Saturday, December 7, 2013

Economic Summary for the week ended 4th Dec 2013

India - India's current account deficit, a key area of concern, narrowed sharply in the second quarter after a series of measures helped curb gold imports.
The deficit fell to $5.2bn during the July-to-September quarter, down from $21bn during the same period last year.
A current account deficit is the difference between inflow and outflow of foreign currency and occurs when imports are greater than exports.
India's deficit had been widening raising fears over its economic health.
India's Finance Minister, P Chidambaram, said the latest numbers indicated that the country was "on target to contain the current account deficit".
According to India's central bank, the Reserve Bank of India (RBI), the current account deficit stood at 1.2% of the gross domestic product (GDP) during the quarter, down from 5% of GDP during the same period last year.
Surveys - A key global survey of international perceptions of official corruption has put Spain down six points to 40th place, following a series of recent scandals.
Only Syria, in the middle of a civil war, lost more points in the survey, carried out by the Berlin-based Transparency International. The list of 177 countries put Denmark and New Zealand top with 91 out of 100.
The U.K. is ranked in 14th place, up from 17 last year, with a score of 76 points out of 100.
The U.S. ranked 19th and China 80th, both unchanged from last year. Russia improved slightly to 127th place, from 133rd previously, and Japan was down one point at 18th.
Transparency International says the world's marginalised and poor remain the most vulnerable to corrupt officials.
Chris Sanders from the group said: "In practice, these numbers mean that corruption is a constant burden in daily life. This June, our global survey showed that you are twice as likely to pay a bribe if you live in a poor country."
Currencies - The Chinese yuan is now the second most used currency in trade finance, surpassing the euro in October.
According to the Society for Worldwide Interbank Financial Telecommunication, the yuan had a 8.66% share of letters of credit and collections in October compared with 6.64% for the euro.
China has been working to build the yuan’s role in global trade and investment by reducing controls on the currency and promoting it beyond local markets and to international players.
However, the U.S. dollar remains the leading currency with a share of 81.08%.
Commodities - Last month was the worst November for gold prices in more than 30 years, but investors pounced on the precious metal’s weakness to add to their positions.
According to gold exchange BullionVault, its clients have now bought back 60% of the 1.2 tonnes sold between April and June, taking their gold holdings above 32.6 tonnes in aggregate.
Although gold ETPs continued to see outflows, BullionVault said that sentiment towards the physical metal is on the up, even if it is still depressed versus last year’s levels and lower than in September 2011, when gold’s price streaked past $1,900 as investors fled for safety.
Predictions - One of the economists who shared this year’s Nobel Prize for economics has argued that the significant rise in stock and property prices risks creating a financial bubble.
Robert Shiller, who scooped the prize with Eugene Fama and Lars Peter Hansen for his research into market prices and asset bubbles, told German magazine, Der Spiegal, that the U.S. stockmarket and the Brazilian property market are the main areas of his concern.
The American economist’s work on financial bubbles, crises, market volatility and risk sharing has received widespread attention.
He told the magazine: “I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets. That could end badly.
“I am most worried about the boom in the U.S. stockmarket. Also because our economy is still weak and vulnerable.”
Markets - November saw developed market equities come close to the highs last seen in 2007, according to S&P Dow Jones Indices, while emerging markets continued to lose ground.
The S&P Global Broad Market Index shows that developed markets gained 1.61% over the month to 30 November, taking the year-to-date gain up to 22.12%. Emerging markets, on the other hand, fell 1.92% and saw their year-to-date loss reach 3.09%.
S&P Dow Jones Indices senior index analyst Howard Silverblatt says: “Overall, developed markets are nearing their peak while emerging markets remain over 22% off than their October 2007 high – struggling with reduced growth expectations as their developed counterparts make progress in economic stability and recovery.”
Only three emerging markets posted a positive result last month, with China advancing 4.44%, Mexico 2.92% and Poland 1.27%. Indonesia was hit by the strongest fall after losing 12.19% in the four-week period, while Peru lost 9.15% and Columbia 8.03%.
Spotlight on: Has QE resulted in ‘bubble trouble’ for global equities?
Bill O'Neill is head of CIO research UK, UBS Wealth Management
On 25 November 2008, the U.S. Federal Reserve kicked off its QE programme.
Over the past five years, QE has become increasingly common in the global economic landscape.
Other developed countries have emulated it by launching similar programs, all of which helped cut borrowing costs and supported asset prices.
In fact, in the five years since QE took off, global equities have returned more than 15% on an annualised basis, treasuries close to 5%, and US high yield credit more than 20%.
This has been a great period for investment returns, but not so great for the growth of the global economy. This disconnect poses the question – does QE’s reflation of asset prices represent the creation of a bubble waiting to burst?
QE has distorted financial markets and, as a result, seems to have caused investor complacency.
The one month average level of bearish sentiment, measured by the American Association of Individual Investors is at levels last seen in early 2011 and 2012. On both occasions this level represented complacency.
Stock markets seem almost indifferent to whether fundamental economic data is good or bad, as support in the form of monetary policy acts as a safety net for investors.
This government intervention is occurring worldwide. Japan’s economics minister attempted equity strategy earlier in the year, setting a two-month target return of 17% on the Nikkei 225.
On the other side of the globe, ECB President Mario Draghi’s “do what it takes policy” in the eurozone implicitly guarantees positive returns on short-dated peripheral government bonds.
It is plain to see how investor complacency may arise from this powerful backing. Yet with investment returns having seen such a significant rise in the past five years, should investors prepare for an imminent bubble burst and end to confidence in equities?
Despite concerns, this indifferent sentiment among investors has not pushed asset valuations beyond reasonable levels. This is good news for long-term investors.
Looking at simple ratios of prices to earnings in equity markets, and at cyclically adjusted earning yields, it does not appear we are in a bubble, not least one fit to burst.
The net result is a cyclically adjusted earnings yield of 5.4%. This represents about a 10% discount to the 20-year median yield of 4.9%, showing that after a significant rally over the last five years, share valuations are fair to slightly high.
Clearly, the important point is there is scope for earnings to drive price appreciation.
Yet, investors should not expect a repeat of the 15% annualised returns they have enjoyed over the past five years.
Annual returns are likely to halve to around 7%-8%. Equally, it is highly unlikely high yield corporate bonds will continue to produce double-digit percentage returns.
Though a bubble does not appear to be emerging, investors should be aware that returns from equities may not be as impressive in the years to come, and inflation is also a risk.
Even moderate inflation could diminish returns for medium-term investors.
Although there will always be risks and warning signs to consider when investing in equities, we are not in the midst of a dangerous bubble in risk assets. Investors’ own bubbles will not be burst just yet.

