plausible, given that it occurred between mid-2015 and mid-2016 (Chart 10). In any case, whether Chinese stimulus comes in the form of the traditional credit channel, or instead in the form of fiscal stimulus to household consumption, the same equity markets will generally benefit the most (Chart 11). Chart 10...But Flattish Retail Sales Are Also A Possibility Indeed, global equity markets react the same way regardless of the type of stimulus implemented. For instance, MSCI returns for the Philippines, Sweden, Malaysia, Indonesia, and Turkey are more closely correlated to both Chinese credit growth and retail sales growth compared to Italy, Japan, and France. The same conclusion is reached when we look at the correlations between Chinese credit growth or consumption growth and individual MSCI sectors such as industrials and consumer discretionary (Chart 12). The relatively stronger correlation between Chinese credit growth and equity returns – as opposed to Chinese retail sales and equity returns – can be put down to the nature of Chinese imports. While industrial goods account for the bulk of China’s purchases of foreign goods, consumer goods excluding autos make up only 15% of China’s imports (Table 4). However, as Chart 12 illustrates, the relationship between China’s retail sales growth and global equities is much tighter in the case of the consumer discretionary sector, whether the latter is compared to global industrials sectors or the overall MSCI index. Table 4Import Composition Of Chinese Imports Equity market exposure to China is not always in line with the extent of each country’s trade exposure to China (Chart 13). There are some clear exceptions – most notably Mexico, which has the highest correlation coefficient with Chinese credit and consumption variables since 2010. However, this is likely due to idiosyncratic factors.4 Correlation does not imply causation, and we cannot conclude with certainty that Mexican equities will outperform amid China’s new round of stimulus. Nevertheless, given that Mexico is a very deeply liquid market that benefits amid EM bull markets, this may not be entirely coincidental. The correlations between global equity markets and Chinese credit peak two months after the stimulus measures are first implemented (Chart 14). This is more or less in line with adjusted total social financing’s correlation versus industrial metals. However, BCA’s Commodity & Energy Strategy has shown that copper’s correlations versus other measures of Chinese money and credit peak after roughly three quarters (Chart 15).5 This is evident in both the 2012 and 2015-16 stimulus episodes in which the bottom in copper prices lagged the bottom in China’s credit growth. Thus we may witness a rebound in equity markets on the back of China’s credit splurge before we see an improvement in annual returns on copper prices. Chart 15Copper Rallies Lag China Credit Stimulus Bottom Line: South Korean and Russian equities are best positioned to benefit from the positive surprise in China’s credit data. France and Italy are the worst positioned. Copper prices will rebound with a delay.  Investment Implications BCA’s Geopolitical Strategy recommends that investors stay long Chinese equities ex-tech relative to the emerging market benchmark. This is a tactical call initiated in August 2018 that is now becoming a cyclical call on the basis of the credit upswing. We also remain long the “China Play Index,” a basket of China-sensitive assets. A rebound in China’s credit data and stronger global growth will support copper demand. Prices are still 15% below the mid-2018 peak and are poised to benefit in this environment, especially given that global inventories are already falling. BCA’s Geopolitical Strategy recommends that investors go long copper. Meanwhile, BCA’s China Investment Strategy recommends (for now) staying only tactically overweight Chinese equities relative to the global benchmark, pending higher conviction that the pace of credit growth will be strong enough to overwhelm the negative ramifications of a continued deceleration in actual activity over the coming few months on sentiment and 12-month forward earnings expectations. Over the long run, Geopolitical Strategy would look to underweight Chinese equities, as we are not optimistic about China’s productivity and potential GDP. This is because of the negative structural consequences of continuing the Socialist Put (i.e., bad loans, zombie companies, trade protectionism). We would expect CNY/USD to remain relatively buoyant in the context of both trade negotiations with the U.S. and fiscal-and-credit stimulus. The trade talks can hardly succeed if CNY/USD is falling. Depending on whether and how soon China’s stimulus results in a durable economic bottom, global growth could stabilize and the USD could see a substantial countertrend selloff.   Matt Gertken, Vice President Geopolitical Strategy mattg@bcaresearch.com Roukaya Ibrahim, Editor/Strategist roukayai@bcaresearch.com   Footnotes 1          Please see Emerging Markets Strategy Special Report titled “China: Prepping A Bazooka?” dated February 14, 2019 available at ems.bcaresearch.com 2      Please see Nicholas Lardy, “The State Strikes Back: The End Of Economic Reform In China?” Peterson Institute For International Economics, January 29, 2019, available at piie.com. 3          Please see Emerging Markets Strategy Weekly Report titled “Dissecting China’s Stimulus,” dated January 17, 2019 available at ems.bcaresearch.com 4       The 2012 election of President Enrique Peña Nieto caused Mexican equities to outperform their EM counterparts. Similarly in 2015-16, U.S. outperformance relative to EM also supported Mexico relative to EM because Mexico’s economy is highly leveraged to its northern neighbor. In both periods Mexico’s outperformance was not caused by – but instead coincided with – Chinese credit stimulus. These idiosyncratic events biased the correlation between Mexico’s equity markets and Chinese credit growth to the upside. 5      Please see Commodity & Energy Strategy Weekly Report titled “Trade Wars, China Credit Policy Will Roil Global Copper Markets,” dated June 21, 2018, available at ces.bcaresearch.com.                  

