Emerging Markets Equity Strategy – JPM

 

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Key Trades and Risks 2019 Year Ahead – Emerging Markets Equity Strategy

 

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1. CHINA’S DRAG ON THE GLOBAL ECONOMY INTENSIFIES

The Caixin Composite PMI dropped a full -1.6pts in OCT to 50.5, which represents the lowest reading since the global deflationary lows of mid-2016.

China’s OCT Headline PPI data (↓ -30bps to 3.3% YoY; breaking down from a TRENDING perspective) further underscores the disinflationary impulse upon the global economy stemming from our #ChinaSlowing theme.

The CNY is down -9% vs. the USD over the trailing six months and will be down -8% YoY in 1H19E assuming no change to the current quarterly average exchange rate, which means the inflationary impulse to import prices stemming from a full implementation to 25% tariffs on the $541.6B in goods the U.S. projected to import from China in 2018E will be more than offset by annualized dollar strength during that interval.

Chinese policymakers are officially panicking with respect to the growth outlook (e.g. strict lending quotas for private firms), but we continue to believe they remain fairly constrained on the monetary policy front until we see a dovish pivot out of the Federal Reserve – likely a mid-to-late Q1 event.

 

 

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#ShortEM (introduced 1/4/18 under the title, “#UnderweightEM”):

  • Beijing Remains Handcuffed (10/18): With respect to Chinese monetary policy, we obviously track a deluge daily/weekly/monthly data – e.g. OMO, MTLF, RRR, BPR, 7DRR, SHIBOR, etc. – but for those of you who want to boil it all down to what it actually means for economic growth on the mainland, there’s one number you need to track on a monthly basis – i.e. the annual growth rate of bank loans.

ChinaBankLoansOutstandingYoYChinaCruiseShipvs.CanoeAnalysisChinaPolicyMonitor

 


-R.W.N II, yours in 322.

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