Asia

Highlights US inflation expectations will moderate, and US real yields will rise. This will support the US dollar. The potential rebound in the US dollar will cap any upside in EM ex-TMT stocks. Rising US real yields are a risk to high-multiple global growth stocks. Maintain a neutral allocation to EM in global equity and credit portfolios. Feature In this week’s report we identify market-relevant issues and topics and then present the investment implications of these potential developments. Current key investment-relevant topics and issues are as follows: 1. Implications of the US elections Fiscal Stimulus: In the context of Biden’s victory and the Senate remaining Republican, the odds of a meaningful fiscal package in the next several months are quite low. The Republican Senate did not support a fiscal package going into the elections. Odds are low that it will now agree to a fiscal package larger than $750 billion. Chart 1Rising US Real Yields Are Positive For The US Dollar Rising US Real Yields Are Positive For The US Dollar Rising US Real Yields Are Positive For The US Dollar According to the US Congressional Budget Office’s calculations, without a new fiscal package, the fiscal thrust in 2021 will be -7.5% of GDP or $1.5 trillion. Hence, fiscal stimulus should be more than $1 trillion to avoid a slump in growth. Granted that the recovery in US consumer income and spending that has been underway since April has to a large extent been supported by US fiscal transfers, the lack of current government income support to households poses a risk to the economy.  Of course, if US economic activity tanks again and the stock market plunges, Republicans will support a much larger package. However, as things stand now, the probability of a substantial (more than $1 trillion) fiscal package is low. The lack of fiscal stimulus implies that US growth and inflation expectations will moderate. Chart 1 shows that US inflation expectations have probably reached an apex and will downshift for now. US nominal bond yields are capped on the upside (by the Fed’s purchases and its commitment not to raise interest rates for several years) and on the downside (by the Fed’s reluctance to reach negative interest rates). Consequently, swings in inflation expectations will drive fluctuations in real yields, as has been occurring in recent months. As inflation expectations decline, real yields will rise. Impact of rising US real yields on financial markets: A stronger US dollar and lower prices for Nasdaq stocks. Rising real rates will support the US dollar (Chart 1, bottom panel). Chart 5 on page 5 reveals that the real rates differential between the US and the euro area has recently been moving in favor of the greenback.  Chart 2Rising US Real Yields Are Negative For Growth Stocks Rising US Real Yields Are Negative For Growth Stocks Rising US Real Yields Are Negative For Growth Stocks Budding investor realization that the US might not pursue an aggressively expansionary fiscal policy, as has been expected since spring, could also support the greenback. Less issuance of Treasury securities might be interpreted as less public debt monetization and less money creation by the Federal Reserve. Such a viewpoint will also be marginally positive for the US dollar. As to the equity market, US real (TIPS) yields have been negatively correlated with the Nasdaq index (Chart 2). As US real yields continue to rise, odds are that global growth stocks will come under selling pressure. Geopolitical ramifications: The impact of the forthcoming change in the White House on US foreign policy has been widely anticipated and has already been priced in by financial markets. A Biden administration will have a positive impact on the euro area, Canada, Mexico and Asia Pacific countries with the exception of China – as was not the case under the Trump administration. On the other end, Russia, Turkey and Saudi Arabia will be under heat from Biden’s White House. In our view, the impact on China will be neutral, not better than during Trump’s administration. It might be mildly positive in the near term but negative in the long run. In the short run, the new US administration will be less likely to use global trade as a weapon. In the long run, however, Biden will likely mobilize Europe to join its geopolitical confrontation with China. This will be negative for the Middle Kingdom.   One country where the impact of Biden’s administration has not been fully priced in is Brazil. The US executive branch will take a tougher stance in its dealings with Brazil’s right-wing government because their social values are not aligned and policy priorities differ. We remain short the BRL and underweight Brazilian equity and fixed-income markets within their respective EM portfolios. 2. Vaccines We have no better expertise than the market’s judgement on the timing of vaccine availability and its effectiveness in containing the pandemic in EM ex-China countries. It is clear, however, that the process of vaccine acquisition and distribution might be slower in EM ex-China than in advanced countries. On all three fronts – the spread of the pandemic, policy stimulus and vaccine distribution – EM excluding China, Korea and Taiwan will continue lagging DM. Therefore, EM ex-China domestic demand will continue to underperform relative to expectations and versus those in DM. This argues for continuous underweight, or at best a neutral allocation, in EM ex-China, Korea and Taiwan equities versus their DM peers. Chart 3Chinese Onshore Equities Have Been In A Trading Range Since Early July Chinese Onshore Equities Have Been In A Trading Range Since Early July Chinese Onshore Equities Have Been In A Trading Range Since Early July 3. China: the business cycle and regulatory clampdown China’s business cycle recovery has further to go. The stimulus injected into the economy has been considerable and will continue to work its way into the economy. Even though we believe that China has reached peak stimulus, the latter works with a time lag of 6-12 months and economic growth will top only around mid-2021. That said, Chinese onshore share prices have been in a consolidation phase since early July and this is likely not over yet (Chart 3).  In turn, Chinese investable stocks have been surging in absolute terms and outperforming the global equity index (Chart 4, top panel). However, the entire Chinese equity outperformance has been due to growth stocks (TMT/new economy). Excluding these, the absolute and relative performance of Chinese investable stocks has been lackluster (Chart 4, top and bottom panels). Chart 4Chinese Investable Stocks: Surging TMT And Lackluster Performance By Ex-TMT Stocks Chinese Investable Stocks: Surging TMT And Lackluster Performance By Ex-TMT Stocks Chinese Investable Stocks: Surging TMT And Lackluster Performance By Ex-TMT Stocks In short, the spectacular performance of Chinese investable stocks this year has been attributed to three new economy stocks: Alibaba, Tencent and Meituan. These three stocks presently account for 40.5% of China’s MSCI Investable Index and 17.5% of the aggregate EM MSCI equity index. Concerns about regulatory clampdowns on new economy stocks have been, and remain, a major risk, not only in China but also in advanced economies. It is impossible to time regulatory actions. Nevertheless, investors should take into account the possibility that regulation may curb the profitability of new economy companies, especially if they are de-facto monopolies or oligopolies. Chinese authorities will not back down from imposing new regulation and scrutiny over the activities of giant new economy companies. Hence, risks of further de-rating remain elevated. In short, even though the mainland business cycle recovery is on a track, Chinese share prices remain at risk of correction due to overbought conditions and re-pricing of regulatory risks for new economy stocks. Will The US Dollar Capture Some Of Its Luster? US real yields are rising not only in absolute terms, but also relative to real yields in the euro area (Chart 5). Rising real yields in the US versus the euro area generally lead to a dollar rally against the euro.  