DOWNUNDER DAILY : DECOUPLED BUT IN SYNCH? - Gerard Minack
There are tentative signs of developed-economy slowdown outside the US. Those signs may not reflect the transmission of US weakness to the rest of the world; instead, growth may be slowing independently, due to tighter policy in other important economies. In other words, this may not be a matter of economic coupling, but the major developed economies may continue to be synchronized. A few thoughts:
First, I continue to believe that for investors (as distinct from economists), the coupling/decoupling debate is a sideshow: Regardless of the economic linkages, the recent correction has again demonstrated that markets remain highly coupled. As a result, if there is a US recession that leads to a bear market in US assets, then risk assets everywhere would suffer whether or not the economies prove to be coupled.
Second, while the evidence for now supports the view that the emerging economies have been able to decouple from slower US growth, the decoupling hurdle would be significantly higher if growth started to slow in Europe and Japan. In that scenario, the issue would be whether the emerging economies can decouple from a broad-based OECD slowdown.
Admittedly, the rest of the world has coped well so far with slower US growth. While overall OECD industrial production is growing at a moderate pace, production in the major emerging economies remains at cycle highs (Exhibit 1). More impressively, production has remained strong in the face of a material slowdown in US import demand (Exhibit 2). It's also notable that for the first time in 20 years, Asian exports have accelerated at a time when US manufacturing orders have slowed (Exhibit 3).
US ECONOMICS: CAPEX RECESSION AHEAD? - Richard Berner
What's New: Coming weakness in US capital spending, and thus at some US capital goods producers, likely will reflect slower growth and tighter financial conditions. Despite those headwinds, strong global demand and a weaker dollar will continue to support the top and bottom line for many high- and low-tech companies.
Conclusions: US capital spending discipline has limited the growth in and sustained "pent-up" demand for US business investment in this expansion. The resulting lack of excess will limit the near-term downside risks and help avert a capex recession. And that discipline should pay off in 2009, when we expect the housing recession to end and the economy to re-accelerate.
Market Implications: Weakness in capital spending will intensify recession fears. But it may also revive the debate over US productivity, potential output, and inflation risks, making a sluggish US economy appear more stagflationary. That may be a recipe for a bearishly steeper yield curve and a challenge to risky assets. Nonetheless, these developments continue to favor outperformance at capital goods producers with high global exposure.
Risks: Even a mild capex downturn could knock half a percentage point off an already-weak prognosis for US growth. Investors may also worry that capital discipline has swung too far towards corporate anorexia, making the domestic portion of US businesses less attractive than their global peers. Relative to our anemic baseline forecasts, however, strong gains in US exports create upside risks to the US outlook.
ASIA PACIFIC STRATEGY: MARKET SNAPSHOT: EARNINGS GROWTH REVISED DOWN - Corey Ng
Earnings growth estimates for 2007 have been reduced from last week's: Earnings growth estimates for 2007 for the MSCI Asia-Pacific Free ex-Japan index were at 14.9% YoY (vs. 15.3% last week), based on bottom-up IBES consensus estimates. Downward revisions were led by Taiwan (-1.8 ppts) and Korea (-1.1 ppts). By sector, Capital Goods and Consumer Durables & Apparel were cut by 4.4 ppts and 3.7 ppts, respectively. See pages 2-6 for details, Also see pages 11-20 for revision trends.
MSCI AC Asia Pacific ex Japan US$ Index increased by 25.3 index points (5.0%) last week. The leading movers are MSCI Australia and China, which contributed 8.4 and 6.7 index points, respectively. Over/Under Contributors: Based on the index weight, MSCI Australia should have contributed 7.2 index points and China, 4.2 index points out of the 25.3 regional index movements. They in fact contributed 8.4 and 6.7 index points, respectively, an over-contribution of 1.2 and 2.6, respectively, according to their index size. MSCI Korea, however, under-contributed by 1.9 index points. See page 8 for details.
Chart of the Week:MSCI China and India have the highest PBV in the region, at 4.2 and 4.1, respectively, for 2007E. At the industry group level, Household & Personal Products (9.2) and Commercial Services & Supplies (8.3) are the most expensive.
