ECOGNOSISADVISORYLTDFromtheGreek:OIKONOMIKHΓNΩΣΙΣ(EkonomikiGnosis,KnowledgeofEconomics).Ecognosisisaglobalfinancial,economicadvisoryandinformationservice,coveringeconomicandfinancialdevelopments,equities,fixedincome,forex,commoditiesandotherassets.EconotesisaresearchpublicationavailablefreeonourinternetsiteandtothepublicinHongKong.Itisnotasolicitationforbusinessandneitherdoesitcontaininvestmentsuggestionsonspecificandnamedsecuritiesincludinganybuy,sellorholdadvice.ItiswrittenbyDr.AndrewF.Frerisbasedon48yearsofmarketexperiencewhichincludesseniorpositionswithGTCapital,SalomonBrothers,BankofAmericaandBNPParibasaswellassenioracademicpostswithuniversitiesinLondonandinHongKong

8/F, 2 Exchange Square, 8 Connaught Place, Central, Hong Kong. Tel: 852 3167 4591, Mob 852 9738 0944 Email: afreris@ecognosisadvisory.com Website: www.ecognosisadvisory.com

ECONOTENo.53Asia:Asummaryofdevelopments-mostlygood 21/8/2016

Summary InvestmentConclusions

TheG3economiescontinuetostruggle,eachfordifferentreasons:theUSbecauseoflikelyratehikes,Japanbecauseneithermonetarynorfiscalpolicieswork,andtheEUbecauseofanemicgrowth,lowinflation and Brexit. In Asia, the very different economies whichform the “Asian” geographical notion, are doing very differentthings.GDPgrowth rates vary currently (2Q.16yoy) from7.9% inIndia, 6.7% in China, and 7.0% in Philippines to 0.7% in Taiwan,inflation is not a threat, exchange rates, in general, strengtheningversus theUSD,and interest ratesbeingcutor leftunchanged.SomuchfortheUSDlinktoAsia.ButalleyesareonChina,becauseofits(undeserved)roleasthelocomotiveofglobalgrowth.

Three small Asian equity markets, Thailand, Indonesia andthePhilippineshavedoneextremelywell, since the startoftheyear,benoted,andinUSDterms,andwilllikelycontinueto do so. Twomedium- sized ones; Taiwan andKorea havealso done well. Asian interest rates offer, in general andexcept forHongKong,widedifferentials to theG3negativeyields. This has driven EMK funds back to Asia, but the G3bond markets are an explosive combination of high pricesand lengthening duration and this means that any“correction”willblowbackontheAsianbonds.SticktothesesmallequitymarketsandtoshorttenorEMKpaper.

Thereisnosuchplaceas“Asia”

And has c

governments introduced expansionary policies in order tosustain themodest recoverynowvisible inbotheconomies.In Taiwan the policy issues are further complicated by theelectionofpresidentTsaiwhoseattitudetoChina,andtotheeconomic links therein, are less simple thanbefore.There isnowaneffort tomake Taiwan lesseconomicallydependentonChinaandthePRCauthoritieshaveconsideredthistobeanother potential step towards fomenting independence.

Between April and July 2016 seven out of the ten Asianeconomies surveyed here cut official rates, the ones NOTdoingsobeingHongKong(peggedtotheFedrate),ChinaandSingaporethelatterfollowingaforexandnotaninterestraterule. This little detail tends to be forgotten in the usualexpectationthataFedhikewillhurttheAsians.Interestratesin Asia have long disconnected from the Fed as their forexratesarenotsomehow“pegged”totheUSD,excludingHongKong,andthemanagedandcapitalcontrols-supportedCNY.AhikebytheFedwillimpact,firstandforemost,theglobaland,hence, the Asian equity markets, but not directly their realeconomies.AsFigs1and2show, the trends inseveralAsianGDP growth rates are modestly accelerating. In specific, thetrends are up for Thailand, Indonesia, India and thePhilippines, ratesmayhavebottomed inS.Korea,HongKong,TaiwanandSingapore,whileforChinaandMalaysiathetrendstaysdownwards.Anumberofpointsneedtobemadehere:For Thailand, after the recent plebiscite on the constitution,themilitarywill likelystay inpowerindefinitelyevenafteranelection. So far politics have not affected the “Teflon”economy,butthismaynotbethecaseinthemediumterm.InMalaysia politics have impacted sentiment as the financialscandal does not seem to subside and the politicalenvironmentstaysdivided.InTaiwanandinS.Koreathe

Fig.1:GDP:China(red),HK(yel),Taiwan(orange),Sing(blue),S.Korea(green)2007-2016(yoy%)

Source: Bloomberg

.