Apart from rising US real bond yields, there are a number of other factors that will likely support the greenback: Investor sentiment on the US dollar is very low (Chart 6). From a contrarian perspective, this is positive. Chart 5The US Versus Euro Area: Real Yield Differentials And Exchange Rate The US Versus Euro Area: Real Yield Differentials And Exchange Rate The US Versus Euro Area: Real Yield Differentials And Exchange Rate Chart 6Investors Are Downbeat On The US Dollar Investors Are Downbeat On The US Dollar Investors Are Downbeat On The US Dollar   Consistently, investors are very short the US dollar, especially versus DM currencies (Charts 7and 8). Positioning is less short in the US dollar versus cyclical DM and high-beta EM currencies (Chart 8). That said, the fundamentals of EM high-beta currencies such as BRL, TRY, ZAR and IDR are poor. Chart 7Investors Are Very Long Safe-Haven Currencies… Investors Are Very Long Safe-Haven Currencies... Investors Are Very Long Safe-Haven Currencies... Chart 8...And Modestly Long Cyclical Currencies ...And Modestly Long Cyclical Currencies ...And Modestly Long Cyclical Currencies   The Republican Senate will block corporate tax increases and limit any regulatory initiatives by Democrats in Congress. Such business-friendly policies are currency bullish. In short, a Republican Senate is broadly positive for the US dollar, and markets have not priced it in. The fact that broad US equity averages – such as small caps and equal-weighted equity indexes – continue outperforming the rest of the world in local currency terms is also dollar bullish (Chart 9). The reasoning is that US equity outperformance versus the rest of the world suggests better profitability and return on capital in the US versus its peers. That favors a firmer US dollar. Finally, the broad-trade weighted US dollar is oversold and is sitting on a long-term technical resistance level (Chart 10). Chart 9US Relative Equity Outperformance Heralds A Stronger US Dollar US Relative Equity Outperformance Heralds A Stronger US Dollar US Relative Equity Outperformance Heralds A Stronger US Dollar Chart 10The US Dollar Is Very Oversold The US Dollar Is Very Oversold The US Dollar Is Very Oversold   Bottom Line: We have been highlighting downside risks to the US dollar since July 9. However, the conclusion of the US election raises the odds of a playable US dollar rebound. EM Strategy EM Equities We have been advocating for a neutral allocation toward EM in a global equity portfolio since July 30. If the US dollar rebounds, as we expect, EM stocks will not outperform the global equity index (Chart 11). Notably, excluding Chinese investable stocks, EM share prices have not outperformed the global benchmark (Chart 12). Besides, as shown in the top panel of Chart 4 on page 4, China’s outperformance against the global equity benchmark has been driven exclusively by new economy stocks. Chart 11EM Stocks Do Not Outperform When The Dollar Rallies EM Stocks Do Not Outperform When The Dollar Rallies EM Stocks Do Not Outperform When The Dollar Rallies Chart 12EM Versus Global Equity Performance: With And Without China EM Versus Global Equity Performance: With and Without China EM Versus Global Equity Performance: With and Without China   All in all, Charts 4 and 12 reveal that excluding three large Chinese new economy stocks – Alibaba, Tencent and Meituan – EM share prices have underperformed the global equity benchmark. Going forward, the potential rebound in the US dollar will cap any upside in EM ex-TMT stocks. Meanwhile, the correction in the NASDAQ and the increased scrutiny on the part of Chinese authorities over new economy stocks poses a risk to Chinese mega-cap TMT share prices. In absolute terms, we have been waiting for a pullback to buy EM equities, but they have surged following the US elections and the news on Pfizer’s vaccine. Chart 13EM Equity Index: No Breakout Yet EM Equity Index: No Breakout Yet EM Equity Index: No Breakout Yet The EM equity index could still advance and reach its 2011 or 2018 highs before rolling over (Chart 13). However, given our view on the US currency and risks to EM stemming from a rising US dollar, we refrain from playing such limited upside. EM currencies EM currencies will be at a risk if the US dollar stages a rebound. Since July 9, we have been shorting a basket of BRL, CLP, TRY, KRW, ZAR and IDR versus an equally-weighted basket of the euro, CHF and JPY. We are sticking with this strategy. Even if the US dollar rebounds, downsides in the euro, CHF and JPY against the greenback will be relatively limited. However, investors might consider adding the US dollar to the long side of this strategy. EM local bonds and EM credit markets We continue recommending long duration in EM local rates. However, we remain reluctant to take on currency risk. We maintain our recommendations from April 23 about receiving 10-year swap rates in Mexico, Colombia, Russia, India, China and Korea. We are also receiving 2-year rates in Malaysia and South Africa as a bet on rate cuts in these economies. In the EM credit space, we are also neutral. Our sovereign credit overweights are Mexico, Colombia, Peru, Russia, Thailand, Malaysia and the Philippines. Our underweights are South Africa, Turkey, Indonesia, Argentina and Brazil. Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com Footnotes Equities Recommendations Currencies, Credit And Fixed-Income Recommendations

The global semiconductor industry has been experiencing a record amount of IPOs and M&A deals in recent months. A flurry of IPOs and M&As in any industry often serves as a sign of a top in share prices (Chart 1). Chat 1Will Booming Semiconductor IPOs And M&As Mark A Peak In Share Prices? Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan The basis is that IPO and M&A booms usually occur when investor sentiment on that industry is super optimistic, which often coincides with a top in share prices. Does this mean that semiconductor stocks in general, and the ones in Taiwan and Korea in particular, are at their zenith? Our broad judgement is that semi stocks have not reached a secular peak. First, as we argued in a recent Special Report, the semiconductor industry is in a structural uptrend due to the continuing rollout of 5G networks and phones, a wider adoption of data centers, further technological advancements in artificial intelligence, cloud computing, edge computing and smaller nodes for chip manufacturing. Second, it is critical to differentiate a macro call on semiconductors from a bottom-up call on individual stocks. Not all semi companies have rallied in recent years, i.e., there has been great divergence among global semi stocks as shown in Chart 2. Chat 2The Performance Of Semiconductor Stocks Has Varied Greatly Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan Several semiconductor companies – like TSMC, Nvidia and AMD – have achieved technological breakthroughs, putting them in a position to enjoy high order volumes and charge higher prices. Not surprisingly, revenues of these companies have outpaced the industry average by a wide margin (Chart 3). Chat 3Semiconductor Companies' Revenues Have Diverged Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan Others – like Intel and Analog Devices - have posted inferior revenue gains because they have fallen behind technologically or because they are specializing in certain types of semiconductors for which demand and pricing have been lackluster. Chat 4One-Off Surge In Demand For Semis Might Be Over Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan Finally, if the global reflation trade resumes and global stocks continue advancing, as the first post-US election day suggests, there is little reason for global semiconductor stocks to falter at this moment. From the macro perspective, lower interest rates in the long run will support not-so-cheap semiconductor stock valuations. In addition, companies with access to unique technological capabilities will be able to raise their product prices benefiting their profits.    