Asia links 31 Dec 2020: Predictions for 2021

Dec 31, 2020

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Prediction #1 – Cyclicals will do better than “work-from-home” stocks

“Work-from-home stocks” have done incredibly well since the pandemic. E-commerce operators, remote working software companies, grocery stores, pharmaceutical companies, FMCG companies, etc. But with vaccines being distributed across Asia in 2021, it looks like we’re nearing the end of the pandemic. Cyclicals on the other hand have suffered immensely, in particular in energy (oil & gas), financials (Korea, Thailand), hotels, property developers, auto retailers, steel producers, etc. I think cyclicals will do well as old consumption patterns re-emerge. In addition, China is experiencing a new credit cycle. And I think the growth in total social credit will stay elevated until July 2021, when the 100 year anniversary of the Chinese Communist Party takes place. Optics are important for communists. So mass distribution of vaccines, a new Chinese credit cycle and a resumption in outbound tourism should probably be positive for cyclical stocks across Asia.

Bloomberg’s “Work-From-Home Index” of COVID-19 beneficiaries

Prediction #2 – Government bonds will suffer into a recovery

Longer-term interest rates tend to be correlated with nominal GDP growth. And now that economic growth is picking up across Asia, we should probably see interest rates moving up again. Chinese rates have already recovered to pre-pandemic levels, whereas that is not yet the case for India, Indonesia, Singapore and several other Asian countries. There are further reasons to suspect higher bond yields going forward: Japan and US M2 money supply growth has gone parabolic. Other Asian central banks will have to ease as well, or risk upward pressures on their currencies. Second, I believe the risks of a conflict over Taiwan are elevated in 2021, due to record PRC stockpiling of commodities, a ramp-up in the PLA marine force and Biden becoming a President in the United States. Even if we don’t see actual warfare, the implied threat forces the region to ramp up its defense spending. Such spending typically leads to higher budget deficits and higher inflation. And lastly, The People’s Republic has just opened up the Pandora’s Box of potentially inflationary Central Bank Digital Currencies. I keep telling friends & family - whatever you do, don’t keep all your money in bank accounts or fixed income securities.

10-year government bond yields for a number of Asian countries

Prediction #3 – We are witnessing the start of a new bull market in oil & gas stocks

The demand for oil will probably recover as air travel resumes throughout 2021. I think we should be expecting Brent in the $60-65 range before 2021 is over. Oil prices are obviously volatile. Small changes to supply & demand can cause incredible drops (as we saw in 2014 and 2020) and incredible spikes (as we saw in the 1970s and in the late 2000s). US shale oil exploration has been weighing the market since 2014. In the past two years however, productivity of shale oil wells has started to deteriorate. Decline curves for shale oil wells are much worse than those of conventional wells. US shale oil E&Ps are downplaying the problem through aggressive accounting of depreciation. But investors won’t support loss-making shale oil exploration forever. Meanwhile, in the rest of the world, exploration capex is at multi-decade lows. And it will get worse as Biden restricts drilling on federal land. So that sets us up nicely for a recovery and perhaps even a bull market for oil & gas stocks. A more inflationary climate and perhaps even a war, would turbo-charge these stocks even further.