Posts Tagged ‘Robust Growth’

Emerging Markets Radar (August 13, 2012)

Saturday, August 11th, 2012

Emerging Markets Radar (August 13, 2012)

Strengths

Chinese President Hu Jintao presided over a Central Politburo meeting on July 26. He reaffirmed maintaining stable growth as the top priority and pledged to increase policy support for the real economy. The frequent economic meetings hosted by the president and premier in late July suggest a higher probability for more follow-up measures soon to stabilize growth.
China’s new bank lending may be about Rmb 700 billion in July, Economic Information Daily reports, showing gradual increase of money supply.
The Ministry of Railway announced that it plans to spend Rmb 470 billion on railroads and bridges this year.
Money supply in Association of Southeast Asian Nations (ASEAN) countries is robust, driven by infrastructure and property, and consumer spending. Singapore total domestic banking loans shows 20.9 percent growth year-to-date by the end of June, while it is 12.6 percent for Malaysia, 26.2 percent in Indonesia, 14.6 percent in Thailand and 14.7 percent for Philippines.
Singapore’s unemployment rate fell in the second quarter to 2 percent from 2.1 percent the previous three months.

Weaknesses

China’s Purchasing Manager’s Index (PMI), China’s official gauge of manufacturing activities, declined by 10 basis points from 50.2 in June to 50.1 in July. It is lower than market consensus of 50.5.
Taiwan’s second-quarter GDP was down 0.16 percent, versus the estimate of 0.5 percent.
Korea’s industrial production rose 1.6 percent in June, missing expectation for a 1.8 percent increase and down from May’s 2.6 percent.
Thailand’s exports fell 4.3 percent in June while imports rose 5 percent, further demonstrating robust domestic demand in the country. Companies that are selling to world markets are in general seeing sales earnings growth slow down, while those that sell to domestic demand are still seeing robust growth, such as telecom, utilities and property. The same happens to China and other ASEAN countries.
Hong Kong June trade growth missed expectations. Exports were down 4 percent year-over-year and imports were down 2.9 percent.
Korea’s second-quarter GDP expanded 2.4 percent, growing at the slowest pace in almost three years, below median estimate for a 2.5 percent gain.
China’s Xi’an city said it would limit vehicle ownership to control traffic congestion.

Opportunities

The recent strong support for the European project voiced by both the ECB and the German political establishment provides significant tail risk of increased forms of monetary policy support in the coming weeks.
After the surprise July rate cut in South Africa, the market is pricing in a 25 percent chance that the Monetary Policy Committee will follow up with a further 50 basis point cut by year-end. Monetary policy is already very accommodative, and the policy rate is at multi-decade lows.
Already representing 17.5 percent of the world’s population, India is projected to surpass China to be the most populous country in the world by the year 2025. With more than 65 percent of its population below the age of 35, it is expected that in the year 2020, the average age of an Indian will be 29 years, compared to 37 years for China.
The dividend yield of telecommunications companies in Asia ex-Japan are close to 5 percent on average. The dividends are sustainable due to high free cash flow yield. This compares favorably with the 10-year treasury which yields less than 2 percent.

Threats

Investors have heard many times from the Chinese government that it is committed to secure economic growth, but its actions are still behind the curve. Particularly, its inability to find a balanced property policy will affect the growth of the economy.
High household debt burden, reduced consumer purchasing power and a relatively weak domestic growth outlook bode ill for banking sector growth in Brazil. Existing banking sector stress is likely to grow over the coming quarters on the back of declining interest rates and deteriorating asset quality.
The Czech central bank forecast GDP will contract 0.9 percent in 2012, as measures to curb the budget deficit damp domestic demand. The economy relies on demand for cars, auto parts and electronics from the EU, which buys about 80 percent of Czech exports.

