Global Investing

Weekly Radar: Managing expectations

With a week to go in January, global stock markets are up 3.8 percent – gently nudging higher after the new year burst and with a continued evaporation of volatility gauges toward new 5-year lows. That’s all warranted by a reappraisal of the global economy as well as murmurs about longer-term strategic shifts back to under-owned and cheaper equities. But, as ever, you can never draw a straight line. If we were to get this sort of move every month this year, then total returns for the year on the MCSI global index would be 50 percent – not impossible I guess, but highly unlikely. So, at some stage the market will pause, hestitate or even take a step back. Is now the time just three weeks into the year?

Well lots of the much-feared headwinds have not materialized. The looming US budget ceiling showdown keeps getting put back – it’s now May by the way, even if another mini-cliff of sorts is due in March — but you get can-kicking picture here already. The US earnings season looks fairly benign so far, even given the outsize reaction to Apple after hours on Wednesday. European sovereign funding worries have proven wide of the mark to date too as money floods to Spain and even Portugal again. And Chinese data confirms a decent cyclical rebound there at least from Q3′s trough. All seems like pretty smooth sailing – aside perhaps from the UK’s slightly perplexing decision to add rather than ease uncertainty about its economic future. So what can go wrong? Well there’s still an event calendar to keep an eye on – next month’s Italian elections for example. But even that’s stretching it as a major bogeyman the likely outcome.

In truth, the biggest hurdle is most likely to be the hoary old problem of over-inflated expectations. Just look at the US economic surprise index – it’s tipped into negative territory for the first time since late last summer. Yet incoming US data has not been that bad this year. What the index tells you more about has been the rising expectations. (The converse, incidentally, is true of the euro zone where you could say the gloom’s been overdone.) Yet without the fuel of positive “surprises” we’re depending more on a structural story to buoy equity and that is a multi-year, glacial shift rather than necessarily a 2013 yarn. The start of the earnings season too is also interesting with regard to expectations. With little over 10 percent of the S&P500 reported by last Friday, the numbers showed 58% had beaten the street. That’s not bad at first glance but a good bit lower than the 65% average of the past four quarters. On the other hand, it’s been top-line corporate revenues that have supposedly been terrifying everyone and it’s a different picture there. Of the 10% of firms out to date, 65 percent have reported Q4 revenues ahead of forecasts – far ahead of the 50% average of the past four quarters. Early days, but that’s relatively positive on the underlying economy at least.

And the Apple story is yet another case in point. Even though its shares fell about 10% in after-hours trade on anything from a slight revenue miss, future guidance and market-share concerns — it says more about the scale of expectations built into this one, if spectacular, corporate story. Look at the actual numbers  and you see in absolute terms, its supposedly worrying iPhone shipments were still up 29% over the year to a new record and iPhone sales in greater China more than doubled. A tough crowd to please now, clearly, but again telling us more about expectations that underlying activity. For what it’s worth, Apple’s bottom-line earnings beat the street. 

And finally, the other big – structural rather than cyclical – story in play over the past 10 days has been the unwind of the euro safe-haven plays – hardly surprising given that now two of the three bailout countries (Ireland and Portugal) are back in the private markets again default-free and the one-time big worry (Spain) is drowning in foreign creditors all of a sudden. Bund, Treasury and Gilt yields of course have all been pushing higher, even though QE limits that move. But perhaps the biggest manifestation of the safe-haven exit has been the 3% Swiss franc retreat – who said the SNB couldn’t hold the line? Sterling’s slide too is as much to do with this as it is related to Cameron’s EU sideswipe. Watch out for others too – Nordic markets perhaps? London property? Gold is still higher on the year, but that just underlines the fact it was always more an inflation-hedge rather than haven from systemic shocks.       

