Sunday, May 19, 2013

Economic Summary for the week ended 18th May 2013

Big Differences Between 1990s Bull Market and This One
The S&P 500 has returned a spectacular 26.2 percent on an average annual basis since bottoming in March 2009, a performance that more or less mimics what happened ahead of the tech-stock bubble that burst in March 2000. The bursting of the tech bubble in 1999 erased more than USD 5 trillion in stock-market value and many market observers see dark parallels between that time and the present.
There are key differences, however. Valuations on the S&P 500 remain around historical averages, even after returning 164 percent since the market hit bottom 50 months ago. Shares trade at around 16 times trailing 12-month profits compared to an average of 25 during the late 1990s. Equity returns this time around have been accompanied by earnings growth, as earnings have surged by about 20 percent per year since 2009, twice as fast as they did during the dot-com advance.
Bears argue that today’s price-to-earnings ratios suggest investors lack confidence in the sustainability of earnings growth and don’t trust this rally. Bulls counter that they imply stocks are valued fairly and have further room to run.
The bulls also have this on their side: the Federal Reserve is providing the economy with an unprecedented level of support. In the late 1990s, the Fed was actively looking to cool the pace of economic growth (GDP growth exceeded 4 percent and inflation was heating up) and raised interest rates six times from 1999 to 2000. By contrast, GDP growth since 2009 has averaged 2 percent annually, and the Fed has kept interest rates near zero percent for the past five years while it has pumped USD 2.3 trillion of economic stimulus into the economy, all in the name of spurring growth.
Also, the rally of the late 1990s was driven largely by individual, as opposed to institutional, investors. Today’s rally has taken place despite individual investors, who have pulled more than USD 400 billion from equity funds over the past four years and have added more than USD 1 trillion to bond funds (in 2013 alone, bond funds through mid-May received more than four times as much money as equity funds).
There’s a lot of scepticism about the state of the US economy and the current stock-market rally. Yet market dynamics today are more conducive to further stock gains than they were in the late 1990s.
End of the Bond Party?
As bonds continue their march upwards, we cannot help but think of the now infamous words spoken by Chuck Prince, then CEO of Citibank, in July 2007: "As long as the music is playing, you've got to get up and dance...We're still dancing." Clearly there are many investors who are approaching the bond market thinking the glass is half full – in reality, there are merely a few drops left in there. Their logic is simple: growth has slowed down (once again), inflation is in check and Japan has now jumped head-first into the quantitative easing party – so keep buying bonds while the music is still playing. The problem is that the music must stop at some point. When it does the effect could be violent.
Central banks around the world have embarked on unprecedented levels of quantitative easing and many believe that this could end in a "ketchup in the bottle effect" – imagine persistently tapping the bottom of a glass ketchup bottle until the ketchup finally bursts out at an unstoppable rate.
Quantitative easing programmes were launched in response to the plummeting of the money multiplier following the financial crisis. If (or when) those programmes succeed, the money multiplier will rise again, resulting in uncontrollably fast monetary growth. At that point, central bankers will have to make the difficult choice between sustaining sharply higher levels of inflation or sacrificing a fledgling recovery. In anticipation of this dilemma, central bankers have been circulating academic papers about the virtues of targeting nominal GDP rather than inflation.
Anyone buying a long-dated bond today is betting on their ability to anticipate ahead of all of the other players in the game when the music will stop. A better path for investors is to reduce interest rate duration and maintain exposure to inflation-linked assets. Commodities and real assets have performed well in inflationary environments historically, and are an integral part of a diversified portfolio. The stakes are high, and who knows how many chairs will be left this time.
