Posts Tagged ‘Emerging Markets’
Saturday, February 16th, 2013
Emerging Markets Radar (February 18, 2013)
- China’s central bank, People’s Bank of China (PBOC), injected $72 billion on February 12 into the system to maintain holiday liquidity through a 14-day reverse repo operation.
- China became the largest trading partner in 2012 after achieving 3 percent more trades than the U.S., the second-largest trading country.
- Lunar New Year data showed visitation to Macau grew 20.8 percent from February 10 to February 13 on a year-over-year basis. The highest growth of Chinese visitors was recorded at 36.5 and 35.8 percent on February 10 (the Lunar New Year) and February 12, respectively. The border checkpoints on the China side were overloaded and it took an hour-and-a-half to pass through during the holiday. The mayor of Zhuhai says that checkpoint expansion will be ready in a few months. Macau is now in a structural growth stage after the Hong Kong and Macau Bridge over the ocean is completed which will shorten the time of travel to about 30 minutes from the Hong Kong airport.
- The policy initiatives of Korea’s new administration will be positive for banks, the property market, construction and steel sectors by focusing on household debt reduction, economic growth, and small and medium enterprise support, according to Morgan Stanley Research Asia/Pacific. Korea may cut policy rates (currently at 2.75 percent) further in the next central bank meeting. The research also believes won appreciation against the Japanese yen is already priced in, and a rebound of the Korean equity market is probably in the cards.
- The Philippines’ December exports grew 16.5 percent, better than the market expectation of 11.5 percent. Non-tech shipments expanded 50.1 percent. Also in the Philippines, the preliminary fiscal deficit of 2.2 percent of GDP for 2012 undershot the government’s fiscal deficit target due to fiscal under-spending in public-private project delays. The same project delays may continue in 2013, which can support the peso and bond spread. On the policy front, the central bank is prescribing tier-one capital of 8.5 percent instead of the planned 10 percent, essentially adopting loosening monetary policy. Bank lending in the Philippines continues to move up as of November last year, up 14 percent year-over-year, while the nonperforming loan ratio continues to soften, hitting at an all-time low of 2 percent.
- Indonesia sustained strong foreign direct investment growth to rise to $4.5 billion, 2.1 percent of GDP, in the fourth quarter, providing funding for the current account deficit.
- Colombia’s second largest Bank, Banco de Bogota, successfully issued $500 million in 10-year bonds at 5.375 percent on Monday. The issue was nine times oversubscribed and rallied to 103.25 on its first day of trading, confirming investors’ appetite for well-managed Latin American debt and equities. The news follows the postponement and scrapping of two planned junk-debt offerings by Brazilian issuers who attributed the decision to weak investor demand.
- Thailand will raise the cooking gas price by 33 percent in April, which will add 0.2 to 0.3 percent on CPI, according to a JP Morgan estimate. With a minimum wage increase of 40 percent last year, demand will be strong, which will add additional pressure on consumer prices. Although these factors won’t change the dynamics of the economy, the Bank of Thailand may not cut rates in the meeting next Wednesday.
- Indonesia’s current account deficit widened to 3.6 percent of GDP in the fourth quarter last year. Increasing domestic consumption and oil imports may continue to keep the current account deficit near 3 percent of GDP. The Bank of Indonesia left the policy rate unchanged at 5.75 percent in the recent meeting.
- Malaysia’s December exports contracted by 2 percent due to lower crude palm oil and weak electronics production.
- Currency revaluation continues to create hazards for Latin American countries. Peru’s fall in exports and softening construction activity slowed its economic growth to a three-year low in December. Similarly, Brazil’s economy grew a meager 0.9 percent during 2012, a far cry from its BRIC peers (Russia, India, and China).
- The chart above shows that going back 10 years, there’s been a significant increase in Chinese stocks in the month following the week-long Chinese New Year holidays. Based on median returns, the Shanghai Composite Index rises 3.46 percent, while the China H Shares climb 4.32 percent.
- Somewhat unexpectedly, Colombia showed the lowest inflation rate of any Latin American country in January 2013. The news comes after Chile saw a spike in inflation driven by increased copper exports to China. The news grants further room to the Colombian Banco de la Republica to continue its monetary easing program, keep the Colombian peso revaluation in check, and sustain economic growth. A 25 basis point interest rate drop has become highly likely for the Central Bank’s March meeting.
- Global emerging markets’ underperformance relative to the developed markets year to date is largely due to a heavy bias of outperformance of the largest of the developed markets and underperformance in the larger emerging markets. Citi calls for a potential reversal of this theme, buying emerging market laggards and selling developed market outperformers.
- It seems China’s government doesn’t need a robust housing market to support the economy today, fearing speculation and inflation risks. The rhetoric to curb the housing price was seen rising recently after moderating for a while since the end of 2011 when economic growth was hindered by monetary and housing tightening. Indeed, housing sales and prices are all up, though not alarming, and therefore the risk of further housing tightening is high. Even if further tightening policies may not affect sales, the negative sentiment can put pressure on the stock prices of developers.
- Following last week’s announcement by the Venezuelan government to devalue its currency by 31.7 percent, foreign companies operating in the country are facing a capital loss on any capital repatriation. The new rate of 6.3 bolivars per U.S. dollar still overvalues the bolivar by about 12 percent on purchase power parity terms, adding to a 26 percent inflation rate, indicating the possibility of further currency devaluation in the future.
- 2.7 percent GDP contraction in the fourth quarter in Hungary raises the risk that the Orban government will further reach for unorthodox policy levers as it heads into election season, according to a Standard Bank analyst.
