Global
ECONOMICS
Key message
Global macro conditions show the eurozone,
China, and emerging markets remain under
significant downward pressure. The US
economy seems relatively good for now, but
the NY Fed’s estimated recession model shows
the possibility that a recession might take
place one year from now. However, history
shows seven to twelve months before a
recession, US stocks still offer generous
returns, meaning we don’t need to worry
about US stocks for another six months, and
underweighting US stocks can wait until early
2020.
Carl Liu, CFA, CFP, CSIA
886.2.2181.8032
carl.liu@kgi.com
Erik Lee
886.2.2181.8024
erik.lee@kgi.com
See the last page for important disclosures.
July 24, 2019
US recession possible in 1 year
Don’t worry about US stocks for 6 months; underweight
in early 2020
Global macro conditions show the eurozone, China, & emerging markets remain
under significant downward pressure
Changes in global macro conditions have increasingly caught the attention of global
investors since mid-2Q19. The global manufacturing PMI Diffusion Index fell below 50
recently (see Figure 1), indicating more major economies are seeing PMI deteriorate than
improve, which is proof that a global economic downturn remains a possibility. The
eurozone and especially Germany have not seen much improvement, and we remain
conservative about Europe/Germany for the next three months. China’s 2Q19 GDP
growth was a 27-year low of 6.2%, echoing our previous viewpoint that investors should
resume a more conservative stance toward the Chinese economy. However, because of
this, we think the Chinese government will increase stimuli both fiscally and monetarily.
The key is whether these stimulus measures will trickle down into the real economy, in
particular the manufacturing sector. Regarding emerging markets, a weak China macro
economy and the impact of the Sino-US trade war have set off a chain reaction in which
Asian nations have seen lower exports, especially China-bound products. What’s
noteworthy is that South Korea’s exports and emerging market earnings are surprisingly
highly correlated, and given Korea’s recent export performance, we think emerging
market earnings will continue in a downtrend (Figure 2).
US economy in relatively better shape, but possibility of economic recession one
year from now has is emerging
The US has performed relatively well and has seen data recover this month. However,
since 2Q19, inversion of 10-year and 3M US Treasury yields has deepened market
concern over US economic prospects, which is a concern we don’t share because
inversion was basically due to distortion by the decline of term premium of US long-term
treasuries. Accordingly, this has weakened US yield inversion as a predictor of economic
recession. In fact, the decline of US long-term treasury premiums in the past few years
was the result of a continuous increase in negative-yield debt worldwide (Figure 3).
However, we note June data from the NY Fed’s long- and short-term interest spread-
based recession model shows the chance of the US entering a recession in the next 12
months has risen above 30% for the first time since the financial crisis (30% is critical
value). In the past 50 years, the number of times when this model has shown a 30% or
higher chance of recession and turned out to be wrong was zero (Figure 4).
Don’t worry about US stocks for six months; underweight US stocks in early 2020
For investors, whether or not a long-term real-term interest rate decline and rising gold
price are indicators of a negative market economic outlook remains to be seen (Figure 5).
However, we believe the logic behind the rise of the price of gold before and after July is
different, with the former mostly reflecting economic slowdown and policy uncertainty,
while the latter most likely indicates the possibility inflation will rise from the trough and
thus should not be seen as a canary in a coal mine for an economic recession. We note,
US stocks remain relatively strong among developed markets which will bolster US dollar
strength in the near term, even if there is a rate cut (Figure 6). Furthermore, even if the
US economy sinks into a recession in one year, experience shows that seven to twelve
months before a recession US stocks still offer generous returns (Figure 7), meaning we
don’t need to worry about US stocks for another six months, and underweighting US
stocks can wait until early 2020.
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  Global  US recession possible in 1 year 
 

Figure 1: Global manufacturing PMI diffusion index indicates most countries still
face downward economic pressure
Global manufacturing PMI, points (LHS); PMI diffusion index, percent (RHS)
60 80
58 70
56 60
54 50
52 40
50 30
48 20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Global mfg. PMI PMI diffusion index
Source: Bloomberg; KGI Research

Figure 2: Judging by South Korean exports, emerging market earnings will keep falling
Emerging market EPS YoY, percent (LHS); South Korean exports growth, percent (RHS)
100 50
75 40
30
50 20
25 10
0 0
(10)
(25) (20)
(50) (30)
2003 2005 2007 2009 2011 2013 2015 2017 2019
MSCI Emerging Markets EPS Korean exports
Source: Bloomberg; KGI Research

