Group Research

30

25 May 2018

Economics & Strategy Research

DBS Monthly

Damage assessment

Taimur Baig Chief Economist taimurbaig@dbs.com

Irvin Seah Economist irvinseah@dbs.com

Please direct distribution queries to Violet Lee +65 68785281 violetleeyh@dbs.com

• Economics: Growth divergence among

developed economies (with the US pulling

away from EU and Japan) is guiding flows.

With the USD and US rates heading up,

emerging market economies with large

external funding needs are under considerable

pressure; we expect no near-term respite. In

Asia, India, Indonesia, and Malaysia are the

most vulnerable to capital outflows, in our

view. The policy makers of these economies

would have act judiciously and expeditiously to

mitigate macro risk.

• Rates: Asia fixed income is facing pressure with

total USD returns largely in negative territory.

Central banks are not keen to follow the Fed,

but we see some capitulation ahead.

• FX: The worst is not over in the euro and

emerging Markets currencies. While not

immune, Asian currencies have proven

resilient. Yet, there little room for complacency

at a time when markets prefer decisiveness

over denials in addressing macro-stability risks

• Credit: We maintain our recommendation to

focus on high quality credits and on relatively

shorter tenors.

• Equities: Asia markets total return outlook will

be eroded by a strong USD. For now, we believe

that it is too early to conclude that the worst is

over as we expect the USD to strengthen

further, and EM ASEAN equities are likely to

bear the brunch of further de-risking

Monthly 25 May 2018

Page 2

Economics: USD funding needs under focus

It has been a bruising month for global markets, with no

respite in view in the near-term. The factors that led the

period of stress to begin, geopolitical tension, trade wars,

rising rates, rising oil price, and strengthening USD,

continue to play out. On the growth front, the ongoing

divergence between the US (which is tracking a strong

2Q) and EU/Japan (both faltering) is supportive of

continued strengthening of the USD.

We had anticipated the move in USD and US rates (See

our April Monthly), but the developments have been

striking nonetheless. No Asian currency has managed to

appreciate against the USD since the last week of April

(see chart below), with the Indian rupee and Indonesian

rupiah the weakest. The Philippine peso, under pressure

from the beginning of the year, has in fact pulled away

from the weak part of the spectrum in the past month.

We credit this to its greater resiliency to the Philippines

authority’s prudent energy pricing policy (of full price

passthrough). Meanwhile, concerns about deficits (fiscal

and current account), subsidy, inflation volatility (timing

and magnitude of fuel price hike) have inevitably hurt the

rupee and the rupiah. Due to its election related

developments and associated policy uncertainty, the

Malaysian ringgit has also been sold recently, although it

is still up for the year. Tellingly, two of the strongest

currencies this year, the Chinese renminbi and Japanese

yen, also joined the depreciation fray this month.

USD strikes back

Source: Bloomberg, DBS

Looking at the ongoing financial market pressure on

Argentina and Turkey, clearly the markets are worried

about economies with large USD funding needs at a

time when the USD and US rates are heading up. Here in

Asia, USD funding reliance is not as acute as the

countries under severe pressure, but the needs are not

trivial by any means. The following chart shows USD

denominated bonds and loans falling due this year and

next for selected Asian economies. We scale the

obligations by central bank FX reserves to make

comparison easier. By this metric, Indonesia and

Malaysia have the largest burden to deal with in Asia.

USD-denominated debt due in 2018-19

Note: Bonds and loans owed by public sector, as well as

financial and non-financial corporations. Source: IIF, DBS

The case of Malaysia is particularly important. Even

without political noise, the economy would have faced

refinancing risks this year, and now the matter is

complicated further. Among Asian emerging market

economies, only Malaysia’s financial sector has

substantial loans from abroad (40% of total refinancing

requirement). Given that banks are the key source of

intermediation for the economy, the disproportionately

large reliance on external debt poses considerable risk

at this juncture.

Malaysia’s saving grace could be a still-buoyant exports

sector, helped by rising oil prices. Some policy slippage

could therefore be accommodated by the markets, but

the margin of error is going to be tight for most

economies in these challenging circumstances.

Taimur Baig

Monthly 25 May 2018

Page 3

Malaysia: Post election challenges

Uneven growth in 1Q18

The Malaysia economy grew 5.4% YoY in 1Q18, exactly in

line with our forecast and below the 5.6% consensus.

However, it is not the pace of growth that is of concern

but rather, the quality of growth that is worth noting.

Growth has turned out to be less broad-based and the

outlook now appears uncertain after factoring in the

impact of post-election policy changes.

Limited boost to consumption from ending GST

Private consumption remained a key driver of growth.

Growth was relatively stable at 6.9% YoY in 1Q18 vs 7.0%

in the previous quarter. Consumers loosened their purse

strings amid an improving labour market and a slew of

generous budget measures introduced ahead of the

general election.

