Monday, August 19, 2013

Economic Summary for the week ended 17th August 2013

Productivity in U.S. Rises Above Forecast as Output Grows - The productivity of U.S. workers rose more than projected in the second quarter as the world’s largest economy expanded.The measure of employee output per hour increased at a 0.9% annualised rate, after a 1.7% decline in the prior three months, a Labor Department report showed today in Washington. Expenses per worker rose at a 1.4% rate, greater than estimated.
Even with the second-quarter pickup, productivity was unchanged in the 12 months ended in June, below the average 2.4% annual gain in the 2000-2011 period, the report showed. Businesses are reaching the limit of how much efficiency they can squeeze from their existing staff, a sign they may take on more workers once they see faster sales.
“Productivity is growing at an extremely slow pace,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, who projected a 0.8% increase. “We’re in an environment where businesses are finding it very difficult to eke out more from the labour they employ. We could see more hiring, but the bad news is, if you’re a worker, you’re seeing your pay cheque barely go up.”
Hong Kong Raises 2013 Growth Outlook on Second Quarter Spurt - Hong Kong’s economy expanded more than estimated in the second quarter on consumer spending and investment, prompting the government to raise its forecast for the full-year expansion. Gross domestic product rose 0.8% in the April-June period from the previous three months after a 0.2% gain in the first quarter, the government said on Friday.
A strengthening economy may aid Hong Kong Chief Executive Leung Chun-ying, whose popularity dropped in July to the lowest since he took office amid allegations of wrongdoing by members of his administration and calls for electoral reform. The government said that growth this year will be between 2.5% and 3.5%, after in May estimating a gain of between 1.5% in 3.5%.
“The risk is still pretty much the external environment and that includes the Chinese economy, because Hong Kong depends on them in terms of exports of goods and services,” Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong, said before the release. “Hong Kong will do better because we’re looking for a continued recovery in the U.S. economy and the bottoming out in the Chinese economy.”
The economy expanded 3.3% from a year earlier in the second quarter, the government said, from a revised 2.9% pace in the first three months.
Indian Rupee falls to Record Low Against US Dollar – The Indian rupee has hit a record low against the dollar despite recent efforts to prop-up the currency. On Wednesday India's central bank put further restrictions on the amount of money that companies and individuals can send out of the country. That had little impact and the rupee fell to 62.03 to the dollar, below its previous low of 61.80 hit on 6 August.
Overseas investors have been pulling money out of Indian shares and debt on concerns over the economy. According to official data, international investors have withdrawn USD 11.58bn in shares and debt from India's markets since the beginning of June. India's economy had been growing at a fast clip, reaching annual growth of 9%. In recent months, it has seen a sharp decline largely because of a slowdown in its manufacturing and services sectors. "There is a complete lack of faith in the markets. There are fears that the RBI (Reserve Bank of India) measures may not help improve the rupee," said Param Sarma, chief executive with NSP Forex.
Indian authorities are concerned that the weak rupee is stoking inflation. The nation relies on imports of crude oil, chemicals and some foodstuffs, which are priced in dollars. The weak rupee makes those more expensive, a cost that is eventually handed on to the consumer. In July, India's main gauge of inflation, the Wholesale Price Index, was 5.79% higher than a year earlier, up from 4.86% in June.
Spotlight On: What’s Next in 2013 – Question and Answer Session with BlackRock
Question. When will central banks begin changing policy and what impact will that have?
Answer from BlackRock. Policy dominates markets – that’s likely to be a key theme for the rest of this year and beyond. Central bankers have expended too much capital – of the monetary, intellectual and reputational kind – to reverse their stimulus policies prematurely and risk a stillborn economic recovery. But monetary policy is starting to diverge.
With tapering of asset purchases in the US expected to start as soon as this year, many market participants anticipate that the world’s largest economy will become the first in the developed world to put up interest rates.
By contrast, Europe remains in a more difficult position that will likely warrant further accommodative monetary policy. Unemployment is at a record 12.2% in the eurozone as governments implement austerity measures, consumer spending remains constrained and credit contracts given banks continue to delever. The Bank of England is also likely to remain accommodative via its own open market purchase programme, having characterised the UK’s recovery as being weak by historical standards. In Asia, the Bank of Japan is seeking to create growth, and has embarked upon an aggressive monetary policy campaign of quantitative easing that is three times the size of open market purchases in the US.
So what does all of this mean for investors? We would continue to advocate underweight positions in core government bonds. Volatility is up, and we believe it will remain elevated. Even with the recent increase in real interest rates, we still believe Treasuries are overvalued and expect that yields are likely to rise over the long term.
Question. What is the state of the global economy? Are risks from Europe receding?
