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.
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.
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.
Asian stock ideas
The Value Pendulum on Chinese pharma distributor Sinopharm
Roddy Boyd on NASDAQ-listed Kazakh brokerage firm Freedom Holdings
Aurelius calls GSX Techedu a “complete and utter fraud”
Articles worth reading
Evergreen-GaveKal are bullish on the RMB
Associated Press: President Xi ordered new restrictions on COVID-19 research
EU and China agree to investment pact
US State Department excluding Chinese military linked companies from indices
China forces drugmakers to slash prices 51% to get on insurance list
SCMP: China’s loan rejection rate in the fourth quarter of 2020 increased to 38%
Hudson Institute: China’s take-down of HK is part of a strategy of world domination
All major Western media outlets take ‘private dinners’, ‘sponsored trips’ from Chinese Communist Propaganda front
WSJ: HK activists sentenced to prison in China for attempt to flee by speedboat
WSJ: China envisions its digital-currency future, with lotteries and a year’s worth of laundry
WSJ: How the US misread China’s Xi: Hoping for a globalist, it got an autocrat
Japan official, calling Taiwan 'red line,' urges Biden to 'be strong'
Zerohedge: How the Chinese use illegal online gambling and tether to launder over 1 trillion yuan
Bloomberg: Mainland cash chasing Hong Kong stocks after record year
Alibaba probe stirs worry about what’s next for Chinese tech
Bloomberg: Vietnam imposes tariffs of 25% on steel from China
How Thailand is increasingly turning to censorship to crack down on dissent
Five things to watch in Japanese politics in 2021
Podcasts and videos
Chinese accounting professor Paul Gillis interviewed by Dan David
Jim Rogers: On gold vs bitcoin, America v China
Anthony Wong from Allianz on investing in Chinese A-shares
Chart of the week – Hong Kong’s headcount in the financial services industry has gone up significantly but remains smaller than in the UK and the US
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