Friday, July 27, 2012

Economic Summary for the week ended 27th July 2012

Europe - European stocks were climbing on Friday after a four day sell-off in the week, following a pledge from European Central Bank (ECB) president Mario Draghi that the ECB will "do whatever it takes to preserve the euro".
Indices across Europe surged as Draghi repeated comments made to Le Monde newspaper last week that the euro is "irreversible". He added: "Within our mandate the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.
"When people talk about the fragility of the euro, very often non-euro members underestimate the political capital that has been invested".
Germany - Credit ratings agency Moody's has changed its outlook for Germany's AAA credit rating to negative, the first step towards a possible downgrade.
Moody's said the country was at risk from the increased likelihood of a Greek exit from the euro and the need to provide more support to Spain.
Concerns are growing that Spain will have to seek a full bailout.
The Netherlands and Luxembourg, both AAA rated economies, were also put on negative watch.
Spain - France and Spain have called for European Union (E.U.) leaders to accelerate a rescue plan for Spanish banks to calm fears of a full international bailout.
Spain said there had been a "worrying delay" in executing plans agreed by eurozone leaders last month.
The main provision would allow the future European bailout fund, the ESM, to pour money directly into ailing banks.
China - The International Monetary Fund (IMF) has warned that the worsening debt crisis in the eurozone poses a "key risk" to China's growth.
The IMF added that China also faces domestic risks, not least from a sharper-than-anticipated decline in the property market.
However, the fund said China had ample room and the fiscal tools "to respond forcefully" to any such developments.
Commodities - Gold held steady above $1,600 an ounce on Friday, on course for its biggest weekly gain in almost two months, after ECB President Mario Draghi signalled the bank would do whatever was necessary to hold the euro zone together.
Gold in the past few months has moved largely in tandem with the euro and riskier assets, with a relentless debt crisis in the euro zone chipping away at bullion's safe-haven appeal and investors piling into assets perceived safer, such as the dollar, yen and U.S. Treasuries.
Spotlight on: Hosting the biggest sporting event in the world
Neptune fund managers Douglas Turnbull, Mark Martin and Thomas Smith consider the economic impact of the upcoming London Olympic Games & also the plans afoot in South America to host the 2016 games.
London 2012
The London Olympics is projected to rank alongside Beijing, Barcelona and Montreal as the most expensive in history. The total London 2012 sports-related budget has increased by 101% from GBP4.2 bn in the 2005 bid to GBP8.4bn in real terms, according to research by the Said Business School.
The benefit of much of this expenditure, however, will already have been felt by construction companies. Looking forward, house builders appear to be the construction companies poised to benefit most from the upgrade in facilities and infrastructure at the Queen Elizabeth Olympic Park: as many as 5,000 new homes could be built in the area after the Olympics.
It is estimated that 500,000 extra people a day will descend on the UK capital and as a result there will undoubtedly be an impact on businesses. Companies exposed to London tourism, such as pub companies like Fuller Smith Turner and Greene King should benefit, especially if they have patriotic brands like Spitfire, London Pride and other UK drinks on tap.
Hotel companies exposed to London and the South should also benefit - Whitbread and Fuller Smith Turner [again] should profit from more people seeking London accommodation who are prepared to pay a premium price. Also we should not forget support service companies like UK-listed Berendsen, which supplies linen to the catering and hotel trades, which could also see increased demand for its products.
Unfortunately, not all businesses will be as well positioned. For theatres and cinemas the month of the Olympiad and the recent Euro 2012 fixture means that cinema admissions are likely to be depressed. Indeed cinema operators such as Cineworld have specifically structured their film release schedule this summer.
However, for all but the shortest-term investors, the beneficial impact of the Olympics on individual stocks will likely be muted. Given that the majority of any stock's value is contained in earnings streams way into the future, the fundamental value of a company will be totally unaffected by a 'pop' in one quarter's earnings.
Rio de Janeiro 2016
The 2016 Games are of particular significance because although the Olympics were held in Mexico City in 1968, they have never been held in South America, giving further recognition of Brazil's arrival on the world stage.
The total benefit for a country hosting the Games is difficult to quantify due to the many indirect investments alongside the direct investments in Olympic stadiums and infrastructure.
A study by the Brazilian Ministry of Sport in conjunction with the University of Sao Paulo estimates that $14.4bn will be invested in Olympic preparations ranging from stadiums, sports pitches and water sports venues to roads, subways and airports.
However, the study also claims that the preparations will generate a 4.26 production multiplier, which will inject $51.1bn into the Brazilian economy from 2009 to 2027 and create over 120,000 jobs annually. This means that for every dollar invested in the organisation of the Olympic Games, private entities will invest an extra $3.26 in production chains related to the event.
The accelerated investment in projects such as airports and roads will help remove infrastructure bottlenecks and raise Brazil's trend growth rate over the medium term.
Rio also stands to benefit from the preparations for the 2014 Football World Cup and having the Olympic-standard facilities built prior to hosting the Pan-American Games in 2007 which will be used in both the Olympics and Paralympics.
Rio was the 2016 candidate requiring the smallest investment in venue construction, allowing it to focus on the much needed infrastructure to transform the city.
Transportation is a priority with new highways being built to link the airport to key points in the city as well as an extension to the city's subway. The sectors likely to benefit most include construction, real estate, oil and gas, transportation and communication.
A mega event such as this can be very positive for a country's economy but this is not always the case. Following the 2000 Summer Olympics, Australia was still paying around $40m a year to maintain under utilised stadiums and facilities a decade later.

