Friday, May 16, 2014

Economic Summary for the week ended 15th May 2014

Japan - Japan's economy grew at the fastest pace in nearly three years in the first quarter, due to increased spending ahead of a sales tax increase on 1 April.
Official data showed GDP rose 1.5percent in the January-to-March period, against a revised 0.1percent in the prior quarter. The figure beat forecasts for 1% growth, and was led by consumer spending which rose by 2.1%.
Private consumption accounts for approximately 60percent of Japan's economy. However, economists warned that spending may taper off now that the April tax hike has been introduced.
"Japan's economy expanded rapidly ahead of the sales tax hike, but is set to slump thereafter," Marcel Thieliant, Japan economist at Capital Economics, said.
"Looking ahead, the economy will certainly contract in the second quarter of the year, as consumers rein in spending after the tax hike, and residential investment is set to plunge."
Germany - German economic growth picked up pace in the first three months of 2014, while France's economy failed to grow, the latest figures show.
German gross domestic product (GDP) grew by 0.8percent, driven by stronger domestic demand, the country's statistics office said.
In contrast, growth in the French economy was flat, with an official figure of 0percent.
Russia - Russia’s first-quarter economic growth will likely prove to be the slowest since a 2009 recession, as the country’s standoff against the U.S. and its allies over Ukraine hampers investment, a survey of economists showed.
Gross domestic product advanced 0.7percent in January-March from a year earlier after a 2percent gain in the previous quarter, according to the median estimate of 19 economists in a Bloomberg survey. The Economy Ministry projects that output expanded 0.8 percent in the period. The U.S. and the European Union responded to President Vladimir Putin’s takeover of Crimea from Ukraine with sanctions and warned they are ready to take further measures if the former Soviet republic’s May 25 presidential election is disrupted. The $2trillion economy was stalling even before the penalties hit. The International Monetary Fund said April 30 that Russia is already in recession.
“The main driver for the slowdown is the contraction of investment,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said. “Investment weakness is due to a combination of much higher borrowing costs and the deterioration of the political and economic outlook. The latter is at least partly due to rising sanction risk from the West.”
Gold - Gold sales at jewelers in Hong Kong have declined as mainland shoppers buy less, the Chinese Gold & Silver Exchange Society reported, adding to signs of a slowdown in consumption by the world’s largest user after 2013’s surge.
Demand dropped about 30percent from a year ago, during the Golden Week break that began May 1, owing to the holiday being shorter this year and there were fewer visitors as luxury spending fell and gift-giving slowed.
While China surpassed India as the biggest user last year, the buying frenzy sparked by gold’s slump into a bear market last April hasn’t been repeated, according to Heraeus Metals Hong Kong Ltd. Lower consumption in China this year may help to extend declines in prices as investors press on with sales from exchange-traded products.
India - Indian stock markets have risen to a record high this week, after exit polls suggested the Narendra Modi-led Bharatiya Janata Party (BJP) and its allies are on course to win the general election.
India's main stock index, the Sensex, rose 1.7% to 23,941.32 points in early trade on Tuesday. This follows a 2.4% gain on Monday, ahead of the exit poll results.
Analysts said investors were hopeful that a BJP win could help reverse the slowdown in India's economy.
Exit polls released by Indian media organisations on Monday evening showed the BJP-led National Democratic Alliance (NDA) well ahead in terms of predicted seat wins, and the governing Congress trailing badly.
Spotlight on: The World Cup effect
For most Brazilians, winning a World Cup on home soil would be priceless. For companies ranging from retailers to airlines, the event is bad for business.
More than two-thirds of malls expect a “significant” drop in traffic during the World Cup next month as soccer fans stay in front of their TVs and shopping centers restrict hours because of public holidays, an Ibope poll released May 13 shows. Banco Santander SA says a drop in business travelers will cut sales for airlines like Gol Linhas Aereas Inteligentes. Hotels and restaurants are also bracing for a slowdown.
