View from the Peak: Is the Rooster wearing bathing shorts?
Traditionally roosters like the centre of attention. In the spotlight. If the tide of excess liquidity withdraws from Asia we must hope that the rooster is appropriately attired, to expropriate Buffett's adage.
The collision of three macro factors worries View from the Peak for 2017. Liquidity, much talked about, hard to pin down, and like air only noticed in its absence may evaporate faster in Asia than a puddle in the Gobi desert. Hard to quantify in absolute terms, but will have a profound impact on those who own businesses and for those who have dry powder to buy into businesses in Asia or invest in Asian markets. All three forces will independently start draining liquidity from Asia come the second half of 2017. Combined, the pool will empty very quickly.
2017 is the year the Basel III et al starts to be felt in Asia. LCR, NSFR and all the other acronyms that govern banks credit allocation hits Asia this year. Asian economies have been built on bank finance. The local and regional banks are the principal credit multipliers to economies. Capital markets remain thin relative to western counterparts and 'market based finance' or the more popularly voodoo sounding 'Shadow Banking' has yet to gain a firm foothold. Compression on the primary credit multiplier over the next three years is estimated at close to $3 trillion by a leading Singapore bank. This will hurt Asia.
This by itself would not be cause for too much concern–economies and markets will adjust. But what if the adjustment comes with two other factors also sucking liquidity out of Asia?
On the minds of Asian corporate borrowers and business owners is to quantify the percentage of 'tourist' dollars sloshing around Asian markets that will briskly head to the exit should US base rates rise. Could a controlled flow become a flood?
If the United States is acting as a positive magnet for money, China is fortifying the walls in a bid to stem the tide of money flowing out. SAFE was instructed to adjust the rules again in late January 2017. Investment bankers note the demise of the 'Random Chinese Buyer' who has cropped up in recent years all over the world, but most notably in Asia. No one outside the tiny circle on the inside of the black box that runs Beijing knows the real direction of policy. Those who genuinely do know, won't say. Everyone else opines. If policy is to forcefully check outflow and retain more capital inside the PRC, Asia will feel it's absence more than anywhere else.
Can the Asian economies and companies adjust should it become a three barrel problem. View from the Peak references the image of Jaws - the all powerful white shark that is only brought to bay with three barrels as drag.
Vacuums are filled. Savvy markets trained next generation Asian families with great knowledge of verticals, deep understanding of the markets and armed with dry powder may find in the battlefields the foundations for new empires.
So tips from View from the Peak for 2017–private credit to mid-tier Asian operations will increasingly be a great place to invest and family offices and private equity firms will try to find a way to work together that yields the best of both worlds for a win, win, win - the markets will be fertile for those that can find the way.
If not and the tide goes out and possibly very rapidly, let's hope the rooster will not embarrass itself with giving the world an eyeful of the last turkey in the shop.