Sunday, July 22, 2012

Economic Summary for the week ended 22nd July 2012

China - China will be able to engineer a soft landing despite recent signs of a slowdown, according to Fitch Ratings.
Last week official numbers showed the the world's second largest economy as growing by just 7.6% in the second quarter of 2012, which is the slowest pace recorded for three years.
Fitch says: "Official figures indicate that the Chinese economy is likely to avoid a hard landing in the short term. Fitch maintains its 8% projection for Chinese growth in 2012, implying annualised growth of 8.1% in the second half of the year."
The group cites supportive monetary policy, better-than-expected banking lending rates in June, export growth outpacing imports and a recent rise in fixed asset investment as positives for the country.
China - Property prices in 70 Chinese cities rose slightly in June, compared to May, after eight months of decline. Home prices rose 0.3% in Beijing and 0.2% in Shanghai compared to the previous month, official data showed.
China had implemented two years of curbs on the real estate market in order to bring prices down. However, as the economy slowed to a three-year low in the second quarter, measures have been taken to boost growth. The Chinese central bank has cut key interest rates twice in recent months. Analysts said this and other steps have broken the trend of falling home prices.
U.S. - Ben Bernanke offered a gloomy outlook for the U.S. economy but the Federal Reserve chairman offered no hint of further monetary easing in testimony to Congress.
"We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we've seen recently is enduring, and whether or not the economy is likely to continue to make progress," he said, warning that progress in reducing a 8.2% unemployment rate "seems likely to be frustratingly slow".
The testimony initially disappointed markets on Wednesday which are expecting a signal of further monetary easing from the Federal Reserve.
Europe - Eurozone economies are in critical danger and in dire need of expansive quantitative easing measures from the European Central Bank (ECB), according to an International Monetary Fund (IMF) staff report.
The report gave detailed recommendations to the ECB, calling on it to cut interest rates further (it cut the headline rate by 25 basis points to 0.75% earlier this month) and embark on a QE programme that should involve "sizeable sovereign bond purchases."
Italy - Moody has cut the credit rating for 13 Italian banks only a few days after cutting the Italian government's bond rating.
The ratings agency dropped seven banks by one notch and another six by two notches. They all remain investment grade.
Moody's says the action follows a weakening of the Italian government's credit profile.
Moody's said that banks are normally rated in line with the government, citing "multiple channels of shared exposure and contagion". The rating agency said Italian banks have substantial exposure to the domestic economy and high direct exposure to sovereign debt.
Spain - Spain sold EUR2.98bn of notes this week, in line with its maximum target, and its borrowing costs surged as demand for the securities weakened. The country's bonds fell after the sale.
The Treasury sold notes due in 2014 at an average yield of 5.204%, compared with 4.335% when they were last sold on June 7. It sold five-year notes at 6.459%, compared with 6.072% on June 21.
Commodities - Oil fell from a seven-week high this week on concern fuel demand may falter after China signalled more economic weakness and analysts cut their profit forecasts for European companies at the fastest rate since 2009.
Futures slid as much as 0.7% after advancing a fifth day yesterday, the longest run of gains since April. The labour situation in China, the world's second-biggest crude user, will become more "severe" Premier Wen Jiabao said, according to a statement on the government's website.
Commodities - Gold edged up on Thursday after two straight days of losses as the dollar weakened, although investors were less than convinced of its direction given the uncertainty over the Federal reserves' stimulus measures and persistent worries about Europe.
The strength in the dollar has been pressuring gold, which has risen barely 1% year to date and has been especially sensitive to signals from the U.S. Federal Reserve on its attitude towards monetary easing, which would lift inflation outlook and boost investor interest in bullion.
Spotlight on: Africa - foundations for growth
According to economic fundamentals, the 'factors of production' of land, labour and capital are regarded as the basic ingredients required for achieving profit. If this stands true then Africa is extremely well placed both now & in the future to sustain the truly explosive growth in the region's recent development.
Africa possesses the first factor, land, in abundance, accounting for 20% of the world's land mass. In addition, it is home to an array of the world's natural resources; 89% of the platinum group of metals, 74% of the chrome, 60% of the diamonds, 12% of the proven oil reserves, 9% of the natural gas and 40% of the gold.
The sheer volume of land is clear to see, but it is the relentless, global demand for natural resources that has meant that vast amounts of these resources are being continuously exported out of Africa, bringing wealth to the region. This growth has resulted in local industries booming and much-needed developments in domestic infrastructure, something which, until recently, was relatively unheard of.
With regards labour, Africa has a population of over 1 billion people, which is growing ever-faster. Unlike in previous periods, this isn't a burgeoning, dependent population. Instead it is a young, vibrant one where the number of people of working age is greater than those who are not.
Similar to the phenomenon in the USA when the so-called 'baby-boomers' came to working age, and also in China in the 1990s, this can create an environment which underpins an economic boom. A median age of 19.7 years in Africa compares to an equivalent age of 29.2 for Asia, 32 for the BRIC nations, and 40.1 for Europe.
In addition to the favorable demographic of the population is the fact that the youth is now in education for much longer than generations before, which may enable Africa to utilize this new, better educated workforce to herald the next BRIC style growth opportunity.
Finally, with regards capital. In a year when most developed economies are hoping to maintain positive growth, the International Monetary Fund is predicting that in 2012, Africa will achieve economic growth of almost 6%.
Further, it predicts that seven of the world's ten fastest growing economies between 2011 and 2015 will be in Africa.
The economic growth story is only one part of the 'capital' story though. In addition, and again dispelling a popular myth about Africa, the continent has very low debt levels compared to more developed regions. Africa's median debt-GDP ratio is 37%, as compared with G8 nations' median of 84%.
The factors above lead many industry commentators us to believe that the time is now to invest in Africa as it is ripe for an explosion of economic growth.