With less than a month to go before the tournament starts, the international soccer championship isn’t giving Brazil’s sluggish economy the lift supporters like former President Luiz Inacio Lula da Silva and Finance Minister Guido Mantega had hoped for. Latin America’s largest economy missed a chance to use the World Cup to fuel long-term growth by not following through with all planned projects to modernize infrastructure, while economic activity in the short term isn’t likely to get a boost, said William Nobrega, managing partner at The Conrad Group, an investment advisory firm for private equity.
“It would have had a positive impact not only on short-term but also long-term economic growth, that didn’t happen,”Nobrega said. The World Cup will“at best” have a neutral impact on gross domestic product.
2 Percent Growth
The tournament comes at a time Brazil is heading toward its fourth straight year of GDP growth below 2percent. The prospect of host cities granting workers more days off may hurt the economy further, Santander said in a report dated May 9.
“With a substantial number of additional holidays during the 32 days of the tournament, our economics team expects a slowdown in economic activity that could impact all companies, ”Santander analysts including Pedro Balcao-Reis said.
Retail businesses like clothing, pharmacy and gasoline stations are also expected to see a decline in sales during the period, according to Moody’s Investors Service analyst Barbara Mattos.
“Possible holidays during the games damage the companies’productivity as they won’t have the same number of working hours,” she said in an e-mail.
UM Investimentos, a brokerage in Rio de Janeiro, is one of those companies. “Volume is lower on the days of the games,” Chief Executive Officer Marcos Maluf said, adding that the day after a game trades will be back to normal.
Route Changes
Brazil’s national air regulator, known as Anac, expects carriers to change routes ahead of the games to adjust for lower-than-expected demand. As of May 1, airlines had sold only 21percent of the seats on flights in June to and from the 12 host cities, Anac said.
Santander estimates that Gol’s revenue during the month-long event will be cut by about 13percent, as an increase in tourists won’t be enough to offset a 70percent drop in business travelers. The negative impact on bigger rival Latam Airlines Group SA will be about half of Gol’s as Brazil represents 50percent of the company’s carrying capacity, the bank’s analysts wrote.
“As corporate clients pay much higher prices, even with the expected increase in leisure prices, the overall impact on prices should also be negative,” the analysts said. “We expect a negative impact on both volume and prices.”
Hotels in Sao Paulo, South America’s business hub, are also suffering.
Occupancy Rates
While World Cup hotel occupancy rates in Rio are already above 90percent, only about 30percent of the rooms are booked in Sao Paulo, where the opening game takes place on June 12, said Joel Renno Jr., director for strategic development at Hotel Urbano, a Rio-based online travel agency. Agencies blocked a large number of rooms in Sao Paulo, hoping to boost rates for a surge in demand that never followed, he said.
“There was overshooting, everybody is much more bullish than what’s really the situation,” Renno Jr. said on May 6.“What we have heard from the market is that it’s about to start a process of super-aggressive promotions from hotels, with rates dropping drastically.”
To be sure, the World Cup is turning out to be a financial boon for some Brazilians. Real estate broker Norbert Hartmer said he is renting luxury apartments to Asian billionaires in Rio’s best neighborhoods for as much as $180,000 for the month.
A three-bedroom residence in Leblon, Rio’s most exclusive neighborhood, goes for an average of 3,500 reais ($1,590) a day during the World Cup, according to Rio’s regional real estate brokerage council.
Government Estimates
The Brazilian government expects the event to mobilize 3.7 million local and foreign tourists, generating 6.7 billion reais in spending linked to the tournament, according to a May 13 statement from the country’s communication secretariat.
Some host cities including Rio, where the tournament’s final will be played on July 13, have declared public holidays on game days to try to ease traffic jams.
“Productivity levels for Brazil during the entire month of the games are just going to go through the basement because you are going to have rolling holidays,” The Conrad Group’s Nobrega said. “Even without official holidays, there are a lot of people who are just not going to go to work.”