The removal of the 6% Goods and Services Tax (GST), with

effect from 1 June, have lifted hopes for more

consumption. However, we may need to temper

expectations here; consumers may not necessarily

frontload their expenditure in response to a permanent

tax cut.

Besides, any lift from higher private consumption growth

on GDP would also be transient due to base effect. And

Malaysia’s high household debt to GDP ratio of 84.3%

could also temper the propensity to consume.

Furthermore, government spending growth has already

slowed to just 0.4% in 1Q18 from 6.8% in the previous

quarter. Some negative spillover into consumption is also

likely from incoming efforts to reduce government

spending to make up the shortfall in GST revenue.

Investment remains a drag on growth

Concerns have also emerged over the drag from

investment on GDP growth. Sharp inventory destocking

and moderation in Gross Fixed Capital Formation (GFCF)

to 0.1%, from 4.3% previously, have led to a decline in

investment (-9.1%). The downside risks from a high base

last year will be particularly evident in public investment.

Though stronger consumption growth could spur private

investment, the need to plug the fiscal gap from the

removal of the GST could impact public sector investment

adversely. The government will be reviewing the existing

pipeline of infrastructure projects and is expected to

tighten the belt on some government agencies in a bid to

make up for the shortfall in the loss of GST revenue. This

could imply immediate delay in disbursement of fund and

potentially even cut back in public investment. The

impact could be significant given the huge fiscal gap to be

filled.

The GST added MYR 44.3bn to the official coffers in FY17

with another MYR 43.8bn projected for FY18. The

reintroduction of the Sales and Services Tax (SST) will not

be able to offset this shortfall. Before the introduction of

the GST in 2015, the SST contributed MYR 17.2bn in tax

revenue in 2014. Assuming that the SST adds some MYR

20.8bn to revenue this year, there could still be a shortfall

of around MYR 23bn (or 10.6% of total revenue based on

budget FY17).

0

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 2013 2014 2015 2016 2017

GST Sales and Services Tax combined

Gap in revenue contribution

Potential shortfall of

MYR 23.5bn (10.6 of total revenue)

Refer to important disclosures at the end of this report.

70

72

74

76

78

80

82

84

86

88

90

2010 2012 2014 2016

Household debtto GDP

Household debt to GDP ratio eased but still high

%

Monthly 25 May 2018

Page 4

To achieve the fiscal deficit of 2.8% of GDP, the

government will need to cut back public investment and

spending. In doing so, GDP growth could be affected.

Fiscal boost from higher oil prices tempered by possible

increase in fuel subsidies

Oil prices have recently hit a multi-year high of

US$74/bbl, well above US$52 assumed in Budget FY18.

We estimate that this could add another MYR 5.4bn to

the official coffers.

Yet, another campaign promise is the reintroduction of

the fuel subsidy to ease the pain of the people from high

oil prices. This could potentially erode an expected

windfall from petroleum tax revenue collection. The

timing of the policy change will have bearing on the fiscal

position. Ideally, the fuel subsidy should only be

introduced when fiscal rationalisation associated with

the removal of the GST is sufficiently addressed.

Don’t pin too much hopes on net exports

While the spike-up in net exports in 1Q18 has buttressed

overall GDP growth, the boost came largely from a

decline in imports (-2%) even as exports moderated to

3.7% versus 6.7% previously. Although higher oil prices

and a potentially weaker MYR could boost export

performance, the price effect may not be manifested in

real GDP growth. Global economic conditions are also

normalizing, implying limited upside on external demand.

Furthermore, ongoing trade tension and financial

volatility could also throw a spanner into the works on

the external front.

Conclusion: an uncertain outlook

Barring external risks, uncertainties have now emerged

with the latest changes in government policies. Any

upside in consumption resulting from the zero rating of

the GST could potentially be eroded by lower public

spending and investment. Focus will now be on the fiscal

rationalization process and expectation is that there

could be more policy changes ahead. The timing of

subsequent policy changes would also be crucial in

determining the impact on the fiscal position and growth.

Until we get more clarity and details of the incoming

policy changes, we are maintaining our below consensus

forecast for GDP growth to slow to 5.0% in 2018-19.

Irvin Seah

20

30

40

50

60

70

80

90

100

110

120

2014 2015 2016 2017 2018

Oil prices - brent

USD/bbl

Latest: Apr18

USD 52/bbl

(Budget assumption)

Oil price rising

Monthly 25 May 2018

Page 5

Will the Sino-US trade negotiations hurt S Korea and

Taiwan?

According to the result of the latest round of Sino-US

trade talks concluded in Washington on 20 May, China

will “significantly increase” its purchases of American

goods and services to reduce the trade imbalance with

the US. The agreement lowers the risk of US and China

imposing tariffs on each other’s exports, which alleviates

the earlier concerns about an indirect decline in South

Korea’s and Taiwan’s exports as a result of falling Chinese

exports. Having said that, China’s commitment to

increase imports from the US raises new questions as to

whether South Korean and Taiwanese exporters will be

squeezed by the US counterparts in the Chinese market.