Monday, February 11th, 2013
SIA Charts Daily Stock Report (siacharts.com)
The SIA Daily Stock Report utilizes a proven strategy of uncovering outperforming and underperforming stocks from our marquee equity reports; the S&P/TSX 60, S&P/TSX Completion and S&P/TSX Small cap We overlay these powerful reports with our extensive knowledge of point and figure and candlestick chart signals, along with other western-style technical indicators to identity stocks as they breakout or breakdown. In doing so we provide our Elite-Pro Subscribers with truly independent coverage of the Canadian stock market with specific buy and sell trigger points.
Note: Subscribers can screen all Canadian and U.S. stocks and mutual funds, or as components of equally weighted mutual fund sectors indices (e.g. Income Trusts, Precious Metals), and fund groups by issuer (eg. AGF, Dynamic, Franklin Templeton), all Canadian ETFs, ETF Families by issuer (iShares, Horizons, BMO) or as components of Equally Weighted ETF Sector Indices (e.g. 2020+ Target date, Cdn Equity Lg Cap), and create and monitor their own, or SIA’s existing model portfolios. Finally, subscribers benefit from being able to generate BUY-WATCH-SELL Signals on demand with SIA Charts proprietary Favoured/Neutral/Unfavoured, SMAX scoring algorithm (see green-yellow-red graph 1 below).
MASTERCARD (MA) NYSE – Feb 11, 2013
GREEN – Favoured / Buy Zone
YELLOW – Neutral / Hold Zone
RED – Unfavoured / Sell / Avoid Zone
MASTERCARD (MA) NYSE – Feb 11, 2013
February 2012 – After a short stint in the Neutral zone in the SIA S&P 100 Report, during January 2012, Mastercard (MA) had an impressive February now in the 8th spot. Having now moved through its last target resistance point at $408.60, the next resistance level is at $451.12. Support is now at $385.03 and again at $335.19.
*** – Although Mastercard did move down into the Neutral zone it did not trigger our technical stops and remained a valid holding.
February 8, 2013 – Now in the 9th spot in the SIA S&P 1OO Report, Mastercard (MA) has continued its upward move towards its next potential resistance level at $557.82. Support is now at $485.61 and again at $448.63.
SIACharts.com specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment. None of the information contained in this website or document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. Neither SIACharts.com (FundCharts Inc.) nor its third party content providers shall be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon.
Copyright © siacharts.com
Monday, February 11th, 2013
Emerging Markets Radar (February 11, 2013)
- China January money supply (M2) was up 15.9 percent year-over-year, beating the market estimate of 14 percent. New January bank loans were Rmb1.07 trillion, or 15.4 percent year-over-year, better than the market expectation of Rmb1 trillion. Total Social Financing increased Rmb2.54 trillion versus Rmb1.63 trillion in December last year.
- China January exports were up 25 percent year-over-year, better than the market estimate of 17.5 percent; imports were up 28.8 percent, also beating the market expectation of 23.5 percent. In spite of belated January base effect last year, the number showed a positive trade trend which can drive up shipping rates and port throughput.
- China January Consumer Price Index was in line with the market expectation at 2 percent year-over-year, and the Producer Price Index was also in line with market expectation down 1.6 percent, which was improved from negative 1.9 percent in December, showing the demand recovery.
- China January passenger vehicle sales were up 49 percent year-over-year, primarily due to a lower base last year and higher demand prior to Chinese New Year which falls on February 10.
- Hong Kong loan and deposit (ex-Rmb) grew 9.6 and 8.8 percent in 2012. Annualized fourth quarter loan and deposit growth rose to 11.2 and 18 percent respectively, supporting a robust property market.
- China January HSBC service Purchasing Managers Index was 56.7 percent versus 51.7 percent in December, driving a strong service sector performance in H shares.
- Chilean exports surged 7.4 percent to $6.94 billion in January year-over-year on the back of increased demand for copper exports to China. The resulting $244 million trade surplus crushed analyst expectations for a $120 million trade deficit.
- Increasing fears of government intervention in curbing the housing market had caused negative sentiment for developer stocks in Hong Kong listed H shares in spite of robust January sales and price increase.
- Indonesia 2012 GDP growth slowed to 6.2 percent versus 6.5 percent in 2011, primarily due to business unfriendly regulations and weak global commodity demand over the past year which dampened investment and consumption growth, though the economy is still robust.
- The Colombian government has suspended Drummond’s coal port operating license as it investigates the company’s responsibility in the dumping of a coal load into the ocean earlier this year. This added to the work stoppage at Cerrejon Mine, Colombia’s largest coal producer by output, has brought 80 percent of the country’s coal production to a halt. Colombia is the fourth largest coal exporter in the world with an annual output of 91 million tons.
- The chart above shows China January total social financing increased to a record high, indicating China’s investment demand is in momentum. Recent data also showed M1/M2 ratio is turning up after being on the down trend for most of 2012. This indicates that faster deposit growth allows the banks to lend more to the economy, confirmed by better-than expected January bank loans.
- Peru’s Central Bank President Julio Velarde has encouraged pension funds to increase their investments abroad in an attempt to devalue the sol from a 16-year high. The Finance Minister of Colombia has vowed to decrease U.S dollar borrowing in favor of local currency borrowing and to narrow the fiscal deficit in an attempt to prevent further Colombia peso revaluation.
- An almost 10 percent correction in Turkish stocks since the recent high presents a buying opportunity, according to J.P. Morgan. There has been no change in the macro outlook, as evidenced by the practically unchanged bond yields and lira exchange rate.
- The People’s Bank of China (PBOC), the central bank, warned of inflation pressure as global central banks are increasing money supply through quantitative easing. Though there probably is no immediate inflation threat in 6 to 9 months, the price increase for energy, materials and food (please refer to the natural resources section of this report) year-to-date are indeed at relatively fast pace and threatens China as the country’s investment demand is recovering.
- Brazil has vowed to allow the Brazilian real to appreciate a further 5 percent before resuming its currency intervention policy amid stagflation concerns. The expansive monetary policy pursued over much of last year accelerated inflation to 6.15 percent while GDP growth remained around the 1 percent level.