Friday, May 2, 2014

Economic Summary for the week ended 1st May 2014

U.S. - The Dow Jones Industrial Average index reached a record high this week, helped along by last year’s worst-performing stocks: International Business Machines (IBM) and Caterpillar Inc.
Four months after reaching its previous closing high, the 30-stock gauge eclipsed the previous level, rising 0.3percent. It was the index’s third straight increase, coming after the Federal Reserve said it would continue to trim the pace of bond purchases as the economy gains momentum.
“Growth in economic activity has picked up recently, after having slowed sharply,” the Federal Open Market Committee said in a statement. “Household spending appears to be rising more quickly.”
Policy makers committee pared monthly asset buying to $45bn, its fourth straight $10bn cut, and said further reductions in “measured steps” are likely.
China - China is poised to overtake the U.S. as the world's largest economy far sooner than expected, according to new statistics.
The Asian giant will overtake the U.S. which has been the largest economy in the world since surpassing the UK in 1872, later this year, according to the World Bank.
That is well in advance of earlier estimates that the U.S. would not be overhauled until 2019.
In its first update since 2005, the World Bank's International Comparison Programme (ICP) concluded that "money goes further in poorer countries than previously thought," prompting an upgrade to the relative size of EM economies.
Though it remains well below the U.S. and other economies when measured on a GDP per capita basis, the ICP's latest figures show China's economy was 87% of the size of that of the U.S. in 2011 on a purchasing power parity (PPP) basis.
That is up from a figure of 43% as of 2005, and puts China on track to surpass the U.S. later this year on a PPP basis.
Japan - Vehicle deliveries last month in Asia’s second-largest auto market fell to the lowest since December 2012, after Japan raised its consumption tax for the first time 17 years, according to industry figures released on Thursday. In the run-up to the levy being increased 3percentage points to 8percent on April 1, sales had surged for seven straight months.
More broadly, the figures may foreshadow the extent of the consumer backlash resulting from the higher taxes Prime Minister Shinzo Abe imposed to counter the world’s biggest debt burden. Economists estimate that this quarter, Japan will see its biggest economic contraction since the earthquake and tsunami that ravaged the country three years ago.
“Any sane person was buying big-ticket items in February or March rather than in April,” Martin Schulz, an economist at Fujitsu Research Institute in Tokyo, said. “The Japanese carmakers will have to prove how much they really can work this very difficult market.”
Ukraine - The International Monetary Fund (IMF) has approved a $17.1bn bailout for Ukraine to help the country's beleaguered economy.
The loan comes amid heightened military and political tension between Ukraine and neighbouring Russia.
The loan is dependent on strict economic reforms, including raising taxes and energy prices.
The money will be released over two years, with the first instalment of $3.2bn available immediately.
The head of the IMF, Christine Lagarde, said the IMF would check regularly to ensure the Ukrainian government followed through on its commitments.
Russia - Russia is "experiencing recession now" because of damage caused by the Ukraine crisis, the International Monetary Fund (IMF) has said.
The fund, which cut its growth forecast for Russia, said $100bn would leave the country this year.
Antonio Spilimbergo, the IMF's mission chief in Moscow, said international sanctions were damaging the economy and threatening investment. Russia's economy contracted in the first three months of this year.
But Mr Spilimbergo said he expected that to continue.
"If you understand by recession two quarters of negative economic growth, then Russia is experiencing recession now," he added.
"The difficult situation and especially the uncertainty surrounding the geopolitical situation... and escalation of sanctions are weighing very negatively on the investment climate."
Asia - Asian policy makers have to push through structural economic reforms in order to withstand volatility inspired by U.S. tapering, according to the International Monetary Fund.
In a regional economic outlook report for Asia by the IMF, entitled ‘Sustaining the momentum; vigilance and reforms’, the organisation points to tightening of global liquidity as the key risk to Asian markets.
Additionally, a sharper than originally thought slowdown in China and waning effectiveness of Abenomics in Japan could be additional risks according to the IMF.
With the latter, the IMF sees structural reforms as vital to ensuring Abenomics-related measures follow through and boost growth.
The report reads: “With the risk of further bouts of volatility ahead, policy complacency will be penalised. Asia’s reform momentum must therefore be nurtured so as to secure the region’s position as the global growth leader.
Spotlight on: Investment Trends
The most recent Merrill Lynch Fund Managers survey found that there had been a significant swing from growth to value. In April, a net 40% of managers believed value stocks would outperform growth stocks over the next 12 months, three times the level in March.
This is part of wider nervousness over the lengthy outperformance of smaller and mid capitalisation stocks, and also of sectors such as technology and biotechnology. Valuations, in some cases, had started to look well ahead of realistic growth prospects. Although the most recent U.S. earnings season saw around three-quarters of companies beating expectations, in some cases these expectations had been lowered ahead of time, and some bellwether companies disappointed, notably among the technology companies.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said that investors were increasingly toning down their bullishness on U.S. growth stocks and their bearishness on emerging markets.
Mega cap has lagged over the past year. Partly this is structural - the real beneficiaries from an improving economic environment are unlikely to be the unwieldy large caps with their globally diversified earnings, but the smaller domestically focused companies. However, there is an increasing groundswell of opinion that this has gone too far and the difference in valuations is too great relative to growth prospects and earnings potential.
Small and mid cap stocks have outperformed the FTSE 100 over almost any time period. However, over the past month, the FTSE 100 has been around 3% ahead. Small and mid cap fell around 2%, while the FTSE 100 rose 1%. While it is dangerous to extrapolate a long-term trend from one month's numbers, it does suggest that markets may have hit an inflection point.
A number of the 'recovery' funds have done well in this environment, such as those from Schroders and Jupiter. Funds such as the Franklin Blue Chip fund and fund groups that prioritise quality, such as Aberdeen, have also done well. In contrast, the mid cap-focused funds lie firmly at the bottom of the performance tables.
Another question is whether active managers can continue their lengthy run of outperformance in this environment. 2013 was an outstanding year for active managers, with many significantly ahead of their benchmarks. However, if the market moves to favour larger capitalisation stocks, the performance of index trackers may start to outstrip active funds.
There are a number of things that may thwart this trend. There may be stronger momentum in earnings and investors may finally be convinced that many growth companies can make the impressive profits that are predicted for them. This is particularly the case if stronger corporate investment comes through. Equally, M&A activity - as has been seen in the pharmaceutical sector - may boost certain parts of the market.
However, investors who have ridden the strong performance of growth stocks, particularly those in the small and mid cap area would do well to be wary in this environment. It seems that the market may be on the cusp of a change in sentiment and the type of portfolio that has garnered strong returns over the past year, may not be appropriate from here.