Answer from BlackRock. Global economic growth is still stuck in a low gear, with little sign of an acceleration ahead. Indeed, in the second quarter, many areas of the world appeared to be decelerating further – particularly many emerging markets. There is less risk of a widespread global recession than there was a year ago, but overall global growth is still hovering around a relatively slow 3.3% to 3.5%. One surprising bright spot has been Japan. Following decades of economic stagnation, the country’s economy grew at an astounding rate of 4.1% in the first quarter. Japan’s new economic policies and increasing confidence is feeding through to the underlying economy.
The near-term threat of an outright Eurozone breakup has definitely receded. Although the economic data is mixed there are some signs of improvement in the underlying economic fundamentals. Certainly the economic data is stabilizing albeit at low level. Overall the region’s banking system is fragile and undercapitalised and remains a source of potential market gyrations. Tail risks such as austerity measure in Greece, or the banking systems in Cyprus remain, but these risks are generally short lived in the global capital markets given the perceived support provided by the European central Bank (EcB) to economies/financial systems at risk. Real European wide reform will require more resolute political will than we’ve seen so far, but we don’t expect much progress ahead of German elections in September.
Question. Where are the best opportunities in stocks for the next six months and beyond?
Answer from BlackRock. Generally speaking, we prefer equities over bonds but investors must brace for more volatility. Most equity valuations look reasonable – with notable exceptions in Southeast Asia and Mexico. In the US, stocks are not as cheap as last year, but we would suggest a focus on cyclical sectors of the market (but not those that are overly exposed to the US consumer), like the energy and technology sectors which both look inexpensive.
Outside of the US, we are seeing some good values in international stocks. While we would back away from yield plays in the US, dividend stocks look cheaper elsewhere. They still trade at discount to broader equities, and still offer higher yields. The UK and Europe dividend equity markets remain attractive given the recent uptick in economic data and outcome statements from the EcB and BoE indicating that interest rates may remain at low level for the foreseeable future. In addition, the uncertainty about growth and the level and direction of interest rates and inflation make minimum volatility equity wrappers another potential option for investors.
Elsewhere, emerging markets have underperformed so far this year and are trading at a significant discount compared to developed markets. We believe valuations have reached depressed levels and this may present some attractive entry points. In particular, we are seeing good long-term value in parts of Asia and Latin America.
At the sector level, many defensive stocks are at their peaks of profitability and valuation – and have outperformed their more economically sensitive counterparts. But valuations of consumer brands and other defensives now look stretched. For example, our research shows that US defensives (minus healthcare) are in the top valuation decile of the past 35 years on a price/earnings basis. As a result, these stocks may not provide the downside protection investors have come to expect.
Question. Will emerging markets’ underperformance continue?
Answer from BlackRock. In the short term, we would not be surprised to see additional performance challenges for emerging markets (EM). Slowing growth, concerns over the Chinese banking system and a general preference among investors for US stocks have been hurting performance and these trends are not going away any time soon. In addition, a less accommodative monetary regime and a stronger dollar will represent headwinds for many EM countries. Finally, anaemic growth in most of the developed world will hinder their exporters. All of this leads us to believe that anomalies and relative value opportunities are likely to emerge. Differences between emerging markets are growing – and investors need to become more discerning.
Over the longer term – say, three to five years – however, we believe EM stocks represent good value, given that they are trading at more than a 30% discount to their developed counterparts, the largest gap since the crisis of 2008. Although the stellar economic growth we saw in China/India in 2010 is not likely to be repeated, EM growth as a whole should continue to outpace that of developed markets. In addition, while EMs face numerous headwinds, by many measures these countries are more stable than many of their developed peers, with lower sovereign debt, significant currency reserves and (with some notable exceptions) relatively stable current account balances. Together, stronger macroeconomic conditions and attractive valuations make for a compelling long-term argument for EM equities.
Question. What of the gold price?
Answer from BlackRock. We believe that investors should still hold gold as a long-term, strategic part of their portfolios. However, we expect gold prices to remain volatile, and anticipate a general downward bias in the price. Sentiment has clearly changed in the gold market and investors my consider reducing holdings in this asset class. Gold prices are facing the headwind of rising real interest rates (adjusted for inflation) for the first time in years. Many investors focus on inflation and the US dollar when thinking about gold prices, but real interest rates actually tend to have a more significant effect. All else being equal, higher real interest rates should create a less supportive environment for gold.