- Regulatory action, competitive pressure, and austerity measures are impacting revenue recovery of Eastern European telecom companies, making it difficult for them to maintain current high dividend yields.
Friday, December 14th, 2012
The MSCI Emerging Markets ETF (EEM) has been surging over the last week after it broke out above its Fall trading range. Don’t look now, but EEM is now outperforming the S&P 500-tracking SPY ETF in 2012. EEM is currently up 14.07% year to date versus a YTD gain of 14.02% for SPY.
As shown in the second chart below, emerging markets got off to a great start to the year but then fell apart during the eurozone crisis in the Spring and early Summer. As emerging markets faded in the middle part of the year, the US held up relatively well. In the fourth quarter, however, we’ve seen the US struggle while emerging markets have soared.
With just 5 basis points separating the two in terms of year-to-date performance, it’s going to be a race to the finish line over the next two weeks.
Copyright © Bespoke Investment Group
Bob Janjuah: “Central Banks Are Attempting The Grossest Misallocation And Mispricing Of Capital In The History Of Mankind”
Tuesday, September 18th, 2012
The always delightful Bob’s World is out. Here are the fmr RBS strtgist’s latst non-abrvtd thots:
When Money Dies
Before providing an update I wanted to refer readers to two items – which may in turn “give away” my thoughts “post-OMT” and “post-QEinfinity”. First, readers may wish to reconsider a piece I wrote earlier this year in February entitled “Bob’s World: Monetary Anarchy” (20 February). Secondly – and much more interesting in my opinion – all readers are urged to read the book When Money Dies by Adam Fergusson.
In terms of my thoughts, I think historically important events may be unfolding. I think that by their actions both Fed Chairman Bernanke and ECB President Draghi may have belied how deeply worried they are about our economies and the financial system. In short, I see fear in their actions. But what really concerns me is that their only responses are to effectively say “we give up”, as they abandon the search for “real” solutions to our ills. Instead, by their actions, we can now clearly see that the only solutions that are offered by the Fed and the ECB are the extension of the same failed policies that got us into our financial and economic despair in the first place. Namely MORE debt, MORE bubbles and MORE monetary debasement. When future historians look back for the day that the West lost its status as global economic superpower, and for the day that the West lost its aspirational leadership in terms of sound economic and prudent financial system management, I feel that September 2012 may be seen as a significant pivot point.
Turning to a few specifics:
1 – Politics: Both Draghi and Bernanke now seem to have deeply and irrevocably immersed themselves into the realm of politics. A review of Draghi’s speech made on the evening of 6 September seems to show, in my view, that he is deeply political and is prepared to use the ECB to further his own political agenda of a federal Europe. As for Bernanke, whilst he may not be so explicit, he will surely realise that his actions are likely to impact voters in the US elections in November. History tells us that politics and central banking should never be allowed to co-mingle. The results when this has been allowed to fester have usually been very undesirable. In my view, we have crossed a critical Rubicon here. My biggest fear now in this respect is that in Europe the (mostly) elected political leadership will – when it comes to delivering fiscal union – fail to follow through, and/or the people of Europe will refuse to co-operate in the Draghi-mandated push for federalism and fiscal union. And in the US, if Bernanke’s actions are perceived by Republicans to secure Obama a new four-year term, I see it as now highly likely that the fiscal cliff will become a full-on reality rather than just a thing we worry about. After all, a Republican Congress will have little to lose and lots to gain potentially by triggering a fiscal crisis IF they conclude that Bernanke has become a political servant of the Democrats.
2 – Growth and inflation: Lest we forget, neither QE, nor the LTRO, nor the OMT either have, or will, do anything sustainably positive for growth. The evidence of the last four years is clear. In fact, all I think we are likely to end up with is WEAKER growth as consumers are forced to save more and as they see their disposable real incomes fall. The idea that consumers and/or corporates will now go on a leverage and consumption/investment/spending binge is based on nothing other than hope – I actually expect the opposite to occur. The emerging world will be forced to TIGHTEN policy as the globally traded prices of food, energy and other commodities will serve to generate real and significant inflation in these nations. These higher “headline” prices (in non-discretionary items) will – in the West – cause growth to weaken as (discretionary) demand will take the hit; Western workers have zero pricing power and aggregate employment in the West will not improve largely because QE and OMT do nothing to generate global demand. Some might feel that a weaker USD will benefit US exports. Here one should not forget that the West is and has for the last five years been in a race to zero when it comes to currency strength. USD weakness will not be tolerated for long by the rest of the world, hence any US “gains” would be purely temporary. One major lesson of the last five years has been forgotten, or indeed rewritten. The recovery from the 2008-09 collapse was NOT primarily caused by QE1. The real drivers were TARP (real fiscal loosening) and the USD4trn fiscal and bank-financed investment binge seen in China from late 2008. I think it is crucial to remember this when the Fed in particular is “judged” over the next few months.
