EMERGING MARKETS

& CHINA STRATEGY

January 20, 2021

Review Of EM Themes, High-Conviction

Calls And Asset Scorecards
In This Report
This week we are reviewing our high-conviction calls on EM assets, as listed on
Theme #1:
page 9. Many of these trades have been open for a while and are now deeply in Chinese Policy Reflation
the money, while others are still early with further gains anticipated. This report And China/Global Growth
Improvement ...................1
recaps the rationale behind these calls and discusses risk factors and our expec-
Theme #2:
tations. Meanwhile, we are updating our quarterly EM Scorecard Chartpack, also Favor High-Beta EM
Laggards In The Post-Covid
attached in today’s email, to provide a snapshot of various EM assets and rank
Macro Environment..........4
their relative attractiveness both from a historical perspective and relative to their
Theme #3:
peers. Relative Value Arbitrage.....6

Our current trades within the EM universe are post-Covid recovery. All these recommendations
centered around three overriding themes, all of have been profitable, and we expect further gains
which will likely continue to prevail, in our view. going forward.

Chinese stocks are overbought in the near term after

Theme #1: Chinese Policy Reflation And
China/Global Growth Improvement
This theme dates back to 2018 when the Chinese
economy slowed significantly, leading to a reflation
process that continued to gain momentum in 2019
during the trade war with the U.S., and went into
overdrive in early 2020 when the Covid-19 pandemic
struck (Chart 1). We initiated a long position in
Chinese A shares in August 2018 when it became
clear that reflation was gaining momentum, and
went long Chinese investable stocks in December
2019 when the U.S. and China were about to reach
“Phase One” of their trade deal. We added a long
position in industrial metals in June 2020 when
the Chinese economy began a strong V-shaped
the massive rally, underscoring rising odds of a cor-
rection. However, signs of a major top are absent.
Valuations are not overly demanding compared to
historical averages and the EM benchmark, and
are still at a substantial discount to DM (Chart 2).
There is a large dispersion in equity multiples in
A shares, which distorts the benchmark valuation
level, but the median equity multiples are still well
below previous feverish highs that have preceded
major bear markets (Table 1). The valuation picture
of Chinese stocks should also improve as earnings
are beginning to recover from last year’s deep
slump.
Meanwhile, investor sentiment toward Chinese
stocks has improved markedly in recent months,

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 Review Of EM Themes, High-Conviction Calls And Asset Scorecards Emerging Markets & China Strategy

Chart 1 China Reflation Trade Has Further To Go Chart 2 Chinese Stocks Are Not Yet Expensive

CSI 300 12-Month Forward P/E

5,500 5,500
20 20
5,000 5,000

4,500 4,500 15 15
Alpine Went Long

4,000 4,000
10 10
3,500 3,500

3,000 3,000 5
Chinese Investable 5
Chinese Domestic A Shares
Emerging Markets
Chinese Investable Stocks* 35 U.S. 35
110 110 Developed World
30 30
100 Alpine Went Long 100
12-Month Trailing P/E
25 25
90 90
20 20
80 80
15 15
70 70
10 10
60 60
© Alpine Macro 2021

08 10 12 14 16 18 20
Industrial Metals Price Index** Source: MSCI

400 400
but there is no sign of speculative frenzy, even in
Alpine Went Long the more volatile and speculative domestic market.
360 360
Equity turnover and margin purchases have been
rising but are well below historical norms (Chart 3).
320 320 In short, market conditions are not yet conjuring up
images of a major top in prices.
280 280
Base metals prices should continue to benefit from
© Alpine Macro 2021 the synchronized global growth recovery led by
2017 2018 2019 2020 2021 China, aided by a weaker dollar and an extremely
*Source: MSCI dovish Federal Reserve. Chinese imports of com-
**Source: S&P GSCI
modities will likely remain strong, as the country’s

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Review Of EM Themes, High-Conviction Calls And Asset Scorecards Emerging Markets & China Strategy

