IB Traders Insight


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Macro

Notable China Equity Market Weakness


The Shenzen SE Composite Index (SZCOMP - 4.46%) is showing the largest negative risk-adjusted return across regions and asset classes overnight.
 
The reasons for equity weakness in China were related to concern over forthcoming tightening policies:
  1.  President Xi said at the Politburo conference “major task for economy work in 2H2016 is to curb asset bubble”;
  2.  Xinhua News wrote China should not issue stimulus as it creates endless troubles;
  3.  Regulators (I.e. Shenzhen Exchange controller) issue statement demanding more disclosure and will be stricter about insider trading;
  4.  China Banking Regulatory Commission (CBRC) may limit wealth management products (WMP) allocations to cash equities; WMP is a $US3.6tn market. 
We have no idea if this was coordinated or is coincidental. Or whether this is to balance out the significant liquidity the central bank has been adding into the system as of late. Or whether this is part of the balancing act given last week they announced a major increase in their fiscal stimulus. Or whether additional tightening messages will be sent out in the coming days.
 
Clearly, given the view that China remains in the midst of a cyclical bounce, it would be an issue if more messages were sent out to mirror what we saw today, especially if the Bank of Japan were to disappoint on Friday and the Country underwhelms on their fiscal stimulus announcement in early August.

 

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10328




Stocks

Coals to Newcastle


The expression “like sending coals to Newcastle” can be traced back to the 17th century, reflecting the insight that whatever else Newcastle needed in those days did not include coal. This windswept port on the North Sea was conveniently located near some of the biggest coalfields of northern England. During its heyday, American trader Timothy Dexter defied common sense and sent a shipment of coal to Newcastle, causing anticipation of a substantial loss. However, perhaps by luck he had the good fortune for his cargo to arrive during a miners strike, thereby profiting from unusual and temporary demand. Coal exports have long since ceased along with local coal production. Today’s Newcastle possesses little of note beyond an English football stadium with capacity well in excess of their local team’s ability (they were just relegated from the Premier League). Meanwhile, Newcastle in the Australian state of New South Wales has become the world’s most prolific coal exporting port.

LNG to the UAE doesn’t quite roll off the tongue as easily as Coals to Newcastle, but it might be a modern-day equivalent. The Middle East has 2.8 quadrillion cubic feet of proved natural gas reserves, enough to meet current global demand for 23 years. OPEC reports that the United Arab Emirates (UAE) holds around 10% of this. And yet, earlier this year the Energy Atlantic LNG tanker unloaded 3.38 BCF (Billion Cubic Feet) of natural gas at the port of Jebel Ali, near Dubai, following an almost seven week journey from the Sabine Pass LNG terminal in Louisiana.

Somehow the power of economics (see Why the Shale Revolution Could Only Happen in America) has overwhelmed the logic of geographic proximity to make such a delivery commercially reasonable in spite of abundant local resources. To show this was no fluke, more recently the Creole Spirit unloaded a similar amount in Kuwait, also sourced from Sabine Pass. The region hasn’t developed sufficient energy infrastructure to properly exploit its resource domestically.

The story of America’s Shale Revolution was built on the single-minded pursuit of unconventional fracking technology by many independent exploration and production (E&P) companies as well as some extraordinary chutzpah by a few. The Frackers by Greg Zuckerman memorably tells the story of some of them. Cheniere Energy (LNG) under then-President Charif Souki was once intent on importing LNG into the U.S. to take advantage of relatively high domestic prices. Cooling natural gas to a near-liquid state (at -260° F) so it can be moved in a condensed form by ship requires a substantial investment (i.e. US$BNs) to create such a facility, as does the construction of a regasification plant on the receiving end. Souki’s career wasn’t obviously suited to leading Cheniere on this journey, having been primarily focused on raising money for banking clients in his native Lebanon and elsewhere in the Middle East. His past also included a stint as restaurant owner of Mezzaluna, the now infamous Los Angeles eatery where Nicole Simpson ate her last meal on June 12, 1994 before being slain by O.J. Simpson (ahem…allegedly).

Undaunted by the absence of any relevant experience, as President of Cheniere Souki set out to use his former banking ties to finance their new business. The Shale Revolution led to a collapse in domestic natural gas prices and turned the economics upside down, causing Cheniere to turn from prospective LNG importer to exporter.