ハイライト グローバル株式およびその他のリスク資産は、今後数週間はボラティリティ高止まりの横ばい推移となり、その後一連の出だし失敗を経て世界成長がようやく加速するにつれて年末までは徐々に上昇するだろう。 私たちは現在、フェドが以前想定していたよりも遅いペースで利上げを行うと見ているが、最終的にはインフレを抑えるために利上げを急がざるを得なくなるだろうと考えている。 フェドファンド金利はおそらく2021年に4％で頭打ちとなり、市場が現在織り込んでいるよりも四半期ごとに0.25ポイントの利上げが合計9回多く示唆される。 12か月の投資期間では、投資家はグローバル株式をオーバーウェイトし、国債をアンダーウェイトし、現金配分は中立を維持すべきである。 ドルは第2四半期にピークを迎え、その後年末までおよび2020年にかけて弱含みとなり、来年遅い時期に再び強含み始めるだろう。 投資家は今後数週間、新興国（EM）および欧州株を一時的に格上げする準備をすると同時に、景気循環型の株式セクターへのエクスポージャーを増やすべきである。 工業用金属と原油は年の経過とともに強含みとなるだろう。金は押し目で買うべきである。 投資家は2020年末にポートフォリオのリスク低減を開始し、2021年の景気後退に備えるべきである。 チャート 001   特集 また始まるのか？ 昨年6月によりディフェンシブになった後、私たちは12月のFOMC後の急落を受けて株式に対して強気に転じた。株式が反発を続けるにつれて、私たちは楽観を和らげた。3月初めに私たちは「年初から上昇してきた世界の株式は、投資家が慌てていわゆるグリーンシュートの出現を待つため、今後6～8週間で『デッドゾーン』に入る可能性が高い」と書いた。1 先週金曜日に発表された期待外れの欧州PMIデータは、グリーンシュート論に一部止めを刺した格好だ。ドイツの製造業PMIは6年ぶりの低水準に落ち込み、新規受注の構成要素はグレート・リセッション以来の弱い水準を示した。これを受けてドイツの10年国債利回りは2016年以来初めてマイナス圏に入り、米10年国債利回りも15か月ぶりの低水準まで下落し、3か月/10年のカーブが逆イールド化した。歴史的に見て、逆イールドは米国の景気後退を予測する信頼できる指標であった（チャート1）。 チャート1イールドカーブの逆転、景気後退、およびタームプレミアム イールドカーブの逆転、景気後退、そしてタームプレミアム イールドカーブの逆転、景気後退、そしてタームプレミアム トランプ大統領がテレビ評論家のスティーブン・ムーアをフェドの理事に任命する決定を下したことも事態を好転させなかった。供給側（サプライサイド）の「経済学者」ラリー・クドローの推薦を受けたムーアは、2007年の住宅市場の懸念を軽視したこと、2010年にQEがハイパーインフレを引き起こすと的確に予測したことで知られ、トランプ減税が財政赤字を小さくするだろうと信じている点でも有名だ。 世界成長は年の後半に加速するだろう これらの憂慮すべき展開を踏まえ、景気とリスク資産に対して再び景気循環的に弱気に転じるべき時だろうか。私たちはそうは考えない。今後数週間は株式にとって厳しい局面があり得る――これは私たちのマクロクオンツ・モデルが現在示しているリスクだ――が、一連の出だし失敗を経て世界成長がようやく加速するにつれてセンチメントは改善するはずだ。実際、すでにいくつかの前向きな兆候が見えている：上昇している先行指標を持つ国の比率を追跡する当社のグローバル先行経済指標の拡散指数は上昇しており（チャート2）、グローバルLEIを先行している。サービス業のPMIも概ね改善しており、世界成長の弱さは主に貿易と製造業に集中していることを示唆している。さらに貿易面でも、バルチック・ドライ指数や世界のコンテナ船の活動を示す週次のHarpex海運指数といったいくつかの先行指標が安値から反発している。 我々はイールドカーブのシグナルを過小評価すべきだと考える。現在それはマイナスのタームプレミアムによって深刻に歪められているからだ。もし米10年のタームプレミアムが2004年の水準に戻っていれば、3か月/10年のスロープは200ベーシスポイント以上急勾配になり、この問題について誰も話題にしないだろう。実際、今日のタームプレミアムを考慮すれば、1995年にはほぼ確実にカーブは逆転していただろう。当時株式を手放した者は歴史上最も偉大なブルマーケットの一つを逃したことになる。 また、米10年利回りの一部低下はポジティブな展開を反映していることは言うまでもない：フェドがよりハト派に転じたのだ。10年/30年部分のイールドカーブを見れば、実際にはスティープ化している。これは市場がフェドの行動をリフレーション的であると見なしている兆候である。 逆イールドカーブが経済活動を鈍化させる明確な因果メカニズムはないが、イールドカーブの逆転が投資家を怯ませ、それによって金融環境のタイト化を招くという自己成就的予言になる可能性はある（チャート3）。このような「ドゥームループ」は概念的には可能だが、今年初めに我々が議論したように、現在の環境で発生する可能性は低い。2いずれにせよ、金融環境は年初以来緩和している。これは今後数か月の成長を押し上げるはずだ。   チャート2世界成長は##br##安定し始めている可能性がある 世界の成長は安定し始めている可能性がある 世界の成長は安定し始めている可能性がある チャート3年初来の金融環境の緩和は世界成長にとって好材料 年初以来の金融環境の緩和は世界経済の成長にとって好材料だ 年初以来の金融環境の緩和は世界経済の成長にとって好材料だ 中国のクレジット成長は上昇へ 世界成長は中国経済の減速に足を引っ張られてきた。昨年のデレバレッジ化キャンペーンは投資支出の大幅な減速を招き、これは世界中の資本財メーカーやコモディティ生産者に悪影響を及ぼした（チャート4）。 歴史的に見て、クレジット成長が名目GDP成長に近づくとき、中国は金融部門への締め付けを緩めてきた（チャート5）。おそらく我々はそのポイントに達したようだ。季節調整で歪んだ弱い2月の数値にもかかわらず、クレジット成長はついに前年比で加速している。 チャート4中国：デレバレッジ化キャンペーンは投資支出に悪影響を与えた 中国：デレバレッジ化の取り組みは投資支出に悪影響を及ぼした 中国：デレバレッジ化の取り組みは投資支出に悪影響を及ぼした チャート5歴史的に、中国はクレジット成長が名目GDP成長に接近するとデレバレッジを縮小してきた 歴史的に見ると、信用の伸びが名目GDP成長率に近づくと、中国はデレバレッジの取り組みを縮小してきた。 歴史的に見ると、信用の伸びが名目GDP成長率に近づくと、中国はデレバレッジの取り組みを縮小してきた。 我々は中国のクレジット成長が過去の再レバレッジ局面ほど大きく上昇するとは予想していない。だが、これは経済の状態がより良くなっているためであり、現状からの債務増加に内在的な制約があるためではない。 中国の高い貯蓄率は、ターム名目GDP成長率よりも金利を大きく下回る水準に保ってきた。これは債務持続可能性の主要な決定要因である（チャート6）。3中央政府が現在のように大部分の地方債務と企業債務に対して暗黙の保証を維持している限り、デフォルトリスクは最小限にとどまるだろう。いずれにせよ、総債務がGDP比240％に達していることを考えれば、クレジット成長が1パーセンテージポイント上昇するだけで、GDPの2.4％に相当する大きなクレジット刺激が生じることになる。 中国のクレジットインパルスは輸入を約6～9か月先行する（チャート7）。これは年の後半における世界貿易にとって良い兆候である。 チャート6中国の高い貯蓄率は金利をトレンドの名目GDP成長率を大きく下回る水準に保ってきた 中国の高い貯蓄率が金利をトレンドの名目GDP成長率を大幅に下回る水準に抑えている 中国の高い貯蓄率が金利をトレンドの名目GDP成長率を大幅に下回る水準に抑えている チャート7中国のリフレーション的刺激は世界貿易に恩恵をもたらすだろう グローバル・トレードは中国のリフレーション的な刺激から恩恵を受けるだろう グローバル・トレードは中国のリフレーション的な刺激から恩恵を受けるだろう   貿易戦争の一服か？ 貿易戦争の緊張緩和は事態を改善するだろう。自称「名交渉人」であるドナルド・トランプは、来年の大統領選挙前に中国との合意をまとめる必要があり、同時にその合意が米国にとって有利な条件で成立したと有権者に納得させなければならない。 任期序盤に中国と合意に達することは、双方向の貿易赤字を減らせなかった場合にはリスクがあった――米国の財政政策が景気循環的であることを考えればそれは全くあり得る結果だ。しかし現時点では、トランプは中国と素晴らしい取引をまとめたと自慢でき、かつその成果が実現するのは再選後であると有権者に安心させることができる。したがって、トランプが合意の締結を目指す可能性は高まっている。 中国側は可能な限り大きな交渉力を確保したがっている。これは、自国経済が双方の利益にならない貿易協定を突っぱねても、その影響を十分に吸収できるほど強いと説得力を持って示せることを意味する。クレジットサイクルが中国成長の支配的な原動力であるため、これはデレバレッジ化キャンペーンを一時的に後回しにすることを必要とする。世界成長の加速と強い国内需要は欧州に恩恵をもたらす 中国の成長加速は今年後半に欧州の輸出セクターを助けるだろう。中国のCaixin購買担当者指数（PMI）の輸出コンポーネントは底値から上昇している。これはユーロ圏のPMIを約三か月先行している。一方で、ユーロ圏の国内需要はより緩和的な財政政策と低下する債券利回りの恩恵を受けるだろう。 イタリアにとっては債券利回りの低下が特に有益だ。昨年三月にポピュリスト政権が選出された後の利回り急騰と企業信頼感の喪失は景気後退に突入させた（チャート 8）。現在、10年物BTP利回りが高値から100ベーシスポイント以上低下しているため、イタリア経済は回復し始めるはずだ。 国内成長が加速しても欧州中央銀行は今年利上げを行わないだろうが、市場はおそらく2020年以降に数回の利上げを織り込むだろう。これによりコア欧州債券市場の利回り曲線がわずかに再スティープ化し、長らく苦しんでいる銀行の収益にはプラスに働くはずだ。 ブレグジットは依然として懸念材料だ。この継続する物語は滑稽な段階に達しており、1) 英国はEU離脱に投票したが、2) 議会はブリュッセルと満足のいく合意に達しない限りEUに留まることに投票し、しかも3) 提示されていた唯一の合意案を拒否した。多くの英国有権者がもはやブレグジットを望んでいないことを考えると（チャート 9）、我々は政府がいわゆる先送りを続け、二度目の国民投票が発表されるか「ソフト・ブレグジット」合意が策定されるまでその問題を先送りにするだろうと考えている。いずれの結果も市場には歓迎されるだろう。 チャート 8イタリアの債券利回りはもはや逆風ではない イタリア国債利回りはもはや逆風ではない イタリア国債利回りはもはや逆風ではない チャート 9英国：やり直しとなれば残留側が勝つ可能性が高い 英国：やり直しが行われれば、残留派が勝つ可能性が高い 英国：やり直しが行われれば、残留派が勝つ可能性が高い   フェッドはどうするか？ チャート10 昨年の「クリスマス暴落」はフェッドの反応関数を明らかによりハト派の方向へと変えた。今後数か月でジェローム・パウエルが利上げを行うとは予想していないが、世界成長の再加速は12月にフェッドを再び引き締めに向かわせる可能性が高い。フェッドは2020年に四半期に一度の利上げを継続し、インフレ上昇に対応して2021年には引き締めペースを加速させるだろう。 総じて、我々はこのサイクルの終わりまでにフェデラルファンド金利が約4%に上昇すると見ている。これは市場が現在織り込んでいる水準よりも四半期ごとの25ベーシスポイントの利上げが九回多いことを意味する（チャート 10）。我々はフェデラルファンド先物のショートポジションで損切りになったが、顧客には2021年6月限フェデラルファンド先物または同等の手段をショートすることを推奨する。 米国経済：再び好調 基本的に米国経済は堅固な基盤にあり、より高い金利にも耐えられる。10年前とは異なり、住宅市場は良好な状態にある（チャート 11）。持ち家空室率は記録的な低水準近辺にある。フィコ・スコアを見る限り、住宅ローンの貸出の質は依然として高い。労働市場も堅調で、求人件数は二月に再び過去最高を記録した（チャート 12）。健全な住宅市場と労働市場の組み合わせは消費者にとって不可避的に良い。 チャート 11米国の住宅の基礎条件は堅調 米国の住宅ファンダメンタルズは堅調だ 米国の住宅ファンダメンタルズは堅調だ チャート 12米国の労働市場は堅調である 米国の労働市場は堅調だ 米国の労働市場は堅調だ チャート13 個人貯蓄率は現在7.6%にあり、家計の純資産対可処分所得比率から期待される水準よりもかなり高い（チャート 13）。貯蓄率の低下は消費支出が所得よりも速く増加することを可能にするだろう。後者は賃金上昇によって支えられているため、これは消費にとって強気材料となる。 設備投資意向は過去数か月で低下したが、歴史的基準から見ると依然として高い水準にある（チャート 14）。実質非住宅資本ストックは回復開始以来平均でわずか1.7%しか成長しておらず、リセッション前の期間の3%から低下している（チャート 15）。生産性成長の景気循環的な上振れ、上昇する労働コスト、低い余剰生産能力の水準は、企業が新しい工場や設備に投資する動機付けとなるはずだ。 チャート 14設備投資意向は軟化したが、依然として高水準にある 設備投資の意向は軟化したが、依然として高水準にある 設備投資の意向は軟化したが、依然として高水準にある チャート 15米国の設備投資余地はまだある 米国への資本投資にはさらなる余地がある 米国への資本投資にはさらなる余地がある   企業債務：どれほどのリスクか？ チャート 16米国の企業債務は世界基準で極端ではない 米国の企業債務は世界基準では極端ではない 米国の企業債務は世界基準では極端ではない 近年、企業債務水準は大幅に増加し、契約条項の緩いローンの増加に見られるように引受基準は悪化した。それでも状況は深刻とは程遠い。 他国と比べると、米国の企業債務はかなり低い（チャート 16）。フランスの企業債務はGDP比で143%に達し、米国の2倍である。これはフランスの企業セクターがすべて順調であることを示すわけではないが、事実としてフランスは企業債務の危機に見舞われていない。これは米国が差し迫った危機に瀕していないことのシグナルにもなる。 現金を差し引くと、米国の企業債務のGDP比は1989年と同じ水準にあり、その年のフェデラルファンド金利はほぼ9%であった。法人ネット負債対EBITDの比率は比較的低いままである。利子負担能力比率は歴史平均を上回っている。加えて、過去数年で企業資産もかなり速く増加しており、企業の債務対資産比率は概ね安定している（チャート 17）。 企業部門の金融収支－－企業の収入と支出の差－－は依然としてGDPの1%でプラス圏にある。過去50年のすべての景気後退は企業部門の金融収支が赤字になったときに始まっている（チャート 18）。 チャート 17米国の企業債務：どのくらい高いか？ 米国の企業債務：どこまで高くなる？ 米国の企業債務：どこまで高くなる？ チャート 18企業部門の金融収支は依然として黒字 企業部門の金融収支は依然として黒字 企業部門の金融収支は依然として黒字 住宅ローンのようにレバレッジドな機関が多く保有する債務とは異なり、ほとんどの企業債務は年金基金、保険会社、ミューチュアル・ファンド、イーティーエフのような非レバレッジのプレイヤーによって保有されている。