Emerging Markets Radar (April 9, 2012)

Sunday, April 8th, 2012

Emerg­ing Mar­kets Radar (April 9, 2012)

Strengths

• The Hun­gar­ian PMI surged above expec­ta­tions in March to 56.8, the strongest read­ing in the last thir­teen months, reflect­ing the pos­i­tive impact of the open­ing of the brand new Daim­ler AG plant. The Czech man­u­fac­tur­ing PMI has also improved.
• Brazil’s con­sumer prices rose 0.21 per­cent in March from Feb­ru­ary, the government’s sta­tis­tics agency said in a report dis­trib­uted in Rio de Janeiro today. Econ­o­mists sur­veyed by Bloomberg had expected infla­tion of 0.37 per­cent, accord­ing to the median fore­cast of 50 analysts.
• Chilean con­sumer prices rose 0.2 per­cent in March from the pre­vi­ous month, less than ana­lysts’ fore­cast, bring­ing annual infla­tion back within the cen­tral bank’s tar­get range for the first time in four months.
• China offi­cial March PMI was 53.1 ver­sus the esti­mate of 50.8, ris­ing 2.1 from Feb­ru­ary; new orders were up 4.1 points at 55.1 per­cent. Nev­er­the­less, due to sea­son­al­ity, March’s PMI is usu­ally 3 points bet­ter than February’s, there­fore, the mar­ket is cau­tious about the better-than-expected PMI for last month. PMI above 50 indi­cates indus­trial activ­i­ties are expanding.
• China’s March non-manufacturing PMI was 58 ver­sus 48.4 in Feb­ru­ary, indi­cat­ing con­sumer con­sump­tion may be resilient.
• Philip­pines infla­tion eased to 2.6 per­cent on a year-over-year basis in March from 2.7 per­cent in Feb­ru­ary. A base-year com­par­i­son sug­gests infla­tion in the coun­try will remain sub­dued in April. How­ever, infla­tion trends should turn up from mid-year dri­ven by a resumed rise in oil and com­mod­ity prices and strength­en­ing domes­tic demand.
• March hous­ing trans­ac­tions increased 40 per­cent in Bei­jing, and sim­i­lar increases were also seen in other tier 1 and tier 2 cities. Some ana­lysts say buy­ers are encour­aged by the fact that the Chi­nese gov­ern­ment had his­tor­i­cally failed in curb­ing hous­ing prices, but oth­ers say March sales vol­ume is always the equiv­a­lent of com­bined sales of Jan­u­ary and Feb­ru­ary in the year and March of this year didn’t see bet­ter vol­ume than prior years.
• Indonesia’s par­lia­ment did not pass the fuel raise bill which was to remove the fuel sub­sidy and raise fuel prices by 33 percent.

Weak­nesses

• The Russ­ian cen­tral bank chair­man said the liq­uid­ity deficit faced by the finan­cial indus­try is the “new norm” this year. One of the rea­sons is a con­tin­ued cap­i­tal out­flow. Rus­sians spent $12 bil­lion on for­eign prop­erty last year, com­pared with $5.5 bil­lion a year in 2007 and 2008, accord­ing to the chairman.
• Colom­bian pol­icy mak­ers meet­ing last month were divided over the need to raise inter­est rates fur­ther to keep infla­tion in check. Ana­lyst Brian Lesmes, at Grupo Ban­colom­bia in Bogota, said that though infla­tion and credit demand have eased, fur­ther tight­en­ing may be needed to cool house­hold demand.
• Thai­land infla­tion edged up to 3.4 per­cent year-over-year in March from 3.3 per­cent in Feb­ru­ary, but base-year com­par­i­son sug­gests infla­tion in the coun­try will remain sub­dued in April.
• Indone­sia is to dis­cuss an export tax on coal and base met­als, which is neg­a­tive for local mate­ri­als com­pa­nies but good for global coal and base metal producers.
• Tai­wan may imple­ment a cap­i­tal gains tax on stock trad­ing profits.

Oppor­tu­ni­ties

• Cit­i­group Inc. raised South African equi­ties to over­weight, the equiv­a­lent of a buy, on expected strong earn­ings growth and com­pa­nies’ expan­sion into Africa’s fast-growing fron­tier mar­kets, the bank said.
• In the last decade, Indone­sia has restored sta­ble eco­nomic growth and, there­fore, has improved its wealth. With oppor­tu­ni­ties to build vast infra­struc­tures and indus­trial com­plex, for­eign direct invest­ments (FDI) now are return­ing to the coun­try. The increas­ing FDI has dri­ven up demand for indus­trial estate and build­ing mate­ri­als, such as cements.

Threats

• Brazil's tax agency said on Wednes­day that intra-company com­modi­ties exports and imports by multi­na­tional traders must be set­tled using inter­na­tional prices. The country’s Fed­eral tax author­ity said the mea­sures are aimed at end­ing "price manip­u­la­tion" of inter-company imports and exports that allow multi-national com­pa­nies to evade local taxes.
• Peru is rene­go­ti­at­ing with Mex­ico to cut nat­ural gas ship­ments after allo­cat­ing gas reserves to its domes­tic indus­try, a Peru­vian gov­ern­ment offi­cial said. Approx­i­mately half of the ship­ments will be cut, the pres­i­dent of state oil con­tract­ing agency Peru­petro said this week.
• The Chi­nese econ­omy is still in the process of a soft land­ing, but the pol­icy response may fall behind the curve. In 2012, cor­po­rate rev­enue growth is pre­dicted to be much slower than 2011, with gross mar­gins also expected to be lower due to weaker demand and a rise in input costs.

Tags: Beijing, Brazil, China, China Official, Chinese Government, Commodities, Commodity, Commodity Prices, Consumer Consumption, Daimler Ag, Economists, Emerging Markets, Four Months, inflation, Philippines, Pmi, Radar, Rio De Janeiro, Russia, Sales Volume, Seasonality, Statistics Agency, Target Range, Thirteen Months, Tier 2
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Shifting Winds-Turbulence Ahead? (Sonders)

Monday, April 2nd, 2012

Shift­ing Winds-Turbulence Ahead?

March 30, 2012

by Liz Ann Son­ders,Senior Vice Pres­i­dent, Chief Invest­ment Strate­gist, Charles Schwab & Co., Inc., and,
Brad Sorensen, CFA, Direc­tor of Mar­ket and Sec­tor Analy­sis, Schwab Cen­ter for Finan­cial Research, and
Michelle Gib­ley, CFA, Direc­tor of Inter­na­tional Research, Schwab Cen­ter for Finan­cial Research

Key Points

• Trea­sury yields have moved some­what higher, while stocks have largely con­tin­ued to rise. Some recent cor­re­la­tions appear to be break­ing down, which could lead to some increased volatil­ity but we remain rel­a­tively con­fi­dent in the equity mar­ket. Per­cep­tion as to the next poten­tial moves by the Fed­eral Reserve appeared to be shift­ing, but Chair­man Bernanke reit­er­ated their easy mon­e­tary stance. Uncer­tainty is ris­ing and the Fed’s goal of increased clar­ity through more trans­par­ent com­mu­ni­ca­tion is under increased scrutiny.
• Liq­uid­ity con­cerns in Europe have eased but eco­nomic risks remain ele­vated, while Spain and Italy face deal with their ongo­ing debt crises. Mean­while, fears remain about a hard land­ing in China, although we have a more san­guine view.

Are we start­ing the return to a more "nor­mal" mar­ket envi­ron­ment? It's too early to tell but we are begin­ning to see lower volatil­ity and asset class cor­re­la­tions. Con­tribut­ing to this more sta­ble envi­ron­ment is a shift­ing of Fed expec­ta­tions and increased investor con­fi­dence about US eco­nomic expan­sion. How­ever, we acknowl­edge that such a shift will likely cause some near-term tur­bu­lence in the mar­ket, espe­cially given ele­vated bull­ish investor sen­ti­ment (a con­trar­ian indi­ca­tor). The mar­ket has also become tech­ni­cally extended after its roughly 30% rally since early Octo­ber 2011, and could be due for a breather. Addi­tion­ally, an uncer­tain earn­ings sea­son is approach­ing, oil prices con­tinue to be con­cern­ing, and the siren song of "sell in May" is likely to be heard again. We believe any con­sol­i­da­tion is likely to be shal­low and could bring back some of the "wall of worry" that the mar­ket loves to climb.

One of this year’s ear­lier trends had been stocks mov­ing higher, but Trea­sury bond yields remain­ing near record lows, indi­cat­ing both con­tin­ued con­cern about the sus­tain­abil­ity of the eco­nomic expan­sion, and the con­fi­dence that the Fed­eral Reserve would con­tinue its extremely accom­moda­tive mon­e­tary stance for the fore­see­able future. Recently, we’ve seen Trea­sury yields move up from those record lows, while stocks con­tin­ued to move higher. This could be the begin­ning of a shift in investor atti­tudes as con­fi­dence in the eco­nomic expan­sion may be grow­ing lead­ing to skep­ti­cism that the Fed can main­tain its cur­rent pol­icy stance through 2014.

Yields Move Higher—For Pos­i­tive Reasons

Source: Fact­Set, Fed­eral Reserve. As of Mar. 27, 2012.

While it's too early to say this is the start of a trend of yields mov­ing inex­orably higher, it does appear that the retail investor could begin to shift some assets from bond funds and cash into equi­ties. This could feed the next leg up in the equity rally.

Eco­nomic Transition

Part of the impe­tus behind the retail investor warm­ing up to equi­ties may be the improve­ment in eco­nomic data—especially as it relates to jobs and hous­ing. But here too we may be enter­ing a tran­si­tion phase as year-over-year com­par­isons become more dif­fi­cult and sub­stan­tial gains become harder to come by. Hous­ing data con­tin­ues to be mixed and although ini­tial job­less claims recently hit their low­est level in three years, the pace of the recov­ery in jobs could slow. This could con­tribute to near-term volatil­ity, but we do believe in the sus­tain­abil­ity of the eco­nomic expan­sion, which should help to sup­port equity prices through the bal­ance of 2012.

Jobs pic­ture con­tin­ues to improve

Source: Fact­Set, U.S. Dept. of Labor. As of Mar. 27, 2012.

Hous­ing is not off to the races and likely won’t see a sharp bounce off of the bot­tom, but we are see­ing encour­ag­ing signs. Although exist­ing home sales fell 0.9% month-over-month in Feb­ru­ary, it was still the best Feb­ru­ary read­ing in five years and sales were up 8.8% over a year ago. Mean­while, hous­ing starts fell 1.1% but forward-looking build­ing per­mits rose 5.1%, to the high­est level since Octo­ber 2008. And while hous­ing remains extremely afford­able based on his­tor­i­cal lev­els, mort­gage rates have moved mod­estly higher. Some­what counter-intuitively this could con­tribute to fur­ther improve­ment of the hous­ing mar­ket as the prospect of rates actu­ally mov­ing higher may push poten­tial pur­chasers who had been sit­ting on the fence toward action.

Other eco­nomic data con­tin­ues to show growth in the econ­omy, although there are some poten­tial chinks that we are watch­ing closely. The Empire Man­u­fac­tur­ing Index moved to its high­est level since June 2010 while the Philly Fed Index rose to its best read­ing since April 2011. How­ever, the for­ward look­ing new orders com­po­nent of both reports moved lower. While not overly con­cern­ing yet, it’s some­thing we’re keep­ing an eye on.

Addi­tion­ally, the Index of Lead­ing Eco­nomic Indi­ca­tors rose 0.7% in Feb­ru­ary, mark­ing the fifth-straight month of improve­ment. The National Fed­er­a­tion of Inde­pen­dent Busi­nesses Index moved higher, indi­cat­ing improv­ing small busi­ness con­fi­dence. Finally, retail sales moved 1.1% higher; while ex-autos and gas they moved 0.6% higher and the pre­vi­ous month was also revised upward, indi­cat­ing the Amer­i­can con­sumer con­tin­ues to spur activity.

Fed Stance Shifting?

This con­tin­ued improv­ing data may be con­tribut­ing to a shift in the per­cep­tion of the future of Fed pol­icy. While the recent Fed meet­ing kept pol­icy the same and con­tin­ued to pre­dict near zero inter­est rates through at least late 2014, they did upgrade their out­look of the econ­omy slightly. Also, sev­eral Fed mem­bers have said they believe higher inter­est rates may be needed sooner than cur­rently offi­cially pre­dicted. The fed funds futures mar­ket has the first rate hike com­ing at least six months before the end of 2014. And finally, dur­ing Chair­man Bernanke’s recent tes­ti­mony on Capi­tol Hill, he did noth­ing to indi­cate another round of quan­ti­ta­tive eas­ing was in the cards, lead­ing investors to believe the Fed's con­fi­dence in the eco­nomic expan­sion may be grow­ing. How­ever, in a sub­se­quent speech, he reit­er­ated his belief that the econ­omy and job mar­ket would con­tinue to need Fed assis­tance, throw­ing a lit­tle more uncer­tainty into the equa­tion. We are encour­aged at these glim­mers of hope and believe that a return to more nor­mal pol­icy sooner rather than later would be appropriate.

Europe’s debt cri­sis merely on pause

The sec­ond Greek bailout was com­pleted on March 20 with mar­kets hardly bat­ting an eye. But the euro­zone sov­er­eign debt cri­sis is far from over—it is merely on pause and there is still risk of future outbreaks.

Where could sov­er­eign debt con­cerns arise?

• Greece and Por­tu­gal could need addi­tional bailouts;
• Ire­land could ask for debt for­give­ness to bol­ster a pub­lic vote for the fis­cal pact;
• France’s gen­eral elec­tion could result in a change of lead­er­ship from Sarkozy to Hollande.

How­ever, we feel these poten­tial events are unlikely to result in a broad con­ta­gion out­break. On the other hand, Spain and Italy have the abil­ity to heat up con­cerns and risk aver­sion due to their large debts and economies. Italy’s econ­omy has grown less than the euro­zone aver­age over the past decade and reforms are needed to improve com­pet­i­tive­ness and enhance growth prospects. Ital­ian Prime Min­is­ter Monti needs to keep mak­ing progress to main­tain investor con­fi­dence, and watered down labor reforms may not have a last­ing effect.

How­ever, Italy has some pos­i­tive attrib­utes, includ­ing a wealthy pri­vate sec­tor with a per capita net worth more than three times higher than the other Euro­pean periph­eral coun­tries, accord­ing to BCA Research, giv­ing them the abil­ity to fund debt locally. As such, Italy’s debt tends to be in stronger, longer-term, hands. Addi­tion­ally, Italy has a pri­mary bud­get sur­plus – a sur­plus before debt pay­ments – as well as long debt maturities.

Spain's hous­ing bub­ble still deflating

Source: Fact­Set, S&P/Case-Shiller, Bank of Spain. As Mar. 27, 2012. Indexed to 100 = 1/1/1996.

Spain on the other hand has a more uncer­tain and risky out­look. While Spain’s cur­rent gov­ern­ment debt load is smaller than Italy’s as a per­cent­age of gross domes­tic prod­uct (GDP), it has an ele­vated deficit, high and ris­ing unem­ploy­ment and a hous­ing bub­ble that is still deflat­ing. A risk is that the large amount of pri­vate sec­tor debt could incur more losses for banks, poten­tially requir­ing cash infu­sions from the gov­ern­ment. Addi­tion­ally, instead of mak­ing deficit-reduction progress, Spain has backpedaled; now tar­get­ing a higher deficit to end 2012 than envi­sioned a few months ago.

Pos­i­tively, Euro­pean pol­i­cy­mak­ers are doing their part to con­tain risks, from the Euro­pean Cen­tral Bank's three-year loans and Germany's recent will­ing­ness to com­bine the tem­po­rary Euro­pean Finan­cial Sta­bil­ity Facil­ity (EFSF) with the longer-term Euro­pean Sta­bil­ity Mech­a­nism (ESM) that comes into effect in July. How­ever, an even big­ger fire­wall may even­tu­ally be needed.

Europe drag­ging down global growth

The lin­ger­ing effects of the sov­er­eign debt cri­sis on the Euro­pean econ­omy con­tinue. The renewed down­turn of euro­zone pur­chas­ing man­ager indexes in March indi­cate the econ­omy is still frag­ile and it could take some time before growth reac­cel­er­ates. A hob­bled Euro­pean bank­ing sys­tem remains at the heart of the slow­down. Bank bal­ance sheets likely don't have enough excess cap­i­tal to expand lend­ing and banks have responded by tight­en­ing lend­ing stan­dards. Lend­ing is the lifeblood of eco­nomic growth and a severe reduc­tion in lend­ing is likely to restrain activity.

In terms of invest­ment impli­ca­tions, the out­look for Euro­pean stocks is mixed. Val­u­a­tions appear attrac­tive and we believe cor­re­la­tions will decline and investors will dif­fer­en­ti­ate across mar­kets. Mar­kets with stronger economies such as Ger­many could do bet­ter, while those with weaker eco­nomic out­looks, like Spain, could lag. The Ital­ian stock mar­ket falls in the mid­dle, as a neg­a­tive eco­nomic out­look is off­set by high pri­vate sec­tor wealth.

Should we worry about China?

