Macro Investing in Asian Markets Using local experts for Asian macro investing


Jimmy Lim, CEO & CIO at Modular Asset Management (Singapore) Pte Ltd, Singapore J


immy Lim has spent 20 years trading Asian markets, at banks and on the buy side, in Singapore, Hong Kong, Tokyo and Geneva. Lim has been trading the Asian Macro strategy since his time at BlueCrest (2011-2015) and


continued to do so at Millennium Management LLC (2017-2019). In January 2020, he spun out of Millennium to form Modular Asset Management and launch the Modular Asian Macro Fund, which was Asia’s largest macro launch in 2020 and led to Lim being featured in The Hedge Fund Journal’s Tomorrow’s Titans report that year. The Asian Macro strategy currently has $1.1bn in assets under management, and since 2011, has gross annualized returns of around 7% with volatility of 3% and maximum drawdown of -2.4% (outperforming most major asset classes during that same period). As at end-September 2022, the Modular Asian Macro Fund is up approximately +11.3% YTD (net). Furthermore, the strategy has generated a higher Sharpe ratio and a lower drawdown compared to most hedge fund strategy indices, with a slightly negative historical correlation to conventional asset classes and other hedge fund strategies.


Modular trades mainly liquid currencies, fixed income, derivatives and options, with a small exposure to equities. Around 90-95% of the risk is in Asia, including Japan, New Zealand, China, Taiwan, Korea, Thailand, Malaysia, Singapore, Indonesia and the Philippines. If a trade has a high beta to US markets this can be hedged out.


The 18-investment staff are grouped into product and country modules. Product modules such as FX and rates aim to deliver stable, consistent P&L through shorter term trades of 2-3 days. Country modules can cover all asset classes but are constrained to the market(s) in which the respective portfolio manager has a distinct domain expertise. Country modules include China, India, Taiwan, ASEAN and ANZ. One objective of the country modules is to trade like a local dealer in the harder to access countries such as China, India, Indonesia and Korea. Country portfolio managers are typically locals who speak the language, have a strong local network, and understand the local market and country. Lim oversees the overall strategy to make sure risk is well diversified and he fills in some gaps where there are no specialist portfolio managers for certain countries.


Investment Process Modular’s portfolio managers and researchers identify themes and build hypotheses and then leverage Modular’s strong local networks in Asia


to visit countries to prove (or disprove) these hypotheses before identifying the best product – FX, rates, credit or equity – and then structuring the trade in the most beneficial way possible. Lim discussed certain themes he believes demonstrate current trading opportunities in the Asian macro space.


Climate change and the rice crisis Climate change is an important theme in Asia, which led Modular to various currency trades. China’s extreme heatwave and drought in its central plains, India’s monsoon deficit in its rice planting states, combined with the worst ever floods in Pakistan, has sown the next rice crisis. This crisis will play out with a time lag of about 4-6 months, as buffer stocks across the region deplete and need replenishment.


As the world’s third largest rice exporter, Thailand is benefiting from higher rice exports, while the world’s second largest rice importer, the Philippines, will face a larger rice import bill. Recent visits to these countries have strengthened Modular’s thesis and Modular’s channel checks have identified other factors in favour of these trades. As Thailand enjoyed a bumper harvest, rice stocks are high, leaving the Thai government and rice merchants in a strong position to raise both export volumes and prices. Concurrently, Thailand is also seeing a recovery in tourism that reached 1.3 million in August – a very strong number considering there is no China traffic these days. This bodes well for the traditional tourism peak in November and December – which will be a source of foreign exchange for the country. Conversely, the Philippines is facing a greater need for USD - to import capital equipment and steel – as the new Marcos administration jumpstarts its mega infrastructure program.


Modular structured the Thai Baht leg of the trade using forwards, as well as option spreads to exploit the very expensive downside skew. In contrast Philippine Peso options were richly priced, so Modular used a mix of spot and forward instead.


Korean yield curve anomaly Another trade idea is founded upon an anomaly detected in the Korean interest rate swap curve. It is deeply inverted almost at GFC levels, with a spread reaching a recent low of -44 basis points between its two- and ten-year tenors, while most other Asian curves are flat. Historically, these inversion episodes are usually explained by Korea’s beta to the US curve and issuance of structured products by local asset managers.


This time however, three special factors lead Modular to expect the curve to steepen. First, Korea has a huge floating rate mortgage market, and the Korean government has introduced a mortgage conversion program with a 40-basis point incentive to switch from floating to fixed rate mortgages. This program will result in issuance of mortgage- backed securities worth 45-50 trillion Korean Won starting early next year. Second, the government is preparing to extend a loan conversion program (once again floating to fixed rate) to a broad base of SMEs hurt by the pandemic. This could result in another 20-30 trillion Korean Won of issuance. Third is the energy company subsidies. High LNG prices create a 30 trillion Korean Won deficit at the state electricity company, which could increase as the energy company builds winter reserves for the cold Korean winter. This subsidy will generate more KRW issuance. Taking these three factors together, there will be 100 trillion Korean Won of extra bond issuance, possibly resulting in 60% of the total KRW issuance for 2023.


Modular has constructed a steepener trade, which earns positive carry. Trade expression for the steepener includes the less liquid interest rate swap curve, and the more liquid bond curve.


Broader Asian themes The above trades are examples of Modular country specific and special opportunity ideas, but Modular has some longer term themes it is tracking.


One such theme is that fiscal challenges will increase as Asian countries copy the fiscal spending seen in the UK and Europe. In fact, Modular sees a growing risk of wage price spirals across the region, as the initial tendency by politicians is to raise salaries or give handouts to cope with inflation. Singapore has introduced a Progressive Wage Program to push lower skilled wages higher. Malaysia unveiled an election budget for 2023 on 7 October 2022, with cash handouts and tax cuts for the lower to middle income groups that it can ill afford. Indonesia faces elections in 2024 and is also likely to be generous. It is easy for politicians to promise pay rises, even if this poses a challenge for central banks.


Another big theme is the evolution of the EV story, which Modular continues to track across Asia. Electrical vehicles are creating competition between countries vying to be an EV hub. Indonesia uses its nickel resources advantage to lure EV battery plants and stainless-steel refineries. Thailand is leveraging its large auto manufacturing base, and


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