Weekly Radar: Global PMIs; US/UK GDP; FOMC; Heavy earnings, inc Apple

Whoosh! The gloomy start to the final quarter seems to have been swept away again by the beginnings of a half decent earnings season stateside – at least against the backdrop of dire expectations – and a steady drip feed of economic data surprises from the United States and elsewhere. Moody’s not downgrading Spain to junk has helped enormously and the betting is now that the latter will now seek and get a precautionary credit line, which would not require any bailout monies up front but still unleash the ECB on its bonds should they ever even need to – and,  given Thursday’s successful sale of 4.6 billion euros of 3-, 5- and 10-year Spanish government bonds,  they clearly don’t at the moment (almost 90% of Spain’s  original 2012 borrowing target has now been raised). What’s more, Greek euro exit forecasts have been put back or reduced meantime by big euro zone debt bears such as Citi and others, again helping ease tensions and defuse perceived near-term euro tail risks. Obama’s bounceback in the presidential polls after the latest debate may be helping too by rolling back speculation that a clean sweep rather than a more likely gridlock was a possible outcome from Nov 6 polls. China Q3 GDP came in as expected with a marginal slowdown to 7.4% and signs of growth troughing — all adding to the picture of relative calm.

So, in the absence of the world ending in a puff of smoke – and the latest week of data, earnings and reports suggests not – we’re left with a view of a hobbled but stabilising world economy aided by hyper-easy monetary policy that is bolting core interest rates to zero. Tactical investors then, at least,  are being drawn into the considerable pricing anomalies/temptations across bond and credit markets as well as the giant equity risk premia and regional price skews.

The upshot has been a sharp bounceback of some 2.5% in world equities since last Wednesday, falling sovereign bond spreads in euroland and in credit and emerging markets, a higher euro and financial volatility gauges still rock bottom. Dax vol, for example, is at its lowest in well over a year. Year to date, developed market equities are now scaling 15-20%! Germany stands out with gains of some 25%, but the US too is homing in on 20%. These are extremely punchy numbers in any year, but are doubly remarkable in year of so much handringing about the future. So much so, you have to wonder if the remainder of the year will be remain so clement. That doesn’t mean another shock or run for the hills, but shaving off the extremes of that perhaps?

Three snapshots for Friday

The correlation between individual country equity indices is rising again:

U.S. consumer spending jumps in February but income growth tepid.

Apple vs. RIM market value:

Three snapshots for Friday

One Apple chart that has been going down for 10 years is its forward P/E ratio:

Rising gasoline prices push up American’s inflation expectations for the next year:

Currency moves this year:

 

 

from MacroScope:

The iPod – the iCon of Chinese capitalism

Walking past Apple's sleek shop along London's Regent Street on Sunday, my wife asked me what I wanted for Father's Day.

"An iPad?" I ventured, half-jokingly.

"Are you sure you want one? Don't you care how they're made?" came her disapproving reply.

She was, of course, referring to the rash of suicides among Chinese workers at Foxconn, the Taiwanese manufacturer of Apple's much desired iPads and iPhones.

Who’s next for the Dow?

Arzu Cevik, director at Thomson Reuters Strategic Research, writes:

“With Citi shares trading below $1, the first time since 1970 that a “penny stock” traded on the Dow Jones Industrial Average, it is widely expected that it will be removed from the index.

“The company was added to the Dow in 1997 when it was still known as Travelers, and the last company to be removed from the Dow was AIG last September (when its stock hovered above $1) and was replaced by Kraft Foods.

“It’s also expected that General Motors may be removed from the Dow. GM shares are trading slightly above $1 and there’s speculation it may be headed toward bankruptcy.

One Minute Manager

One minute, one manager. An occasional word about what to expect from the economy and financial markets. Today is Giles Keating, global head of research at Credit Suisse Private Bank.

It is time, Keating says, to prepare for a bottoming out of the global economic downturn.

Is there a gadget to avoid recession?

apple.jpgSome investors reckon the U.S. economy is in recession and undergoing a W-shaped pattern of growth — that is decline, temporary recovery, decline again, then rebound.

Fortis Investments is one such believer and is telling its clients that they are currently in the second down phase. That implies a rebound is coming, but Fortis is not ready to say when. Not anytime soon, is all it suggests.

One quick gauge of a country’s economy, meanwhile, is to drop into a popular shopping area and see what people are doing. Purely subjectively, a visit last week to two malls in the United States — in Maryland and Virginia — suggested things are pretty bad.