There are plenty of bear­ish sto­ries about China these days and China remains a puz­zle to many. The lack of trans­parency and the view that news is fil­tered and man­aged helps fuel the fears.

We believe the truth lies some­where between the bear­ish and bull­ish case. We still believe that a hard land­ing is unlikely and that mar­kets are at times over-reacting to data that is really not new news. Exam­ples include the 7.5% growth tar­get for 2012 when the Five-Year Plan issued a year ago envi­sioned a 7% rate over the full period; and com­ments from BHP Bil­li­ton that demand for iron ore would drop to single-digits, which was not sig­nif­i­cantly dif­fer­ent than what they had said in the past.

Even reports that China's man­u­fac­tur­ing pur­chas­ing man­ager index (PMI) is in con­trac­tion ter­ri­tory are a mis­nomer. The PMI sur­vey is a dif­fu­sion index—a read­ing below 50 indi­cates more peo­ple say things are slower ver­sus last month than faster—in other words, below aver­age activ­ity. In a fast grow­ing econ­omy such as China, this does not nec­es­sar­ily equate to a contraction.

Man­u­fac­tur­ing in China slowing

Source: Fact­Set, Markit. As Mar. 27, 2012.

We have believed for some time that China's econ­omy would con­tinue to slow, but that a sharp drop in infla­tion and money sup­ply would allow stim­u­lus to be enacted that could reac­cel­er­ate growth later in 2012. How­ever, we are dis­cour­aged by so far mod­est pol­icy eas­ing amid signs of accel­er­ated slowing.

In par­tic­u­lar, the report that prof­its for Chi­nese indus­trial com­pa­nies fell 5.2% dur­ing the first two months of 2012 was worse than we expected. Granted, this fig­ure was after prof­its gained 34.3% a year ear­lier and is dur­ing a sea­son­ally weak period, so it may not be a last­ing trend, but is concerning.

The Chi­nese gov­ern­ment typ­i­cally takes grad­ual moves, but the slow pace of response while eco­nomic data is mov­ing faster indi­cates the gov­ern­ment could slip behind the eco­nomic momen­tum, then strug­gle to gain ground. China’s econ­omy is now the second-largest glob­ally and is becom­ing tougher to micro-manage – the risk of a pol­icy mis­take is grow­ing. We’re not ready to change our view as we believe we’re still in the early innings of the slow­down, but have a wary eye on pol­icy response.

An event that could have longer-term impli­ca­tions is the com­ing polit­i­cal changeover at year's end. Con­cerns have arisen after the party chief in Chongqing, one of China's biggest cities, was sacked in March. This is the high­est level offi­cial removed in over two decades. There appears to be increas­ing strains within the Com­mu­nist party about whether to move toward reforms or tighten con­trol. We'll be mon­i­tor­ing this over the com­ing year.

Read more inter­na­tional research at www.schwab.com/oninternational.

Impor­tant Disclosures

The MSCI EAFE® Index (Europe, Aus­trala­sia, Far East) is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure devel­oped mar­ket equity per­for­mance, exclud­ing the United States and Canada. As of May 27, 2010, the MSCI EAFE Index con­sisted of the fol­low­ing 22 devel­oped mar­ket coun­try indexes: Aus­tralia, Aus­tria, Bel­gium, Den­mark, Fin­land, France, Ger­many, Greece, Hong Kong, Ire­land, Israel, Italy, Japan, the Nether­lands, New Zealand, Nor­way, Por­tu­gal, Sin­ga­pore, Spain, Swe­den, Switzer­land and the United Kingdom.The MSCI Emerg­ing Mar­kets IndexSM is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure equity mar­ket per­for­mance in the global emerg­ing mar­kets. As of May 27, 2010, the MSCI Emerg­ing Mar­kets Index con­sisted of the fol­low­ing 21 emerging-market coun­try indexes: Brazil, Chile, China, Colom­bia, the Czech Repub­lic, Egypt, Hun­gary, India, Indone­sia, Korea, Malaysia, Mex­ico, Morocco, Peru, Philip­pines, Poland, Rus­sia, South Africa, Tai­wan, Thai­land and Turkey.The S&P 500® index is an index of widely traded stocks.Indexes are unman­aged, do not incur fees or expenses and can­not be invested in directly.Past per­for­mance is no guar­an­tee of future results.Investing in sec­tors may involve a greater degree of risk than invest­ments with broader diversification.International invest­ments are sub­ject to addi­tional risks such as cur­rency fluc­tu­a­tions, polit­i­cal insta­bil­ity and the poten­tial for illiq­uid mar­kets. Invest­ing in emerg­ing mar­kets can accen­tu­ate these risks.The infor­ma­tion con­tained herein is obtained from sources believed to be reli­able, but its accu­racy or com­plete­ness is not guar­an­teed. This report is for infor­ma­tional pur­poses only and is not a solic­i­ta­tion or a rec­om­men­da­tion that any par­tic­u­lar investor should pur­chase or sell any par­tic­u­lar secu­rity. Schwab does not assess the suit­abil­ity or the poten­tial value of any par­tic­u­lar invest­ment. All expres­sions of opin­ions are sub­ject to change with­out notice. The Schwab Cen­ter for Finan­cial Research is a divi­sion of Charles Schwab & Co., Inc.

Tags: asset class, Bernanke, Brazil, Canadian Market, Charles Schwab, Chief Investment Strategist, China, Contrarian Indicator, Earnings Season, Economic Expansion, Economic Risks, India, Investor Confidence, Investor Sentiment, Liz Ann, Market Environment, Market Perception, Monetary Stance, Russia, Sanguine View, Senior Vice President, Siren Song, Stable Environment, Transparent Communication, Treasury Yields
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Emerging Markets Radar (April 2, 2012)

Sunday, April 1st, 2012

Emerg­ing Mar­kets Radar (April 2, 2012)

Strengths

• China’s State Coun­cil has pro­vided Wen­zhou City a pol­icy to nat­u­ral­ize pri­vate lend­ing with new forms of small finan­cial insti­tu­tions. China is in the process of launch­ing out­bound direct-investment chan­nels and set­ting up regional cap­i­tal mar­kets to trade non-listed shares, tech­nol­ogy and art prod­ucts over-the-counter.
• Com­pa­nies in Inter­net, casino, and bank­ing sec­tors have mostly beat mar­ket esti­mates so far in the Hong Kong earn­ings season.
• The Shang­hai Ship­ping Exchanged released data this week show­ing strong momen­tum in China’s freight traf­fic. In addi­tion, Alpha­liner reported Maersk halted North Europe-Asia book­ings due to a capac­ity crunch led by skipped sail­ings in pre­vi­ous months.
• Thai­land exports rose 0.91 per­cent in Feb­ru­ary, unex­pect­edly rebound­ing as fac­to­ries con­tinue to resume pro­duc­tion after last year’s floods. Jan­u­ary saw a 6 per­cent slide in the fig­ure and the median Bloomberg esti­mate was for a 5 per­cent con­trac­tion. In addi­tion, imports rose 8.25 percent.
• Hong Kong’s Feb­ru­ary trade growth sur­prised on the upside. HK exports were up 14 per­cent and imports 20.8 per­cent dur­ing Feb­ru­ary, notably bet­ter than the con­sen­sus expectation.
• Due to extremely low val­u­a­tion mul­ti­ples for Chi­nese com­pa­nies listed on U.S. exchanges, major share­hold­ers of these com­pa­nies have come out to buy out these com­pa­nies. The lat­est was Zhongpin’s chair­man, who offered to buy out the com­pany for about $418 mil­lion, or $13.50 per share. The trend may con­tinue if those com­pa­nies don’t see their mul­ti­ples re-rated.
• With liq­uid­ity and growth fears eas­ing, the Pol­ish Bank­ing Sen­ti­ment Index has improved after a 30 per­cent decline in the fourth quar­ter, accord­ing to Bloomberg. Recent acqui­si­tions by San­tander of Kredyt Bank and by Raif­feisen of Pol­bank, in con­junc­tion with Poland’s under­pen­e­trated bank­ing mar­ket and higher growth rates vs. the euro­zone, have dri­ven the rebound.

Weak­nesses

• South Africa’s eco­nomic growth is less than half the level the gov­ern­ment says is needed to make inroads into the high­est job­less rate of the 61 coun­tries tracked by Bloomberg. At 24 per­cent unem­ploy­ment, investors are being pushed to con­sider alter­na­tives from Aus­tralia to Peru.
• The S&P down­graded South Africa’s out­look to neg­a­tive on struc­tural eco­nomic and social prob­lems. The finance min­is­ter had listed nar­row­ing the fis­cal deficit among his pri­or­i­ties this year, in addi­tion to reduc­ing unem­ploy­ment and pro­vid­ing mod­er­ate tax relief. As ris­ing wages dis­cour­age invest­ment, lower rev­enues will con­strain the government’s efforts to meet ambi­tious goals for job creation.
• January-February prof­its for indus­trial com­pa­nies in China were said to be down 5.2 per­cent this year ver­sus 25.4 per­cent increase dur­ing this period last year. This raised con­cerns about a “hard land­ing,” espe­cially in Hong Kong where sen­ti­ment is worsening.
• Recent veg­etable prices in China were at his­toric highs, which may mean the next con­sumer price infla­tion (CPI) data may tick higher, reduc­ing the scope for China to relax its cur­rently tight mon­e­tary policy.
• The Tai­wan gov­ern­ment has agreed to put a cap­i­tal gains tax for stock price appre­ci­a­tion at the top of its agenda. At 3.3 per­cent of GDP, the Tai­wanese gov­ern­ment is run­ning the high­est bud­get deficit in Asia and a new source of money is needed.

Oppor­tu­ni­ties

• Ship­pers have been able to raise con­tainer freight rates this year after remov­ing capac­i­ties away from the mar­ket. Con­tainer lin­ers have been los­ing money due to a severe freight rate slump fol­low­ing over­build­ing in global capac­ity dur­ing the boom-bust cycle. At the cur­rent rate, ship­pers are able to breakeven and may make money if rates and vol­umes con­tinue to increase.



• Brazil’s cen­tral bank Pres­i­dent Alexan­dre Tombini said the country’s labor mar­ket can accom­mo­date faster eco­nomic growth now that pol­i­cy­mak­ers are fore­cast­ing for the sec­ond half of the year.
• Russia’s entry into the World Trade Orga­ni­za­tion (WTO) will add about $162 bil­lion to the country’s eco­nomic out­put each year as mar­ket access and for­eign invest­ment improves.
• Accord­ing to Mer­rill Lynch, the oppor­tu­nity for active stock pick­ers to add value in global emerg­ing mar­kets is now increas­ing (see chart). This per­for­mance oppor­tu­nity refers to dis­per­sion of returns and how large or small the oppor­tu­nity is between out­per­form­ing and under­per­form­ing assets. The oppor­tu­nity to add value from small-sized com­pa­nies has con­sis­tently been higher than the oppor­tu­nity to do so from large ones.

Threats

• Hun­gary would under­mine its cred­i­bil­ity by sell­ing eurobonds before obtain­ing a loan from Inter­na­tional Mon­e­tary Fund (IMF), the CEO of OTP warned. OTP is the Hungary’s largest bank.
• South Africa’s power sup­ply con­straint has the poten­tial to act as a “hand brake” on the country’s GDP growth out­look and is an “under­ap­pre­ci­ated” down­side risk, a domes­tic bank­ing group warned. In fact, Absa Cap­i­tal econ­o­mist Jef­frey Schultz says that the power short­fall is one of the “idio­syn­cratic” fac­tors that is likely to act as a drag on domes­tic eco­nomic expan­sion dur­ing 2012, as well as over the medium term. It was also a fac­tor in the Bar­clays affiliate’s deci­sion to revise its GDP out­look down­ward for 2012.

Tags: Art Products, Bloomberg, Brazil, Capital Markets, Chinese Companies, Contraction, Earnings Season, Emerging Markets, Europe Asia, Eurozone, Financial Institutions, Freight Traffic, Internet Casino, Investment Channels, North Europe, Polbank, Private Lending, Raiffeisen, Regional Capital, Russia, Sentiment Index, Thailand Exports
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The World's A Little Richer

Saturday, March 31st, 2012

Imag­ine your daily con­sump­tion cost­ing you less than a cup of Star­bucks. About 1.3 bil­lion peo­ple around the world live this real­ity. The good news is that it’s the low­est num­ber of peo­ple ever.

The World Bank released an update to its con­sump­tion poverty esti­mates in devel­op­ing coun­tries, and for the first time ever, the orga­ni­za­tion found progress in all the regions they track. In terms of the num­ber and per­cent­age of peo­ple liv­ing on $1.25 a day (on a pur­chas­ing power par­ity) at 2005 prices in 130 devel­op­ing coun­tries, the world is a lit­tle richer.

The area see­ing “dra­matic progress” was East Asia, reports the World Bank. Back in the 1980s, this region had the world’s high­est inci­dence of poverty. Nearly 80 per­cent of peo­ple lived on less than $1.25 each day; In 2008, the num­ber dropped to 14 percent.

Across these poor­est coun­tries, in 1981, 70 per­cent of peo­ple were liv­ing on less than $2 a day; 2008 data shows that the fig­ure has fallen to just above 40 per­cent. Whereas just over 50 per­cent of peo­ple in the poor­est coun­tries were liv­ing on less than $1.25 a day in 1981, only about 25 per­cent are today.

I dis­cussed the impor­tance of this ris­ing con­sumer with CNBC’s Squawk Box Asia’s Mar­tin Soong and Lisa Oake this week. I stopped by their stu­dios while I was in Sin­ga­pore to dis­cuss my thoughts on the con­tin­u­ing build-out of emerg­ing markets.

Watch it now.

By click­ing the link above, you will be directed to a third-party web­site. U.S. Global Investors does not endorse all infor­ma­tion sup­plied by this web­site and is not respon­si­ble for its con­tent. All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor.

The S&P/ASX 200 Index is a market-capitalization weighted and float-adjusted stock mar­ket index of Aus­tralian stocks listed on the Aus­tralian Secu­ri­ties Exchange. E-7 are the seven most pop­u­lous emerg­ing mar­ket countries—China, India, Indone­sia, Brazil, Pak­istan, Rus­sia and Mexico.

Tags: Asx 200, Australian Securities, Australian Stocks, Brazil, Cnbc, Dramatic Progress, East Asia, Emerging Market Countries, India, India Indonesia, Market Capitalization, Martin Soong, Oake, Paki, Poorest Countries, Poverty Estimates, Purchasing Power Parity, Russia, S Martin, Squawk Box, Starbucks, Stock Market Index, U S Global Investors
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How to Access the EM Consumer? Think Small (Koesterich)

Friday, March 30th, 2012

“If every­one in China length­ened their shirt tails by a foot, the tex­tile mills of Eng­land would spin for a year.” That’s what one Eng­lish­man report­edly said nearly two cen­turies ago about the prospect of sell­ing to, and prof­it­ing from, con­sumers in emerg­ing markets.

Today, not much has changed. In a world in which most devel­oped mar­kets are strug­gling with too much debt and too lit­tle growth, few themes get investors more excited than the prospect of ben­e­fit­ting from the bil­lions of rel­a­tively debt-free con­sumers in emerg­ing mar­kets. Across the globe, emerg­ing mar­ket growth con­tin­ues to cre­ate hun­dreds of mil­lions of new middle-class con­sumers. By 2025 China, India and Brazil are respec­tively expected to be the 2^nd, 4^th, and 9^th largest con­sumer mar­kets in the world.

How­ever, access­ing emerg­ing mar­ket con­sumers may not be as sim­ple as just own­ing broad emerg­ing mar­ket funds. In fact, investors who are look­ing to specif­i­cally gain expo­sure to emerg­ing mar­ket domes­tic con­sump­tion may want to con­sider the small cap seg­ment of that mar­ket. Here’s why.

The com­pa­nies that tend to dom­i­nate broad emerg­ing mar­ket indices are large, multi-national firms that are often more lev­ered to the global eco­nomic cycle than to local con­sump­tion. Such com­pa­nies, for instance, make up roughly two-thirds of the MSCI World Emerg­ing Mar­ket Index. Just con­sider the sec­tors that dom­i­nate that index: Finan­cials (24% of the index), energy (15%), tech­nol­ogy (14%) and mate­ri­als (13%).

In con­trast, small cap emerg­ing mar­ket indices tend to pro­vide a more con­cen­trated expo­sure to domes­tic demand. These indices are less dom­i­nated by large, global cycli­cal plays and have a higher con­cen­tra­tion of com­pa­nies in indus­tries with a local fla­vor, such as cap­i­tal goods, real estate, con­sumer dis­cre­tionary, and food and beverages.

To be sure, I’m not sug­gest­ing that investors aban­don emerg­ing mar­ket large cap stocks. As I’ve been advo­cat­ing since the end of 2011, there are both short– and long-term ratio­nales for over­weight­ing cer­tain emerg­ing mar­kets.

