Global Investing

January in the rearview mirror

As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures – thanks to Scott Barber and our graphics team.

The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world’s central banks.

The ECB’s near half trillion euros of 3-year loans  has stabilised Europe’s ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it’s also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It’s also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..

But to the extent that the ECB move was aimed primarily at preventing a seizure of the banks, then one measure of  success can be seen in the degree to which it steepened government yield curves in Spain and Italy. A positive yield curve, which measures the gap between short-term  and long-term interest rates,  is effectively commercial banks’ ATM — they  make money by simply borrowing short-term and lending long. This chart then shows some normality returning to the benchmark interest structure.

 

 

 

 

 

 

 

 

 

 

 

 

The problem, as highlighted by bond investor Pimco and others, is twofold. One, how does all this extra liquidity find its way to the real economy if fearful households and companies don’t or can’t borrow more or are still assiduously paying down debts — the suffocating ‘deleveraging’ process scaring investors and policymakers alike? It’s one thing lending back to governments, and that may be a necessary move to prevent economic meltdown, but that’s not going to generate renewed economic activity or job growth on its own. And then, two, what if banks — under regulatory and market pressure to rebuild shot balance sheets — simply refuse to expand “risky” lending again and hoard these cheap borrowings as cash that gets put back on deposit at the central bank?

EM growth is passport out of West’s mess but has a price, says “Mr BRIC”

Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O’Neill. O’Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China’s economy is growing by $1 trillion a year  and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece?  Italy’s economy was surpassed in size last year by Brazil, another of the BRICs, O’Neill counters, adding:

“How Italy plays out will be important but people should not exaggerate its global importance.  In the next 12 months the four BRICs will create the equivalent of another Italy.”

Emerging economies are cooling now after years of turbo-charged growth. But according to O’Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent,  a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.

Home is where the heartache is…

On a recent trip home to Singapore, I was startled to learn just how much housing prices in the city-state have risen in my absence.

A cousin said he had recently paid over S$600,000 — about US$465,000 — for a yet-to-be-built 99-year-lease flat. Such numbers are hardly out of place in any major metropolis but this was for a state-subsidised three-bedroom apartment.

Soaring housing prices have fueled popular discontent — little wonder as median monthly household incomes have stagnated at around S$5,000.

A shoe, a song and the promise of the West

I found myself at Selfridges this week, specifically in what the London retailer says is the world’s largest shoe department.

Slightly dazed by cornucopia of women’s shoes on slick display, I was roused only when the haze of muzak wafting over the PA system was suddenly dispersed by the jaunty strains of the Chinese New Year ditty ‘Gongxi Gongxi’.

A 1946 composition from Shanghai, the song has gone from classic to kitsch, evolving to become the most popular festive song in the Chinese-speaking world. Its ubiquity rests on the many — for me at least — teeth-grindingly cloying versions played all over shops and markets in Asia. (Click here for example and don’t say I didn’t warn you)

BRIC: Brilliant/Ridiculous Investment Concept

BRIC is Brazil, Russia, India, China — the acronym coined by Goldman Sachs banker Jim O’Neill 10 years back to describe the world’s biggest, fastest-growing and most important emerging markets.  But according to Albert Edwards, Societe Generale‘s uber-bearish strategist, it also stands for Bloody Ridiculous Investment Concept. Some investors, licking their wounds due to BRIC markets’ underperformance in 2011 and 2010, might be inclined to agree — stocks in all four countries have performed worse this year than the broader emerging markets equity index, to say nothing of developed world equities.

For years, money has chased BRIC investments, tempted by the countries’ fast growth, huge populations and explosive consumer hunger for goods and services. But Edwards cites research showing little correlation between growth and investment returns. He points out that Chinese nominal GDP growth may have averaged 15.6 percent  since 1993 but the compounded  return on equity investments was minus 3.3 percent.

But economic growth — the BRIC holy grail – is also now slowing. Data showed this week that Brazil posted zero growth in the third quarter of 2011 compared to last year’s 7.5 percent. Indian growth is  at the weakest in over two years. In Russia, rising discontent with the Kremlin — reflected in post-election protests — carries the risk of hitting the broader economy. And China, facing falling exports to a moribund Western world,  is also bound to slow. Edwards goes a step further and flags a hard landing in China as the biggest potential investment shock of 2012.  “Yet investors persist in the BRIC superior growth fantasy…If growth does matter to investors, they should be worried that
things seem to be slowing sharply in the BRIC universe,” he writes.