Saturday, August 10, 2013

Economic Summary for the week ended 9th August 2013

Chinese Economic Data Points To End of Slowdown - China's economy could be stabilising, the latest set of economic figures from the country has suggested. Factory output in July rose 9.7% compared with a year ago, ahead of expectations and up from the previous month's figure of 8.9%. Consumer prices held steady in July, rising 2.7% from a year earlier, matching the rate seen in June.
China's growth rate has been slowing at its fastest pace since the global financial crisis in 2008. In the second quarter of the year, China's economy grew by 7.5% compared with the previous year, down from 7.7% in the January to March period. The government has set a target of 7.5% growth for the whole of 2013, which would mark the lowest rate of expansion in more than two decades.
In other data released on Friday, the producer price index fell 2.3% in July from a year earlier compared with a drop of 2.7% in June. However, although July's retail sales jumped by 13.2% compared with last year, that was a slower pace of growth than the 13.5% recorded between June 2012 and June 2013. On Thursday, trade figures showed export and import growth rebounded in July.
Analysts welcomed the latest data, but said more evidence would be needed before it would be safe to say whether the economy was beginning to pick up again. You Hongye, economist at Essence Securities, said: "Broadly speaking, economic growth is stabilising and recovering slightly, but we still need to see whether the momentum could be sustained."
Xu Dongshi, from Galaxy Securities in Beijing, said: "The easing PPI drop also implies signs of stabilising of the industrial sector. But it's still too early to say that China's economy is on the track of rebounding as it takes time to resolve economic structural problems."

Japan’s Debt Exceeds 1 Quadrillion Yen as Abe Mulls Tax Rise - Japan’s national debt exceeded 1,000 trillion yen for the first time, underscoring the case for Prime Minister Shinzo Abe to proceed with a sales-tax increase to shore up government finances.
The country’s outstanding public debt including borrowings reached a record 1,008.6 trillion yen (USD 10.46 trillion) as of 30 June, up 1.7 percent from three months earlier, the finance ministry said in Tokyo on Friday. Larger than the economies of Germany, France and the U.K. combined, the amount includes 830.5 trillion yen in government bonds.
The world’s heaviest debt burden will weigh on Abe when he decides next month whether to implement a two-step plan to double the tax on consumers in a nation with ballooning welfare costs. While boosting the levy would drag on growth, Moody’s Investors Service yesterday warned that a worsening of finances would erode confidence in government bonds.
“Ballooning public debt underlines the need for Abe to push for a sales-tax increase,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo. “This is a minimum policy requirement for his government.”
The levy on consumption is due to be raised to 8 percent in April from the current 5 percent, followed by an increase to 10 percent in October 2015. Abe said he would make a final call on the plan after the release of revised second-quarter gross domestic product data on 9 September.
The sales-tax law enacted last year gives Abe the power to postpone the rise should he conclude that the economy is unable to weather the austerity measure.