3 – Credibility: Central bankers who lose credibility are a major problem. I will leave it for others to judge, but the success of central bank policy over the last four to five years when it comes to creating jobs, boosting real demand and improving Western worker competitiveness is, frankly, paper-thin. In fact, the opposite is easier to prove. I see nothing in this latest and most dangerous round of monetary anarchy that will reverse the process of deflationary debt deleveraging, other than a short-term impact on the pace of deleveraging, and whilst QE and OMT have and will boost asset prices, this is again a very short-term outcome, but possibly at a truly enormous cost. Further, specifically in terms of the Fed and QEinfinity, I am deeply worried that what Bernanke is now de facto saying is that the real underlying economic and jobs situation is much worse than we all think, that he has no idea how bad or for how long this situation will get or will last, and that as a result the only tool left is a permanently open monetary spigot. Anyone who carefully considers his actions will, I think, end up as concerned as me. Regarding the promise to keep rates lower for longer I can only conclude that either (a) this policy will succeed and so result in enormous inflation (eventually) based on the explosion in M0 and based on the Fed’s 30-year track record of failing to take away the punchbowl before it’s way too late, which will trigger the next collapse; or (b) the policy will not succeed (my base case). Either way, the Bernanke Fed, which helped cause the US housing bubble, then helped cause its collapse, who first told the world there was no housing bubble, who then told us that all we had a minor USD20bn-odd sub-prime problem, who went on to tell us that QE was a temporary emergency policy that would be soon reversed, and who persists in telling us that QE will help deliver millions of jobs and will bring us back to pre-crisis levels of trend growth (above 3%!) – he does after all keep telling us the problem is cyclical and not structural! – is now very much in the Last Chance Saloon. Markets and political leaders, and the US people, may well judge Bernanke in an extremely negative way over the next few months if this latest huge gambit fails.
4 – Demographics and Behaviour: These are areas which get little focus in financial markets and with policymakers, who are both generally always looking for instant gratification and doing anything to avoid the reality that money debasement solves very little in the short run and creates huge problems in the long run. But I think they matter. The demographics in the US, in Europe and in China are, at least for the next few years, very negative (i.e., rapidly ageing). Ageing populations grow slowly. They save more, they spend less, and they do not go on debt-funded consumption binges. If consumption is weak, if uncertainty is high, if fiscal policy is having to be tightened and if global central bank policy settings are already at such historically emergency settings, I find it extremely hard to understand why any CEO/CFO will feel that now is the time to lever up, to invest, to hire, or to grow. If I am right about the private sector response, then Bernanke and Draghi will have to imagine up new justifications for their actions at the very least!
“The bottom line is simple: The Fed and the ECB are directing
and attempting to orchestrate the grossest misallocation and mispricing
of capital in the history of mankind. Their problem is that
their actions have enormous unintended and even (eventually) intended
consequences which serve to negate their actions in the shorter run, and
which could create even bigger problems than we currently face in the
near future. Kicking the can is not a viable policy for us now. The
private sector knows all this, consciously and/or sub-consciously,
which is why I feel these current policy settings are doomed to fail. Having
said all that, the one area which for some reason still holds onto
hope that Draghi and Bernanke can still perform feats of “magic” is the
financial market, which central bankers assume, rely on and are happy
to encourage Pavlovian responses. The reality here though is that even
financial markets are, collectively, either sensing or assigning a
half-life to the “positives” of central bank debasement policies, which
to me means that even markets are only suggesting a short-term benefit
from the latest policy actions. This is not what Draghi and
Bernanke are hoping for, but in order for them to see the half-life
outcome averted they know that we need to see major political and
structural real economy reforms which somehow make Western workers
competitive and hopeful again. The track record of the last
four to five years inspires very little confidence that we will see
such great necessary reformist strides taken anytime soon.”
Notwithstanding this, in terms of markets:
1 – This Week: We are four S&P closes away from being stopped out on the bearish call outlined in my August note . It seems – let’s see how this week plays out – that we were wrong to believe that central bankers would not become so “political”. As we have captured around 300 S&P points in the sell-off that began in early April (1422 to 1275) and the rally that began in early June (1275 to 1425), and as the S&P traded at 1425 on the day my August note with its 1450 S&P stop was released, the extraordinary central bank actions of the last few weeks has resulted in a very small hit to “our year to date”. As said, however, my stop loss will be triggered on this Friday’s close if the S&P is still above 1450. So my stop-loss and I are at the mercy of the next four days’ price action. Real-world risk takers/investors may choose to exercise any such stop sooner but I will wait/accept the risk. But to reiterate, if the S&P closes above 1450 on Friday, the bear call of August is closed and initially at least I’d choose to go flat/neutral on a tactical basis. If my stop-loss is NOT triggered by this Friday’s close – a possibility, but not a probability – then I will write again, but my initial sense in such an event would be that the half-life upside cycle is even shorter then I currently think and has already played out. Let’s see.
2 – Rest of 2012: Clearly the caveat/stop-loss above needs to be addressed first. Thereafter, I feel markets are now fully hostage to the data and in particular the political ebbing and flowing in Europe and in the US over the next few weeks and months. And for that matter in China too where, in my view, the growth slowdown seems to be accelerating, where handover to new leadership will delay until March 2013 any genuinely aggressive and detailed stimulus plans, and where the market is increasingly beginning to understand the huge risks inherent in trying to boost growth through another round of investment spending, where investment as a share of GDP will be at untenable levels (over 50%!) if all the stimulus headlines currently announced become a reality. Or alternatively, and in our base case, the market will quickly figure out that all/most of the currently announced investment plans are just that, merely plans, where little/no funding is in place and/or where funding plans are vague/non-existent, and where the market will figure out that the bulk of the announced spending plans are merely a restatement of existing plans. As such, of the USD2trn+ of plans announced, I expect only 5-10% to come to fruition on any reasonable and useful timeframe. Bottom line – in my view, and unlike in 2008-09, China capex is not going to prevent China’s bumpy (at best) landing and is certainly not going to be a meaningful boost to global demand. In general I expect material data weakness globally. And as politicians have generally proven themselves to be unable to deliver the real structural changes we need, then being long risk over the next few weeks and months may feel like the right “trade”, but I do believe that the maximum upside is around 10% to equity markets (from here), and furthermore, capturing this 10% will be one of the riskiest and most stressful phases of the market rally out of the 2008-09 lows. The scope for a complete reversal in sentiment and for gapping risk-off price action is very high, so being long risk over the rest of 2012 needs to be done with extreme caution, needs to be very tactical and liquid, and will require a willingness to potentially go against the Fed and/or the ECB. Probably the most important specific items the markets will now focus on are the US fiscal cliff and debt ceiling debate, where the risks of a negative outcome are, in my view, now higher after the recent actions by Bernanke, the lack of political follow-through and worse-than-expected economic performance with respect to Greece, Spain and Italy, and in general the outlook for global growth (where the US and China will, I think, disappoint).