That said, there are also several signs that the global semi demand cycle might have entered a period of indigestion: The one-off demand surge for personal computers and gadgets and one-off ramp up of global server shipments due to the pandemic might be drawing to a close (Chart 4, top panel). Digitimes Research has reported that global server shipments are estimated to have slipped 6% sequentially in Q3 from Q2 and are projected to drop another 12% in Q4 (Chart 4, bottom panel). Unlike those in March-April, renewed lockdowns are unlikely to produce another surge in demand for digital equipment and, hence, for semis. Many people and companies have already settled into working from home. In short, as the effect of the one-off demand surge for digital hardware fades, global semi demand will moderate.  Semiconductor companies in general, and the ones in Korea and Taiwan in particular, have greatly benefited from China having stockpiled semiconductors in 2019 and 2020 in preparation for US sanctions on Huawei that went into effect on September 15, 2020 (Chart 5). The US supply ban on semiconductors to China for 5G technology will remain in place regardless of the outcome of the US presidential elections. Restrictions on semi sales to China will weigh on certain semi producers. In addition, smartphone sales in China generally, including 5G smartphone sales, have plunged as of late (Chart 6). Chat 5China Has Been Accumulating Semis Inventories Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan Chat 6China: Smartphone Shipments, Including 5G, Are Weak Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan   Finally, the PMI new orders sub-index for Taiwan’s electronic industry has rolled over, signaling a slowdown in its growth rate (Chart 7).   Similarly, the memory chip revenue indicator has recently rolled over, signaling a potential risk to memory stocks such as Samsung and Hynix which make up the Korean technology index (Chart 8). Chat 7A Moderation In The Taiwanese Semis Industry? Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan Chat 8Proxy for Value Of Memory Chips And Korean Tech Stocks Asian Semi Stocks: Upgrade Korea But Not Taiwan Asian Semi Stocks: Upgrade Korea But Not Taiwan   We have been advocating a neutral allocation to both the Korean and Taiwanese stock markets within the EM equity universe. One of our arguments for this strategy has been a potential escalation in the US-China confrontation going into the US elections. However, this risk has not materialized. We are upgrading the Korean bourse to overweight. As to Taiwan, a contested US election and the resulting vacuum of power in the next couple of months might lead to a rise in all types of geopolitical risks around the world. Taiwan could be one of these. We maintain a neutral allocation to the Taiwanese bourse within an EM equity portfolio. Bottom Line: In absolute terms, Korean and Taiwanese equity performance depends on the direction of global stocks. We will discuss the outlook for global and EM stocks in a Strategy Report to be published early next week when there is more clarity on the outcome of the US presidential elections. Within an EM equity universe, we are upgrading Korean stocks from neutral to overweight but keeping Taiwan’s allocation at neutral. Arthur Budaghyan Chief Emerging Markets Strategist arthur@bcaresearch.com Ellen JingYuan He Associate Vice President ellenj@bcaresearch.com Footnotes

The 14th Five-Year Plan has more strategic importance than in the past decade. Spending on national defense, technological self-sufficiency, public welfare and green energy will likely see substantial increases under the guidelines of a strong central government. The Proposal from the Five-Year Plan does not change our cyclical view on Chinese assets. Beyond mid-2021, the differences in sectoral performance will widen. We will likely begin to trim our position in China’s “old economy” stocks in the first half of 2021.

Highlights A Biden victory with a Republican Senate (28% odds) poses the greatest risk to the global reflation trade. The US is the most susceptible to social unrest of all the developed markets. Europe is stable relative to the US, but political risks are rising as new lockdowns go into effect. Emerging markets are also susceptible to social unrest – even those that look best on paper. Chile and Thailand have more downside due to politics, despite underlying advantages. Turkey and Nigeria are among those at risk of major unrest in a post-COVID world. Book gains on EUR-GBP volatility, Indian pharma, and rare earths. Cut losses. Feature This week saw a long-awaited risk-off move in global financial markets. A new wave of COVID lockdowns plus the US failure to pass a fiscal package finally registered with investors. Over the past two months we have argued that rising COVID cases without stimulus would produce a pre-election selloff that would drive the final nail in President Trump’s re-election bid. That should still be the case (Chart 1).  While we are sticking with our view that Biden will win, we have upgraded Trump’s odds from 35% to 45%. We are focused on Trump’s momentum – not alleged polling errors – in Florida and Pennsylvania, and Biden’s loss of altitude in Arizona, as these trends open a clear Electoral College path to another Trump victory (Chart 2). Nevertheless Biden is tied with Trump among men and leads by 17 percentage points among women. He is also in a statistical tie among the elderly.  