Tags: Asean Countries, Association Of Southeast Asian Nations, Brazil, Chinese President Hu, Chinese President Hu Jintao, Earnings Growth, Economic Information, Hu Jintao, India, Market Consensus, Money Supply, Politburo, President Hu Jintao, Purchasing Manager, Quarter Gdp, Robust Growth, S Industrial, Southeast Asian Nations, Stable Growth, Telecom Utilities, Top Priority, Unemployment Rate
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Emerging Markets Radar (August 6, 2012)

Sunday, August 5th, 2012

Emerging Markets Radar (August 6, 2012)

Strengths

Chinese President Hu Jintao presided over a Central Politburo meeting on July 26. He reaffirmed maintaining stable growth as the top priority and pledged to increase the policy support for the real economy. The frequent economic meetings hosted by the president and premier in late July suggest a higher probability for more follow-up measures soon to stabilize growth.
China’s new bank lending may be about Rmb 700 billion in July, Economic Information Daily reports, showing the gradual rising of money supply.
The Ministry of Railway announced that it plans to spend RMB470 billion on railroads and bridges this year.
Money supply in the Association of Southeast Asian Nations (ASEAN) countries is robust, driven by infrastructure and property, and consumer spending. Singapore total domestic banking loans shows 20.9 percent growth year-to date by the end of June, while it is 12.6 percent for Malaysia, 26.2 percent in Indonesia, 14.6 percent in Thailand, and 14.7 percent for Philippines.
Singapore’s unemployment rate fell in the second quarter to 2 percent from 2.1 percent the previous three months.

Weaknesses

China’s PMI, China’s official gauge of manufacturing activities, declined by 10 basis points from 50.2 in June to 50.1 in July. It is lower than market consensus of 50.5.
Taiwan’s second quarter GDP was down 0.16 percent, versus the estimate 0.5 percent.
Korea’s industrial production rose 1.6 percent in June, missing expectations for a 1.8 percent increase and down from May’s 2.6 percent.
Thailand’s exports fell 4.3 percent in June while imports rose 5 percent, further demonstrating robust domestic demand in the country. Companies that are selling to the world market are, in general, seeing sales earning growth slow down, while those that sell to domestic demand, such as telecom, utilities and property companies, are still seeing robust growth. The same happens to China and other ASEAN countries.
Hong Kong June trade growth missed expectations. Exports were down 4 percent year-over-year and imports down 2.9 percent.
Korea’s second quarter GDP expanded 2.4 percent, growing at the slowest pace in almost three years, below the median estimate for a 2.5 percent gain.
China’s Xi’an city said it would limit vehicle ownership to control traffic congestion.

Opportunities

The recent strong support for the European project voiced by both the ECB and the German political establishment provides significant tail risk of increased forms of monetary policy support in the coming weeks.
After the surprise July rate cut in South Africa, the market is pricing in a 25 percent chance that the Monetary Policy Committee will follow up with a further 50 basis point cut by year end. Monetary policy is already very accommodative and the policy rate is at multi-decade lows.
Already representing 17.5 percent of the world’s population, India is projected to surpass China to be the most populous country in the world by the year 2025. With more than 65 percent of its population below the age of 35, it is expected that in the year 2020, the average age of an Indian will be 29 years compared to 37 for China.
The dividend yield of telecom companies in Asia, excluding Japan, is close to 5 percent on average. The dividends are sustainable due to high free cash flow yield. This compares favorably with 10-year U.S. Treasury which yields less than 2 percent.

Threats

Investors have heard many times from the Chinese government that it is committed to secure economic growth, but the government’s actions are still behind the curve. Particularly, its inability to find a balanced property policy will affect the growth of the economy.
High household debt burden, reduced consumer purchasing power, and a relatively weak domestic growth outlook bode ill for banking sector growth in Brazil. Existing banking sector stress is likely to grow over the coming quarters on the back of declining interest rates and deteriorating asset quality.
The Czech central bank forecasts gross domestic product to contract 0.9 percent in 2012, as measures to curb the budget deficit damp domestic demand. The economy relies on demand for cars, auto parts and electronics from the European Union, which buys about 80 percent of Czech exports.

