Page 4: True Partner Fund - Volatility update 01-2017
Traveling into Asia, we enter the realm of the collateral damage. This is where the June 2013 ‘Taper Tantrum’ springs to mind. Whereas in the US, the rhetoric was all about the possible detrimental effects of rising interest rates, the emerging Asian economies were already impacted on a day to day basis. Massive outflows from Emerging Market Equity and Emerging Market Bond ETF’s triggered severe declines in their underlying capital markets. Then as now, local companies with excessive US Dollar denominated debt appear caught out in the combination of rising rates and appreciating Dollar. In 2013, the risen US interest rate reverted back to its downward trajectory and subsequently markets calmed down. However, in our opinion, the current relative quiet across Asian markets is the proverbial calm before the storm. If Trumponomics is the cause of rising US interest rates, there is less of a trigger for rates to revert down. Moreover, the Fed has started on a hiking trail as well, albeit slowly.
For the main markets, some individual aspects might result in different development over the coming year. For China and Hong Kong, the interest rates will be the main event. The Hong Kong real estate market, crowned as the world’s most unaffordable for the past years, is based on floating rate mortgages pegged to US interest rates. Increased mortgage payments could lend new meaning to the term unaffordable. For China, higher US rates and a declining Yuan will only increase the desire of capital to flow out of the country. China indeed appears to be manipulating its currency, but Trump has the direction wrong. A free-floating Yuan would most likely resemble a brick in water. And in the background, the governance conflict for Hong Kong escalates. This in turn is not helping cross-strait relations with Taiwan, where Ing-Wen Tsai would be reinforced in her more critical chance on China, which subsequently results in more of a chill out of Beijing.
Korea: Balance sheet vs. Politics
Korean companies look to have stronger balance sheets this time around, but the political situation could become a spoiler. With a 4% approval rating and millions marching in the streets of Seoul, GyunHye Park’s presidency can be considered over. This tends to beg the question as to what the Northern neighbors are up to in this temporary void.
Japan: Deflate, inflate
Japan seems to be in an opposite situation, where after throwing the kitchen sink and more at attempting to deflate its economy, Bank of Japan president Kuroda might now be aided by the situation in the US. Finally, the Japanese Yen seems to nestle weaker than 110 to the US dollar. But how will it fare should its major trading partners (mentioned above) be captured in a negative swell? And speaking about unaffordable, one can hardly fathom the damage to the Japanese finances should reflation indeed occur and with JGB interest rates going up accordingly.
Finally, the main story for Australia will be commodities. Quite a lot of infrastructure building appears to be priced into the commodity space, leaving some room for disappointment. With both personal and corporate indebtedness high as a hangover from the boom years, the margin of error is limited.
All in all, the picture remains similar to the previous years with a mapping of potential market moving events, which could at any time be supplemented with known or unknown low probability events. These could be unwelcome; such as acts of God or the occurrence of terrorism, or welcome in the form of technological changes that both improve the world, but also rapidly disrupt markets and industries.
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Published by Ralph van Put
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