Tuesday, November 26, 2013

Economic Summary for the week ended 22nd Nov 2013

Japan - Japan's exports have seen their biggest annual rise for three years.
Exports rose 18.6% to 6.1tn yen ($61bn) in the year to October, largely thanks to more car shipments, its ministry of finance said, this was above analysts' forecasts of about 16.5%.
A weak yen and an improving global economy has seen oversees demand pick up, but despite this and Prime Minister Shinzo Abe's looser monetary policies, Japan's economy remains fragile.
The yen has fallen approximately 14% against its U.S. dollar value in 2013, making Japanese goods cheaper for foreigners to buy. Car exports rose 31.3% year-on-year, while the volume of overall exports to the U.S. and European Union grew 5.3% and 8% respectively.
"U.S. private-sector demand remains strong and European economies appear to be bottoming out," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo, "If advanced economies recover, Japanese exports can rise more," he added.
China - China has attracted 5.77% more foreign direct investment (FDI) in the first 10 months of the year, compared to 2012. Government figures show FDI totalled $97bn over the period.
In October alone, the country attracted $8.4bn, an increase on a year earlier but down from September's figure.
Ministry of Commerce spokesman Shen Danyang said foreign investment policy would remain stable and transparent as China carried out its reform agenda.
U.S. - The leading U.S. equity markets hit fresh record highs on Monday, suggesting a ‘Santa rally’ is well underway in the run up to Christmas.
The Dow passed the 16,000 mark for the first time ever, while the S&P 500 recorded a fresh high above 1,800.
Year to date, the Dow is up 22% and the S&P is up 26%, showing growing investor confidence following a strong results season and a continuation of QE.
Janet Yellen, who is soon expected to take over as the head of the U.S. central bank, mounted a defence of quantitative easing in her first address to Congress last week, giving investors hope loose monetary policy will remain in place to support equity markets for some time to come.
Brazil - The Brazilian Ibovespa index declined the most in seven weeks this week, on speculation Latin America’s largest economy will remain stalled, making stock rallies hard to sustain.
The Ibovespa slid 2.3% at Tuesday’s close in Sao Paulo, the biggest decline sinceSept. 30 and the worst performance among major global benchmarks. Sixty-nine of 72 stocks on the index fell. The real weakened 0.5% to 2.2759 per dollar.
Brazil’s gross domestic product will expand 2.45% this year and next, according to the median forecast of analysts surveyed by Bloomberg. The economy grew 0.9% last year, the worst performance since the 2009 financial crisis.
Trends - New York has overtaken London as the world’s top financial centre, according to a survey of senior financial services executives commissioned by Kinetic Partners, the global professional services firm.
Those surveyed also said they foresaw London’s influence declining further in coming years, with “only a quarter of banking, asset management and hedge funds leaders now thinking that London will still be a contender for the world’s pre-eminent global financial centre in five years’ time,” a summary of the survey’s findings said.
The survey for Kinetic Partners’ 2014 Global Regulatory Outlook report sees the proportion of executives who name London as the leading financial centre drop to 40%, down from 65% in the same survey last year.
Almost half, or 49%, now name New York instead, up from 31% a year ago.
Looking forward, 40% still expect New York to be top of the global financial world in 2018, but just 26% – and only 24% of the 132 chief executives questioned – think the same of London, down from 41% last year, the summary of the survey’s findings noted.
Spotlight on: Un-loved Russia?
Robin Geffen, fund manager & CEO of Neptune Investments (the managers of the underlying asset to MC148 & MC148S2, the HIL Neptune Russia & Greater Russia fund) shares his thoughts on the lack of appreciation for the favourable position that Russia now finds itself in.
At a time of emerging market fragility, Russia stands out for the resilience of its economic framework. In the near term, lower oil prices and tighter monetary conditions have weighed on Russia’s economic activity, but as global interest rates begin to recover alongside improving global economic growth, countries with demands on foreign capital in the form of current account deficits will be vulnerable. Russia has one of the larger current account surpluses within emerging markets and a debt to GDP ratio of just 11% – compared to 60% in 2000 – and is far less dependent on foreign capital. This, along with a more stable foreign exchange landscape and a target of decreasing inflation year-on-year, is creating a stable savings and investment platform which we believe will significantly benefit the equity market.
Indeed, policymakers have been addressing the systemic weaknesses that were exposed in the global financial crisis and, as a result, Russia’s resilience to external shocks has improved dramatically. These reforms, however, have been significantly underappreciated by market participants: whilst there has been a significant reduction in systematic risk, the market’s valuation suggests precisely the opposite.
Following the MSCI Russia Index’s 76% increase in dividends in 2012, the market now offers an attractive 4% yield. The driving force behind this increase in dividends has been the government itself, which last year gave the final approval to legislation requiring state-owned entities (SOEs) to pay out 25% of their net income to shareholders. This measure affects a large number of Russia’s blue-chip stocks, ranging from energy-sector heavyweights such as Gazprom and Rosneft to consumer-facing companies that include the national airline carrier Aeroflot and telecommunications provider Rostelecom.
Moreover, these higher payouts have not been confined to state companies and have catalysed a response in the private sector too. Companies are deeply concerned with their own low valuations and are determined to remain competitive with their state-run peers. A good example of this is Lukoil, the largest private oil producer in Russia. Management at Lukoil has engaged very actively with the investment community and has listened to the demands of its shareholders. Having never cut its dividend, Lukoil has committed to grow its dividend by at least 15% annually. We consider these strong cash returns to shareholders to be an increasingly compelling argument to invest in Russia at these historically low valuation levels.
Improving business environment
To quantify progress, the government has targeted moving from 122nd in the World Bank Doing Business Index in 2010 to 20th by 2020. Progress so far has been impressive, with Russia rising to 92nd in the recently announced 2014 report. The main focus is on speeding the process of starting a business, simplifying doing business and making it cheaper to operate businesses. Improvements include shortening the number of days to receive a construction permit, reducing the number of hours to complete tax returns, and cutting the time taken to pass goods through customs, among many others. These policies provide a very supportive backdrop to investing in Russia and will be key to improving sentiment and unlocking value.
Fixed asset investment
With the 2014 Winter Olympics in Sochi just one of many ongoing infrastructure projects, capital investment is becoming a burgeoning investment theme. In 2012, Russia’s investment-to-GDP ratio stood at 22%, a ratio the government is aiming to raise to 27% by 2018. The key levers behind this will be a growing savings base, issuing infrastructure bonds and the development of public-private partnerships, all things the government is actively pursuing.
In particular, the government’s target of increasing fixed asset investment provides significant opportunities for industrial stocks with exposure to priority areas. One of these areas is transportation infrastructure, which is consistently increasing its share of total fixed asset investment spending. For example, the Federal Target Programme (FTP) spend on the rail system is expected to reach RUB300bn by 2014, up from just over RUB200bn in 2011.
Neptune Russia & Greater Russia Fund
The Fund is exposed to three key themes: rising consumer spending, energy and infrastructure spend.
Rising consumer spending power has been a long-held theme of ours in Russia. We continue to favour consumer staples, where strong top-line growth is now being complemented by rising gross margins. There remains significant scope to increase margins through greater scale as retail penetration continues to rise and the market consolidates. For example, we have seen a significant gross margin improvement across the sub-sector in the past 24 months as increasing scale is providing better purchasing terms with suppliers. Furthermore, food retail sales continue to grow at high single digit levels despite historically low inflation. We also continue to access the consumer theme through the financials, consumer discretionary and information technology sectors.
We also maintain significant exposure, albeit a large underweight relative to the Index, in the energy sector. Russian oil companies continue to have the lowest ‘lift’ costs in the world, extracting oil at much lower costs than their competitors. They are therefore well-placed to outperform, even if the oil price does drift lower, whilst benefiting from growing dividends.
The third sector that we have strong conviction in is industrials, which we expect to benefit from increasing investment into infrastructure and logistics.
Looking forward, we remain positive on Russia. We consider the market to be very attractively valued and the scale of its discount wholly unjustified. Reflecting this outlook, the Fund remains fully invested in its favoured sectors and is well-positioned to take advantage of this investment opportunity.
In our opinion, reforms that have been undertaken in Russia have been underappreciated by the market. We believe that there has been a significant reduction in systemic risk, whilst the market has suggested precisely the opposite. Consequently, we believe that the Russian market has significant re-rating potential and that when investor sentiment begins to improve there is enormous value to be unlocked. The Neptune Russia & Greater Russia Fund remains very well positioned to capture this value through our focus on high growth consumer-facing sectors and companies that provide strong cash returns to shareholders.