Tags: Asean Countries, Association Of Southeast Asian Nations, Banking Loans, Basis Points, Chinese President Hu, Chinese President Hu Jintao, Economic Information, Hu Jintao, Market Consensus, Money Supply, Politburo, President Hu Jintao, Quarter Gdp, Robust Growth, S Industrial, Southeast Asian Nations, Stable Growth, Telecom Utilities, Top Priority, Unemployment Rate
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Run, Don’t Walk (Hussman)

Monday, April 23rd, 2012

by John Hussman, Hussman Funds

We currently estimate the prospective 10-year total return on the S&P 500 at about 4.5% annually, in nominal terms, based on our standard valuation methodology. This may not seem bad, relative to 2% yields on the 10-year Treasury bond, provided that investors actually consider either figure to be an adequate 10-year investment return, and provided that they view 4.5% annual returns as adequate compensation for securities that have several times the volatility of a 10-year Treasury bond (especially when yields are low), and provided that investors ignore the fact that prospective market returns tend to enjoy a significant range over the course of the market cycle, so that “locking in” present prospective returns must necessarily forego any higher prospective return that might be observed in the coming decade. Even given robust growth in GDP and corporate revenues, a move to prospective returns of just 6% at some point in the next two years would likely leave investors with no return (including dividends) in the interim (see Too Little to Lock In).

Wall Street continues to focus on the idea that stocks are “cheap” on the basis of forward price/earnings multiples. I can’t emphasize enough how badly standard P/E metrics are being distorted by record (but reliably cyclical) profit margins, which remain about 50-70% above historical norms. Our attention to profit margins and the use of normalized valuation measures is nothing new, nor is our view that record profit margins have corrupted many widely-followed valuation measures. As I noted in our September 8, 2008 comment Deja Vu (Again), which happened to be a week before Lehman failed and the market collapsed, “Currently, the S&P 500 is trading at about 15 times prior peak earnings, but that multiple is somewhat misleading because those prior peak earnings reflected extremely elevated profit margins on a historical basis. On normalized profit margins, the market’s current valuation remains well above the level established at any prior bear market low, including 2002 (in fact, it is closer to levels established at most historical bull market peaks). Based on our standard methodology, the S&P 500 Index is priced to achieve expected total returns over the coming decade in the range of 4-6% annually.” Present valuations are of course more elevated today than they were before that plunge.

Suffice it to say that every P/E multiple is simply a shorthand for proper discounted cash-flow methods, because there are countless assumptions about growth, margins, return on invested capital and other factors quietly baked inside. Like price-to-forward operating earnings multiples, even our old price-to-peak earnings metric has been rendered misleading due to historically high profit margins. Of course, we knew that was happening even before the credit crisis began, and believe that numerous widely-followed valuation measures remain distorted by record profit margins here.

On the economic front, the recent uptick in new unemployment claims is consistent with the leading economic measures and “unobserved components” estimates that we obtain from the broad economic data here (see the note on extracting economic signals in Do I Feel Lucky?). Indeed, it will be difficult to get the expected flat or negative April employment print if weekly new claims don’t rise toward about 400,000 in the next few weeks. We’ve seen “surprising” weakness in some of the more recent regional surveys such as Empire Manufacturing and Philly Fed. A continuation of that trend would also be informative.

As I noted a few months ago, “examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began. These were not small numbers. The average payroll growth (scaled to the present labor force) translates to 200,000 new jobs in the month of the recession turn, and about 500,000 jobs during the preceding 3-month period. Indeed, of the 80% of these points that were positive, the average rate of payroll growth in the month of the turn was 0.20%, which presently translates to a payroll gain of 264,000 jobs. Notably however, the month following entry into a recession typically featured a sharp dropoff in job growth, with only 30% of those months featuring job gains, and employment losses that work out to about 150,000 jobs based on the present size of the job force. So while robust job creation is no evidence at all that a recession is not directly ahead, a significant negative print on jobs is a fairly useful confirmation of the turning point, provided that leading recession indicators are already in place.” (see Leading Indicators and the Risk of a Blindside Recession).