Gains in the Brazilian Stock Market
Brazil is no sprinter. The world's eighth-largest economy has grown at a 3.25 percent annual clip since 2000, compared with 2.7 percent for the US and 10 percent for China. Brazil's stock market, however, is up more than 12 percent per year on average over the past 12 years, compared with about 1 percent for the S&P 500 and 5 percent for Hong Kong's Hang Seng Index. Can it continue to race ahead at such a heart-thumping pace? The answer largely depends on three important variables: Brazil's inflation rate, China, and stock valuations.
Inflation in Brazil gets out of control every so often, and it can hammer stocks. Inflation topped 10 percent in 2002, driving equities down by more than 50 percent. The current consensus is for a more moderate 5 percent inflation rate in 2013, so that's not a big worry. But then there's China, the biggest importer of Brazilian commodities. That demand also affects investors because energy and materials account for more than 40 percent of the Brazilian stock market. Right now, the consensus outlook for China GDP is positive, calling for a slight increase next year, to 8.4 percent. Meanwhile, Brazil's stock valuations are reasonable, with a price-earnings ratio of about 11 times 2012 estimated earnings across the MSCI Brazil Index.
Because firstly Brazil's inflation is moderate, secondly China doesn't appear to be on the ropes and thirdly valuations aren't bad, Brazilian stocks may be a good bet now according to some analysts. There are caveats, though, and the biggest one is the global economy, and not just with respect to exports. Brazil could also be vulnerable to investor fear should the global debt crisis worsen. Italo Lombardi, a Latin America economist at Standard Chartered Bank, connected the dots recently when he pointed out that concerns have spread from Greece to Portugal and Spain. "In this scenario," Lombardi said, "risk aversion tends to go up, which affects demand for Brazilian assets in general, including stocks."
Spotlight on the Rise in Japan’s GDP
Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.
Gross domestic product rose an annualised 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. Nominal GDP, which is unadjusted for changes in prices, rose 1.5 percent, also the most in a year.
Today’s report shows while consumers, aided by a stock-market surge, are responding to the reflation campaign mounted by Prime Minister Shinzo Abe and Bank of Japan chief Haruhiko Kuroda, companies remain cautious. That may change as the yen’s 20 percent slide against the dollar in the past six months spurs profits and Abe's administration embarks on reducing regulations.
“Japan is clearly back from stagnation last year,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “The key from here is whether Abe can unveil a strong growth strategy. If he succeeds, that will boost business investment to support growth.” Abe plans next month to unveil his so-called third arrow of structural reform, following the first two arrows of monetary and fiscal stimulus.
Nominal GDP rose 0.4 percent last quarter from the previous three months, less than the median forecast for a 0.5 percent advance. The so-called GDP deflator, a broad measure of prices across the economy, tumbled 1.2 percent from a year before, the most since the final three months of 2011, underscoring Kuroda’s challenge as he seeks to end more than a decade of entrenched deflation.
The Bank of Japan’s plans to double the monetary base, a measure of the supply of money in the economy, have helped the yen weaken more than 15 percent against the dollar and almost 14 percent against the euro this year, the largest declines of the 16 major currencies.
The Nikkei 225 Stock Average (NKY) has climbed almost 45 percent this year, more than twice the gain in the Standard & Poor’s 500 Index. Meantime, bonds have tumbled as inflation expectations have risen. Ten year government bond yields jumped the most in almost a decade until the Bank of Japan on Wednesday announced a 2.8 trillion yen (USD 27 billion) infusion of funds.
“Some say Japanese stocks may be too high but the GDP shows the strength of economy may justify the uptick trend in stocks,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “I see a chance that Japan will have even better growth this quarter.”

