Posts Tagged ‘India’
Saturday, April 13th, 2013
India’s industrial output rose just 0.6 percent in February, official figures showed Friday, adding to a string of weak economic data and bolstering the case for more interest rate cuts. While the output increase at factories, mines and utilities defied analysts’ forecasts of a 1.0-percent decline,…
Thursday, April 4th, 2013
April 3, 2013
by Michelle Gibley, CFA, Director of International Research, Schwab Center for Financial Research
• Emerging markets have great promise—but we see constraints on future growth in large EM economies, and stocks have underperformed recently.
• Meanwhile, inflation is stubbornly high in several large countries, which could result in monetary tightening that further slows growth.
• We are cautious on emerging markets as an asset class, and see better opportunities in developed markets such as Europe and Japan.
The large emerging-market economies of Brazil, China and India have run into growth, inflation, and structural challenges. Combine that with a potential peak in commodity prices that could damage heavy commodity exporters such as Brazil, South Africa, Russia, Indonesia and Chile, and we see reason to be cautious on emerging markets (EM) as an asset class.
High economic growth doesn’t assure strong stock performance
Just five years ago, emerging markets, including the BRIC sub-group (Brazil, Russia, India and China) showed great promise. Chinese and Indian incomes were growing; Brazil and Russia boasted abundant and valuable natural resources; and low government debt and high levels of foreign exchange reserves in many emerging markets seemed to pave the way for rapid growth.
Emerging-market growth steps down
Source: FactSet, IMF. Estimates used after vertical line are as of Oct. 2012, World Economic Report database.
Unfortunately, growth rates have taken a noticeable step down, and emerging-market stocks have underperformed over the past two years. Some investors have held on to emerging-market allocations on the premise that the growth outlook for these countries remains above that in the developed world.
Paradoxically, higher economic growth doesn’t always equate to the best investment returns—academic research suggests no clear correlation. While stronger economic growth creates the potential for greater sales growth, high earnings per share and dividend growth don’t necessarily follow. Profits can suffer if wages rise faster than productivity increases. Weak corporate governance can reduce returns when profits are expropriated rather than passed along to shareholders. Additional capital can be needed to sustain high growth, which can reduce shareholder returns.
The role of expectations and valuations is also very important. High growth expectations can be accompanied by high valuations, resulting in future underperformance—the good news is priced in. We believe that missed growth expectations in emerging markets are the likely culprit for the underperformance over the past two years.
Emerging market growth may have difficulty improving
So are expectations now low enough to get in? We view valuation as an important basis for future performance, but not the only factor. We are cautious on emerging markets (EM) as an asset class due to growth constraints for 60% of the weight in the universe, as defined by the MSCI Emerging Market Index. We believe addressing these constraints could involve difficult transformations or decisions by policymakers in the largest countries.
• A combination of stagflation and structural issues in the large emerging market economies of Brazil, China and India, which represent 40% of the MSCI Emerging Market Index.
• Commodities are potentially peaking, which represents roughly 20% of the MSCI Emerging Market Index, excluding Brazil (included above).
China: Still growing, but sources are suspect
Construction spending has been the primary driver of China’s economic growth in recent years, but it was fueled by a massive issuance of debt, which grew at 30% of GDP for four straight years. That rate of growth can’t continue forever, so we think property and infrastructure construction will likely slow from the rapid pace of the past. Additionally, the overhang of debt could result in a credit crunch that reduces growth for the overall economy.
China’s government is trying to transition to a more consumer-led economy, which will likely be an eventual positive for consumer spending—but we could see policy mistakes and uneven economic progress along the way. It’s much harder for a government to control consumer spending than it is to order new infrastructure construction or command a state-owned company to build another factory. Wages are rising, which benefits consumers, but sales and labor productivity are slowing, constraining corporate profits. Corporations have had difficulty with pricing power.
Additionally, China has a host of challenges related to the growth of its shadow banking sector. See more in “China’s Hidden Risks: Shadow Banking and US Delisting” and “Avoid China – Subprime-Like Bubble Brewing.”
China’s debt-fuelled growth potentially unsustainable
Source: FactSet, People’s Bank of China, Bloomberg. In current dollars using the December 31, 2012 exchange rate. Total credit as measured by total social financing. As of January 29, 2013.
Brazil: Stressed consumers and government bureaucracy
Brazil’s economy relies heavily on consumers, who represent 60% of GDP—and right now, consumers are challenged by inflation and high levels of household debt.
