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Editor's Note: Hamish Risk | September 9, 2020
2020 may be remembered as the year of ”peak humans” as the global pandemic results in one of history’s great inflection points, towards automation and digitalisation, argues Vincent Deluard from StoneX. Of course this is already in the price and is clear for all to see in technology stocks across the globe, but what is less clear is what this means for the broad sweeping macro trends of the future. Deluard attempts to take his readers to that place. While many see this shift as deflationary, Deluard argues the opposite, saying it will lead to rising price pressures as migration, global demographic imbalances and generational conflict increase the urge for policymakers to print their economic problems away. Inflation is also on the mind of Quant Insight, which sets out why it is currently the driving force in the currency markets as investors seek to preserve capital. Meanwhile, in Asia, where digitalisation leads the march ahead of the rest of the world, CLSA presents an optimistic analysis of an economic bounce back spurred on by a resurgent digital consumer with Telco and fintech companies the major beneficiaries of the aforementioned trend. This economic recovery is already apparent, as UBS explains why China’s exports are so resilient, even amid all the dark clouds of the US -China trade and tech wars. Already, there are signs of some global economic bifurcation, and as Trivium China Markets points out, China’s upcoming fiscal stimulus splurge, is set to benefit China domestically (and perhaps its neighbours), more than the global economy.
automation demographics digitalization StoneX
1. Peak humans and peak workers: three questions for a dystopian future“Peak humans” will not be caused by an epic battle against cyborgs, but by a steady decline in birth rates, while 2020 will be remembered as the year of “peak workers” says Vincent Deluard of StoneX. He says Covid-19 has accelerated the trends of automation and artificial intelligence and devastated the worker-intensive sectors of retail, leisure, tourism and education. Capital, according to Deluard, is increasingly being funnelled into a handful of tech monopolies with few tangible assets, making long algos and robots and short humans the best trade of 2020. He challenges the consensus that ageing and de-population will be deflationary, however. Deluard points out that the experiences of Japan and Europe show that ageing no longer drives yield lower after rates hit their lower boundary. Furthermore, he says higher medical spending and shrinking tax bases are already busting public finances, which will eventually cause inflation. In addition says Deluard, the rise of “capitalism without capital or workers” reduces governments’ ability to raise taxes. Last, he adds migrations, global demographic imbalances and generational inequalities could eventually lead to conflicts and a desire to “print these unsolvable problems away”.
currencies Inflation Regime change Quant Insight
2. FX, inflation, and the ECB’s dilemmaAs a follow up to yesterday’s briefing, some more thoughts from Quant Insight’s Mahmood Noorani, on the factors currently driving asset prices. As he pointed out, a one dimensional trading environment has emerged in which expectations over fiscal and monetary stimulus are driving asset prices, particularly in equities and bonds, with rates taking a back seat. The one exception, according to Noorani is in FX, where there has been a big regime shift in the dollar, which has put inflation expectations to the fore as an explanation for currency moves in recent months. With the hunt for yield now having evaporated, FX is now about capital preservation he explains, and to the extent that inflation expectations in the eurozone are weak and they are strong in the US, this has been driving force behind the recent rise in EURUSD from $1.05 to the $1.20 level. Noorani says this in turn has created a headache for the European Central Bank, weighing on its ability to inflate away its debt, and is now beginning to bite into eurozone equity performance. The fact that the US economic policy making tends to be more dynamic than in Europe, suggests the determination of the Fed to inflate means the ECB may just have to live with a currency at a higher level than it necessarily wants, he adds. Going forward, Noorani identifies two factors that may cause a regime shift more broadly across asset markets – namely a return of the bond vigilantes or a Democrat victory in November’s US presidential election.
ASEAN consumer COVID-19 CLSA
3. ASEAN – Living with Covid; consumers on the marchCovid has hit Asean economies hard and the road to recovery is a daunting one, says Sue Lin Lim at CLSA, who has issued a report assessing the outlook for economies, sectors and businesses in the region as they adjust to living with the coronavirus. She says while each country differs in how the pandemic has impacted them and their response to it, she has identified clear commonalities and drawn from them a list of potential winners and losers. Lim explains why she expects consumer staples and telcos to recover first with fintech following close behind; while tourism, gaming and construction will continue to struggle. For the most part, Asean countries have dealt with Covid relatively well with many now coming out of strict lockdowns, she says, and while any further opening up is likely to be cautious, consumers are on the march. Many, according to Lim, are heading back to malls and an ever increasing number are buying online. As such, she expects this sector to recover first but some subsectors – including discretionary – may take longer than others. As ecommerce grows it opens the door for fintech to expand as traditional banks and new players race to offer platforms for online banking, ewallets and epayments, adds Lim. She says providing the backbone to all this are the telcos, which she expects to continue to see huge surges in usage and demand for data.
China Global trade UBS
4. Why are China’s exports so strong?Tao Wang at UBS has put out a examining the reasons behind the strength of China’s resilient export sector after figures showed the country’s China’s exports grew by 9.5% year on year in August, beating market expectations again. Recent export strength has been driven mainly by shipments to developed markets, including the US, she says, with protective equipment and medical equipment, as well as electronics products the predominant drivers of China’s performance. As to why has China been able to gain export market share globally – and even in the US – Wang says timing and base effects matter since China was hit by and came out of Covid-19 first, and exports to the US declined sharply in 2019 due to the trade war. In addition, she says China’s supply chain resilience and adaptation to supply chain restructuring may have helped, as evidenced by its exports to Taiwan and Vietnam. Going forward, Wand believes China’s exports should benefit from a gradual recovery in global demand but may face increased competition as other producers come back online. Indeed, she now expects China’s 2020 exports to come in largely flat from the 2019 level, as export growth stays in the low-mid single digits for the rest of 2020.
China economy fiscal stimulus Trivium China Markets
5. Why China’s fiscal bazooka is firing blanksFiscal data coming out of China doesn’t get a lot of attention relative to the credit numbers, but this is where investors’ focus should be for the remainder of the year according to Trey McArver at Trivium China Markets. He notes Chinese policymakers’ effort to transition away from monetary and credit-led stimulus toward direct on-budget fiscal channels to support the economy is hitting roadblocks, with fiscal expenditure so far this year significantly lagging the target for 2020 set in the May budget. Despite the slow progress made so far, policymakers are doubling down on their efforts to put their planned fiscal bonanza into play, however, says McArver. If policymakers succeed in their ambitions, fiscal spending will rise substantially in the final five months of the year, he says, but the impact on the wider economy from this spending will likely be limited. As McArver explains, this is because fiscal expenditure is being channelled into areas like education, 5G, and healthcare, and not simply being splurged on infrastructure. Investment in these areas, he notes, has less of a knock-on effect for other sectors and provides less of an immediate boost to the wider economy. If all goes to plan, investors can expect a moderate fiscal boost to growth in the coming months, says McArver, but not a “rising-tide lifts-all-boats situation”. Rather than betting on the traditional stimulus destination of infrastructure or a renewed surge in aggregate economic activity in China, he adds, investors would do better to follow the money into specific areas like healthcare and telecommunication.