Friday, November 8, 2013

Economic Summary for the week ended 8th Nov 2013

China - China's service sector grew at its fastest pace in a year in October, the latest sign of a recovery in the world's second-largest economy.
The non-manufacturing Purchasing Managers' Index (PMI) rose to 56.3 in October from 55.4 in September. The report comes just days after data showed that China's manufacturing PMI also rose to an 18-month high in October.
China's service sector, which includes construction and aviation, accounts for nearly 43% of its overall economy. The PMI is a key gauge of the sector's health and a reading above 50 indicates expansion.
"The non-manufacturing sector should continue to develop at a stable rate over the next few months, though there still needs to be more market training and promotion to further release the service sector's potential," said Cai Jin, vice-president of the China Federation of Logistics and Purchasing.
U.S. - The Dow Jones Industrial Average closed at a record high on Wednesday.
The index was helped by a 4% gain for shares in Microsoft, which rose following a report that the company has narrowed its search for a new chief executive.
Overall the Dow Jones Industrial Average closed 128 points or 0.8% higher at 15,746. The S&P 500 closed 0.4% higher at 1,770 - just one point short of its record.
"The markets are going to slowly drift up higher, unless there is something to keep it from happening," said Randy Frederick, from stock broker Charles Schwab.
Traders are also betting that the US Federal Reserve (the Fed) is unlikely to end its stimulus programme in the near future. Currently it is pumping $85bn into the economy every month by buying government bonds, which is helping to keep interest rates extremely low.
Late on Tuesday the president of the San Francisco Federal Reserve Bank said the Fed should wait for more solid evidence of economic growth before phasing out that effort.
"What's seeping into the market is the increasing likelihood [the Fed] will keep zero percent interest rates for 18 months longer than they had signalled previously," said Steven Einhorn from the hedge fund Omega Advisors.
Industries - One-fifth of the world’s biggest banks may be broken up or sold as part of a “radical course correction” to boost shareholder returns, according to McKinsey& Co.
The number of global universal banks may drop to fewer than 10 from about 25 as they narrow their focus on products or regions, the consulting firm said in an annual review of the industry this week. Ninety global lenders are generating higher returns by following one of five distinct strategies described by McKinsey, according to the report.
“It’s not as if it can’t be done,” Fritz Nauck, a director at the consulting firm and a co-author of the report, said in an interview. “It’s about how do the other banks get there or how does this consolidation start to bring the overall industry up in terms of performance.”
Global banks’ return on equity climbed to 8.6% in 2012 from 7.9% a year earlier, still below the 10% to 12% average cost of equity, a measure of the minimum return required by shareholders, McKinsey said in the report.
Commodities - Gold held gains after the biggest advance in almost two weeks as investors await reports that may show the U.S. economy lost momentum last quarter and employers added fewer workers, boosting the case for sustained stimulus.
Bullion for immediate delivery was at $1,318.78 an ounce on Thursday, when prices climbed 0.5%, the most since Oct. 24.
Europe - The European Commission has said the European economy has reached a "turning point", but the eurozone will grow less quickly than previously expected. The Commission said there were "signs of hope" that had started to turn into "tangible positive outcomes".
Although in the eurozone, the 18 nations that use the euro, it predicted growth of just 1.1% next year. This is the second downward revision of 2014 eurozone growth this year, after it was cut from 1.4% to 1.2% in May.
Jonathan Loynes, chief European economist at Capital Economics, said the subdued forecasts reflected the "general sluggishness" of the eurozone economy.
Spotlight on: Japanese Equities, from Chris Taylor of Neptune
Chris Taylor, manager of the Neptune Japan Opportunities fund (the underlying asset to the HIL Neptune Japan Opportunities fund, MC133, available in HIL), assesses the outlook for Japan.
Japanese Prime Minister Shinzo Abe’s, and his deputy Taro Aso’s, intentions for Japan are best understood after appreciating their family histories and the fiscal time bomb facing Japan.
Both their families have over 150 years of history in providing both ministers and prime ministers to successive Japanese governments which, combined with the country’s savings being insufficient to fund the burgeoning national debt within five to seven years, means both men see it as their deep-rooted duty to rescue the country from an otherwise inevitable bankruptcy. They also see Japan’s economic resurgence as a prerequisite to re-establishing Japan’s position in the world.
Their recent electoral successes should ensure governmental stability, with Japan having endured 15 prime ministers over the last 25 years. This time Abe has a clear majority in both houses of parliament, strong electoral support and most importantly dominates his own party, the LDP (Liberal Democratic Party). Prior infighting within the LDP was the main cause of the historic prime ministerial turmoil.
The current administration has both the political will as well as the political power to pursue the required dramatic policy shifts. These entail aggressive monetary easing to stimulate loan growth, substantially higher government infrastructure and defence spending to kick-start the economy, and deregulatory measures to make more efficient use of resources such as men, money and materials.
In the short term, this means taking on greater budget deficits and outstanding national debt to finance the recovery which, once it has taken hold, will eventually lead to improved tax receipts that reverse the fiscal deterioration.
Yen weakness: the unintended consequence
The intended doubling of the money supply in two years compared to a relatively static economy should undermine the yen and see it fall substantially, aided by further fiscal deterioration.
The yen’s fall is merely an “unintended consequence of their domestic policies”. Compared to the US, the sum of money involved in easing is greater than all three QE fundings, acting on an economy less than a third of the size and in two years rather than five.
This means the Japanese efforts are over ten times as cash, time and GDP intensive as the US actions. This illustrates the dramatic nature of Abe’s policies to rescue Japan.
The intended yen weakness is crucial to the success of Abe’s policy measures. The currency’s fall would lift the yen value of the overseas derived profits, which would then be repatriated to fund increased full-time employment, higher base wages and renewed capital investment. These in turn will lift domestic GDP and tax receipts.
Currently, 85% of employed Japanese pay no income tax, as well as 35% of the workforce not enjoying full-time employment. The average wage of ¥4m puts most individuals below the tax threshold, which is also why the authorities have become increasingly dependent upon indirect taxes i.e. why the consumption tax is being increased next year. However, the latter’s potential negative economic impact will be offset by equivalent supplementary budget expenditure.
Japanese multinationals
Yen depreciation should not be seen as a ‘competitive’ devaluation, as Japan’s multinationals no longer export all they produce from Japan as they did over 30 years ago when a cheap yen was essential to their success.
They now make and sell substantially more outside of the country than within it. Nissan, for instance, exports only 14% of its entire worldwide production from Japan, while 72% of all its vehicles are already made abroad, so a cheaper yen is of no major benefit. Instead, the impact is translational, lifting only the yen value of its overseas derived earnings.
The adopted 2% inflation target is aimed principally at mobilising Japan’s huge savings pool to be spent and boost the economy via ending the prevailing deflationary mentality through a price hike shock.
Japanese individuals behaved rationally while prices fell by saving and putting off purchases, which helped raised their potential spending power but shrank the economy.
Now they will have to deploy these savings or see their spending power whittled away by inflation. Their resultant likely sale of Japanese government bonds (JGBs) will be absorbed by the Bank of Japan’s annual quantitative easing (QE) program of ¥50trn ($500bn equivalent), which is roughly half the size of QE 3 in the US but acting on an economy a third the size, so 50% more aggressive.
In practice, expenditure to-date has averaged almost ¥70trn and has peaked at over ¥90trn, so greatly larger than the US’s QE 3 maximum purchases.
Japan version 2.0
In summary, Shinzo Abe’s polices are not aimed at political reform or an ‘old versus new Japan’ environment. It is largely about rejuvenating the country by improving the way it operates.
Japan version 1.0 worked well from the 1950s to the 1980s but then become obsolete. Abe’s ‘reboot’, or Japan version 2.0, involves pursuing quick, aggressive and very substantial policy changes to avoid the otherwise inevitable national bankruptcy i.e. Japan version 0.0.