Russian GDP Unexpectedly Slows – Russia’s economy unexpectedly slowed in the second quarter to extend a slide that’s threatening to push the world’s largest energy exporter near recession.
Gross domestic product expanded 1.2 percent from a year earlier, the Federal Statistics Service in Moscow said today in an e-mailed report. That was below all 19 forecasts in a Bloomberg survey, which had a median estimate of 2 percent. The Economy Ministry had projected that output expanded 1.9 percent in the period.
The surprise deceleration underscores the challenges Russia faces from weaker global demand for its commodities, which is compounding a domestic slowdown. Russia’s central bank left its main rates unchanged for an 11th month today while signalling increased concern about economic expansion.
“Second-quarter GDP is seriously disappointing and is a very strong argument for monetary-policy easing,” said Piotr Matys, an emerging-markets economist at 4Cast Ltd. in London. “Weak external demand and investments are still the main drag on the economy, but we suspect that final consumption, which has been the only relatively strong component so far, may have weakened as well.”

Spotlight On: Schroder’s Global Macro Economic Outlook
Bob Jolly, Head of Macro at fund manager Schroders, gave his views on the global macro economic outlook this week.
“We expect market volatility to remain high in the coming months and have moved to a more cautious stance. However, volatility creates opportunity for active fund managers, so we are remaining vigilant for mispriced investment opportunities to exploit when markets overshoot in either direction.
Looking ahead into the remainder of 2013 our central expectation is that the US will continue to slowly accelerate and exit so-called ‘stall-speed’ growth. Banks have been loosening their credit standards, companies are increasing their capital expenditure and the house prices are starting to accelerate. There has already been a shift in the Federal Reserve’s thinking due to the gradual economic improvements – away from Quantitative Easing and towards tapering – and this has caused a great deal of market volatility.
Elsewhere, the story is less positive. In China, for example, data suggests that economic activity resulted in an investment splurge following the credit crisis of 2008, leading to over-investment across sectors such as infrastructure and export companies. In our view this has resulted in overcapacity. Furthermore, this over-investment was funded by debt, resulting in rising levels of household and corporate debt. Indeed, data suggests Chinese households have never been so indebted.
However, much of this has been priced into market valuations so we are not too negative on China from an investment perspective. In addition, the government is making the longer term outlook more promising by putting its emphasis on encouraging quality of economic growth, rather than quantity by enacting policies that focus on moving the economy from being export-driven to a more consumption-based model.
Europe’s situation, meanwhile, is concerning and in some respects we believe economic conditions are worsening. Bank lending is contracting, the output gap has continued to grow and, with inflation falling sharply, it appears the European Central Bank has not been aggressive enough. The eurozone is already closer to deflation than many believe and tax increases (particularly duty and VAT) have been disguising underlying disinflationary pressures. In Spain for example, if you exclude taxes from its headline inflation rate, then the country is already seeing disinflation. Adding to the uncertain outlook for the eurozone is the upcoming German election in September, political posturing in the run-up to which could be an additional source of market volatility.
In the UK policymakers’ focus has been on boosting growth by kick starting the housing market. So far this has been positive as the economic backdrop is improving. However, we believe that it is too early to become optimistic, as inflation has acted as a tax on incomes resulting in falling real incomes for the UK population.
In our portfolios we will be closely watching market volatility that is likely to ebb and flow around expectations of central bank actions. Following recent market falls we have been seeking to add to positions which have become less crowded, but we are not adding aggressively to risk markets.
The key in such an environment is to be nimble. On the duration front, for example, we expect market noise to cause movements in government bond yields and present opportunities on both the long and short side.
Currently we have a neutral duration stance. However, we have been buying some duration at the front end of the yield curve in Europe as we think the market has priced in rate hikes that are unlikely to happen given the economic outlook for the eurozone. Meanwhile we have a short exposure to 10-year US Treasuries as we think the US economy will continue to improve and yields could grind higher.
On a country basis we now have zero exposure to peripheral eurozone sovereign bonds after we took profits from our Portuguese and Irish positions earlier in the quarter.
Valuations in the credit market do not look particularly attractive compared to history. However, regardless of Fed tapering, we are in an environment of abundant liquidity, low interest rates, and there is little prospect of inflation in the near future given the size of output gaps. As a result, cash is unlikely to appeal to investors and credit markets will continue to be underpinned by the hunt for yield. We continue to follow a thematic approach to help identify the most attractive credits. In a difficult overall environment for credit, we think prudent credit selection backed up by rigorous research will be rewarded.
Within foreign exchange, we no longer have a short exposure to the Australian dollar, but maintain our short exposure to the Japanese yen, which we expect to be the world’s weakest currency. Recent positions we have favoured include a long position in the Indian rupee and a long exposure to the Russian ruble. We have also recently implemented a short position in the Chinese renminbi.”