The facility that can regassify LNG for normal use is not the same one that can liquify it for long distance transport. Converting an LNG import facility to an export one is not the same as reversing a pipeline, and many more $Billions were required for Cheniere to be ready for business. Just as export operations began, Souki was pushed out by its board of directors which included Carl Icahn. The boss’s substantial risk appetite was by now well known, but his latest plan to add a gas trading business was a risk too far for investors who could finally see actual cashflows on the horizon. Souki’s compensation over the years had matched his ego, but recognizing that his risk appetite didn’t match ours we have never invested in Cheniere.

The Sabine Pass facility began exporting late last year and is eventually expected to handle 3.8BCF per day. Some of its supply travels from the Marcellus shale in Pennsylvania along the Transco pipeline network owned by Williams Companies (WMB), in which we are invested. A few weeks ago I had the opportunity to be presenting in Laceyville, Pennsylvania to a group that included landowners receiving royalty checks from the production of natural gas under their property. As we noted last week, few countries assign mineral rights to the owner of the land beneath which they sit.

For just a moment, step away from the prosaic question of the market’s near term direction and consider this: an Egyptian-born Lebanese former restaurant owner raised $Billions to export liquefied natural gas over 11,000 miles to a region of the world whose wealth is totally reliant on hydrocarbons. It couldn’t have happened anywhere else, except America.

We are invested in WMB

Simon Lack, CFA – Managing Partner – Following 23 years with JPMorgan, Simon Lack founded SL Advisors, LLC, in 2009. Much of Simon Lack’s career with JPMorgan was spent in North American Fixed Income Derivatives and Forward FX trading, a business that he ran successfully through several bank mergers ultimately overseeing 50 professionals and $300 million in annual revenues. Simon Lack sat on JPMorgan’s investment committee allocating over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that took economic stakes in emerging hedge fund managers. Simon chairs the Investment Committee for Wardlaw-Hartridge School in Edison, NJ, and also chairs the Memorial Endowment Trust Investment Committee of St. Paul’s Episcopal Church in Westfield, NJ. He is the author of The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, published in 2012 to widespread praise from mainstream financial press including The Economist, Financial Times and Wall Street Journal, and Bonds Are Not Forever: The Crisis Facing Fixed Income Investors (September 2013). Simon is a CFA Charterholder and Vice-Chair of the New York Society of Security Analysts’ Market Integrity Committee, and makes regular appearances on cable TV business shows discussing hedge funds and investing. Simon is also Portfolio Manager for the Catalyst MLP and Infrastructure Fund.

This article is from SL Advisors LLC and is being posted with SL Advisors LLC’s permission. The views expressed in this article are solely those of the author and/or SL Advisors LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 

10327




Stocks

The Future of Wealth Management And Morgan Stanley's $28 Billion Opportunity


Big banks are facing competitive pressures from two forces in recent years: regulators and new (fintech) competitors. Regulators have cracked down on many of the traditional activities that fueled growth in the financial sector during the pre-crisis boom. To compensate, many big banks have migrated towards more retail-like activities such as wealth management that face less regulation.

As they attempt this pivot, the banks have also found that new technology-driven entrants are putting pressure on their traditional advisory model. “Robo Advisor” startups such as SigFig, Betterment, and Wealthfront offer cheap, automated investing services that threaten to disrupt the wealth management business.

The big banks still have significant advantages though. Their brand names, financial capital, advisor networks, and large client bases give them the opportunity to leverage the innovations of these startups and become the biggest winners in this new wealth management model.

“Digital advice will become a multi-trillion dollar market over the next decade,” says NextCapital CEO John Patterson. “Trusted brands with large installed client bases that rapidly adapt to digital advice will win this opportunity.”

Morgan Stanley (MS) has that large installed client base. In 2009, it became one of the biggest wealth managers in the world with the acquisition of Smith Barney. As Figure 1 shows, its wealth management business has always been more profitable than its investment banking activities.

Figure 1: Segment ROIC: Wealth Management Is the Leader

NewConstructs_MS_WealthMgmtVsInstitutionalROIC_2016-07-21

Sources:   New Constructs, LLC and company filings.

What’s more, the company has already taken the first steps towards adapting digital advice. At its current valuation of ~$29/share, Morgan Stanley has the potential to create almost $28 billion in value for shareholders if it successfully completes this digital transformation.

Regulatory Squeeze On Margins

What used to be a profitable and growing business is now plagued by ever tightening margins as banks spend more and more money on compliance. The six biggest U.S. banks—J.P. Morgan (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), and Morgan Stanley—spent over $70 billion on regulatory compliance in 2013, more than double what they spent in 2007.

