Euro Area capex as a share of GDP is currently close to its record low. But the pressure to begin making capital investments is mounting. As capacity utilization in the region starts to tick upwards from its mid-2013 trough, companies will have to consider finally making the investment that they’ve been putting off. Since the last cycle peak in ’07-’08. Italy and Spain have seen the greatest fall in buildings spending, while France and Germany saw a bigger drop in transport expenditure. Consider the US post-financial crisis, when US capex rebounded from record lows in 2009 to levels above its long term average. The key driver then was profile recovery, and European earnings look to be gaining strength. Given the Eurozone’s rising utilization, relatively healthier corporate earnings, and easier lending standards, investors might like to pay attention to capex trends in the coming quarters.
Wednesday, April 29, 2015
Thursday, April 23, 2015
With the exception of a confetti- throwing protestor, there were no surprises out of the ECB press conference last week. Draghi confirmed that purchases would run “until we see a sustained adjustment in the path of inflation”, ruling out any speculation of tapering in the near term. Despite escalating rhetoric over a Greek default and news that Greek officials made an informal approach to the IMF about delaying the interest payments, yields continue to grind lower. German Bund yields went negative at the 9-year maturity, while the 10 year yield tested the zero threshold. The question remains, with yields still falling and the ECB unable to buy bonds below its -0.2% lower limit, weather policy makers will face a scarcity of European government bonds. How long will it be before they may have to change their strategy?
Thursday, April 16, 2015
The year of the Sheep is characterised as one of promise and prosperity, this seems to be accurate when looking at the equity market - the Shanghai Composite index has gained 25% this year despite a slowing economy. The surge in equities has less to do with growth and more to do with liquidity and valuations. The challenging economic outlook is leading to a case of ‘bad news is good news’ for Chinese equities. Sentiment is spilling over into the international market via the Hong Kong-Shanghai Stock Connect as investors look for arbitrage opportunities for dual-listed companies. The pace of the gain in Chinese equities is alarming but with further policy easing likely and valuations that remain unchallenging, this may be the sheep with the golden fleece.
Saturday, April 4, 2015
The dollar’s sharp increase on a trade weighted basis over the last year implies lower economic growth in the coming quarters via weaker export growth. But, the US Federal Reserve may be more concerned with the impact on prices, as consumers may choose to swap domestically produced goods for cheaper foreign imports, further weighing on prices and with a potential knock on effect to wage growth. The Fed’s preferred measure of inflation, personal consumption expenditure, exhibits a close relationship with consumer import prices as shown in this week’s chart. Central banks usually treat currency movements as transitory, but with the inflation rate already at zero the greenback is going to come under closer scrutiny.