Saturday, August 3, 2013

Economic Summary for the week ended 2nd August 2013

US jobs data may show strength, prompt stimulus end - Investors positioned for a strong U.S. jobs report on Friday, balancing the likelihood it will confirm the economy is recovering with wariness it might prompt the Federal Reserve to end its stimulus earlier. But coming just after Fed Chairman Ben Bernanke tried to ease concerns about an imminent tapering of its money-printing stimulus, a strong number could reignite some market volatility.
The prospect of an end to stimulus - which has pumped billions of dollars into world markets - has already battered some assets, notably in emerging markets. "The data in the US is picking up appreciably at the moment. It's all pointing to a better (jobs) number today and bond markets should be scared," said William Hobbs, head of equity strategy at Barclays Wealth.
The payrolls report is forecast to show an increase of 184,000 in jobs outside the farm sector last month and the jobless rate dropping to 7.5 percent from 7.6 percent, according to a Reuters poll. The unemployment rate is closely monitored by the Fed as it gauges when to cut back its USD 85 billion a month bond-buying program.
Japan says GDP growth could slow to 1 percent after sales tax hike – Japan's economic growth will slow to 1.0 percent in fiscal 2014/15, less than half the pace expected this year, as a planned sales tax hike weighs temporarily on consumption, government forecasts showed.
In fiscal 2013/14, which began in April, Japan's economy is forecast to expand 2.8 percent as an improving labour market bolsters consumer spending and as policies to end 15 years of deflation start to take hold, the cabinet office said. That is an upgrade from the government's previous forecast of 2.5 percent growth.
Prime Minister Shinzo Abe has to decide this later this year whether to carry out a plan that would raise the 5 percent sales tax to 8 percent from next April and then to 10 percent in October 2015. Private consumption is expected to grow 0.5 percent in fiscal 2014/15, less than the 2.1 percent growth forecast for the current fiscal year, the cabinet office said.
The plan to raise the sales tax will add 0.2 percentage point to gross domestic product (GDP) in fiscal 2013/14 as shoppers rush to buy goods before the first tax hike, according to a cabinet office official. But the tax increase would then subtract 0.6 percentage point from economic growth in fiscal 2014/15 as consumers scale back purchases, the official said. Overall consumer prices are expected to rise 3.3 percent in fiscal 2014/15, but excluding the tax hike prices will rise 1.2 percent, the cabinet office said. In comparison, overall consumer prices are forecast to rise 0.5 percent in fiscal 2013/14, the cabinet office said.
The sales tax hike is meant to be the first step towards fixing Japan's public debt, which at more than double annual GDP, is the biggest burden in the industrial world. Abe has made economic recovery and the defeat of deflation his top priorities, but there are concerns he could delay the pace of tax hikes to avoid a slowdown in growth. The Bank of Japan unleashed an intense burst of monetary stimulus on April 4, promising to double the supply of money through aggressive asset purchases to meet its 2 percent inflation target in roughly two years.
Latin American stocks rise on encouraging global outlook - Latin American stocks rose on Thursday as China manufacturing data and the US Federal Reserve's promise to continue an USD 85-billion-per-month bond-buying program helped lift regional shares. Mexico's IPC index approached a near two-month high, while Chile's stock exchange snapped its five-session slide.
China on Thursday released data showing its manufacturing sector grew slightly more than expected in July. China, the world's second-largest economy, is Brazil's biggest trading partner and a key purchaser of Latin American commodities exports, such as iron ore, soy, copper and petroleum.