China may need to divert some imports from other

trade partners to the US, if required to address trade

imbalance with the US by a large amount within a short

period. Stimulating domestic demand and enlarging the

overall size of imports carry the risks of aggravating

China’s debt problems and causing overheating.

Meanwhile, given the sharp narrowing in China’s current

account surplus (1.3% of GDP in 2017), spurring domestic

demand and boosting total imports would also put

stresses on the external balance and the RMB.

On the surface, diverting imports from South Korea and

Taiwan to the US will be an effective way to help China

reduce trade imbalance with the US. While China enjoys

a trade surplus worth about USD 300bn with the US, it

runs large trade deficits with Asia’s advanced economies

at the same time. The annual trade deficit with Taiwan

amounted to USD 111bn in 2017, while that with South

Korea was also large at USD 75bn.

A closer look, however, suggests that it may not be easy

for China to substitute imports from South

Korea/Taiwan with US products in the short term.

China’s trade deficits with South Korea and Taiwan

largely stem from the high-tech sector. South Korea and

Taiwan are China’s biggest suppliers of machinery and

electrical equipment, accounting for 18% and 16%,

respectively, in China’s related imports. This is far above

the US’s share, which stands at only 5%.

Note that China’s tariffs on electronics imports are

already close to zero today, thanks to the trade

liberalisation under the WTO framework. China’s high

reliance on electronics imports from South Korea and

Taiwan is partly structural, owing to their geographic

proximity, close investment ties, and the establishment

of an intertwined and sophisticated regional electronics

supply chain over decades. It is also a reflective of the

intra-company supplies, i.e., the purchases of key

components by the South Korean/Taiwanese electronics

firms based in China from their parent companies.

Meanwhile, the US’s relatively low share in China’s

electronics imports is partly due to its intended

restrictions on high-tech exports to China, amidst the

concerns over national security and technology transfer.

Should China further remove trade barriers to facilitate

the US imports, the impact would be largely reflected in

Refer to important disclosures at the end of this report.

-150

-100

-50

0

50

100

150

200

250

300

2000 2003 2006 2009 2012 2015

US EU Japan

Korea Taiwan ASEAN

USD bn

China: Trade balance with key partners

0

2

4

6

8

10

12

14

16

18

20

Taiwan Korea Japan Germany US

China: Imports of machinery and electrical equipment,

by source

% share

Monthly 25 May 2018

Page 6

non-electronics products. These may include footwear,

textiles, fuels, agricultural goods and metals – the US-

made products are subject to relatively high effective

tariffs in the Chinese market at present (Table below).

These are not the key items that China imports from

South Korea/Taiwan (10%/5%, vs the 55%/70% share of

machinery and electrical equipment). As such, the

substitution effect should be limited.

For the time being, the amount and the timeframe of

China’s planned increases of US imports remain unclear.

The earlier media reports showed that the US has

requested China to reduce bilateral trade imbalance by

USD 200bn by the end of 2020. But China denied that it

has accepted the US’s request. Product-wise, China has

so far reached consensus with the US to increase the

purchases of agricultural and energy goods. The high-

tech products were not mentioned. Regarding whether

and how much South Korea and Taiwan would be

affected, much will still depend on the concrete details of

the ongoing Sino-US negotiations.

Ma Tieying

Table: China’s imports from the US and the world, by product (2016) US World

Value (USD bn)

Share in Total

Imports (%)

AHS Weighted Average

Tariffs (%)

Value

(USD bn)

Share in Total

Imports (%)

AHS Weighted Average

Tariffs (%)

All products 135 100 6.3 All products 1588 100 3.5

Mach and Elec 29 21.1 2.9 Mach and Elec 553 34.8 1.7

Transportation 27 20.2 13.2 Fuels 177 11.1 0.9

Vegetable 17 12.4 4.1 Chemicals 109 6.8 4.5

Chemicals 13 9.7 5.9 Minerals 99 6.2 0.1

Plastic or Rubber

7 5.3 7.3 Transportation 97 6.1 14.8

Metals 5 3.4 5.5 Metals 79 5.0 3.5

Animal 3 2.1 10.8 Plastic or Rubber 75 4.7 6.1

Food Products 3 2.0 13.0 Vegetable 62 3.9 4.9

Fuels 2 1.8 4.9 Textiles and Clothing

28 1.8 7.8

Minerals 1 1.1 0.4 Animal 22 1.4 8.3

Textiles and Clothing

1 1.0 10.6 Food Products 20 1.2 11.5

Footwear 0.1 0.1 15.8 Footwear 3 0.2 6.8

Sources: World Bank, DBS

Monthly 25 May 2018

Page 7

Rates: Waning risk appetite

Risk appetite across the emerging market space has

waned as USD rates stay high. With US inflation gauges

closing in or above 2%, the market has become

increasingly convinced that the Fed will be able to deliver

another rate hike in June. As yield differentials come back

into play, the USD has rebounded contributing to the

challenging environment facing emerging market bonds.