Chart 1COVID Rising + Stimulus Falling = Red Ink COVID Rising + Stimulus Falling = Red Ink COVID Rising + Stimulus Falling = Red Ink Chart 2Trump's Momentum In Swing States Trump's Momentum In Swing States Trump's Momentum In Swing States   Even assuming Trump’s comeback proves too little, too late, it could produce a contested election in which Trump has constitutional advantages, or a Republican Senate. Either of these two scenarios would extend the election season volatility for one-to-three months. Our updated US election probabilities are shown in Table 1 alongside the odds from the popular online betting site PredictIt.org. Table 1There Is A 72% Chance The Post-Election Policy Setting Will Favor Reflation Election Trades And Global Social Unrest: A GeoRisk Update Election Trades And Global Social Unrest: A GeoRisk Update A Biden victory with a Republican Senate (28% odds) is the only deflationary scenario in the near term, since fiscal stimulus will be reduced in size and uncertain in timing. However, assuming financial market pressure forces senators to agree, this is actually the best outcome over the full two-year Senate election period, since neither tariffs nor corporate taxes would rise. Notably Treasury yields have risen regardless of election scenario, but there is little doubt that this scenario poses the greatest risk to the global reflation trade (Chart 3). Why does this election matter? Trump’s re-election would prolong US political polarization and “maximum pressure” foreign and trade policy. Trump must win through the constitutional system, not the popular vote, so a win would push polarization up. Polarization at home, including Democratic opposition in the House of Representatives, would drive him abroad. By contrast, a Biden win would include a popular majority and might include a united Democratic Congress, which would result in a clear popular mandate and would concentrate Biden's administration on an ambitious domestic agenda.   A Biden victory with a Republican Senate (28% odds) poses the greatest risk to the global reflation trade. Hence Trump’s election would bolster the USD and US equity outperformance, along with global policy uncertainty relative to the United States (Chart 4). Whereas Biden’s election, if it also brings a Democratic Senate, would bolster global equity outperformance, cyclical equities, and US policy uncertainty relative to global. Chart 3Republican Senate Less Reflationary Republican Senate Less Reflationary Republican Senate Less Reflationary Chart 4Trump Would Boost US Equity Outperformance Trump Would Boost US Equity Outperformance Trump Would Boost US Equity Outperformance   The election will have a geopolitical fallout. First, Trump is still president through January 20 regardless of outcome and could take aggressive actions to seal his legacy and lock the Biden administration into conflict with China or Iran. Second, a contested election would create a power vacuum in which other nations could seek to take advantage of American distraction. Third, a Trump victory spells strategic conflict with Iran and China, and either could try to seize the advantage by acting first. Fourth, a Biden win spells confrontation with Russia and ultimately China, and both countries would test his resolve early in his administration. Diagram 1 summarizes these key market takeaways of the US election scenarios. This week we provide our monthly GeoRisk Update with a special focus on our COVID-19 Social Unrest Index and implications for select developed, emerging, and frontier markets. Diagram 1Scenarios For US Election Outcomes And Market Impacts Election Trades And Global Social Unrest: A GeoRisk Update Election Trades And Global Social Unrest: A GeoRisk Update The United States The market can get hit by negative surprises after the US election just as easily as before.1 The US is a powder keg of social and political angst, ranking the worst among developed markets in our COVID-19 Social Unrest Index (Table 2). The lower a country ranks on the list, the less stable it is and the more susceptible to unrest. Social unrest becomes market-relevant if it weighs on consumer or business sentiment, or if it causes a major change in government or policy. Table 2The US Is The Developed Market Most Susceptible To Social Unrest Election Trades And Global Social Unrest: A GeoRisk Update Election Trades And Global Social Unrest: A GeoRisk Update The first US risk is a contested election. By rallying in the swing states in the final weeks of the election, Trump has increased the likelihood of a disputed outcome. Armies of lawyers will descend upon the swing state election boards. The Supreme Court’s intervention in Florida in 2000 has incentivized political parties to seek a judicial intervention, especially if they think they are losing the popular vote narrowly. Mail-in counts, recounts, and other disputes could push up against the December 14 Electoral College voting date. Worse, if the Electoral College is hung, the House of Representatives would have to decide the outcome in January. Volatility and risk-off sentiment would predominate. Emerging markets are showing the first signs of upheaval in the wake of this year’s crisis. The second risk is resistance to the election results. If Trump wins on a constitutional technicality, the country faces widespread unrest. This would be relevant to investors if it paralyzes major cities, exacerbates the COVID outbreak, or snowballs into something big enough to suppress consumer confidence. If Biden wins on a technicality, the country faces not widespread unrest but isolated pockets of potentially armed resistance or domestic terrorist attacks. The FBI, DHS, and recent news events have confirmed the presence of armed or violent extremist groups of various ideological stripes that pose a rising threat in the current climate of pandemic, unemployment, and polarization.2 They could strike any time after the election.     Europe And Brexit Chart 5European Lockdowns Push Up Political Risk European Lockdowns Push Up Political Risk European Lockdowns Push Up Political Risk Europe and Canada have reinstated lockdowns in response to their rise in COVID-19 cases. The surge in political risk is evident from our GeoRisk Indicators (Chart 5). These lockdowns will not be as draconian as earlier this year as the death rate has been found to be lower than once feared. While most governments have time on the political clock to take a hardline approach today, at the start of what could be a nasty winter season, they do not have so much leeway in 2021. Greece, Spain, Italy, the UK, and France are next in line for social unrest, after the US, in our index, Table 2 above. These countries are also vulnerable because fiscal support is not as robust as elsewhere, as can be seen by our global fiscal stimulus tracker (Chart 6). France is in better shape than the others and marks the dividing line – the 2017 election was a turning point in which the political establishment unified to defeat a right-wing populist challenge. President Emmanuel Macron’s popularity is holding up decently and it will now be buttressed by his tough stance against a spate of radical Islamist terrorist attacks. Extremist incidents will continue to be a problem, given the lockdowns and economic slump. Macron will focus on economic reflation in 2021 leading up to an election for which he is clearly favored in spring of 2022. Anything that derails his political trajectory before that time is of great importance for Europe’s political future, since Macron will be the de facto leader once Angela Merkel steps down in October 2022. Italy and Spain will be ongoing sources of political risk. Italy was the first major European hotspot of the pandemic, and euroskeptic attitudes are quietly ticking back up, but the ruling coalition and especially Prime Minister Giuseppe Conte have received popular backing for their handling of the crisis. Spain, on the other hand, has seen Prime Minister Pedro Sánchez lose support, while conservative parties tick up in popular opinion. These two countries are candidates for early elections when the hens come home to roost for the pandemic and recession (Chart 7). Chart 6More Stimulus Needed In Europe Election Trades And Global Social Unrest: A GeoRisk Update Election Trades And Global Social Unrest: A GeoRisk Update Chart 7Europe’s Leaders Fare Better Than Others Election Trades And Global Social Unrest: A GeoRisk Update Election Trades And Global Social Unrest: A GeoRisk Update   The other major countries with looming elections in 2021-22 are seeing relatively positive outcomes in popular opinion (e.g. the Netherlands, Germany). The exception is the UK, which is on the lower end of the social unrest index and is in the midst of internal disruption due to Brexit. Our assessment remains that Prime Minister Boris Johnson and the Tories will have to accept a trade deal with the EU over the next month (Chart 8). They can afford to leave on paper, but the economy would suffer and Scotland’s nationalists would be empowered to attempt secession. Our European Strategist Dhaval Joshi believes a Biden win in the US will hasten Johnson’s capitulation. We don’t expect much more upside in our GBP-EUR volatility trade after the US election result is known (Chart 9).  