Posts Tagged ‘Fiscal Stability’
Friday, May 4th, 2012
by Axel Merk, Merk Funds
May 3, 2012
Central Banks around the world have been under pressure to cover shortfalls in fiscal policy. At his monthly press conference, European Central Bank (ECB) President Mario Draghi stuck to his guns, telling politicians to focus on structural reforms to stimulate growth, rather than raising hopes for more easy money from the ECB. Interest rates remain at 1%; the euro reacted positively to Draghi’s comments.
Pointing to the experience of how stagflation in the 1970s was overcome, Draghi points out structural reform, not increased spending, is the the proper course of action. Specifically, Draghi calls for: fiscal balances, fiscal stability and competitiveness. Having said that, the prepared introductory statement of the press conference mentions “growth” 13 times, stressing that “growth and growth potential in the euro area need to be enhanced by decisive structural reforms. In this context, facilitating entrepreneurial activities, the start-up of new firms and job creation is crucial. Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.”
Draghi also calls for a vision of how the Eurozone ought to look in a decade, so that such vision can be implemented. A fiscal compact, not a “transfer union” is the appropriate starting point of how fiscal sovereignty can be delegated over time to a central Eurozone authority. The press conference was ahead of this weekend’s national elections in France and Greece, as well as regional elections in Germany.
In our assessment, austerity is the easy part, structural reform is the tough part. With regard to monetary policy, Draghi was notably light. He shed cold water on the notion of re-activating the peripheral bond purchase program (Securities Markets Program, SMP). He also dampened expectations of a rate cut by emphasizing balanced inflation risks, as well as a gradual economic recovery, albeit with downside risks. He suggested the European banking sector is improving, not only visible in reduced intra-bank refinancing (repo) rates, but also apparent in an increase of the deposit base in peripheral Eurozone countries.
Curiously, just about all actions suggested by Draghi are really outside of the purview of the ECB. We may want to add a comment recently made by Bundesbank President Jens Weidmann: the higher cost of borrowing can also been seen as an encouragement to engage in reform. It appears that the ECB is in line with our view that the one language policy makers listen to is that of the bond market.
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President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds
Tags: Austerity, Central Banks, Easy Money, Ecb Interest Rates, Ecb President, Elections In France, Elections In Germany, Employment Adjustment, Entrepreneurial Activities, Eurozone, Fiscal Policy, Fiscal Stability, Growth Prospects, Introductory Statement, Job Creation, National Elections, Product Markets, Regional Elections, stagflation, Trade Performance
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Wednesday, May 2nd, 2012
by Russ Koesterich, Chief Investment Strategist, iShares
Investors often have a home country bias when it comes to their fixed income portfolios, which means they are generally too reliant on domestic issues. Today, however, there are a number of reasons why investors should consider maintaining a strategic benchmark allocation to emerging market debt.
In recent posts, I’ve highlighted some of these arguments, including the increased stability and improving fundamentals of emerging market countries. But since so many investors are asking me lately about emerging market debt, I figured I’d expand on the case for this asset class in this post. Here’s a bit more on four arguments favoring exposure to emerging market fixed income.
Better fiscal positions: Emerging markets exited the financial crisis in a far better position than their developed market counterparts. The average debt burden of emerging markets is less than 40% of gross domestic product, while developed market debt has soared to more than 100% of GDP on average. This greater fiscal stability is partly why emerging market bonds should now be less volatile relative to their developed counterparts than in the past.
Fading inflation risk: While investors in emerging markets were reasonably concerned about inflation in 2011, inflation appears to be a fading risk in most of the large emerging market countries, the exception being India. Chinese inflation is currently running at 3.6%, roughly half the level of last July. In Russia, inflation has fallen to 3.7% in March from nearly 10% last May. Even in Brazil, a country with a history of stubbornly high inflation, consumer price inflation has dropped to 5.2% in March, down from 7.3% in September. International Monetary Fund estimates suggest that this trend should continue, with emerging market inflation expected to fall throughout 2012.
High premium: Despite emerging markets’ improving fundamentals, emerging market bonds are offering a significant, and historically high, premium over most developed market debt. Currently, emerging market bonds are yielding roughly 350 basis points over the 10-year Treasury, close to a record high.