For now, the market is largely focused on the selloff in

Argentina and Turkey. In both cases, the central banks

were forced to hike rates aggressively to defend their

currencies. While idiosyncratic reasons have been

plaguing these two economies, these large financial

market adjustments are having spillover impact unto the

rest of the EM complex. The past three months have

been tough for EM bonds, but we are not convinced that

the worst is over just yet.

Asia fixed income is facing similar pressures with total

returns (in USD terms) largely in negative territory.

India, Indonesia and the Philippines (three of the highest

yielders) bore the brunt of the selloff. The specifics

impacting each country differ (budget, external funding,

or overheating risks) but the policy implications point in

the same direction – there is greater pressure on these

central banks raise policy rates (the Philippines hiked

rates for the first time since 2014). Investors are now less

tolerant of macroeconomic risks and are keeping an eye

out on interest rate differentials with the US. On a

separate note, Malaysia kept policy rates steady amidst

political uncertainty after the opposition took power in

the General Elections.

Amongst the markets we track, only three (China, Korea

and Japan) registered positive total returns (using each

economy’s respective iBoxx index) in USD terms. The

outperformance of Chinese government bond is perhaps

not surprising given that the People’s Bank of China cut

the reserve requirement ratio in late April, leading to a

level shift lower in the yield curve. However, yields at

current low levels are unlikely to be sustained. For Korea,

easing geopolitical tensions and a realization that the

Bank of Korea (BoK) may not be in a hurry to raise rates

have benefited KTBs. Lastly, the Bank of Japan’s (BOJ)

hold on the yield curve has not wavered despite the

selloff across global bonds this year.

The outlook for EM sovereigns remains challenging. The

populist stance from the new Italian government and

worries about the Turkish elections in June are going to

weigh on already weak risk appetite. On balance, room to

keep rates low is narrowing. While longer-term EM rates

have generally underperformed, shorter-term rates are

already follow higher as domestic rate hike expectations

get priced in. Against this backdrop, the beneficiaries are

going to be the traditional safe havens of USTs, German

Bunds and JGBs for the short term. Beyond the bout of

volatility, we still think that interest rates (especially

those in the G3) are likely to grind higher. The Eurozone

and Japan would likely embark on their own monetary

normalisation path, joining the US in dragging the centre

of gravity for developed market interest rates higher.

Eugene Leow

-10

-8

-6

-4

-2

0

2

4C

NY

KRW

USD PH

P

HK

D

MYR JP

Y

SGD

AU

D

GER

THB

INR

IDR

FX return in USD

Bonds total return (lcy)

% chg

3M Total Return Indices & FX Returns (vs USD) For Sovereigns

Dated: 25 May 2018

Source: Bloomberg, DBS transformation

80

85

90

95

100

105

2.00

2.25

2.50

2.75

3.00

3.25

Jan-17 Jul-17 Jan-18

Rising US yields & strong USD is bad for sentiment

% pa

DXY Index (rhs)

10Y UST Yield

Index

Source: Bloomberg

Monthly 25 May 2018

Page 8

FX: chills in Europe and Emerging Markets

The euro is not out of the woods yet. The situation

appears to have reversed for euro bulls. About the same

time a year ago, the euro was recovering with the

economic growth in the Eurozone after the French

presidential elections (on 23 April and 7 May) rejected

the far-right opposition. Speculators were at the cusp of

turning their net short euro positions into record longs

then, which in turn, led euro to its three-year high around

1.25 in the first quarter of this year.

Over the past month, the euro has sharply retreated

from 1.24 to below 1.18 on a downward adjustment in

the bloc’s growth outlook for 2018. In the past week, the

anti-establishment Five Star Movement and the

ultranationalist League has come together to form a

populist and Eurosceptic coalition government in Italy.

With its “Italy First” agenda resembling Brexit and

Trump’s policies, the new Italian government is set to

put Europe’s third largest economy and second most

indebted country on a collision course with the

European Union.

Emerging market (EM) currencies get the chills. Higher

US interest rates and rising oil prices are not the only

factors responsible for the misfortunes in the three

hardest hit currencies this year – the Venezuelan Bolivar,

the Argentinian peso and the Turkish lira.

Higher oil prices did not prevent a meltdown in

Venezuela. Investor confidence was lost after the

government defaulted on some of its debt and resorted

to printing money and wage increases to gain support for

President Nicolas Maduro’s re-election on 13 May. The

bolivar has collapsed to 78,652 in May from 9.95 in

January. Inflation has soared to 13779% YoY in April.