Table 1 Chinese A Shares: Valuations Are Not As Extreme As Previous Peaks

Median Valuation
Now Jan-18 Jun-15 Aug-09 Oct-07
Indicators
Trailing P/E 27.6 39.3 94.6 40.5 59.7
All A-Share
P/B 2.5 3.3 7.9 4.4 5.9

Trailing P/E 28.0 40.0 97.5 40.6 59.7

A-Share Excluding
Financials & Petroleum
P/B 2.5 3.4 7.9 4.3 5.9

A-Share Excluding Trailing P/E 23.6 36.0 82.2 40.5 59.7

ChiNext & STAR P/B 2.1 3.1 7.1 4.4 5.9
Source: Choice

Chart 3 Chinese A-Shares:

No Sign Of Speculative Frenzy
% % infrastructure construction accelerates on a multi-
70 As % of Chinese Market Cap: 70
year horizon, while in the U.S. President-elect Joe
60 60 Biden will likely also make infrastructure investment
Monthly Turnover a priority. Meanwhile, inventories of base metals
50 50
in global exchanges have become very low, all of
40 40
which are supportive for prices (Chart 4).
30 30
In addition, we see a strengthening case that the
20 20 current rally in base metals will develop into a

10 10
multi-year structural bull market, as supplies will
be constrained by the marked reduction in capital
% % spending in the mining sector in recent years due
4 4 to the prolonged bear market in prices, which will
Margin Debt likely lead to shortages and higher prices. We will
follow up on this issue in an upcoming special
3 3
report.

2 2 The reflation trade in Chinese stocks and base

metals will be disrupted decisively if and when
China’s overall policy environment tightens aggres-
1 1
sively. Historically, Chinese and EM asset prices
© Alpine Macro 2021 have always suffered major losses when Chinese
credit flows contracted – i.e. a credit crunch in
04 06 08 10 12 14 16 18 20

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 Review Of EM Themes, High-Conviction Calls And Asset Scorecards Emerging Markets & China Strategy

Chart 4 Metal Inventories Are Chart 5 Improved Risk Appetite Bodes Well
Nearly Depleted For High Beta EM Bourses
Mn T Mn T %yoy %yoy
Commodity Inventories at LME* Equity Return Relative to EM Benchmark*:

5
Aluminum (ls) Brazil
Zinc (rs) Indonesia
1.2 40 40
4

3 0.8 0 0

2
0.4 -40 -40
1

EM Risk Aversion Index** (Inverted)

Mn T Mn T
0.2 0.2
Nickel (ls)
.4 Copper (rs) 0.8
0.4 0.4

.3 0.6 0.6 0.6

.2 0.4 0.8 0.8

© Alpine Macro 2021

.1 0.2
2014 2016 2018 2020
*Source: MSCI
© Alpine Macro 2021 **Source: Citi

80 85 90
*London Metal Exchange
95 00 05 10 15 20
Theme #2: Favor High-Beta EM
Laggards In The Post-Covid Macro
the economy, as discussed in greater detail in last
Environment
week’s report.1 Currently, China’s credit flows are This theme covers our long positions in Brazil-
just beginning to moderate but are far from con- ian and Indonesian equities, as well as the local
tracting, and conditions for the Chinese authorities currency bonds of Mexico, Indonesia and South
to impose draconian credit tightening are absent. Africa, initiated progressively since the onset of the
This should prolong China’s credit and business pandemic. These assets have recovered strongly
cycle expansion and support growth-sensitive since the pandemic-induced meltdown early last
assets. year, but are still far below their respective peaks,
and should continue to advance thanks to the

1 Alpine Macro EM & China Strategy "The Risk Of Chinese

generalized increase in risk appetite towards EM
Tightening: Three Key Questions" (January 13, 2021). assets among global investors (Chart 5).