Those numbers come from a recent article in the Wall Street Journal. That same article described a town-hall meeting at Barclays (BCS) where bankers described compliance officers as “nuns with guns,” indicating the extent to which regulation has become a constant squeeze on investment banking activities.

Return on invested capital (ROIC) has dramatically declined since the financial crisis for the big banks. In 2006, they earned an average ROIC of almost 15%. Last year, their profitability had been cut in half, at ~7.5%.

Wealth Management Is The Way Forward For Margin Expansion

Before the financial crisis, Morgan Stanley’s small Wealth Management division was highly profitable, while the much larger Institutional Securities division was not as profitable due, in no small part, to massive bonuses for its many investment bankers.

After the financial crisis—and the Smith Barney acquisition—the Wealth Management division’s ROIC fell, but it remained in the double digits. Institutional Securities, on the other hand, has failed to achieve an ROIC above the company’s WACC every year since 2006.

Increased capital requirements and compliance costs make Institutional Securities a dead end for profitable growth. If Morgan Stanley wants to grow profits and create value for investors, it needs to invest heavily in wealth management.

Changing Culture Is Difficult And Takes Time

As Morgan Stanley reorients itself towards a greater focus on wealth management, it will need to bridge the gap between the value that advisors believe they deliver and what clients say their priorities really are. As a recent report from EY shows, advisors put a much higher priority on regular interaction and personalized understanding, whereas clients are more concerned with performance, transparency, and fees.

Another interesting finding from the report is that clients see the most beneficial use of social media as a forum to connect with other clients to ask questions and share experiences.

These findings suggest that Morgan Stanley, which currently has the largest advisory force of any firm, will need to undergo a major cultural shift to meet the needs of more digitally active clients. A failure to do so could lead to a mass exodus of clients as wealth transfers to the younger generations. However, it also opens up the possibility for major gains in margins and efficiency.

A truly comprehensive digital transformation would be one that embraces automated portfolio management, full transparency in fees and holdings, and a robust online community the enables clients to find and share information easily. Such a transformation could lead to significantly larger margins by allowing Morgan Stanley to further reduce its advisor count (a process that can happen organically with 25% of advisors near retirement age), as well as maintaining fewer physical branches.

New Entrants Bring Change, Challenge & Opportunity

Robo Advisors own a very small fraction of the market right now, but their share is growing rapidly. Just as importantly, their emphasis on low fees is already forcing more traditional advisors to adapt.

We can see this focus on low fees play out in Morgan Stanley’s financial statements. Between 2008 and 2015, fee-based accounts—which tend to be less lucrative than accounts that pay commissions per trade—went from 25% to 40% of its assets under management. In just the past three years, the average fee rate on those accounts has fallen from 77 basis points to 74.

The old advisor model won’t work in this new world of falling fees, and it’s clear Morgan Stanley already knows that. The company has been steadily reducing its advisor headcount and number of retail locations since 2009. In that time, it has increased its revenue per representative by 6% compounded annually.

In January, Morgan Stanley hired Naureen Hassan, the executive that led Charles Schwab’s own Robo Advisor launch. Hassan will help spearhead a digital overhaul that will use automated investing services—along with a number of other digital tools—to complement its existing advisory force.

This digital overhaul comes at a particularly sensitive time in the wealth management business. At the moment, Morgan Stanley has about 10% of the wealth management market for high net-worth individuals. However, the wealth management industry could face a major upheaval in the coming years with an unprecedented intergenerational wealth transfer as baby boomers begin to pass down money to their children. 66% of children fire their parent’s advisor after receiving an inheritance, which means there’s an opportunity for Morgan Stanley to gain (or lose) market share.

In addition, technology promises to grow the wealth management pie by enabling banks to profitably serve lower net worth individuals. Robo Advisors are a perfect example of a disruptive innovation. By automating much of the portfolio management process, they’ve been able to meet the needs of lower-end customers that traditional wealth managers have typically ignored, and now they’re moving up the income ladder.

Failure to adapt to changing technologies could lead to Morgan Stanley getting squeezed out of its most profitable business. On the other hand, a well-executed digital overhaul could allow Morgan Stanley to gain market share from traditional competitors, expand its potential customer base, and cut costs.

Modeling The Potential Value Creation of The Strategy Shift

To understand the value that a digital overhaul could create for Morgan Stanley, it’s important to understand the drivers of market valuation. While things like news, quarterly earnings, and sentiment might create short-term fluctuations in stock prices, ROIC is the primary driver of long-term value.

