Engines of Growth: Global Macro Opportunities in Asia
- In the last edition of the Global Macro Outlook, we looked at central banking policy in the United States and how that would affect general asset classes like equities, bonds and currencies. In this month’s release, we shift our attention to some of the more interesting developments in the Asian Macro sphere, and how we can scour a different macroeconomic landscape for investment opportunities.
- In the most recent months, China has been the subject of intense discussion around the incorporation of Chinese A-Shares into the closely-followed MSCI Benchmark. Furthermore, much talk has gone into the ‘One Belt, One Road’ (OBOR) initiative that is being pioneered by the Chinese government. Interestingly, part of that initiative is providing Chinese corporates with the mandate to invest in high-growth, Central Asian markets like Azerbaijan and Pakistan.
- Although most of the commentary surrounding China at the beginning of 2017 was negative, the hard data coming out this year actually points to better-than-expected domestic growth at approximately 6.9% QoQ. The geopolitical landscape has also been less disastrous for China than previously anticipated at the beginning of the year. Negative forecasts were premised on weaknesses in Chinese Steel, but what we’ve seen since then is strong government clampdowns on excess capacity and, as a result, Chinese steel margins have become very strong. Strong Chinese growth has run-on effects in terms of supporting commodities demand across the supply chains throughout Asia, and this could provide a much-needed uplift in economic activity within the region.
- As we consider some of the macro factors that are driving a lot of the strength in Asia, one way that private investors could express that view is via a proxy currency such as the AUD. The Aussie Dollar is our choice for expression because it stands to benefit, not only from the high correlation that it has with Chinese economic activity, but also from the recent recoveries in key commodities like Iron Ore and Gold. Furthermore, given the relatively risk-on sentiment that we’ve observed in the run-up in S&P prices, the AUD, being a “risk currency”, could benefit from the market optimism.
- In terms of execution, we’ve recently seen a tremendous rally in the Aussie Dollar in no small part due to the multiple macroeconomic currents supportive of AUD strength. In lieu of this price action, we could anticipate a short-term retracement back to the key support level of 0.7750, which for a long time proved to be a major resistance level. From that level, we take a long position with an immediate target at 0.8000, and beyond that, the next key resistance of 0.8200.
- In summary, some of the most exciting investment opportunities in the near-term do not necessarily have to come from the more mature and talked-about economies like the U.S. Meaningful analysis into Asian Markets like China, Japan and India, all of which have seen robust growth in recent months, could reveal trading opportunities with a much better risk-return profile than what one would consider more traditional plays on the global macro environment.
By Nicholas Tan Wei Hong