Overheating worries have driven the Turkish lira down

20% ytd to a new record low of 4.71 on 24 May. This was

despite the unscheduled 300bps rate hike to 16.5% on 23

May. The economy suffers from twin (current account

and budget) deficits and double-digit inflation. Moody’s

cited “faltering institutional strength” for its single-

notch debt rating downgrade to Ba2 on 7 March. Other

rating agencies are also concerned about effective

policymaking under President Erdogan; many assume

that he would win the snap election on 24 June. Standard

& Poor’s has, on 1 May, brought its rating one notch

below Moody’s rating to “BB-”. Fitch may need to play

catch up with its rating currently at “BB+”. Turkey has

potential to hurt the euro. Some of the largest foreign

holders of its debt are EU countries.

Sharp rate hikes did not stop the Argentinian peso from

quickening its depreciation. The policy rate increased

thrice between 27 April and 4 May to 40% from 27.25%

but the peso fell to 24.3 from 21.7 thereafter. Fearing for

its economy, Argentina has requested an exceptional

Stand-By Arrangement with the International Monetary

Fund (IMF). If successful, Argentina will be an example

to Turkey and other EM countries that decisiveness (e.g.

reforms) and not denials (e.g. accusations of speculation)

will be required to address macro-stability risks.

While not immune, Asia ex Japan (AXJ) currencies have

been resilient to EM stress. The falls in the three weakest

currencies – the Indian rupee (24 May: -6.5% ytd), the

Philippine peso (-5.2%) and the Indonesian rupiah (-4.1%)

– are modest compared to Venezuela, Turkey and

Argentina.

Yet there is little room for complacency. Like its troubled

EM peers, India, Indonesia and the Philippines also suffer

from twin deficits. The Philippines needs to rein in

inflation back into its official 2-4% target. In India, higher

oil prices pressure the trade deficit and inflation. Rate

hikes in Indonesia and the Philippines this month did

not stop their currencies from falling to new year’s lows

past 14000 and 52 respectively. Neither will a rate

increase expected in India next month prevent the rupee

from falling to a new life-time low.

Overall, the factors that led Asian currencies stronger

throughout 2017 have weakened substantially. US

monetary policy normalization has become tighter-than-

expected with the US 10Y bond yield pushing higher

above 3%. Geopolitical risks have heightened in the

Middle East following America’s withdrawal from the Iran

nuclear deal, and with it, the possibility of an oil price

shock. Last year’s strong cyclical rebound is unlikely to be

repeated with downside risks from US-China trade

tensions. A peaceful resolution to the US-North Korean

nuclear crisis is still considered an aspiration rather than

an eventual reality. Sadly, seeking clarity on these

complicated issues have been difficult due to Trump’s

incoherent and inconsistent ramblings and outbursts.

Philip Wee

Monthly 25 May 2018

Page 9

Credit: stay short duration

Asian credit market sentiment was weak in May but

recovered somewhat in the second half of the month.

New issues pricing at substantial concession to secondary

did not help either. As these factors eased later in the

month, market tone recovered somewhat but sentiment

is still subdued.

We believe value has emerged selectively in Asian credit

following the recent correction. However, given the

potential for further moves in the UST and spread

widening, we maintain our recommendation to focus on

high quality credits and on relatively shorter tenors.

Moreover, credit events have become more frequent.

E.g. in May, there was a default on a USD bond by a

Chinese issuer (Hsin Chong), a restructuring of an

Indonesian high yield bond (MNC Investama), and more

reported defaults on onshore Chinese debt (e.g. CEFC

Energy), indicating default rates in Asia will likely pick up

going forward.

Key benchmarks

Sources: Bloomberg, Markit

Indonesian HY trip takeaways We met several Indonesian high yield corporates recently

in Jakarta. Following are our main conclusions:

Earnings outlook is mixed: Some companies face

challenging operating conditions, especially those in the

property sector and we could see some deterioration in

credit profile, The residential property market continues

to remain weak and some companies have increased land

sales in order to offset the drop in property sales. While

this is supportive of earnings and liquidity in the near

term, it could potentially open the door for more

competition in the longer term. Some of the industrial

companies are facing some pressure from rising input

costs (e.g. fuel, raw material) but these are not significant

yet to be of concern, in our view. Commodity related

issuers (e.g. coal miners, coal contractors), on the other

hand, have a stable to improving earnings outlook.

Despite the mixed earnings outlook, we believe key credit

drivers for the companies have not changed. Event risk

will also be in focus and could have a bearing on some

credits (e.g. decisions on capex / acquisitions as well as

asset sales).

Impact of IDR depreciation varies but is generally

manageable: While most companies either have a

natural hedge (e.g. commodities) or have put in place

hedging (through call spreads with ranges adequate for

now in most cases), some property companies and

industrials have exposure. But there is no material near-

term cash flow impact (apart from higher coupon

payments), which is manageable for now.