Chart 8Go Long Sterling Go Long Sterling Go Long Sterling Chart 9Close EUR-GBP Volatility Trade Close EUR-GBP Volatility Trade Close EUR-GBP Volatility Trade Chart 10Trump Would Weigh On Euro Trump Would Weigh On Euro Trump Would Weigh On Euro Trump’s re-election would be negative for the European Union’s economic and political stability (Chart 10). It would portend a greater trade war, Middle Eastern instability and refugees, Russian aggression, or European populism. By contrast, Biden will not use sweeping tariffs to resolve trade tensions, will seek to restore the 2015 nuclear deal with Iran, will suppress anti-establishment politics, will seek a multilateral approach to China trade tensions, and will only substantially aggravate the Europeans by being too aggressive on Russia. EM: Chile And Thailand Emerging markets are showing the first inevitable signs of upheaval in the wake of this year’s global crisis. What is critical to note about our Social Unrest Index for EM is that even if a country ranks high on the list overall, it could still face significant sociopolitical upheaval. This is manifest in the top-ranked countries of our list – Chile, Malaysia, Thailand, Russia, Indonesia – all of which have already seen some degree of social and/or political unrest in this crisis year (Table 3).  Table 3Even Emerging Markets That Look Good On Paper Are Susceptible To Unrest Election Trades And Global Social Unrest: A GeoRisk Update Election Trades And Global Social Unrest: A GeoRisk Update The best example is Chile, which is top-ranked in the index but ranks ninth in the “Household Grievances” column, which measures inequality, inflation, and unemployment. The latter measure helps explain how Chile erupted last fall and again this fall in mass protests. Chart 11Political Risk Weighs On Chile Political Risk Weighs On Chile Political Risk Weighs On Chile Over the past week Chileans voted overwhelmingly in a referendum to revise their constitution with a constitutional convention that will be elected, i.e. not overdetermined by current members of the National Congress. The constitutional revision process is ultimately a positive way for a country with good governance to assuage its household grievances. But the process will continue through a revision process in April 2021, the November 2021 general election, and a final referendum in 2022, ensuring that political risk persists. Chilean assets have fallen short of their expected performance based on global copper prices, suggesting that they have upside in the near term (Chart 11). Positive news is driven by macro fundamentals, including Chinese stimulus, but political risk will periodically put a cap on rallies by highlighting Chile’s transition to expansive social spending, higher debts, and hence future currency risk. Thailand’s case is different, as it is not household grievances per se but rather the ongoing governance problem that is triggering mass protests. The governance problem stems from regional disparities in wealth and representative government. Modern society and pro-growth populism have repeatedly clashed with the royalist political establishment and its military backers over the past 20 years and that process is set to continue. Chart 12Thailand Not Fully Pricing New Instability Cycle Thailand Not Fully Pricing New Instability Cycle Thailand Not Fully Pricing New Instability Cycle The newest round of the crisis will build for some years and ultimately culminate in some degree of bloodshed before a new political settlement is achieved. Typically, over the past 20 years, Thai political unrest creates a buying opportunity for investors. But the previous major wave of unrest, from 2006-14, occurred during the lead-up to the all-important royal succession. Now the succession is “over” and it is not clear that the new king, Vajiralongkorn, will live up to his father’s legacy as a successful arbiter of society’s conflicts. It is possible that he will overreact to domestic opposition and abuse his powers. Our Emerging Markets Strategy has downgraded Thailand in its portfolio, showing that the economy is suffering from insufficient stimulus as a negative credit impulse offsets public spending during the crisis. Thai equities do not offer relative value within the emerging market space at present (Chart 12). Most likely Thai political troubles will continue to provide a buying opportunity, but at the moment the risks are not sufficiently priced. If Chile, Malaysia, and Thailand are already experiencing significant political risk despite their high rankings on our index, then Brazil, South Africa, Turkey, and the Philippines face even greater challenges going forward. We have written about Brazil recently – we continue to see a rising political risk premium there (Chart 13). We will update our views on South Africa and the Philippines in forthcoming special reports. For now we turn to Turkey. Turkey: One Step Forward, Two Steps Back Turkey scores near the bottom of our Social Unrest Index. The regime of President Recep Tayyip Erdogan has been in power for nearly two decades, is suffering cracks in public support, is continuing to suffer the inflationary consequences of populist monetary and fiscal policy, and is embroiled in a range of international adventures and conflicts, now including Nagorno-Karabakh. After a brief pause of tensions in September, we argued that President Recep Tayyip Erdogan’s retreat would be temporary and that geopolitical tensions would re-escalate. They have done so even sooner than we thought. The lira is collapsing, as registered by our GeoRisk Indicator, which is once again on the rise (Chart 14). Chart 13Brazilian Political Risk Nearing 2018 Levels Brazilian Political Risk Nearing 2018 Levels Brazilian Political Risk Nearing 2018 Levels Chart 14Turkish Political Risk Spikes Anew Turkish Political Risk Spikes Anew Turkish Political Risk Spikes Anew   Relations with Europe have worsened significantly. Aggressive rhetoric between Erdogan and Macron in response to France’s treatment of French Muslims and handling of recent terrorist incidents has led to a diplomatic crisis: Paris recalled its ambassador. The episode highlights both Erdogan’s increased assertiveness vis-à-vis the EU as well as his Neo-Ottoman bid to become the leader of the Muslim world. Erdogan has called for a boycott of French goods (alongside similar popular calls in various Muslim countries). The European Commission warned Turkey could face punitive action at its December summit.   The feud in the eastern Mediterranean is also escalating. Turkey’s Oruc Reis seismic research vessel was once again sent out on an exploratory mission in contested waters on October 12. The mission’s duration was extended multiple times.    