The upshot is that while I expect a weak April jobs report, we should hesitate to take leading information from what remains largely a short-lagging indicator. We’re already seeing deterioration in economic data, but it remains largely dismissed as noise. An acceleration of economic deterioration as we move toward midyear would be more difficult to ignore. My impression is that investors and analysts don’t recognize that we’ve never seen the ensemble of broad economic drivers and aggregate output (real personal income, real personal consumption, real final sales, global output, real GDP, and even employment growth) jointly as weak as they are now on a year-over-year basis, except in association with recession. All of these measures have negative standardized values here. My guess is that we’ll eventually mark a new recession as beginning in April or May 2012.

Emphatically, however, our concerns about the stock market continue to be independent of these economic expectations, as the hostile investment syndromes we’ve seen in recent months have historically been sufficient to produce very negative market outcomes, on average, even in the absence of economic strains (see Goat Rodeo and An Angry Army of Aunt Minnies). As always, I strongly encourage investors to adhere to their disciplines – including those following a buy-and-hold approach – provided that they have carefully contemplated the full-cycle risk and their ability to stick to their strategy through the worst parts of the investment cycle. What I am adamantly against is the idea that speculators can successfully “game” overvalued, overbought, overbullish markets – particularly in the face of numerous hostile syndromes, near-panic insider selling, speculation in new issues, and broad divergences in market internals, all of which we are now observing.

In the absence of hostile syndromes like we observe today, we generally have more equanimity about market prospects – recognizing the average outcome, but also emphasizing the wide range of individual outcomes associated with a given set of market conditions. The majority of our past market comments are filled with reminders that our expectations are based on average return and risk characteristics, and should not be taken as forecasts about any specific instance. At present, the outcomes that have historically emerged from similar conditions are so uniformly negative that too much equanimity would be misleading.

One way to gauge your speculative exposure is to ask the simple question – what portion of your portfolio do you expect (or even hope) to sell before the next major market downturn ensues? Almost by definition, that portion of your portfolio is speculative in the sense that you do not intend to carry it through the full market cycle, and instead expect to sell it to someone else at a better price before the cycle completes. With respect to those speculative holdings, and when to part with them, my own view is straightforward. Run, don’t walk.

Notes on banking and monetary policy

Banks continue to report seemingly pleasant earnings, as long as one doesn’t look under the hood at the drivers of those reports. Two drivers have been particularly important this quarter. One is the further reduction of reserves against future loan losses, which shows up as a positive contribution to bank earnings. For example, a decline in loan loss reserves was the source of about one-third of the earnings reported by Citigroup. The other driver is something called a “debt valuation adjustment” or DVA. You might recall that as a result of European credit strains last year, investors sold off the bonds of major banks. In the world of bank accounting, the debt was therefore cheaper to retire, so – I am not making this up – the decline in the value of the bonds was booked as earnings. Of course, the value of bank debt has recovered somewhat since then, as investors have set aside concerns about Europe (which we doubt is a good idea). One might expect that since banks booked DVA as a contribution to earnings last year, we would see the opposite effect this quarter. But one would be wrong. As Peter Tchir noted last week, “Morgan Stanley no longer includes DVA in its ‘continuing operations’ headline number. It was a loss of $2 billion this quarter. With 2 billion shares outstanding, that would have wiped out the gain. What bothers me, is that in Q3, when it was a gain of $3 billion, it was part of continuing ops.” It was the same story at Bank of America, prompting one analyst to observe “one-time items are to be ignored when negative, and praised when providing a ‘one-time benefit.’”

Tyler Durden of ZeroHedge has started referring to the Federal Reserve as simply “CTRL+P” – which is brilliant, because it really captures the full intellectual content of Fed policy in recent years. Keep in mind that when the Fed engages in quantitative easing, it purchases Treasury securities and pays for them by creating new base money. From an equilibrium perspective, the U.S. government has financed its deficit in recent years partly by issuing new Treasury debt that was bought by the public, and partly by printing money that is now held by the public (corresponding to the Treasuries bought by the Fed). Of course, the Fed can “unprint” the money, so to speak, by reversing its transactions, and selling those Treasury securities back to the public. But the Fed’s ability to do such massive selling without disruption is unproved, to say the least.