3 – Longer term: No change here – we continue to favour/recommend high quality non-financial corporate credit and we continue to recommend any equity exposure be focused on high-quality, big-cap blue-chip non-financial global corporates. In essence, we still favour the “strong balance sheet” rule when it comes to investing (rather than trading).
Lastly, and for avoidance of any doubt, my 800 target for the S&P is truly alive and kicking. Actually, the recent Fed and ECB actions give me HIGHER confidence in this call. All that I think has really happen – at best – is that the August through November risk-off phase we forecast has been by-passed by the historic moves by the ECB and Fed, and we have now gone straight to the final leg of the 2009-2012/13 cyclical bull market, which I have talked about frequently. As set out in my previous few notes, we have long felt that we would get major QE/monetary debasement around December time, which we felt would take the S&P from 1100 (my target for the bear forecast we made most recently in August and which we thought we would see by November) up to new cycle highs out of the 2009 lows. A quick and dirty look at the charts would imply that by H1 2013 we could see mid- to high-1500s on the S&P. So as per above, if I adopt my most bullish stance possible, I can see the S&P rallying another 10% from here over the next two to six months. However, I believe that this will be the “riskiest” 10% to try and capture, that this possible 10% upside move can truncate and reverse at any time, and that it will be followed by what I think will be a severe repricing of risk over the rest of 2103 and 2014, which should deliver my 800 S&P target.
Tuesday, September 18th, 2012
The last two quarters we have seen quite a deceleration in S&P 500 earnings – in fact the S&P 499 has been flatlining. But Apple has a massive out sized effect on earnings (and hence supporting S&P 500 earnings growth). The NYT has a piece out this morning where they extrapolate a potential negative growth rate on said earnings, even with Apple. With export revenues hurt by Europe and to a lesser degree “emerging markets” (China, India, Brazil, et al) and profit margins falling from record highs, this is definitely an issue. That said stock prices are part earnings and part multiples – multiples are always an unknown; we saw how high they could get in 1999 when Uncle Alan flooded the world with liquidity ahead of Y2K.
- Wall Street analysts expect earnings for the typical company in the S.& P. 500 to decline 2.2 percent in the third quarter from the same period a year ago, according to Thomson Reuters, the first such drop since the third quarter of 2009. Earnings are expected slide 3 percent from the second quarter of 2012.
- “A lot of the profit gain you had in the last few years was a bounce from the recession and a result of very aggressive cost-cutting,” said Ethan Harris, chief United States economist at Bank of America Merrill Lynch. “Those factors are going to be very hard to replicate.”
- What is more, 88 companies have already said that results will come in below expectations; 21 that have signaled a positive outlook, said Greg Harrison, corporate earnings research analyst at Thomson Reuters. “That’s much more pessimistic than normal,” said Mr. Harrison, who added that the third quarter of 2001 was the last time that earnings guidance leaned so heavily to the downside.
- After rising steadily in the wake of the recession, profit margins for S.& P. 500 companies peaked at 8.9 percent in late 2011, said David Kostin, chief United States equity strategist at Goldman Sachs. Margins are expected to fall to 8.7 percent in 2012. (still a great figure)
- While profit margins have plateaued in corporate America, productivity gains in the overall economy have ebbed as well. After rising at an annual rate of 2.9 percent in 2009, and a 3.1 percent pace in 2010, productivity inched up 0.7 percent in 2011, according to the Bureau of Labor Statistics. “There’s only so much you can cut,” said Chad Moutray, chief economist at the National Association of Manufacturers.
Sunday, September 16th, 2012
Emerging Markets Radar (September 17, 2012)
- New home sales, residential investments and housing starts in China all showed an encouraging recovery in August, registering 13 percent, 10 percent, and 5 percent year-over-year growth, respectively, as lower interest rates and policy relaxation for first-time home buyers continued to help housing transactions normalize.
- South Korea announced a $5.2 billion stimulus package aimed at reducing taxes on individual income and home and auto purchases as well as expanding social welfare programs. Combined with $7.5 billion introduced in June, cumulative government initiative for this year equals 1 percent of GDP. The country’s debt rating was upgraded one notch to A+ by S&P this week.
- Turkish Airlines’ passenger numbers increased by 19 percent year-to-date in August. After a slowdown in July 2012 due to Ramadan, which negatively affected mainly Middle Eastern air traffic, the carrier again posted a strong increase in load factor, up 5.2 percent. Meanwhile, favorable passenger mix development continues as business class passenger count was up 45 percent year-to-date.
- China’s industrial production growth in August came out lower than expected at 8.9 percent year-over-year, the first monthly pace below 9 percent since May 2009, as a slight stabilization in heavy industry output failed to offset a retreat in light industry. Deterioration in the metric with the highest historical correlation to GDP lowers the probability of a near-term growth recovery in China.
- China’s passenger car sales grew 11 percent year-over-year in August to a lower-than-estimated 1.22 million units, as dealer inventories remained higher than normal and consumers postponed purchases in anticipation of more price discounts. Total auto sales rose 8.3 percent to 1.5 million, as commercial vehicle sales stayed weak.
- China’s total imports declined by 2.6 percent year-over-year in August, the first year-over-year decline since October 2009 excluding seasonal distortions from the Chinese New Year, another indicator of feeble domestic demand and continued de-stocking.
- New EU banking union proposals are designed so that non-euro countries can join if they wish. Austrian bank regulators expressed their support for the new eastern members of the EU to join. Austrian banks are the biggest lenders in Southeastern Europe.