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 Review Of EM Themes, High-Conviction Calls And Asset Scorecards Emerging Markets & China Strategy

Chart 6 Indonesian And Brazilian Equities: Chart 7 EM Bonds: Where Are The Yields?
The Derating Is Advanced
% %
Stock Prices Relative to EM Benchmark: Real 10-Year Government Bond Yield
Brazil (ls)
4.0 Indonesia (rs) 1.1 4 4

1.0
3.6 3 3

0.9
3.2
2 2
0.8
2.8
0.7 1 1

2.4
0.6
0 0
2.0
0.5
-1 -1
1.6 0.4
© Alpine Macro 2021
© Alpine Macro 2021

Chile
Taiwan

China
Poland

Thailand
India
Czech Republic

Hungary
Philippines

South Korea

Colombia

Indonesia
Brazil
Turkey

South Africa
Russia

Mexico

Malaysia
06 08 10 12 14 16 18 20
Source: MSCI

Brazilian and Indonesian equities have lagged other

EM bourses badly in recent years, and suffered
further at the height of the Covid-19 pandemic,
but the relative performances of both bourses have
stopped deteriorating in recent months – a sign
that the derating has become advanced (Chart 6).
Both countries’ equities and currencies are among
the cheaper ones within EM. In addition, Indo-
nesian equities should strengthen to reflect the
country’s improving macro profile in recent years,
while Brazilian stocks should benefit from the
strong growth rebound in recent months, driven
by the country’s extremely aggressive pandemic
relief measures.3 Finally, both countries’ economic
performances and financial assets are sensitive to
commodity prices, and should stage outsized gains
if our positive view on base metals plays out.
In terms of EM local currency bonds, Mexico, In-
donesia and South Africa are our favorites, as they
are among EM’s highest yielders in both nominal
2
and real terms, and their currencies are among
the cheapest (Chart 7). In addition, Indonesian
and Mexican government’s fiscal rescue programs

2 Alpine Macro EM & China Strategy "A Bullish Case For 3 Alpine Macro EM & China Strategy "A Tale Of Two Economies:
Indonesia" (Octiber 14, 2020). Brazil And Mexico In 10 Charts" (September 23, 2020).

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 Review Of EM Themes, High-Conviction Calls And Asset Scorecards Emerging Markets & China Strategy

Chart 8 The KRW Will Catch Up Chart 9 Korean Exports Are Racing Up
Bn$ Bn$
Nominal Effective Exchange Rate: Goods Exports: 34
South Korea South Korea
120 Thailand 120 52 Taiwan
32
Taiwan

116 116 30
48
28
112 112

44 26
108 108
24
40
104 104
22

100 100 36 20

18
96 96
32
© Alpine Macro 2021 © Alpine Macro 2021 16

2014 2016 2018 2020
Source: J.P. Morgan
Note: all series are rebased to Jan 2016=100
for the pandemic last year were modest, and the
damage to their public debt levels is not sub-
stantial, which bodes well for local interest rates.
Meanwhile, we expect inflation pressures in these
economies to remain well behaved, allowing real
yields to normalize.
The risk to these positions is primarily associated
with the U.S. dollar. We expect the dollar to continue
to weaken, and therefore these trades have further
upside.
Theme #3: Relative Value Arbitrage
This theme capitalizes on valuation gaps across
EM assets with supportive macro factors. This is
behind our calls to go long the Korean won against
2010 2012 2014 2016 2018 2020
the Thai baht and the Taiwanese dollar, as well as
our relative position of long Hong Kong property
sector versus the broader benchmark.
All three Asian currencies are relative “safe havens”
within EM, supported by the strong balance-of-
payment positions of their respective economies,
but the KRW has lagged the THB and TWD signifi-
cantly in recent years (Chart 8). As such, the KRW
is among the cheapest currencies in EM Asia, while
the THB and TWD are among the most expensive,
based on our fair value assessment. The KRW also
has a slightly higher carry than both THB and TWD.
The KRW/THB trade has worked out well and the
KRW/TWD position is also beginning to pan out. We
see further upside for both positions, as the basic
driving forces remain intact. Korea’s economic