銀行貸出は非金融企業部門債務のわずか18%を占め、1980年の40%から低下している（チャート 19）。銀行が保有するレバレッジド・ローンのシェアは10年前の約25%から現在は10%未満に低下している。さらに、今日の銀行は過去よりもはるかに高品質の自己資本を多く保有している（チャート 20）。これにより企業債務は経済にとってシステミックに重要である度合いが低くなっている。   チャート 19銀行は企業セクターへのエクスポージャーを削減した 銀行は企業向けのエクスポージャーを縮小した 銀行は企業向けのエクスポージャーを縮小した チャート 20米国の銀行は十分な自己資本を保有している 米国の銀行は健全な資本水準にある 米国の銀行は健全な資本水準にある 我々が12月にリスク資産に対してより強気になった理由の一つは、株式が急落し企業スプレッドが拡大したにもかかわらず金融ストレス指数に大きな追随がなかったためである。例えば、悪名高いテッド・スプレッドはほとんど動かなかった（チャート 21）。 チャート 21テッド・スプレッドは落ち着いており、深刻な金融ストレスの兆候は示していない TEDスプレッドは良好に推移しており、金融ストレスの重大な兆候は見られない TEDスプレッドは良好に推移しており、金融ストレスの重大な兆候は見られない みんなラリーに同意している 米国経済に大きな不均衡がないことを踏まえると、投資家はなぜフェッドが実際にはさらに利上げできないと考えているのだろうか。フェデラルファンド金利の実質ベースはかろうじてゼロを上回っているにすぎないのに。答えは、投資家がラリー・サマーズの世俗的停滞（セキュラー・スタグネーション）論を受け入れているように見えることである。これは中立金利が過去に比べて今日ははるかに低いという仮説である。 我々はこの理論にいくぶんの同情を持っているが、これは生産性や人口動態といった長期的な金利決定要因に関する理論であることを忘れてはならない。この理論は景気循環的な金利のドライバー、すなわち余剰生産能力の量、財政政策のスタンス、信用の成長、賃金動向などについてはほとんど何も語っていない。 今十年初め、我々がまだ債券に非常に強気であったときには、経済は極めて低い金利を必要としているともっともらしく主張できた：産出ギャップは依然として大きく、デレバレッジのサイクルは始まったばかりであり、住宅と株価は下押しされ、賃金上昇は乏しく、大不況の間の短い景気刺激のバーストの後に財政政策は制約的になっていた。中立からはほど遠いか？ 上述のすべての要因は、過去数年の間に完全にまたは部分的に方向を転じている。財政政策を一例として挙げると、IMFは米国の構造的財政赤字が2014–15年にGDPの平均で3.3%だったと推計している。2019–20年にはIMFは赤字がGDPの平均で5.6%になると見込んでいる。 より緩和的な財政政策はどの程度まで米国の中立金利を押し上げたのだろうか。保守的に仮定して、追加の1ドルの財政刺激が総需要を1ドル押し上げるとしよう。この場合、財政政策は過去5年間で総需要に対してGDP比で2.3%を上乗せしたことになる。総需要が1パーセンテージポイント増加すると中立金利が1%上昇すると仮定すると（これはイエレン元FRB議長が支持したテイラールールの仕様と一致する）、財政政策だけで中立金利を2パーセントポイント以上押し上げたことになる。 上の議論は、長期的な構造要因が中立金利を下押ししているとしても、景気循環的な要因が中立金利をかなり押し上げた可能性があることを示唆している。FRBは今後1〜2年の経済にとって適切な水準を見据えて金利を設定するはずなので、金利が過度に低い状態が長く続くことになりかねない。これにより経済は過熱し、最終的にはインフレが急上昇するだろう。 インフレの脅威 良いニュースは、我々のお気に入りの指標のいずれも大規模な差し迫ったインフレ上昇を示していないことだ（チャート22）。関税が高まっているにもかかわらず、消費者向け輸入物価のインフレ率は鈍化している。コア中間財の生産者物価インフレ率は減速している。ISMや地域連銀の調査における支払価格項目は急落している。インフレ・サプライズ指数は反転して低下している。調査ベースおよび市場ベースのインフレ期待はともに昨夏より低いままである。これらの動きに沿って、BCAの独自のパイプライン・インフレ指標は2年半ぶりの低水準に下落している。 賃金上昇は加速しているが、生産性の伸びの方がさらに大きくなっている。その結果、単位労働コストのインフレ率は昨年中頃から低下している。単位労働コストはコアCPIの約12か月先行指標である（チャート23）。これは少なくとも来年下半期までは消費者物価のインフレ率が不快なほど高い水準に達する可能性は低いことを示唆している。 Chart 22米国における差し迫った大規模インフレ上昇の兆候は見られない 米国で差し迫った大規模なインフレーションの急騰の兆候は見られない... 米国で差し迫った大規模なインフレーションの急騰の兆候は見られない... Chart 23単位労働コストの減速は当面インフレ圧力を和らげる ...そして、単位労働コストの減速は当面の間、インフレ圧力を和らげるだろう ...そして、単位労働コストの減速は当面の間、インフレ圧力を和らげるだろう その時点では、インフレが上昇に転じるリスクが高い。これによりFRBは2021年初めに急激な利上げを開始せざるを得なくなり、ドルが上昇し株式やスプレッド・プロダクトが売られる可能性がある。結果として金融状況が引き締まり、2021年中～後半に米国と世界の景気が後退に陥る恐れが高い。   当面はグローバル株式に強気を維持し、来年後半に防御的姿勢へ転換 Chart 24アナリスト予想はかなり控えめである アナリストの予想はかなり控えめだ アナリストの予想はかなり控えめだ 上で述べた二段階のFRBによる引き締めサイクル――12月に始まり2020年にかけて徐々に利上げを行い、その後インフレ上昇に反応してより積極的な利上げに移行する――が今後数年間の投資見解を形作る。本刊行物の冒頭にある主要金融市場予測チャートは、主要資産クラスが向かう先の大まかなスケッチを示している。 株式や他のリスク資産は、FRBが年内にさらに利上げを示唆して市場の準備を始める時期の前後でボラティリティが高まるものの、最初の段階の利上げを織り込むことができるだろうと我々は考えている。昨年9月とは異なり、利益見通しはより保守的だ。ボトムアップの推計では、2019年に米国で1株当たり利益（EPS）が3.9%上昇し、世界のその他地域で5.4%上昇する見通しである（チャート24）。成長の加速、金融環境の緩和、継続的な自社株買いの組合せは、これらの数値に上振れ余地を示唆している。 さらに重要な点は、9月とは異なり、FRBは経済が良好に推移している場合にのみ利上げを開始するだろうということである。パウエルは米国経済が減速し始めたちょうどその時に「金利は中立からは遠い」と述べてしまい、誤りを犯した。もしその発言が米国の成長がまだ加速している時点で出ていたなら、投資家はおそらくそれを無視しただろう。 ジェローム・パウエルは同じ過ちを繰り返さないだろう。代わりに別の誤りを犯す可能性がある：経済を過熱させ、FRBが明らかに後手に回り、追いつくために慌てて利上げを行わざるを得ない状況にしてしまうことである。その結果生じるスタグフレーション的な環境――労働力不足により成長が鈍化しつつインフレが上向く状況――は株式や他のリスク資産にとって有毒となるだろう。 タイミングを正確にするのは難しいが、我々は投資家に対して今後12〜18か月は控えめにリスク志向を維持することを推奨する。ただし、FRBが利上げのペースを加速する前の来年後半には株式とスプレッド・プロダクトへのエクスポージャーを削減すべきだ。 国際株式を一時的に格上げする準備をする 米国株式市場は他の市場と比べて「ロー・ベータ」になりがちである。もし今年後半に世界成長が加速するなら、国際株式は米国株式をアウトパフォームするだろう。我々はEEMイーティーエフのプットを1月3日に売却して104%の利益を得ており、現在は新興国株式を純粋にロングすることを推奨している。世界成長の回復を示すさらなる確証が得られ次第、為替ヘッジなしの条件で新興国株式と欧州株式の両方をオーバーウェイトへ格上げすることを数週間以内に検討する予定だ。 日本株については判断が分かれるところだ。強い世界成長は日本の多国籍企業に恩恵をもたらすが、国内市場に重心を置く企業は政府が10月に消費税を引き上げるなら打撃を受ける可能性がある。当面は日本株の格上げは見送るつもりだ。 グローバルなセクターレベルでは、我々は今年初めにディフェンシブ寄りの配分を縮小した（昨夏により慎重になっていた後で）。投資家にはエネルギーとインダストリアル（工業）をオーバーウェイトすることを推奨する。金融とマテリアル（素材）にも好感を抱き始めている。前者は今年後半のイールドカーブのスティープ化やクレジット成長の加速から恩恵を受けるだろう。後者はより堅調な中国経済から利益を得るだろう。ヘルスケア、情報技術、コミュニケーション・サービスは中立配分を維持する。不動産と公益事業は債券利回りが上昇し始めるとどちらも傷を負う。生活必需品のような古典的なディフェンシブ・セクターもアンダーパフォームするだろう。  世界の債券利回りは上昇しそうだ 世界の債券利回りは、成長が上振れサプライズを起こすにつれて今後12〜18か月で上昇する可能性が高い。インフレが加速するにつれて利回りは2021年前半に向けてさらに上昇し続けるだろう。 過去のリスクオフ局面とは異なり、次の景気後退に向かう過程で米国債が大きなセーフヘイブンの役割を果たすとは限らない。上述の通り、今日債券利回りがこれほど低い理由の一つはターム・プレミアムが非常に低下していることだ。FRBの債券買入の累積効果がターム・プレミアムを押し下げている可能性は高いが、より大きな影響は投資家が米国債をさまざまなマクロリスクに対する保険として見なしていることに由来している。投資家は、経済が景気後退に陥ると株価は下落し、住宅市場は悪化し、賃金上昇は鈍化し、雇用見通しは悪化するが、少なくとも債券ポートフォリオの価値は上がるだろうと考えることに慣れているのだ。 この考え方の問題は、それが有効なのはFRBが成長の強まりに対して利上げを行う場合だけだという点だ。もしFRBがインフレが手に負えなくなっていることに反応して利上げを行うなら、米国債利回りは上昇する一方で株式は下落する可能性がある。これは実際、1960年代後半から2000年代初頭にかけては常態だった（チャート25）。 Chart 25米国債利回りが上昇する一方で株式が下落する可能性 米国債利回りは上昇する一方で、株価は下落する可能性がある 米国債利回りは上昇する一方で、株価は下落する可能性がある もし米国債がセーフヘイブンの地位を失えば、ターム・プレミアムは上昇するだろう。利回り上昇が株式市場を弱め、投資家が株式と債券の両方から現金へと一斉に逃げることで、さらなる利回り上昇と株価下落を招くという悪循環が生じる可能性がある。 投資家は今後12か月間、米国債に対してはやや短めのデュレーション・スタンスを維持し、その後インフレが表面化し始める2020年中頃にはデュレーションを最大限アンダーウェイトにするべきだ。デュレーションをロングする（長めの債を保有する）判断が合理的になるのは、FRBが金利を制約的な水準まで引き上げ、経済が景気後退に入った場合だけである。それが起こるのは2021年下半期まで見込まれない。 地域別には、今後12か月間で米国債に対して欧州、カナダ、オーストラリア、ニュージーランド、特に日本の国債を好む。米国経済が最も過熱するリスクにさらされているからだ。通貨ヘッジありの観点では、10年物米国債利回りは世界の主要国の中で低い部類に入る（表1）。例えば日本の10年国債は通貨ヘッジありの条件で2.72%を提供し、ドイツ国債は2.94%を示している。 Table 1先進国の債券市場 2019年第2四半期 ストラテジー見通し：デッドゾーンからエンドゾーンへ 2019年第2四半期 ストラテジー見通し：デッドゾーンからエンドゾーンへ  米ドル：ソフト・パッチへ向かう 米ドルの見通しを測るのはやや厄介だ。米連邦準備制度理事会（Fed）は今後12か月間で段階的に利上げを行うにせよ、市場が織り込んでいる水準よりは高い利上げを行う見込みだ。他の大半の中央銀行がまだ様子見の姿勢を続けているため、短期金利差は米ドルに有利に動く可能性が高い。それでも、日本を除けば、世界的な成長が強まると投資家は2020年以降の他の先進国での追加利上げを織り込む可能性が高い。その結果、長期の利回り差は短期の利回り差ほど拡大しないかもしれない。 おそらくそれ以上に重要なのは、米ドルはカウンターサイクリカル、つまり世界成長の動きと逆方向に動く通貨であるという点だ（Chart 26）。この逆循環性は、米国経済が世界の他地域と比べて製造業よりもサービス業により重点を置いていることに起因する（Chart 27）。したがって、世界成長が加速すると、資本は米国から世界の他地域へ流れる傾向が強まり、外貨需要が増え、ドル需要は減少することになる。 Chart 26ドルは逆循環通貨である ドルは景気循環に逆行する通貨である ドルは景気循環に逆行する通貨である Chart 27米国はグローバル成長に対する低ベータの投資対象である 米国はグローバル成長に対する低ベータの投資先 米国はグローバル成長に対する低ベータの投資先 もし世界成長が今年後半に持ち直すなら、ドルは第2四半期にピークを付け、その後2019年末から2020年にかけて弱含む可能性が高い。ドルの動きは、2017年の経過と似た経路をたどるかもしれない。2017年はFedが4回利上げした年だが、貿易加重換算の広義ドルはそれでも7％弱含んだ。 Chart 28円はリスクオフ通貨である 円はリスクオフ通貨だ 円はリスクオフ通貨だ 2017年と同様に、ユーロは今年後半に米ドルに対して上昇するだろうし、多くの新興国通貨やコモディティ通貨も同様に上昇するだろう。ただし、2017年に多くの通貨がドルに対して上昇したのに日本円がその動きに参加しなかったのと同じように、円は米ドルに対してあまり勢いよく上昇するのは難しいだろう。 円は“リスクオフ”通貨であり、したがって世界のリスク資産が上昇すると円は弱まる傾向がある（Chart 28）。さらに、もし今年後半に世界の国債利回りが日本国債（JGB）利回りに対して上昇するならば、円は打撃を受けるだろう。特に、財政政策の引き締まりを受けて日銀がイールドカーブ・コントロールの運用を長引かせざるを得ない場合はその傾向が強まる。123を下回る場面ではEUR/JPYをロングするつもりだ。 一旦弱含んだ後、米ドルは来年末に再び上昇する 米国経済が2020年に供給面の制約にますます直面するにつれ、成長は鈍化し、インフレは加速するだろう。