Corporate governance/banking relationships remains

most important driver of bond performance: For bond

investors, corporate governance track record and

strength of local banking relationships will remain the key

consideration to retain / add exposure to Indonesian

corporates. This issue remains an overhang for a few

issuers. Companies that have improved their banking

access in the recent past have largely done so through

non-Indonesian banks with local banks still forming only

a small percentage of the funding structure. This will be a

key issue to monitor as primary bond market access gets

more challenging for weaker corporates and as bonds

come up for refinancing over the next few years.

Neel Gopalakrishnan

01-Jan-18 01-May-18 22-May-18

5Y UST yield (%) 2.21 2.81 2.90

10Y UST yield (%) 2.41 2.97 3.06

Indonesia 5Y CDS 85.3 103.7 122.7

Philippines 5Y CDS 65.1 71.4 85.5

Markit iBoxx China HY TRI 292.1 287.6 285.2

Markit iBoxx Indonesia HY TRI 247.5 239.0 237.0

Markit iBoxx India HY TRI 226.3 222.4 221.3

Monthly 25 May 2018

Page 10

Equities: Expect earnings downgrade

It’s earnings revision season. Within Asia, the strongest

downward revision (between March and May) was

recorded in Taiwan, and the strongest upward revision in

India. For Taiwan, the disappointments came from the

Tech sector after an exceptionally strong recovery last

year. As the global synchronised recovery starts to show

signs of fatigue, earlier high expectations that the

recovery is sustainable will have to be toned down. As for

India, we believe the strong earnings growth expectation

of 25.8% is too good to be true, judging from the past

record of downgrades throughout the year when analysts

tend to be overly bullish at the beginning of the year.

EM ASEAN countries including Malaysia, Thailand,

Indonesia and Philippines also recorded marginal

negative revisions. Upside earnings surprise is seen with

Singapore Banks, prompting us to upgrade the Singapore

Straits Times Index (STI) as a result. Companies in

China/Hong Kong generally met expectations.

Asia’s market cap composition suggests that about 12%

are exposed to the energy and materials sector which

should benefit from rising oil prices. Cyclical sectors

make up 41% of total market cap which means these

sectors are likely to be negatively affected by rising oil

prices. Higher interest rates should bode well for Banks’

net interest margin expansion in general, but the

negative sensitivity of high interest rates on loan growth

remains a concern. Save for some companies with a large

direct USD exposure due to asset/liability or

revenue/cost mismatch, the weakness in domestic

currencies is more of a macro concern affecting total USD

returns and foreign risk appetite, rather than having an

overall material impact on earnings.

In the near term, macro headwinds of volatility in the

currencies, oil prices, interest rates and trade wars

should pose further risks to Asia corporate earnings for

most sectors and we expect more downgrades by the

street in the second half.

We recommend investors to seek refuge in the oil & gas

and commodity sectors as earnings from these sectors

should stay resilient in view of the rising commodity

prices and USD. We are also positive on banks as selective

banks whose earnings are more sensitive to net interest

margin than loan growth, and those with higher CASA

ratios (ratio of current and savings account to total

deposits) for low costs of funds should benefit in a rising

interest rate environment.

In terms of valuations, Asia ex-Japan still trades at above

10-year historical average level, indicating that markets

still have room for risk premium to compress further.

Asia markets total return outlook will be eroded by a

strong USD. Hence, the turn of the USD will be a key

factor to watch for risk appetite to return and the current

volatility to be over. For now, we believe that it is too

early to conclude that the worst is over as we expect USD

to strengthen further, and EM ASEAN equities are likely

to bear the brunt of further de-risking.

Joanne Goh

Monthly 25 May 2018

Page 11

RECENT REPORTS

Focus pieces

• Malaysia: Post election challenge

• India’s slippery slope of oil

• GDP Nowcast update; decent 2Q start for China/India

• Malaysia: Beyond the election and politics

Weekly wrap / Flash notes

• USD Rates: Compressed term premium

• Will the Sino-US trade negotiations hurt South Korea and Taiwan?

• Weekly: The ride gets bumpier

• Japan: Recovery intact but faces more risks

• Malaysia: Flat interest rates again

• Hong Kong’s full-fledged economic upturn

• China’s slowing investment dynamic

• SGS: How Rich Is The 5Y?

• India: A rate hike is coming

• Weekly: Shocks galore

• Wind of change in Malaysia

• Four implications of a likely return of Iran sanction

• India’s bellwether state election

• China’s imperative to stronger ties with EU

• Indonesia: Global risk factors kick up dust

• USD Rates: How high? How flat?