Inflation in Brazil accelerated to 6.3% in February and has exceeded the central bank’s 4.5% target for more than two years. The country’s tight labor market could further propel inflation. With flagging productivity gains and low unemployment, employers won’t find it easy to get more productivity out of the existing workforce or hire lower-wage workers—which means that rising wages may be next. This is good for workers, but often leads to accelerating inflation.
Additionally, the rapid growth in consumer credit that helped to fuel Brazil’s economy in recent years may now be waning. Brazil’s households spend roughly 20% of their disposable income servicing debt, compared to 14% at the peak for the US consumer in 2007, according to Capital Economics. With consumers spending so much money servicing debt, there’s little disposable income left over for new consumption.
Brazil’s consumers are tapped out on credit
Source: FactSet, Banco Central do Brasil, Bloomberg. As of March 15, 2013. *Household debt is the sum of consumer loans outstanding and housing loans outstanding.
On the business side, government bureaucracy and increased interference in the private sector has created a difficult operating environment—particularly for the two largest stocks in the Bovespa Index, as well as utilities and banks. For example, the government limited the price Petrobras could charge for petrol fuel in order to dampen inflation—but this reduced profits for the oil company. Meanwhile, Brazil’s central bank has pursued a somewhat volatile monetary policy. It has overshot at times, creating volatility in both growth and inflation, and has instituted controls that limit foreign investment.
India: Reforms needed, but hopes fading
Economic growth in India has roughly halved from the 9-10% range in the late 2000s to a 4.5% annualized rate as 2012 ended, well below the country’s 8% growth goal. From a funding perspective, India suffers from both a large fiscal deficit and the need for foreign investment due to low savings rates. Therefore, reforms to reduce fiscal spending and attract investment are important to reinvigorate growth.
India’s fiscal deficit expected to worsen before it improves
Source: FactSet, Bloomberg, India Central Statistical Organization. Estimates used after vertical line are provided by India Central Statistical Organization. As of March 15, 2013.
The fiscal budget released in February 2013 was a disappointment for investors hoping for reforms. The budget projected optimistic revenue increases and placed a greater tax burden on corporations, but lacked reforms to spending, preserving populist measures such as costly fuel, food and fertilizer subsidies. Reforms to open the economy to competition announced in 2012 were a positive first step, but momentum has stalled and the possibility of progress ahead of elections in April 2014 is fading.
Meanwhile, inflation is stubbornly high due to swings in food prices, which constitute a large portion of consumer spending. This volatility is the result of supply bottlenecks that stem from insufficient power and warehouse facilities, low agriculture yields, an inefficient public food-distribution system and dependence on the unpredictable monsoon season for irrigation.
Commodity prices may be peaking
As emerging-market economies continue to build out infrastructure and housing, they’ll support demand for commodities such as industrial metals and construction materials. However, the pace of demand growth is likely to slow. China constitutes 40% of demand for many commodities right now, and we expect slower growth in future demand from China as construction of infrastructure and property slow. We don’t see any countries that could replace China as a major commodities consumer—both Brazil and India are potential candidates, since they appear to need large investments in infrastructure, but government bureaucracies and lack of funding are barriers to progress.
Revenues for commodity producers are a function of both demand (where we expect slower volume gains) and prices. Prices of some commodities may have difficulty increasing, as demand growth in the past was met with significant increases in supply. Stagnant commodity revenues could be a challenge to economic growth for the commodity-oriented emerging economies of Brazil, South Africa, Russia, Indonesia and Chile.
Commodity prices have yet to gain traction
Source: FactSet, Commodity Research Bureau. As of March 15, 2013.
Monetary policy may tighten
In Brazil, central bank chief Alexandre Tombini said in February that he was “uncomfortable” with current inflation levels and that the bank will not hesitate to raise rates. At its March 6 meeting, the central bank removed the language (used since October) that it would maintain monetary policy for a “prolonged period of time,” suggesting it has shifted its priority from encouraging growth to fighting inflation. Brazil was the first major emerging-market country to ease in August of 2011, and its moves could be reflective of broader trends.
Inflation still a concern in Brazil and India
Source: FactSet, IBGE, Indian Ministry of Labor. As of March 15, 2013.
In China, Governor Zhou of the People’s Bank of China (PBoC) noted in March that China should be on “high alert” as inflation could accelerate later this year. As a result, monetary policy in China is now in “neutral” territory, and the next move for the PBoC is more likely to be tightening than easing.
Attractive valuations, but disappointing earnings
In a fourth straight quarter of disappointing results, more than 59% of companies in the MSCI BRIC Index reported quarterly earnings that trailed analyst estimates, while profits rose less than 1%, according to Bloomberg. Earnings estimates for emerging markets may still be overly optimistic, as economic growth continues to come in below expectations.
Consumers in some countries (such as Brazil) and other borrowers (such as local governments in China) appear tapped out on credit, and without credit to help fuel consumption we may see slower economic growth. Additionally, rising labor costs in many emerging markets could put a damper on corporate profits. While valuations appear attractive relative to historical averages, lower growth and potentially unmet estimates will likely necessitate lower valuations until these trends turn around.
As long as China’s economic reacceleration continues, emerging-market investments could benefit in the short term. However, we believe longer-term investors may want to consider re-orienting international exposure away from China and emerging markets and toward developed international markets. Earnings in non-US developed markets such as Europe and Japan have been cut quite dramatically, and economic data has shown steady (albeit modest) improvement. Additionally, valuations in Europe and Japan look low relative to historical averages, so stocks in these markets could be a relative bargain.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
The MSCI BRIC Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the following four emerging market country indices: Brazil, Russia, India and China.
The Bovespa Indexis comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange, and serves as the main indicator of the Brazilian stock market’s average performance.
Copyright © Charles Schwab and Co.
Tuesday, December 4th, 2012
Submitted by Sudha Ramachandran via The Diplomat,
Although its interests in the continent are broadly similar, India’s engagement with Africa differs significantly from China. Will it prove sustainable?
India’s engagement with Africa has grown remarkably over the past decade.
Trade with Africa jumped from U.S. $3 billion in 2000 to $52.81 billion in 2010-11 and is expected to exceed $90 billion by 2015. India has emerged as Africa’s fourth largest trade partner, after the European Union, China and the United States. Its cumulative investment in the continent exceeded $35 billion in 2011 in industries diverse as energy, pharmaceuticals, agriculture and telecommunications.
Close ties between India and Africa are not new. Trade has flourished between East Africa and India’s west coast for centuries. India also supported Africa’s struggle against colonial rule and apartheid, and its freedom movement inspired the anti-colonial struggles of African countries, Ruchita Beri, an expert on India-Africa relations at the Institute for Defence Studies and Analyses (IDSA) in New Delhi told The Diplomat. Throughout the 1960s and 70s, India worked closely with the newly liberated African countries to forge common positions on global issues.
However, New Delhi’s interest in Africa waned in the 1990s. With the end of the Cold War, India was preoccupied with mending relations with the West and establishing ties with the newly independent former Soviet republics in Central Asia. As a result Africa moved to the margins of India’s foreign policy.
Rapid economic growth and soaring energy requirements, however, forced India at the turn of the new millennium to rethink its neglect of Africa.
India imports 70% of its oil, much of it from the politically volatile Middle East. Finding new suppliers to diversify its oil sources is crucial to its energy security and Africa is an attractive option.
Besides oil, Africa is rich in gold, diamonds, platinum, copper, manganese and uranium. India’s diamond-cutting industry – the world’s largest – depends on rough diamonds from Africa, while uranium in Niger, Uganda and Tanzania is vital for India’s nuclear power industry.
There are other reasons too for India’s renewed interest in Africa. Africa is rich in votes at the UN General Assembly, which India needs when it pushes for a seat in the Security Council. Realization of its strategic ambitions too hinge on cooperation with Africa. India is keen to assert its naval power across the Indian Ocean from Africa’s east coast to the western shores of Australia. This has prompted it to step up naval cooperation with Africa’s Indian Ocean littorals like Seychelles, Mauritius and Madagascar. Tackling problems like piracy off Somalia’s coast too requires India to work with Africa.
India’s interest in Africa is thus multifaceted although its focus is on the economic dimension.
Historically, India was active in Africa’s Anglophone countries and in East Africa. It was the large Indian diaspora in countries like Kenya, Tanzania and Mauritius that facilitated close economic relations. Over the past decade, however, India is looking beyond East Africa. With oil and other natural resources emerging as key drivers of its engagement, West Africa and South Africa are the focus of its attention. Nigeria’s immense oil wealth has contributed to its emergence as India’s top trading partner in Africa, accounting for roughly 30% of India’s trade with the continent.
India’s imports from Africa consist mainly of primary commodities (91% of its imports from Africa in 2010). Oil accounts for 61% of Africa’s exports to India. The continent also provides a market for India’s manufactured goods – over two-thirds of African imports from India are manufactured goods such as pharmaceuticals, machinery and transport equipment.
The domination of oil and natural resources in India’s imports from Africa and of manufactured goods in its exports to the continent has drawn criticism that India is indulging in a “neo-colonial grab” for Africa’s resources. Critics liken its trade with Africa to that which the European powers engaged in with their colonies.
“This is an uninformed view,” argues HHS Viswanathan, a distinguished fellow at the Observer Research Foundation in New Delhi and India’s former ambassador to Nigeria and Cote d’Ivoire. “Africa of today is not the same as during colonial times. When countries exploit the resources of Africa today, the terms are set by the African nations and not by outsiders. The deals are mutually beneficial.”
Echoing this view, IDSA’s Beri said that India’s relationship with Africa is “not a one-way street,” with benefits flowing to one side only. “India is sharing its own development experience with Africa,” she said. It was its services sector that spurred the Indian economy and India is now helping Africa achieve a similar growth by building its services sector.
“Capacity building is an important component of India’s engagement of Africa,” says Aparajita Biswas, head of the Department of African Studies at the University of Mumbai. India is supporting institutional capacity building at the pan-African, regional and bilateral levels. It is setting up scores of institutions in areas as diverse as food processing, agriculture, textiles, weather forecasting and rural development. A pan-African e-network linking schools and hospitals across Africa with top institutions in India will make Indian expertise in healthcare and education accessible to the African people.
Illustrating the mutually beneficial nature of India’s ties with Africa, an official in India’s Ministry of External Affairs (MEA) drew attention to training in diamond cutting, polishing and grading that India is providing to the people of Botswana. “While India’s diamond cutting industry has benefitted from Botswana’s diamond roughs, India is enabling Botswana to move up the value chain in the diamond business,” he pointed out.
Similarly, while Africa provides a major market for India’s pharmaceutical industry – 14% of India’s $8 billion pharmaceutical exports in 2009 went to Africa, “the role it has played in controlling the spread of HIV/AIDS and other diseases by making treatment affordable cannot be ignored,” the official said. Besides pharma companies like Ranbaxy are not just selling to Africa but have set up production facilities there.
India’s investments in African land have drawn criticism too. It has been accused of engaging in a “land grab,” especially in Ethiopia where Indian companies like Karturi Global, one of the world’s largest exporters of roses, have leased vast tracts of land to cultivate cash crops. This could undermine Africa’s food security, critics charge.
“Land grab is too strong a term” to describe Indian companies’ cultivation on Africa’s land, counters Viswanthan, “So far, the projects have benefitted both parties,” he says. However, he cautions that such projects have to be “constantly monitored for any adverse effects on local food security.”
Parallels are often drawn between India and China’s African “safaris.” Indeed, their trade with Africa has grown at similar rates; India’s at a compounded annual growth rate of 24.8% and China’s at 26.3%. More importantly, access to natural resources and especially oil is the main driver of both Asian giants’ engagement of the continent.
There are important differences though. For one, India’s footprint in Africa is small compared with that of China. Take their role in Africa’s trade for instance. In 2011, India accounted for 5.2% of Africa’s global trade compared with China’s 16.9%. Besides, unlike China’s investment in Africa, which is led by state-owned companies, Indian investment is mainly driven by the private sector. In another contrast with Chinese companies, India hires local laborers while many Chinese companies bring Chinese laborers to their projects in Africa.
Indian officials admit that China’s aid-for-oil strategy, which involves extension of soft loans for massive infrastructure projects in return for African oil, used to impress them as it helped Beijing secure deals in its favor, according to the MEA official. This prompted India to follow the Chinese strategy in some countries where it was seeking oil deals. However, India was unable to match the aid the Chinese offered. It underscored the need for an approach that built on India’s strengths, which ultimately resulted in India focusing on capacity building in Africa.
India is upbeat over its relations with Africa. It has reason to be. With regard to oil for instance, not only has its access to African oil grown significantly – Africa now accounts for 20% of India’s fuel imports – but also it has been successful in acquiring equity in African oilfields, observes Viswanathan.
The question is how secure are its investments in Africa? Its experience in Sudan underscores the need for caution. ONGC Videsh Ltd (OVL), the overseas unit of India’s state-run Oil and Natural Gas Commission, invested $2.5 billion in oil exploration and production in an undivided Sudan. This investment came under threat with South Sudan’s secession from Sudan in 2011, with three OVL blocks in the Muglad Basin straddling the border between the two Sudans and one entirely in South Sudan. This situation became especially precarious earlier this year when Sudan forced South Sudan to halt oil production, resulting in massive losses for OVL.
As for allegations of neo-colonial exploitation, these have been leveled largely by the western media. Will such a view eventually be echoed by Africa, potentially jeopardizing India’s presence there?
India hopes that its capacity building, people-centric approach and efforts to build a sustainable partnership with Africa will keep such allegations at bay.
Friday, November 30th, 2012
Back-to-back days of 1.5%+ gains pushed India’s stock market to a new 52-week high today. As shown in the first chart below, the chart pattern couldn’t look any better for the India’s Sensex.
At the same time, China, India’s BRIC brother, made a new 52-week low today. As shown below, the chart pattern can’t get any worse for China’s Shanghai Composite.
The chart below shows just how long China’s stock market has been struggling. Back in late 2008, both China and India made their financial crisis lows at the same time. Both indices bounced 100%+ very quickly off of the lows, but the two countries have seen their stock markets take very different paths since late 2009. India has hung in there and is currently up 125% off of its lows, while China is now up just 13.95% from its low made back in October 2008. How much further will China fall before it finally sees some kind of sustained rally?
Copyright © Bespoke Investment Group
Tuesday, September 25th, 2012
by Neuberger Berman Investment Strategy Group
The “BRIC” countries have been a focal point of investor interest since the early 2000s. Brazil, Russia, India and China account for about half of the world’s population, boast vast natural resources and are among the fastest-growing economies in the world. That said, progress at times has been uneven. Since 2010, the MSCI BRIC Index has largely underperformed the S&P 500 as economic growth flagged. In this edition of Strategic Spotlight, we discuss current conditions and the outlook for these markets.
Following the global financial crisis of 2008–2009, the BRIC countries enjoyed a strong economic rebound as forceful policy measures reignited growth. However, a surge in capital inflows stoked inflation and led to tightening measures in 2010 and 2011. Currently, the BRICs are experiencing varying stages of easing as growth and inflation decline. Unlike the synchronous rebound we saw in 2009, progress in the BRIC countries is diverging due in part to idiosyncratic policy initiatives aimed at managing structural changes within their specific economies.
BRIC GROWTH RATES HAVE SLOWED
Brazil’s real GDP growth declined from 9.3% in the first quarter of 2010 to 0.5% in the second quarter of 2012—a number that disappointed investors looking for 3.5% GDP growth for all of 2012. The slowdown is partly a function of so-called macro-prudential measures—meant to fight inflation and control the appreciation of the real currency due to capital inflows—as well as a slowdown in exports. The tightening measures have had the desired impact of reducing inflation from 7.2% from last September to 4.1% in August 2012, but have also caused investment spending to plummet as the outlook for commodities (a key sector for Brazil) deteriorated. Domestic consumption, which accounts for about 60% of Brazilian GDP, has held up surprisingly well, supported by the country’s still-low unemployment rate.
Since the end of 2011, the Brazilian central bank has reduced interest rates, complementing the government’s recent accommodative fiscal measures such as payroll tax cuts. The OECD expects growth to pick up gradually in the third quarter as these measures work through the system.
Russia: The Limitations of Oil
The Russian economy has held up reasonably well in the past few years despite turmoil in Europe. Since the end of June 2012, real GDP has grown at around 4% annually, which is close to the post-crisis peak of around 5% in 2010. This good fortune is mainly due to relatively high oil prices and, most recently, fiscal spending ahead of the presidential elections in March 2012. Unlike Brazil, Russia is grappling with rising inflation as record-low unemployment has supported wage growth. In September, the country’s central bank surprised investors by hiking interest rates as inflation had come in above the bank’s target range of 5%–6%.
For the most part, Russia’s domestic consumption has been strong but the impact of declining oil demands from key trading partners such as Europe and China could have spillover effects—weakening the outlook for budget and current account balances. Concerns about an overheating economy have led to predictions that further tightening measures could be introduced, marginally reducing growth in 2013.
PERFORMANCE AND VALUATIONS
Source: FactSet as of Sept 17, 2012.
Despite a year-to-date equity market return of about 20% (see display), India’s real GDP growth continuously slowed to about 4% in the second quarter—a level last seen during the crisis of 2008–2009. Declining global growth, reductions in foreign investments and monetary tightening measures have contributed to a slowdown in manufacturing and services. In June, government agencies reported that foreign direct investments had decreased by as much as 67% from a year ago, as economic reforms stalled and business conditions were increasingly viewed as being biased against foreigners.
In addition, India is dealing with rising consumer price inflation, as recent cuts in government fuel subsidies and the effects of the monsoon season feed through the system. Consumer price inflation ramped up to 10% in August, reducing the scope for further rate cuts by the Reserve Bank of India. Moreover, warnings of a downgrade have been issued by rating agencies, given that India’s government finances are weaker than other BRIC countries. Investors are closely watching reform measures designed to promote competition and improve market efficiency following the decision last week to expand foreign companies’ access to the retail and airline industries.
China: Political Transitions
Recent data indicate that China continues to slow from tightening measures enacted in 2010–2011 and a decline in exports. Investors have been somewhat surprised by the government’s passivity toward this slowdown. Following small cuts in interest rates and reserve requirement ratios earlier in the year, the People’s Bank of China (PBoC) has not done more despite inflation dipping below its 3%–4% target. And while most analysts did not expect a repeat of the 2008–2009 RMB 4.0T fiscal stimulus, the government has acted less forcefully than expected.
The failure to act could be a result of widely reported complications in the current once-in-a-decade change to the country’s political leadership. Moreover, the PBoC could be concerned about magnifying the inflationary impact of loose monetary policy in developed countries. The political transition is expected to conclude by March 2013, potentially paving the way for better policy engagement. Regardless, the IMF expects China’s growth to reaccelerate next year.
A More Nuanced Progression
In the past decade, the BRIC countries have experienced rapid growth, but are now showing signs of slowing down as cheap labor and abundant resources are beginning to yield a diminishing impact on their economies. As such, investors should consider looking towards the rising middle class to lead the charge in driving growth.
Before we reach that point, however, we believe some structural reforms will need to be made. Investors should remain vigilant of the various policy prescriptions during this period to avoid potential speed bumps. Not every policy change will be successful, but if imbalances are adequately addressed, the BRIC countries should continue to offer investment opportunity.
This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The views expressed herein are generally those of Neuberger Berman’s Investment Strategy Group (ISG), which analyzes market and economic indicators to develop asset allocation strategies. ISG consists of five investment professionals who consult regularly with portfolio managers and investment officers across the firm. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
Monday, September 24th, 2012
Emerging Markets Radar (September 24, 2012)
- China needs more subways, highways and sewage plants, and construction of those infrastructures will help the economy, Xu Lin, the head of the planning department at National Development and Reform Commission said this week.
- Malaysia’s CPI stayed flat at 1.4 percent in August as in July.
- The Federation of Thai Industries reported solid August auto production of 210,333 units (up 37 percent year-over-year), driven by strong domestic sales.
- HSBC September Flash China PMI was 47.8 versus estimate 47.6 for August, which, though improved on a month-over-month basis, indicates that the economic activities still are contracting. However, new orders overall increased to 47.6 from 46.1.
- Taiwan August export orders fell 1.5 percent year-over-year, improving from the contraction of 4.4 percent in July. The market expects export orders in tech products to revive going forward due to iPhone 5 and Windows 8 ODM plays.
- Turkey GDP growth, which was 8.5 percent in 2011 and 3.3 percent in the first quarter of 2012, slowed down to 2.9 in the second quarter.
- Foreign investors have consistently put more money in Asia equity markets, such as the Philippines as shown in the graph above. Particularly, Association of Southeast Asian Nations countries are on the rise in consumer spending and infrastructure investments helped by an increasing middle class and growing government balance sheet.
- India opened retail and aviation sectors for foreign investment, cut the fuel subsidy by 12 percent and cut the withholding tax on local corporate bonds held by foreigners 20 percent to 5 percent.
- In a separate move, India’s central bank cut its reserve ratio requirement for the banks by 25 basis points, setting the stage for a rally in financials.
- The tension between Japan and China over disputed islands in East China and North Taiwan is escalating with some possibility of trade and military clashes.
- Credit Suisse remains cautious on the Polish banking sector, and cut 2012 earnings forecast by 13 percent due to cyclical pressures from lower loan growth and higher provisioning charges.
- President Putin was critical of the proposed budget for not incorporating provisions for several of his election promises. This higher expenditure will have to be financed through borrowing and/or higher taxes.
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.
Saturday, September 8th, 2012
Gold Market Radar (September 10, 2012)
For the week, spot gold closed at $1735.65, up $43.64 per ounce, or 2.58 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 5.16 percent. The U.S. Trade-Weighted Dollar Index lost 1.29 percent for the week.
- Gold surged on Friday to close at $1,735.65—up 2.58 percent for the week—primarily on the heels of a poor jobs report and the accompanying expectation of quantitative easing and the debasement of the U.S. dollar. Technically, gold extended its recent rally above the 200-day moving average, and is now within striking distance of its February highs. The dollar, on the other hand, plummeted below its 200-day moving average on Friday. If the price action is allowed to speak for itself, the question is not whether there will be QE, but when.
- Significantly, a number of analysts raised their year-end forecasts for gold prices. A quick survey: J.P.MorganChase called for gold to close the year at $1,800; Goldman Sachs said $1,840; Bank of America Merrill Lynch suggested $2,000 in the event of QE, and one Citigroup analyst called for gold to reach $2,500 by the end of the first quarter 2013, and even higher in the event of geopolitical conflict.
- The fall seasonality trade looks to be in full swing. This historically strong period of the year for gold prices is supported by a weakening dollar, a strengthening euro, and seasonally strong demand.
- AuRico Gold decreased its production guidance substantially at its Ocampo project: 2012 guidance was essentially halved, 2013 guidance cut by 25 percent, and the stock finished down for the holiday-shortened week, off about 14 percent.
- Continued strikes in South Africa are problematic. While the unions were said to be close to a deal this week, sending troubled Lonmin up midweek, the deals fell through, and strikes are ongoing with very few workers returning to work.
- Global accommodative monetary policies remain very much in play. The Fed meeting next week—on the heels of a poor jobs report—offers the possibility for further easing and may be an additional catalyst for gold prices.
- Gold, as priced in euros, is rapidly approaching its all-time highs.
- We mentioned last week that the dollar’s 200-day moving average might be defended from a technical standpoint. A decisive break below that average, as occurred on Friday, likely signals further weakness in the dollar to come and possible gains in gold.
- India—the world’s largest importer of gold—may raise the import duty on gold for the third time this year, potentially curtailing some Indian demand. Bloomberg reported that, “The government may look at increasing the duty to 7.5 percent,” according to the president of the Bombay Bullion Association. The time frame on this potential policy change remains unclear at this point.
- There remains the risk that an inflation premium is cooked into the gold price, which, in the event of no quantitative easing, would cause prices to react negatively. The Fed’s next meeting is September 12-13.
- A rapid move upward in gold and gold equities which does not successfully trigger meaningful short-covering might invite resistance, or additional short positions. The ultimate identifiable catalyst for short-covering remains government policy a la quantitative easing in the near term.
Saturday, September 1st, 2012
Gold Market Radar (September 2, 2012)
For the week, spot gold closed at $1,692.01 up $21.46 per ounce, or 1.28 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.69 percent. The U.S. Trade-Weighted Dollar Index slipped lower, falling 0.43 percent for the week.
- The tides appear to be turning. Since the February $1,790 highs in gold and Bernanke’s stalling on any new stimulus measures, gold has been the fast money’s favorite short with each ensuing Fed meeting.
- However over the last couple of months, Fed meetings have produced only modest pull backs in gold that were met with heavy accumulation. Gold inventories held in ETFs have been on the rise with nearly 38 tons of accumulation in August just in the U.S.’s most widely traded product, marking the biggest inflow since November. Gold held in ETFs now exceeds Italy’s national reserves of gold, which are the third largest in the world.
- The $36 plus jump in gold on Friday, as it initially slumped close to its 200-day moving average after Bernanke’s speech, set a very strong tone for investors to get long and don’t be wrong.
- The labor conflict between the South African unions at the platinum mines has started to spill over to the gold mines. Labor at Gold Fields Kloof-Driefontein operation started an illegal strike at the close of the week and caused its share price to miss out on any of the gains produced by the surge in gold. This mine accounted for 31 percent of Gold Field’s production last year.
- In addition, Gold Fields said it expected Ghana to announce a 10 percent windfall tax by the end of next month. Gold Fields has been trying to get a tax stability agreement in place for the last eight years with regards to its Tarkwa mine. This may be a bargaining ploy to signal to Ghana that new investment in the country will be a risk if an agreement cannot be reached.
- Some of the press articles still try to villainize hedge fund manager John Paulson for the tremendous success he has had in the capital markets, particularly since he is focused on gold and it has had a rough start to the year.
- Harmony Gold and Newcrest Mining released their prefeasibility study for the Golpu project in Papua New Guinea mid-week. Both companies’ share prices took a hit on the push back on the development timeline, but for Harmony the growth in the updated resource base will be game changer over time. Harmony’s gold reserves in Papua New Guinea have grown to 42 percent of the company’s total reserves versus 11 percent in the prior year. Earlier this year Harmony sold its Evander operations in South Africa, further reducing its exposure to South Africa.