The EU may impose sanctions as early as December. Brussels' response to Turkish provocations may include targeted anti-dumping measures, likely on steel and fish. There have also been calls to suspend the customs union, but this would require the conflict to rise above rhetoric as it would harm EU investments in Turkey. Turkey is growing even more assertive in its neighborhood with its support for Azerbaijan in the conflict with Armenia. Tensions with Russia are rising yet again. Erdogan is already overextended in Syria and Libya, and recently threatened to launch a new military operation in northern Syria if Kurdish militants do not relocate from along Turkey’s border. The warning follows a Russian airstrike on Turkey-backed Syrian rebels in Idlib earlier this week – the deadliest strike in Idlib since March. Provoking the United States, Turkey also tested its newly purchased Russian S400 missile defense system on October 16. This was swiftly followed by US warnings that Turkey faces US sanctions under the Countering America’s Adversaries Through Sanctions Act if it operationalizes the system. The risk of punitive action would rise under a Biden presidency as he is more likely to adopt a tougher stance on Erdogan than President Trump. Chart 15More Downside For Turkish Lira More Downside For Turkish Lira More Downside For Turkish Lira These developments all point to a continuation in geopolitical tensions, as Erdogan flouts various risks and constraints. Turkey’s relationship with NATO allies is continuing to deteriorate meaningfully. The lira’s collapse is also in response to economic developments. After a surprise 200 basis points rate hike in September, the CBRT disappointed markets by keeping the benchmark 1 week repo rate on hold at its October 22 meeting. Investors had hoped that the September hike marked a reversal of Erdogan’s unorthodox policies. However, the October decision disconfirms this hope, as the central bank is instead opting for stealth measures to raise the cost of funding (e.g. limiting funding at the benchmark rate and thus forcing banks to borrow at higher costs; widening the interest rate corridor to give itself more room to raise the weighted average cost of funding). These decisions come amid rising inflation, debt monetization, a loss in foreign interest in Turkish equities and bonds, and deteriorating budget and current account balances. All point to further lira weakness (Chart 15). Bottom Line: The TRY faces downside pressure from the deteriorating geopolitical and economic backdrop. Although the EU has so far shown restraint in penalizing Ankara, its stance has not dissuaded Erdogan from adopting a provocative foreign policy stance. Moreover tensions with the US are at risk of escalating due to the possibility of a Biden presidency. Economic factors also point to continued weakness as monetary policy is too loose and the CBRT has not abandoned Erdoganomics. Nigeria: No Political Change Waves of protests have erupted across Nigeria in recent weeks, largely driven by the country’s youth. Protests center on calls to end the special anti-robbery squad (SARS), an arm of the national police service, which has long been accused of extrajudicial killings, torture, extortion, and corruption. Most recently, dozens of soldiers and police officers approached the scene of a major protest site in Lekki, a large district in Lagos, and opened fire, killing 12 people. The violence fueled outrage toward the government and security forces. To quell unrest, the government announced that SARS would be disbanded and promised a host of reforms. Demonstrators are skeptical of government promises without clearly specified timeframes. After all, previous incumbents have suggested police reform would be expedited. This has yet to happen, so we do not expect national policy to meet public demand. Moreover, President Buhari is a former military dictator who has maintained a hard line on security matters. He is in his final term in office and not legally required to step down until 2023. While discontent grows toward the government for social injustices, the Nigerian economy remains vulnerable and imbalanced. The local currency is facing considerable risk of major devaluation stemming from strains on its balance of payments, as BCA’s Emerging Markets Strategy pointed out in a recent report. Low oil prices and weak FDI inflows will foster various imbalances impeding the nation’s structural adjustments and its potential growth rate. The US election will act as a positive catalyst for markets in the short run as long as it produces a clear result and resolves the US fiscal stalemate. Nigeria’s current account excluding oil has been structurally wide, a sign of weak domestic productivity and an uncompetitive currency (Chart 16). Foreign currency reserves stand at $36bn, barely above foreign debt obligations at $28bn. FDI inflows have reached their second lowest point over the past decade, weighing on productivity growth, which is near 0%. A positive for Nigeria’s macro fundamentals is that public debt is low, at 23% of GDP, decreasing the likelihood of a sovereign default in the near term. Government officials refrained from large COVID fiscal relief, keeping spending in check. Coupled with low debt servicing costs, of which the foreign share only represents 2% of government revenues, a currency depreciation to improve competitiveness would not make public debt dynamics a concern. Nominal GDP is above short-term rates (Chart 17). Hence there is room for the currency to fall and government spending to pick up into next year to support the economy.  Chart 16Nigeria Struggles With Economic Rebalance Nigeria Struggles With Economic Rebalance Nigeria Struggles With Economic Rebalance Chart 17Nigeria Has Fiscal Firepower Nigeria Has Fiscal Firepower Nigeria Has Fiscal Firepower   In the post-dictatorship era, oil revenues knit the country’s predominantly Muslim north with its oil-rich and predominantly Christian south. The country has struggled to rebalance the economy in the wake of the 2014 oil shock. Crude production has fallen from over 2 million barrels per day to around 1.6 million bpd since 2010, and Nigeria struggles to meet its modest OPEC quotas. The current global crisis could have a negative long-term impact as rig counts have fallen again. We expect global oil demand to be supported in 2021, as lockdowns will be less stringent the second time and global fiscal stimulus will keep coming. And while Buhari’s age and poor health make him vulnerable, he is not without reserves of political strength. He is seen as someone who has kept up a good fight against the Islamist militant group Boko Haram. Considering that he is a northerner and a Muslim by faith, this strategy has helped ease sectarian tensions across the country, strengthening his grip. The problem is that the size of the global crisis could upset even the most stable of petro-states. Like most of sub-Saharan Africa, the youth population is large – the median age is around 18. If global oil demand relapses amid the second wave of the pandemic and a lack of domestic and global stimulus, the country will suffer yet another wave of unemployment. And if policy remains hawkish, sociopolitical troubles will be amplified.  