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.