Thursday, October 31, 2013

Economic Summary for the week ended 31st Oct 2013

U.S. - US shares hit fresh all-time highs on Tuesday, ahead of the conclusion of a Federal Reserve meeting that is expected to see economic stimulus measures maintained.
On Wall Street the Dow Jones closed up 111 points at 15,680 - beating the previous high set in September.
The Nasdaq was up 12 points at 3,952, just short of its March 2000 record.
The S&P 500 closed at a fresh high of 1,772, after gaining almost 10 points in the day's trading.
US traders broadly expect the US Fed to keep its programme of quantitative easing in place for several more months, and analysts say the economic indicators support that view.
The level of support provided to the economy by the Fed has become a significant factor in market sentiment in recent months.
Any sign that the economic recovery is stumbling is taken as an indication that stimulus measures will be kept in place, and will not be gradually tapered.
"The Fed has been pretty clear about making decisions dependant on data and the data the Fed has received since the last meeting have certainly not been upbeat," said Art Hogan, head of product strategy equity research at Lazard Capital Markets.
India - The new governor of the Reserve Bank of India, Raghuram Rajan, told the BBC in his first international interview that India has enough foreign-exchange reserves to safeguard against a repeat of the 1991 balance of payments crisis.
Mr Rajan said that India has enough money to pay for all of its short-term debts tomorrow if it needed to, as it has reserves that are equal to 15% of GDP. This is a key difference from two decades ago when the country was rescued by the IMF.
He said that a country with $280bn (£175bn) in reserves can finance itself, and points out that India's external debt is about 22% of GDP. He said that very few countries with such low level of debt has had an external crisis. Mr Rajan was also adamant about anyone who suggests that India should seek IMF assistance should know that there will be "no IMF, it's not going to happen". And that India is a creditor to the IMF.
Emerging Markets - Emerging market equity funds are taking “inordinate risks” by tilting their portfolios towards popular growth sectors and ignoring other parts of the market, Bank of America Merrill Lynch warns.
A note by the group argues that emerging market funds are “egregiously overweight” sectors such as consumer, internet and telecoms stocks while being “exceptionally underweight” in the state capitalist space.
FE Analytics shows the average fund in the IMA Global Emerging Markets sector has 22.1 per cent of its portfolio in consumer goods names, with another 20.5 per cent in telecoms, media and technology stocks.
BofA ML’s The GEMs Inquirer report says: “We think that prudent risk management demands recognising the substantial risks of this concentrated positioning in the emerging markets and to hedge the risks, or close this stretched position.
“In our view, while buying unpopular, undervalued stocks (mainly in the state capitalist sector) entails significant discomfort, continued overweighting of expensive growth stocks increasingly risks years of possible future underperformance.”
Spain - Spain has seen its first quarterly economic growth since 2011, according to data from the country's National Statistics agency INE.
The country's GDP grew 0.1% in the July-to-September period, after contracting for the previous nine quarters.
Its growth confirmed last week's estimates from the Bank of Spain.
Spain was one of the countries worst hit by the global economic crisis, with street riots and soaring unemployment. The statistics mean Spain is officially out of recession.
The INE said an increasing number of exports supported the growth, with a boost to the tourist industry from holidaymakers avoiding northern Africa and the Middle East.
Commodities - Gold advanced for the first time in three days as the smallest gain in U.S inflation in five months bolstered expectations that Federal Reserve policy makers meeting today will delay curbing stimulus measures.
Consumer prices increased 1.2 percent in the 12 months through September, the lowest since April, a government report showed today.
Gold has fallen 19 percent in 2013, while global equities advanced 18 percent, reaching the highest since 2008 today. BlackRock Inc. Chief Executive Officer Laurence D. Fink said yesterday that it’s imperative that the Fed begins trimming stimulus as the policy is contributing to “bubble-like markets.”
Spotlight on: Mexican investment themes in LatAm
Investors have been steering clear of Latin America as Brazil - once the region's engine of growth - is struggling with high inflation and falling GDP. But following reforms to the energy sector, Mexico could be a bright spot in the region, said BlackRock's Will Landers.
Finding someone bullish on investing in Latin America today seems to be a difficult task. Making the case for a continuation of a bear market in the region is relatively straight forward, based on the fact that the region’s biggest market, Brazil, continues to underperform global markets and its officials have failed to guide the country back to growth.
In addition, the second largest market in the region, Mexico, boasts some of the highest valuations one can find in the world, and the Andean markets offer a combination of high valuations and low liquidity. Mexico benefits from its proximity to the US and its ability to gain share in the manufactured import market given the competitiveness of Mexico's labour costs compared to China.
The pending energy reform recently proposed by President Peña Nieto's team has the potential to transform Mexico's energy sector into a major global player once again, reducing Mexico's dependency on imported sources of energy and increasing the investment rate in the country. Trading at 16x next year's earnings, it is not a cheap equity market, but one that should continue to be favoured by investors if it can deliver on its reform agenda.
The reality is that the reasons for investing in Latin America in the past are still very true today. The region’s demographics continue to rank among the most attractive in the world, with over 50% of the population being less than 30 years old.
In addition, years of keeping inflation under control, combined with better employment opportunities has expanded the middle classes in Brazil, Chile and Colombia, as well as in Peru and in Mexico albeit at a slower growth rate. This new consumer class is changing the economic dependencies from many of these economies, reducing the impact of global trade and increasing the importance of domestic growth.
Brazil boasts the enviable combination of 40 million new domestic consumers having entered the middle class over the last decade with one of the most attractive forward P/Es in the world, currently trading at close to 9x 2014 expected earnings.
The country has seen its equity market transformed by stricter minority shareholder protection rules, significant increase in the participation of small and mid-cap stocks and a strong entrepreneurial spirit that has allowed companies to succeed regardless of the economic climate.
The Andean region – Chile, Colombia and Peru – offers a combination of commodity growth in copper (Peru and Chile) and oil (Colombia) with significant investments in domestic infrastructure – especially Peru, but also Colombia.
Chile has been a quasi-developed market for a while, but the improvements in security in Colombia have returned that country to investors’ radars, both financial as well as strategic, while Peru continues to lead the region in terms of growth rates. In addition, intra-regional investments are creating multinational corporations with greater growth potential.