In the near term, I expect emerg­ing mar­ket coun­tries to out­per­form based on low rel­a­tive val­u­a­tions, falling infla­tion and stronger growth. Longer term, emerg­ing mar­ket stocks are likely to ben­e­fit from falling emerg­ing mar­ket volatil­ity and ris­ing devel­oped mar­ket volatil­ity. How­ever, if you’re specif­i­cally try­ing to cap­ture, and profit from, the sec­u­lar rise of emerg­ing mar­ket mid­dle class con­sumers, it’s worth con­sid­er­ing that small cap stocks pro­vide a more tar­geted expo­sure. I pre­fer to access emerg­ing mar­ket small caps through the iShares MSCI Emerg­ing Mar­kets Small Cap Index Fund (NYSEARCA: EEMS), which has a rel­a­tively high weight to con­sumer dis­cre­tionary stocks and real estate man­age­ment and devel­op­ment, as well as the iShares MSCI China Small Cap Index Fund (NYSEARCA: ECNS) and the iShares MSCI Brazil Small Cap Index Fund (NYSEARCA: EWZS) for more tar­geted access to Chi­nese and Brazil­ian small caps.

Source: Bloomberg

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Investme

Tags: Billions, Brazil, Cap Stocks, Capital Goods, Centuries, Concentration, Consumer Markets, Domestic Consumption, Economic Cycle, Emerging Market Funds, Emerging Market Indices, Emerging Markets, Englishman, Food And Beverages, India, Market Consumers, Market Index, Middle Class, Msci World, Small Cap, Textile Mills, Two Thirds
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Where Are We in the Boom/Bust Liquidity Cycle?

Thursday, March 29th, 2012

Where Are We in the Boom/Bust Liq­uid­ity Cycle?

By Thomas Fahey, Asso­ciate Direc­tor of Macro Strate­gies, Loomis Sayles

March 2012

In an often cyn­i­cal world, stan­dard fi nan­cial and macro­eco­nomic quan­ti­ta­tive mod­els give peo­ple the benefi t of the doubt. Fun­da­men­tal eco­nomic the­ory assumes the best of us, sup­pos­ing that human beings are per­fectly ratio­nal, know all the facts of a given sit­u­a­tion, under­stand the risks, and opti­mize our behav­ior and port­fo­lios accord­ingly. Real­ity, of course, is quite dif­fer­ent. While a sig­nifi cant por­tion of indi­vid­ual and mar­ket behav­ior can be mod­eled rea­son­ably well, the human emo­tions that drive cycles of fear and greed are not pre­dictable and can often defy his­tor­i­cal prece­dent. As a result, quan­ti­ta­tive mod­els some­times fail to antic­i­pate major macro­eco­nomic turn­ing points. The ongo­ing debt cri­sis in Europe is the most recent exam­ple of an extreme event shat­ter­ing his­tor­i­cal norms.

Once an extreme event occurs, stan­dard mod­els offer lim­ited insight as to how the ensu­ing cri­sis could play out and how it should be man­aged, which is why pol­icy responses can seem dis­jointed. The lat­est pol­icy responses to the Euro­pean cri­sis have been no excep­tion. To under­stand and respond to a cri­sis like the one in Europe, per­haps we need to con­sider some new mod­els that include the “human fac­tor.” Eco­nomic his­to­rian Charles Kindle­berger can offer some insight. In his book Manias, Pan­ics, and Crashes, Kindle­berger explores the anatomy of a typ­i­cal fi nan­cial cri­sis and pro­vides a frame­work that con­sid­ers the impact of the pow­er­ful human dynam­ics of fear and greed. Kindleberger’s descrip­tive process of the boom and bust liq­uid­ity cycle can help shed light on the cur­rent Euro­pean sov­er­eign debt saga, and per­haps illu­mi­nate whether we have in fact turned the cor­ner on this fi nan­cial crisis.

KINDLEBERGER AND THE MINSKY MODEL

Kindle­berger ana­lyzed hun­dreds of fi nan­cial crises dat­ing back cen­turies and found them to share a com­mon sequence of events, one that fol­lowed mon­e­tary the­o­rist Hyman Minsky’s model of the insta­bil­ity of a credit sys­tem. Fun­da­men­tally, the more sta­ble and pros­per­ous an eco­nomic struc­ture appears, the more lever­age and spec­u­la­tive fi nanc­ing will build within the sys­tem, even­tu­ally mak­ing it highly vul­ner­a­ble to a sur­pris­ing, extreme col­lapse. Kindle­berger pro­vided the qual­i­ta­tive (as opposed to quan­ti­ta­tive!) descrip­tion of the Min­sky Model, shown below, which is a use­ful snap­shot of the liq­uid­ity cycle. It can be applied to Europe and any poten­tial boom/bust can­di­date, includ­ing Chi­nese real estate, com­mod­ity prices, or investors’ recent love affair with emerg­ing mar­kets. Kindle­berger famously dubbed this sequence a “hardy peren­nial,” prob­a­bly because the gal­va­niz­ing human con­di­tions of fear and greed are more often than not prone to over­shoot fun­da­men­tal val­ues com­pared to the behav­ior of a ratio­nal indi­vid­ual, which exists only in macro­eco­nomic theory.

DISPLACEMENT

The boom typ­i­cally starts with a “dis­place­ment,” a macro­eco­nomic shock (for exam­ple a new tech­nol­ogy, dereg­u­la­tion of an indus­try), that cre­ates new profi t oppor­tu­ni­ties. For Europe, dis­place­ment came in the form of the Eco­nomic and Mon­e­tary Union (EMU) in 1999, which united par­tic­i­pat­ing coun­tries under a sin­gle mon­e­tary pol­icy and cur­rency, the euro. By estab­lish­ing one inter­est rate for EU mem­ber states, EMU enabled all par­tic­i­pat­ing sov­er­eigns to trade as if they pos­sessed Germany’s supe­rior cred­it­wor­thi­ness, regard­less of their fi scal con­di­tion. The oblig­ing mar­ket responded by lend­ing to EU coun­tries indiscriminately.

BANK CREDIT FEEDS THE BOOM

Armed with “AAA credit” bor­rowed from Ger­many, Europe entered the next phase of the cycle: bank credit feeds the boom. As Euro­pean bond yields con­verged to Ger­many under the united cur­rency, it appeared that Europe had entered a new era of exchange rate and inter­est rate sta­bil­ity. How­ever, this con­ver­gence weak­ened mar­ket dis­ci­pline and spurred mount­ing lever­age in Europe’s pub­lic and pri­vate sec­tors. Money was unprece­dent­edly cheap for many sov­er­eign nations and, con­se­quently, the pri­vate sec­tor also saw huge declines in inter­est rates. For exam­ple, neg­a­tive real inter­est rates in Spain and Ire­land fueled real estate booms. Europe ended up with a one-size-fi ts-none mon­e­tary policy.

Impor­tantly, when bank credit feeds the boom, Kindle­berger explains that the fi nan­cial sys­tem often spawns “new” forms of money. This is known as the elas­tic­ity of credit, and it facil­i­tates bor­row­ing and spec­u­la­tion. In Europe, Basel cap­i­tal rules facil­i­tated the elas­tic­ity of credit. Using the assump­tion that devel­oped mar­ket sov­er­eigns would not default, Basel cap­i­tal rules had loop­holes that allowed banks to hold sov­er­eign bonds with­out some off­set­ting charge to risk-based cap­i­tal. As a result, bank appetite for sov­er­eign bonds was endur­ing despite dete­ri­o­rat­ing credit profi les in coun­tries like Greece and Por­tu­gal. With­out any cap­i­tal charge for sov­er­eign bonds, this cre­ated unchecked lever­age on bank bal­ance sheets.

The wave of secu­ri­ti­za­tion and the rise of repur­chase and sale (or “repo”) agree­ments also spawned new forms of money that fed the credit boom. The secu­ri­ti­za­tion and repo mar­kets were the dark cor­ners in which the global fi nan­cial cri­sis man­i­fested itself, because the run on Lehman Broth­ers’ assets occurred in the repo mar­ket, not out­side the broker-dealer’s front door. Sim­i­larly, the Euro­pean bank­ing cri­sis and rush for liq­uid­ity is occur­ring through the inter­bank repo markets.

The repo mar­ket, like bank­ing, is a vehi­cle of liq­uid­ity trans­for­ma­tion. Banks secure fund­ing in short-term liq­uid mar­kets, lend in longer-dated less liq­uid mar­kets and col­lect the inter­est rate spread between the two. Liq­uid­ity trans­for­ma­tion is sus­cep­ti­ble to pan­ics and runs if short-term lenders lose faith and demand imme­di­ate repay­ment. Banks have deposit insur­ance to limit runs, but only up to cer­tain cash lim­its, say €250,0001. In the repo mar­ket, where the sums of money are in the bil­lions, bor­row­ers post col­lat­eral, which serves as insur­ance to let lenders know their money should be safe. This col­lat­eral, usu­ally a pool of loans or bonds, allows banks to secure cru­cial fund­ing liq­uid­ity through short-term loans.

Secu­ri­ti­za­tion and the repo mar­ket expanded the elas­tic­ity of credit that fed the boom. In a cir­cu­lar fash­ion, they also increased the demand for eli­gi­ble col­lat­eral to post as insur­ance in the repo mar­ket. This is where the fi nan­cial engi­neers went to work and helped cre­ate AAA col­lat­eral out of worth­less loans to sub­prime bor­row­ers. By not requir­ing cap­i­tal charges on sov­er­eign bonds, the laissez-faire reg­u­la­tory envi­ron­ment also made sov­er­eign bonds highly val­ued col­lat­eral in repo transactions.

SPECULATION, OVERTRADING & GEARING

As the cycle churned on, the urge to spec­u­late in sov­er­eign bonds, real estate and struc­tured prod­ucts drove prices higher, and the veloc­ity of money (rate at which money changes hands) expanded. This is typ­i­cal of booms—easy credit and the increased wealth that accom­pa­nies soar­ing asset val­u­a­tions feed a sense of eupho­ria and the per­cep­tion that asset val­ues will increase indefi nitely. Greed enters. In Europe, pri­vate and pub­lic investors were rid­ing high. They will­ingly sus­pended their dis­be­lief, seduced into think­ing the music would never stop. Liq­uid­ity trans­for­ma­tion, espe­cially in the repo mar­ket, tends to be very pro-cyclical. As long as prices rise and col­lat­eral val­ues remain sta­ble, there is ample market-based liq­uid­ity to fuel the over­trad­ing and gear­ing (lever­age) of assets. It was cir­cum­stances like these that led Irish banks to lend against ques­tion­able assets six times the size of the nation’s econ­omy with­out being ques­tioned. Accord­ing to Minsky’s fi nan­cial insta­bil­ity hypoth­e­sis, this is the time when the fi nan­cial sys­tem starts becom­ing highly spec­u­la­tive and shaky despite the appear­ance of sta­bil­ity. Just look at how sta­ble Euro­pean bond yields were before the cri­sis, hid­ing deep­rooted credit prob­lems in the periph­eral markets.

INSIDERS TAKE PROFIT AND THE RUSH FOR LIQUIDITY

Finally, the cycle grinds to the point at which insid­ers start to take profi ts, pre­cip­i­tat­ing a rush for liq­uid­ity. Insid­ers are investors who pos­sess an infor­ma­tion advantage—and they rep­re­sent a pow­er­ful real­ity that fl ies in the face of eco­nomic the­ory and mod­el­ing. If insid­ers or lenders begin to worry that the col­lat­eral pool (of sov­er­eign bonds, bank loans, struc­tured prod­ucts) is weak­en­ing, they can demand bet­ter col­lat­eral or a big­ger hair­cut (the dif­fer­ence in value between the actual money lent ver­sus the posted col­lat­eral). These increased require­ments com­pro­mise bor­row­ers’ abil­ity to fund their liq­uid­ity trans­for­ma­tion, fear unseats greed, and the pan­icked rush for liq­uid­ity is on. Bor­row­ers are forced to sell assets and reduce lever­age, caus­ing prices to abruptly reverse.

The fact that trans­ac­tional money (or market-based liq­uid­ity) and credit (like the repo mar­ket) are not fac­tored into tra­di­tional eco­nomic mod­els is a crit­i­cal rea­son why these mod­els failed to iden­tify the sever­ity of the global fi nan­cial cri­sis or its rever­ber­a­tions through­out the inter­con­nected fi nan­cial sys­tem. It was in the repo mar­ket that the insid­ers fi rst began to take profi ts dur­ing the Euro­pean sov­er­eign and bank­ing panic of 2011, just as they had done three years ear­lier when Lehman Broth­ers imploded. As shown in the chart to the right, dur­ing the sum­mer and fall of 2011, the level of repo reported by the Fed­eral Reserve and Euro­pean Cen­tral Bank (ECB) was declin­ing, sig­nal­ing insid­ers’ stress and the rush for liq­uid­ity. Though most tra­di­tional mod­els may have missed the signs of spec­u­la­tive fi nance and grow­ing insta­bil­ity, the Min­sky Model helps high­light these risks, at least fi guratively.

REVULSION, FRAUD, DISCREDIT AND THE LENDER OF LAST RESORT

Once the liq­uid­ity reverses, caus­ing a fi nan­cial crash and cri­sis, the fi nger point­ing begins. Heroes turn to vil­lains as revul­sion, fraud and dis­credit creep in. Banker revul­sion has become an endur­ing issue, the Greek fraud as to the true size of its national debt has been dis­closed, and the notion that a devel­oped mar­ket sov­er­eign could not default was dis­cred­ited. The saga has fol­lowed the typ­i­cal sequenc­ing of a fi nan­cial cri­sis, but a crit­i­cal ques­tion remains: have we moved past revul­sion, fraud, dis­credit and turned the cor­ner toward recovery?

Accord­ing to Kindleberger’s fi gura­tive descrip­tion of Minsky’s liq­uid­ity cycle, we should be turn­ing the cor­ner on the bust phase of the global liq­uid­ity cycle because lenders of last resort have fi nally promised suffi cient liq­uid­ity to restore order—or have they?

In our pre­vi­ous updates on the Euro­pean cri­sis, we were very crit­i­cal of the ECB because it was, in our view, not act­ing like a cred­i­ble lender of last resort. There was a rush for liq­uid­ity when the Euro­pean repo mar­ket plum­meted in the fall of 2011. Widen­ing credit spreads, falling equity prices and tighter bank credit indi­cated the mar­kets were scream­ing for liq­uid­ity. At that time, we believed that the ECB needed to expand its bal­ance sheet much more aggres­sively and meet the ris­ing demand for liq­uid­ity. The ECB has since responded, and its bal­ance sheet is expand­ing rapidly. Most recently, the ECB broke the fever of risk aver­sion with its three-year Long-Term Refi nanc­ing Oper­a­tion (LTRO), which deliv­ered liq­uid­ity to the bank­ing sys­tem and should help avert the devel­op­ment of a severe credit crunch.

While cen­tral bank liq­uid­ity buys time, it does not fi x the fun­da­men­tal sol­vency ques­tion of whether there is enough future income to ser­vice out­stand­ing debts. The say­ing “a rolling loan gath­ers no loss” is a nice thought, but even­tu­ally bad debt has to be rec­og­nized, and some­one has to take a loss. The gear­ing, or lever­age, from the past decade’s credit boom was mas­sive and is tak­ing a long time to resolve. It takes time to reveal which assump­tions on future income, prices and profi tabil­ity lev­els were faulty when lever­age was ris­ing rapidly. Recent infor­ma­tion on some Euro­pean bal­ance sheets, includ­ing the Greek sov­er­eign bal­ance sheet, has revealed such extreme gear­ing that it is unre­al­is­tic to think future incomes and tax rev­enues will be suffi cient to ser­vice the debt. For now, pol­icy mak­ers are try­ing to for­tify bal­ance sheets before rec­og­niz­ing any poten­tial losses to min­i­mize sys­temic risks. In our view, we are not through the process of unwind­ing lever­aged bal­ance sheets; that is why we have had such a hard time reach­ing escape veloc­ity from the fi nan­cial cri­sis despite repeated attempts by cen­tral banks to pro­vide suffi cient liq­uid­ity. The halt­ing eco­nomic recov­ery sug­gests cen­tral banks will have to fi ght any urge to pre­ma­turely reduce their uncon­ven­tional liq­uid­ity provisions.

Nev­er­the­less, the fact that the ECB has laid its cards on the table and is act­ing like a lender of last resort, despite its tough rhetoric, is good news. Other cen­tral banks have also moved to pro­vide more liq­uid­ity: the Fed­eral Reserve, for exam­ple, recently gave guid­ance that inter­est rates will stay very accom­moda­tive until late 2014; the Bank of Japan has imple­mented an infl ation goal of 1.0% and will use quan­ti­ta­tive eas­ing to pur­sue its objec­tive; the People’s Bank of China cut its cap­i­tal reserve require­ments and has been rolling loans to local gov­ern­ments; the Brazil­ians, Aus­tralians, Swedes and Nor­we­gians all cut inter­est rates. Coör­di­nated cen­tral bank actions are help­ing to boost risk appetites glob­ally. These are pos­i­tive signs for reduc­ing major sys­temic tail risks going forward.

