CLSA Greed & Fear
Trump inflection point? Dt 10/11/2016
· In the end it was the sheer enthusiasm that counted. Those who have argued that the crowds consistently attending The Donald's rallies during this presidential campaign belied the negative message sent by opinion polls have been proved absolutely right. Still it is remarkable just how wrong the vast majority of opinion polls have been.
· The consequences of the US election results could be momentous in the sense that Donald Trump has every intention of pursuing an aggressively pro-growth policy while, with the Republican Party retaining control of Congress, there is every chance that such policies can be implemented.
· The focus on growth is why the market reaction on Wednesday US time ultimately makes sense, namely falling bonds and rising stock prices. This is the opposite of the market action that was happening in Asian time Wednesday when it first became clear that The Donald was on course to win. Then stocks sold off sharply and bonds rallied in classic "risk off" market action.
· GREED & fear must admit to surprise at the US dollar's strength since the base case here would have been that a Trump victory would lead to a weaker dollar. Still the critical issue right now is the Treasury bond action. This is because a Trump triggered "bond riot" has the potential to feed on itself in the run up to the inauguration on 20 January.
· First, there is the issue of the amount of money in America allocated to so-called "risk parity" strategies where bonds are owned on leverage. The second risk posed by a bond riot would be renewed turmoil in the credit markets where there remains a major technical problem in terms of the collapse in inventories held by brokers and dealers.
· The third issue raised by a bond sell-off is whether it creates a stress test of the Bank of Japan's recent commitment to fix the 10-year JGB yield at 0%. The more Treasury bonds sell off the bigger the risk that such a test occurs. A move in the 10-year Treasury bond yield through 2.25%, say, is the kind of market move that could trigger such a stress test. That in turn would mean the BoJ being seemingly committed to unlimited JGB purchases which would be yen bearish and Japanese equity bullish.
· Trump now has ten weeks prior to his inauguration to calm markets ahead of his presidency. It will be much easier for Trump to implement his pro-growth agenda if comparative bond market calm can be maintained.
· Trump's undoubted likely focus on getting the US$2.5tn of cash held offshore by corporate America back into the US could work out two ways. It could be interpreted as either very bond bullish or bond negative depending on how all that cash is deployed. It is also a potential issue for the funding of the European banking sector.
· Trump now has ten weeks to convince the world that he is not the cartoon character depicted by the mostly biased media in recent months. The rally in stocks commenced when Trump made his acceptance speech which was surprisingly gracious to those who have bought into the caricature. The point here is that it has so far not paid to underestimate The Donald. He has made a success of whatever he has chosen to focus on as an adult.
· It is also worth asking whether a Trump victory and a continuing Republican controlled Congress spells some sort of relief from the excruciating regulatory overkill which has been suffocating the American financial services industry. That is certainly a possibility to consider. The hope will be material changes if not repeal of the Dodd-Frank legislation. Another hope would be the repeal of the Department of Labour's Fiduciary Rule which poses the latest threat to the active fund management industry.
· GREED & fear's hope on the protectionist theme is that the Trump focus will be more focused on renegotiating trade deals rather than overt protectionism. The first target is likely to be Mexico not China. The other hope must be that one of his more informed supporters will be able to convince The Donald that China ceased to be a currency manipulator many years ago.
· A Fed rate hike now seems "baked in the cake" in December following last Friday's data with average hourly earnings growth accelerating to 2.8%YoY in October. Still the Trump victory, combined with a continuation of a strong dollar and rising bond yields, would imply a tightening of monetary conditions which will not be welcomed by the Fed. But the base case now must be for a Fed rate hike in December unless equities sell off sharply in the interim.
· There have been some extraordinary developments over the past week in Asia GREED & fear would not have predicted. One such was a draconian increase in stamp duty on purchases of Hong Kong residential property announced last Friday. This to GREED & fear seems way over the top though it is true that residential property prices have started rising again while mainlanders have again become more active in purchasing.
· The rising mainland purchases raise the issue of whether Hong Kong Chief Executive Leung Chun-ying, prompted perhaps by Beijing, is trying to discourage capital outflow from China as well as addressing "affordability" issues at home.
· It is also a sign of the times that developers had no forewarning on the latest increase in stamp duty. Still it is hard to see how such draconian hikes in stamp duty can help Hong Kong Chief Executive CY Leung reach his target of increasing supply since such high stamp duty surely leads to depressed transaction activity and therefore reduces demand to buy land at auction on the part of developers.
· The property developers sold off on this latest announcement which is no surprise given its unexpected nature and the renewed fear of price declines. Still support for these stocks will be provided by their dividend yields.
· The other point about the latest move in Hong Kong is that it makes Singapore property prices look even more of a relative bargain, particularly for Singaporeans who do not have to pay the additional 15% stamp duty imposed on foreigners in addition to the normal 3% stamp duty. This may be enough to attract increased purchases by mainland investors.
· Another surprising development over the past two weeks in Asia is the "scandal" which has engulfed Korean President Park Geun-hye. GREED & fear hears that the real story at play here is a media-driven witch hunt where other ulterior moves have been at work.
· That strategy has clearly been successful in inflaming the mood of the ever emotional Korean electorate. It certainly also raises the odds that the left-wing opposition party wins next year's presidential election. The only positive spin to put on this is that such a prospect should serve as a catalyst to accelerate the chaebol ownership restructuring, with particular reference to Samsung and Hyundai.
· Still the reality is that the Park presidency has a perfectly respectable track record. In the domestic economy insanely draconian property tightening measures were eased significantly in July 2014 which has allowed for a construction and mortgage lending boom which has served to provide a domestic demand buffer in the context of an external slowdown. While there has also been ongoing pressure on Korean corporates to raise payout ratios, pressure which is now showing results.
· Anyone who thinks Indian Prime Minister Narendra Modi is not serious about making bold changes should pay attention to the Indian Government's surprise move on Tuesday night to scrap the legal tender status of Rs500 and Rs1,000 currency notes. This is a big deal since India has one of the highest levels of currencies in circulation at 12% of GDP while cash on hand is an estimated 3.2% of household assets at the end of March. Of this cash, 87% is in the form of Rs500/1,000 notes.
· This will be short-term pain for long-term gain for India. Part of that pain will be reflected in renewed weakness in the property sector where use of "black money" is endemic. But this is all part of Modi's ongoing effort to promote digital money, a process enabled by the fact that 1.08bn Indians now have electronic ID.
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