Diversifying hedge: Emerging market bonds add diversification and a hedge on the dollar, although they are more volatile than domestic bonds. And for those wishing to avoid the foreign currency exposure associated with international bonds, there are dollar denominated emerging market bonds and funds that offer the incremental yields without the foreign currency risk.
In short, most investors are arguably underweight emerging market bonds in their fixed income portfolios though there’s a strong case for considering increasing exposure to this asset class through vehicles such as the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSEARCA: EMB) and the iShares Emerging Markets Local Currency Bond Fund (NYSEARCA: LEMB).
Disclosure: Author is long EMB
Diversification may not protect against market risk. Bonds and bond funds will decrease in value as interest rates rise. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The Fund may be subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments.
Tags: asset class, Bias, BRICs, Chief Investment Strategist, Consumer Price Inflation, Counterparts, Debt Burden, Emerging Market Bonds, Emerging Market Countries, Emerging Markets, Estimates, Financial Crisis, Fiscal Positions, Fiscal Stability, Fixed Income, GDP, Gross Domestic Product, Inflation Risk, International Monetary Fund, Portfolios, Russ
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Tuesday, April 3rd, 2012
from David Rosenberg, Gluskin Sheff
What a quarter! The Dow up 8% and enjoying a record quarter in terms of points — 994 of them to be exact and in percent terms, now just 7% off attaining a new all-time high. The S&P 500 surged 12% (and 3.1% for March; 28% from the October 2011 lows), which was the best performance since 1998. It seems so strange to draw comparisons to 1998, which was the infancy of the Internet revolution; a period of fiscal stability, 5% risk-free rates, sustained 4% real growth in the economy, strong housing markets, political stability, sub-5% unemployment, a stable and predictable central bank.
And look at the composition of the rally. Apple soared 48% and accounted for nearly 20% of the appreciation in the S&P 500 (it now makes up 3% of the 200 largest hedge fund portfolios — three times as much as any other name; 4% of the S&P 500 market cap; and 11% of the Nasdaq). Not since Microsoft in 1999 was one stock this dominant, though the valuations are not comparable (MSFT then was trading with a 70x P/E multiple).
But outside of Apple, what led the rally were the low-quality names that got so beat up last year, such as Bank of America bouncing 72% (it was the Dow’s worst performer in 2011; financials in aggregate rose 22%). Sears Holdings have skyrocketed 108% this year even though the company doesn’t expect to make money this year or next.
What does that tell you? What it says is that this bull run was really more about pricing out a possible financial disaster coming out of Europe than anything that could really be described as positive on the global macroeconomic front. Low- quality stocks in the S&P 500 outperformed high-quality stocks in Q1 by 500 basis points and high-beta stocks within the Russell 1000 outperformed low- beta by 900bps. On a global scale, what has been a poorer place to put capital to work than Japan? And yet the Nikkei posted a ripping 19% advance in Q1, the best start to any year since the pre-bubble-burst times of 1988. Emerging markets are up 13% year-to-date. Greece rallied 7% in Q1 — that also tells you something about this rally. It’s called a dead-cat bounce. Meanwhile, the stodgy sectors that worked so well last year are biding their time — utilities so far in 2012 are down 3%, telecom is flat, and staples are up a mere 5%.
Most investors can dig back to 2000 if they really try. It was not uncommon for typically risk-averse investors such as retirees to be insistent that at least half of their portfolios consisted of Microsoft, Intel, Cisco and Dell. Each of these stocks had gone parabolic and none of them paid dividends, which was a good thing because that left them with all those earnings to plow back into the business. If you needed to buy groceries, you could just sell a few shares for cash flow.
My how things have changed. Today, “dividend paying stocks” are all the focus of attention — not to mention fund flows. Indeed, what is still so fascinating is how the private client sector simply refuses to drink from the Fed liquidity spiked punch bowl, having been burnt by two central bank-induced bubbles separated less than a decade apart. Investors continue to use stock price appreciation as an opportunity to rebalance and diversify rather than chase performance — pulling $15.6 billion from U.S. equity mutual funds so far this year while taxable bond funds have seen net inflows amounting to $59 billion.
The lack of any real significant back-up in bond yields suggests that the asset allocators have been idle as well.