Friday, May 10, 2013

Economic Summary for the week ended 10th May 2013

China - China's trade growth accelerated in April, beating analyst expectations, a positive sign for the country's fragile economic recovery.
Exports surged by 14.7% compared with a year earlier. That is up from 10% in March. Imports also rose by 16.8% up from 14.1%.
The data meant a trade surplus for China, reversing a surprise deficit in March. However, some analysts raised questions about the accuracy of the data.
"I have no strong conviction whether the data reflects reality," said Zhiwei Zhang, chief China economist at Nomura in Hong Kong.
Japan - Japan's Nikkei has continued its surge, rising above the 14,000 mark for the first time since June 2008.
The benchmark index rose 3.6% to 14,180 on its first day of trading after the Golden Week holiday.
Japanese markets have jumped recently after its central bank unveiled aggressive moves, including doubling the money supply, to spur growth.
On Tuesday, markets were also reacting to last week's events, including a rate cut by the European Central Bank.
"Stocks must account for a few sessions of most positive activity in overseas markets, which have resulted in a sharply weaker yen, all of which will be tonic for buying," said Hiroichi Nishi from SMBC Nikko Securities.
"Signs that the U.S. economy is improving, as well as the European Central Bank's rate cut are most encouraging fundamentally."
South Korea - South Korea has cut interest rates in a surprise move aimed at boosting growth and countering a weak Japanese yen.
Its central bank, the Bank of Korea, lowered its benchmark rate to 2.5% from 2.25%, the first cut in seven months. South Korean exporters are seeing their price competitiveness suffer after the Japanese government's recent aggressive policy stance weakened the yen.
"This rate cut means that the Bank of Korea admits that the economy is not as good as they think," said Jun Min-Kyoo from Korean Investment and Securities.
U.S. - The Dow Jones index closed above 15,000 for the first time on Wednesday as strong German factory data pushed U.S. and European share markets higher.
The Dow rose 87 points to 15,056. It has been rising rapidly over the past six months, and was boosted by better-than-expected jobs figures last week.
Meanwhile, the world’s most famous investor, Warren Buffett, has forecast that despite U.S. indices surging to new highs, there is still more to come.
Speaking to CNBC the Berkshire Hathaway boss said: “”You’ll see (stock) numbers a lot higher than this in your lifetime.”
Buffett, dubbed the Sage of Omaha, said while he felt stocks are not as cheap as they were just a few years ago, they were “reasonably priced”. He conceded there could be a correction at any time but warned against attempts to time the market.
Mexico - Mexico had its credit rating raised by Fitch Ratings on the prospect that proposed legal changes will boost growth in Latin America’s second-largest economy. The peso surged to the strongest level since August 2011.
Fitch increased the rating to BBB+, the third-lowest investment grade level, from BBB, putting it in line with Moody’s Investors Service’s Baa1 rating. The move reverses a cut that Fitch carried out in November 2009, when falling oil output and a recession curbed tax revenue.
Fitch said in a statement that the increase reflects Mexico’s economic resilience and that it sees “greater than anticipated commitment of the new administration and Congress to pass structural reforms.” President Enrique Pena Nieto, who took office in December, has pledged to push through legal changes to boost tax collection and open the state-controlled energy industry to more private investment.
U.K. - Shares in London soared to another five year high on Tuesday as the FTSE 100 index played catch up after the May Day bank holiday.
The blue chip index climbed as high as 6,563.35 in the middle of the afternoon carrying on Friday's rally after better than expected job creation figures from the U.S. revealed unemployment fell to 7.5%. Aside from its recent rally it has not been above 6500 in the last five years. The FTSE was last above 6550 in the first week of December 2007. The next nearest high would require the index to jump by 100 points to 6661.30 which was achieved before the financial crisis had taken hold in the third week of October 2007.
Commodities - Gold futures posted the biggest gain in almost two weeks as demand for bars and jewellery increased in India and China, the world’s largest consumers of the metal.
Imports by China from Hong Kong more than doubled to an all-time high in March, Hong Kong government data showed on Wednesday. India’s purchases are set to top 100 metric tons in May for the second straight month, according to India Pvt., a bullion refiner. Last month, gold had the biggest two-day drop in 33 years, slumping into a bear market, although subsequently climbed 12% from a 26-month low on April 16.
“The jump in prices was mainly on reports of strong physical buying from India and China,” Michael Smith, the president of T&K Futures & Options Inc. “Imports by China in April may have been even higher than in March.”
Spotlight on: Cyclical stocks start to outperform, suggesting more room for market growth
Cyclical stocks are starting to outperform their defensive peers, suggesting the ongoing rally could be extended even further.
The uplift which has boosted world stockmarkets since the start of the year has been dominated by defensive sectors such as healthcare rather than by financials and other cyclicals, that would typically lead market rally.
The S&P 500 Healthcare sector, for example, rose 23% over the opening three months of 2013 - outperforming the 18% gain in the S&P 500 Financials sector.
However, defensives’ outperformance appears to have moderated in the weeks since, with U.S. financials rising 4.2% in the first eight days of May against a 1.6% increase in healthcare.
BlackRock chief investment strategist Russ Koesterich adds: “Some of the more expensive defensive sectors of the market such as the utilities sector are underperforming, while the technology sector has experienced better results and still looks inexpensive.”
In the UK, banks have so far outperformed pharmaceuticals during May. The FTSE All-Share Banks sector is up 13.9% year to date, against the FTSE All Share Pharmaceuticals and Biotechnology sector’s 21%.
But over the course of May so far, banks have firmed 3.3% while pharmaceuticals have dropped by 0.8%. research director Kathleen Brooks says: “Even though the global economic backdrop is shaky, investors are still piling into equities. Even more interestingly, the cyclical, or risky, sectors of the S&P 500 are starting to outperform the defensive sectors.
“When this happens it suggests two things: investors are more confident and the markets may see another leg higher.”
However, Brooks notes that economic data needs to continue to improve if cyclical areas are to continue their bull run.