- Iraq’s central government and the Kurdish regional government struck a preliminary deal on Thursday on a months-long oil dispute that will see the autonomous region export 200,000 barrels of oil per day, officials said. Any resolution of the long standoff will help crystallize valuation of the energy companies with exploration projects in the area.
- The launch of the third round of quantitative easing (QE3) by the U.S. Fed brings new hope for emerging Asian markets in general. Based on the historical parallel of what happened to different equity sectors in the near term after the Fed’s formal announcement of QE2 in early November 2010, the technology sector in Asia tends to consistently outperform in this environment.
- A risk exists that policymakers in Asia may overreact to inflation prospects as a result of QE3-induced commodity price rallies and hot money inflows. The earliest sign was observed when Hong Kong’s monetary authority tightened mortgage lending immediately after the Fed’s QE3 announcement.
- According to the Turkish banking regulator bulletin, a large corporate loan on the banking sector’s balance sheet has gone bad. Next week, the list of banks that potentially have been hit by this default should be narrowed down.
- Moving counter to the global easing cycle, the Central Bank of Russia (CBR) decided to hike key interest rates by 25 basis points, with another hike now expected in the fourth quarter. The CBR elaborated on inflation risks and stated that headline inflation advanced to 6.3 percent, exceeding its target.
Friday, September 14th, 2012
by Seth J. Masters, AllianceBernstein
In the past few weeks, central banks have reaffirmed their intent to do “whatever it takes,” in European Central Bank (ECB) President Mario Draghi’s words, to address the various ailments afflicting the global economy. While central bank actions may or may not have their desired effects on the real economy, they do create short-term opportunities and medium-term risks for investors, as my colleague Jon Ruff explains below.
Today, the Federal Reserve reiterated that it will “increase policy accommodation” because they are concerned that “without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.”
These comments follow Fed Chairman Ben Bernanke’s speech two weeks ago in Jackson Hole, Wyoming, in which he reiterated that quantitative easing (QE) works primarily by reducing the “supplies of various assets available to private investors” and therefore “affect(ing) the prices and yields of those assets.” In other words, the primary objective of QE is to inflate asset prices. The Fed buys US Treasury bonds from investor A, who turns and buys US high-yield bonds from investor B, who turns and buys US equities from investor C.
US yields go down. US asset prices go up. Everybody is happy—except for two things.
First, these liquidity flows invariably end up in areas of the market least able to handle them. Investor C gets taken out of the highest return opportunities in the US, leaving emerging-market-related assets as the only place left with yield and growth opportunities. Subsequently, money flows to commodities, higher-yielding currencies and emerging-market real estate. Unfortunately, these markets are not as liquid as US stock and bond markets, so the liquidity flows have a disproportional impact on prices. While that’s good for owners of these “real assets” in the near term, it is not good for emerging-market economies that have to deal with food inflation, strengthening currencies and domestic real estate bubbles.
Second, the Fed buys bonds with new money that is tinder for a potential inflationary fire. Currently, banks don’t want to lend and the private sector doesn’t want to borrow, so the new money sits idle as bank reserves. But if (when?) a spark ignites the supply and demand for credit, watch out: the Fed will have to properly identify, time and execute an exit strategy or face an inflationary outbreak that will make the 1970s look tame. Such an outbreak would likely prove to be good for owners of real assets, at least relative to traditional stocks and bonds, but it would not be good for the US economy.
We expect to see continued asset-buying announcements from central banks around the world: the ECB last month, the Fed today, the Bank of Japan imminently. The impact of these announcements, and ensuing implementations on the real economy, are likely to be ambiguous at best. However, our research suggests that “real assets” such as real estate and commodities will profit from asset purchases in the near term and protect from related inflationary risks in the medium term.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio- management teams.
Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein. Jon Ruff is the lead Portfolio Manager and Director of Research—Real Asset Strategies at AllianceBernstein.
Thursday, September 13th, 2012
by William Smead, Smead Capital Management
Our long-time readers are aware that we are stingy when it comes to trading and big believers of keeping trading costs low at Smead Capital Management. Despite these natural inclinations, we do try to keep the pulse of sentiment in the US stock market. The old adage used to be that in the short run your stock movements were 70 percent market-related (beta), 20 percent industry-related (sector attribution) and 10 percent company-related (stock picking). In the long run (3-5 years), we assume the numbers were exactly the opposite, 70 percent company- related, 20 percent industry-related and 10 percent market-related. Therefore, long-duration investors like us focused almost exclusively on company selection (which we do), since it affected our long-term track record and wealth creation the most.
Despite these disciplines, we do follow sentiment indicators and try to conclude what the masses are up to in the marketplace. In our view, these sentiment indicators are useful at extremes and can even be helpful to long-duration owners and buyers of common stock. Since the bear market low of March 2009, we have observed a huge new factor in sentiment indicator usefulness.
We wrote a missive a couple of years ago and we talked about how people are participating with one foot out the door. Our theory has been that heavy use of indexing and ETF investing, coupled with wide-asset allocation and tactical work in those arenas, has altered what the traditional sentiment indicators mean. Our belief in the bull market in US stocks has been positively affected by the near total lack of belief the largest pools of money have in the US stock market. They might get somewhat invested in it from time to time, but they have over-emphasized the most pessimistic S & P 500 sectors like energy, basic materials, heavy industrials and consumer staples, all the sectors which would benefit from the world economy outperforming the US. In other words, long US stocks and bearish on the US economy and future.
Here are a few examples that might be helpful. First, at the high in the S&P 500 index in 2010, 2011 and 2012, bullish sentiment reached a level of around three bulls for each bear in the Investor’s Intelligence weekly survey. Each reading led to a painful mid-year correction. Neither time did bullish sentiment reach 60 percent, which we view as a historically meaningful signal for declines of 20 percent or greater. Since institutional and individual investors appear to have a very small part of their overall portfolio in long-only US large cap stocks and are instead heavily committed to wide-asset allocation, do these sentiment numbers mean as much as they used to? Should you reduce exposure to US common stocks as a long-duration investor in an era of loneliness and US equity de-emphasis because of historically effective sentiment indicators?