• South Korea: Growth eases; inflation picks up

Monthly 25 May 2018

Page 12

Growth, Inflation, Policy Rates & FX forecasts

GDP growth, % YoY CPI inflation, % YoY, ave

2016 2017 2018f 2019f 2016 2017 2018f 2019f

China 6.7 6.9 6.6 6.2 2.0 1.6 2.1 2.2Hong Kong 2.0 3.8 3.3 2.9 2.4 1.7 2.0 2.5India* 8.0 7.1 6.6 7.2 4.9 4.5 3.6 4.6Indonesia 5.0 5.1 5.3 5.4 3.5 3.8 4.0 4.5Malaysia 4.2 5.9 5.0 5.0 2.1 3.9 2.6 3.0Philippines** 6.9 6.7 6.7 6.7 1.3 2.9 4.2 3.5Singapore 2.0 3.6 3.0 2.7 -0.5 0.6 1.0 1.8South Korea 2.9 3.1 2.9 2.9 1.0 1.9 1.8 1.8Taiwan 1.4 2.9 2.8 2.4 1.4 0.6 1.3 1.0Thailand 3.2 3.9 4.0 4.0 0.2 0.7 1.5 1.5Vietnam 6.2 6.8 6.4 6.6 2.7 3.5 3.6 3.8

Eurozone 1.8 2.5 2.2 2.2 0.2 1.5 1.4 1.4Japan 0.9 1.7 1.1 0.9 -0.1 0.5 0.8 1.0United States*** 1.5 2.3 2.6 2.5 1.3 2.1 1.8 1.8* refers to year ending March ** new CPI series *** eop for CPI inflation

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

China* 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35India 6.00 6.00 6.25 6.50 6.50 6.50 6.50 6.50Indonesia 4.25 4.50 4.75 4.75 4.75 5.00 5.00 5.00Malaysia 3.25 3.25 3.50 3.50 3.50 3.50 3.50 3.50Philippines 3.00 3.25 3.50 3.50 3.75 4.00 4.00 4.00Singapore** 1.40 1.65 1.90 2.15 2.15 2.40 2.40 2.65South Korea 1.50 1.50 1.75 2.00 2.00 2.25 2.25 2.25Taiwan 1.38 1.38 1.38 1.50 1.50 1.63 1.63 1.75Thailand 1.50 1.50 1.50 1.50 1.75 2.00 2.25 2.50Vietnam*** 6.25 6.25 6.25 6.25 6.50 6.50 6.75 6.75

Eurozone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10United States 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50* 1-yr lending rate; ** 3M SOR ; *** prime rate

Policy interest rates, eop

Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19

China 6.28 6.40 6.50 6.60 6.55 6.50 6.45 6.40Hong Kong 7.85 7.84 7.83 7.82 7.82 7.81 7.81 7.80India 65.2 68.5 69.0 69.5 70.0 70.5 71.0 71.5Indonesia 13728 14100 14150 14200 14250 14300 14350 14400Malaysia 3.86 4.00 4.10 4.20 4.18 4.15 4.13 4.10Philippines 52.2 53.0 53.5 54.0 54.5 55.0 55.5 56.0Singapore 1.31 1.34 1.36 1.38 1.37 1.36 1.35 1.34South Korea 1064 1100 1125 1150 1140 1125 1115 1100Thailand 31.2 32.2 32.9 33.6 33.3 33.0 32.7 32.4Vietnam 22775 22836 22903 22970 23022 23074 23246 23177

Australia 0.77 0.75 0.74 0.73 0.74 0.74 0.75 0.75Eurozone 1.23 1.18 1.17 1.16 1.17 1.18 1.19 1.20Japan 106 111 113 115 114 113 112 111United Kingdom 1.40 1.34 1.33 1.32 1.33 1.34 1.35 1.36Australia, Eurozone and United Kingdom are direct quotes