Tuesday, July 3, 2012

Economic Summary for the week ended 28th June 2012

Spain - Spanish Prime Minister Mariano Rajoy has said Spain cannot afford to finance itself for much longer at current rates. Spanish 10-year government bonds have been trading at yields above 6.8%, coming close to the 7% that is considered unaffordable.
Mr Rajoy was speaking ahead of this week's European Union (E.U.) summit. "The most urgent subject is the subject of financing," he said. Spain has asked for funding for its banks, but the country has not been bailed out.
Eurozone countries have agreed to lend up to EUR100bn to support Spain's banks.
China - The E.U. has asked the World Trade Organization (WTO) to arbitrate in a row about China's export restrictions on its "rare earth" minerals.
The E.U., along with the U.S. and Japan, has asked the WTO to set up a dispute settlement panel, arguing that China is being unfairly restrictive.
The term rare earth refers to a group of 17 elements that are used to make a range of hi-tech gadgets. These elements are used in products ranging from MP3 players to mobile phones, flatscreen TVs and hybrid batteries.
With those products becoming increasingly popular, the demand for rare earths has been rising.
China - China is to provide a GBP6.4bn credit line for Latin American countries to support infrastructure projects in the region. The proposal was made by China's Premier Wen Jiabao as he wrapped up his visit to the region.
He also proposed a free trade pact between China and South American trade bloc 'Mercosur', which includes Brazil, Argentina, Uruguay and Paraguay.
Many of the Latin American countries are still at a development stage and are building new infrastructure in a bid to boost growth in their economies.
Meanwhile, China, which has the world's largest foreign exchange reserves, has been looking to for new areas invest some of its cash.
India - Indian Prime Minister Manmohan Singh pledged to restore confidence in Asia's third-largest economy as he resumed control of the finance ministry after growth slowed to the weakest in almost a decade and the rupee slumped.
Singh, 79, urged senior ministry officials to act quickly to revive investor sentiment as he assumed the role vacated this week by Pranab Mukherjee, who resigned to run for president. India needs to address "problems on the tax front," as well as in the mutual funds and insurance industries, he said at a meeting in New Delhi.
"Don't expect a big change yet," said Ramya Suryanarayanan, a Singapore-based economist at DBS Group. "If until now there were bottlenecks and policy logjams it's not going to miraculously disappear."
Cyprus - Cyprus has told the European authorities that it intends to apply for financial assistance, the fifth eurozone member to do so.
It said it needs help to shore up its banks, which are heavily exposed to the Greek economy.
The country needs to find about approximately EUR1.8bn over the next few days to recapitalise its second largest lender, Cyprus Popular Bank.
In a short statement, the government said that it required assistance following "negative spill over effects through its financial sector, due to its large exposure in the Greek economy".
U.S. - Orders for durable goods climbed more than forecast in May, easing concern that U.S. manufacturing is faltering.
Bookings rose 1.1%, the first increase in three months, a Commerce Department report showed. Excluding the volatile transportation equipment, orders for goods meant to last at least three years advanced 0.4%.
"This comes as a relief that businesses aren't completely cutting back," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, who projected a 1 percent gain in orders. "We still have to be quite cautious as there is considerable uncertainty. U.S. growth will be moderate."
Russia - Russia's BBB debt rating was affirmed at Standard & Poor's this week, which cited low government debt levels balancing risks for the world's biggest energy exporter from commodity-price swings.
