DSG Asia Kicking The Can Down The Road Khazanah Megatrends Forum - - PowerPoint PPT Presentation

DSGAsia

Independent Asian Economic & Political Analysis

DSGAsia

Kicking The Can Down The Road

Khazanah Megatrends Forum

Simon Ogus October, 2010

simon@dsgasia.com; www.dsgasia.com

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DSGAsia

Independent Asian Economic & Political Analysis

Deleveraging in the West is a multi-year process and there is scant evidence as yet of credit multipliers re-starting. A square-root “recovery” seems likely

The Square-Root “Recovery”

• 2%

0% 2% 4% 6% 8% 10% 12% 14%

• 2%

0% 2% 4% 6% 8% 10% 12% 14% 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Global Nominal Money and Credit Growth

% YoY 3MMA

Private Domestic Non-Financial Credit Broad Money

Global includes US, Euroland, UK & Japan

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DSGAsia

Independent Asian Economic & Political Analysis

Global rebalancing is being constrained by unreconstructed mercantilism. The dollar is cheap against the majors but the real divergences remain within continents

40 60 80 100 120 140 160 180 40 60 80 100 120 140 160 180 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Real Unit Labour Cost-Based Trade-Weighted Exchange Rates

January 1990 = 100

Japan Euro Area USA China Asia ex China ex Japan

USA, Japan and Euroland IMF/Official Calculations; Asia* and China DSGAsia Calculations * ULC-based where available, WPI-based otherwise

40 60 80 100 120 140 160 180 40 60 80 100 120 140 160 180 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Real Unit Labour Cost-Based Trade-Weighted Exchange Rates

January 1990 = 100

Japan Non-Germany Euro Area Korea Germany

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DSGAsia

Independent Asian Economic & Political Analysis

Japan is the champion government debtor but a unique ownership pattern suggests that Europe is the likelier catalyst for bond market mayhem

Central Bank 7.9% General Government 11.3% Postal Savings 20.8% Public Life Insurance 9.8% Public Pension Funds and CMTs 10.6% Public Financial Institutions 0.3% Private Sector 39.3%

Sectoral Holdings of Central Governement Debt (Jun 2010)

Source: Japanese Government Flow of Funds Data Source: Japanese Government Flow of Funds Data Source: Japanese Government Flow of Funds Data (of which Foreign holdings 6.1%)

Sectoral Holdings of Central Government Debt (June 2010)

0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 220% 240% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Government Debt as a Percentage of GDP

Asia ex-Japan* Asia ex-Japan, China & India* USA** Euroland UK Japan (RHS)

* Excluding central bank paper ** USA 2008 84% of GDP if State and GSE debt is

Forecasts from the IMF

A 2009 Rogoff-Reinhart study notes that if public debt exceeds 90%, median growth rates fall by 1% and average growth rates by more

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DSGAsia

Independent Asian Economic & Political Analysis

Where was the decoupling? An early 1990s earnings trajectory seems likely though this may not preclude market re-ratings at times of global calm

• 18%
• 15%
• 12%
• 9%
• 6%
• 3%

0% 3% 6% 9% 12%

• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Asia Exports and OECD Industrial Production

Asia Ex-Japan Exports (LHS) OECD Industrial Production (RHS)

USD %YoY, 3MMA %YoY, 3MMA

Asia Ex-Japan Exports Volumes (LHS)

30 35 40 45 50 55 60 65

• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 50% 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

Asia ex-Japan Exports (LHS) US ISM Manufacturing PMI (RHS)

Exports USD %YoY, 3MMA, EPS market cap/MSCI weighted %YoY Index 3MMA

Asia ex-Japan EPS Growth (LHS)

Asia ex Japan Exports & EPS Growth and the US ISM Manufacturing PMI

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DSGAsia

Independent Asian Economic & Political Analysis

Year-on-year export comparisons are easy but volume levels will tell us whether sustainable final demand is really returning

60 90 120 150 180 210 240 270 300 60 90 120 150 180 210 240 270 300 04 05 06 07 08 09 10

Export Volumes

Japan Korea Taiwan China

Index 2004=100, 3MMA

20 40 60 80 100 120 140 160 180 20 40 60 80 100 120 140 160 180 04 05 06 07 08 09 10

Export Volumes

Hong Kong (Domestic) Singapore (Non-Oil Domestic) Malaysia Thailand

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DSGAsia

Independent Asian Economic & Political Analysis

China may well be cyclically over-invested but it remains structurally under-invested

30,000 60,000 90,000 120,000 150,000 180,000 210,000 1955 1970 1990 2009

USD Capital Stock Per Capita, 2009 Prices

China Japan USA

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 1834 1842 1850 1858 1866 1874 1882 1890 1898 1906 1914 1922 1930 1938 1946 1954 1962 1970 1978 1986 1994 2002 2010

Fixed Investment as a % of GDP

US Japan China Korea

Taiwan

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The Malaysian private corporate sector has been disinvesting; the household and government sectors have been gearing up

DSGAsia

Independent Asian Economic & Political Analysis

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Total Private Public Inward FDI Total Private Public Inward FDI Total Private Public Inward FDI

Investment as a Percentage of GDP

1989-97 1998-09 Malaysia Thailand China

Malaysia's net FDI has averaged only 0.2% p.a. since 1998, and -2.8% p.a. since 2007 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Household Debt / Disposable Personal Income

US Australia Korea Malaysia Japan Thailand China

9

A huge current account surplus is perhaps more a sign of weakness than strength

DSGAsia

Independent Asian Economic & Political Analysis

• 4%
• 2%

0% 2% 4% 6% 8%

• 4%
• 2%

0% 2% 4% 6% 8% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Asia ex Japan & China: Balance of Payments as a % of GDP

Trade Account Current Account Net FDI Basic Balance* Implied Other Capital Foreign Exchange Reserves

* DSGAsia Robust Definition: Current Account Plus Net FDI

• 20%
• 10%

0% 10% 20% 30% 40%

• 20%
• 10%

0% 10% 20% 30% 40% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Malaysia: Balance of Payments as a % of GDP

Trade Account Current Account Net FDI Basic Balance* Implied Other Capital Foreign Exchange Reserves

* DSGAsia Robust Definition: Current Account Plus Net FDI