Exchange rates, eop

Monthly 25 May 2018

Page 13

Rates forecasts

2018 2019

Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4

US 3m Libor 2.31 2.30 2.50 2.75 3.00 3.25 3.50 3.75

2Y 2.27 2.60 2.75 2.90 3.05 3.20 3.35 3.50

10Y 2.74 3.00 3.10 3.20 3.30 3.40 3.50 3.50

10Y-2Y 47 40 35 30 25 20 15 0

Japan 3m Tibor 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.05

2Y -0.13 -0.12 -0.11 -0.10 -0.08 -0.05 -0.03 0.00

10Y 0.05 0.09 0.10 0.10 0.10 0.10 0.10 0.10

10Y-2Y 18 21 21 20 18 15 13 10

Eurozone 3m Euribor -0.33 -0.30 -0.30 -0.25 -0.20 -0.10 0.00 0.10

2Y -0.60 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30

10Y 0.50 0.80 0.90 1.00 1.13 1.25 1.38 1.50

10Y-2Y 110 110 110 110 113 115 118 120

Indonesia 3m Jibor 5.36 5.90 6.15 6.15 6.15 6.40 6.40 6.40

2Y 5.51 6.70 6.85 7.10 7.20 7.30 7.40 7.50

10Y 6.68 7.15 7.25 7.40 7.55 7.70 7.85 8.00

10Y-2Y 117 45 40 30 35 40 45 50

Malaysia 3m Klibor 3.69 3.65 3.90 3.90 3.90 3.90 3.90 3.90

3Y 3.45 3.70 3.80 3.85 3.85 3.85 3.85 3.85

10Y 3.94 4.20 4.25 4.30 4.35 4.40 4.45 4.50

10Y-3Y 50 50 45 45 50 55 60 65

Philippines 3m PHP ref rate 4.08 4.05 4.20 4.20 4.25 4.30 4.30 4.30

2Y 4.16 4.60 4.80 4.90 5.00 5.10 5.20 5.20

10Y 6.00 6.60 6.70 6.80 6.90 7.00 7.00 7.00

10Y-2Y 184 200 190 190 190 190 180 180

Singapore 3m Sibor 1.45 1.70 1.85 2.05 2.25 2.45 2.65 2.85

2Y 1.79 2.00 2.10 2.20 2.30 2.40 2.50 2.60

10Y 2.29 2.50 2.60 2.70 2.80 2.85 2.90 2.90

10Y-2Y 50 50 50 50 50 45 40 30

Thailand 3m Bibor 1.57 1.60 1.60 1.60 1.85 2.10 2.35 2.60

2Y 1.32 1.45 1.50 1.60 1.80 2.00 2.20 2.40

10Y 2.40 0.50 2.60 2.70 2.80 2.90 3.00 3.00

10Y-2Y 107 -95 110 110 100 90 80 60

China 1 yr Lending rate 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35

3Y 3.56 3.20 3.20 3.30 3.40 3.50 3.60 3.70

10Y 3.75 3.60 3.65 3.70 3.75 3.80 3.85 3.90

10Y-3Y 19 40 45 40 35 30 25 20

Hong Kong 3m Hibor 1.21 1.70 1.90 2.15 2.40 2.65 2.90 3.15

2Y 1.42 1.90 2.05 2.20 2.35 2.50 2.65 2.80

10Y 1.99 2.30 2.40 2.50 2.60 2.70 2.80 2.80

10Y-2Y 57 40 35 30 25 20 15 0

Taiwan 3m Taibor 0.66 0.66 0.66 0.74 0.74 0.81 0.81 0.89

2Y 0.45 0.60 0.60 0.68 0.68 0.75 0.75 0.83

10Y 0.99 1.15 1.25 1.35 1.45 1.55 1.60 1.65

10Y-2Y 54 55 65 68 78 80 85 83

Korea 3m CD 1.65 1.65 1.90 2.15 2.15 2.40 2.40 2.40

3Y 2.22 2.25 2.30 2.35 2.40 2.45 2.45 2.45

10Y 2.62 2.80 2.85 2.90 2.95 3.00 3.05 3.10

10Y-3Y 41 55 55 55 55 55 60 65

India 3m Mibor 7.48 7.00 7.00 7.15 7.15 7.30 7.30 7.30

2Y 6.85 7.25 7.30 7.40 7.50 7.60 7.70 7.80

10Y 7.40 7.70 7.80 7.90 8.00 8.10 8.20 8.30

10Y-2Y 55 45 50 50 50 50 50 50

%, eop, govt bond yield for 2Y and 10Y, spread bps

Monthly 25 May 2018

Page 14

Group Research Economics & Strategy

Taimur Baig

Chief Economist - G3 & Asia

+65 6878-9548 taimurbaig@dbs.com

Nathan Chow

Strategist - China & Hong Kong

+852 3668-5693 nathanchow@dbs.com

Joanne Goh

Regional equity strategist

+65 6878-5233 joannegohsc@dbs.com

Neel Gopalakrishnan

Credit strategist

+65 6878-2072 neelg@dbs.com

Eugene Leow

Rates Strategist - G3 & Asia

+65 6878-2842 eugeneleow@dbs.com

Chris Leung

Economist - China & Hong Kong

+852 3668-5694 chrisleung@dbs.com

Ma Tieying

Economist - Japan, South Korea, & Taiwan

+65 6878-2408 matieying@dbs.com

Radhika Rao

Economist - Eurozone & India

+65 6878-5282 radhikarao@dbs.com

Irvin Seah

Economist - Singapore, Malaysia, & Vietnam

+65 6878-6727 irvinseah@dbs.com

Duncan Tan

FX & Rates Strategist - ASEAN

+65 6878-2140 duncantan@dbs.com

Samuel Tse

Economist - China & Hong Kong

+852 3668-5695 samueltse@dbs.com

Philip Wee

FX Strategist - G3 & Asia

+65 6878-4033 philipwee@dbs.com

Disclaimer:

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Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations)