Emerging Markets Radar (February 6, 2012)

Sunday, February 5th, 2012

Emerging Markets Radar (February 6, 2012)

Strengths

• Emerging markets had a strong week as positive global economic data is boosting expectations on economic growth. Key outperformers included Taiwan, Turkey and the Czech Republic.
• Currencies played a big role this week with many emerging market currencies rallying strongly. The South African Rand rose 2.9 percent, the Mexican Peso rose 1.9 percent and the Turkish New Lira, Indian Rupee and Colombian Peso each rose more than 1.25 percent.
• China’s January PMI was 50.5, improved from 50.3 in December and higher than the market estimate of 49.6. PMI above 50 indicates economic activities are expanding. The new order index was up 0.6 to 50.4 from December, while the new export order index was down 1.7 to 46.9, indicating China’s economy is driven by domestic demand. China’s January HSBC flash PMI improved slightly to 48.8 from 48.7 in December.
• German luxury-car maker BMW AG said Thursday that sales in mainland China rose about 30 percent in January to around 26,500 cars.
• Chinese banks may extend 9 trillion yuan ($1.43 trillion) of new loans this year as policymakers allow expansion in formal lending to replace shadow financing and enable the nation’s powerful growth engine to keep humming, Fitch Ratings Ltd. said.
• Korean CPI rose 3.4 percent in January, the slowest increase in 12 months.
• Thailand’s CPI rose 3.38 percent in January as lower food prices offset higher energy costs. The result was down from December, but in line with estimates.
• Indonesia’s CPI rose 3.65 percent in January, slowing for a fifth month and leaving the central bank room to resume interest rate cuts.

Weaknesses

• Korean exports unexpectedly dropped 6.6 percent in January, the first decline in more than two years. Weakness in Europe and the Lunar New Year holiday were blamed.
• China’s official PMI for non-manufacturing sectors fell to 52.9 in January from 56 in December, the China Federation of Logistics and Purchasing said in a statement today. The sub-index of new orders fell to 48.5 from 50.5 the previous month, slipping into contractionary territory and reflecting the effect of the government’s tightening measures on the property market, the statement noted.
• Hong Kong’s forth quarter GDP growth decelerated to 3 percent from 4.3 percent in the third quarter of 2011, but was better than the forecast of 2.5 percent.
• Taiwan has reported the advance estimate for fourth quarter GDP to be 1.9 percent year-over-year, below market estimates of 2.8 percent and lower than the growth of 3.4 percent in the third quarter. The real GDP declined 1 percent quarter-over-quarter, technically entering recession.

Opportunities

• The left chart below shows how the people in China spend their time on media devices, indicating 47 percent of time is spent on the internet and 22 percent on mobile phones. The right chart compares online time as a percentage of total time spent on media with online ads spent as a percentage of total ads.  It is clear that there is more potential to monetize the internet in China through ad sales.

Threats

• China’s food prices were up in January due to holiday and winter effects.

Tags: Bmw Ag, Car Maker, Chinese Banks, Colombian Peso, Economic Activities, Economic Data, Emerging Market, Emerging Markets, Energy Costs, Fitch Ratings, Food prices, Higher Energy, Indian Rupee, Interest Rate Cuts, Korean Exports, Lunar New Year, Mainland China, Manufacturing Sectors, Mexican Peso, South African Rand
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India’s Year of Living Stagnantly

Friday, January 27th, 2012

by Jaswant Singh, former Indian Finance Minister, via Project Syndicate

2012-01-25

NEW DELHI – Will 2012 prove to be a year of renewal for India, or another annus horribilis? No country progresses unerringly, but India cannot afford another politically and economically torpid year like 2011. For India, last year is a year best forgotten. India has been so deeply mired in political paralysis that the Nobel laureate economist Amartya Sen recently said that the country has “fallen from being the second best to the second worst” South Asian country, and that it is currently “no match for China” on social indicators. This is a damning comment on a country that held such promise just a short time ago.

In early January, the American social critic James Howard Kunstler described India as “a nation with one foot in the modern age and the other in a colorful hallucinatory dreamtime.” Kunstler’s view is harsh, but perhaps prophetic: India’s “climate-change-related problems are doing heavy damage to the food supply. Their groundwater is almost gone. The troubles of the wobbling global economy will take a lot of pep out of their burgeoning tech and manufacturing sectors.” Indeed, suddenly, India’s economy has begun spinning out of control. Last year, the country’s GDP growth slowed, manufacturing plummeted, and inflation and corruption grew uncontrollably. Elected and unelected government officials alike, including cabinet ministers, members of parliament, and civil servants, were implicated in corruption scandals. The situation triggered recollections of Prime Minister Indira Gandhi’s fraudulent call for a state of emergency in 1975, when she ruled by decree for 21 months, suspending elections and civil liberties.

The population’s outraged response to these events was visceral, and previously unknown figures such as the anti-corruption activist Anna Hazare rallied thousands of Indians in meetings across the country to protest against government corruption. As Prime Minister Manmohan Singh’s government floundered, the opposition vainly sought to gain the upper hand. But, to ordinary Indians, this political gamesmanship appeared to be merely a farce – the blind pretending to lead the unsighted. Perhaps for the first time ever, India’s government failed to enact even a single piece of legislation, much less undertake any economic reforms, restore price stability, or address widespread civil disorder.

Read the complete article here.

Copyright © Project Syndicate

Tags: Annus Horribilis, Civil Liberties, Civil Servants, Corruption Scandals, GDP Growth, Global Economy, Hallucinatory, Indian Finance Minister, Indira Gandhi, James Howard Kunstler, Jaswant Singh, Manufacturing Sectors, Members Of Parliament, Nobel Laureate Economist, Political Paralysis, Prime Minister Indira, Project Syndicate, Social Critic, Social Indicators, South Asian Country
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Global PMI Scorecard: A turn for the better led by the U.S. and China

Monday, January 9th, 2012

The acceleration in global economic activity since the lows in October gained traction in December.

The JP Morgan Global Composite Index improved to 53.0 from 52.0 in November after falling to 51.4 in October. While the improvement in the composite PMI could virtually be attributed entirely to a significant improvement in business conditions in the U.S., the improvement in December was more broad based. The U.S. continues to lead the way, though, as my GDP-weighted Composite ISM PMI taking into account the Non-manufacturing Business Activity Index (the basis Markit uses to calculate the composite PMIs) instead of the PMI itself improved further to 55.7 from 55.4 in November. The manufacturing sector experienced accelerated growth increasing to 53.2 from 52.7. The ISM Business Activity Index remained unchanged at a relatively robust 56.2.

China, Brazil and India contributed significantly to the acceleration in global economic activity. China reversed the unseasonal slump in November in both the manufacturing and non-manufacturing sectors while Indian industries accelerated to near robust levels.

The contraction in the Eurozone’s private sector eased markedly for the second consecutive month. My calculated GDP-weighted PMI for the Eurozone rose to 48.3 from 47.2 in November and 46.6 in October. After stagnating in November, growth in Germany’s services sector is accelerating again while the services sector in France has stopped contracting. Elsewhere in the Eurozone the situation is dire to say the least, with the services sector in Ireland joining the contraction in the other debt-ridden Eurozone countries. However, the contraction in the Eurozone’s manufacturing sector, including France and Germany, continues. The acceleration in growth in the U.K.’s services sector from near stagnation in November is noteworthy.

The situation in Australia’ manufacturing and services sectors has stabilized while Japan is showing signs of acceleration in growth. The contraction in Hong Kong and Taiwan eased somewhat but the contraction in South Korea’s manufacturing sector deepened. In the Middle East, Saudi Arabia’s economy remains robust but growth in the Emirate states is faltering.

Note: ISM Non-manufacturing Business Activity Index used instead of Non-manufacturing PMI.

Sources: *Markit; **CFLP, Li & Fung, Plexus Asset Management; ***ISM, Plexus Asset Management; ****Markit, Plexus Asset Management.

Sources: Markit; CFLP*; ISM**; US Business Activity Index***; Plexus Asset Management.

Sources: Markit*; Li & Fung**; Kagiso***; Plexus Asset Management****; ISM*****.

Tags: Acceleration, Activity Index, Business Activity, Business Conditions, Composite Index, Contraction, Eurozone Countries, Global Economic Activity, Ism, Jp Morgan, Lows, Manufacturing Business, Manufacturing Sector, Manufacturing Sectors, Markit, Pmis, Second Consecutive Month, Services Sectors, Significant Improvement, Stagnation
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Global PMI Scorecard: Not a Pretty Picture

Monday, December 12th, 2011

After faltering in October, growth in global economic activity accelerated again in November. The global manufacturing sector remains in recession territory, while growth in the services sector inched ahead after dropping in October.

The JP Morgan Global Composite Index improved to 52.0 after falling to 51.4 in October. The improvement in the composite PMI can virtually be entirely attributed to a significant improvement in business conditions in the U.S.  My GDP-weighted Composite ISM PMI, taking into account the Non-manufacturing Business Activity Index (the basis Markit uses to calculate the composite PMIs) instead of the PMI itself, showed a major improvement to 55.4 from 53.1 in October. The manufacturing and non-manufacturing sectors both experienced accelerated growth.

My calculated GDP-weighted PMI for the Eurozone improved slightly to 47.2 from 46.6 in October as the deepening recession in the manufacturing sector was outweighed by an easing of the contraction in the services sector of the economy. France was a major contributor as a result of a significant easing of the contraction in France’s composite PMI from 45.6 to 48.8 in November. Germany moved from stagnation to contraction, though, while the U.K. managed to eke out slightly faster growth.

In contrast, business conditions in the other major economic regions weakened significantly. Both Japan and China took a turn for the worse in November. Growth in Japan’s services sector ended abruptly, while the manufacturing sector is contracting again. Significant weakness has crept into both economic sectors of China. Business conditions in Hong Kong have worsened again. Conditions in the major emerging economies turned for the better, though. Growth in India is accelerating again after stagnating in October, while growth in Russia is accelerating. Economic activity in Brazil also improved slightly.

Note: ISM Non-manufacturing Business Activity Index used instead of Non-manufacturing PMI.

Sources: *Markit; **CFLP, Li & Fung, Plexus Asset Management; ***ISM, Plexus; ****Markit, Plexus Asset Management.

Tags: Activity Index, Business Activity, Business Conditions, China Business, Composite Index, Contraction, Economic Regions, Economic Sectors, Emerging Economies, Eurozone, Global Economic Activity, Jp Morgan, Manufacturing Business, Manufacturing Sector, Manufacturing Sectors, Markit, Pmis, Recession, Significant Improvement, Stagnation
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Global Manufacturing PMI: Saved by the U.S.

Friday, December 2nd, 2011

The contraction in the global manufacturing sector continued in November. The global manufacturing PMI that I calculate on a GDP-weighted basis for the major economic regions was virtually unmoved at 49.6 from October’s 49.5. The relatively unchanged PMI masks significant changes in the individual countries and regions, though.

The global manufacturing sector was saved by a higher than expected showing in the U.S. as my calculations show the global PMI excluding the U.S. fell from 48.7 in October to 47.8 In November. The ISM Manufacturing PMI surged by 1.9 to 52.7 from 50.8 in October. Outside the U,S., South Africa, Russia, Turkey and India were the only other economies where manufacturing expanded. The contraction in Brazil’s manufacturing sector eased significantly.

The downturn in the Eurozone is gathering pace as the contraction in France and Germany, the two major economies in the region, is deepening. The Markit Eurozone Manufacturing PMI fell to 46.4 in November from 47.1 in October. After Ireland fell back into contraction, the manufacturing sectors of all countries in the Eurozone are now in recession while the contagion widened to emerging European economies. In both China and Japan the expansion ended abruptly. Elsewhere in the Far East the contraction in Taiwan continues and the contraction in South Korea has deepened.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****

The current state of the global manufacturing sector leaves global central bankers no other choice but to act aggressively to stop the rot. We should expect more announcements in coming weeks regarding lower reserve requirements for banks and interest rate cuts in countries where these cuts can still have a major impact on the economy, especially countries in the BRICS block.

Tags: Contagion, Contraction, Current State, Downturn, Economic Regions, European Economies, Eurozone, Gathering Pace, GDP, Interest Rate Cuts, Ism Manufacturing, Manufacturing Sector, Manufacturing Sectors, Markit, Masks, Plexus Asset Management, Pmi, Recession, S South, South Korea
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China’s Manufacturing PMI Disappoints, Again

Tuesday, November 1st, 2011

The CFLP manufacturing PMI for October dropped to 50.4 from 51.2 in September. The weakening trend was broad based except in the case of stocks of finished goods, which edged upwards.

The lower PMI is contrary to the HSBC Purchasing Managers’ Index for China, which signaled a stronger expansion by rising to 51.0 in October from 49.9 in September.

The somewhat weaker trend in the CFLP PMI compared to September was in line with that of previous “normal” years (2008/2009 excluded due to the great financial crisis), but it is clear how weak the manufacturing sector is compared to previous years.

Sources: Li & Fung; CFLP; Plexus Asset Management.

Although the CFLP PMI Manufacturing Index is supposed to be seasonally adjusted, a further seasonal pattern is evident in the graph above. I therefore adjusted the CFLP PMI further to get a clearer picture of the underlying trend. On my seasonally adjusted basis the PMI actually improved from 49.9 to 50.6. The severe knock in global trade as a result of the Eurozone sovereign debt crisis in September is especially evident in my seasonally adjusted CFLP PMI.

Sources: Li & Fung; CFLP; Plexus Asset Management.

The interrelationship between the manufacturing sectors in China and Japan continues as, according to Markit, Japan’s manufacturing PMI posted 50.6 in October compared to 49.3 in September. According to Markit the acceleration in Japan’s manufacturing sector occurred despite the fact that new export orders contracted for the 8^th consecutive month mainly as a result of weak demand from China and adverse exchange rate factors. Perhaps trade between Japan and China is picking up?

Sources: Li & Fung; CFLP; Markit; Plexus Asset Management.

Stock levels in China’s manufacturing sector remain high compared to the level of new orders. The ratios of stocks of major inputs compared to new orders and stocks of finished goods to new orders point to a relatively unchanged CFLP Manufacturing PMI in November as the ratios tend to lead the PMI by one month.

Sources: Li & Fung; CFLP; Plexus Asset Management.

Sources: Li & Fung; CFLP; Plexus Asset Management.

November is historically a somewhat stronger month than October and a slight uptick in November’s CFLP PMI can therefore be expected. That is unless Japan’s manufacturing sector accelerates further.

Sources: Li & Fung; CFLP; Plexus Asset Management.

But what are the markets saying? The Shanghai Composite Index is pointing to a relatively unchanged CFLP Manufacturing PMI at this stage.

Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.

With input prices contracting the threat of higher inflation has receded. That, together with the significant lower growth in the manufacturing sector, may compel the Chinese authorities to relax monetary policy and cut rates soon.

Tags: Acceleration, Asset Management, Debt Crisis, Exchange Rate, Export Orders, Financial Crisis, Finished Goods, Global Trade, Interrelationship, Manufacturing Sector, Manufacturing Sectors, Markit, Pmi, Previous Years, Purchasing Managers Index, Rate Factors, Ratios, Seasonal Pattern, Sovereign Debt, Stock Levels
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Emerging Markets Cheat Sheet (August 22, 2011)

Sunday, August 21st, 2011

Emerging Markets Cheat Sheet (August 22, 2011)

Strengths

• In August, Macau gaming revenues tracked at HK$23 billion, up 45 percent on a year-over-year basis.
• China will look to import $8 trillion worth of goods over the next 5 years. For the first 7 months, China bought $973.1 worth of goods from other countries. Chinese imports will bode well for the global economy, particularly Korea and the countries in the Association of Southeast Asian Nations (ASEAN), which run a trade surplus with China. Korea exports 25 percent of its goods to China, while ASEAN exports to China is catching up with that of the U.S., up 25 percent for the first 7 months January through July this year.
• Chile’s central bank opted to keep its benchmark interest rate unchanged for a second straight month after consumer prices rose less than expected and economic growth slowed in the second quarter. The highest interest rates in more than two years have helped rein in consumer spending and slow inflation in South America’s fifth-biggest economy, giving policy makers leeway to keep borrowing costs unchanged as they weight the threat posed by slowing global growth.
• Roubini Global Economics speculated that Colombia’s central bank will leave the monetary policy rate at 4.5 percent amid increased risks to growth globally. In Colombia’s central bank’s latest minutes, growth was driven by domestic demand, elevated credit growth, low real rates, improved consumer and business confidence, robust retail sales and high consumer reports. The central bank remains bullish on its economy.
• Peruvian GDP growth will likely increase to 6 percent year-over-year in July, following the deceleration in the construction and manufacturing sectors, although it is supported by the strong retail sector.
• The Istanbul Stock exchange closed in the positive territory after volatile trading for the week, bucking the malaise consuming world markets. Even though initial investor response to last week’s interest rate cut by the Central Bank was negative, the cut now appears perfectly timed to stem the contagion from global slowdown.

Weaknesses

• In July, Chinese new loans were RMB 492.6 billion, 25.2 billion less than the same period in 2010; M2 went up 14.7 percent, down 1.2 percent month-over-month and 2.9 percent year-over-year. This was consistent with a M2 growth target of 15 percent for the year; RMB total deposit balance at the end of July was 77.97 trillion, down 492.6 billion from the end of June, probably showing the negative effect on deposit due to negative interest rate spread.
• The People’s Bank of China (PBOC) on Tuesday sold a one-year note 8 basis points higher than prior sales, and on Thursday, it sold 3-month note also at 8 basis points higher. The market believes the PBOC will raise interest rates again, but many economists dismissed such speculation because of the adverse global economic environment.
• For the week, Argentina was the worst Latin American performer. The peso is posting its biggest monthly decline in 18 months after President Cristina Fernandez de Kirchner’s 51 percent victory in a primary election, confirming her status as the front-runner before elections in October. Capital flight from South America’s second-biggest economy is also putting additional pressure on the peso to weaken. Individuals and companies took $9.8 billion out of the economy in the first half of this year.
• Volkswagen AG cut production in Brazil as car sales fell. The company cancelled three-days of extra production that would have produced 3,000 cars due to a slowdown in car sales.
• Russian Central Banker Ulyukaev expressed caution about giving additional liquidity to the market, to avoid “unwise spending,” poor quality investments, and “incorrect budget liabilities.” Bank stocks fell in response.

Opportunities

• The month of August was another headwind for China’s banking stocks. The HSCI financial index was down 14.32 percent. Stock prices did not react well to China’s money supply numbers in July: new loans, M2 growth, and bank deposits were all down on a year-over-year basis. However, bank stocks’ valuations are lower than during the 2008 financial crisis. Many in the investment industry believe the cheap valuation is a support for bank stock prices, in addition to higher net interest spread. The table below shows China’s banking industry valuation at historical lows. The chart underneath shows low prices are moving up, which benefits the banks’ profitability.

  

• Year-to-date, Colombia has the best performing currency in Latin America, strengthening 8 percent to 1,776.24 per dollar, compared with the Brazilian real’s 4.6 percent rise and the Peruvian’s sol’s 2.5 percent appreciation. Seeking to break the peso’s rally, Finance Minister Juan Carlos Echeverry said that the government would create an overseas fund with as much as $1.2 billion from dollars bought in the local market, and forgo repatriating funds from abroad for the rest of the year. According to Bloomberg, Colombian companies are borrowing the most overseas in at least 12 years, taking advantage of the near-zero benchmark interest rate in the U.S. to borrow more cheaply than in Colombia, where the interbank rate is 4.5 percent.

  

• Honda plans to build a new $800 million factory to produce cars for the North American market in Mexico. The plant will employ around 3,200 workers, producing up to 200,000 cars per year.
• While U.S. benchmark crude at Cushing, Oklahoma is now barely above $80 because of excess mid-continent supply, Russian Urals blend still sells well above $100. At current levels, Russian equities seem to be discounting much lower oil prices.

Threats

• China will extend tightening housing policies to second and third tier cities, which are seeing housing price rise faster than tier one cities this year. The Chinese government is preparing a list of cities that should limit the number of houses that their residents are allowed to purchase. Basically, one family is only permitted to buy one house with 60 percent down payment, among other restrictive measures.
• Venezuelan President Hugo Chavez ordered the central bank to repatriate $11 billion of gold reserves held in developed nations’ institutions in the U.S., the U.K. and Canada.
• Polish Treasury minister said the government may suspend its planned sale of shares in the country’s largest lender in light of recent market conditions. The stake sale was supposed to raise an equivalent of 1 percent of the budget and Treasury will have to issue more debt to make up the gap. Constitutionally, Poland is limited to 55 percent net debt to GDP and the country will be close to that limit in 2011.

Tags: Asean, Association Of Southeast Asian Nations, Benchmark Interest Rate, Brazil, Business Confidence, Canadian Market, Chinese Imports, Crude Oil, Deceleration, Gaming Revenues, GDP Growth, Global Economics, Global Economy, Global Growth, Initial Investor, Istanbul Stock Exchange, Leeway, Manufacturing Sectors, Retail Sector, S Central, Slow Inflation, Southeast Asian Nations, Trade Surplus
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Global PMI Scorecard: Growth Accelerating

Monday, June 13th, 2011

Despite the markets showing their dismay when the manufacturing PMIs for May were published, the pace of expansion in the global economy has actually picked up! The JPMorgan Global Composite PMI, which takes the manufacturing and non-manufacturing/services into account, rose to 52.6 from 51.8 in April (a number above 50 indicates expansion) as the turnaround of Japan since the twin disaster seems to be lending solid support.

The contraction in Japan has eased significantly, with the Markit composite PMI jumping to 46.2 from 35.0 in April.  Growth in the US eased slightly with my ISM GDP-weighted composite PMI registering 54.3 compared to April’s 54.6. The manufacturing and non-manufacturing PMIs reversed roles – the non-manufacturing PMI jumped to 54.6 from 52.8 while the manufacturing PMI sank to 53.5 from a very robust 60.4. Growth in the Eurozone’s economy at long last eased with my GDP-weighted PMI coming in at 55.2 compared to 57.1 in April. Although the pace of growth in both Germany and France has eased, these countries continue to find themselves growing at a rapid pace. Elsewhere the pace has eased somewhat in China, the UK, Hong Kong and India.

Sources: ISM, Markit, CFLP, Plexus Asset Management.

Except in the case of Japan, where the manufacturing sector expanded again after reeling in the face of the twin disaster, growth in the global manufacturing sector has eased significantly. My GDP-weighted manufacturing PMI for the major economies dropped by 2.4 points to 53.1 in May.

The USA’s manufacturing sector was hit the hardest, succumbing 6.9 index points, followed by Germany’s 4.3 and the Eurozone’s 3.4 index point declines. The manufacturing sectors in the Eurozone’s problem countries are struggling, though. The contraction in Greece has deepened, Spain has moved into contraction while Ireland’s PMI fell heavily from 56.0 to 52.1. China’s CFLP manufacturing PMI was in line with my earlier expectations based on seasonal weakness. Brazil was the only economy that managed to eke out a faster rate of expansion.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****

Non-manufacturing/Services PMIs

The JPMorgan Global Services PMI for May jumped to 52.5 from 51.0 in April.

The US ISM non-manufacturing PMI retraced 1.8 index points of the 4.5 index point drop in April. The Eurozone PMI dropped by 1.3 index points to 55.4 from 56.7 in April, with the countries other than Germany and France taking the biggest knocks. Growth in Italy’s services sector has decelerated sharply, whereas Spain and Ireland continue to find themselves on the brink of contraction. Growth in the UK’s services sector eased slightly to 53.8 from 54.3 in May. The pace of contraction in Japan has eased significantly by 8.8 index points to 43.8 in May from 35.0 in April. Australia’s services sector is contracting again.

Sources: ISM, Markit, CFLP, Plexus Asset Management.

Tags: Asset Management, Brazil, Contraction, Disaster, Dismay, Eurozone, GDP, Global Economy, Greece, Hong Kong, Index Point, Index Points, India, Ism, Manufacturing Sector, Manufacturing Sectors, Manufacturing Services, Pmi, Pmis, Rapid Pace, Scorecard, Turnaround
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Global PMI Scorecard: Global Growth Still Strong but Moderating

Monday, April 11th, 2011

Manufacturing PMIs

The manufacturing PMIs for March indicate that the pace of the robust global manufacturing sector has moderated. My GDP-weighted PMI for the major economies fell to 56.0 from 58.2 in February.

The pace of expansion in the US eased slightly to a still robust 61.2 in March from 61.4 in February. The pace in the Eurozone also eased to 57.5 from 59.0 in February and easing was widespread. Greece, on the other hand, has seen a moderation of the contraction in its manufacturing sector. The UK’s manufacturing sector moderated relatively sharply from a robust 61.5 to 57.1.