Fedはインフレの上昇以上の速さで利上げを行って応じる。結果として実質金利が上昇し、ドルに上方圧力がかかるだろう。 このスタグフレーション的な環境では、株式は急落し、クレジットスプレッドは拡大する。米国の金融環境の引き締まりは世界中に波及し、世界成長はそれがなかった場合よりも一層減速するだろう。これがさらにドルを加速させる。米ドルがピークを付けるのは、Fedが2021年末に利下げを開始した時点のみである。 コモディティ：より強気に 今年後半のドルの弱含みと、中国の回復に牽引された世界成長の強化はコモディティにとって追い風となる。BCAのコモディティ・ストラテジストは、現行水準で銅のロングを推奨する。また、原油に対する強気のバイアスも維持している。ブレントは今年平均75ドル/バレル、2020年は80ドル/バレルになると見込んでいる。米国のシェール生産の増加は、深海の輸出施設整備の遅延によって相殺され、供給は比較的タイトに保たれるだろう。 過去のレポートでは、インフレヘッジとして金を購入することの有用性を論じてきた。ただし、我々はドル強気見解のためにそれを実行に移すのを控えてきた。今やドルが今後数か月でピークを付けると見ているため、1275ドル/オンスを下回る場面があれば金を買いたい。   Peter Berezin, チーフ・グローバル・ストラテジスト グローバル・インベストメント・ストラテジー peterb@bcaresearch.com 脚注 1      Please see Global Investment Strategy Weekly Report, “グレツキーのドクトリン,” dated March 1, 2019. 2      Please see Global Investment Strategy Weekly Report, “FCIドゥーム・ループの可能性は低い,” dated January 4, 2019. 3      Please see Global Investment Strategy Weekly Report, “本当に世界には政府債務が多すぎるのか？” dated February 22, 2019. ストラテジー & マーケット動向 マクロクォント・モデルと現在の主観的スコア チャート29 タクティカル・トレード ストラテジー推奨 クローズド・トレード

Highlights Just when it looked like the agricultural complex was starting to perk up, it was slapped down again. After crawling its way back from a mid-2018 crash – retracing more than half of its decline – the CCI Grains and Oilseeds index plummeted in February, declining by nearly 9% (Chart Of The Week). The decline was broad-based, but was led by wheat, which was dragged down by muted demand and accounted for most of the index’s decline. Looking forward, we expect U.S. financial conditions and developments on the trade-war front to remain the main forces driving ag prices. Ample inventories will provide the cushion necessary to moderate the impact of potential supply-side shocks. Highlights Energy: Overweight. Venezuela suffered another power outage earlier this week, indicating the deterioration of its infrastructure is accelerating. While officials claim to have restored power, we expect more such outages going forward, which will severely reduce the country’s production and export capacity. Separately, Aramco announced it will buy 70% of Sabic, a Saudi state-owned petchem producer, for $69 billion, according to the Wall Street Journal. Base Metals: Neutral. China’s MMG Ltd was set to declare force majeure following protests at its Las Bambas mine in Peru earlier this week. The mine produces ~ 385k MT p.a., most of which goes to China. Precious Metals: Neutral. The inversion of the U.S. yield curve put a bid into the gold market this week, as investors sought a safe-haven refuge. Continued weakness in bond yields, and accommodative central banks responding to low inflation expectations globally will continue to support gold. Agriculture: Underweight. A more patient Fed will be supportive of ag prices in 2H19, as we discuss below. Feature Chart of the WeekWheat Had A Rough Start To 2019 A Patient Fed Will Support Ags In 2H19 While differences across ag markets will arise due to idiosyncratic supply shocks and targeted trade policies, a common determinant of ag price movements more generally is U.S. financial conditions. Since our last assessment of global ag markets, Fed policymakers have adopted a much more patient approach to monetary policy.1 In line with the pause in the Fed’s rates-normalization policy, financial conditions have eased considerably (Chart 2). We believe this will, ceteris paribus, bring relief to commodity markets in general, ags in particular, in the second half of this year. Chart 2Easier Financial Conditions Bode Well For Ags The bulk of this relief will be transmitted through the impact of a weaker dollar. Since the dollar is a countercyclical currency, its weakness implies an improvement in global growth. This more solid economic backdrop is associated with greater aggregate demand, particularly in EM economies, as well as demand for agricultural products. The lagged effects of financial tightening, weak Chinese credit growth and the trade war will persist in 2Q19. Furthermore, when the USD weakens against the currencies of ag exporting countries, farmers there are incentivized to hoard or cut exports – thus reducing supply – awaiting periods when a stronger greenback will raise their profits. At the same time, ags priced in USD become relatively more affordable for importing nations, incentivizing them to raise consumption. The net impact of this contraction in supply amid greater demand will pull up prices – illustrated by the relatively tight inverse relationship between ag prices and the dollar (Chart 3). Chart 3A Weaker USD Will Be A Tailwind In 2H19 Going into mid-2019, we expect global economic indicators to continue to be uninspiring. The lagged effects of financial tightening, weak Chinese credit growth and the trade war will persist in 2Q19. However, as these factors fade and give way to an improvement in global economic conditions and easier financial conditions, we expect the dollar to peak around mid-year. As such, a resurgence in global growth in the second half of the year will be reflected in an improvement in the value of the currencies of major ag exporters ex-U.S. (Chart 4). Ceteris paribus, this also benefits ag prices. Chart 4Weak Local Currencies Supporting Farm Profits, Incentivizing Production China’s Economy Remains Central Our outlook hinges on developments in the Chinese economy. Peter Berezin – our Chief Global Investment Strategist – expects Chinese authorities to not only stabilize credit growth, but also increase it, creating room for improvement in the world’s second largest economy.2 This combination of supportive global growth and a softer dollar bodes well for ag prices in 2H19. The Fed pause and associated easing in U.S. financial conditions will support global growth, causing the U.S. dollar to weaken – a bullish force for ag markets. Apart from the currency impact, easy financial conditions are supportive of global growth. A rise in income levels of emerging economies will support demand for goods and services generally, and agricultural commodities specifically.3 The market now expects 36 and 51 basis points of rate cuts over the coming 12 and 24 months, respectively. Similarly, following last week’s FOMC meeting, the median Fed dot indicates no rate hikes this year from the U.S. central bank, and only one in 2020. While our Global Investment Strategists would not be surprised to see a hike this year, the noticeably less hawkish tone in the Fed’s forward guidance and dot plots are positive for ag