Figure 3: US 10-year premium down long-term as global negative-yield debt is rising

US 10-year term premium, percent (inverted, LHS); global market-cap of negative-yield debt, US$tn
(RHS)
(1.0) 16

12
(0.5)
8
0.0
4

0.5 0
2015 2016 2017 2018 2019
US 10-yr term premium Global market cap of negative yielding debts
Source: Bloomberg; KGI Research

Figure 4: NY Fed model shows chance of US recession in mid-2020

NY Fed estimated chance of US economic recession, percent
50

40

30

20

10

0
1985 1990 1995 2000 2005 2010 2015 2020

Note: Shaded areas denote NBER-defined US recessions

Source: Bloomberg; KGI Research

July 24, 2019 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 2

 
 
  
  Global  US recession possible in 1 year 
 

Figure 5: Whether long-term real-term interest rate decline & rising gold price
relative to other cyclical commodities are signs of global macro downtrend
remains to be seen
Global Gold Mining Index/Oil & Gas E&P Index, x (LHS); US 10-year TIPS yield, percent (inverted, RHS)
0.09 (0.3)
0.08 0.0
0.07
0.3
0.06
0.6
0.05
0.04 0.9
0.03 1.2
2016 2017 2018 2019
Global Gold Mining Index/S&P Oil and Gas E&P Index 10 Year Treasury Inflation-Protected Securities yield

Source: Bloomberg; KGI Research

Figure 6: Relatively good performance of US stocks bolsters US dollar

S&P 500/ MSCI Global ex-US Index, x (LHS), US Dollar Index, point (RHS)
12 130
10 120
8 110
100
6
90
4 80
2 70
0 60
1991 1995 1999 2003 2007 2011 2015 2019
S&P 500/ MSCI Global ex-US Index USD Index
Source: Bloomberg; KGI Research

 
Figure 7ĈExperience shows that 7-12 months before a recession US stocks still
offer generous returns
Prior to recession
S&P 500 annualized real total returns prior to recessions 13-24 months 7-12 months 1-6 months
1953/7-1954/5 21.9 17.8 (13.8)
1957/8-1958/4 15.8 (17.0) 13.9
1960/4-1961/2 31.3 6.6 (2.2)
1969/12-1970/11 13.4 (11.0) (20.7)
1973/11-1975/3 16.9 (11.3) (2.7)
1980/1-1980/7 0.5 6.8 4.0
1981/7-1982/11 32.3 (11.2)
1990/7-1991/3 14.3 22.2 1.6
2001/3-2001/11 8.9 20.0 (40.6)
2007/12-2009/6 11.6 13.6 (6.3)
Average 15.0 8.0 (7.8)
 
SourceĈBCA; KGI Research

July 24, 2019 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 3

 
 