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 Review Of EM Themes, High-Conviction Calls And Asset Scorecards Emerging Markets & China Strategy

Chart 10 A Stronger KRW Has Not Been Chart 11 Asian Central Banks Are Hoarding
A Bane Reserves Again
Bn$ Bn$
FX Reserves:
KRW/THB (ls)
.031 .029 500 500
Taiwan
KRW/TWD (rs)
South Korea
.030 Thailand
.028

.029 400 400

.027
.028
.026
.027 300 300

.025
.026

200 200
Equity Return in Local Currency Terms*:
South Korea vs Thailand (ls)
2.0 2.0
South Korea vs Taiwan (rs)
1.9 100 100
1.8

1.8
1.6
© Alpine Macro 2021
1.7
1.4 00 02 04 06 08 10 12 14 16 18 20
1.6
1.2
1.5 A key risk factor for these trades is that all three
1.0
economies are facing deflationary pressures and
© Alpine Macro 2021 1.4
are uncomfortable with currency appreciation.
2015 2016 2017 2018 2019 2020 2021
Official reserves have been rising rapidly across
*Source: MSCI
Note: all series shown as 5-day moving average the board, underscoring aggressive interventions
to check currency strength (Chart 11). Among the
three, currency appreciation is probably the least
recovery since the start of the pandemic has been
affordable in Thailand, given the country’s weak
far stronger than Thailand and rapidly catching up
growth outlook. Going forward, messages from
to Taiwan (Chart 9). Despite the relative strength
these central banks should be monitored closely.
of the KRW, Korean stocks have significantly
outperformed their Thai counterparts since late Our long Hong Kong property sector versus the
2019 and have also begun to outpace Taiwanese overall equity benchmark is also designed to
stocks more recently even in local currency terms capture the extreme “valuation gap” between the
(Chart 10). This means the KRW is still cheap and two. The dividend yield of Hong Kong property
remains a reflationary force. stocks is currently about 5%, a level last seen during

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Review Of EM Themes, High-Conviction Calls And Asset Scorecards Emerging Markets & China Strategy

the 1997-‘98 Asian crisis (Chart 12). Similarly, Chart 12 Market Expects A Hard Landing
property stocks’ relative performance of late also In Hong Kong Property?
% %
mirrors the late-1990s market meltdown, which set
Dividend Yield:
in motion a massive 70% collapse in Hong Kong Hang Seng Property Index
8 8
property prices. Hang Seng Index

This means that the market is pricing in a hard

6 6
landing in the Hong Kong real estate market, which,
in our view, appears overly pessimistic. Cyclically,
property stocks should gain support from currently 4 4

ultra-low interest rates; structurally, we expect the

Hong Kong government will have to significantly 2 2
ramp up construction to ease supply shortages in
order to placate the relentless upward pressure on
Hong Kong Housing Price Index* (ls)
home prices, which offers growth opportunities for Hang Seng Property Index 3.5
developers.4 200 vs Benchmark (rs)

This trade currently is our only position that is in the 3.0

150
red. The risk to this call is that the property sector
remains sluggish in the near term while other
100 2.5
sectors continue to rally strongly, rendering an even
larger valuation gap. Our hunch is that developers'
50
stock prices have reached a major bottom, but we 2.0

will maintain discipline and respect the stop point © Alpine Macro 2021

on this position. 1995 2000 2005 2010 2015 2020

*Source: Hong Kong Centadata Company Limited
Please check today’s email for the link to our
updated Quarterly EM Assets Scorecard Chartpack.

Yan Wang, CFA EDITORIAL BOARD

Chief Emerging Markets & China Strategist Yan Wang
Chief EM & China Strategist

Xiaocen Wang Kevin Yulianto

Senior Research Analyst Research Analyst

Chen Zhao Tony Boeckh

Chief Global Strategist Editor-in-Chief

David Abramson Henry Wu

Chief U.S. Strategist &
4 Alpine Macro EM & China Strategy "Hong Kong: After The Director of Research
Head of Quantitative Research
Reset" (December 9, 2020).