Figure 2: ROIC Vs. Valuation: Big 6 US Banks

NewConstructs_ROICregression_BigUsBanks_2016-07-21

Sources:   New Constructs, LLC and company filings.

Figure 2 shows that ROIC explains 96% of the differences in Enterprise Value/Invested Capital (a cleaner version of price/book) for the six largest US banks. Morgan Stanley has exactly the valuation one would expect from that chart given its ROIC and the regression equation.

This allows us to easily quantify the potential value creation for Morgan Stanley from a truly comprehensive digital overhaul. Figure 3 shows the expected stock price for four different scenarios:

  1. Simply sustaining the current level of profitability
  2. Improving margins through greater levels of automation
  3. Improving margins and increasing market share with a platform that can take advantage of changing investor preferences
  4. Investing heavily in an overhaul that yields minimal results.

Figure 3: Implied Valuations For Different Profitability Scenarios

NewConstructs_MS_ImpliedValuationsforProfitabilityScenarios_2016-07-21

Sources:   New Constructs, LLC and company filings.

Figure 3 shows that even Scenario 2, with margin improvement but no revenue growth, delivers almost $8 billion in additional shareholder value. A full transformation that manages to decrease advisor compensation costs and attract new business could be worth nearly $28 billion. See the full details of our model scenarios here.

It’s worth noting how modest these scenarios really are. 20% revenue growth for Morgan Stanley represents about $7 billion in additional revenue. EY estimates the global revenue opportunity for wealth managers to be in the range of $175-$200 billion. Morgan Stanley just needs to claim 4% of this pie.

In addition, it’s worth noting that Morgan Stanley and the other big U.S. banks are valued significantly lower than other financial institutions and the S&P 500 in general (See Appendix A for details). The intense regulation they face has clearly caused them to be priced at a discount to the rest of the market. Continued growth in the less regulated wealth management business could convince investors to value Morgan Stanley at an even higher EV/IC multiple.

On the other hand, a mismanaged foray into the robo-advisory space could also destroy value. The final scenario in the table shows what could happen if the cost of Morgan Stanley’s digital transformation goes overboard and the company fails to recognize the capital and cost savings from closing branches and reducing its advisor count.

Figure 3 also analyzes how management might consider compensating those that help execute this digital overhaul. Rather than pay traditional rates and fees, one could propose a gain share model to ensure your consulting partners are aligned with increasing ROIC.

Conclusion

Morgan Stanley’s shifting focus towards Wealth Management is the result of both the carrot and the stick. Changing technologies and intergenerational wealth transfers create significant opportunity, and heavy regulations have made it hard to earn satisfactory returns in its more established Institutional Securities business.

This report provides an outline for how developing a robo-advisor and embracing other digital technologies could allow Morgan Stanley to cut costs, attract new business, and create significant value for its shareholders.

After several years of lagging ROIC, low growth, and lagging stock performance, we believe shareholders would welcome a digital overhaul of the Wealth Management division that focuses on maximizing ROIC.

Appendix A: Implied Values Based on Linear Equations from Regression Analyses

Figures I – III show how we calculate the implied share prices and ROIC based on the three regression analyses in this report. Click here for the original spreadsheets with all calculations and details.

Figure I: Implied Stock Price and Upside for MS Based on Linear Equations from Regressions

NewConstructs_MS_ImpliedStockPriceUpside_LinearEquations_2016-07-21

Sources: New Constructs, LLC and company filings.

Figure II: Implied ROIC for MS Based on Linear Equations from Regressions

NewConstructs_MS_ImpliedROIC_LinearEquations_2016-07-21

Sources: New Constructs, LLC and company filings.

Figure III: Implied Value Creation Scenario Details

NewConstructs_MS_ImpliedValueCreationScenarios_2016-07-21

Sources: New Constructs, LLC and company filings.

Appendix B: More Regression Analyses Details

Figures IV and V show additional regressions of ROIC vs. Enterprise Value/Invested Capital (a cleaner version of price-to-book). The relationship between ROIC and valuation holds quite strongly on larger groups of stocks. Figure V shows that ROIC explains 54% of the changes in valuation for the stocks in the S&P 500.

Verify the data and regression analyses in the original spreadsheet here.

This regression framework for stock valuation was first introduced long ago by folks with much more impressive pedigrees than ours: McKinsey’s Valuation Handbook, Bennett Stewart’s Quest For Value, Credit Suisse’s Michael Mauboussin’s ROIC Patterns and Shareholder Returns. The innovation we bring to the table is modeling ROIC, free cash flow and GAP, etc. with scale.