  
  Global  US recession possible in 1 year 
 

Figure 8: Key US economic data

Indicators Units 2015 2016 2017 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19
GDP QoQ SAAR QoQ %, SAAR 3.4 2.2 3.1
GDP
GDP YoY YoY % 2.9 1.6 2.2 3.0 3.0 3.2
CPI YoY % 0.1 1.3 2.1 2.9 2.7 2.3 2.5 2.2 1.9 1.6 1.5 1.9 2.0 1.8 1.6
Core CPI YoY % 1.8 2.2 1.9 2.4 2.2 2.2 2.1 2.2 2.2 2.2 2.1 2.0 2.1 2.0 2.1
Consumer prices
PCE price index YoY % 0.3 1.1 1.7 2.4 2.2 2.0 2.0 1.8 1.8 1.4 1.3 1.5 1.6 1.5
Core PCE index YoY % 1.3 1.7 1.6 2.0 1.9 2.0 1.8 1.9 2.0 1.8 1.7 1.5 1.6 1.6
Labor force participation rate % 62.7 62.8 62.9 62.9 62.7 62.7 62.9 62.9 63.1 63.2 63.2 63.0 62.8 62.8 62.9
Unemployment rate % 5.3 4.9 4.4 3.9 3.8 3.7 3.8 3.7 3.9 4.0 3.8 3.8 3.6 3.6 3.7
Labor market
Non farm payrolls '000 2,713 2,240 2,153 178 282 108 277 196 227 312 56 153 216 72 224
Avg. hourly earnings YoY % 2.3 2.6 2.5 2.8 3.2 3.0 3.3 3.3 3.3 3.2 3.4 3.2 3.2 3.1 3.1
Industrial production YoY % (0.7) (1.2) 2.0 3.9 5.3 5.4 4.1 4.1 3.8 3.6 2.8 2.3 0.9 2.1 1.3
Durable goods orders YoY % (4.6) (1.7) 5.9 10.5 13.4 6.1 8.2 5.0 3.7 8.1 0.9 0.2 0.1 (3.2)
Core capital goods orders YoY % (4.4) (4.5) 5.2 10.3 8.4 0.5 5.7 6.4 2.2 3.5 2.3 2.2 2.4 1.0
Economic activity ISM manufacturing index Point 48.4 54.3 59.4 58.4 60.8 59.5 57.5 58.8 54.3 56.6 54.2 55.3 52.8 52.1 51.7
ISM non-manufacturing index Point 55.3 56.9 56.3 56.7 58.8 60.8 60.0 60.4 58.0 56.7 59.7 56.1 55.5 56.9 55.1
ISM manufacturing index: new orders Point 49.6 59.5 67.3 60.8 64.5 61.5 58.0 61.8 51.3 58.2 55.5 57.4 51.7 52.7 50.0
Conference board leading index YoY % 2.0 1.3 5.7 6.3 6.3 6.6 5.3 5.0 4.1 3.5 3.0 2.9 2.5 2.5 1.6
Housing starts '000, SAAR 13,285 14,128 14,518 1,184 1,279 1,236 1,211 1,202 1,142 1,291 1,149 1,199 1,270 1,265 1,253
New home sales '000, SAAR 6031 6731 7403 609 604 607 557 615 564 644 669 705 679 626
Housing market Existing home sales mn, SAAR 62.8 65.3 66.4 5.4 5.4 5.2 5.2 5.2 5.0 4.9 5.5 5.2 5.2 5.4 5.3
NAHB housing market index Point, SA 60 69 74 68 67 67 68 60 56 58 62 62 63 66 64
S&P/Case-Shiller 20-city composite home price index YoY % 5.5 5.4 6.3 5.9 5.6 5.2 5.0 4.5 4.0 3.4 2.9 2.6 2.5
Personal expenditures YoY %, SA 4.0 4.0 4.5 3.0 3.1 2.7 2.8 2.8 2.0 2.6 2.6 2.8 2.8 2.7
Retail sales YoY % 2.6 3.0 4.6 6.6 6.3 3.9 4.8 4.0 1.4 2.6 1.9 3.8 3.8 2.9 3.4
Consumption Retail sales ex-autos YoY % 1.4 2.8 4.6 7.5 6.8 5.0 6.0 4.5 1.1 3.2 2.1 3.7 3.9 2.8 3.3
Domestic vehicles sales mn, SA 164.4 163.1 160.1
Michigan Consumer Sentiment Index Point 92.6 98.2 95.9 97.9 96.2 100.1 98.6 97.5 98.3 91.2 93.8 98.4 97.2 100.0 98.2
Fiscal Budget balance As % of GDP (2.6) (3.1) (3.4) (3.8) (4.3) (3.8) (3.9) (4.2) (4.2) (4.3) (4.4) (4.1) (4.4) (4.3)
Int'l balance Current account balance As % of GDP (2.2) (2.3) (2.3) (2.2) (2.4) (2.4)
Federal funds rate % 0.50 0.75 1.50 2.00 2.00 2.25 2.25 2.25 2.50 2.50 2.50 2.50 2.50 2.50 2.50
Monetary & financial 10-Year treasury yield % 2.27 2.44 2.41 2.96 2.86 3.06 3.14 2.99 2.68 2.63 2.72 2.41 2.50 2.12 2.01
Dollar index Point 98.6 102.2 92.1 94.6 95.1 95.1 97.1 97.3 96.2 95.6 96.2 97.3 97.5 97.8 96.1
Source: Bloomberg; KGI Research

