Asia's Downside Risk And The Three Big Hopes

Tyler Durden's picture

'Risks are all to the downside for Asia' is the view of UBS' global macro team. It appears the markets are pinning their optimism on growth and earnings over the next year on three hopes: that the US will not fall off its 'fiscal cliff'; that Europe will 'muddle through'; and that China will pull Asia out of the current morass. Duncan Wooldridge takes on each of these 'hopes' noting that he expects Asian exporters to be far more likely to pull back on investment and take a wait and see attitude than simply ride into the breach.

UBS: Asia and the Fellowship Of Hope




Hope number one is that the US will not fall off a “fiscal cliff” in early 2013.

The fiscal cliff refers to automatic spending cuts and tax hikes that are scheduled for 1 January 2013 that equal 5% of US GDP according to the Congressional Budget Office (CBO). The CBO believes this could cause the US economy to contract 1.3% in 1H13 and would result in the US growing just 0.5% next year. The only way the US can grow close to 2.5% next year is if US politicians renege on their prior policy commitments and that is the view UBS is taking. But it is important to understand that the uncertainty around this debate, as it heats up later in the year, will likely have a dampening impact on private investment in places like Asia because of the uncertainty the debate itself will generate for Asia’s export outlook. Asian exporters are far more likely to pull back on investment and take a wait and see attitude than simply ride into the breach.


Hope number two is that Europe can continue to muddle through.

Is the risk that Europe surprises on the upside or the downside? This depends critically on policy and what we arguably know is that European policy is reactionary; i.e., policymakers seem to only respond after the economy deteriorates. So for those who believe that in the end everything will work out for the best, one has to admit that further deterioration is probably a precondition for the sort of sea change in policy that markets want to see. Piecemeal policy measures in response to a gradually worsening scenario in Europe should not be cause for hope and optimism, at least from where we sit in Asia. If anything the risks in Europe are to the downside on the horizon. Again, not terribly helpful forgetting Asia out of her current funk.


Hope number three is China. Can China pull Asia out of the current morass? 

In reality China has limited room to play global or regional saver this time around. In part, that’s because domestic debt is now driving toward 190% of GDP and it is especially high in the corporate sector. And as we pointed out several weeks a go pushing Chinese leverage higher from current levels will not have the same salubrious effect as in 2009. Credit expansions overtime tend to suffer from diminishing marginal returns. Debt can go higher, but it won’t feel as fun. The other issue is this. China’s domestic investment cycle is mainly driven by construction. China’s policy response to the global financial crisis was very successful precisely because credit poured into housing and infrastructure construction. But look at chart 2.



Chinese construction is now sitting at what can only be considered a cyclical peak as a share of GDP, around 7% on a value added basis or close to 14% if you prefer to think of this on an expenditure basis. Yes, China can do a little something, something with infrastructure spending per UBS China economist Tao Wang’s assertions, but that’s not going to compensate for everything else going on in the world. You really need to see another massive surge in Chinese construction activity to get bulled up on growth – and that would be very hopeful indeed.

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Future Tense's picture

Incredible interview with Jim Rickards discussing Operation Twist, Europe's next move, and what it means for gold:

falak pema's picture

ah the rent seekers... and all that derivative shit piled onto german banks; then the punch line : not our fault and nothing to do with Gl-St. TBTF oligarch totally protected on both red-blue ends!

Cognitive Dissonance's picture

Call the squid. We need more fingers tentacles for the dike.

WatchingIgnorance's picture


The other white meat.

Its whats for dinner.

Cognitive Dissonance's picture

Time to fire up the BBQ and slice me a side of banker.

Umm umm good.

The good ole days. "Campbell's in the cupboard is like money in the bank."

LawsofPhysics's picture

...especially when it comes down to the "beans and bullets" economy.

Silversem's picture

Gold is going sky high! This is good news since i am involved in cfd trading. cfd's are ideal for trading gold.

BlueStreet's picture

Just came back from Korea.  Inflation and prices are so high they are paying for restaurant meals on their credit cards with a multi-month payment plan like they offer on the home shopping channel, flex pay or whatever.  

reader2010's picture

They forgot how to cook at home?

BlueStreet's picture

They love to eat out and shop.  It's seems to be their national sports. Grocery stores also are also not much better in terms of prices. 

reader2010's picture

That explains why I see tons of Koreans that don't speak English in my neck of woods lately.

Dr. Engali's picture

Better get to building some more empty cities quick. Or maybe tear down a couple and rebuild them.

reader2010's picture

Or they need invasions from Aliens right now.'s picture

Risk pfft...thats for losers that cant manipulate the market...

JohnKozac's picture

The Middle Kingdom is in an odd position. The wealth inequality there is astronomical---$5 million homes down the street from peasant wood boxes...RE developer and Gubbermint Offical Billionaires by the dozens while the average workers' median wages have levelled off around $8,500 pa.


Sumthin has to give.

covert's picture

asia will do well, especially china, vietnam and korea.

LawsofPhysics's picture

I agree and I am looking forward to selling them soybeans in exchange for gold and other commodities in the future.  Careful what you wish for China.

old naughty's picture

but but I thought they're going capitalistic, no?

So what's to give, might I ask?

Perhaps their 'version' of the capitalism?

giggler123's picture

Nothing like re-building after a war?

Vegetius's picture

Good to see fantasy is alive and well and living in the banking world, they have over dosed on Hopium. If the above work is the best they can produce well say no more. Lets have a quote -

"Reality is merely an illusion, albeit a very persistent one".  Albert Einstein