markets.4 Looking beyond that into late-2020 or early 2021, a potential pick-up in inflation will force the Fed to take a more hawkish stance, and once again support the U.S. dollar. This will weigh down on ag prices over the strategic time horizon. Bottom Line: The Fed pause and associated easing in U.S. financial conditions will support global growth, causing the U.S. dollar to weaken – a bullish force for ag markets. However, this is unlikely to occur before mid-year. In the meantime, a stronger dollar on the back of the lagged effects of growth dampening events in 2018, will remain a headwind. Ample Inventories Will Cushion Against Supply Shocks Putting aside the more or less uniform impact of U.S. financial conditions, individual supply-demand fundamentals will manifest as idiosyncratic risks and opportunities. The USDA has been revising its projections for ending stocks higher in its monthly World Agricultural Supply and Demand Estimates (WASDE) across the board since it released the first projections for the 2018/2019 crop year last May. However, we find that solely on the back of fundamentals, soybeans are more likely to resist upward pressure from easier U.S. financial conditions in 2H19 vs. wheat and corn. The USDA’s latest projections for the current crop year indicate that global bean markets are well supplied. Expectations of a global surplus this crop year – for the seventh consecutive year – will add to the growing cushion (Chart 5). Chart 5Beans Surplus Will Add To the Glut Since May, global ending bean stocks have been revised higher by a total of 20.47mm MT. The change in projections comes on the back of upward revisions to production and beginning stocks, compounded by downward revisions to consumption. The latter will likely contract further if the U.S. and China do not reach an agreement on the trade front (see below). Consequently, unless a weather disruption weakens supply, we expect soybean inventories to stand at record highs relative to consumption at the end of the current crop year. In the case of wheat, the impact on prices will likely be marginal. The global balance is expected to shift to a deficit in the current marketing year, following five years of surplus (Chart 6). While this is a positive for wheat prices, given that global inventory levels are relatively elevated – capable of supporting 37% of consumption – and the current deficit is relatively small, we do not expect the deficit to pressure prices in the near term. Chart 6Elevated Wheat Inventories Will Cushion Against Minor Deficit Despite continued downward revisions to the USDA’s wheat production projections, expectations of ending stocks have actually risen on the back of downward revisions to consumption. Similarly, corn fundamentals are also unlikely to sway prices much. The grain is expected to remain in deficit for the second consecutive year, which will pull inventories down off their 2016/17 peak to be capable of covering ~27% of global consumption (Chart 7). Despite this contraction in availability, global supplies remain relatively elevated, especially compared to the 2003 to 2012 period. Thus unless there is a significant supply shock, we don’t expect much support from fundamentals. Chart 7A Global Corn Deficit ... Unlike wheat demand, which has been downgraded, the USDA has revised corn consumption up relative to the first projections for the crop year released last May. Nevertheless, stronger expectations of consumption have been overwhelmed by upward revisions to production and beginning inventory levels. Given that world inventories already are bloated, we do not expect the likely deficit in wheat and corn supplies this crop year to pressure prices much to the upside. Since the mid-1990s, U.S. farmers had been planting more corn and wheat at the expense of soybean acreage (Chart 8). On a global level, while wheat remains more popular in terms of acreage, it is generally trending downwards, while corn and soybean plantings are trending up. However, over the longer term, U.S. farmers are expected to dedicate more land to corn relative to soybeans. Chart 8... Will Be Met By Rising U.S. Acreage Bottom Line: Given that world inventories already are bloated, we do not expect the likely deficit in wheat and corn supplies this crop year to pressure prices much to the upside. Similarly, a global glut in soybean supplies will only add to swelling inventories. The Trade War And Soybeans: It Ain’t Over Till It’s Over Aside from U.S. financial conditions and supply-demand balances, U.S. trade policy has also been roiling ag markets since China slapped U.S. soybeans with 25% tariffs in mid-2018. In fact, since the escalation of the trade dispute, soybean prices have been moving largely in response to developments on the trade front (Chart 9). As developments since the G20 Summit in Buenos Aires last December have been more favorable, soybean markets are on the path to recovery. Chart 9Markets Optimistic Of A Trade War Resolution So far, even though U.S. soybean exports to China picked up over the past two months, total U.S. exports still lag levels typical for this time of year (Chart 10). This comes despite U.S. efforts to raise shipments to other trading partners. Furthermore, U.S. exports will now be in direct competition with the Brazilian crop, which usually dominates trade flows at this time of year (Chart 11). While the U.S. tariff hike from 10% to 25% on $200bn of Chinese goods has been postponed, a resolution to the trade war has yet to occur. The path to a resolution is fraught with risks. While the U.S. tariff hike from 10% to 25% on $200bn of Chinese goods has been postponed, a resolution to the trade war has yet to occur. The path to a resolution is fraught with risks. The Trump-Xi meeting that was expected to occur in late-March was postponed; the next most likely date for a meeting is at the G20 summit in end-June. This leaves another 3 months of trade uncertainty. Nevertheless, our models indicate that soybeans are now priced at fair value, based on U.S. financial variables – absent a trade war (Chart 12). Furthermore, the premium priced into Brazilian beans above those traded on the CBOT has returned to its historical average (Chart 13). Thus, we do not expect a further reduction in the premium in the event Sino-U.S. trade negotiations are successful. Chart 13Premium For Brazilian Beans Has Normalized Rather, markets will be disappointed if the U.S. and