So, if cen­tral banks are try­ing to restore order by promis­ing suffi cient liq­uid­ity, should we now focus on iden­ti­fy­ing where bank credit could feed the next boom? Our answer is a resound­ing yes. The next boom always seems to rise from the ashes of the pre­vi­ous bust, just as the global hous­ing bub­ble rose from the easy money poli­cies that fol­lowed the 1990s tech­nol­ogy bust. For now, investors should look around the world and deter­mine which bank­ing sys­tems appear healthy enough to pro­vide that elas­tic­ity of credit. In many devel­oped mar­kets, there are still major head­winds to a tra­di­tional bor­row­ing– and spending-driven recov­ery. The con­sumer and pub­lic sec­tors appear less will­ing or able to lever­age their bal­ance sheets to pro­vide that extra boost to growth. Emerg­ing mar­kets, on the other hand, should still have ample room to grow. How­ever, we sug­gest investors remain vig­i­lant, watch­ing for any sign that boom­ing credit has sown the seeds of Kindleberger’s “hardy perennial.”

Charles P. Kindle­berger (1910–2003) was an Amer­i­can econ­o­mist and eco­nom­ics pro­fes­sor. His noted works include Manias, Pan­ics, and Crashes, A His­tory of Finan­cial Crises, first pub­lished in 1978 (John Wiley & Sons, Inc.).

Hyman P. Min­sky (1919–1996) was an Amer­i­can econ­o­mist and eco­nom­ics pro­fes­sor. His noted works include Sta­bi­liz­ing an Unsta­ble Econ­omy, first pub­lished in 1986 (Yale Uni­ver­sity Press).

Past mar­ket expe­ri­ence is no guar­an­tee of future results.

This arti­cle is pro­vided for infor­ma­tional pur­poses only and should not be con­strued as invest­ment advice. Any opin­ions or fore­casts con­tained herein reflect the sub­jec­tive judg­ments and assump­tions of the authors only and do not nec­es­sar­ily reflect the views of Loomis, Sayles & Com­pany, L.P., or any port­fo­lio man­ager. Invest­ment rec­om­men­da­tions may be incon­sis­tent with these opin­ions. There can be no assur­ance that devel­op­ments will tran­spire as fore­casted and actual results will be dif­fer­ent. Data and analy­sis does not rep­re­sent the actual or expected future per­for­mance of any invest­ment product.

We believe the infor­ma­tion, includ­ing that obtained from out­side sources, to be cor­rect, but we can­not guar­an­tee its accu­racy. The infor­ma­tion is sub­ject to change at  any time with­out notice.

MALR008968 LEGREV122812

Copy­right © Loomis Sayles

Tags: Associate Director, Boom And Bust, Brazil, Charles Kindleberger, Cynical World, Debt Crisis, Economic Historian, Economic Theory, Extreme Event, Greed, Human Dynamics, Human Emotions, liquidity, Loomis Sayles, Market Behavior, Nancial, Panics, Policy Responses, Quantitative Models, Sovereign Debt, Thomas Fahey
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Frontrunning: March 27, 2012

Tuesday, March 27th, 2012

• 6.0+ Mag­ni­tude quake strikes near Tokyo (USGS)
• Ire­land Faces Legal Chal­lenge on Bank Bailout (Reuters)
• Bernanke says U.S. needs faster growth (Reuters)
• Spain Promises Aus­tere Bud­get Despite Poll Blow (Reuters)
• Orban Pun­ished by Investors as Hun­gary Retreats From IMF Talks (Bloomberg)
• Obama vows to pur­sue fur­ther nuclear cuts with Rus­sia (Reuters)
• Japan's Azumi Wants Tax Issue Decided Tues­day (WSJ)
• Aus­tralia Los­ing Com­pet­i­tive Edge, Says Dow Chem­i­cals CEO (Aus­tralian)
• OECD Urges ‘Ambi­tious’ Euro­zone Reform (FT)
• Yields Less Than Italy’s Sig­nal Indone­sia Exit­ing Junk (Bloomberg)

Overnight News Digest

Canada

THE GLOBE AND MAIL

- Public-sector employ­ees in Ontario will have to make higher con­tri­bu­tions to their pen­sion plans, have their ben­e­fits cut or work longer before they can col­lect retire­ment pay, as part of new aus­ter­ity mea­sures to be unveiled in Tuesday's provin­cial bud­get. r.reuters.com/hys37s

- Nat­ural Resources Min­is­ter Joe Oliver con­firmed Mon­day that the bud­get will spell out the government's inten­tion to reduce reg­u­la­tory delays faced by energy and min­ing com­pa­nies when they pro­pose major projects in Canada. r.reuters.com/gys37s

- It was offi­cially billed as a nuclear secu­rity sum­mit, but trade and the econ­omy trumped ter­ror­ism in Stephen Harper's back­room chats with other world lead­ers. r.reuters.com/fys37s

Reports in the busi­ness section:

- As North Amer­i­can crude oil prices con­tinue to lan­guish, pipeline builder Enbridge Inc is launch­ing a major new round of con­struc­tion to push more bar­rels down the cen­tre of the con­ti­nent, in hopes of eas­ing sup­ply gluts that have kept prices low. r.reuters.com/dys37s

NATIONAL POST

- Depart­ment of National Defence offi­cials charged with select­ing Canada's next fighter jet met with Lock­heed Mar­tin — maker of the F-35 — more times than with all other bid­ders com­bined before their billion-dollar deci­sion to select it. r.reuters.com/cys37s

- The fed­eral government's once-feared bad-news bud­get is being trans­formed into a plan that will com­bine spend­ing cuts with new mea­sures designed to spur the econ­omy, RBC Eco­nom­ics says in a research report Mon­day. r.reuters.com/bys37s

- The gov­ern­ment of Alberta is expected to pocket $1.2 tril­lion in roy­al­ties from the oil sands in the next 35 years, as oil pro­duc­tion rises to 5.4 mil­lion bar­rels a day from today's 1.6 mil­lion bpd, accord­ing to a new study by the Cana­dian Energy Research Insti­tute made pub­lic Mon­day. r.reuters.com/xus37s

Reports in the busi­ness section:

- Engi­neer­ing firm SNC-Lavalin Group Inc could face a reg­u­la­tory or police probe into the US$56 mil­lion that went miss­ing under Chief Exec­u­tive Offi­cer Pierre Duhaime and into the company's busi­ness in Libya. r.reuters.com/zus37s

WSJ

* Ben Bernanke said that the Fed­eral Reserve's easy money poli­cies are still needed to con­front deep prob­lems in the nation's labor market.

* After years of tout­ing the supe­ri­or­ity of online ads, Google is tak­ing a dif­fer­ent approach to pro­mote itself against rivals.

* The Chief Exec­u­tive of BATS Global Mar­kets has reached out to direc­tors about his future and said the com­pany likely will can­cel bonuses related its stock floata­tion, which was pulled Friday.

* Abu Dhabi's sovereign-wealth fund said it would invest $2 bil­lion to buy into the sprawl­ing busi­ness empire of Brazil's rich­est man, Eike Batista.

* A House sub­com­mit­tee said a top lawyer at J.P. Mor­gan Chase will tes­tify at a highly antic­i­pated hear­ing Wednes­day into the col­lapse of MF Global Hold­ings Ltd

FT

GOLDMAN EYES ELECTRONIC BOND TRADING

Gold­man Sachs is con­sid­er­ing how to roll out elec­tronic trad­ing tech­nol­ogy to its fixed income busi­ness — one of its biggest rev­enue gen­er­a­tors — as it pre­pares for new regulation.

BUMI BOARD DISPUTE NEARS RESOLUTION

London-listed Bumi is expected to announce changes to the board and man­age­ment that will see financier Nat Roth­schild step down as co-chairman of the Indone­sian coal miner he cre­ated in 2010.

CAMERON BOWS IN CASH FOR ACCESS ROW

British Prime Min­is­ter David Cameron has been forced to reveal the names of Con­ser­v­a­tive party donors invited to din­ners at his offi­cial res­i­dences as pres­sure grows for an inde­pen­dent inquiry into the "cash for access" affair.

JEFFERIES TO SET UP EUROPE FINANCING ARM

Jef­feries is look­ing to set up a cor­po­rate lend­ing busi­ness in Europe as the fast-growing U.S. invest­ment bank seeks to grab mar­ket share from retrench­ing rivals.

FED DOUBTS BIG US JOBLESS FALLS WILL LAST

Rapid recent falls in U.S. unem­ploy­ment may prove to be a one-off unless eco­nomic growth picks up, Ben Bernanke, chair­man of the U.S. Fed­eral Reserve, warned on Monday.

HUEWEI SEEKS TO OVERTURN AUSTRALIAN BAN

Huawei, the world's second-largest net­work equip­ment ven­dor by sales, aims to con­vince the Aus­tralian gov­ern­ment with gen­er­ous secu­rity mea­sures to revert a ban on the Chi­nese com­pany from a large broad­band project.

EMBRAER AIMS FOR SECOND SHOT AT US JET CONTRACT

Embraer said it expects a can­celled U.S. Air Force con­tract for light attack air­craft to be re-tendered "within weeks" in a deal seen as cru­cial to the defence ambi­tions of the Brazil­ian air­craft producer.

EASYJET OFFERS EXIT-ROW SEATS FOR 12 STG

Seats in the exit rows of some Easy­Jet flights will cost 12 pounds from April as the no-frills air­line seeks to attract cus­tomers reluc­tant to take part in the boarding-time mêlée of bud­get flying.

NYT

* State offi­cials and insur­ance exec­u­tives are devis­ing pos­si­ble alter­na­tives to the com­ing fed­eral require­ment that most Amer­i­cans buy health insur­ance, even as the Supreme Court hears argu­ments about the con­sti­tu­tion­al­ity of the mandate.

* The U.S. government's chief con­sumer pro­tec­tion agency said on Mon­day that it intended to take direct aim at the vast indus­try that has grown up around the buy­ing and sell­ing of infor­ma­tion about Amer­i­can consumers.

www.nytimes.com/2012/03/27/business/ftc-seeks-privacy-legislatio .html?ref=business

* The Euro­pean Union took a big step on Mon­day toward build­ing a finan­cial fire­wall strong enough to pre­vent the spread of fis­cal con­ta­gion to major economies like Spain. The move came after Ger­many dropped its oppo­si­tion to bring­ing the Continent's total bailout capac­ity to more than 690 bil­lion euros ($916 billion).

* As grow­ing num­bers of baby boomers face retire­ment with inad­e­quate sav­ings, some state offi­cials are con­sid­er­ing a novel pro­posal to rebuild America's ail­ing retire­ment sys­tem — hav­ing state pen­sion funds run retire­ment plans for companies.

* The Supreme Court on Mon­day ordered an appeals court to recon­sider its deci­sion to uphold patents held by Myr­iad Genet­ics on two genes asso­ci­ated with a high risk of breast and ovar­ian cancer.

* FX, a basic cable chan­nel that is part of News Corporation's pow­er­ful cable divi­sion, has con­sciously carved a niche in the new tele­vi­sion land­scape, fol­low­ing a blue­print to lure younger view­ers whom mar­keters pay a pre­mium to reach.

* In a speech that sought by turns to deflate opti­mism and pes­simism about the labor mar­ket, the Fed­eral Reserve chair­man, Ben Bernanke, said Mon­day that the Fed's efforts to stim­u­late growth were grad­u­ally reduc­ing unem­ploy­ment, but that the scale and dura­tion of the prob­lem could leave last­ing scars on the economy.

* The chief exec­u­tive of SNC-Lavalin, a major Cana­dian engi­neer­ing and con­struc­tion firm that had exten­sive busi­ness oper­a­tions in Libya, left the com­pany on Mon­day after the release of a report indi­cat­ing that he had autho­rized 56 mil­lion Cana­dian dol­lars in improp­erly doc­u­mented pay­ments to uniden­ti­fied agents, the company's chair­man said Monday.

* MF Global's top lawyer will break her five-month silence on Wednes­day to tell Con­gress that she was unaware of a gap­ing short­fall in cus­tomer money until hours before the bro­ker­age firm filed for bank­ruptcy on Oct. 31.

* Michaels Stores, the arts and crafts retailer owned by the Black­stone Group and Bain Cap­i­tal, plans to file to go pub­lic as soon as next week, in what could be one of the biggest ini­tial pub­lic offer­ings of the year.

* Mega Mal­dives Air­lines is going after a grow­ing niche, link­ing the increas­ingly afflu­ent China with the tiny island nation of the Mal­dives. The company's chief exec­u­tive says his start-up is poised for expansion.

Euro­pean Eco­nomic Update

• Ger­many GfK Con­sumer Con­fi­dence Sur­vey 5.9 – lower than expected. Con­sen­sus 6.0. Pre­vi­ous 6.0.
• Ger­many Import Price Index 1.0% m/m 3.5% y/y – higher than expected. Con­sen­sus 0.9% m/m 3.5% y/y. Pre­vi­ous 1.3% m/m 3.7% y/y.
• Switzer­land UBS Con­sump­tion Indi­ca­tor 0.87. Pre­vi­ous 0.92. Revised 0.93.
• Swe­den House­hold Lend­ing 5.0% y/y – in line with expec­ta­tions. Con­sen­sus 5.0%. Pre­vi­ous 5.1%.
• Swe­den PPI 0.4% m/m 0.5% y/y – lower than expected. Con­sen­sus 0.5% m/m 0.3% y/y. Pre­vi­ous 0.5% m/m 0.1%. y/y.
• Swe­den Trade Bal­ance (Kro­nor) 5.9B – lower than expected. Con­sen­sus 8.0B. Pre­vi­ous 11.3B. Revised 10.8B.
• UK CBI Reported Sales 0 – higher than expected. Con­sen­sus –5. Pre­vi­ous –2.

Tags: Austerity Measures, Bank Bailout, Brazil, Canadian, Canadian Market, Crude Oil Prices, Department Of National Defence, Dollar Decision, Dow Chemicals, Enbridge Inc, Globe And Mail, Gluts, Imf Talks, Joe Oliver, Lockheed Martin, Magnitude Quake, Mail Public, Mining, Natural Resources Minister, Nuclear Cuts, Overnight News, Public Sector Employees, Quake Strikes, Retirement Pay, Russia
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The Economy and Bond Market Radar (March 26, 2012)

Sunday, March 25th, 2012

The Econ­omy and Bond Mar­ket Radar (March 26, 2012)

Trea­sury yields reversed course this week and headed lower as con­cerns sur­round­ing a slow­down in China inten­si­fied. A com­bi­na­tion of weaker fac­tory data out of China and talk of slower steel and iron ore demand from China by global min­ing giant BHP Bil­li­ton was a cat­a­lyst for investors to rethink last week’s move in trea­sury yields.

Strengths

• Ini­tial job­less claims con­tinue to improve, hit­ting the low­est level since March 2008.
• Infla­tion data in China, Brazil and the U.K. all indi­cated a slow­ing trend this week.
• The Con­fer­ence Board’s Lead­ing Indi­ca­tor Index con­tin­ues to grind higher for the fifth month in a row.

Weak­nesses

• The HSBC Flash China Man­u­fac­tur­ing Pur­chas­ing Man­agers’ Index (PMI) fell to 48.1, con­firm­ing other recent weak data and com­ments by gov­ern­ment officials.
• Signs of weak­ness in the auto area are start­ing to build as gaso­line demand fell 7 per­cent and some indi­ca­tors are point­ing to a slow­down in auto sales.
• FedEx announced earn­ings this week and low­ered its global growth forecast.

Oppor­tu­ni­ties

• Should a growth scare resur­face due to the lack of an announce­ment of fur­ther quan­ti­ta­tive eas­ing from the Fed­eral Reserve, bonds may rally again as investors flee to safety, sim­i­lar to what hap­pened in mid-2010 and mid-2011 when the QE1 and QE2 pro­grams ended.

Threats

• Ris­ing oil and gaso­line prices com­bined with liq­uid­ity impli­ca­tions of global eas­ing, led by Europe, may raise the prospect of the reap­pear­ance of higher infla­tion going forward.