As expected, the expansion in Japan’s manufacturing sector was halted as the impact of the terrible disaster is being felt. After registering its second consecutive month of expansion in February, the manufacturing PMI dropped from 52.9 to 46.4. The huge turnaround in Australia’s manufacturing sector in February came to an abrupt end in March with the PMI falling to 47.9 from 51.1. China’s manufacturing PMI rebounded from 52.2 in February to 53.4 in March, mainly due to seasonal factors. Taiwan failed to follow mainland China, though. The manufacturing sectors in emerging economies generally followed the weaker trend with South Africa (RSA), Russia and India the exceptions.

Sources: Markit; Li & Fung; Kagiso; ISM; Plexus Asset Management.

Sources: Markit*; Li & Fung**; Kagiso***; Plexus Asset Management****; ISM*****.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Where the still relatively robust global manufacturing PMI numbers were likely to lead to improved global industrial production growth through end June, this year a hiccup is facing global industrial production in coming months, especially in light of the tragic events in Japan.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****; I-Net Bridge

The immediate outlook for industrial metal prices is therefore cloudy.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****; I-Net Bridge.

Non-manufacturing/Services PMIs

The JPMorgan Global Services PMI for March got hammered as it dropped to 54.0 from a robust 59.3 in February.

The ISM non-manufacturing sector in the US eased from a very robust 59.7 in February to 57.3 in March. In the Eurozone the robust services sectors of France and Germany upped the pace again, but elsewhere in the Eurozone the PMIs came in mixed. Spain again fell back into contraction while growth in Ireland’s services sector moderated sharply, finding itself on the brink of contraction.

March was characterised by a significant rebound of the UK services sector as the PMI rose to 57.1 from 52.6 in February. Japan’s services sector took a huge smack as the PMI dropped from 49.8 to 35.3 on the back of the disaster. The contraction in Australia’s services sector again deepened with the PMI falling to 46.5 from 48.7 in February.

In the emerging economies the robust expansion in India’s services sector has moderated slightly. China’s non-manufacturing PMI surged to 60.2 from 44.1 in February – in line with the seasonal pattern.

Sources: CFLP; Plexus Asset Management.

The rate of expansion in Russia’s services sector has steadied while the expansion in Brazil’s has accelerated.

Sources: Markit; CFLP; ISM; Plexus Asset Management.
*Japan is off the screen due to the disaster’s impact on the numbers.

Sources: *Markit; **CFLP, Li & Fung, Plexus; ***ISM, Plexus; ****Markit, Plexus Asset Management.

GDP-weighted/Composite PMIs

On a GDP-weighted/composite basis where the manufacturing and non-manufacturing/services are both taken into account, the growth in global economic activity decelerated sharply in March, taking the JPMorgan Global Composite PMI index from a robust 59.4 in February to 54.7. That compares to 58.3 in January and 57.1 in December last year.

Sources: *Markit; **CFLP, Li & Fung, Plexus; ***ISM, Plexus; ****Markit, Plexus Asset Management.

Sources: Markit; Li & Fung; ISM; Plexus Asset Management.
*Japan is off the screen due to the disaster’s impact on the numbers.

Summary

US economy: GDP-growth accelerating

My GDP-weighted ISM PMI for the US leads US real GDP growth by a quarter. At this stage it continues to indicate first-quarter GDP growth in excess of 3% on a year-ago basis and may even touch 3.5%. If the current robust manufacturing and non-manufacturing PMIs hold up through end June, the year-on-year GDP growth could reach 4% and beyond in the second quarter, barring any fallout from the Japanese disaster, that is.

Sources: ISM; FRED; Plexus Asset Management.

Eurozone: GDP growth to gain momentum in Q2

The PMIs during the fourth quarter of 2010 indicates that GDP growth in the first quarter is likely to come in at approximately 2.5% compared to a year ago and, barring any fallout from the Japanese disaster, to accelerate to 3% in the second quarter.

Sources: Markit (various internet sources); I-Net; Plexus Asset Management.

China: Still going strong!

As I expected, my calculated GDP-weighted PMI for China spiked in February, due to the reversal of the seasonal weakness induced by the Chinese Golden Week. The non-manufacturing PMI for March surprised me on the upside, though. Where I thought that the somewhat weaker trends in January and February were indications that the stricter monetary policies pursued over the past 12 months have started to bite, it seems to me that the PBoC needs to do more to slow the economy.

Sources: CFLP; Plexus Asset Management.

