February, 24 2017 by lsr team

Jonathan Fenby sets out 12 reasons why China feels good: 1. China’s economy is ticking over on a cyclical reflation path with sharp PPI recovery coming through.
2. Though it will get worse in absolute terms, the debt problem has been diffused for now by shifting it away from banks and local governments.
3. Currency outflows have moderated for the time being. The housing sector is heading for a correction not a meltdown.
4. Preparations for the Communist Party Congress in late 2017 seem to be on track with no challenge to Xi as he moves into his...

February, 10 2017 by lsr team

- Trade dispute with US to peak in 12 months - Trump deal could be 45% tariff on "non-essential" goods - Chinese trade surplus to fall from 2018 - RMB policy will be undermined - FDI will decline and then retreat

February, 03 2017 by lsr team

Dario Perkins answers your questions on Trump policy:

- How far are markets underestimating President Trump's protectionsit tendencies?
- Is America really getting a bad trade deal?
- What are the Trump trade scenarios?
- How relevant is the 1930s experience?
- How would a possible trade war be different now?
- How might China respond?
- If major RMB devaluation what impact on the US & the global economy?

January, 27 2017 by lsr team

Successful renegotiation of NAFTA is likely but will not provide the template for the US administration’s future China policies. - US-Mexican trade is dominated by global value chains. US-sourced content in Mexican exports to the US is 40% so it is impossible for Trump to realize his threats to impose border taxes on Mexico without causing major damage to US manufacturing jobs. - This makes a successful renegotiation of NAFTA both possible and probable. - But the same cannot be said about US-China trade, which lacks such well-developed channels for trade. As...

December, 21 2016 by lsr team

- EMs to benefit from US and Chinese reflation in 2017
- But global macro ‘push’ factors set to recede thereafter
- Mature US recovery at risk from tighter monetary conditions
- Beijing’s debt-RMB dilemma pressing as the mini-cycle turns
- Global search for yield to persist, albeit tempered
- Lift-off growth phase elusive for North Asia’s exporters
- Clogged rate and FX channels leave fiscal stimulus option

November, 18 2016 by lsr team

Trump's policies are clearly inspired by Ronald Reagan in the 1980s. Reagan introduced substantial tax cuts and trickle-down economics, but Reaganomics conflicts with Trump's desire to close the US trade deficit.

October, 14 2016 by lsr team

The euro area LI continues to put in an above consensus call. It is probably over predicting growth somewhat but its strength is fundamentally underpinned by the newly emerged German locomotive. While German demand often turns out to be derived from others, chiefly China, in this case it is genuine. In fact, this is highlighted by our below consensus Australia call. China’s stimulus has not fed through to a rebound in private demand, although easing PPI deflation is helping manufacturers.

September, 16 2016 by lsr team

Emerging market growth has been on a downward trend for just over half a decade. The slowdown probably bottomed out at the end of last year. On an aggregate basis, the advance in EM annual real GDP accelerated to 3.9% in Q2 from 2.4% in Q3 2015. Is this the start of a sustained rebound in EM growth? Click above to watch the full video or below for our latest report on emerging markets.

July, 22 2016 by lsr team

Our preliminary estimates show that Chinese GDP growth stabilised at 6% in Q2. Domestic demand growth slowed to 5% in Q2, but offset by net trade. With the improvement in activity momentum largely a result of policy stimulus, it is highly questionable whether the government’s growth target can be achieved without fresh stimulus to boost investment. More worryingly, despite the recent stabilisation in industrial profits, private fixed asset investment growth has remained weak. With the outlook of domestic demand souring, companies are under pressure to deleverage an...

July, 07 2016 by lsr team

Last quarter we warned that, although growth was likely to remain positive during our 2-year forecast horizon, the end of the cycle was now in sight. Since then the Brexit vote has dragged forward the debilitating effect of final demand uncertainty on investment that we would normally associate with the very late cycle. As a result we expect a technical recession during H2 2016. To find out more about Brexit’s impact on the UK economy, click above the watch the video or below for our latest UK Outlook report.  

June, 22 2016 by lsr team

June would have been a busy month for event risk by any measure, with ECB, Fed, BoJ and BoE policy decisions, an OPEC meeting at the start of the month and Spanish elections at the end. But all these have been completely overshadowed by the EU referendum the UK will hold tomorrow on June 23. With the emphasis very much on the short term, we focus on two aspects of Brexit: what’s likely to happen and how to position for it. Click above to watch the full video or below for our latest Asset Allocation report on Brexit strategy.