Thursday, October 10, 2013

Economic Summary for the week ended 10th Oct 2013

Global - The International Monetary Fund (IMF) has revised its forecast for global economic growth. It now expects global growth of 2.9% this year, a cut of 0.3% from July's estimate. In 2014 it expects global growth of 3.6%, down 0.2%.
It cited weakness in emerging economies for the cut.
Despite the improvement in growth in advanced economies such as the UK and U.S., the IMF warned that a slower pace of expansion in emerging economies such as Brazil, China and India, was holding back global expansion.
It expects growth in Russia, China, India and Mexico to be slower than it forecast in July.
In part, it says this is due to expectations of a change in policy by the U.S. central bank, the Federal Reserve. Simply the expectation that the U.S. could trim back its efforts to stimulate the U.S. economy has already had an impact on interest rates in emerging economies, the IMF said.
The IMF expects the U.S. to drive global growth.
But it warns that the political standoff over raising the U.S. government's borrowing limit, if it results in the U.S. defaulting on its debt payments, "could seriously damage the global economy".
Japan - Japan's aggressive policies aimed at reviving its economy may take 10 years to have a full impact, Akira Amari, Japan's minister in charge of economic revitalisation, has said.
Known as ‘Abenomics’, these include easing monetary policy, boosting stimulus and reforming key sectors. Some of these steps have already been introduced and have boosted growth.
But he warned that whilst it is easy to implement monetary stimulus measures, scaling them back can be tricky.
He told the BBC that Japan's central bank was likely to "learn from the experiences" of the U.S. Federal Reserve, which is widely expected to reduce its key stimulus programme in the coming months.
"The Fed Chairman, Ben Bernanke, is experimenting with it," Mr Amari said. "That's why one word from him can move stocks and currencies."
U.S. - There were signs of tentative progress on the U.S. fiscal deadlock on Wednesday as President Obama indicated he would accept a short-term increase in the nation's borrowing authority to avert a default.
According to Reuters, Obama's press secretary, Jay Carney, told reporters the President would be willing to accept a short-term debt ceiling increase in order to get past the potential crisis date of 17 Octoberwhen the government hits the $16.7trn borrowing limit.
Carney said while the White House would prefer to raise the ceiling longer term, at least for a year, he added "we have never stated and we are not saying today that the debt ceiling ought to be or can be any particular length of time."
A short-term increase would give Republicans and Democrats some breathing room, but by itself would not address the underlying issues preventing an agreement.
Meanwhile, China has critcised the "pitiful" and self-inflicted political deadlock in America over raising the country's borrowing limit, as premier Li Keqiang added his voice to concerns that the world’s biggest economy could default on its debt.
Mr Li told John Kerry, U.S. secretary of state, that China was paying “great attention” to the issue of raising America's $16.7 trillion debt ceiling.
China is the largest foreign owner of U.S. debt, holding more than $1.277 trillion in Treasury bills.
Emerging Markets - The capital outflows endured by the world’s developing economies are set to continue, as should interest rate hikes unless they can substantially bolster their fundamentals says Invesco chief economist John Greenwood.
Since the U.S. Federal Reserve first signalled an end to its massive $85bn per month bond buying programme, in May, emerging markets have suffered a significant market sell-offs and substantial capital outflows.
The knock on impact on fund performance has also been significant, where the average IMA Global Emerging Markets portfolio has shed 5% in the past six months alone while in comparison, the typical Global equity fund has risen by more than 3%.
Greenwood says: “The withdrawal of funds from emerging markets is likely to continue, as should countervailing policy measures such as interest rate hikes and currency interventions by EM authorities.”
Among the biggest emerging markets, including China, India and Brazil, growth has pulled back and the policy-makers are struggling to ensure smooth transitions to domestic-led growth models.
Commodities - Gold will extend losses into 2014 amid expectations the Federal Reserve will pare stimulus as the U.S. recovers, according to Morgan Stanley, adding to bearish calls from Goldman Sachs and Credit Suisse.
“We recommend staying away from gold at this point in the cycle,” Melbourne-based analyst Joel Crane said. Bullion will average $1,313 an ounce in 2014, down from the $1,420 forecast for this year, Morgan Stanley said in its quarterly metals report published this week.
Bullion is heading for the sixth weekly loss in seven and investment holdings are shrinking even as U.S. lawmakers wrangle over the debt ceiling and budget, seeking to avert a default and end a government shutdown. Gold is a “slam dunk” sell for next year because the U.S. will extend the recovery after lawmakers resolve the stalemate, Jeffrey Currie, Goldman’s head of commodities research, said this week.
Spotlight on: An alternative take on the U.S. debt issue
Multi-managers believe the political stalemate in the U.S. could be a prime opportunity to buy more risk assets, although there is concern about the looming debt ceiling.
Last week, for the first time in 17 years, the U.S. government partially closed down after the Republicans refused to agree spending plans that included President Obama’s affordable health care scheme, despite the reforms already being signed into law. If Congress does not agree its budget soon, it will run out of money on 17 October unless its debt ceiling is raised.
JP Morgan Asset Management Fusion fund range lead manager Tony Lanning notes suggestions which estimate that for each week the government is closed, 0.12% of economic quarterly annualised growth is lost.
Lanning says: “The debt ceiling and the impact of the shutdown could provide a meaningful opportunity to add more risk to our portfolios. So far markets have taken these events broadly in their stride.”
Fidelity Multi Asset Defensive fund manager Trevor Greetham remains bullish and believes when the smoke clears, investors will see an “equity-friendly backdrop.” He adds: “Any stock market weakness should present a buying opportunity.”
However Lanning views markets as being very complacent in regards to the debt ceiling. He says: “It seems to imply that investors have concluded that the ceiling will have to be raised, which it has been many times before.
”But were it not, several ratings agencies have said they will determine the U.S. is in default if it misses even one interest payment. The market has not priced this in.
Hargreaves Lansdown senior investment manager Adrian Lowcock says: “This does not look like a selling trigger. Investors should focus on their long-term goals and use any short term weakness as opportunities to invest.”
Meanwhile, it is the view of Fitch Ratings that global bonds, global equities and multi-asset funds will perform well in 2014 while other asset classes may suffer.
The ratings agency indicates improving investor confidence and an increasingly solid macro-economic background will support growth, but changing investor demand and intense market competition will cause uneven growth.
While global funds are set to perform well, domestic equities and government bonds could struggle due to changing investor demand. Fitch Ratings Fund and Asset Manager Rating Group director Alastair Sewell says: “AUM in traditional asset classes such as domestic equities or government bonds are threatened by changing investor allocations.
”In particular, managers that have large AUM in government bonds or aggregate portfolios would suffer from rising interest rates.” Fitch also points to the fact that half of European managers saw no inflows in the first three years to end of July 2013, while the top 10 firms received 50% inflows to bonds and mixed asset funds and 75% of inflows into equity funds.

Friday, September 20, 2013

Economic Summary for the week ended 19th Sep 2013

Global - Global stocks jumped to a five-year high on Thursday, while bonds and metals rallied after the Federal Reserve unexpectedly refrained from reducing U.S. monetary stimulus. The Malaysian ringgit strengthened the most since 1998.
The MSCI All Country World Index climbed 1.2%, set for the highest close since May 2008, as Asia’s benchmark index gained 2.4% and the Stoxx Europe 600 rose 1%. Standard & Poor’s 500 Index futures added 0.2%.
Many investors had speculated that the Federal Reserve would begin reducing its $85bn bond-buying plan this month. But in a statement released after its two-day policy meeting, the Fed said there was no fixed timetable for it to begin scaling back, or "tapering", its stimulus.
The central bank said it was taking a more cautious stance because of an "elevated" unemployment rate and concerns about the U.S. economic recovery. "The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," it said.
The Fed also cut its forecast for growth this year to between 2.0% and 2.3%. That compares to a June estimate of between 2.3% and 2.6%.
Japan - Japan’s exports rose the most since 2010 in August, boosting Prime Minister Shinzo Abe’s growth drive even as rising energy costs extended the streak of trade deficits to the longest since 1980.
Exports rose 14.7% from a year earlier, the sixth straight advance, a Finance Ministry report showed in Tokyo.
A surge in exports to the U.S., along with a rebound in shipments to China in the wake of bilateral tensions last year, are offering momentum to Japan as it prepares for the first sales-tax increase since 1997. Rising competitiveness from the yen’s 20% drop against the dollar in the past year also has helped manufacturers including Panasonic Corp. as they cope with higher energy costs with the nation’s nuclear industry shuttered.
“We are finally seeing a clear recovery in exports, led by a weak yen and a moderate global recovery,” said Takeshi Minami, chief economist at the Norinchukin Research Institute in Tokyo.
India - India has seen its growth forecast dramatically reduced to 5.3 % for the current fiscal year by the prime minister’s economic advisory panel, says Reuters.
GDP has been brought down to 5.3% from an original estimate of 6.4%. The lower estimate is closer to figures from India’s central bank and economists who have already predicted 5% GDP growth for the fiscal year.
The panel’s revised figure remains higher than GDP growth than the 5% witnessed over the fiscal year 2012/13.
India’s economy has battled decade-low growth along with a record current account deficit and a steep fiscal shortfall already this year, according to Reuters.
The prime minister’s economic advisory council has also warned that keeping India’s fiscal deficit within the budgeted target of 4.8% of GDP could prove difficult, while finance minister Palaniappan Chidambaram has stated that the target will not be exceeded.
Europe - The European Central Bank (ECB) is concerned that investors could be spooked by next year’s bank balance-sheet reviews and stress tests unless their results are carefully timed.
As the ECB prepares to take over supervision of all euro-area lenders in 2014, it will begin a three-phased analysis of the institutions coming under its umbrella. As laid out by Executive Board member Yves Mersch last month, the bank will start with a risk review before analyzing banks’ balance sheets and conducting stress tests in collaboration with the London-based European Banking Authority.
Now central bankers are wrestling with how to move through the exercise without releasing conflicting numbers at different times, particularly for banks that aren’t in good health.
Commodities - Gold fluctuated between gains and losses after jumping the most in 15 months following the Federal Reserves’ unexpected decision to reduce the pace of monthly bond purchases.
Gold for immediate delivery rose and fell as much as 0.4% before trading at $1,364.42 an ounce, taking this week’s gain to 2.8%. Prices added 4.1% on Wednesday, the most since June 1, 2012, rebounding after a drop below $1,300 for the first time in six weeks.
Spotlight on: Fund Manager confidence highest in almost 4 years
A net 72% of global investors expect the world economy to pick up over the next 12 months, according to August’s Bank of America Merrill Lynch Fund Manager Survey.
This number shows a “surge” from the 52% of respondents in July and is the highest amount in nearly four years.
More investors are bullish on the eurozone recovery than last month too, with 88% of European fund managers anticipating strengthening in the region by the end of 2013.
BofA Merrill Lynch European investment strategist John Bilton says: “The current earnings season shows global recovery reflected in European companies’ performance. With the eurozone the most undervalued major market by far, optimism on the region’s equities should be sustained.”
Specifically, sentiment towards China has improved within this time, with 32% of investors in August expecting China economic growth to be weaker, compared to the 65% from the previous month.
Sentiment to emerging markets continued to suffer in August, with EM equity exposure falling to its lowest level since November 2001 at 19% underweight.
BofA Merrill Lynch Global Research chief investment strategist Michael Hartnett says: “While global growth expectations have risen very rapidly, the good news is that cash levels remain high. Out-of-favour emerging markets offer some enticing opportunities to deploy these balances.”
In terms of portfolio weightings, the percentage of investors overweight equities crept up to a net 56% in August while those underweight to bonds increased to a net 57%.
In terms of regional weighting, there was a decrease in exposure to Japan equities from 27% in July to 19% in August.
August also saw the third largest overweighting to US equities in ten years, coinciding with 72% of investors favouring the US dollar over a 12-month horizon.
And stocks in the eurozone saw their highest allocation since January 2008, with 17% of asset allocators saying they are overweight to the region, a further 20% said they would overweight the market on a 12-month view.
The month also saw the highest exposure to UK stocks since December 2002, with this being the first overweight reading since February 2003.

Saturday, September 14, 2013

Economic Summary for the week ended 11th Sep 2013

India - The Indian prime minister's economic advisory council has lowered the growth outlook for the current financial year. It now expects the economy to expand by 5.3% this year, down from its earlier projection of 6.4% growth.
The new growth outlook is in line with the projections of the central bank and many other economists.
The council also warned that keeping the fiscal deficit within the budget target of 4.8% of gross domestic product (GDP) "could be a challenge".
In its latest economic outlook, the council said that the fiscal deficit during the first four months of the current financial year had already reached 62.8% of the budgetary provision for the full year.
China - China's economy is going through a "crucial" stage of restructuring, says the country's Premier, Li Keqiang.
At the World Economic Forum in the Chinese port city of Dalian, Mr Li pledged to improve relations with foreign firms. He stressed that multinationals would get "equal treatment" with state-owned enterprises.
He added that China was well-placed to hit a growth target of 7.5% this year, despite a "complex" economic climate.
China posted its lowest growth in two decades for the second quarter of 2013, and there had been some concerns that the world's second-largest economy might be headed for a so-called "hard landing".
However, Mr Li sought to allay those fears by saying the Chinese economy was stable and had strong fundamentals.
Japan - Asian stocks soared this week, led by Japan's Nikkei, as investor confidence was boosted by Tokyo winning the race to host the 2020 Olympics.
Sentiment was also helped by an upwards revision to Q2 GDP for the Japanese economy. The annualised estimate was revised up to 3.8%, compared to an expected figure of 2.6%.
The Nikkei index has jumped 2.4% on the positive news and the broader Topix is up 2.1% while the yen has slid against the dollar to 99.7.
According to Japan's Prime Minster Shinzo Abe, the Olympics will spur construction and help beat deflation, delivering stronger economic growth.
U.S. - An anticipated reduction in stimulus by the Federal Reserve that has roiled the financial markets for months will be seen as “no big deal” if it goes ahead next week, according to a Bloomberg Global Poll of investors.
57% of those surveyed say they don’t expect a sudden change in the markets because investors already anticipate tapering action by the U.S. central bank. 8% see a rally on such news, while just under a third are looking for declines.
“A taper-lite seems priced in” by the markets, Greg Lesko, managing director at New York-based Deltec Asset Management LLC, said, referring to what he says will be a small reduction in stimulus by the Fed.
Opinions - The largest developing nations for the first time have the worst market opportunities as optimism for stronger growth shifts to the U.S. and Europe, according to a Bloomberg Global Poll.
India fared the poorest, followed by Brazil, Russia and China, a worldwide poll of investors, analysts and traders who are Bloomberg subscribers showed this week.
“The BRICs will always be playing second fiddle to the developed economies,” said survey respondent Ben Kelly, an analyst at Louis Capital Markets in London. “The pro-growth monetary policy of the U.S. allowed emerging countries to thrive due to very low or negative real rates,” he said, referring to borrowing costs adjusted for inflation.
Now that the U.S. and “to a certain extent Europe are beginning to stabilize, maybe part of this trade may unwind and we have seen that already in the bond markets,” Kelly said.
Commodities - As concerns over the Syria crisis persist, oil and gold prices have risen, prompting investors to look at commodities as “the only contrarian play left in the market”.
WTI Crude oil is currently trading at $108.5 per barrel and Brent has shot up to $115.6, while gold topped the $1,400 mark last week to enter a new bull market.
The Thomson Reuters/Jefferies CRB Commodity index has climbed more than 6% from its June trough, up from 275.6 on 28 June to 292.7 on 3 September.
Flows data from BofA Merrill Lynch shows investors have begun cautiously returning to commodities in the two weeks to 28 August, after 27 straight weeks of redemptions.
Spotlight on: Post-holiday allocations
The British summer months are traditionally a quiet time for the financial world. This year was no exception, with markets gently going nowhere throughout August, in spite of a raft of stronger economic news.
Commentators variously blamed concerns in Syria or the prospect of the end of quantitative easing but it was only as investors returned from their holidays towards the end of the month that markets gathered any meaningful direction.
The most significant trend was a wholesale move out of emerging markets. This was less a move out of risk assets (European equity fared well, for example) and more a clear move away from the developing economies as investors started to fret about their long-term growth prospects and, more importantly, their currencies.
The prospect of monetary tightening in the West has seen currency traders driving money towards developed markets in expectations of higher rates. This has hit currencies such as those of Brazil, India and Indonesia, particularly hard.
This was reflected in outflows from emerging market equity funds, which, in the last week of August, reached almost $4bn, according to data from EPFR Global.This was more than double the outflows for the previous week of $1.7bn. Emerging market debt was similarly unpopular, with $2bn exiting the sector in the last week of August, on the back of $1.3bn the week before.
Manager views
Expert investors tend to be moving in the opposite direction to the wider market in terms of emerging market exposure. For example, Tim Wilson, manager of the Newton Managed Income fund, said he expects developing markets to be the major beneficiary of improved economic data in the West.
“They boast relatively low levels of debt, export-orientated economies and strong growth rates in comparison to their more developed peers, even if growth is currently subdued on a historic basis,” he said.
Stephen Thornber, manager of the Threadneedle Global Equity Income fund, goes one step further, maintaining an overweight to the unpopular Asian region. He is attracted by the region’s “fantastic growth”. That said, his exposure is in more defensive sectors, such as telecoms or utilities, in countries like Malaysia and Thailand, which have high population growth.
Meanwhile, the prospect of higher interest rates continue to trouble many expert investors or, at the very least, they are still avoiding conventional fixed income.
Tom Beckett, chief investment officer at Psigma, dipped a toe back into conventional government bonds for the first time since 2011, having bought some US treasuries on the basis that bonds had fallen “too far, too quickly”. However, he remains an exception.
Meena Lakshmanan, co-head of Investment Solutions, said: “There may be a bond rally if something goes wrong, such as an escalation in the Syrian crisis, but given where the US economy is, the downside on bonds still looks significantly greater than the upside. We remain less worried about default risk, so we are focusing our fixed income exposure on credit and floating rate areas.”
For Gary Potter, co-head of multi-manager at F&C Investments, the climate is still right for risk assets.
“The world is undergoing a marginal improvement in its prospects. Things are definitely off the bottom,” he said.
“We like the coupon in some bonds but most of the value has already been realised. That said, we have tempered our equity overweight as the market has edged near 6,600 because there are still a number of issues. We have been using any weakness to top up, rather than taking profits on the dips.”
The market has rallied in the early days of September and it should shortly become clear whether investors have returned from their holidays in a bullish mood. The possible military intervention in Syria and the end to quantitative easing are likely to continue to dampen spirits, however.

Tuesday, September 10, 2013

Economic Summary for the week ended 7th Sep 2013

Rising Demand Adds to Evidence World Growth is Picking Up – Euro zone businesses had their best month in over two years in August as orders increased for the first time since mid-2011 while growth in China's services sector hit a five-month high, underpinned by new orders and business optimism. Pockets of weakness remain across the world, however. Dataon Wednesday showed Indian services activity shrank in August at its quickest pace since the depths of the global financial crisis. Italian services also contracted more than expected and the downturn continued in France. "The advanced economies have clearly picked up, China is the exception among the major emerging economies but the other emerging economies are still struggling and India in particular," said Andrew Kenningham, senior global economist at Capital Economics.
Emerging economies are particularly vulnerable to a tightening of United States monetary policy, the International Monetary Fund warned in a note prepared for the Group of 20 meeting in St. Petersburg this week. Markets are preparing for the Federal Reserve to begin slowing down its huge bond-buying program this month as the US recovery remains on track.
The US Institute of Supply Management is due to publish its PMI for US services on Thursday and a Reuters poll predicted a dip to 55.0 from July's 56.0. A sister survey on Tuesdaycovering factories showed a surprise upturn. Markit's Eurozone Composite Purchasing Managers Index (PMI) rose to 51.5 last month from 50.5 in July, its highest reading since June 2011. The headline figure was revised down a touch from a preliminary reading of 51.7. Anything over 50 indicates expansion.
But there are still major differences between Europe's two most important economies. The composite PMI for Germany, the euro zone's largest, jumped to a seven-month high of 53.5, but the French PMI dipped to 48.8 from 49.1. Across the channel, a rush of new business last month drove the fastest growth in Britain's services sector for more than six years, challenging the Bank of England's cautious outlook for the economy. It's services PMI beat forecasts with a rise to 60.5.
Led by firm US growth, the outlook is gradually improving for advanced economies and even crisis-weary Europe is at last joining the recovery, the OECD said on Tuesday, but warned a slowdown in many emerging economies meant global growth would remain sluggish.
The Chinese Markit/HSBC Services Purchasing Managers' Index (PMI) climbed to 52.8 in August after seasonal adjustments, up from July's 51.3 and the highest since March. Qu Hongbin, an HSBC economist, cited new business growth as the key driver of the PMI and expected the momentum to be sustained. "A rebound in manufacturing output is expected to support service industry growth in the coming months," Qu said.
Any improvement will cheer investors as fears of a sharp slowdown in the world's second largest economy had kept markets in check but the good news will be tempered by a slowdown in India, Asia's third largest economy. Having fallen below the 50-mark in July for the first time in nearly two years India's services PMI slipped further last month and with a survey of factories published on Monday showing activity shrank for the first time since early 2009, the picture is grim.India's economic growth has almost halved in the past two years and the economy grew 4.4 percent in April-June, its slowest quarterly growth rate since early 2009. The weak run is set to continue with macroeconomic uncertainty and tighter financial conditions weighing on growth," said Leif Eskesen, HSBC's chief India economist.
Emerging Nations Save USD 2.9 Trillion Reserves in Rout - Developing nations from Brazil to India are preserving a record USD 2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.
After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.
“If fundamentals are going against you, it’s not credible to defend a currency level - investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.
Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to USD 2.9 trillion as of 28 August, from USD 2.95 trillion on 31 Decemberand an all-time high of USD 2.97 trillion in May,. The holdings increased from USD 722 billion in 2002. The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds USD 3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.
Spotlight On: Indonesia Loses its Allure as Prices Chill Buyouts
Indonesia has lost much of its allure for private equity as steep valuations restrain buyouts in a country that two years ago was, in the words of one investor, “probably the sexiest destination in the emerging markets.”
International private-equity firms have acquired stakes in four Indonesian companies this year, down from 10 in 2011 and seven last year, according to data compiled by Bloomberg and the Asian Venture Capital Journal. Total transaction values fell from USD 649 million for the nine deals in 2011 where terms were disclosed to USD 324 million for the six deals last year for which prices were available, the data show.
Deals have fallen precipitously this year, to USD 87 million for three of the four announced deals. “Expectations have been high over the past two years for private-equity deal making in Indonesia,” said Nicholas Bloy, Kuala Lumpur-based managing partner at Navis Capital Partners Ltd., which oversees USD 3 billion in public and private equities in Asia. “But many players in the industry had a sobering reality check and now need to be more realistic in their return expectations, as they are facing inflated valuations by sellers.”
Even after its 22 percent decline from its all-time high on May 20, the Jakarta Composite Index (JCI) has surged 75 percent over the past four years, compared with a 11 percent increase in the MSCI Emerging Markets Index. The companies in the Jakarta index are trading at 17 times earnings, compared with 11 times earnings for companies in the MSCI Emerging Markets Index, according to data compiled by Bloomberg. “Value expectations have been at record highs,” Bloy said. “Cautious investors are looking at valuations in a different way than bullish entrepreneurs.”
In addition to valuations, deal making is being chilled by shifting government regulations, which complicate market assumptions for acquirers, and competition from strategic buyers.
Growth in private equity in Indonesia has turned out to be “lumpy” rather than “a straight line,” said Juan Delgado-Moreira, a Hong Kong-based managing director at Hamilton Lane Advisors LLC, which invests in private equity. “There is a bid-ask gap to bridge” because of high prices in the stock market, “which some would say is overheated” despite the recent drop, he said. Delgado in January 2012 had said that “Indonesia is probably the sexiest destination in the emerging markets now,” calling it “one of the key long-term investment destinations in Asia.”
Large global private-equity firms this year have been selling more than buying. Deals in Indonesia have failed because of unrealistically high valuation expectations by sellers. One consumer company seeking a valuation at 12 to 14 times earnings before interest, taxes, depreciation and amortization for a private-equity stake should have been priced around eight times Ebitda based on comparable public companies, according to Navis Capital’s Bloy. “When you have a slight divergence you can adjust, but here you can’t bridge the gap,” Bloy said. “Someone has to give.”
If the selloff in share prices as well as Indonesia’s rupiah continues, it may improve opportunities for private-equity investors, according to Sebastien Lamy, a Singapore-based partner at management consultancy Bain & Co.
The rupiah has plunged 13 percent this year to the weakest level in four years, making it the worst performer among Southeast Asia’s currencies, according to data compiled by Bloomberg. “If the stock-market adjustment lasts, it will also have an impact on private-equity valuations, and those lower valuations would mean that private equity deploys more capital in the country,” Lamy said. “A lasting devaluation of the rupiah will have the same effect.”
High asking prices have also been bolstered by the prospect of increasing economic expansion. Growth rates in Indonesia, Southeast Asia’s largest economy and home to 249 million people, are forecast to increase from 5.8 percent this year to 6.4 percent in 2015, according to the median forecast of 24 economists surveyed by Bloomberg. That’s higher than projections for neighboring Malaysia and about double the growth expected for the global economy.
Economic growth of about 6 percent a year would mean Indonesia’s economy will surpass Germany and the U.K. in size by 2030, according to a report last year by consulting firm McKinsey & Co. By 2020, the number of middle-class and affluent Indonesians may double to more than 141 million, Boston Consulting Group said in a March report. That’s greater than the population of Japan, and almost that of Russia.