From a forecasting point of view the CFLP manufacturing PMI gives a better picture of underlying GDP growth due to lower seasonality. China’s year-on-year GDP growth of 9.8% in the last quarter of 2010 was in line with my estimate of 10% based on the manufacturing PMI’s trend in that quarter. It is evident to me that China’s year-on-year GDP growth in the first quarter is likely to come in at approximately 10%.

Sources: Dismal Scientist; Li & Fung; Plexus Asset Management.

Japanese economy: To get worse before recovering?

How the Japanese economy will perform over the next few quarters as a result of the disaster is virtually impossible to say. We will have to take our lead from the trend in the manufacturing and services PMIs. In the following graph I have assumed that the manufacturing PMIs for the next three months will come in as follows (March was 46.4): April 40; May 45; and June 50. In this scenario it seems to me that GDP growth in the first quarter will register approximately -1% on a quarter-on-quarter annualised basis. In the second quarter the GDP is likely to shrink by 2% to 3% on the same basis.

Sources: Dismal Scientist; Markit; Plexus Asset Management.

UK economy: Continuing to gain traction…

From my reading of the GDP-weighted PMI the UK grew by approximately 2.0% in the first quarter on a year-on-year basis compared to 1.6% in the fourth quarter of 2010. It is evident that growth in the second quarter will accelerate to approximately 2.5% to 3.0%, barring any fallout from the Japanese disaster.

Sources: Markit; Dismal Scientist; Plexus Asset Management.

Conclusion

While both global manufacturing and non-manufacturing/services PMI numbers continue to be relatively strong, the onset of a declining trend is something to watch closely. The population of black swans in the global pond has now been expanded by the terrible natural disaster in Japan. The geo-political situation in the Middle East and North Africa is not improving, lending support to higher oil prices and increasing price pressures in the global economy. The PBoC has again tightened its monetary policy. The potential contagion of the debt crisis in the Eurozone and the impact of austerity measures on the Eurozone economy are still major uncertainties. These black swans and how they will unfold are likely to influence and prescribe the policies of central bankers globally.

Tags: Asset Management, Brazil, China, Contraction, Emerging Economies, Eurozone, Global Growth, Gold, Hiccup, India, Ism, Kagiso, Mainland China, Management Sources, Manufacturing Sector, Manufacturing Sectors, Moderation, oil, Pmis, Rsa, Russia, Scorecard, Seasonal Factors, Second Consecutive Month, Tragic Events, Turnaround
Posted in Brazil, Energy & Natural Resources, Gold, India, Markets, Oil and Gas, Outlook | Comments Off

Around the Investment Globe in 5 Minutes

Wednesday, October 13th, 2010

After not having posted articles for a while, the logical first bite at the cherry is a quick review of the overall investment landscape and major asset classes. Covering the globe necessitated a somewhat longer post than usual, but hopefully the read will be useful.

Global manufacturing: growth slowing rapidly

Manufacturing Purchasing Managers Indices (“PMIs”) released for September indicate a rapid slowdown in global manufacturing growth.

On a GDP-weighted basis our global manufacturing PMI (US, Japan, China, Eurozone and UK) fell for the fifth consecutive month to 53.0 in September.

Sources: Markit, Li & Fung; ISM; Various internet sources; Plexus Asset Management.

Among the major economies only China managed to report faster growth. Growth in the Eurozone weakened mainly as a result of a significant slowdown in Germany. Growth in the US slowed, while the manufacturing sector in Japan contracted for the first time in 14 months. Growth in the Czech Republic and France remained robust. In the East, the manufacturing sector in Australia contracted alarmingly, the contraction in Taiwan continued, while growth in India slowed. The austerity measures in the Eurozone’s problem children have started to take effect, with the manufacturing sectors in Ireland and Spain contracting. The manufacturing sector in South Africa is contracting too.

Sources: Markit; Li & Fung; ISM; Plexus Asset Management.

Sources: Markit, Li & Fung; ISM; Various internet sources; Plexus Asset Management.

Tags: Asset Classes, Asset Management, Austerity Measures, China, Commodities, Contraction, Covering The Globe, Czech Republic, Eurozone, First Bite, GDP, India, Internet Sources, Investment Landscape, Ism, Japan China, Management Sources, Manufacturing Sector, Manufacturing Sectors, Manufacturing Services, Purchasing Managers, Services Sectors, Slowdown
Posted in China, Gold, India, Markets, Outlook | Comments Off