Sunday, May 5, 2013

Economic Summary for the week ended 2nd May 2013

U.S. - Big moves in the technology and materials sectors helped the S&P 500 close at its highest ever level on Monday.
The index rose 0.7% to 1,593.61, eclipsing its earlier record close set on 11 April this year. The benchmark has now risen by more than 12% in the last six months.
Apple was among the big movers amid rumours its much-anticipated iPhone 5S could hit shelves as early as this summer, months ahead of a forecast autumn release.
U.S. stocks had slipped towards the end of last week following data that showed the U.S. economy had grown at a weaker than expected pace.
China - China has overtaken the U.S. as the world's biggest market for personal computers, according to a market data report.
Research by the consultants IHS said PC shipments to the country rose to 69 million units in 2012.
The U.S. was the largest market up until 2011. Last year, it had orders for 66 million units. China is also the world's biggest internet market, with more than 500 million users.
Laptops are the fastest rising sector in developed markets and have overtaken PCs, but in China the sale of desktops and laptops is evenly split.
The Chinese government is investing heavily in computer infrastructure, and plans to spend around 40 trillion yuan ($6.4tn) building rural infrastructure in the next 10 years.
Japan - Japan’s Topix Index rose on Tuesday, capping its best month in 14 years, as brokerages led the advance after Nomura’s quarterly profit more-than-tripled to the highest in seven years.
“We can expect some profit growth in domestic shares tied to government stimulus measures, if not as much as in exporters,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which manages about 10.2 trillion yen ($104 billion) in assets. “We may see a correction in Japanese stocks any time, and I don’t think the stocks are cheap in terms of valuation.”
Asia - The International Monetary Fund (IMF) has warned strong capital inflows into Asia have increased the risks from rapid credit growth and rising asset prices.
In its annual report on Asia, the IMF was optimistic about the region's economy, which it expects to lead a "global three-speed recovery" with growth of 5.75% this year, according to the Financial Times.
However, the IMF urged policymakers to "stand ready to respond early and decisively to any prospective risks of overheating", amid widening financial imbalances in certain economies.
The IMF said pressures caused by capital inflows could build if so-called ‘Abenomics’ has the desired impact on the Japanese economy.
Europe - Unemployment in the eurozone has surged to a fresh record high, while inflation has fallen to a three-year low, boosting expectations that the European Central Bank will cut interest rates.
Unemployment in the 17 countries using the euro hit 12.1% in March, up from February's 12%, according to official figures from Eurostat.
A Reuters survey last week found that a majority of economists expect the European Central Bank (ECB) to cut the bank's main refinancing rate by 25 basis points to a record low of 0.5%.
If the ECB was to cut rates, it would mark its first reduction since July last year.
Emerging Markets - Emerging stocks rallied to a one-month high this week, led by technology shares, as investors speculated central bank stimulus will boost demand for riskier assets. Russian stocks rose for the first time in four days on Monday.
“Monetary policies will remain on easing mode,” Vattana Vongseenin, chief executive officer at Phillip Asset Management Co., which oversees about $24 million of assets, said in Bangkok. “Low interest rates and high liquidity will continue to make equity investments attractive.”
Eight out of 10 groups in the MSCI Emerging Markets Index rose as a measure of technology stocks added 1.9%. The broad gauge has lost 2% this year, compared with a 9.7% increase in the MSCI World Index of developed-country stocks.
Commodities - Surging demand for gold from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years as the biggest price slump in three decades lures consumers, according to MKS (Switzerland) SA.
Premiums paid by wholesalers and bulk buyers in Dubai to secure a 1 kilogram bar of bullion are being quoted between $6 an ounce and $9 an ounce over the London cash price, said Frederic Panizzutti, global head of marketing and sales at the Swiss-based bullion refiner.
“Physical demand has been tremendous in a way I haven’t seen for a number of years,” said Jeffrey Rhodes, global head of precious metals at INTL FCStone Inc., who’s worked in the industry for more than three decades. “The price collapse prompted a physical gold rush and the evidence of the extent of that is the prolonged period of high premiums that we’ve seen.
Spotlight on: Schroders urge calm over China
Schroders head of global and international equities Virginie Maisonneuve remains focused on the long term outlook for China, urging investors not to read too much into data taken from a single quarter.
Recent economic data from China showed GDP grew by 7.7% in the first quarter, just short of the expected 8%, sparking a panic across markets last week.
However Maisonneuve argues alternatively that, “markets should look at China’s longer-term picture in light of the new government, and not overly focus on one quarter’s data.”
She describes the recent slowing in China as a “sticking point” also seen in weaker than expected data to come from America, which does not take away from the fact both economies are “heading in the right direction.”
She adds: “While the numbers show a moderate slowdown, we are not concerned. One-off factors have had a significant impact, such as weakness in food and catering as the anti-corruption campaign curtails business functions.”
Maisonneuve goes further to say that China’s economic figures also show more positive signs. She says: “Digging into the detail reveals positives such as the fourth consecutive gain in the services sector – this is encouraging given China’s need to re-balance its economy.”
The new leadership in China must be also allowed time for its plans to take effect, says Maisonneuve. She also notes that it is currently in the process of reviewing areas of reforms extending across state-owned-enterprises, fiscal policy and social security.
She adds: “As the country adjusts to its size it must focus on quality growth to avoid the pitfalls of over- investment and misallocation of capital. The upcoming structural reforms are therefore key.”
Although Maisonneuve does not expect growth in China to return to double digits, it should pick up over the next few quarters, as policy measures “ramp up” and boost infrastructure spending.
Further growth should also be aided by the property sector and investment in the manufacturing sector, following 18% profit growth.
Maisonneuve stresses that in the medium term, “the key to understanding China’s growth potential is to assess whether investment will take place in areas where it is needed and efficient.
“In this environment, and provided the U.S. and Japan continue to provide support, any weakness in the global equity markets should be used to accumulate positions, especially for funds which have benefitted in the past from a healthy allocation to bonds.”