- Gold smuggling in India may be up as much as 10-fold based on seizures of undeclared gold coming into the country at airports. The rise in the import duty on gold from 2 percent to 4 percent earlier this year has evidently not stymied the desire to acquire gold in India. Weakness in the rupee has sent the local gold price to new highs, which typically would soften the demand for gold in anticipation of a pull-back, but demand still appears to be strong.
- Not only has shorting gold bullion been a popular trade by the fast money players but so has shorting the gold stocks. This has become a crowed trade and of course all good things must come to an end. In the case of Dundee Precious Metals, the short interest has reached such an extreme that it would take nearly 51 days of average trading volume to close out the short positions. Let the wailing and gnashing of teeth begin for the short sellers as the gold price rises higher.
- Some are cautioning that the silver mining stocks have risen too much in the recent rally and are due for a correction in the short term. It is true the silver stocks have been star performers but historically silver stocks have exhibited as much as a three- times beta to the gold stocks. We haven’t seen much talk that the gold stocks are overdone yet.
- The dollar has drifted steadily lower over the month of August and now within a couple percent of crossing below its 200-day moving average. This could be a technical support level which some traders might try to defend, considering the political backdrop to keep America strong, and could be a testing point to see if the gold price can go higher.
- The next Fed meeting on September 12-13 may be the last time the Fed can announce any new measures to shore up the economy, without looking too partisan in its bias, and could be an important test for new legs in the gold price. Given that Romney has said that he will fire Bernanke if he is elected, we will see how badly the Fed Chairman would like to keep his job.
Saturday, September 1st, 2012
Emerging Markets Radar (September 2, 2o12)
- Central Huijin Investment, China’s government wealth management entity, picked up more A-shares of Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China in the second quarter, in hopes of boosting the market sentiment in China as regulators also called on companies to buy back their shares as their share price approaches book value.
- China’s third-quarter economy may rebound and be “slightly” higher than the second quarter as stable growth policies start to take effect, Xinhua reported, citing Hou Yunchun, a researcher at the State Council’s State Development Research Center.
- China will overtake the U.S. as the world’s largest smartphone market this year. China will account for 26.5 percent of smartphone shipments in 2012, compared with 17.8 percent for the U.S., research firm IDC said.
- About 2,453 publicly listed Chinese companies combined first-half profits falling 0.38 percent with no growth on a year-over-year basis, China Securities Journal said. For the second half of the year, Bank of America Merrill Lynch Global Research and CICC believe corporate earnings growth could accelerate as they think China will step up easing policies.
- High commodity prices have played a significant role in depressing Indian equities’ price performance. Lower commodity prices will help stabilize India’s relative performance against other emerging markets because they will at the margin boost profit margins as well as domestic liquidity, according to BCA.
- Thailand’s July exports fell 4.46 percent, lower than the consensus of -3.8 percent, but imports surged 13.7 percent on a year-over-year basis, resulting in a widening trade deficit of $1.75 billion.
- Here is a case in point that government policy is a precursor to change. In the Philippines, both monetary and fiscal policies are in favor of property and construction and consumer income growth, as the country is cutting interest rates and allocating the budget toward building infrastructure in the country. The chart below shows capital goods imports increased, an indication that construction is booming.
- Indian relative equity valuations are no longer excessive given that India’s return on equity and return on assets exceed, and will likely remain, above those of emerging markets counterparts, maintains BCA Research.
- Now that anti-corruption allegations have largely subsided, BCA Research expects the Indian government to approve a pipeline of pending projects. After a prolonged and messy hold up, this is not only positive for India’s power problems, but also for the nation’s banks, which have a sizable exposure to the power industry.
- Indonesia’s current account deficit widened to 3.1 percent GDP in the first half of the year as export commodity prices fell, while the domestic economy and consumptions were booming. Directly impacted by current account deficit, Indonesia’s currency was weakened, which, though not a structural issue, caused some market volatility lately.
- On the heels of the Republican convention, a Citibank strategist opined that a victory for Romney could drive the Russian equity market down by 5 to 10 percent. Romney’s foreign policy stance differs in two key areas that could damage the Russian market: 1) the ‘number one geopolitical foe’ rhetoric would elicit an equal and opposite reaction; and 2) a greater push for U.S. energy independence has important consequences for global oil markets.
- On the other hand, Romney’s foreign policy platform would bolster relationships with traditional bulwarks against aggressive behavior on the part of Russia, such as Poland and Turkey. He plans to decrease European energy reliance on Russia by helping to speed up development of shale gas in Poland. He would also aim to free Central Asian gas with construction of the Nabucco pipeline through Georgia and Turkey.