"The stable outlook reflects our assessment of balanced risks to the ratings," S&P said in a statement. "Vulnerability of the budget and the economy to fluctuations in key export prices are offset by low government debt levels and the country's slight net external asset position."
"The confirmation of the rating is a positive for Russia given the very adverse global backdrop and very significant fall in oil prices" said Ivan Tchakarov, Moscow-based chief economist at Renaissance Capital.
Spotlight on: looking past the past
In the run-up to 2012's halfway point, industry commentators have expressed concern that memories of last summer's crash are blinding long-term investors to the current low equity valuations.
There is a remarkable symmetry between the course of markets in the half-year to-date and their trajectory in the same period in 2011.
However, there is a massive difference in sentiment. In contrast to the optimism of last year, investors are far more sanguine about the prospects for the rest of 2012, and it seems that much of this is down to what happened last August.
In just a little over two weeks the FTSE fell 15%, as the European authorities finally admitted Greece would need a bailout, and IFAs say investors are still suffering the psychological scars.
Graham Toone, head of research at AFH Wealth Management, claims it is getting harder to persuade clients to look past temporary market reversals.
"We try to get our clients to look through these wobbles. There are people out there who get very nervous about short-term volatility," he said.
"We all feel the pain when the markets have a wobble, but you have to stand back and try not to get too caught up in the fear."
The eurozone crisis hasn't gone away, of course, and governments seem to move from summit to summit and from stop-gap to stop-gap, without any medium-term plan to calm markets.
"If the eurozone wasn't around there would be another issue I'm sure, but right now Europe is determining investor sentiment," said AWD Chase de Vere's Patrick Connolly.
"What we have seen is lots of volatility and we are in for more of the same."
"Markets are driven by macro events at the moment. The eurozone is pushing prices up or down with each announcement or downgrade."
One of the most obvious differences between sentiment last year and this is the general reluctance to make predictions.
News headlines claiming the eurozone will inevitably break up or stay together are not as common as they were.
Claims that China will pull the world out of recession or sink with it are also less forcefully expressed.
For example, Neither Toone nor Connolly wanted to make any predictions for the year ahead; however, Connolly believes cheap valuations mean there is only one winner in the equity versus bond debate for the long-term investor.
"I am sure there will be up and down periods, however I would not assume what happened last year will happen again. I wouldn't be surprised either way to be honest," he said.
"The safest assets have become more expensive and will likely get even more expensive, while the riskier assets meanwhile will get cheaper and cheaper."
Toone added: "The market seems to be relatively steady right now, but you find it hard to be too excited or frightened by things."
"We still favour the more defensive areas of the market in this tough macro environment."
"On a strategic level we are sanguine on our equity rating and we like high yield bonds. We are still very wary of gilts, we prefer high yield bonds."
Another reason for the general lack of enthusiasm for the year ahead may be the growing realisation that the difficulty will last for years to come.
"We're all waiting to see the E.U. come up with a plan to resolve the crisis, but I'm afraid the solution might not be too pretty either," said Connolly.