Tags: Auto Sales, Bhp Billiton, Bond Market, Brazil, China Manufacturing, Fedex, Gasoline Prices, Giant Bhp, Global Growth, Inflation Data, Initial Jobless Claims, Iron Ore, Leading Indicator, liquidity, Market Radar, Pmi, Purchasing Managers Index, Qe1, Qe2, Slowdown, Treasury Yields
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Emerging Markets Radar (March 26, 2012)

Sunday, March 25th, 2012

Emerg­ing Mar­kets Radar (March 26, 2012)

Strengths

• China has cut the required reserve ratio (RRR) for 379 branches of the Agri­cul­ture Bank of China to boost rural area loan vol­umes, sig­nal­ing fine-tuning mon­e­tary eas­ing. The mar­ket is cur­rently expect­ing fur­ther RRR cuts for all the banks this year.
• China has raised gaso­line and diesel prices by 7 per­cent and 7.76 per­cent, respec­tively. After the increase, the down­stream refin­ery busi­ness is closer to breakeven.
• Singapore’s Con­sumer Price Index (CPI) rose 4.6 per­cent in Feb­ru­ary, unex­pect­edly slow­ing as com­mu­ni­ca­tion costs fell in the city state. In Malaysia, con­sumer prices also slowed, ris­ing 2.2 per­cent year-over-year in Feb­ru­ary, down from 2.7 per­cent in Jan­u­ary and well below the mar­ket esti­mate of 2.5 per­cent. The key rea­son for the decline in infla­tion was a drop in food price inflation.
• The Philip­pines’ bud­get deficit nar­rowed to 15.9 bil­lion pesos ($370 mil­lion) in Jan­u­ary from 101.5 bil­lion pesos the pre­vi­ous month. In Thai­land, the Bank of Thai­land left its bench­mark rate at 3 per­cent, paus­ing after two recent reduc­tions. The result was widely expected.
• Nouriel Roubini turned more pos­i­tive on Colom­bia, revis­ing his 2012 and 2013 growth fore­casts to 5 and 4.5 per­cent, respec­tively, cit­ing a dis­si­pa­tion of down­side risk from the global econ­omy and a cool-down in domes­tic eco­nomic activity.
• The Brazil­ian labor mar­ket is show­ing that con­di­tions are get­ting bet­ter for con­sumers. Although the Feb­ru­ary unem­ploy­ment rate inched up to 5.7 per­cent from 5.5 per­cent in Jan­u­ary and 4.7 per­cent in Decem­ber, after strip­ping out sea­son­al­ity, the unem­ploy­ment rate remained at the series' record low of 5.6 per­cent for the fourth con­sec­u­tive month. Employ­ment grew 0.6 per­cent month-over-month (while the num­ber of unem­ployed work­ers dropped by 0.5 per­cent), which cou­pled with the 0.7 per­cent increase in real wages, pushed the real wage bill up by 1.3 per­cent month-over-month or by 17 per­cent in annu­al­ized terms.
• The num­ber of peo­ple employed in South Africa’s for­mal sec­tor inched up 0.3 per­cent in the fourth quar­ter of 2011, with the man­u­fac­tur­ing sec­tor pri­mar­ily adding the jobs. Employ­ment rose by 23,000 peo­ple dur­ing the last quar­ter of 2011, to 8.381 mil­lion, and was up 1.6 per­cent on a year-over-year basis, Sta­tis­tics South Africa said.

Weak­nesses

• HSBC March China Flash Pur­chas­ing Man­agers’ Index (PMI) was 48.1, down 1.5 from February’s 49.6, indi­cat­ing indus­trial activ­i­ties are fur­ther con­tract­ing, par­tic­u­larly in export-oriented manufacturers.
• Bloomberg news reports today that CBRC said China banks mis­clas­si­fied RMB1.8 tril­lion (20 per­cent) of local gov­ern­ment loans as fully-cash-flow-covered due to the inclu­sion of gov­ern­ment sub­si­dies. CICC bank ana­lysts will check whether CBRC peo­ple have said this or not, but bank ana­lyst Mao Jun­hua does not believe the 1.8 tril­lion num­ber is correct.
• Lend­ing by China’s four biggest banks was less than RMB 50 bil­lion from March 1 to 15, the Eco­nomic Infor­ma­tion Daily reports.
• BCA research reported recently that India’s cap­i­tal rationing is deter­ring growth, and pre­dicts a finan­cial crunch in 2012, which will ham­string much-needed cap­i­tal spend­ing. The firm sus­pects that India’s poten­tial growth rate is declin­ing because of slow­ing pro­duc­tiv­ity gains, which in turn are due to lower sav­ings and invest­ment rates.

Oppor­tu­ni­ties

• The South African rand gained for the first time in four days on Fri­day, trim­ming its worst weekly loss in six weeks, before data fore­cast to show U.S. sales of new homes rose last month, damp­en­ing demand for the dol­lar as a haven.
• Fol­low­ing a severe con­trac­tion in the fourth quar­ter of 2011, Thai­land is in the midst of a solid rebound that should bring back a growth trend by the end of the year with a 5.3 per­cent annual expan­sion, Nouriel Roubini said this week.
• Ver­bal inter­ven­tion from gov­ern­ments to bring down the price of crude has increased, in addi­tion to rumors of an agree­ment between the U.S. and the U.K. to tap into strate­gic reserves. In fact, France has offi­cially said that it and other indus­tri­al­ized nations are con­sid­er­ing a strate­gic reserves release. Fur­ther­more, Saudi Ara­bia has called present prices “unjus­ti­fied,” cit­ing a global sup­ply sur­plus of 1–2 mil­lion bar­rels per day, sig­nal­ing that it is pre­pared to increase pro­duc­tion by 25 per­cent to bring prices down if needed.
• Indonesia’s stock mar­ket has lagged its peers this year, pri­mar­ily due to the over­hang of ris­ing infla­tion risk. This is the result of the removal of gov­ern­ment sub­si­dies in fuel and power prices, and wage increases this year. How­ever, the dri­vers of the econ­omy in Indone­sia (i.e., ris­ing for­eign direct invest­ment, infra­struc­ture con­struc­tion, and ris­ing mid­dle class con­sump­tion) are intact and, there­fore, the stock mar­ket appears to be a long-term play.

Threats

• The Chi­nese econ­omy is still in the process of a soft land­ing, which may cause uncer­tain­ties for the economy.
• Poland’s shale gas reserves are about one-tenth the size of pre­vi­ous esti­mates, a gov­ern­ment report showed this week, dent­ing hopes for an energy source that could play a key role in wean­ing Europe off Russ­ian gas. The long-awaited study esti­mated Poland's recov­er­able shale reserves at 346 to 768 bil­lion cubic meters, far less than the pre­vi­ous esti­mate of 5.3 tril­lion from the U.S. Energy Infor­ma­tion Association.
• South Africa’s for­eign affairs min­istry said it is reduc­ing Iran oil imports, as its largest sup­plier of crude oil faces inter­na­tional sanc­tions. The indus­try awaits fur­ther detail, as a national oil indus­try group said it hadn’t been informed of the plan.

Tags: Agriculture, Agriculture Bank Of China, Bank Of China, Bank Of Thailand, Benchmark Rate, Brazil, Budget Deficit, Communication Costs, Consumer Price Index, Diesel Prices, Downside Risk, Food Price, Global Economy, Growth Forecasts, Index Cpi, Price Inflation, Reserve Ratio, Rrr, Rural Area, Russia, Seasonality, Unemployed Workers, Unemployment Rate
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The Emerging Market Growth Story Continues (ING)

Tuesday, March 20th, 2012

by Dou­glas Coté, ING

We have dis­cussed the pos­si­bil­ity, and risk, of a hard land­ing in China (growth slow­ing to less than 7%), but what has been going on in some of the other BRIC’s like India and Brazil? Right now India is in the midst of bud­get nego­ti­a­tions which would reign in its gross fis­cal deficit to 5.9% of GDP (total debt is around 50% of GDP). India’s GDP growth is expected to sub­side to 6.9% after two solid years of greater than 8% growth. A global slow­down as well as high oil prices have con­tributed to the decrease. How­ever, Indian finan­cial offi­cials expect a return to 9% plus growth in the future. Mean­while Brazil has just over­taken the U.K. to become the sixth largest econ­omy in the world. Brazil grew 2.7% in 2011 com­pared to U.K.’s mea­ger .8%. And with sub­stan­tial oil and gas reserves fuel­ing their exports, Brazil has their eye on num­ber 5. You can find some key sta­tis­tics about India and Brazil as well as other emerg­ing mar­kets on page 33 of the Global Per­spec­tives book.

Click on images below for PDF

Copy­right © ING Invest­ment Management

Tags: Brazil, BRIC, Budget Negotiations, Economy, Emerging Market, Emerging Markets, Financial Officials, Fiscal Deficit, Gas Reserves, GDP, GDP Growth, Global Perspectives, Global Slowdown, India, Ing, Ing Investment Management, Key Statistics, Midst, Nbsp, Oil and Gas, Oil Prices, risk
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Full Steam Ahead for China Rails

Monday, March 19th, 2012

China’s eco­nomic engines of growth have begun to accel­er­ate again, but you wouldn’t know it by look­ing at the chart below. After approvals for new rail­road projects spiked to a five-year high in the third quar­ter of 2010, the num­ber of new plans slowed, then com­pletely halted through­out 2011, decreas­ing 89 per­cent by value, says J.P. Morgan.

There were mul­ti­ple rea­sons for the slow­down in rail­road con­struc­tion, says BCA. A bul­let train crash caused height­ened con­cern for safety last sum­mer. Also, the gov­ern­ment inten­tion­ally delayed projects as it pulled the brakes to decel­er­ate growth and curb inflation.

Since China received signs of slow­ing infla­tion over the past few months, it can now shift its atten­tion toward growth. Recent poli­cies are send­ing a “full steam ahead” mes­sage to rail­way invest­ment. Accord­ing to J.P. Mor­gan, in Decem­ber and Jan­u­ary, China announced tax ben­e­fits on inter­est income for rail­way bond­hold­ers, issued bonds for rail­way projects, and injected cash into the two largest train mak­ers. This con­certed effort should help the coun­try meet its long-term goal to con­nect 100 per­cent of cities with a net­work of high-speed rail.

Over the past two decades, China’s rail­way sys­tem has come a long way very quickly, with track length increas­ing 50 per­cent since 1995. Demand has increased at a faster rate, though, as “pas­sen­gers trav­el­ling on the country’s rail­way sys­tem per year dou­bled dur­ing the same period, while rail­way freight increased by 150 per­cent,” says BCA.

And, on a per capita basis, China’s rail length is much lower than most major economies, accord­ing to BCA Research. When you com­pare the total length of rail­ways in devel­oped and emerg­ing mar­kets, Aus­tralia has the most rail per cap­i­tal, with 1.77 kilo­me­ters of rail­way per 1,000 per­sons; Brazil has con­sid­er­ably less, with only 0.15 kilo­me­ters of rail track per 1,000. How­ever, as you can see below, China lands in last place for the total length of rail­way per capita.

Although China has been busy con­struct­ing its rail­ways over the past few years, this com­par­i­son shows that this infra­struc­ture build­out has been more of a “catch-up process,” rather than an “over­shoot,” says BCA.

New! Web­cast on China

Learn more about China and what’s expected through­out 2012 by join­ing CLSA’s Andy Roth­man and me for a web­cast on April 5.  Reg­is­ter today for Hard or Soft Land­ing in China? Nav­i­gat­ing China’s Tran­si­tion to a Consumer-Driven Econ­omy.

Tags: Bondholders, Brazil, Bullet Train, China Railway, Concerted Effort, Economic Engines, Emerging Markets, High Speed Rail, Interest Income, J P Morgan, Kilometers, Long Term Goal, Per Capita, Railroad Construction, Railway Freight, Railway Projects, Railway System, Railways, Slowdown, Steam Railway, Train Crash
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Mr. BRIC Trade is on Our Side

Friday, March 16th, 2012

by William Smead, CEO, CIO, Smead Cap­i­tal Management

A recent arti­cle in “The National” quoted Jim O’Neil as say­ing that cur­rent sup­ply and demand for oil indi­cates that $80 to $100 per bar­rel for Brent Crude would be a fair price. For those of you who don’t rec­og­nize the name, O’Neil is a very savvy econ­o­mist for Gold­man Sachs (GS), who coined the phrase BRIC trade back in 2001. Since that qual­i­fied him as an invest­ment “Wayne Gret­sky” (he skates to where the puck is going to be), we believe his thoughts are worthwhile.

O’Neil argues that there are no win­ners in a war over Iran’s nuclear capa­bil­ity. There­fore, he argues that the $25–35 pre­mium in the price per bar­rel, which comes from sup­ply dis­rup­tion fears, would dis­ap­pear by sum­mer. We agree wholeheartedly.

We also agree with his belief that Brazil and Rus­sia don’t ben­e­fit from lower oil and com­mod­ity prices. In our opin­ion, the decade long bull mar­ket for com­modi­ties is held together by oil prices stub­bornly act­ing on a ten-year old bull case and fool­ish asset allo­ca­tors invest­ing in the rearview mir­ror. Oil is 30 per­cent of most com­mod­ity indexes. It hangs on while nat­ural gas, cot­ton, cof­fee, wheat and corn are firmly in bear mar­ket territory.

When oil and gold join the bear mar­ket, we believe the race for the exits will look like the tech stock bear mar­ket of 2000–2002. Those folks who were long tech lost 80 per­cent from March of 2000 to Octo­ber of 2002. When a non– eco­nomic mar­ket crum­bles, it is like the Tower of Ter­ror at Disney’s Cal­i­for­nia Adven­ture Park. You drop straight down with­out interruption!

We dis­agree with O’Neil in one way. He believes lower oil prices would stim­u­late China’s econ­omy, help­ing to pro­mote a “soft land­ing”. We agree with Michael Pet­tis, Pro­fes­sor at Peking Uni­ver­sity, on this sub­ject. In a recent NPR broad­cast his opin­ion was sum­ma­rized as follows:

“For Pet­tis, China’s eco­nomic mir­a­cle is just the lat­est, largest ver­sion of a famil­iar story. A gov­ern­ment in a devel­op­ing coun­try fun­nels tons of money into con­struc­tion. This increases eco­nomic activ­ity for a while, but the coun­try ulti­mately over­builds — and the loans start going bad.

‘In every sin­gle case it ended up with exces­sive debt,’ Pet­tis says. ‘In some cases a debt cri­sis, in other cases a lost decade of very, very slow growth and rapidly ris­ing debt. And no one has taken it to the extremes China has.’ “

In our opin­ion, if China slows into a recession/depression, $30–40 per bar­rel oil is a pos­si­bil­ity. Or if China doesn’t grow much in the next ten years, com­mod­ity expo­sure will be a noose around the neck of asset allo­ca­tors. Add in the like­li­hood that there would be poor per­for­mance among the US cycli­cal stocks, which have suck­led on China’s boun­teous teat, and you have the ideal set up for an asset allo­ca­tion “nightmare”!

The infor­ma­tion con­tained in this mis­sive rep­re­sents SCM’s opin­ions, and should not be con­strued as per­son­al­ized or indi­vid­u­al­ized invest­ment advice. Past per­for­mance is no guar­an­tee of future results. Some of the secu­ri­ties iden­ti­fied and described in this mis­sive are a sam­ple of issuers being cur­rently rec­om­mended for suit­able clients as of the date of this mis­sive and do not rep­re­sent all of the secu­ri­ties pur­chased or rec­om­mended for our clients. It should not be assumed that invest­ing in these secu­ri­ties was or will be prof­itable. A list of all rec­om­men­da­tions made by Smead Cap­i­tal Man­age­ment with in the past twelve month period is avail­able upon request.

Copy­right © Smead Cap­i­tal Management

Tags: Asset Allocators, Brazil, Brent Crude, Bull Case, California Adventure Park, Commodity Prices, Current Supply, Economic Market, Economic Miracle, Goldman Sachs, Michael Pettis, Mr Bric, Npr, Nuclear Capability, O Neil, Oil Prices, Peking University, Rearview Mirror, Russia, Sachs Gs, Supply Disruption, Tower Of Terror
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Where to Look for Dividends? Try Outside the US (Koesterich)

Friday, March 16th, 2012

In a world in which fixed income yield is scarce, investors have increas­ingly been turn­ing to div­i­dend pay­ing domes­tic stocks as an alter­na­tive source of income.

But with much of the div­i­dend cor­ner of the US equity mar­ket – includ­ing US util­ity stocks in par­tic­u­lar — now crowded and expen­sive, investors might want to con­sider look­ing abroad for div­i­dend income, as I write in my recent Mar­ket Update piece. Here are three rea­sons why.

More Rea­son­able Val­u­a­tions: Out­side of the United States, div­i­dend pay­ing stocks still appear cheap and are trad­ing at a sig­nif­i­cant dis­count to the broader equity mar­ket. For exam­ple, the Dow Jones EPAC Select Div­i­dend Index – pri­mar­ily com­posed of com­pa­nies domi­ciled in Europe and Asia – is cur­rently trad­ing at a bit below 12x trail­ing earn­ings. In com­par­i­son, the MSCI World Index of devel­oped coun­tries is trad­ing at more than 14x earnings.

More Attrac­tive Yields: Non-US div­i­dend com­pa­nies are offer­ing more entic­ing yields than their US coun­ter­parts. Cur­rently, the Dow Jones Indus­trial Aver­age yields 2.5%, while the broader S&P 500 yields 2%. In com­par­i­son, inter­na­tional mar­kets cur­rently pro­vid­ing yields in the 3% to 5% range include Ger­many, the Nether­lands, Nor­way, Aus­tralia, Hong Kong, Sin­ga­pore, New Zealand and Brazil.

Out­per­for­mance in a Slow Growth Envi­ron­ment: As pointed out in a recent Black­Rock Invest­ment Insti­tute paper on the pros and cons of invest­ing in div­i­dend stocks, high div­i­dend pay­ing stocks tend to out­per­form dur­ing peri­ods of slow growth like the one we’re expe­ri­enc­ing this year. As the chart below shows, while inter­na­tional div­i­dend pay­ing stocks have gen­er­ally out­per­formed a broader global bench­mark since 1999, the median out­per­for­mance of the inter­na­tional div­i­dend index was more than 18% in years in which global growth was below aver­age. In con­trast, in years when global growth was above aver­age, the inter­na­tional div­i­dend index’s rel­a­tive out­per­for­mance fell to around 3.5%.

In short, there’s a strong case for why investors in search of equity income should con­sider inter­na­tional div­i­dend pay­ing stocks, which are acces­si­ble through instru­ments like the iShares Dow Jones Inter­na­tional Select Div­i­dend Index Fund (NYSEARCA: IDV) and the iShares Emerg­ing Mar­kets Div­i­dend Index Fund (NYSEARCA: DVYE).