Nigeria’s impact on global oil prices is limited – it only provides 2% of global oil supply – but it could become a contributor to rising unplanned outages if instability gets out of hand. Bottom Line: The SARS protests are not likely to threaten overall government stability, but mounting economic pressures could exacerbate social unrest, and the negative feedback with security forces. This could deliver a significant blow to the aging Buhari’s government if he does not enact expansionary fiscal policy to smooth out the external shocks. Investment Takeaways Chart 18Biden Good For Global Trade Rebound Biden Good For Global Trade Rebound Biden Good For Global Trade Rebound The US election will act as a positive catalyst for markets in the short run as long as it produces a clear result and resolves the US fiscal stalemate. But a contested election is not unlikely and a deflationary risk arises in the 28% chance that Biden wins while Republicans retain the Senate. Stimulus would still be agreed but its size and timing would be uncertain, prolonging the selloff. Therefore we are updating our portfolio to book some gains and cut some losses. We are booking gains on our EUR-GBP volatility trade for a return of 13%. We are closing our long Indian pharmaceuticals trade for a gain of 12%. We are throwing in the towel on our long defense and aerospace trade for a loss of 21%. And we are closing our rare earths basket trade for a gain of 5%. We are closing two pair trades and re-initiating them as absolute longs: long China Play Index relative to MSCI global stocks (0.1% return) and long ISE Cyber Security Index relative to the NASDAQ (-6.8%). Chinese reflation and global cyber-attacks will remain relevant themes.  The inverse of Trump, Biden is positive for the euro, negative for the dollar, and supportive of global trade. However, a range of higher taxes and levies on corporations suggests that his administration will ultimately weigh on S&P global stocks relative to those at home. And while Biden appears softer on China, we consider this a mispricing, as he has largely coopted Trump’s and Sanders’s trade agenda (Chart 18). Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com Roukaya Ibrahim Editor/Strategist Geopolitical Strategy RoukayaI@bcaresearch.com Guy Russell Research Analyst GuyR@bcaresearch.com Chart 19China: GeoRisk Indicator China: GeoRisk Indicator China: GeoRisk Indicator Chart 20Russia: GeoRisk Indicator Russia: GeoRisk Indicator Russia: GeoRisk Indicator Chart 21UK: GeoRisk Indicator UK: GeoRisk Indicator UK: GeoRisk Indicator Chart 22Germany: GeoRisk Indicator Germany: GeoRisk Indicator Germany: GeoRisk Indicator Chart 23France: GeoRisk Indicator France: GeoRisk Indicator France: GeoRisk Indicator Chart 24Italy: GeoRisk Indicator Italy: GeoRisk Indicator Italy: GeoRisk Indicator Chart 25Canada: GeoRisk Indicator Canada: GeoRisk Indicator Canada: GeoRisk Indicator Chart 26Spain: GeoRisk Indicator Spain: GeoRisk Indicator Spain: GeoRisk Indicator Chart 27Taiwan: GeoRisk Indicator Taiwan: GeoRisk Indicator Taiwan: GeoRisk Indicator Chart 28Korea: GeoRisk Indicator Korea: GeoRisk Indicator Korea: GeoRisk Indicator Chart 29Turkey: GeoRisk Indicator Turkey: GeoRisk Indicator Turkey: GeoRisk Indicator Chart 30Brazil: GeoRisk Indicator Brazil: GeoRisk Indicator Brazil: GeoRisk Indicator   Geopolitical Calendar Footnotes 1  There have been strange warnings in recent days – an unidentified aircraft intercepted over a Trump rally in Arizona, a Saudi warning of a potential Houthi attack on Americans, and a Chinese warning of a potential US drone attack against Chinese assets in the South China Sea. None of these have amounted to anything, and the idea of a US drone attack on China is absurd, but investors should be cautious nonetheless, particularly because a range of state and non-state actors will have an incentive to take actions once the US outcome is known. 2  Please see FBI Director Christopher Wray, “Statement Before The House Homeland Security Committee,” Washington DC, September 17, 2020, fbi.gov; Department of Homeland Security, “Homeland Threat Assessment,” October 2020, dhs.gov; Tresa Baldas and Paul Egan, “More details emerge in plot to kidnap Michigan Gov. Whitmer as suspects appear in court,” USA Today, October 13, 2020, usatoday.com.   

Highlights Global risk assets have more downside in the near term. The US dollar is primed to rebound. Without major fiscal stimulus in the US, the upside in the greenback will be substantial. China’s business cycle recovery will continue but Chinese stocks and China-related plays are over-hyped and will experience a setback. For equity and credit investors, we recommend maintaining a neutral allocation to EM versus their DM counterparts. Feature Global risk assets have been in a twilight zone. On the one hand, there has been enormous uncertainty related to the US elections, the US fiscal stimulus and the impact of renewed social mobility restrictions on economic activity, especially in Europe. On the other hand, ultra-accommodative central banks, zero or negative interest rates on risk-free investments and the possibility of positive news on the COVID-19 vaccine front have until recently precluded a carnage in global risk assets. What will be the path going forward? We believe the risk-off period in global markets will continue in the near run, i.e., there will be a dusk before a sunrise. Hence, investors should maintain dry powder at the moment. Several negative outcomes have a non-trivial probability of occurring over the very near term. Chiefly these include a contested US presidential election or a Republican Senate under a Biden presidency acting as a constraint on large fiscal stimulus. Chart I-1The US Needs $1.5tn (7.4% Of GDP) Of Fiscal Stimulus In 2021 To Have A Neutral Fiscal Thrust The US Needs $1.5bn (7.4% Of GDP) Of Fiscal Stimulus In 2021 To Have A Neutral Fiscal Thrust The US Needs $1.5bn (7.4% Of GDP) Of Fiscal Stimulus In 2021 To Have A Neutral Fiscal Thrust Needless to say, without a large fiscal stimulus package, the US is facing a fiscal cliff. According to the US Congressional Budget Office, the fiscal thrust will be negative 7.4% of GDP in 2021 if no further stimulus is enacted (Chart I-1). The fiscal thrust is the change in the cyclically-adjusted budget deficit. Even if the cyclically-adjusted budget deficit as a share of GDP remains the same, fiscal thrust will be zero. Hence, to achieve a positive fiscal thrust in the US, the fiscal stimulus must be greater than 7.4% of GDP or above $1.5 trillion.  Even though Congress eventually approves a large fiscal package, there is a risk that the economy will slip in the interim. To emphasize, we do not mean there will be no fiscal stimulus. The point is that a large fiscal package is possible only if markets riot. With equity and credit markets still richly priced relative to their fundamentals, the carnage in global risk assets will likely continue.     With equity and credit markets still richly priced relative to their fundamentals, the carnage in global risk assets will likely continue. Chart I-2The US: Lower Inflation Expectations, Higher Real Rates And A Stronger Dollar The US: Lower Inflation Expectations, Higher Real Rates And A Stronger Dollar The US: Lower Inflation Expectations, Higher Real Rates And A Stronger Dollar In the absence of a large US fiscal package and amid falling oil prices, US break-even inflation expectations will drop and the TIPS (real) yields will bounce in the near term (Chart I-2). A rebound in TIPS (real) yields will induce a bounce in the US dollar (Chart I-2, bottom panel).  