Figure IV: ROIC Drives Valuations for the S&P 500

NewConstructs_ROICregression_SP500_2016-07-21

Sources: New Constructs, LLC and company filings.

Figure V (r-squared is 68%) shows that the explanatory power of ROIC for stock prices remains strong when we narrow the focus to large cap financial stocks.

Figure V: Regression Still Strong For Financials

NewConstructs_ROICregression_LargeCapFinancials_2016-07-21

Sources: New Constructs, LLC and company filings.

This article originally published here on July 21, 2016.

Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.

Our stock rating methodology instantly informs you of the quality of the business and the fairness of the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a "Buy" rating, Very Dangerous and Dangerous correspond to a "Sell" rating, while Neutral corresponds to a "Hold" rating.

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This article is from New Constructs, LLC and is being posted with New Constructs, LLC’s permission. The views expressed in this article are solely those of the author and/or New Constructs, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10326




Macro

Markets Want Action but G20 Delivers Hot Air


There was lots of vague chatter about moves to boost growth, but not one member pledged specific fresh action.

 

With deflation spreading, growth evaporating, markets in turmoil, free trade under assault and authoritarianism on the rise, it’s sure comforting to see the Group of 20 nations saving the day.

As if! Its weekend meeting in Chengdu, China was touted as the economic equivalent of those superhero savior films Hollywood can’t seem to churn out fast enough. It was hoped that, like a policymaking “Avengers” or “Justice League” of super friends, our 20 powerhouses would join forces to protect middle-class households from a homeless-shelter future. Their grand plan? You’re all on your own.

Sure, there were rhetorical plot twists, including pledging to use all tools in G-20 members’ bags of tricks to restore growth and confidence. There also was lots of vague chatter about fiscal and structural moves to defeat the recession menace in our midst. But not one of the 20 pledged specific fresh action. Worse, they insulted our collective intelligence with painfully-obvious dialogue like “the global economic recovery continues but remains weaker than desirable” in its communique. Gee, you think?!

And why stop there? Let’s just lie to our collective populations accounting for two-thirds of humanity and 85% of world output and say we will “carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency” when we’re doing the opposite.

Granted, the G-20 is a dreadful vehicle for the kind of hero fetish in which moviegoers around the world indulge. But it’s proving to be even more helpless in the face of competing challenges to the world order (and I’m not even taking about terrorism). It’s even proving less than super on the basics of the transparency, cooperation and brainstorming it purports to champion. That goes for members here in Asia as much anywhere.

If China were using all the tools in its arsenal, for example, President Xi Jinping’s team wouldn’t be blowing fresh bubbles in debt, credit and asset markets. True, the real anxiety has shifted from China to the West, where Brexit-related turmoil is whipsawing markets and reminding us Europe’s perma-crisis may be flaring up anew. The idea of a Donald Trump presidency, meanwhile, has many envisioning a dystopian U.S. future, and all the frightening global feedback effects sure to follow.

Yet China is only standing its ground by borrowing from a future that may include a debt crash much worse than Japan’s. Beijing’s 6.7% second-quarter growth rate was actually bad news, as it proves the process of shifting engines from unhealthy investment to services is unfolding glacially, at best. If growth were heading to the 5% or even the 4% level many economists including Lawrence Summers say would indicate China really is recalibrating, we could assume there’s a method to this madness. Instead, authoritarian China is guiding the yuan lower to boost exports in ways that play into Trump’s paranoid worldview.

If Japan were doing its part, all eyes wouldn’t be on the Bank of Japan, but Prime Minister Shinzo Abe. As the BoJ prepares for a two-day meeting ending Friday, it’s under incredible pressure to expand quantitative-easing efforts. Abe’s own glacial embrace of structural change demonstrates the limits of the G-20’s influence and the zero-sum nature of today’s geopolitics.

BoJ Governor Haruhiko Kuroda enabling Abe’s timidity again would surely weaken the yen. New corporate welfare might boost the Nikkei for a few days, but it increases the odds of copycat devaluations by China, South Korea and others. The more Kuroda indulges Abe, the less incentive Tokyo has to loosen labor markets, increase innovation and productivity and lower trade barriers, as per the G-20’s prescription.