Some have asked why the Fed will ever need to reverse its transactions. Couldn’t the Fed just leave the monetary base out there and perpetually roll the Treasury portfolio forward? The answer depends on what sort of inflation we would like to observe, particularly in the back-half of this decade.

To put some structure on this question, I’ve updated our Liquidity Preference chart (1947-present), which illustrates the close relationship between nominal interest rates and monetary base per dollar of nominal GDP. Currently, the U.S. monetary base amounts to 17 cents per dollar of GDP – a level that is consistent with contained inflation only if short-term (3-month Treasury) yields are held below about 10 basis points. For more on the relationship between the monetary base, interest rates, nominal GDP and inflation, see Sixteen Cents – Pushing the Unstable Limits of Monetary Policy, and Charles Plosser and the 50% Contraction in the Fed’s Balance Sheet.

Think of it this way. The willingness of people to hold a given amount of base money, per dollar of nominal GDP, is intimately tied to the rate of return that they could get on an interest-bearing security. Higher interest rates reduce the demand for zero-interest cash. So if there is upward pressure on interest rates, and the Fed leaves the money supply alone, how do you reach equilibrium? Simple – nominal GDP becomes the adjustment variable. If there’s not enough real GDP growth to absorb the excess base money, prices rise to do the job.

Likewise, expanding the amount of base money per dollar of nominal GDP puts downward pressure on Treasury bill yields and short-term interest rates, but really only if there are no inflationary pressures in the system. Clearly, if inflationary pressures are present (suggesting that the monetary base is already too large), an expansion in the monetary base won’t produce lower interest rates. Rather, it will accelerate those inflationary pressures as nominal GDP is forced to keep up with the monetary base – even if real GDP isn’t growing at all. All hyperinflations are built on this dynamic. That said, it’s worth emphasizing that untethered money growth is invariably a reflection of untethered fiscal deficits (the central bank just buys the government debt and replaces it with money). So significant inflation is ultimately not a monetary phenomenon as much as it is a fiscal one.

In any event, the simple fact is that the Fed can sustain the current size of its balance sheet, without inflationary pressures, only to the extent that people (and banks) are willing to sit on idle, low or zero-interest money balances. In an environment of credit concerns and an increasingly likely implosion of the European banking system (where the fresh leverage taken to pursue the “Sarkozy trade” is now turning into leveraged losses), the short-term willingness to hold idle but “safe” cash balances is quite high. So in the event of additional credit strains, the ability of the Fed to go further out to the right on the Liquidity Preference curve is nearly unconstrained.

The problem is that this policy is inconsistent with any economic environment except one where credit is imploding and the Fed is running the whole show in setting short-term interest rates. As the Fed increases the monetary base, it becomes a greater and greater challenge to reverse those actions in the future. Getting into the position may be as easy as hitting CTRL+P, but getting out of the position promises to be a disruptive nightmare – not to mention the effect that these policies have in distorting financial markets, rewarding reckless lenders, punishing savers, and misallocating capital.

Notably, any exogenous pressure on short term interest rates to even 0.25% (on the 3-month Treasury yield), would effectively require the Fed to move back to the pre-QE2 monetary base in order to forestall incipient inflation pressures. Of course, the Fed could delay that outcome by boosting the interest it pays to the banking system for holding idle reserves. Then again, the Fed already has a balance sheet leveraged more than 50-to-1 against its own capital. So upward interest rate pressure would begin to induce capital losses on the Treasury securities the Fed has accumulated at low yields. Raising interest payments to banks would further strain the Fed’s balance sheet, producing an insolvent Fed while providing a fiscal subsidy to the banking system at taxpayer expense.

Needless to say, I don’t expect that all of this will end very well, but given that the full historical record captures inflation, deflation, recession, expansion, Depression, credit expansion, and credit crisis, we are prepared to respond to a wide range of possible events, without relying on the hope for perpetually high profit margins, endless monetary interventions, absence of major sovereign defaults, stability of the euro-zone, or avoidance of what we view as an oncoming recession. For now, both market and economic evidence remain negative, and we remain accordingly defensive. That will change, but we emphatically view present conditions as being among the most negative subset we’ve observed in the historical record.