Source: Bloomberg

Index returns are for illus­tra­tive pur­poses only and do not rep­re­sent actual iShares Fund per­for­mance. Index per­for­mance returns do not reflect any man­age­ment fees, trans­ac­tion costs or expenses. Indexes are unman­aged and one can­not invest directly in an index. Past per­for­mance does not guar­an­tee future results.  For actual iShares Fund per­for­mance, please visit www.iShares.com or request a prospec­tus by call­ing 1–800-iShares (1–800-474‑2737).

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume.  There is no guar­an­tee that div­i­dends will be paid.

Tags: Blackrock, Brazil, Chart Below Shows, Developed Countries, Dividend Income, Dividend Paying Stocks, Dividend Stocks, Domestic Stocks, Dow Jones, Fixed Income, Global Benchmark, Global Growth, Growth Environment, High Dividend Paying Stocks, Hong Kong Singapore, International Markets, Msci World Index, Netherlands Norway, Outperformance, Us Equity Market, Utility Stocks
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Cyclical Outlook: Navigating the Hurricane of Global Deleveraging (PIMCO)

Friday, March 16th, 2012

by Saumil H. Parikh, PIMCO

• We expect the euro­zone econ­omy to expe­ri­ence a reces­sion in 2012 on the back of con­tin­u­ing pro-cyclical fis­cal aus­ter­ity measures.
• We expect 2012 to be the year in which the res­i­den­tial con­struc­tion sec­tor begins to grad­u­ally con­tribute to U.S. eco­nomic growth after a long and painful five-year hiatus.
• Major emerg­ing mar­ket economies are strug­gling with domes­tic over-investment, ris­ing income inequal­i­ties and infla­tion risks. There­fore, PIMCO expects major emerg­ing mar­ket economies to be less of a global engine of growth in 2012–13.

The global econ­omy finds itself sail­ing through calmer waters and clearer skies this quar­ter. Most finan­cial asset prices have improved sub­stan­tially in recent months. Liq­uid­ity con­di­tions across mar­kets have eased. Forced bal­ance sheet delever­ag­ing has slowed, and as a result, global eco­nomic growth has found a foot­ing of sorts com­pared to last quarter.

The recent improve­ment in liq­uid­ity con­di­tions and finan­cial asset prices in Europe on the back of two Long-Term Repo Oper­a­tions (LTROs) car­ried out by the Euro­pean Cen­tral Bank (ECB) in early Decem­ber and early March is of great impor­tance to the evolv­ing nature of PIMCO’s cycli­cal eco­nomic out­look. These oper­a­tions have suc­ceeded in pro­vid­ing highly at-risk Euro­pean finan­cial insti­tu­tions with nearly a tril­lion euros in much needed financ­ing to meet accel­er­at­ing deposit flight, pay bond redemp­tions, secure longer-term fund­ing and address asset-liability mis­matches. Addi­tion­ally, they have also dri­ven pos­i­tive spillover effects for cer­tain sov­er­eign bond mar­kets (in par­tic­u­lar Italy and Spain). In turn, this has slowed down the vicious Euro­pean delever­ag­ing feed­back loop that was threat­en­ing the global eco­nomic out­look com­ing into 2012.

But the crit­i­cal ques­tion for the year ahead is whether the ECB has done enough to halt and reverse delever­ag­ing and change the course of the euro­zone and global eco­nomic out­look on a sus­tain­able basis? That is, is the global econ­omy in the eye of the hur­ri­cane or has the hur­ri­cane passed over completely?

At PIMCO, we rec­og­nize the dynam­ics of eco­nomic and bal­ance sheet heal­ing but remain con­cerned that, in some key areas, they have not yet reached crit­i­cal mass. This is par­tic­u­larly the case in Europe, where ECB liq­uid­ity pro­vi­sions are nec­es­sary, but insuf­fi­cient to deal with the twin under­ly­ing prob­lems of too lit­tle growth and too much debt.

Eurozone’s Chal­lenges Continue

In our view, it is still too early to give the all clear sign for the euro­zone out­look. The fun­da­men­tal prob­lem fac­ing the euro­zone remains one of uneven com­pet­i­tive­ness, cur­rency rigid­ity and the lack of a coör­di­nated vision shared between mon­e­tary and fis­cal pol­icy institutions.

We expect the euro­zone econ­omy to expe­ri­ence a reces­sion in 2012 on the back of con­tin­u­ing pro-cyclical fis­cal aus­ter­ity mea­sures, which will make euro­zone sov­er­eign risk indi­ca­tors cycli­cally worse before they are given a chance to get sec­u­larly better.

This raises the specter of more down­grades, fur­ther destruc­tion of demand for euro­zone debt and the need to fur­ther delever­age bal­ance sheets in the com­ing months and quar­ters. Spain has already raised its hand, demand­ing per­mis­sion to run higher fis­cal deficits than promised just a few months ago. The sit­u­a­tion in Greece remains crit­i­cal, and, along with Por­tu­gal, high­lights the inad­e­quacy of liq­uid­ity pro­vi­sions to cure real sol­vency prob­lems once debt dynam­ics move beyond the point of no return.

The future sol­vency of euro­zone sov­er­eigns can only be improved via the real­iza­tion of much higher nom­i­nal growth and the reduc­tion in sov­er­eign bor­row­ing costs which will require a lender of last resort. Rates need to drop to a level low enough to make debt bur­dens sus­tain­able even at eco­nomic growth rates below the eurozone’s full poten­tial. Nei­ther of these sol­vency improv­ing options are being offered to the trou­bled euro­zone economies today.

As a result of our expec­ta­tions for a euro­zone reces­sion, ris­ing polit­i­cal risks across impor­tant coun­tries and also the lack of crit­i­cal sol­vency con­di­tions, we believe the delever­ag­ing feed­back loop in Europe will remain in place and will con­tinue to be the defin­ing cen­tral fea­ture of the global cycli­cal eco­nomic out­look. Like we said in Decem­ber, as goes the euro­zone delever­ag­ing, so goes the global econ­omy over the next six to 12 months.

U.S. Eco­nomic Growth Prospects

While the strug­gling euro­zone econ­omy will likely pre­vent the U.S. from achiev­ing above-trend growth, some sec­tors of the U.S. econ­omy have gen­uinely improved and are re-emerging from sec­u­lar lows. This is clear in auto­mo­bile out­put and more gen­er­ally in man­u­fac­tur­ing. One impor­tant inflec­tion point in the story of U.S. delever­ag­ing is the flat­ten­ing out and rever­sal of the neg­a­tive con­tri­bu­tion of res­i­den­tial con­struc­tion to over­all eco­nomic growth. We expect 2012 to be the year in which the res­i­den­tial con­struc­tion sec­tor begins to grad­u­ally con­tribute to U.S. eco­nomic growth after a long and painful five-year hia­tus. While we don’t expect the total con­tri­bu­tion from this sec­tor to be large (῀0.3%-0.4%), it does set the stage for a poten­tial multi-year recov­ery in res­i­den­tial con­struc­tion that we expect will even­tu­ally see a return to bal­ance between house­hold for­ma­tion rates and new con­struc­tion. This will add jobs and cre­ate income for many Amer­i­can work­ers that have endured a long depres­sion in the sec­tor. This is great news.

Another pos­i­tive for the U.S. econ­omy in 2012 is the nascent revival of avail­abil­ity of con­sumer credit. In recent months, this has become most clearly evi­dent in the areas of stu­dent loans and also auto­mo­bile financ­ing. The lat­ter was a crit­i­cal com­po­nent in the recov­ery of auto­mo­bile sales to a 15 mil­lion annu­al­ized sales rate in Feb­ru­ary 2012 (a level of activ­ity not seen in the sec­tor since March of 2008) accord­ing to the U.S. Depart­ment of Com­merce.
An impor­tant ques­tion, how­ever, is whether this recov­ery in con­sumer credit avail­abil­ity will fil­ter deep enough and wide enough in the house­hold sec­tor to allow for a sus­tained and con­tin­ued drop in the U.S. house­hold sav­ings rate, which will be needed to sus­tain cycli­cal U.S. eco­nomic growth in the face of a weak­en­ing out­look for fis­cal stim­u­lus and exports. The poten­tial cer­tainly exists and will be strength­ened sig­nif­i­cantly if cur­rent improve­ments in employ­ment and income can be sus­tained into 2013.

Emerg­ing Mar­ket Slowdown

Europe and the emerg­ing mar­kets are very impor­tant des­ti­na­tions for U.S. exports. Brazil, Rus­sia, India, China and Mex­ico, in total, are the largest mar­ket for U.S. exports, fol­lowed by Canada, fol­lowed closely by Europe. While we believe Europe is almost cer­tainly going to encounter a reces­sion in 2012, recent evi­dence from the major emerg­ing mar­ket coun­tries sug­gests that there is a sig­nif­i­cant cycli­cal slow­down under­way there as well, espe­cially in China, Brazil and India.
Our cycli­cal out­look for the major emerg­ing mar­kets is for growth to set­tle at the sector’s full poten­tial, with risks of under-shooting due to poli­cies designed to oppor­tunis­ti­cally con­tain infla­tion. Emerg­ing mar­ket economies have played an out­sized role in the global eco­nomic recov­ery since 2008.

Because of much bet­ter ini­tial con­di­tions, and also greater pol­icy effec­tive­ness, fis­cal and mon­e­tary stim­u­la­tion of major emerg­ing mar­ket economies pro­vided impor­tant exter­nal demand for both U.S. and Euro­pean com­mod­ity and cap­i­tal goods exports dur­ing frag­ile peri­ods of post-crisis growth. But, we expect this exter­nal demand source to wane dur­ing 2012.

Major emerg­ing mar­ket economies are strug­gling with domes­tic over-investment, ris­ing income inequal­i­ties and infla­tion risks. There­fore, PIMCO expects major emerg­ing mar­ket economies to be less of a global engine of growth in 2012–13.

Poten­tial Grey Swans

Finally, there are three grey swans on the cycli­cal horizon.

The U.S. elec­tions in Novem­ber will be crit­i­cal in deter­min­ing the shape of U.S. fis­cal pol­icy going into 2013 and beyond. As is well known by now, the U.S. econ­omy faces a “fis­cal cliff” in Jan­u­ary of next year, when tax stim­u­lus and gov­ern­ment spend­ing worth approx­i­mately 3.5% of GDP are sched­uled to be cut. Even if the new pres­i­dent and incom­ing con­gress are able to avoid the debil­i­tat­ing fis­cal con­trac­tion in 2013, the risk remains that as we approach the “fis­cal cliff,” polit­i­cal the­atrics and uncer­tainty regard­ing the out­come will hin­der con­fi­dence and ani­mal spir­its as they did before the debt ceil­ing debate of 2011.

There are also pres­i­den­tial elec­tions in France, a coun­try that is key to resolv­ing the Euro­pean debt cri­sis. We will be fol­low­ing devel­op­ments there closely, with par­tic­u­lar focus on their poten­tial impact on the French pol­icy stance, Franco–

Ger­man col­lab­o­ra­tion and the out­look for Europe.

It is the third swan that dis­turbs us most. The qui­etly ris­ing ten­sions in the Mid­dle East between Israel and Iran must be addressed by global lead­ers in a uni­fied man­ner before long. The exis­tence of known unknowns is exert­ing unwel­come pres­sure on oil prices at a time when the global econ­omy is only begin­ning to sta­bi­lize and grow out of vicious sec­u­lar delever­ag­ing process. Any global com­pla­cency on this front will quickly embed itself in oil prices, which in turn will ren­der our best cycli­cal fore­casts use­less dur­ing a time in which vis­i­bil­ity is already poor on all points across the horizon.

While we are sail­ing through calmer seas and clearer skies this quar­ter, the hori­zon in most direc­tions remains grey and vis­i­bil­ity remains very poor. A sus­tain­able res­o­lu­tion to the euro­zone sov­er­eign cri­sis, con­tin­ued gains in U.S. employ­ment and con­sump­tion and a peace­ful res­o­lu­tion to Mid­dle East ten­sions are all nec­es­sary before we can declare sec­u­lar smooth sail­ing ahead.

Tags: Asset Liability, Asset Prices, Austerity Measures, Bond Markets, Brazil, Canadian Market, Construction Sector, Critical Question, Emerging Market Economies, Feedback Loop, Financial Asset, Fiscal Austerity, Global Economic Growth, Global Economic Outlook, Global Economy, Income Inequalities, Inflation Risks, Liquidity Conditions, Outlo, Parikh, PIMCO, Russia, Spillover Effects
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Chart of the Week: The World’s Infrastructure Plans

Thursday, March 15th, 2012

Demand for access to basic needs, an emerg­ing mid­dle class and a never-ending use of global resources—these are the pri­mary dri­vers of major infra­struc­ture projects over the next sev­eral years, says GE.

In its Investor Meet­ing last week, the firm high­lighted a few macro slides on world growth. One slide pins major global infra­struc­ture plans total­ing $4 tril­lion over the next 2 to 20 years.

Emerg­ing mar­kets across Africa, Asia, the Mid­dle East and South Amer­ica are over­whelm­ingly the ones pulling out their check­books. A num­ber of projects are expected in Brazil, includ­ing the PAC 2 invest­ment pro­gram total­ing $872 bil­lion, Petro­bras Oil & Gas project of $225 bil­lion, and the infra­struc­ture spend­ing for the World Cup and Olympics expected to cost $668 bil­lion. Brazil’s PAC 2 will mostly be spent on energy and the remain­der on sub­si­dized hous­ing, urban­iza­tion, san­i­ta­tion and elec­tric­ity dis­tri­b­u­tion, says Finan­cial Times.

India and Rus­sia also have tremen­dous infra­struc­ture plans, as each coun­try is expected to be a half of a tril­lion dol­lars. China’s 12th Five-Year Plan is expected to spend $840 bil­lion on the power indus­try and another $180 bil­lion on health care.

In GE’s pre­sen­ta­tion, the pres­i­dent & CEO of Global Growth & Oper­a­tions, John Rice, says many of these coun­tries’ gov­ern­ments face extra­or­di­nary pres­sure “to increase stan­dards of liv­ing and reduce the wealth dis­par­ity.” Of the world’s pop­u­la­tion of 7 bil­lion, GE says 1.5 bil­lion have no access to basic needs, such as health care, elec­tric­ity and water. In addi­tion, in the next 20 years, another 3 bil­lion peo­ple will be added to the mid­dle class, accord­ing to GE. That equates to 150 mil­lion peo­ple each year who will have the means and “the same kind of demands in terms of basic liv­ing con­di­tions and infra­struc­ture” avail­able in the U.S., says Rice.

This trend is what I refer to as the Amer­i­can Dream Trade. When the boomers were babies, Pres­i­dent Dwight D. Eisen­hower signed the 1956 Federal-Aid High­way Act. The “great road pro­gram” was said to be the most intense road con­struc­tion period in U.S. his­tory, alter­ing where Amer­i­cans chose to live, vaca­tion and work. A 62-day trip in 1919 from Wash­ing­ton D.C. to San Fran­cisco was reduced to two days due to the U.S. inter­state sys­tem. This helped sus­tain a more than ten­fold increase in the U.S. GDP, accord­ing to the U.S. Depart­ment of Transportation.

A pur­suit of the Amer­i­can Dream from the U.S.’s emerg­ing mid­dle class led to the suc­cess of many well-known U.S. com­pa­nies. Restau­rants includ­ing McDonald’s and Dairy Queen and auto­mo­bile man­u­fac­tur­ers Ford and GM pros­pered fol­low­ing this infra­struc­ture spend.

The infra­struc­ture plans tak­ing place across emerg­ing mar­kets emu­late a 1950s Amer­ica. As these gov­ern­ments help their res­i­dents pur­sue the Amer­i­can Dream of bet­ter homes, health care and qual­ity of life, I believe the com­pa­nies with a strong foot­print in these grow­ing mar­kets stand to benefit.

See GE’s pre­sen­ta­tion slideshow here.

Tags: Africa Asia, American Dream, Boomers, Brazil, Checkbooks, Electricity Distribution, Emerging Markets, Financial Times, Five Year Plan, Global Growth, Global Infrastructure, Global Resources, Infrastructure Projects, Investment Program, John Rice, Middle Class, Russia, Sanitation, Slide Pins, Subsidized Housing, urbanization, Wealth Disparity
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Global PMI Scorecard: Services Sector Drives Acceleration in Global Growth

Monday, March 12th, 2012

Growth in global eco­nomic activ­ity con­tin­ued to accel­er­ate for the fourth con­sec­u­tive month in Feb­ru­ary. High­lights of the Feb­ru­ary PMIs are as follows:

• The JP Mor­gan Global Com­pos­ite PMI increased to 55.5 from 54.5 In January.
• The JP Mor­gan Global Ser­vices PMI jumped to a rather robust 56.5 from 55.4 in January.
• Growth in the global man­u­fac­tur­ing sec­tor slowed markedly, mostly as a result of a sharp slow­down in the U.S.
• After sta­bi­liz­ing in Jan­u­ary the Euro­zone econ­omy is slid­ing again as the sit­u­a­tion in Italy, Spain and Greece has worsened.
• Growth in the BRICS coun­tries is accel­er­at­ing, espe­cially in larger China.
• Pock­ets of robust growth are emerging:
  • U.S. non-manufacturing sector
  • India’s man­u­fac­tur­ing and ser­vices sectors
  • Brazil’s ser­vices sector
  • South Africa’s man­u­fac­tur­ing sector
  • Saudi Ara­bia’ over­all economy.