The Fed's bond-buying program has kept US interest rates low and limited fixed-income returns, prompting investors to buy higher-risk assets such as emerging market stocks. Recent Fed suggestions that the program may be wound down had fuelled selling of assets in Latin America.
"The movement today in our market, based as strongly as it is on commodities, is upward," said Gillmor Monteiro, an investment manager at Intrader in Sao Paulo. He added that shares of lenders are rising today because of the expectation of low-interest rates in the near future.
Brazil's benchmark Bovespa index snapped a three-session slump on Thursday, rising 1.15 percent to 48,787.10 points in early afternoon trading.
Spotlight On: Rethinking Emerging Market Allocations
Following five years of review, MSCI, whose equity indexes are tracked by investors with about USD 7 trillion in assets, recently announced that they will promote the United Arab Emirates (UAE) and Qatar from frontier-market status as of May 2014.
“It has been a long journey, but we’ve finally arrived,” said Georges Elhedery, head of global markets for the Middle East and North Africa at HSBC Holdings Plc when the move was announced on 12 June. “Today’s decision firmly establishes the region on the emerging-markets growth map in the minds of global institutional investors.”
The upgrades have the potential to draw USD 800 million of new funds into Qatari and UAE shares, according to HSBC. Economies in the six-nation Gulf Cooperation Council are growing three times faster than developed markets as governments funnel oil wealth into infrastructure projects, including plans to build stadiums and roads in Qatar before the nation hosts the 2022 soccer World Cup.
MSCI raised Qatar and UAE after they adopted changes including a buyer cash-compensation procedure, which enables investors to be paid in cash if a security is unavailable for delivery on settlement day. Qatar, the world’s biggest exporter of liquefied natural gas, has raised foreign-ownership limits of companies in its USD 141 billion stock exchange, the Qatar Exchange cited Finance Minister Yousef Hussain Kamal as saying in June.
This recent news has led to a rethink of emerging markets, investors are embracing countries that have improved their balance sheet and don't rely on outside funding for growth. Some investors are looking for extra insulation from future market gyrations. Stocks from Middle Eastern oil-and-gas producers have held up better than other emerging markets. Oil prices have risen recently, even as most other commodities have fallen. These countries' currencies are also pegged to the US dollar, so they aren't affected when the greenback rallies.
MSCI has released indicative indices for the UAE and Qatar, together with weights, following the MSCI’s announcement in June. The UAE companies include EMAAR Properties, DP World Ltd and Aldar Properties PJSC, while the Qatari companies include Qatar National Bank, Qatar Electricity & Water Co and Qatar Telecom.
According to Bloomberg consensus estimates the UAE companies are projected to witness strong income growth both in 2013 and 2014 and respectable BEst 2014E dividend yield averaging 3.1%. Strong UAE stock market YTD (DMGI +47%) has resulted in the Qatari stocks trading on lower multiples (QE Index +12% ) and having higher projected BEst 2014E dividend yields of 5.2%, with a majority of companies also projected to have double digit net income growth in 2014, according to the Bloomberg consensus estimates.
In the global hunt for yield, both the UAE and Qatari markets have companies offering attractive dividend yields, supported by income growth, and unlike a majority of other emerging and frontier markets the UAE and Qatar do not suffer from currency risk, given their US dollar pegs.