Global Investing

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.

So what exactly have investors and been doing while waiting for the fog to clear in Brussels?  The truth on most benchmark prices and indices is “not very much” — at least not since world markets got the collywobbles in early August about US downgrades and debt ceilings, euro sovereign debt angst and double dip recession. Yet, since the European stocks nadir in late September prodded the Franco-German alliance into more serious action, there has been some impressive market gains of between 10 and 20% across most equity sectors and national indices. More broadly, after a year of intense political and financial turmoil across the globe, developed market equities are only down about 4% year-to-date — a 10 point outperformance on emerging markets, for example.

And the clearing of the euro fog now allows investors to start looking beyond the Brussels cauldron and review how the rest of the world is shaping up. What they find, surprisingly for those drowning in disaster commentaries, is‘not all that bad – especially, but not exclusively in the United States. There’s been a string of more positive economic data releases throughout October and these have continued through the back end of last week and early this week. The bellwether Philadelphia Fed industrial index rose to its highest in six months; U.S. durable goods orders (excluding volatile aircraft orders) rose at their fastest pace in six months in September; U.S. new home sales rose at their fastest in five months; business surveys show Chinese manufacturing is back expanding again in October for the first time in three months; U.S. power firms are reporting a pickup in industrial activity in H2, Ford has increased fourth quarter forecast for North American vehicle production. The U.S. Q3 earnings season hasn’t been half bad either – with a third of the S&P500 reported, some 70 percent beat forecasts and the main strength was in the industrial world. What’s more for markets, seasonal equity flows are typically in an updraft for the rest of the year, all things being equal. Fund managers already started rebuilding equity positions in September.

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.

We’re all in the same boat

The withering complexity of a four-year-old global financial crisis — in the euro zone, United States or increasingly in China and across the faster-growing developing world — is now stretching the minds and patience of even the most clued-in experts and commentators. Unsurprisingly, the average householder is perplexed, increasingly anxious and keen on a simpler narrative they can rally around or rail against. It’s fast becoming a fertile environment for half-baked conspiracy theories, apocalypse preaching and no little political opportunism. And, as ever, a tempting electoral ploy is to convince the public there’s some magic national solution to problems way beyond borders.

For a populace fearful of seemingly inextricable connections to a wider world they can’t control, it’s not difficult to see the lure of petty nationalism, protectionism and isolationism. Just witness national debates on the crisis in Britain, Germany, Greece or Ireland and they are all starting to tilt toward some idea that everyone may be better off on their own — outside a flawed single currency in the case of Germany, Greece and Ireland and even outside the European Union in the case of some lobby groups in Britain. But it’s not just a debate about a European future, the U.S.  Senate next week plans to vote on legisation to crack down on Chinese trade due to currency pegging despite the interdependency of the two economies.  And there’s no shortage of voices saying China should somehow stand aloof from the Western financial crisis, even though its spectacular economic ascent over the past decade was gained largely on the back of U.S. and European demand.

Despite all the nationalist rumbling, the crisis illustrates one thing pretty clearly – the world is massively integrated and interdependent in a way never seen before in history. And globalised trade and finance drove much of that over the past 20 years. However desireable you may think it is in the long run, unwinding that now could well be catastrophic. A financial crisis in one small part of the globe will now quickly affect another through a blizzard of systematic banking and cross-border trade links systemic links.

Emerging consumers’ pain to spell gains for stocks in staples

Food and electricity bills are high. The cost of filling up at the petrol station isn’t coming down much either. The U.S. economy is in trouble and suddenly the job isn’t as secure as it seemed. Maybe that designer handbag and new car aren’t such good ideas after all.

That’s the kind of decision millions of middle class consumers in developing countries are facing these days. That’s bad news for purveyors of everything from jeans to iphones  who have enjoyed double-digit profits thanks to booming sales in emerging markets.

Brazil is the best example of how emerging market consumers are tightening their belts. Thanks to their spending splurge earlier this decade, Brazilian consumers on average see a quarter of their income disappear these days on debt repayments. People’s credit card bills can carry interest rates of up to 45 percent. The central bank is so worried about the growth outlook it stunned markets with a cut in interest rates this week even though inflation is running well above target

from MacroScope:

Give me liberty and give me cash!

Come back Mr Fukuyama, all is forgiven.

In his 1992 book "The End of History and the Last Man", American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually 'immortal' in countries with a GDP per capita above $10,000.

from The Great Debate:

What is the best strategy against Chinese cyberattacks?

By Ian Bremmer
The views expressed are his own.

All eyes should be peeled on China, but not for the reason you think. While the biggest structural risk right now is global rebalancing, especially between China and the U.S., there is another important threat from China: cyberwars. Cyberattacks are one of the biggest fat tails (along with climate and North Korea).

It’s no surprise that the latest Google hack attack came from China. The presumption is that the vast majority of cyber attacks hitting the U.S. are coming from the Chinese government. It’s very hard to know where threats are originating – country-wise and/or person-wise -- because it’s very difficult to go back and figure out the paper trail. But at a minimum, there is an environment in China that tolerates cyber attacks.

Proprietary information around technologies – gaining profit shares, increasing revenues – allows a country to be much more economically competitive. China has leverage because everyone wants to get into China. If you want to make something in their country, you have to share the technology.

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.

from MacroScope:

Brazil joins fellow-BRIC China in world’s Top 5

Volkswagen's Brazil car factory. Sales are booming as the economy roars ahead

Volkswagen's Brazil car factory. Sales are booming as the economy roars ahead

Distracted by the upheaval in the Middle East and $120 per barrel oil,  few noted Brazil's ascent last week to the ranks of the world's top five economies. Strange given that the move comes just months after China displaced Japan as the second-biggest economy in the world.

Goldman Sachs Asset Management head Jim O'Neill points out that  Brazil -- part of the BRIC group of big emerging economies -- grew 7.5 percent in 2010. By the end of last year the economy was valued around $2.2 trillion. That's next only to the United States, China, Japan and Germany. And bigger than France and Britain.

from Davos Notebook:

Will Goldman’s new BRICwork stand up?

RTXWLHHJim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.