Tags: Acceleration, Brazil, Cape Town, Economy, Global Economic Activity, Global Growth, Global Services, Greece, Jp Morgan, Manufacturing Sector, Pmis, Pockets, Postcard, Robust Growth, Saudi Arabia, Scorecard Services, Services Pmi, Services Sectors, Slowdown, South Africa
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Global Manufacturing Sags Again in February: U.S. the Culprit!

Tuesday, March 6th, 2012

After rebound­ing from con­trac­tion in Novem­ber last year the global man­u­fac­tur­ing sec­tor finds itself on the brink of stag­na­tion again. The GDP-weighted man­u­fac­tur­ing PMI that I cal­cu­late for the major economies fell to 50.8 in Feb­ru­ary from 51.5 in Jan­u­ary, but is still higher than the 50.3 I recorded in Decem­ber last year.

The U.S. ISM Man­u­fac­tur­ing PMI’s fall to 52.4 in Feb­ru­ary from 54.1 in Jan­u­ary con­tributed 0.6 points to the fall in the GDP-weighted PMI. Exclud­ing the U.S., growth in the man­u­fac­tur­ing sec­tor in the rest of the world remained basi­cally unchanged.

Although still indi­cat­ing con­trac­tion at 49.0 the Markit Euro­zone Man­u­fac­tur­ing PMI shows that the man­u­fac­tur­ing sec­tor in the region is stabilizing.

Growth in Greater China is accel­er­at­ing, with my sea­son­ally adjusted CFLP Man­u­fac­tur­ing PMI up to 51.9 from 51.0 in Jan­u­ary, while the man­u­fac­tur­ing sec­tor in Tai­wan is at long last grow­ing again. The growth out­look in the other BRICS coun­tries has turned for the bet­ter, with South Africa’s PMI surg­ing to 57.9 from 43.2 in Jan­u­ary while Brazil’s PMI rose to 51.4 from 50.6.

Sources: Markit*; Li & Fung**; Kag­iso***; Plexus Hold­ings****; ISM*****.

Sources: Markit*; Li & Fung**; Kag­iso***; Plexus Hold­ings****; ISM*****.

Tags: Amp, Brazil, BRICs, Brink, Contraction, Culprit, GDP, Greater China, Growth Outlook, Hypho, Ism Manufacturing, Kagiso, Manufacturing Sector, Markit, Plexus, Pmi, Rest Of The World, Sags, South Africa, Stagnation, Taiwan
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YTD 2012 Country Stock Market Performance

Friday, January 27th, 2012

Below is a table high­light­ing the year to date stock mar­ket returns for 78 coun­tries around the world.  Of the 78 coun­tries shown, 59 (75%) are in the black for the year, while 19 are in the red.  Twelve coun­tries have posted dou­ble digit gains already in 2012, with Argentina lead­ing the way at 18.11%.  Rus­sia ranks sec­ond with a gain of 13.70%, fol­lowed by Hun­gary in third and Greece (yes, Greece) in fourth.

The US cur­rently ranks 33rd on the list with a gain of 4.73% year to date.  The US ranks fourth among G7 coun­tries behind Ger­many (10.88%), Italy (6.77%) and France (6.44%).  The UK has been the worst per­form­ing G7 coun­try so far in 2012 with a gain of 4%.

Last year the BRICs were sig­nif­i­cant under­per­form­ers ver­sus the rest of the world, but they've bounced back so far in 2012.  As men­tioned above, Rus­sia is up 13.70% year to date, which is the best of the BRICs.  Brazil ranks sec­ond with a gain of 10.92%, India isn't far behind at 10.50%, and China ranks fourth with a gain of 5.44%.

Tags: Argentina, Brazil, BRICs, China, Countries Around The World, Country Stock, France 6, G7 Countries, G7 Country, Greece, Hungary, India, Italy, Leading The Way, Rest Of The World, Russia, Stock Market Performance, Stock Market Returns, Stock Performance, Year To Date
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Bill Gross and Mohamed El-Erian in Depth (Part Two)

Monday, November 7th, 2011

Part two of Consuelo’s exclu­sive dou­ble inter­view with two of the invest­ment world’s biggest stars! Bill Gross and Mohamed El-Erian, Co-Chief Invest­ment Offi­cers of money man­age­ment pow­er­house PIMCO, sit down together to dis­cuss out­look and strategy.

Here is the full tran­script for Part Two of this in depth inter­view with Bill Gross and Mohamed El-Erian.

Octo­ber 28, 2011

CONSUELO MACK: This week on Wealth­Track, part two of WealthTrack’s exclu­sive inter­view with two of the world’s most influ­en­tial investors. PIMCO’s Great Investor Bill Gross and Finan­cial Thought Leader Mohamed El-Erian sit down together to dis­cuss their invest­ment strate­gies in the “new nor­mal” world– next on Con­suelo Mack Wealth­Track.
Hello and wel­come to this edi­tion of Wealth­Track. I’m Con­suelo Mack. This week we are con­tin­u­ing our exclu­sive con­ver­sa­tion with PIMCO’s two influ­en­tial Finan­cial Thought Lead­ers, Bill Gross and Mohamed El-Erian together. It is a rare occa­sion to be able to inter­view them side by side, and as you will see they are a fas­ci­nat­ing study on how a suc­cess­ful part­ner­ship works. Since 2008, they have been co-chief invest­ment offi­cers of one of the world’s lead­ing money man­age­ment firms, Pacific Invest­ment Man­age­ment Com­pany– PIMCO– which Gross co-founded in 1971. El-Erian is also CEO and is expand­ing the firm from its very large bond roots into stocks, com­modi­ties, ETFs, and pas­sive as well as its core active strate­gies. Gross’ leg­endary PIMCO Total Return Fund, which he has led to the top of the bond world in per­for­mance and size since 1987, will soon have an ETF clone, actively man­aged by him.
El-Erian a for­mer head of Harvard’s endow­ment and fif­teen year vet­eran of the IMF, was also a top ranked emerg­ing mar­kets bond fund man­ager dur­ing his early years at PIMCO. He now co-manages the PIMCO Global Multi-Asset Fund which, as its name implies, can invest any­where in the world, in mul­ti­ple assets through pas­sive indexes and actively man­aged PIMCO funds. Accord­ing to Morn­ingstar, it is the first PIMCO fund to be for­mally run in a team for­mat and it also has an inno­v­a­tive tail risk hedg­ing strat­egy to cush­ion it in down mar­kets– it could be a model for the firm itself!
El-Erian and Gross are hedg­ing their bets in all sorts of ways. They are work­ing over­time to under­stand what El-Erian calls the string of once unthink­able macro events of recent years, which he and Gross believe are hav­ing a huge neg­a­tive impact on the mar­kets and invest­ment results. They are also prepar­ing for an even weaker “new nor­mal” slow growth and low return envi­ron­ment than they envi­sioned for the devel­oped world back in 2009. We pick up the con­ver­sa­tion dis­cussing this year’s unchar­ac­ter­is­tic under­per­for­mance of Gross’ PIMCO Total Return Fund. I asked Gross if this time feels dif­fer­ent than the few other years when the fund fell behind.

BILL GROSS: Well, the under­per­for­mance has been more sub­stan­tial. Let’s be hon­est about it. And so it feels dif­fer­ent. The prob­lem this year is the Total Return Fund for the first six to seven months was set up for a new nor­mal type of econ­omy and now we’re in the new nor­mal minus and so the shift, which pro­pelled trea­sury prices and trea­sury yields lower, was actu­ally very quick and very sud­den. It was related, to some extent, to the debt ceil­ing cri­sis which occurred a few months ago and the lack of con­fi­dence in the United States. Sur­pris­ingly, when it was down­graded to dou­ble A plus, trea­sury did the best and that was because, I think, the recog­ni­tion on the part of investors that the abil­ity to address the deficit, that the abil­ity to basi­cally pro­duce growth going for­ward was lim­ited, as opposed to new normal-ish. And that was the big prob­lem, I think, that the Total Return Fund had in terms of adjust­ing so quickly.

CONSUELO MACK: So you’ve rebal­anced, as Mohamed said in a recent inter­view, The Total Return Fund. So the last I looked you had 16% in trea­suries. Given what you’ve just told me about the new nor­mal minus, are you increas­ing your trea­sury expo­sure? I mean, what are you over­weight­ing now in the Total Return Fund?

BILL GROSS: Well, we’re over­weight­ing mort­gages. The mort­gages are “agency guar­an­teed.” Not an explicit guar­an­tee, but an implicit guar­an­tee that becomes more and more explicit as the years and ver­bal guar­an­tees go by.

CONSUELO MACK: So like Fan­nie and Freddie?

BILL GROSS: Fan­nie and Fred­die. Those are mort­gages which yield three to 3.5 per­cent. Sounds very low, but you know, com­pared to a five year trea­sury at 1.25 per­cent, that’s a nice attrac­tive spread. And so mort­gages have been over weighted. They’re not trea­suries, but they’re trea­sury related. They’re, in our opin­ion, very safe dou­ble A plus, AAA type of assets and that’s one area where we’re hop­ing to pick up yield with­out sac­ri­fic­ing quality.

CONSUELO MACK: So the other stuff like finan­cial ser­vices bonds, like Cit­i­group bonds or some of the emerg­ing mar­ket bonds, are those things that you are now under­weight­ing? So have you done a risk off trade pretty much in the Total Return Fund?

BILL GROSS: No. The risk off has basi­cally been evi­denced by increas­ing the trea­sury over­weight­ing as a coun­ter­bal­ance to the risk. We haven’t really sold our JP Mor­gan or our Wells Fargo assets in terms of the finan­cially related cred­its, nor have we sold the emerg­ing mar­ket coun­tries. We’re a believer in the emerg­ing mar­ket growth. We’ve cer­tainly tried to coun­ter­bal­ance that with a higher con­cen­tra­tion of trea­suries and I think that’s work­ing out fine.

CONSUELO MACK: You know, Mohamed, I have to ask you, “When Mar­kets Col­lide” which was your best­selling and really won­der­ful book that came out sev­eral years ago which was, again, very pre­scient, and one of the things that you talked about on Wealth­Track a cou­ple of years ago after that book that came out was that one of the lessons that you’ve learned from the finan­cial cri­sis is the unthink­able can hap­pen. So when I just hear Bill describ­ing the fact that trea­suries rally after the debt is down­graded in the U.S. – so what are the other big, unthink­able things that are hap­pen­ing, that are affect­ing PIMCO’s invest­ment out­look and strategy?

MOHAMED EL-ERIAN: You know, I used to keep a list of unthink­ables, but it got so long that now I keep it to the last three months. Because just think what has hap­pened over the last few months. We’ve had, as Bill said, the US gov­ern­ment flirt with default. The biggest bond mar­ket in the world. Unthink­able. We’ve lost our AAA from one rat­ing agency. Unthink­able. We have now three Euro­pean coun­tries in the élite club, the Euro­zone, rated as junk. One is rated worse than Pak­istan. Unthink­able. We have Switzer­land that has made its name as the safe haven to take steps to stop being a safe haven. They say we don’t want to be a safe haven any­more. All these are unthink­ables. If we were hav­ing this inter­view a year ago and I said, “in a year’s time this is what would have hap­pened” I would have doubted myself on every sin­gle one of them. I would have doubted myself even more on all of them and yet they’ve hap­pened. Why? The sys­tem is try­ing to tell us some­thing. What the sys­tem is try­ing to tell us that there are major global realign­ments. I tell my wife, “It’s like the tec­tonic plates shift­ing.” Okay? You get lots of earth­quakes and things and things realign. And we’re going through a major realign­ment. And it’s hap­pen­ing slowly.

CONSUELO MACK: It is? It feels awfully fast to me.

MOHAMED EL-ERIAN: Well, let me give the exam­ple. So let’s take the exam­ple of trea­suries. This a sit­u­a­tion where PIMCO was right on three of the four issues that are crit­i­cal to the val­u­a­tion of trea­suries, but the fourth one became so large. So trea­suries are deter­mined by the out­look for growth. If you remem­ber, con­sen­sus was up here, we were down here. Con­sen­sus came towards here. Trea­suries are dic­tated by the out­look for poli­cies and we’ve been say­ing for a long time, don’t expect the Fed to raise rates. It is floor to zero for a long time. That has hap­pened.
Trea­suries are also deter­mined by the credit out­look and we’ve been express­ing con­cern about the credit out­look, and sure enough, the U.S. lost its AAA. But there was that fourth ele­ment which was the flight to qual­ity. So PIMCO’s view was, why not gain what trea­suries give you in AAA coun­tries instead? Why not go to Nor­way? Why not go to Ger­many? Why not go to Aus­tralia? Why not go to Canada where you can get the same inter­est rate expo­sure with­out credit? And what hap­pened because of all of these unthink­ables is that sud­denly the flight to qual­ity became dom­i­nant. Peo­ple didn’t care any­more. Bill has this notion of your clean­est dirty shirt– that peo­ple are will­ing to wear their dirty shirt if they view it as the clean­est dirty shirt.

CONSUELO MACK: So the U.S. trea­suries are the clean­est dirty shirt?

MOHAMED EL-ERIAN: Are the clean­est dirty shirt. Right. And that is a lit­tle bit of a dri­ver of the unthink­able. For us it’s been an impor­tant reminder to push our­selves even harder in terms of think­ing of what else can hap­pen out there. And I think that that is the chal­lenge for every­body. We’re nav­i­gat­ing these major changes. The mar­kets are going to romance very short term things. How else do you explain to some­one that in the last 15 min­utes of trad­ing the Dow can move by 400 points on a pol­icy headline?

CONSUELO MACK: Try high fre­quency trad­ing, up to 70% of U.S. mar­ket vol­ume now. That’s not pol­icy, that’s tech­no­log­i­cal real­ity in the markets.

MOHAMED EL-ERIAN: Cor­rect, but lack of con­vic­tion, right? So when you don’t have the con­vic­tion, when you don’t have the anchors, all it takes is you tip it a lit­tle bit and then every­body takes you one way, and then sud­denly you tip it the other way and every­body tips it the other way because we’ve lost our anchors. We’ve lost the con­vic­tion because the U.S. is going through the unthink­ables and Europe is going through the unthink­able. And that is the world that all investors have to nav­i­gate through and it’s an uncom­fort­able world, it takes you out of your com­fort zone, but you have no choice. That’s the real­ity of today’s world.

CONSUELO MACK: So do fun­da­men­tals still count, Bill?

BILL GROSS: Well, they do, but fun­da­men­tals are being dis­torted in the finan­cial mar­kets and have been actu­ally for ten or twenty years, but even more so now. You know, fun­da­men­tally, you could say that with infla­tion at 2.5 to 3 per­cent, that 10 year trea­sury deserves to be at 3.5 to 4 per­cent. That would be the his­tor­i­cal rela­tion. Fun­da­men­tally, you could say that the pol­icy rate that Ben Bernanke’s Fed fund level should be at 2 to 2.5 per­cent. That would be the his­tor­i­cal rela­tion to infla­tion, but fun­da­men­tals have been thrown out the door, cer­tainly because the econ­omy hasn’t recov­ered. Unem­ploy­ment is at nine per­cent, etcetera. The Fed must do some­thing, but also the series of quan­ti­ta­tive eas­ings, the One, the Two, the Twist, you know, have pro­duced dis­tor­tions in the mar­ket that are not really rel­a­tive to his­tor­i­cal exam­ple or his­tor­i­cal fun­da­men­tals, so it becomes a ques­tion not just of diag­nos­ing value.
You know, we’d be the first to say that trea­suries are over­val­ued rel­a­tive to what they’re offer­ing the investor class, but in addi­tion, you have to observe where they’re going to be from the stand­point of pol­icy tech­ni­cals. Will the Fed stay at 25 basis points for the next five years? And if so, then it’s cer­tainly to an investor’s advan­tage instead of accept­ing 25 basis points for suc­ces­sive peri­ods of time for the next five years to buy a five year trea­sury at 1.25 per­cent. And so it becomes a ques­tion not just of fun­da­men­tals, but of deter­min­ing pol­icy maker choices and pol­icy maker deci­sions going for­ward and that’s a del­i­cate balance.

CONSUELO MACK: What do you say to indi­vid­ual investors now who have basi­cally grown up think­ing that they should be in the stock and the bond mar­kets for their retire­ment sav­ings and that that’s what we should depend on? Can they depend on it?

MOHAMED EL-ERIAN: So we tell them it’s right to feel unset­tled. Right? Because again, you know, we are going through major struc­tural change.

CONSUELO MACK: Right.