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Investment Recommendations Emerging Markets & China Strategy

Investment Recommendations

Strategic Positions (6-12 months)

Open Closing Total
Recommendations Notes
Date Date P&L

Long Chinese A-Share, Currency Buy Shanghai Shenzhen CSI300 Index, initiated at 499.16,
8/28/2018 68.1% currently 839.23; stop points at rolling 10% or 4.67% below
Unhedged
current level
Long MSCI China Free Index, currency unhedged, Initiated at
Long MSCI China Free Index 12/18/2019 37.2% 1113.2, currently at 1527.89; stop points at rolling 10% or
10% below current level

Long KRW/TWD 09/04/2019 -1.1% KRW/TWD 38.63 at initiation; includes carry

Long KRW/THB 09/04/2019 7.2% KRW/THB 39.66 at initiation; includes carry

Tactical Investment Positions (3 - 6 months)

Open Closing Total
Recommendations Notes
Date Date P&L

Buy Mexican 10-year local currency government bond;

Long Mexican 10-year Government
05/27/2020 24.3% includes holding period return 9.51% and P&L on FOREX
Bond, Currency Unhedged
13.49%; stop points at rolling 5% or 5% below current level

Long S&P GSCI Industrial Metals Spot Index; initiated at

Long GSCI Industrial Metals Index 06/10/2020 29.7% 299.94, currently at 388.88; stop points at rolling -5% or 4.7%
below current level

Long MSCI Brazil; P&L on stocks 29.8% and forex hedge

Long Brazilian Equities, Currency 24.3%
09/23/2020 -4.27%; currency hedge removed on 12/02/2020; rolling
Unhedged
stop points at -10% or 10% below current level

Buy Indonesian 10-year local currency government bond,

Long Indonesian 10-year
Government Bond, Currency
Unhedged
10.0% currency unhedged; includes holding period return 5.42%
10/14/2020
and P&L on FX 4.38%; stop points at rolling -5% or 0.9%
below current level

Long Indonesian Equities, 26.8% Long MSCI Indonesia, currency unhedged; stop points at
10/14/2020
Currency Unhedged rolling -5% or 4.7% below current level

Buy South African 10-year local currency government bond,

Long South African 10-year
Government Bond, Currency
Unhedged
5.0% currency unhedged; includes holding period return 1.83%
11/18/2020
and P&L on FX 3.16%; rolling stop points at -10% or 9.6%
below current level

4.9% Buy Hang Seng Property Index (HSP Index); stop points
Long Hong Kong Property Index 12/09/2020
at -5%

Buy Hang Seng Property Index (HSP Index) versus MSCI

Long Hong Kong Property Index -3.4%
12/09/2020 Hong Kong; P&L on long HSP 4.94% and short MXHK
vs MSCI Hong Kong
-8.38%; stop points at -10%

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EM Country And Sector Allocations Emerging Markets & China Strategy

EM Equity Country Allocation

Overweight Slight Overweight Neutral Slight Underweight Underweight
Mexico South Korea Czech Republic
Chile Poland Taiwan
Colombia Russia Hungary
Brazil Turkey Malaysia
Indonesia China Philippines
South Africa Thailand
Peru India

EM Equity Sector Allocation

Overweight Slight Overweight

Materials Health Care

Consumer Discretionary
Energy
Neutral
Information Technology
Industrials
Financials
Underweight Slight Underweight
Utilities
Consumer Staples
Communication Services

EM Local-Currency Government Bond Allocation

Overweight Neutral Underweight

Mexico Russia Thailand

Brazil India Taiwan
Colombia China Philippines
Indonesia South Africa Poland
South Korea Czech Republic
Chile Hungary
Malaysia Turkey

Copyright © 2021, Alpine Macro. All rights reserved.

