Global Investing

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)

I was somewhat surprised by the song’s appearance in the British retail icon — not least because it’s still some ways off the Year of the Dragon. But then looking at the shoppers around me it all made sense.

Mainland Chinese travellers spent some £200 million on Bond Street last year. That’s a 155 percent surge from 2009, according to an association of luxury retailers in the London thoroughfare.

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.

Phew! Emerging from euro fog

Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise.  And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you’d be just a little blue in the face waiting for the ‘big bazooka’. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse.
And here’s where most global investors stand following the “framework” euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers — a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros — were broadly what was called for, if not the “shock and awe” some demanded.  Financial markets, who had fretted about the “tail risk” of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible “Phew!”.

Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:

It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.

from Jeremy Gaunt:

Splendour in China and other branding

MSCI, the index provider used by leading investors across the world, has decided it needs a name change in Greater China. In a news release this morning the firm (which is no longer owned by Morgan Stanley, the MS in its title) said its Chinese business would henceforth be branded as  MSCI 明晟.

When I tweeted this @reutersJeremyG, one wag suggested  this meant "MSCI small-ladder-bigger-ladder-books-on-a-picnic-table", which is what it indeed looks like to an untrained eye (like mine).  But it is actually Ming Sheng, which  apparently is supposed to symbolise "brightness and transparency, prosperity and splendour".

That might sound a little flowery for an index provider, but is arguably apt given the role such indices have in opening up markets to investment.

If China catches a cold…

China has defied predictions of a hard economic landing for some time now so it is somewhat unsettling to see  investors positioning for a sharp slowdown in the world’s second-largest economy.

Over the last 10 years, the world has become accustomed to Chinese annual GDP growth of above 9 percent. A seemingly insatiable demand for commodities from soya beans to iron ore has catapulted the Asian giant to near the top of the global trade table. China is the biggest trading partner for countries on nearly every continent, from Angola to Australia.

But many are now fretting that an unhappy coincidence between stuttering global demand and domestic strains in the property and banking sectors could knock Chinese growth to below 7 percent (the level commonly identified as a ‘hard landing’), with grave implications for the rest of the world.