Provided that the primary risks presently stem from DM rather than Chinese growth, we recommend maintaining a neutral allocation to EM within respective global equity and credit portfolios. Why not overweight EM versus DM? First, the rebound in the greenback will weigh on EM financial markets. Second, outside China, Korea and Taiwan, EM fundamentals are poor. Net-net, odds of EM out- and under-performance versus DM are, for now, balanced. China: Peak Stimulus, Equities And Commodities China’s business cycle recovery is intact. However, Chinese equities have become fully priced and are at risk of a setback (in absolute terms) along with global share prices. Notably, there are several elements that could trigger a meaningful setback in Chinese stocks. First, the money and credit impulses are about to peak. The top panel of Chart I-3 shows that changes in commercial banks’ excess reserves ratio lead the credit impulse by about six months. The drop in the excess reserves ratio since May foreshadows the top in the private credit impulse. Interbank rates – shown inverted in the bottom panel of Chart I-3 – point to an apex in the narrow money (M1) impulse. Authorities have been shrinking commercial banks’ excess reserves at the PBoC since May/June.  Tightening liquidity conditions in the banking system have led to higher interbank rates as well as government and corporate bond yields. Higher borrowing costs will weigh on money and credit growth. Second, the loan approval index of the PBoC banking survey has rolled over (Chart I-4). This implies that bank loan origination will subside going forward. Chart I-3China: Money/Credit Impulses Are At An Apex China: Money/Credit Impulses Are At An Apex China: Money/Credit Impulses Are At An Apex Chart I-4China: Loan Growth To Moderate China: Loan Growth To Moderate China: Loan Growth To Moderate Finally, fiscal stimulus is also peaking. Chart I-5 shows that the issuance of local government bonds is set to dwindle in the coming months. A peak in stimulus does not herald an immediate end of the recovery in the business cycle. China’s combined credit and fiscal spending impulse leads the business cycle by about nine months (Chart I-6). Therefore, even as the credit and fiscal spending impulse reaches an apex, the Chinese mainland’s economic activity will stay firm in H1 2021. Consequently, corporate profits will continue to recover. Chart I-5China: Fiscal Stimulus Is Peaking China: Fiscal Stimulus Is Peaking China: Fiscal Stimulus Is Peaking Chart I-6China: The Economy Will Continue Recovering China: The Economy Will Continue Recovering China: The Economy Will Continue Recovering What do all these imply for share prices? In periods when borrowing costs rise along with accelerating profit growth/improving net EPS revisions, share prices could still advance (Chart I-7). Hence, peak stimulus is not a sufficient reason to turn negative on share prices. Chart I-7China: Share Prices (ex-TMT), EPS Expectations And Corporate Bond Yields China: Share Prices (ex-TMT), EPS Expectations And Corporate Bond Yields China: Share Prices (ex-TMT), EPS Expectations And Corporate Bond Yields That said, there are some signs that the Chinese equity market is overbought and over-hyped, making it vulnerable: A major IPO often marks a top in an asset class. Chart I-8 illustrates that Goldman Sachs’ IPO in 1999 preceded the secular top in US equities, IPOs of KKR and Blackstone in 2007 took place before the US credit bubble and the LBO boom unraveled; and finally, Glencore, the largest commodity trading house, went public in 2011 at the very peak of the secular bull market in commodities. In this respect, will Ant Group’s upcoming IPO mark a major top in Chinese or new economy stocks? Time will tell. Chart I-9 illustrates that Chinese IPO booms were historically associated with equity market tops. The current surge in Chinese IPOs – in various jurisdictions including China, Hong Kong, and the US – is a symptom of an over-hyped market. Chart I-8A Major IPO Often Marks The Top in Respective Asset Classes A Major IPO Often Marks The Top in Respective Asset Classes A Major IPO Often Marks The Top in Respective Asset Classes Chart I-9China: Booming IPOs = An Equity Market Top? China: Booming IPOs = An Equity Market Top? China: Booming IPOs = An Equity Market Top? Finally, new economy stocks in both the US and China have risen by about 20-fold since January 2010. Both in terms of duration and magnitude, their rallies are identical to the bull market in the Nasdaq 100 index in the 1990s (Chart I-10). The striking similarity with those episodes as well as current euphoria among investors about FAANG and Chinese new economy stocks warrant caution. In regard to commodities, in recent months we have been arguing that China is entering a commodity destocking cycle following the major restocking cycle that occurred in April-August. As Chinese imports of key commodities temporarily diminish due to destocking, commodities prices will relapse. Importantly, investor sentiment and net long positions in some key commodities are very elevated, suggesting overbought conditions (Chart I-11). Chart I-10FAANG And Tencent Have Been Tracking The Trajectory Of Nasdaq 100 In The 1990s FAANG And Tencent Have Been Tracking The Trajectory Of Nasdaq 100 In The 1990s FAANG And Tencent Have Been Tracking The Trajectory Of Nasdaq 100 In The 1990s Chart I-11Investors Are Very Bullish On Copper Investors Are Very Bullish On Copper Investors Are Very Bullish On Copper Critically, global mining stocks have been dropping since early September and are signaling a relapse in industrial metals prices (Chart I-12). In brief, commodity prices and commodity plays remain vulnerable. Chart I-12Global Mining Stocks Point To A Relapse In Industrial Commodities Prices Global Mining Stocks Point To A Relapse In Industrial Commodities Prices Global Mining Stocks Point To A Relapse In Industrial Commodities Prices Bottom Line: Marrying the positive outlook for China’s business cycle on the one hand with an  impending potential correction in global stocks, the peak in Chinese stimulus and signs of Chinese equity investor euphoria, we conclude that the risk-reward profiles of Chinese stocks and China-related plays in absolute terms are unattractive. That said, we continue recommending overweighting Chinese stocks within an EM equity portfolio. From a cyclical perspective, Chinese corporate profits will outperform EM and DM corporate earnings because China has dealt with the pandemic much better than almost all other countries. An Update On Currencies And Local Fixed-Income We have been shorting a basket of EM currencies – BRL, CLP, ZAR, TRY, KRW and IDR – against an equally-weighted basket of the euro, CHF and JPY. This strategy remains intact. However, we believe the US dollar is primed to stage a major rebound, in general, and versus EM currencies, in particular. Therefore, US dollar-based investors should hedge their currency risk or short the same EM currency basket versus the greenback. In EM local fixed-income markets, we have been receiving 10-year swap rates but have not recommended owning cash domestic bonds because of currency risk. We continue to recommend investors receive 10-year swap rates in the following markets: Mexico, Colombia, Russia, China, India and Korea. We have also been recommending long positions in domestic bonds in certain frontier markets like Egypt, Ukraine, and Pakistan. The global risk-off phase will cause their currencies to relapse versus the US dollar, raising the possibility that local bond yields will rise. Therefore, investors who are long these markets should close these positions.   Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com Equities Recommendations Currencies, Credit And Fixed-Income Recommendations