MOHAMED EL-ERIAN: Right? And there are these shifts and you’re going to feel uncom­fort­able. It’s like some­one in the mid­dle of an earth­quake. They’re going to feel uncom­fort­able, but the answer is not nec­es­sar­ily aban­don the city, but rather under­stand what’s going on and under­stand what is frag­ile and what is val­ued– because if you under­stand and have the right mind­set, you can nav­i­gate. We did some­thing, luck­ily, on the busi­ness side that has helped us a lot. Back in ’08, ’09, we invited a pro­fes­sor from the Lon­don Busi­ness School to come and speak to us. He made his rep­u­ta­tion, his name is Don Sull, by look­ing at why suc­cess­ful com­pa­nies split into either remain­ing suc­cess­ful or not. And it’s really inter­est­ing. It’s not because they don’t rec­og­nize the par­a­digm shift. Com­pa­nies are very good at rec­og­niz­ing when the world is chang­ing. It’s what do they do next. And the biggest trap that a com­pany can fall in, the biggest trap that an investor can fall in is that they rec­og­nize the shift, but then they become hostage to what is called “active iner­tia.” Active iner­tia is active in the sense that you do some­thing, but iner­tia you’re doing more of the same, but your world is chang­ing and, there­fore, you have to evolve with it. And there­fore, you know, the mes­sage that we tell investors is you’re right to feel unset­tled. Okay? That’s because the world is chang­ing, but under­stand that that requires you to also evolve with it. I’ll give you an example.

CONSUELO MACK: So tell us how do we adapt as investors? And I know one of your spe­cial­ties is emerg­ing mar­kets. You ran one of the top emerg­ing mar­ket bond funds here for seven years. How do we adapt? What should we be doing with our port­fo­lio today?

MOHAMED EL-ERIAN: I’ll tell you what we did at PIMCO. First, we made sure we have the best sec­tor and coun­try spe­cial­ists. So you want to have the best peo­ple there that are look­ing at the world from a bot­tom up per­spec­tive. But that’s not enough. You need to com­pli­ment it with a top down. You need to ask them every sin­gle day, are your choices and what you like and not like con­sis­tent with the growth dynam­ics that we’re see­ing? Are they con­sis­tent with bal­ance sheet? Bal­ance sheet is absolutely crit­i­cal to nav­i­gate an earth­quake. Are they con­sis­tent with the pol­icy choices that the pol­icy mak­ers are mak­ing right now? So what we try to do is bring the best bot­tom up exper­tise com­pli­mented with a lot of think­ing. Bill and I sit through four days a week, three hours of an invest­ment com­mit­tee where we dis­cuss these things over and over again to try and get it right. And it’s hard work, but there is no alter­na­tive. Right?

CONSUELO MACK: Well, PIMCO is also diver­si­fy­ing into other asset classes, and into equi­ties, and you’re doing ETFs, the Total Return Fund is going to have a new ETF, which is a whole other topic. But back to the orig­i­nal ques­tion is how do we as investors– I know how PIMCO is adapt­ing, but how do we as investors adapt our port­fo­lio? What should we be doing differently?

MOHAMED EL-ERIAN: So first, be very clear about what your objec­tives are. Sec­ond, be very clear what your risk tol­er­ance is. Third, rec­og­nize that the answer today to your objec­tives are solu­tions, not prod­ucts. Investors make the mis­take of think­ing only in prod­ucts space, but you need a more holis­tic solu­tion. Fourth, be very clear as to how much volatil­ity you’re will­ing to stom­ach because volatil­ity has this nasty ten­dency of encour­ag­ing you to do some­thing stu­pid at the wrong time. Right? Then you can put together a port­fo­lio. It would mean being more global than you are today. Much more global. It would mean under­stand­ing that the asset classes are trans­form­ing. For exam­ple, the S&P today relies to a great extent on what’s hap­pen­ing over­seas. It’s no longer domestic.

CONSUELO MACK: Right. Forty per­cent of rev­enues are over­seas. Right.

MOHAMED EL-ERIAN: And don’t be hostage to the famil­iar. So we have a ten­dency of say­ing, I’m only going to invest in this name because I’ve seen it. Well, you know what? There are cer­tain names, as Bill men­tioned, that are com­ing up in the rest of the world that are as attrac­tive and they are the big names of tomor­row; and there­fore, it’s impor­tant to tar­get tomor­row as opposed to yesterday.

CONSUELO MACK: So Bill, same ques­tion to you. So how do we adapt to the new real­ity as investors? How should we be posi­tion­ing our portfolios?

BILL GROSS: As Mohamed is sug­gest­ing, you need to go global. You need to think in, to some extent, in non-dollars based. The world revolves around the dol­lar. The dol­lar is the reserve cur­rency, but to the extent that it depre­ci­ates rel­a­tive to other cur­ren­cies and rel­a­tive to stronger growth economies over time, then other economies and other assets that are in non-dollars base might be a sig­nif­i­cant advan­tage. It doesn’t mean, you know, take your entire port­fo­lio and put it into Brazil and into the Brazil­ian real, but it means an investor prob­a­bly, if they want a higher return, they’re going to have to go to those parts of the world and those cur­ren­cies which offer a higher rate of return. So I think that would be crit­i­cal. And last, as Mohamed has sug­gested, you sim­ply have to know what your risk para­me­ter is. We’re fond of quot­ing a phrase from Will Rogers that says, “At cer­tain peri­ods of time, you should be more con­cerned about the return of your money, as opposed to the return on your money.” We try and do both here, but impor­tantly, dur­ing a period of uncer­tainty, dur­ing a period of slow growth in the devel­oped world or no growth in the devel­oped world, cer­tainly the return of your money is crit­i­cal going for­ward. You don’t want to lose 10 or 20% of it because you’re behind the eight ball going forward.

CONSUELO MACK: So Mohamed, specif­i­cally you co-manage PIMCO’s Global Multi-Asset Fund, a fund of funds. So how are you posi­tion­ing it? What are you over­weight­ing in PIMCO’s Global Multi-Asset Fund?

MOHAMED EL-ERIAN: So impor­tantly, this is a go any­where fund.

CONSUELO MACK: Yes.

MOHAMED EL-ERIAN: It can do equi­ties, it can com­modi­ties, it can do fixed income all in the liq­uid space. Even more crit­i­cally, it’s a fund that has tail hedg­ing in it. Now, tail hedg­ing is some­thing that’s very famil­iar to peo­ple as indi­vid­u­als, but not as investors.

CONSUELO MACK: So explain what it is.

MOHAMED EL-ERIAN: So when we buy car insur­ance, we tail hedge. We ask the ques­tion, “What deductible do you want?” Five-hundred, a thou­sand, two-thousand? We don’t buy car insur­ance because we think we’re going to crash the car, because if we’re going to crash the car we shouldn’t be dri­ving. We buy car insur­ance because there’s a small prob­a­bil­ity of a really bad event and we want to know whether we can limit our losses in that world.
So the global multi-asset strate­gies, what they do is they incor­po­rate within the con­struc­tion of the port­fo­lios this tail hedg­ing. And you see how it worked dur­ing the third quar­ter, which was a ter­ri­ble quar­ter and it really does kick in to limit the down­side in that. How are we posi­tioned rel­a­tive to where most peo­ple are? We’re much more global. Sec­ondly, we look for equity risk, but very high up the cap­i­tal structure.

CONSUELO MACK: So senior credit, for instance? I mean, preferreds?

MOHAMED EL-ERIAN: So senior credit. So what a lot of investors sort of don’t think about, they think of equity risk only com­ing in equity. If you buy com­modi­ties, you’d be amazed how much equity risk there is in com­modi­ties because com­modi­ties are also cor­re­lated to growth, just like equi­ties are. So in cer­tain states, com­modi­ties can offer you a bet­ter claim on the upside than equi­ties do. We are over­weight in emerg­ing mar­ket bonds. We over­weight local bonds in emerg­ing mar­kets where we think that you are earn­ing both a high inter­est rate and you have a poten­tial for cap­i­tal appre­ci­a­tion. We are diver­si­fied in cur­rency as you can sus­pect from what Bill just said. And we look at this actively.
So there are three of us who run this fund, Vineer Bhansali, Cur­tis Mew­bourne, and myself, and we’re each respon­si­ble for a dif­fer­ent part of it, but we con­sult every sin­gle day and posi­tion it accord­ingly. What we’ve been doing recently is we’ve been increas­ing our gold expo­sure. We had taken it down sig­nif­i­cantly as gold peaked. We thought it had gone too far. Now we see poten­tial. We think that we are still in a very volatile period. We are going to have many bouts of risk off. And peo­ple are going to look for hedges and increas­ingly gold is start­ing to enter as part of an asset allo­ca­tion, so we have been increas­ing gold. And we have been shift­ing out of the U.S., which has out­per­formed in the equity space, to cer­tain emerg­ing economies that were ini­tially hit hard not by their fun­da­men­tals, but by the amount of cap­i­tal that came out. So this is a con­tin­u­ous repo­si­tion­ing to reflect val­u­a­tions and also our sec­u­lar views.

CONSUELO MACK: One Invest­ment for long term diver­si­fied port­fo­lio, I ask all our guests this at the end of Wealth­Track inter­views. So Bill Gross, what should we all own some of in a long term diver­si­fied portfolio?

BILL GROSS: Cer­tainly bonds.

CONSUELO MACK: Cer­tainly bonds?

BILL GROSS: Yes.

CONSUELO MACK: Broad category.

BILL GROSS: Because bonds, high grade bonds not nec­es­sar­ily trea­suries, but sin­gle A and dou­ble A cor­po­rate bonds, pro­vide an accept­able return rel­a­tive to infla­tion. Not an his­toric return, but an accept­able return rel­a­tive to infla­tion. In an uncer­tain world of slow to no growth in the devel­oped world, it seems to me that invest­ment grade bonds of multi­na­tional cor­po­ra­tions, sin­gle A or dou­ble A cor­po­ra­tions which yield three to four to five per­cent, are cer­tainly low, but accept­ably high rel­a­tive to infla­tion and rel­a­tive to the alter­na­tive. So for a longer term invest­ment, for a five, ten, fif­teen year type of invest­ment, a sin­gle A or dou­ble A cor­po­rate bond. And for those that are earn­ing a Wall Street as opposed to Main Street income, munic­i­pal bonds in the sin­gle and dou­ble A cat­e­gory are very attrac­tive as well. They yield more than U.S. trea­suries, which is an his­tor­i­cal twist, so to speak. So I’d rec­om­mend both of those.

CONSUELO MACK: Mohamed, what is your One Invest­ment for a long term diver­si­fied portfolio?

MOHAMED EL-ERIAN: So how to sup­ple­ment Bill with­out repeat­ing Bill, that’s really hard. Any­thing that has the three char­ac­ter­is­tics of very strong bal­ance sheet, expo­sure to emerg­ing mar­ket growth, and income. So either div­i­dends, etcetera. So lots of com­pa­nies meet that criteria.

CONSUELO MACK: So stocks or bonds?

MOHAMED EL-ERIAN: Right. So think of a Microsoft with a three per­cent plus div­i­dend, exposed to emerg­ing mar­kets, sit­ting with a ton of cash would be an exam­ple of a com­pany like that. There are many exam­ples of com­pa­nies like that. There are coun­tries, sov­er­eigns that have these char­ac­ter­is­tics. Right?

CONSUELO MACK: Such as?

MOHAMED EL-ERIAN: Brazil. Sit­ting with $300-billion of reserves, hav­ing good growth prospects on there, and pay­ing an inter­est­ing carry or inter­est income, if you like– what Bill referred to in terms of high qual­ity com­pa­nies, high qual­ity munic­i­pals. So these char­ac­ter­is­tics one finds in quite a few dif­fer­ent places and you can build a port­fo­lio on that that allows you to sleep at night, gives you income, and also because it has so many buffers in terms of the bal­ance sheet, can nav­i­gate this enor­mous volatility

CONSUELO MACK: So Bill Gross, thank you so much for join­ing us. Mohamed El-Erian, what a treat to have the Dynamic Duo from PIMCO here on WealthTrack.

BILL GROSS: Thank you for coming.

CONSUELO MACK: Thank you.

MOHAMED EL-ERIAN: Thank you very much.

CONSUELO MACK: At the con­clu­sion of every Wealth­Track, we give you one sug­ges­tion to help you build and pro­tect your wealth over the long term as well. This week’s Action Point: Con­sider the invest­ment themes empha­sized by Bill Gross and Mohamed El-Erian. First, think inter­na­tional, that’s where the growth is. Sec­ond, think qual­ity, of busi­ness, bal­ance sheet, and credit, whether it’s a com­pany or a coun­try. Third, con­sider emerg­ing mar­kets in par­tic­u­lar for all asset classes includ­ing stocks, bonds and cur­ren­cies. Both Bill and Mohamed rec­om­mend hold­ing local cur­rency bond funds, not dol­lar denom­i­nated ones, to pro­tect against future dol­lar declines.
Next week we are going to delve deeper into emerg­ing mar­kets with two experts: Matthews Asia Funds’ chief invest­ment offi­cer, Robert Hor­rocks, and Pay­den Rygel’s emerg­ing mar­kets bond fund strate­gist Kristin Ceva. Both are also suc­cess­ful fund man­agers. Thank you for watch­ing and make the week ahead a prof­itable and a pro­duc­tive one.

Tags: Asset Fund, Bill Gross, Bond Fund, Bonds, Brazil, Canadian Market, Chief Investment Officers, Commodities, Consuelo Mack, Depth Interview, Double Interview, Gold, Gross Co, Investment Management Company, Investment Strategies, Investment World, Investor Bill, Mohamed El Erian, Money Management Firms, Outlook, Pacific Investment Management Company, Partnership Works, Pimco Total Return, Pimco Total Return Fund, Rare Occasion, Wealthtrack
Posted in Bonds, Brazil, Canadian Market, Commodities, ETFs, Gold, Markets, Outlook | Comments Off

Growth Falters, with Exception of Japan — Global PMI Scorecard (Oct 2011)

Monday, November 7th, 2011

Growth in global eco­nomic activ­ity fal­tered in Octo­ber after accel­er­at­ing in Sep­tem­ber. The global man­u­fac­tur­ing sec­tor slipped into reces­sion ter­ri­tory while growth in the ser­vices sec­tor slowed markedly.

The JP Mor­gan Global Com­pos­ite Index fell to 51.4 after ris­ing to 52.0 in Sep­tem­ber from 51.5 in August. The drop in the com­pos­ite PMI is mainly attrib­uted to a sig­nif­i­cant drop in my cal­cu­lated GDP-weighted PMI for the Euro­zone to 46.6 from 48.7 in Sep­tem­ber. Germany’s com­pos­ite PMI at a 27-month low indi­cates that eco­nomic activ­ity in the pri­vate sec­tor has vir­tu­ally stag­nated while eco­nomic activ­ity in France, Italy and Spain at 28 to 30-month lows has con­tracted severely. Growth in the U.K. weak­ened con­sid­er­ably to stag­na­tion levels.

My GDP-weighted Com­pos­ite ISM PMI for the U.S. in Octo­ber eased to 52.4 from 52.7 in Sep­tem­ber, indi­cat­ing con­tin­ued but below-par growth.

Growth in China also eased on a non-seasonally as well as a sea­son­ally adjusted basis.

Japan was the excep­tion to the rule among devel­oped economies. Accord­ing to Markit, Japan­ese pri­vate sec­tor activ­ity rose for the first time since Feb­ru­ary as the com­pos­ite out­put index breached the neu­tral 50.0 thresh­old. The com­pos­ite PMI jumped from a con­tract­ing 47.0 to a high­est read­ing of 52.4 since data were first com­piled in Sep­tem­ber 2007.

Eco­nomic activ­ity in emerg­ing economies improved some­what. Brazil has returned to growth again. Growth in India and Rus­sia edged up mar­gin­ally while the con­trac­tion in Hong Kong eased markedly.

Sources: Markit; CFLP*; ISM**; US Busi­ness Activ­ity Index***; Plexus Asset Management.

The JP Mor­gan Global Ser­vices PMI for Octo­ber eased to 51.8 from 52.6 in Sep­tem­ber on the back of a sig­nif­i­cant deep­en­ing in the con­trac­tion in the Euro­zone and espe­cially France, Italy and Spain. The Ger­mans are hold­ing out, though, and have man­aged to eke out some growth from con­tract­ing in Sep­tem­ber. The ser­vices sec­tor in the U.K. con­tin­ues to exhibit some growth but at a reduced rate, while growth in Ire­land accel­er­ated slightly. Australia’s ser­vices sec­tor is under the water again while growth in the ser­vices sec­tor in China is weak­en­ing. The U.S.’s ISM non-manufacturing PMI con­tin­ued its slightly weaker trend with the PMI mar­gin­ally lower at 52.9 from 53.0 in Sep­tem­ber. How­ever, it sur­prised the mar­ket on the down­side as the con­sen­sus was for a rise to 53.5. The Busi­ness Activ­ity Index fell sharply from a robust 57.1 to 53.8.

Among the BRICS coun­tries Brazil made a huge turn­around as its ser­vices PMI jumped to 53.6 from 50.5 in Sep­tem­ber. Rus­sia expe­ri­enced a slight accel­er­a­tion in growth but the con­trac­tion in India’s ser­vices sec­tor has deepened.

Tags: Activity Index, Adjusted Basis, Brazil, Business Activity, Composite Index, Composite Output, Contraction, Emerging Economies, Eurozone, Exception To The Rule, Global Economic Activity, Global Services, India, Ism, Jp Morgan, Lows, Manufacturing Sector, Output Index, Private Sector Activity, Scorecard, Services Pmi, Stagnation
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