China are unable to conclude a deal. This would put CBOT prices at risk and support the premium on those traded in Brazil. Given that our geopolitical strategists assign a non-negligible 30% probability that the trade war escalates further, we believe markets are overly optimistic that a deal will be concluded.5 If the trade war drags on and turns into a multi-year conflict, soybean markets will likely take a more meaningful hit. According to the USDA’s latest long-term projections released earlier this month, China’s soybean imports were projected to rise 32.1mm MT during the 2018-28 period – a massive downward revision from the 46mm MT expected for the 2017-2027 period contained in the previous long-run projections. Furthermore, outbreaks of African swine fever in China may put demand there at risk. Over 100 cases have so far been reported in China, with several cases already reported in Vietnam as well. This threatens to depress China’s need for soybean as animal feed, regardless of what happens on the trade front. Bottom Line: A positive outcome from the U.S.-China trade negotiations is not a given. Nevertheless, soybean markets are treating it as such. Our geopolitical strategists assign 30% odds that a final deal falls through. This non-negligible probability threatens to cause soybean prices to relapse anew, should Sino-U.S. trade negotiations break down.   Roukaya Ibrahim, Editor/Strategist Commodity & Energy Strategy RoukayaI@bcaresearch.com Footnotes 1 Please see “2019 Key Views: Policy-Induced Volatility Will Drive Markets,” published by BCA Research’s Commodity & Energy Strategy December 13, 2018.  It is available at ces.bcaresearch.com. 2 Please see BCA Research’s Global Investment Strategy Weekly Report titled “What’s Next For The Dollar,” dated March 15, 2019, available at gis.bcaresearch.com. 3 Please see BCA Research’s Commodity & Energy Strategy Weekly Report titled “Global Financial Conditions Will Drive Grain Prices In 2018,” dated November 30, 2017, available at ces.bcaresearch.com. 4 Please see BCA Research’s Global Investment Strategy Weekly Report titled “Questions From The Road,” dated March 22, 2019, available at gis.bcaresearch.com. 5 Please see BCA Research’s Geopolitical Strategy Special Report titled “China-U.S. Trade: A Structural Deal?,” dated March 6, 2019, available at gps.bcaresearch.com.   Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table   Trades Closed in 2019 Summary of Trades  

特別レポート

Highlights Taiwan’s semiconductor sector is facing both cyclical and structural headwinds. Semiconductor exports will continue to contract over the next six months or so, on retrenching global demand. In the long run, Taiwan is facing increasing competition from Korea in the high-end supply, and from mainland China in the medium- to low-end supply of the semiconductor market. The latest rebound in Taiwanese share prices is unsustainable, and they are about to relapse anew. Within an EM equity portfolio, we recommend staying neutral on Taiwanese stocks for now. Feature Taiwan’s exports and manufacturing are in full-blown recession. The equity market has rebounded after a major selloff last year. However, the overall manufacturing PMI and its export sub-component are extremely weak, and do not justify the latest share-price rebound (Chart I-1). Chart I-1Taiwanese Equities: Unsustainable Rally Are manufacturing activity and exports about to recover? Or will the stock market rally fade? Our answer is the latter. There are currently no signs suggesting a recovery in exports is imminent. Moreover, the engine of the economy – the semiconductor sector – is facing both cyclical and structural headwinds. We remain negative on Taiwanese stocks in absolute terms. Within an EM equity portfolio, we recommend a market-weight allocation to Taiwanese stocks for now. Importance Of Semiconductors Over the past 15 years, the semiconductor sector has become the cornerstone of the Taiwanese economy. The Taiwanese economy is highly dependent on its external sector, as exports contribute to nearly 70% of GDP. As such, Taiwan’s business cycle has often been closely associated with its export sector. This means the region’s growth outlook relies on both external demand (a cyclical factor) and the competitiveness of its export sector (more of a structural factor). Over the past 15 years, the semiconductor sector has become the cornerstone of the Taiwanese economy. It contributes to over one-third of the region’s total exports, up from 22% in 2009 (Chart I-2). Chart I-2Semiconductor: Cornerstone Of Taiwanese Economy Consistently, tech stocks also account for the lion’s share of the Taiwanese stock market, representing nearly 60% of the MSCI Taiwan Index and 47% of the Taiwanese Stock Exchange (TSE) index in market-value terms. There have been two key forces behind the significant growth of Taiwan’s semiconductor sector: booming global demand for smartphones/tablets and increasing competitiveness among domestic semiconductor companies. However, looking forward, the Taiwanese manufacturing sector and its semiconductor exports are facing a double-whammy: cyclical weakness in global demand and a relative decline in Taiwan’s export ability. In the context of a negative structural outlook, a cyclical downtrend engenders substantial deterioration in manufacturing, and by extension corporate profitability. Cyclical Downturn In Global Semiconductor Demand The outlook for the Taiwanese semiconductor industry remains poor. The global semiconductor industry has already been in a cyclical downtrend since early 2018. Global smartphone sales are shrinking. Both DRAM and NAND prices have been falling (Chart I-3). Chart I-3Falling Memory Chips Prices The freefall in Taiwan's new export orders seems to entail a further contraction in exports (Chart I-4). Chart I-4A Further Contraction In Exports Is Likely Importantly, exports of electronics parts lead Taiwanese tech EPS growth, and currently point to an impending contraction in corporate earnings (Chart I-5). Chart I-5An Impending Contraction In Corporate Earnings The outlook for the Taiwanese semiconductor industry remains poor. First, Taiwanese semiconductor producers are highly vulnerable to any further downside in global smartphone demand. There are two major pure-play wafer manufacturers in Taiwan: Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics (UMC). TSMC and UMC are the world’s largest and fourth-largest