Second, the American Association of Individual Investors (AAII) weekly poll is another useful sentiment indicator. We were astounded recently when the S&P 500 was up nearly 10 percent for the year and the AAII voters were bearish by a ratio of two to one! We haven’t given you the worst part of the story. We spoke at a regional meeting of the National Association of Investment Clubs, which is affiliated with the American Association of Individual Investors. They told us the membership is down over 40% in the last four years. You almost have to add those folks to the bearish category. Throw in 38 consecutive months of Lipper analysis indicating net liquidation of US equity mutual funds and you wonder if the sentiment polls can accurately compare today with years gone by.
Third, the CFTC reported over the weekend that money managers have more net long bets on oil in the week ended September 4th as they did the week ended May 1st of this year. In our opinion, this should especially scare oil investors. The net long exposure in early May was at over $106 per barrel and September 4th was at $96 per barrel. Any technician gets very nervous at lower peaks on worse sentiment. We believe very few institutions, almost no registered investment advisors and very few financial advisors had any participation in commodity futures contracts 10-12 years ago. With more participants than ever in history and more capital committed than ever, we believe these sentiment stats from the CFTC should scare every oil optimist to death. It is the dead opposite of the AAII polling circumstance in our view.
Lastly, one anecdotal piece of sentiment was provided over the weekend. China appears to us at SCM to be six months into a four-year recession/depression. We believe they badly need it to clean their economy of severe imbalances, fraud and bad loans in the banking system. We view where they are today to where the US was in the 1870′s when the four-year depression in our economy was triggered by over-building the western railroad system on money borrowed from Europe. Numerous US companies like FedEx (FDX), Cummins (CM) and Intel (INTC) have warned of the affects a hard landing in China could have on their business. All it took last week was the announcement of new government controlled-fixed asset investment stimulus on the part of Chinese government to trigger a four-percent rally in the Shanghai Composite. It also caused the President of Caterpillar (CAT) to declare over the weekend that the new stimulus from China would cause business to pick up for CAT in China in early 2013.
Why is this so important? Caterpillar is one of the companies we use as an example of representing the risk associated with “suckling on China’s economic boom”. They bought Bucyrus International near the top in investor enthusiasm for coal, gold and just about everything pulled out of the ground. When you helped people dig up the ground, we think you should get nervous when things have never gone better in the history of your company and industry. Our point is this; so many people are twisted up in the BRIC trade that bullish sentiment is effectively on steroids. More people are interested and participating in emerging markets and commodity-related stocks, bonds and commodities than ever before and we believe any smart contrarian should be doubly skeptical.
In conclusion, we at SCM are assuming low overall interest in US large cap stocks should be included when thinking about sentiment indicators. Our belief is that historically foolish enthusiasm and participation in all things BRIC-trade related should be avoided based on sentiment alone.
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.
Copyright © Smead Capital Management
Wednesday, September 12th, 2012
by Mark Mobius, Franklin Templeton Investments
As we cross the mid-way point of the year, you might say the equity and fixed income markets have been a lot like the recent weather in much of the world: uncertain, and tending toward extremes. The perception of a stormy economic climate has driven some equity valuations to extremely low levels, particularly in Europe, and investors have been pouring into fixed income despite extremely low yields.
For a temperature check of Europe and emerging markets, we turned to Dr. Mark Mobius, executive chairman of Templeton Emerging Markets Group, and Dr. Michael Hasenstab, co-director of Franklin Templeton Fixed Income Group’s® International Bond Department, for their long-term perspective on where shifts in the changeable economic climate could occur.
- There’s no question the status of economies in Europe is weighing on the entire financial system, but my view is that the situation should get better with time.
- Looking at companies around the world generally, we are finding valuations looking rather cheap right now.
- Despite the possibility of somewhat slower growth in the Chinese economy this year, there are a lot of companies with what we believe are good valuations and good earnings growth potential in China.
- In my opinion if Greece can privatize state-owned enterprises, collect unpaid taxes and reduce the size of the government, it should have no need to raise taxes.
As Mobius sees it, emerging markets are generally in a good fiscal position right now compared with some of the more debt-laden developed markets, and going forward, he believes economic growth rates in emerging markets should outperform developed markets.
“There’s no question that the status of economies in Europe is weighing on the entire financial system. Emerging markets have been reducing their exports to the U.S. and to the EU, although economic problems (in the U.S. and EU) going forward could still bear significant impact. Eastern Europe of course has been affected by what’s happening in the rest of Europe. We are finding a lot of the opportunities there from companies where valuations have dramatically wiped out, many unfairly, and provide opportunities for long-term holdings.
My view of the European situation is quite different from a number of economists. My view is that the situation should get better with time and as the Europeans solve their fiscal problems. A case in point, of course, is Greece. Greece was originally part of the emerging markets realm until it joined the European Union, so we therefore have had some past experience investing in Greece. The challenge for the government now is to make some giant steps toward reform. This means privatization of state-owned enterprises that have been a drag on productivity and government finances, collection of taxes that are owed but not paid, and reducing the size of the government. If those three measures are taken, in my opinion there should be no need to actually raise taxes. Moreover, entrepreneurship should be encouraged. Greece has very strong tourism and shipping industries which I think can be the launching pad for growth in the future.
Looking at companies around the world generally, we are finding that valuations look rather cheap right now. The price-earnings ratios of emerging markets averaged about 9.6 ( based on the MSCI Emerging Markets Index 12-month forward P/E), compared to a world index of 11.4 (based on the MSCI World Index 12-month forward P/E) and the U.S. average of 11.9 (based on the MSCI US Index 12-month forward P/E), as of July.1 The dividend yield average for emerging markets was 3.0%, while the world average was 2.9% and the U.S. was 2.2%, as of July, based on the MSCI EM Index, World Index and US Index.1 So, as value investors, our team has been finding lots of opportunities in these markets that we think should bode well longer term.
