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

DSG Asia Kicking The Can Down The Road Khazanah Megatrends Forum Simon Ogus October, 2010 simon@dsgasia.com; www.dsgasia.com DSG Asia 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 Global Nominal Money and Credit Growth The Square-Root “Recovery” 14% 14% % YoY 3MMA 12% 12% Private Domestic Non-Financial Credit 10% 10% 8% 8% 6% 6% 4% 4% Broad Money 2% 2% 0% 0% Global includes US, Euroland, UK & Japan -2% -2% 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 DSG Asia 2 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 Real Unit Labour Cost-Based Trade-Weighted Exchange Rates Real Unit Labour Cost-Based Trade-Weighted Exchange Rates 180 180 180 180 January 1990 = 100 January 1990 = 100 160 160 160 160 Non-Germany Japan Japan Euro Area 140 140 140 140 Euro Area 120 120 120 120 100 100 100 100 USA 80 80 80 80 Germany China 60 60 60 60 Asia ex China Korea USA, Japan and Euroland IMF/Official Calculations; ex Japan Asia* and China DSGAsia Calculations * ULC-based where available, WPI-based otherwise 40 40 40 40 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 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 DSG Asia 3 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 Government Debt as a Percentage of GDP Sectoral Holdings of Central Government Debt 100% 240% (June 2010) Asia ex-Japan* Asia ex-Japan, China & India* Sectoral Holdings of Central Governement Debt (Jun 2010) 220% 90% USA** Euroland 200% UK Japan (RHS) 80% Central Bank 7.9% 180% 70% 160% Private Sector General Government 39.3% 11.3% 60% (of which Foreign 140% holdings 6.1%) 50% 120% Postal Savings 100% 20.8% 40% 80% Public Financial 30% Institutions Public Life Insurance 60% 9.8% 0.3% 20% Public Pension Funds 40% and CMTs 10.6% 10% 20% * Excluding central bank paper Source: Japanese Government Flow of Funds Data Source: Japanese Government Flow of Funds Data Source: Japanese Government Flow of Funds Data ** USA 2008 84% of GDP if State and GSE debt is Forecasts from the IMF 0% 0% A 2009 Rogoff-Reinhart study notes that if public debt exceeds 90%, median growth rates fall by 1% and average growth rates by more DSG Asia 4 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 Asia Exports and OECD Industrial Production Asia ex Japan Exports & EPS Growth and the US ISM Manufacturing PMI 40% 12% 50% 65 OECD Exports USD %YoY, 3MMA, EPS Asia Ex-Japan Index 3MMA market cap/MSCI weighted %YoY Industrial Exports (LHS) Asia ex-Japan 9% Production 40% Exports (LHS) 30% 60 (RHS) 6% 30% 20% 55 3% 20% 0% 10% 50 -3% 10% 0% 45 -6% 0% Asia Ex-Japan Exports Volumes (LHS) -9% -10% 40 US ISM -10% Manufacturing -12% PMI (RHS) -20% 35 -20% -15% Asia ex-Japan EPS Growth (LHS) USD %YoY, 3MMA %YoY, 3MMA -30% -18% -30% 30 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 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 DSG Asia 5 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 Export Volumes Export Volumes 300 300 180 180 Japan Korea Hong Kong (Domestic) Singapore (Non-Oil Domestic) Taiwan China Malaysia Thailand 270 270 160 160 240 240 140 140 210 210 120 120 180 180 100 100 150 150 80 80 120 120 60 60 90 90 40 40 Index 2004 = 100, Index 2004=100, 3MMA 60 60 20 20 04 05 06 07 08 09 10 04 05 06 07 08 09 10 DSG Asia 6 Independent Asian Economic & Political Analysis

China may well be cyclically over-invested but it remains structurally under-invested Fixed Investment as a % of GDP USD Capital Stock Per Capita, 2009 Prices 50% 50% 210,000 China China Japan USA 45% 45% 180,000 40% 40% 150,000 US 35% 35% 30% 30% 120,000 25% 25% 90,000 20% 20% Taiwan 15% 15% 60,000 Japan 10% 10% Korea 30,000 5% 5% 0 0% 0% 1955 1970 1990 2009 1834 1842 1850 1858 1866 1874 1882 1890 1898 1906 1914 1922 1930 1938 1946 1954 1962 1970 1978 1986 1994 2002 2010 DSG Asia 7 Independent Asian Economic & Political Analysis

The Malaysian private corporate sector has been disinvesting; the household and government sectors have been gearing up Household Debt / Disposable Personal Income Investment as a Percentage of GDP 45% 200% 200% Malaysia's net FDI has averaged only 0.2% 1989-97 1998-09 p.a. since 1998, and -2.8% p.a. since 2007 Australia 40% 180% 180% 160% 160% 35% Korea Thailand 140% 140% 30% Malaysia China 120% 120% US 25% 100% 100% 20% Japan 80% 80% 15% 60% 60% 10% 40% 40% Thailand Malaysia 5% 20% 20% China 0% 0% 0% Total Private Public Inward FDI Total Private Public Inward FDI Total Private Public Inward FDI 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 DSG Asia 8 Independent Asian Economic & Political Analysis

A huge current account surplus is perhaps more a sign of weakness than strength Asia ex Japan & China: Balance of Payments as a % of GDP Malaysia: Balance of Payments as a % of GDP 8% 8% 40% 40% Trade Account Current Account Trade Account Current Account Net FDI Basic Balance* Net FDI Basic Balance* Implied Other Capital Foreign Exchange Reserves Implied Other Capital Foreign Exchange Reserves 6% 6% 30% 30% 4% 4% 20% 20% 2% 2% 10% 10% 0% 0% 0% 0% -2% -2% -10% -10% * DSGAsia Robust Definition: Current Account Plus Net FDI * DSGAsia Robust Definition: Current Account Plus Net FDI -4% -4% -20% -20% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 DSG Asia 9 Independent Asian Economic & Political Analysis