It would then seem as though this is a market being driven by traders. Then again, it has been a very tradable rally, just as the post-QE1 and post-QE2 jumps were. Ditto for the current post-LTRO rally. But liquidity is not an antidote for fundamentals. And a market that lacks breadth, participation and volume is not generally one you can rely on for sustained strength, notwithstanding the terrific first quarter that risky assets delivered. We lived through this exactly a year ago.
Meanwhile, we have real estate deflation rearing its ugly head in China, a spreading European recession (for all the talk of German resilience, retail sales volumes sank 1.1% in February and have contracted now in four of the past five months), acute debt problems in Portugal and Spain (there is already talk in Greece about the need for a third bailout), and the U.S. data have been coming out rather mixed (it should have enjoyed a much bigger bounce than it did in recent months from the extremely warm weather — it was the fourth warmest winter since 1896; 15% warmer than usual.
In Chicago, it was the warmest March ever and second balmiest March on record in New York City. For the latter, it was 9 degrees above normal and would have lined up in the top 10 for any April!). That the employment, housing and spending data weren’t even stronger than what they showed — likely little better than a 2% pace for Q1 real GDP — is the real story beneath the story. The fact that the 10-year note yield stopped at 2.4% and has since rallied 20 basis points instead of making the expected technical challenge of 2.65% suggests that the bond market crowd may be figuring out what this means for the Q2 landscape as the weather skew to the data subsides.
U.S. DATA ON SHAKY GROUND
Yes, yes, U.S. personal spending jumped an above-expected 0.8% in February, above the 0.6% increase that was generally expected and the largest monthly gain since August 2009 when the shoots were green. But if truth be told, this as we would say in market parlance, was a “low multiple” increase. The reason? Personal incomes were soft and that is what counts most — income fundamentals remain dismal. Not only did income come in soft at +0.2% (half what was expected) but not even enough to cover the cost of living, but January and February were both revised lower. Real disposable income also declined 0.1% — the third decrease in the past four months and on a per capita basis is down 0.4% YoY, a far cry from the +2% trend of a year ago. The economy is building momentum. Right.
Let’s just say that had the savings rate stayed the same in February, nominal consumer spending growth would have come in at a puny +0.2% and guess what? Real PCE would have been -0.1%. Thanks for coming out. As we said, a “low quality” spending performance, absent the income fundamentals, there is no sustainability.
Then we got yet another spotty regional manufacturing index in the form of the Chicago PMI (the national figure comes out today). It came in below expectations at 62.2 for March (consensus was 63.0) — a 1.8 point drop from the previous month, and the third decline in the past four months. New orders slid from 69.2 to 63.3 — the largest one month drop since last May and the lowest level since October (this is now the fifth manufacturing survey to show a drop in new orders). If not for the inventories, which jumped from 49.6 to 57.4 — the sharpest run-up since December 2010 and the highest levels since last September — the headline decline would have been much worse. And in a signpost of how corporate executives (or the Human Resource departments in any event) are responding to negative productivity growth, the employment index dropped from 64.2 to 56.3— largest drop since April 2008 and it has fallen in two of the past three months.
Then we got the University of Michigan consumer sentiment index which was revised higher for March to 76.2 from 74.3 in the preliminary reading — this the highest level since February 2011. What was interesting were the details beneath the surface, such as auto buying plans being revised down from 123 to 122 — first decline in three months; and buying conditions for large household items being revised lower from 127 to 125— a four-month low.
Finally, the best Canada could muster up was a 0.1% gain in real GDP for January. At least it was positive — but barely. It reveals an economy that right now is uneven and sputtering. It’s a good thing there was a solid handoff from the tail-end of Q4, as that is what is keeping Q1 GDP estimates close to a 2% annual rate. If there is a piece of information that Canadian dollar bulls can put in their back pocket it is that manufacturing output, even with the loonie at par, managed to post a solid 0.7% advance — factory output up now for five months running. Now that is impressive.