Despite the possibility of somewhat slower growth in China’s economy this year, there are a lot of companies in China with what we believe are good valuations and good earnings growth potential. Southeast Asian countries are also doing very well in our view, particularly Thailand, because the economy has been growing at a good pace and it is benefiting from China’s expansion.”
Some other markets on Mobius’ radar screen include places less adventurous investors may not even be considering right now.
“We believe taking a bottom-up, company-oriented approach is best because we can find opportunities in places other people are ignoring. We are excited about frontier markets, particularly Africa, because African countries have been growing at a fast pace. Of the 10 fastest growing economies in the world in the last 10 years to 2010, six of those were African.2 And in a country like Pakistan, which many people consider to be a very risky place, we are still finding opportunities simply because it’s so unpopular.”
- Some of the markets that traded off pure contagion and ‘Armageddon’ fear have now begun to recover.
- We see a lot of value in many emerging countries, but need to be cognizant of possible inflation risks longer term.
- Emerging markets are probably the most vulnerable to the immediate inflationary impacts of massive global quantitative easing.
- We don’t see value in the countries that are printing money and debasing the value of their currencies.
The Eurozone crisis whipped up quite a market storm this year, but Hasenstab has held steadfast in his belief that leaders there would find solutions, and that sky-falling forecasts were probably not warranted. He’s not ruling out more market chop for the rest of the year, but is seeing signs of calmer conditions.
“I think the recovery has been somewhat apprehensive thus far and really has not returned full fair value to a lot of these markets, but clearly we are on that path. We still think there’s a long way to go, but just about 10 or 11 months ago we were in a period of much greater uncertainty. It was during that period that we really highlighted our long-term conviction that the eurozone wouldn’t split apart because the European Central Bank (ECB) ultimately would be the lender of last resort (despite ongoing problems in Greece), and that China’s growth rate would moderate but would not face a hard landing. As the year progressed, we saw increased evidence that those core convictions were holding. I think now we’re moving closer to further clarity that the ECB will likely prevent breakup of the Eurozone, and the key countries such as Spain and Italy are taking some steps to improve their long-term finances. The fact that ECB support will likely be conditional is good for two reasons: it can help prevent a vicious cycle and provides liquidity, and it provides some sort of fiscal discipline. This has given a bit of calm to markets and as a result, some of the markets that traded off pure contagion and ‘Armageddon’ fear have now begun to recover.
In a world where there are no risk-free assets anymore, I think one has to accept some degree of market volatility, but I think our ability to hold onto our long-term convictions and not panic, not flip around because of market volatility, has been beneficial.”
Turning our Doppler radar back to China, a market some predict is heading for a crash-landing, Hasenstab believes that, toward year-end, growth there should gain a bit more altitude or at least stay on a stable course. Structural changes in the economy are creating new challenges, he says, but notes China has “more powder,” should it need to engage in further stimulative measures.
“In China, there are some very important long-term structural reforms that are underway. The reforms in China that began in the late 1970s are now entering their fourth phase. The first phase was the reform of the agricultural sector, the second phase was the reform of state-owned enterprises, the third was the opening of free trade, and this next, close-to-the-final phase would be the liberalization of the financial markets. It’s probably one of the most exciting phases of their reform, and if China can succeed in this—and we have every reason to believe that China should —it really has the potential to elevate China from a middle-income to a high-income country over the next decade or so.”
Like Mobius, Hasenstab sees value in many emerging markets right now. However, he’s cautious about taking longer-term interest rate exposures there because the easy monetary policies many central banks around the world have been engaging in for years could leave emerging economies vulnerable to trickle-down inflation.
“These emerging countries generally do not have the indebtedness problems that developed countries in general currently have, and even though their absolute growth is slowing on a relative basis, emerging growth rates remain much healthier than developed growth rates. There are exceptions, but by and large we see a lot of value in many of these countries, but we would be cautious that there are going to be inflationary risks. We think it’ll be good for currencies but we would be cautious about taking a lot of interest rate risk.
We have the Bank of England, the Federal Reserve in the U.S., the Bank of Japan, the ECB, the Swiss National Bank, all printing an unprecedented amount of money. Never in the history of central banks have we experimented with this amount of printing, and to think that there are no longer-term consequences would be naïve. Those effects may not be felt immediately, but ultimately the money that is printed in those countries will flow globally. Emerging markets are probably the most vulnerable to the immediate inflationary impacts of this massive quantitative easing.
On the currency side, we don’t see value in the countries that are printing money and debasing the value of their currencies—we continue to look for opportunities in countries which are not printing money.”
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What are the Risks?
All investments involve risks, including potential loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability, and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries may increase the economic risk of investing in companies in Europe.
1. Source: MSCI Emerging Markets Index, MSCI Emerging Markets World Index, MSCI US Index, July 2012. Indexes are unmanaged and one cannot directly invest in an index. All MSCI data is provided “as is.” MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI. Past performance is not indicative of future results.
The price-to-earnings (P/E) ratio for an individual stock compares the stock price to the company’s earnings per share. (This figure is often calculated using trailing 12-month earnings, but some use forecasted earnings.) The P/E indicates how much the market will pay for a company’s earnings. A high P/E can indicate a strong belief in the company’s ability to increase those earnings. A low P/E indicates the market has less confidence that the company’s earnings will increase.
The dividend yield is the sum of a company’s annual dividends per share, divided by the current price per share. It is often expressed as a percentage.
2. Source: International Monetary Fund; 2001-2010.
Copyright © Franklin Templeton Investments