June, 02 2016 by lsr team

China’s rebalancing started only in 2015, with recent numbers showing significant progress in rebalancing from excessive saving and capex towards more consumer spending. Capex in 2015 fell by 1.8% of GDP, while gross savings dropped by 1%. This is the first concrete evidence of genuine rebalancing, but still remains small in relation to what is needed. Our Chief Economist, Charles Dumas explains how further rebalancing can be achieved through explicit yuan devaluation against the dollar and other major currencies. Click above to watch the full video. &...

May, 16 2016 by lsr team

Depending on who you believe, Brexit would either cause a crisis on a par to what happened in 2008, or herald the start of a British economic renaissance, an era of free trade and rapid deregulation. The truth, of course, is that nobody really knows what will happen because the outcome depends on what policies and institutional arrangements are put in place following the referendum. The only thing we know for sure is that this situation is causing considerable uncertainty and a Brexit vote would compound any short-term damage that is doing to the UK economy. While Brexit...

April, 20 2016 by lsr team

The EM asset rally has been underpinned by a dovish Fed, receding fears of US recession and tentative evidence of macro stabilisation in China following a shift to pro-growth policies in Beijing. What has received less attention is the role played by recent yen appreciation, from both fundamental and risk angles. The onset of Abenomics weakened JPY/USD by some 40% in the space of three years. The yen bottomed in June, received a boost in the wake of August’s CNY step devaluation and embarked on a relatively steep appreciation path in December 2015 as global risk av...

March, 24 2016 by lsr team

We recently published the Q2 2016 edition of the LSR UK Outlook. Our central forecasts assume that the UK remains in the EU, but we also modelled a ‘Brexit risk’ scenario. This risk involved shocking the model in a number of different ways, in particular by weakening trade-weighted sterling, increasing the level of household’s precautionary saving and reducing the share of business investment associated with exports to the EU to a ‘depreciation-replacement’ only level. The difference in the quarterly profile of growth between our central pro...

March, 22 2016 by lsr team

Households have been borrowing more and saving less, suggesting their finances are increasingly vulnerable to shocks – not least in view of stretched property market conditions. This is a topic that was repeatedly raised during out recent visits to Australian clients. Spurred by easy monetary policy and a buoyant property market, the leverage of households –predominantly mortgages- has risen to a record 1.8 times income. At the same time, their savings ratio has been declining through the RBA’s extended easing cycle, raising questions about the robustne...

March, 15 2016 by lsr team

The Bank of Japan left monetary policy unchanged today. The effect of negative interest rates on the currency in January was the opposite of that intended: the central bank’s aggressive adoption of negative deposit rates merely fuelled global angst at a critical juncture, driving repatriation flows into Japan and pushing up the currency. The ECB’s policy easing last week had a more beneficial effect on asset prices but has again left the currency unchanged, reinforcing the message for the BoJ. For Japan, where currency moves dominate the equity market, it’...

March, 09 2016 by lsr team

Improved risk sentiment is driving another rebound in EM assets. Investors have scaled back fears of a US recession, with Treasury yields now off recent lows and inflation breakeven rates bouncing from depressed levels. At the same time, China is loosening the fiscal taps, while the PBoC has shifted its focus back to boosting liquidity and credit. In turn, commodity prices have found a degree of stability. Market expectations for the path of Fed policy hit extremes in February. Since then, the US$ index (DXY) has turned higher, EM currencies have strengthened and oil pri...

February, 15 2016 by lsr team

The UK cycle is rapidly maturing. We have stressed before that uncertainty over Brexit is likely to add a burden to the end of the cycle, dampening investment intentions just when consumption bottlenecks would otherwise have driven up capex. As with the Scottish referendum, polls have narrowed. The latest poll of polls put those who want to remain in the EU on 51%, with those who wish to leave on 49%. Many of those who expect an exit presumably think it would be a good thing. But in the short term, uncertainty over how Brexit would affect trade and capital flows will tak...

February, 09 2016 by lsr team

Ironically, financial market turbulence has hit just as the world economy’s chances of rebalancing successfully had increased. We published our year ahead piece in early December with the title “Don’t panic!”, but investors returned to work after the holidays worried about China’s slowdown, collapsing oil prices, global debt unwinding and the dearth of policy options left open to leading central banks. Widespread anxiety pulled the rug from under asset prices. As is our tradition, we asked our clients in mid- January for their top questions...

January, 25 2016 by lsr team

Markets are jittery and the latest manufacturing data, both from the US and the wider global economy, are doing nothing to restore confidence. Last week’s plunge in the Empire State index confirms a trend that has been apparent for some time – global industry is struggling. Since manufacturing has often been reliable guidance to near-term macro trends, investors are understandably worried. It is no coincidence, for example, that industrial data play a dominant role in the OECD’s leading indicators. So why are manufacturers struggling? More importantly,...