ECOGNOSISADVISORY–August2016

ECONOTENo.53

ChinaandIndia:differenttalesfromtherest Fig2:GDPGrowth:India(red),Thai(violet),Mal(blu),Indo(brown)2007-2016(yoy%)zzz((brown),china

China’s deceleration (since 2010 be noted, nothing recent )has been interpreted as either a secular decline while thestructure of the economy changes from exports-led growth( which was never the case as, in most recent years, netexportsmade a negative contribution toGDPgrowth, a littledetail widely ignored), or a sign of impending financialdisaster.Thelatteralsoignoredthefactthatnetgloballendersnever go bankrupt globally or domestically. China’sdecelerationsimplyreflectsthedeclineininvestmentgrowth,triggered by policy actions to reduce excess capacity andwaste,theimpactontheexportssectoroftheG20weakness,albeitmodestintermsofGDPgrowthaswehavepointedout,and the massive losses in the poorly handled and inflatedequity markets where state intervention was a disasterouswasteofmoney. India’seconomycontinuestogrowwell,butwith no chance under the Modi administration of achieving10-12%growth,easily

Source : Bloomberg

FACTBOX:SmallAsianequitymarketsaredoingwell.ToToAs

InapurplexingworldsticktosimplicityToAugust20th,theequitymarketsinThailandandIndonesiawereupYTDinUSDby24.0%and23.0%respectively,whilethePhilippinesfollowedwitharespectable15.0%return.ThebiggermarketsofTaiwanandKoreafollowedwith12.0%and10.0%returns.(Allfiguresrounded).Itwouldhavebeenconvenientifthemacroperformanceoftheseeconomieswerestrongenoughtoprovidesupportforthisperformance,butitisnot.TaiwanhascurrentlythelowestGDPgrowthrateinAsia(0.7%yoyo2Q.16)whileThailand’scurrentgrowthat3.5%isinthelowerrangeinthecountriessurveyed.Chineseequitiesareyieldinganegative14.0%whiletheMumbaiindexreturnsstandatamodestXX%.ThissimplyconfirmsthatGDPgrowthandequitiesreturnsarenotlinked.

Source:Bloomberg.

Among the discussion of a “new normal” in terms of anextendedperiod ,evenofdecades,ofnear zero rates, and theconundrum of central banking policy, the discussion hasbecometotallyG3-centric.Asiancentralbankshavenotpushedrates to zero, Asian economies are growing at such diverserates, fromveryhigh tovery low,as tomakenonsenseofanycyclical explanation, and their equities markets yield fromnegativesintheteens,topositivesinthetwenties.The saying “include me out please” should be ferventlyadoptedbymostAsianpolicymakersandinChinainparticularwhoselargeeconomyisdomesticallydrivenandwhoseexternallending position insulates it from any fear of systemicinstability. India can do miracles if its political system and itscitizens choose to do so.The well worn argument that drasticeconomic reforms in Indiawill harm the poor simply ensuresthat the poor stay harmed by low growth rates and by stateexpenditures in the wrong places, other than the ones whichraiseproductvity,suchasinprimaryeducation,andhenceraisepeople out of poverty.In themiddle of the travailsof the G3,Asia offers a clear vision that what happens in the G3 is notnecessarily of very significant relevance or of importance toAsia.Ifyoufindthishardtobelievelookat“their”andat“our”numbers.”Itistheeconomystupid”afterall.AndrewFreris(writingcompleted21August2016)

growthratesof10-15%,attainableifboldreformsweretobeinstituted. A great deal wasmade of the passing of the GSTreform, two years into Modi’s government, which will unifythe indirect taxation system.This is anadministrative reformand has no structural impact or consequence on the sorelyneeded reforms of the labormarket, of retail andwholesaledistributionopening to foreign participation, rural andurbanlandreform,drasticreformofthenearbankruptstatebankingsystem, a revitalization of infrastructure investment and,hardlyevermentioned,atrulygiganticefforttobringtoahighstandard the abysmal state of primary education andespecially thatavailable togirls. It isabsurd for India tosendmissions toMarswhen illiteracy runs, in global absolute andcomparative terms, exceptionally high in some states andespeciallyamongwomen.Caserests.

ECOGNOSISADVISORY–June2016