Figure 9: Key Taiwan economic data

Indicators Units 2015 2016 2017 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19
GDP GDP YoY YoY % 0.8 1.5 3.1 2.4 1.8 1.7
CPI YoY % (0.3) 1.4 0.6 1.8 1.5 1.7 1.2 0.3 (0.1) 0.2 0.2 0.6 0.7 0.9 0.9
Consumer prices
Core CPI YoY % 0.8 0.8 1.0 1.5 1.4 1.2 0.7 0.7 0.5 0.5 0.3 0.5 0.6 0.6 0.5
Labor market Unemployment rate % 3.8 3.9 3.8 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.8 3.7
Industrial production YoY % (1.6) 1.4 3.0 4.7 1.1 1.7 8.8 2.6 (1.1) (1.1) (2.0) (9.4) 1.4 (2.6) (0.4)
Markit Taiwan manufacturing PMI Point 56.2 56.6 53.1 53.0 50.8 48.7 48.4 47.7 47.5 46.3 49.0 48.2 48.4 45.5
yellow- yellow- yellow- yellow- yellow- yellow- yellow-
NDC monitoring light signal green green blue
Economic activity blue blue blue blue blue blue blue
NDC monitoring indicators Point 14 28 22 26 24 22 22 17 16 20 17 20 21
NDC composite leading index YoY % (0.9) 0.9 3.4 2.5 2.0 1.3 0.7 0.3 0.2 0.5 1.1 1.7 2.1 2.5
NDC composite coincident index YoY % (1.9) 1.1 4.4 4.0 3.1 2.2 1.2 0.3 (0.5) (1.2) (1.7) (2.2) (2.4) (2.8)
Consumption Retail sales YoY % 0.3 1.9 1.2 1.8 (0.8) 2.7 0.6 (0.4) 0.5 6.2 (9.4) 1.3 4.5 2.9 4.5
Exports US$bn 285.3 280.5 317.5 28.4 28.3 29.6 29.6 27.8 28.6 27.3 20.4 28.7 25.8 27.7 28.4
Imports US$bn 237.2 231.0 259.6 26.1 23.8 25.3 26.2 23.2 23.9 26.4 15.5 25.6 23.2 23.2 24.5
Trade balance US$bn 48.1 49.5 57.9 2.2 4.5 4.3 3.4 4.7 4.7 0.9 4.9 3.1 2.7 4.5 3.9
Trade Export growth YoY % (10.9) (1.7) 13.2 4.7 1.9 2.6 7.3 (3.5) (3.2) (0.3) (8.8) (4.5) (3.4) (4.8) 0.5
Import growth YoY % (15.8) (2.6) 12.4 20.1 7.4 13.7 17.4 0.9 2.2 6.8 (19.8) 6.6 2.6 (5.9) 6.6
Export orders US$bn 451.8 472.8 492.8 41.8 43.7 47.9 49.0 47.7 43.4 40.5 28.9 38.6 37.7 38.7 38.5
Export order growth YoY % (4.4) (1.6) 4.2 8.0 7.1 4.2 5.1 (2.1) (10.5) (6.0) (10.9) (9.0) (3.7) (5.8) (4.5)
M1B YoY % 6.4 6.0 4.0 5.8 5.2 5.2 5.3 5.1 5.7 6.6 6.0 6.9 7.7 7.2 7.4
M2 YoY % 5.7 4.1 3.6 3.7 3.4 3.3 3.4 3.1 3.1 3.1 2.9 3.1 3.7 3.4 3.1
Monetary & financial Foreign reserves US$bn 426.0 434.2 451.5 458.5 459.9 460.4 460.2 461.4 461.8 463.0 463.9 464.1 464.8 464.4 467.0
Rediscount rate % 1.625 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375
Exchange USD/TWD 32.83 32.33 29.65 30.64 30.72 30.51 30.95 30.82 30.57 30.72 30.81 30.84 30.90 31.63 30.98
Source: Bloomberg; KGI Research

July 24, 2019 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 4

 
 
  
  US  US recession possible in 1 year 
 

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Outperform (OP) We take a positive view on the stock. The stock is expected to outperform the expected total
return* of the KGI coverage universe in the related market over a 12-month investment horizon.

Neutral (N) We take a neutral view on the stock. The stock is expected to perform in line with the expected
total return* of the KGI coverage universe in the related market over a 12-month investment
horizon.

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return* of the KGI coverage universe in the related market over a 12-month investment horizon.

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transaction and in certain other circumstances.

Total return = (12M target price - current price) / current price

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China Development Financial Holding Corporation Group. All information contained herein is believed to come from reliable sources;
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