If India were getting its act together, it wouldn’t be going the Japan route. One of the G-20’s more explicit warnings is against relying on monetary easing alone. “Underscoring the essential role of structural reforms,” the G-20 said, “we emphasize that our fiscal strategies are equally important to support our common growth objectives.” Yet the overwhelming focus in New Delhi is on replacing a central bank head viewed as too independent with a soft-money governor. It’s an ominous sign given the shock therapy needed to turn Prime Minister Narendra Modi’s ambitious reforms into reality.

If South Korea wanted to be a team player, President Park Geun-hye wouldn’t be doubling down on growth from the family-owned conglomerates towering over her economy. Or jawboning the Bank of Korea to add more monetary fuel to an economy buckling under record household debt. Being true to the G-20’s fight means accelerating efforts to support small-and-midsize enterprises, incentivizing young entrepreneurs and diversifying growth engines away from exports.

If Indonesia were joining the campaign, Jakarta would act more forcefully to dismantle the thick layer of corruption and cronyism that dictator Suharto constructed over 32 years (he was ousted in 1998). Granted, President Joko Widodo is trying, as did predecessor Susilo Bambang Yudhoyono. But when the G-20 waxes on about a near utopian world of open markets, less protectionism, freer investment flows and spreading the benefits of growth enjoyed mostly by elites within its ranks, Indonesia is Exhibit A.

If Australia, finally, wanted to do its bit, newly-reelected Prime Minister Malcolm Turnbull would wean his economy off a slowing China. That means diversifying away from resources exports with greater investments in infrastructure, education and training to increase productivity. Australia is the envy of the Asia-Pacific region, having avoided a recession for more than 20 years. But as the “lucky” country’s luck runs out, Canberra will rue the day it didn’t act faster to help hasten growth.

There’s loads of blame to go around, of course. It’s not like G-7 nations Britain, Canada, France, Germany, Italy, Japan and the U.S. are pulling their weight, never mind Brazil, Russia, South Africa, Turkey and the rest of our league of 20 superheroes. But the common thread is that as these powers pledge a united front against slow growth and voter disillusionment, they’re just playing defense, at best. And often poorly, at that.

No one really expects the 20 most important economic powers to swoop down and fix all the world’s problems. But if this is best we can do is talk about “inclusive” growth and not act on the problem, then the second half of 2016 may be more horror film than happy-ending action flick.

William Pesek is Executive Editor of Barron’s Asia. Based in Tokyo, he writes Barron’s Asia’s lead column “Up & Down Asia,” which covers economics, politics, markets and social issues throughout the Asia-Pacific region. He is the author of the 2014 book “Japanization: What the World Can Learn from Japan’s Lost Decades.” Before joining Barron’s, Mr. Pesek was Bloomberg View’s Asia columnist. His columns have appeared in the International Herald Tribune, the Sydney Morning Herald, the New York Post, the Straits Times, and many other publications. Follow him on Twitter @WilliamPesek.

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This article is from Barron's and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron's and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10325




Macro

GUOSEN Closing Bell (July.27)


MARKET

Chinese stocks closed lower today, with the benchmark Shanghai Composite Index ended at 2992.0 points. The A share market tumbled amid tightened financial regulations; Beijing sent a strong message with intention to push liquidity into industry and commerce, investors panicked in response. Bank sectors led the gains; while computer and communication sectors led the falls. Combined turnover for both markets was 806.8 bn yuan, up 66.3% dod.

 

CLOSE

%CHG

VOL (bn yuan)

%YTD

SH Composite

2992.0

-1.91

316.8

-15.46

SZ Component

10405.85

-4.11

490.0

-17.84

CSI300

3218.24

-1.57

124.4

-13.74

ChiNext

2155.39

-5.45

136.7

-20.58

 

Sector

Top 1

Led by

Top 2

Led by

Upward-leading

Bank

601328

 

 

Downward-leading

Computer

300386

Communication

300134

 

NEWS

*Chinese investors pumped $17 billion into overseas property investment during the first five months, becoming the world's second-largest source of outbound property investment. The United States retained its top spot with $19 billion, according to a report released by DTZ/Cushman & Wakefield, a global leader in commercial real estate services. Outbound Investment continued its rapid growth in China, the report said. The total outbound investment from January to May this year has accounted for the 65.6 percent of the total investment of 2015. (China Daily)

*China's gold production rose by 0.16 percent year on year to 229 tons in the first half of 2016, while consumption declined 7.68 percent to 529 tons. The majority - 341 tonnes - of consumption went on jewelry, according to the China Gold Association on Tuesday. (Xinhua)

 

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