Market Climate

As of last week, the Market Climate continued to be characterized by rich valuations and a variety of hostile syndromes (generally related to overvalued, overbought, overbullish conditions, and other variants that capture a general syndrome of “overextended market coupled with a loss of supporting factors”). This places market conditions among the most negative 1% of observations on record, particularly on a 6-18 month horizon, though shorter horizons are clearly negative as well here. Strategic Growth and Strategic International Equity remain tightly hedged. Strategic Dividend Value continues to be about 50% hedged, which is its most defensive position. In Strategic Total Return, we raised our exposure in precious metals shares to about 12% of net assets in response to recent price weakness in that sector. The ratio of gold prices to the XAU is now nearly 10-to-1, which is close to a record high. Historically, gold stocks have been treated as having “insurance” features, and their negative correlation with other stocks was accompanied by premium valuation multiples. At present, many precious metals shares have higher yields than most S&P 500 stocks, and are also significantly depressed relative to gold prices, which suggests a relative margin of defense even if gold prices were to decline substantially. This sector still has substantial volatility, which is why our exposure in terms of net assets is not aggressive (though we would likely increase that exposure on significant economic weakness). Overall, we’re comfortable shifting to a moderately higher exposure in this sector, recognizing that we may observe additional volatility as market conditions change. Strategic Total Return continues to hold a duration of just under 3 years in Treasury securities, and a few percent of assets in utilities and foreign currencies.

Tags: Adequate Compensation, Corporate Revenues, Deja Vu, Dividends, Forward Price, GDP, Hussman Funds, Investment Return, John Hussman, Lehman, Methodology, Metrics, Norms, Price Earnings, Profit Margins, Record Profit, Robust Growth, Several Times, Volatility, Year Treasury Bond
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Global PMI Scorecard: Services Sector Drives Acceleration in Global Growth

Monday, March 12th, 2012

Growth in global economic activity continued to accelerate for the fourth consecutive month in February. Highlights of the February PMIs are as follows:

The JP Morgan Global Composite PMI increased to 55.5 from 54.5 In January.
The JP Morgan Global Services PMI jumped to a rather robust 56.5 from 55.4 in January.
Growth in the global manufacturing sector slowed markedly, mostly as a result of a sharp slowdown in the U.S.
After stabilizing in January the Eurozone economy is sliding again as the situation in Italy, Spain and Greece has worsened.
Growth in the BRICS countries is accelerating, especially in larger China.
Pockets of robust growth are emerging:
- U.S. non-manufacturing sector
- India’s manufacturing and services sectors
- Brazil’s services sector
- South Africa’s manufacturing sector
- Saudi Arabia’ overall economy.

Source: Investment Postcard from Cape Town

Tags: Acceleration, Brazil, Cape Town, Economy, Global Economic Activity, Global Growth, Global Services, Greece, Jp Morgan, Manufacturing Sector, Pmis, Pockets, Postcard, Robust Growth, Saudi Arabia, Scorecard Services, Services Pmi, Services Sectors, Slowdown, South Africa
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Emerging Markets Cheat Sheet (November 7, 2011)

Sunday, November 6th, 2011

Emerging Markets Cheat Sheet (November 7, 2011)