The information, recommendations, analysis and research materials presented in this document are provided for information purposes only and
should not be considered or used as an offer or solicitation to sell or buy financial securities or other financial instruments or products, nor to con-
stitute any advice or recommendation with respect to such securities, financial instruments or products. This document is produced for subscribers
only and represents the general views of Alpine Macro, and does not constitute recommendations or advice for any specific person or entity receiving
it. The text, images and other materials contained or displayed on any Alpine Macro products, services, reports, emails or website are proprietary
to Alpine Macro and should not be circulated without the expressed authorization of Alpine Macro. Any use of graphs, text or other material from
this report by the recipient must acknowledge Alpine Macro as the source and requires advance authorization. Alpine Macro relies on a variety of
data providers for economic and financial market information. The data used in this publication may have been obtained from a variety of sources
including Bloomberg, Macrobond, CEIC, Choice, MSCI, BofA Merrill Lynch and JP Morgan. The data used, or referred to, in this report are judged to
be reliable, but Alpine Macro cannot be held responsible for the accuracy of data used herein.

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Previous Reports Emerging Markets & China Strategy

Archive Of Previous Reports:

Please contact us if you are interested in our recent reports:

1. The Risk Of Chinese Tightening: Three Key Questions - January 13, 2021
2. EM Equity Allocation For Q1 - January 6, 2021
3. China Monthly Tracker: Sustaining The Mini Boom - December 22, 2020
4. EM Outlook: Consensus, Risks And The Long-Term Trend - December 16, 2020
5. Hong Kong: After The Reset - December 9, 2020
6. Stay Bullish, But Be Aware Of Chinese Policy Shift - December 2, 2020
7. China Monthly Tracker: Economic Mini Boom And Policy Normalization - November 26, 2020
8. South Africa: The Good, The Bad, And The Ugly - November 18, 2020
9. Covid Vaccine, President-Elect Biden And EM Laggards - November 11, 2020
10. Election, Pandemic And EM Long-Term Trend - November 4, 2020
11. China Monthly Tracker: The Mini-Boom Is Spreading - October 28, 2020
12. Are Chinese Assets Headed For A Bigger Boom? - October 28, 2020
13. Thematic Chartpack: EM Assets Q3 2020 Scorecard - October 22, 2020
14. A Bullish Case For Indonesia - October 14, 2020
15. EM Equity Allocation For Q4 - October 7, 2020
16. India’s Emerging Tech Giants And Turkey’s Hopeless Lira Defence - September 30, 2020
17. A Tale Of Two Economies: Brazil And Mexico In 10 Charts - September 23, 2020
18. China In The Next Five Years - September 9, 2020
19. Chinese Stocks And Geopolitical Tensions - September 2, 2020
20. EM Reflation, Pandemic Scorecard And Investment Implications - August 26, 2020
21. China Monthly Tracker: Is The Recovery Faltering? - August 25, 2020
22. China Shop - August 12, 2020
23. China: Big Questions For The Next Three Months - August 5, 2020
24. Red Flags On Turkey And U.S.-China Fight - July 29, 2020
25. China Monthly Tracker: The V-Shaped Recovery - July 21, 2020
26. China: Beyond The Headlines - July 15, 2020
27. What Would A Biden Presidency Mean For China? - July 8, 2020
28. Thematic Chartpack: EM Assets Q2 2020 Scorecard - July 7, 2020
29. EM Equity Allocation For Q3 - July 1, 2020
30. Looming Policy Shift? - June 25, 2020
31. When Two Elephants Fight… - June 17, 2020
32. Rotation - June 10, 2020
33. Buy Some EM Bonds - June 3, 2020
34. Great Concerns In Greater China - May 27, 2020
35. China Monthly Tracker: Growth Improvement Gains Traction - May 21, 2020

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About Alpine Macro Emerging Markets & China Strategy

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