Copyright © Gluskin Sheff
Tags: Bank Of America, Basis Points, Bull Run, Canadian, Canadian Market, China, David Rosenberg, Financial Disaster, Fiscal Stability, Fund Portfolios, Global Scale, Gluskin Sheff, Hedge Fund, Internet Revolution, Low Quality, Lows, Msft, Nasdaq, Political Stability, Quality Names, Quality Stocks, Record Quarter, Sears Holdings
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Tuesday, November 1st, 2011
Rally Continues on Positive News from Europe
by Bob Doll, Chief Equity Strategist, Fundamental Equities, Blackrock
October 31, 2011
Markets Buoyed by Debt Deal
Last week’s announcement that European policymakers were able to come to an agreement to at least temporarily address that region’s debt crisis helped stocks rally for a fourth consecutive week. Investors were also cheered by some solid US economic data that further reduced the odds that the United States would sink into a double-dip recession.
For the week, the Dow Jones Industrial Average climbed 3.6% to 12,231, the S&P 500 Index advanced 3.8% to 1,285 and the Nasdaq Composite rose 3.8% to 2,737.
European Agreement Represents Significant Progress
Last week’s agreement (which includes an expansion of the European rescue fund and an agreement by Greek’s debt holders to accept some losses) is still lacking in some details and certainly does not solve all of Europe’s long-term debt issues. Nevertheless, the European debt deal is a significant milestone and helps remove some of the risk that had been weighing on the global economy and financial markets.
Despite some of the lingering uncertainty, to us, one of the most important takeaways from last week’s news is that all of the parties were able to come together to make some hard decisions, to take some losses and to set up a new institutional structure that is powerful enough to take action while assuaging the concerns of many (chiefly Germany) over creating a more tightly intertwined fiscal union. It is important to remember that it was only a couple of years ago that the thought of any sort of bailout was a complete non-starter among most policymakers. Europe has been able to move from that point to an agreement in which countries will effectively guarantee each other’s debt???a significant achievement.
There are still some significant long-term concerns about the fiscal stability of several European countries, particularly given that overall European economic growth is likely to remain weak. Italy and Spain, for example, still need to enact some significant fiscal reforms, which will be difficult to do given a charged political backdrop.
US Economy Continues to Grind Higher
On the other side of the Atlantic, recent data confirms that the US economy is continuing to grow. Perhaps not very quickly and certainly not fast enough to effect noticeable improvements on a persistently high unemployment rate, but it is growth nonetheless. Business investment levels and spending on equipment and software continue to improve and consumer spending levels have been ticking up. These trends were confirmed by last week’s news that gross domestic product in the third quarter grew by an initial estimate of 2.5% (with final sales figures growing a healthy 3.6%). Corporate earnings have also remained solid. We are more than halfway through the third-quarter reporting season and companies have again been surpassing expectations for both revenues and earnings.
From a longer-term view, a retrospective look at the economy suggests that the United States is continuing to make some gradual headway against the lingering post-crisis headwind of high debt levels. Household debt levels are continuing to contract and banks are also continuing to improve their capital and liquidity levels. From a nearer-term perspective, we believe that the third-quarter GDP report shows that the economy has been moving past the negative effects of the Japanese earthquake and commodity price spike that hurt growth in the first half of 2011. One issue that remains a long-term concern is the federal deficit. The deadline for the so-called “super committee” to present a plan to reduce the deficit by $1.2 trillion is approaching and it is not clear at this point whether the committee will be successful in doing so. In any case, the deficit overhang looks to be an issue that will persist for at least the next couple of years.
Looking ahead, we expect this environment of sluggish and grinding growth should persist as the economy continues to heal from the credit crisis. As a result, we expect economic growth levels will remain modest through next year, suggesting that unemployment is likely to be stuck at an unfortunately high level.
Market Outlook Continues to Improve
Investor sentiment has certainly improved over the past several weeks, and while it is much too early to declare victory over the European debt crisis, last week’s deal is certainly a positive step. The easing of the risks associated with Europe’s issues, along with a brighter outlook for the US economy than was the case a couple of months ago, does create a more solid footing for risk assets. Given the sharp advance markets have seen over the past month, we may be in for a period in which markets need to “digest” these gains, but the longer-term outlook for stocks does appear to be improving.
About Bob Doll
Bob Doll is Strategist for Fundamental Equities at BlackRock® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.
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Tags: Bailout, Bob Doll, Bonds, Debt Crisis, Debt Deal, Debt Holders, Debt Issues, Double Dip Recession, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Fiscal Stability, Global Economy, Institutional Structure, Nasdaq Composite, Outlook, Policymakers, Positive News, Strategist, Takeaways, Term Concerns
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