Strengths

China’s railway ministry will get an additional 300 billion yuan of bank credit after receiving loan of 200 billion yuan, reports 21st Century Herald. Indeed, CSR Corp. and other rail equipment makers have received billions of payments from the ministry this week for their outstanding accounts.
China’s finance ministry raised the threshold for payment of value-added and business taxes so that fewer small companies will have to pay the levy, according to a statement posted to its website this week. The new threshold is raised to Rmb 5,000-20,000 from Rmb 2,000-5,000.
In China, prices of meat, chicken, aquatic products, eggs and vegetables have fallen for the last three weeks, pointing to a lower Consumer Price Index (CPI) number for the month of October. A declining CPI will be a relief for the People’s Bank of China (PBOC), which may provide room for PBOC to relax money supply.
Indonesia’s consumer prices rose 4.42 percent year-over-year, unexpectedly slowing from previous months.
Korea’s October CPI rose 3.9 percent year-over-year, missing market expectation for a 4.2 percent gain. Asian countries are showing a clear trend toward decreasing inflation.
China’s five-year interest-rate swap dropped 5 percent the biggest decline in three years, after the central bank injected cash into the financial system, adding to signs that an easier monetary policy is being pursued.
Malaysia’s exports grew 16.6 percent year-over-year in September, ahead of both last month’s gains and consensus estimates on higher sales of electronics and commodities.
Russian oil output hit another post-Soviet record of 10.34 million barrels per day in October. Sluggish or declining output on the brown field is being compensated by robust growth from green fields.
The Russian Manufacturing PMI index returned into positive territory (50.4) after a pause in the third quarter. Both new export orders and total new orders have increased.
Turkish Manufacturing PMI was stronger at 53.3 in October, the highest level in seven months, after 51.5 reading in September.
In September 2011, passenger traffic at Istanbul International Airport was up 32 percent to 3.89 million passengers (up 29 percent year-over-year in domestic volumes and up 33 percent year-over-year growth in international passengers).

Turkey Aviation Market

Japan’s largest brewer, Kirin Holdings Co., will pay $1.35 billion for a 49.54 percent stake in Brazilian Schincariol Participacoes e Representacoes, completing its biggest acquisition as it seeks growth in emerging markets.
Bloomberg reported that Japanese investors are buying the most South African rand bonds in more than two years and pumping yen into Brazilian real funds, seeking higher yields even as Europe’s debt crisis increases emerging-market currency swings. Volatility among emerging market currencies are the highest since 2009. Japan’s two-year government bonds offer yields of 0.14 percent, compared with 5.8 percent in South Africa and almost 11 percent in Brazil. Foreign-asset buying and Bank of Japan intervention helped weaken the yen against all 25 emerging currencies tracked by Bloomberg this quarter.
Bloomberg reported that Old Mutual Plc, the third-largest insurer in the U.K., said third quarter revenue rose 8 percent helped by growth in Africa, Asia and Latin America. CEO Julian Roberts said that, “sales were driven primarily by emerging markets.” Life assurance sales grew to 358 billion pounds a year from 331 million pounds a year earlier.

Weaknesses

China’s October PMI dropped to the lowest level since February 2009 to 50.4 versus the market estimate of 51.8. Although a PMI above 50 still indicates that economic activities are in expansion mode, the sub-indices for new orders, purchase price and new export orders had all fallen from the prior month, while inventory was up. Those sub-indices indicate the Chinese economy is still in the process of slowing.
Korea’s exports rose 9.3 percent year-over-year in October, climbing at the slowest pace in two years. Imports rose 16 percent. The numbers showed weakening external markets for Korea, and global exporting countries. In particular, Korea’s KOSPI index is highly correlated with the global economy and metal market activities.
Thailand’s CPI rose 4.19 percent in October, holding above 4 percent for the seventh straight month as food costs soared during the flooding.
Taiwan’s third-quarter GDP advanced 3.4 percent versus the estimated 3.6 percent.
The Philippines CPI rose 5.2 percent in October, climbing for the second-straight month after utility and food costs increased.
Hungarian PMI dropped to 48.2 in October from 50.7. Spillover risks from the Eurozone are growing and Hungary could face a recession next year.
Honda Motor Co. plans to reduce production in Brazil, England and the Philippines because of part shortages stemming from the floods in Thailand. Honda hasn’t decided when the production will resume, Bloomberg reported.
South Africa’s petrol pump prices rose by 23 cents or 2.2 percent on Wednesday. Wholesale diesel petrol increased by 3.7 percent. South Africa is a net importer of oil and adjusts its fuel price each month to account for changes in the rand exchange rate, the international oil price and government levies.

