My macro theme update. Part 1: China

Yesterday I talked about locking in a macro view so as to formulate a 2015 strategy. Well, today is probably the biggest event for those looking at an Asian strategy.

Source: Bloomberg

Following on from yesterday's article, China’s GDP figures will likely show the country grew at the slowest rate in 24 years. Year-on-year GDP growth was 3.9% back in 1990. The difference between then and now is that China was at the beginning of their economic renaissance.

Now, however, with growth moderating in China, the next phase of the country’s economic prosperity is being mapped out through fiscal regulation and sustained growth targets. Those ideas mean the central government is also looking to moderate rampant speculation, encourage sustained growth for domestic demand and ensure private enterprise becomes more self-sufficient.

These are longer term goals. In the interim, growth is still needed to maintain employment, wealth and China’s global competitiveness.

I think the regulations brought in on margin lending accounts over the weekend are one of the ways the central government can achieve its long term goals while maintaining momentum in the interim.

As a result, the Chinese banking regulator has cracked down on business-to-business (B2B) lending and other forms of shadow bank lending that have been amassing over the past few years. But it’s the new rules blocking the B2B loans used in securities investment that are most interesting to export nations.

Yes, this will tighten fund flows into the markets in the interim, but this regulation looks more like a positive stimulus measure as it will mean these loans need to find other investment avenues. Infrastructure projects, practical business lending and corporative investment are likely destinations.

I see this as net positive for exporting nations as these new rules filter into investment decision making. The collapse of copper is a key example. If B2B lending is forced into property or commercial projects, demand for industrial metals will return.

Morgan Stanley sees copper rallying 23% over the next year, which is possible considering it’s coming from such a low base. I remain positive on a second-half recovery in cyclical stocks. There are plenty of reweighted equites that will benefit from this cyclical swing in industrial metals, and when the swing surfaces be ready to ride the upturn.  The first part of my macro strategy is likely to fall into place from today.

Ahead of the Australian open

With the US closed for Martin Luther King Day, there are no real leads to be drawn from futures and physical equity markets. I see the effect of the banking regulations in China continuing to weigh on investment decisions here in Australia.

The big four gave back all gains yesterday and slid into the red as their Chinese counterparts took a pounding in Shanghai. This is likely to continue today. Energy plays are also likely to give up some of yesterday’s gains after Iraq reported its output is at record highs, seeing Brent and WTI falling over 2.5%.

However, most Asian trade will likely be subdued until China gives us a clear picture of the current state of affairs. Expectations are for a 7.2% read year-on-year. The release is due at 1pm AEDT.

I would be wary of taking positions in the likes of BHP and RIO ahead of the print as the market is likely to turn on the two miners, depending on the outcome. I suspect trade will be light in the morning session as all of Asia focuses on Beijing.

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