Retail volte face confirms India as BRIC that disappoints

Jim O’Neill, the Goldman Sachs banker who coined the term BRICs to capture the fast-growing emerging-markets quartet of Brazil, Russia, India and China,  has fingered India as the BRIC that has disappointed the most over the past decade in terms of reforms, FDI and productivity. New Delhi’s latest decision to put on hold a landmark reform of its retail sector will only confirm this view.

The government’s backtracking on plans to allow foreign investment in supermarkets will not surprise those accustomed to New Delhi’s record on key economic reforms. But it means India’s weak performance on FDI receipts will continue and that’s bad news for the worsening balance of payments deficit.  Speaking of the retail volte face, O’Neill said: ”They shouldn’t raise people’s hopes of FDI and then in a week, say, ‘we’re only joking’”.

Various Indian lobby groups that oppose the reforms contend that foreign giants such as Wal-Mart and Tesco will kill off the livelihoods of millions of small traders.

India: the odd BRIC out

China moved to ease policy this week via a reserve ratio cut for banks, effectively starting to reverse a tightening cycle that’s been in place since last January. Later the same day, Brazil’s central bank cut interest rates by 50 basis points for the third time in a row. Both countries are expected to continue easing policy as the global economic downturn bites. And last week Russia signalled that rate cuts could be on the way.

That makes three of the four members of the so-called BRIC group of the biggest emerging economies. Indonesia, the country some believe should be included in the BRIC group, has also been cutting rates. That leaves India, the fourth leg of the BRICs, the quartet whose name was coined by Goldman Sachs banker Jim O’Neill ten years ago this week. India could use a rate cut for sure. Data this week showed growth slowing to 6.9 percent in the three months to September — the slowest since September 2009. Factory output slowed to a 32-month low last month, feeling the effects of the global malaise as well as 375 basis points in rate increases since last spring. No wonder Indian stocks, down 20 percent this year, are the worst performing of the four BRIC markets.

But unlike the other BRICs, a rate cut is a luxury India cannot afford now — inflation is still running close to double digits.  “The Reserve Bank of India (RBI) is the odd guy out due to stubbornly high inflation of near 10 percent,” writes Commerzbank analyst Charlie Lay.

Sparks still flying over Harbin Electric

Emotions continued to run hot on Tuesday over Harbin Electric, the small-cap U.S. listed Chinese motor manufacturer, a week after a year-long management buyout process came to an end.

The company was finally taken private in a deal that paid $24 a share, but not before short-selling bloggers pummeled the stock to a 52-week low of $5.82 on June 16.

Short sellers including Andrew Left of Citron Research and researcher/journalist Roddy Boyd published research claiming the company was being run fraudulently. Harbin was one of many Chinese companies listed in North America that came under scrutiny earlier in the year.

The power of Chinese international tourists

These days, streets of London, Paris, Tokyo and even Santorini are filled with Chinese tourists. In London’s Heathrow Airport Terminal 3, the queue for the tax refund is so long that one has to wait 3 hours to get his or her tax refund (my mother, on her recent trip to the UK, had to give up in the end).

But the potential economic impact of Chinese international tourists — estimated to be 100 million by 2020, or 6.4 percent of global outbound tourists according to United Nations World Tourism Organisation — is something that could boost sluggish consumer spending in the West.

Hong Kong and Macau, currently the top destinations for Chinese tourists, are reaping the benefits from Chinese tourists thanks to their rich offering of luxury goods. In Hong Kong alone, Chinese tourists spent HK$87 billion ($11 billion) last year — fivefold compared with 2000 — with shopping accounting for 74 percent of their total spending.

Who is in greatest need to reform pension?

This year’s fall in global equities (down nearly 20 percent at one point) and tumbling bond yields, along with the euro zone sovereign debt crisis, are sowing the seeds for a new financial crisis – in the pension funds industry.

But which country is in the greatest need of pension reform?

Everyone, you may say, but a new study from Allianz Global Investors finds that Greece, India, China and Thailand need to reform their pension systems the most.

The study, which charts the relative sustainability of national pension systems in 44 countries, shows that India and China — two of the fastest growing emerging economies — suffer from low pension coverage and lack of adequate measures to improve the situation.