Opportunities

The graph below by Deutsch Bank shows how China’s increase in new loans drives up the copper imports into the country. China International Capital Corp’s banking team found that the big four banks in China lent Rmb 100 billion in two working days at the beginning of this week, confirming the increase. The lending speed is consistent with Rmb 600 billion of new loans in October, and Rmb 700 billion in the next two months. For the year, total new loans will likely be Rmb 7.7 trillion, slightly ahead of the full year target of Rmb 7.5 trillion.

Chinese Bank Lending

The Central Bank of Turkey allowed banks to keep up to 10 percent of their reserves in gold.
With luxury goods showing strength in a period of global economic uncertainty, Burberry Group Plc announced that it will open a third store in Brazil.

Threats

China’s October PMI indicates economic growth is slowing, along with slowing export and money supply growth. Without easing current tightening monetary policy, China may see an increase in bankruptcy and bad loans by small business and property developers.
In Poland, the zloty’s steep fall has turned attention to public debt dynamics and inflation.
Under Argentinean President Cristina Fernandez de Kirchner’s recent re-election, sellers of foreign-made cars are being forced to become exporters of everything from bio-diesel to bottled water in return for access to an auto market that’s growing 30 percent a year. Argentina introduced the program in March to boost exports, increase investment in local industry and shore up dwindling central bank reserves. Porsche importer Hugo Pulenta has now promised to ship wine from his family’s vineyards in the Andean foothills in exchange for permits to bring his expensive cars into Argentina. Similarly, Mitsubishi Motor Corp’s representative will export peanuts while imported Subarus will be matched by sales of chicken feed to Chile.
Roubini Global Economics had revised down their 2011 growth forecast for Thailand to 1.6 percent. This is considerably lower than the central bank’s recently revised estimate of 2.6 percent, but attributed to the projected 4.1 percent year-over-year contraction in the fourth quarter caused by the effects of flooding on industry and agriculture.
Brazil is now facing a $100 billion hit in agricultural output if the senate rejects legislation that would forgive farmers for illegally clearing protected rainforest. If the bill is not approved, farmers would be required to reforest about 70 million hectares of land currently under coffee, oranges and other commodities. Brazil is the world’s top producer and exporter of coffee and sugar cane, the biggest beef exporter, the largest producer of oranges and the second-largest producer of soy. The bill would update the 1965 Forest Code, which requires farmers to keep a certain percentage of their land as forest.

Tags: agricultural, Agriculture, Asian Countries, Bank Of China, Bonds, Brazil, Commodities, Consensus Estimates, Consumer Price Index, Cpi Number, Emerging Markets, Expectation, Export Orders, Finance Ministry, Gold, Index Cpi, Interest Rate Swap, Meat Chicken, Monetary Policy, Money Supply, Oil Output, Pboc, RMB, Robust Growth, Russian Oil, Yuan
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A Contagion of Bad Ideas (Stiglitz)

Friday, August 5th, 2011

by Joseph E. Stiglitz

NEW YORK – The Great Recession of 2008 has morphed into the North Atlantic Recession: it is mainly Europe and the United States, not the major emerging markets, that have become mired in slow growth and high unemployment. And it is Europe and America that are marching, alone and together, to the denouement of a grand debacle. A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fueled substantial budget deficits. The response – massive spending cuts – ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years.

The European Union has finally committed itself to helping its financially distressed members. It had no choice: with financial turmoil threatening to spread from small countries like Greece and Ireland to large ones like Italy and Spain, the euro’s very survival was in growing jeopardy. Europe’s leaders recognized that distressed countries’ debts would become unmanageable unless their economies could grow, and that growth could not be achieved without assistance.

But, even as Europe’s leaders promised that help was on the way, they doubled down on the belief that non-crisis countries must cut spending. The resulting austerity will hinder Europe’s growth, and thus that of its most distressed economies: after all, nothing would help Greece more than robust growth in its trading partners. And low growth will hurt tax revenues, undermining the proclaimed goal of fiscal consolidation.

China’s Growth Down to 9.2%: Time to Start Nibbling on Stocks?

Tuesday, June 14th, 2011

China’s CFLP non-manufacturing PMI of 61.9 for May was perfectly in line with the apparent seasonal trend experienced since the PMI survey started in 2008.