dedicated integrated circuit (IC) foundries, respectively. The smartphone sector has been the main revenue source for both companies, accounting for a 45% share for TSMC and 40% for UMC. Global smartphone demand is likely to decline further in 2019, as major markets such as mainland China and advanced economies have entered the saturation phase of mobile-phone demand. DRAMeXchange expects global smartphone production volume for 2019 to fall by 3.3% from last year following a 4% drop in 2018 (Chart I-6). Chart I-6Global Smartphone Demand Started A Downtrend Smartphone sales in mainland China remain in deep contraction after two consecutive years of declines (Chart I-7). Odds are that smartphone shipments will remain sluggish amid the ongoing economic slump in the mainland’s economy. Chart I-7Smartphone Sales In Mainland China Are In A Deep Contraction In addition, Taiwan’s TSMC is the sole chip supplier for Apple iPhones. A further decline in Apple smartphone shipments will reduce the company’s revenue and profits, damaging the region’s growth outlook. Mainland China now can produce top-notch quality smartphones at relatively cheaper selling prices. This will further crowd out higher-priced products from Apple, Samsung and others (Chart I-8). Chart I-8Apple Has Been Losing Market Share In Global Smartphone Market Second, the significant surge in bitcoin prices greatly boosted cryptocurrency mining activity in 2016-‘17 as miners quickly expanded their computing power. This boosted demand for graphic process unit (GPU) chips and in turn brought higher revenue for Taiwan chipmakers between June 2016 and early 2018. However, with the bust in bitcoin prices (Chart I-3 on page 3), demand from cryptocurrency mining has vanished and is unlikely to revive soon. Indeed, Taiwan chipmakers have suffered from last year’s plunge in cryptocurrency mining activity. According to TSMC, revenue from the cryptocurrency mining-related high-performance computing (HPC) sector contracted by double digits in 2018. Given that HPC demand is the second-biggest source of revenue for TSMC, with 32% share, TSMC revenue will be curtailed as HPC chip demand will continue to decline on weak bitcoin prices. Last, developments in new technologies, such as foldable smartphones, artificial intelligence, fifth-generation (5G) mobile networks and the so-called Internet of Things (IoTs) could only produce a modest pick-up in semiconductor demand. Most of these developments are still in their infancy and early stages. Hence, their growth will not be large enough to make a cyclical difference in global semiconductor demand. For example, the foldable smartphone that Huawei recently announced is indeed appealing. However, a lack of stability in panel supply and quite-high selling prices will limit sales. WitsView, a division of TrendForce, predicts that the market penetration rate of the foldable phone will be only 0.1% in 2019, and could rise to 1% in 2020 if more panel providers join the game, enabling a significant reduction in panel costs. Moreover, these categories together account for only ~23% of TSMC’s revenue; their modest growth will not be able to make up for the losses from the smartphone and HPC sectors within Taiwan’s economy. Besides, there has been a slowdown in demand from high-growth areas such as data center servers, as well as the automotive and industrial sectors. Putting it all together, odds are that global semiconductor demand will only materially recover in 2020. By that time, more-mature 5G technology and the increasing adoption of the 5G network and 5G-related products may be able to shift global semiconductor demand from the current downturn to a cyclical uptrend. Hence, the cyclical weakness in global semiconductor demand is likely to persist over the next six months. Consequently, Taiwan’s major types of semiconductor production will likely remain in contraction, and inventory levels will stay elevated (Chart I-9 and Chart I-10). Chart I-9Taiwan: Semiconductor Output Contraction Will Likely Continue Chart I-10Taiwan: Semiconductor Inventory Are Elevated Bottom Line: There are no signs of an imminent recovery in exports. A Potential Decline In Taiwan’s Semiconductor Competitiveness Taiwan wafer manufacturers are facing an increasing threat from their Korean and mainland China competitors. Leadership in advanced process technologies has been a key factor in Taiwan’s strong market position in the global semiconductor industry. With cutting-edge technologies, Taiwan has been the global wafer capacity leader since 2015. As of last year, it held about 22% of global installed wafer capacity (Chart I-11). However, Taiwan wafer manufacturers are facing an increasing threat from their Korean and mainland China competitors. Korean Chipmakers While Taiwan will remain highly competitive in 7 nanometer (nm) and 10 nm wafer production, it is facing fierce competition from Korea. Manufacturing technologies designated by smaller nanometer numbers tend to have faster speeds and be more power-efficient than technologies designated by larger numbers. TSMC was the first company in the world to mass-produce 7 nm node wafers. Its 7 nm deep ultraviolet lithography (DUV) node has been in mass production since April 2018, producing chips for AMD, Apple, HiSilicon, and Xilinx. Beginning at the end of this month, TSMC will be ready to begin mass production of 7nm wafers using extreme ultraviolet lithography (EUV). The switch from 7nm DUV to 7nm EUV allows for fewer defects and fewer steps required during the production process. The company also aims to boost volume production of its 5 nm nodes in early 2020 and has a target of 3 nm wafers for 2022. Last year, wafer revenue from 7nm and 10nm chips accounted for 9% and 11% of TSMC’s total revenue, respectively (Chart I-12). Samsung has been closely following TSMC in terms of technological innovation. It started mass production of EUV-based 7nm chips last October, with a plan of risk production1 of 5nm wafers in 2019 and a target of 4nm wafers in 2022. Meanwhile, IBM announced last December that it signed an agreement with Samsung to produce its next-generation processors with Samsung’s 7nm technology. As Samsung seeks to diversify its revenue source away from memory chips, which last year contributed to about 80% of its operating profit, the company has been determined to ramp up the development of its foundry business. It aims to replace TSMC as the world’s