January, 04 2016 by lsr team

Happy New Year! Having sifted through various sell-side reports, we conclude that our emerging market view is more on the bearish side. While we have a constructive stance on some EMs, India and Mexico in particular, our general tone is still one of caution. For more details, please request a copy of our year-ahead piece -2016: Don’t panic, yet! In today’s note, we address three key questions: 1) Why are we more bearish than consensus on EMs? 2) What would make us more optimistic? 3) What would make us more negative? Click below to find out more.

December, 09 2015 by lsr team

Twelve months ago we said 2015 would be a year of ‘deceptive calm’. With the S&P 500 up 5% and US 10-year yields around 5bps higher, you could say our forecast was accurate. Markets spent much of the year in an anxious state, fretting about Greece, then China, then the risk of a synchronised global recession. In 2006 and 2007, LSR had a high conviction that a financial meltdown was about to wreak havoc on the global economy. This time around we stick with our 2015 theme ‘Keep Dancing’ but with no great conviction. Looking ahead to 2016, China...

November, 25 2015 by lsr team

Last week we published our LSR View explaining why US growth is likely to accelerate into 2016 and that, by inference, recent scares about the potential for a US recession are greatly overplayed. We think US real GDP growth is set to quicken to 2½ -3% from the 2% average of the past five years. This exceeds most current estimates of US growth potential and fully justifies the Federal Reserve’s expected rate increases. Rapidly growing household spending, on housing as well as consumption, plus an end to five years of fiscal drag will be the main engines of gr...

October, 22 2015 by lsr team

The Trans Pacific Partnership is publicly touted in Japan as a boon for exporters, but a well-designed FTA should be geared towards households. The chief gains from free trade typically arise from tougher import competition. The aim of an FTA in Japan should be to increase the efficiency of goods and services provision so that consumers benefit from a more competitively priced product while workers earn more thanks to improved productivity. That’s a heady ideal, and in practice it doesn’t always work like this. The report below examines two key issues: 1) to...

October, 09 2015 by lsr team

Abenomics is a response to frustration with Japan’s poor economic performance since its bubble burst in 1990. But Abenomics treats the symptoms, especially deflation, rather than the disease, which it makes worse. Disastrous consequences of Abenomics have only been avoided so far, because it has failed to generate inflation – courtesy of the oil price slump and Japan’s enfeebled domestic demand. But can QE ever be stopped and more importantly, is Japan about to face a financial crisis? Click below to find out our latest View on Japan.

October, 06 2015 by lsr team

The emerging market (EM) slowdown that started in 2011 and gathered pace after the taper tantrums of 2013 continues unabated. The two questions investors often asked over the last couple of years have been: are EMs heading for a 1990s-style crash and is the worst behind us? We have replied No to both, and the follow-up question has usually been ‘how much more pain is in store?’ This has been tough to answer. Our latest publication - LSR View looks at the extent of the adjustments that EMs still need to make by answering the following set of questions: 1) W...

September, 16 2015 by lsr team

When oil prices crashed last winter, the world’s major central banks were planning to ‘look through’ this development. They argued the impact would be temporary, with inflation quick to rebound. This view has been broadly correct- inflation in developed economies is close to a trough and should rise by early 2016 thanks to favourable base effects. That said, the global economy is clearly more deflationary than policymakers anticipated at the start of the year. Meanwhile, China’s slump has caused a broader EM downturn, which is weighing heavily on...

August, 19 2015 by lsr team

Emerging markets are grappling with deficient global demand, souring domestic fundamentals, a strong dollar and potentially higher US real rates. A lower yuan creates a ‘perfect’ storm for most EMs, at least in the short term.  Our analysis has consistently highlighted Malaysia as one of the more vulnerable Asian economies and the sharp depreciation of the ringgit validates our concerns. The collapse in the global oil price, a sharp increase in leverage and poor FX reserves ammunition are some of the reasons. Besides, idiosyncratic risks have esc...

August, 17 2015 by lsr team

Japan’s Q2 real GDP declined at a 1.6% annual rate, led by consumer spending and exports. While Q1 was buoyant, underlying growth since the start of Abenomics –QE in late 2012 has been no better than on trend. The Q2 contraction would have been a lot worse if the government had not resumed boosting public investment, and government spending in general, to complement continued massive QE. The basic problem in Japan remains that only exports seem capable of generating growth in the economy. Japan has two alternatives: implement structural measures to slash corp...

July, 27 2015 by lsr team

The minutes from July’s RBA meeting confirmed a cautiously dovish monetary stance. Given the subdued inflationary pressures- reflecting sluggish growth and a weak labour market, the downward pressure on policy rate should persist, at least in the near term. At the same time, Governor Stevens is under pressure to protect the economy from a lack of fiscal drive. The end of Australia’s commodity supercycle has far-reaching fiscal implications: government finances are stuck in chronic deficit and foreign debt build up is accelerating. Click below to find out...