largest foundry producer by 2030. In the near term, Samsung aims to secure a 25% market share in the global pure-play foundry market by 2023, a rise from 19% currently. Last year, Samsung surpassed Taiwan’s UMC to become the world’s second-largest dedicated chipmaker. Moreover, Samsung’s capital spending has been and will continue to be much higher than TSMC. Over the course of 2017 and 2018, Samsung spent about $46.9 billion on semiconductor capital expenditures, more than double TSMC’s $21 billion. Hence, the competition between TSMC and Samsung in the high-end chip market will intensify in the coming years. Chipmakers In Mainland China The competition between TSMC and chipmakers from mainland China is also escalating. Chart I-12 shows that 80% of TSMC’s wafer revenue comes from bigger node wafers (bigger than 10 nm). Taiwan’s second-biggest chipmaker, UMC, only produces wafers equal to or bigger than 28 nm. Therefore, the chip market using less-advanced technology than 10 nm will be the main battlefield between Taiwanese and mainland China’s chipmakers. Before 2014, there were few wafer manufacturers in mainland China, and those that did exist were too weak to compete with giant market players like TSMC. In 2014, the Chinese central government made a move to foster development within the local IC industry. Since then, the authorities have poured significant amounts of capital into semiconductor foundries, as well as companies focused on memory production, chip design and related equipment and materials. Semiconductor Manufacturing International Corporation (SMIC) is the world’s fourth-largest dedicated wafer manufacturer, and is the largest in mainland China. While 28nm will likely remain a large part of its business, SMIC plans to go into production on its 14 nm technology in the first half of 2019. The company is also working on 10nm and 7nm nodes with the use of EUV. SMIC currently counts HiSilicon and Qualcomm as customers, manufacturing smartphone chips with medium-to-low technology. As mainland China aims to increase its self-sufficiency rate for ICs significantly over the next five to 10 years, the nation’s producers will significantly expand their wafer capacity. Mainland China is likely to reduce its semiconductor imports from Taiwan considerably in the coming years, especially wafer imports. According to IC Insights, nine 300mm wafer fabs2 are scheduled to open worldwide in 2019, with five of them in mainland China. Based on another set of data from SEMI, the number of 200mm wafer fabs in the world will increase from 194 in 2017 to 203 by 2022, with an additional 56 established fabs planning to expand their manufacturing capacity. Mainland China is expected to account for 44% of the growth. In comparison, Taiwan only accounts for about 10% of the growth. Mainland China currently accounts for over 30% of Taiwanese electronic parts exports (wafers, PCBs, mainboards and others). As mainland China continues to build new wafer manufacturing capacity and gradually improve its existing technology, it will switch its consumption from imports to domestic production. Consequently, mainland China is likely to reduce its semiconductor imports from Taiwan considerably in the coming years, especially wafer imports (Chart I-13). This is structurally bearish for Taiwanese semiconductor companies. Chart I-13Mainland China’s Semiconductor Imports From Taiwan Will Drop Bottom Line: Taiwan is facing increasing challenges from Korea in terms of defending its market share in the high-end wafer market. Meanwhile, Taiwan is also set to lose market share in the medium-to-low market to wafer producers from mainland China. What About The Rest Of The Economy? The rest of the economy is exhibiting mixed signals, with contracting major non-semiconductor export sectors but decent household consumption and property market. Table 1 shows Taiwan’s top 10 exported products, with the top three attributing to over half of total exports. Besides the semiconductor sector, exports of the other two major products – electrical machinery products and machinery – are beginning to contract (Chart I-14). Chart I-14Taiwan: Contracting Non-Semiconductor Exports However, the domestic economy seems to be running well at present. Production of construction materials in volume terms is growing rapidly, accompanied by a rebound in building permits granted (Chart I-15). While employment growth is decent, average wage growth has been quite strong (Chart I-16). With persistent contraction in exports and inflation very low, the central bank could cut rates in 2019. Chart I-15Decent Domestic Demand Chart I-16Strong Wage Growth Ongoing contraction in semiconductor exports will likely slow domestic demand with a time lag. In fact, the inverted 5-year/6-month yield curve is indeed signaling an economic slump in Taiwan (Chart I-17). Chart I-17Inverted Yield Curve Signals Continuing Economic Slump Ahead Investment Recommendations The latest rebound in Taiwanese stocks is unsustainable and share prices will relapse again. Within an EM equity portfolio, we recommend maintaining a market-weight allocation to Taiwan for now. We are reluctant to downgrade Taiwan to underweight because some other emerging markets and sectors within the EM universe have a poorer outlook. In addition, Taiwanese shares have already underperformed the EM benchmark since last September (Chart I-18). Chart I-18Taiwanese Stocks: Staying Neutral Within EM The Taiwanese currency is cheap (Chart I-19). The region has a massive current account surplus and foreigners do not hold any local bonds, which is very different from many other EM countries. Hence, Taiwan is less vulnerable to capital outflows than many current-account-deficit EM economies. The latter could be forced to raise rates, which will place pressure on their banks as well as on domestic demand. In contrast, Taiwan has the ability to cut rates. Chart I-19TWD Is Cheap Ellen JingYuan He, Associate Vice President Emerging Markets Strategy ellenj@bcaresearch.com     1 "Risk Production" means that a particular silicon wafer fabrication process has established a baseline in terms of process recipes, device models, and design kits, and has passed standard wafer level reliability tests. 2 A fab, sometimes called foundry, is a semiconductor fabrication plant where devices such as integrated circuits are manufactured. Equity Recommendations Fixed-Income, Credit And Currency Recommendations