Three snapshots for Tuesday
Is now the time to shift to equities vs. bonds? Goldman Sachs think so and traditional valuation measures such as the equity risk premium (chart) make bonds look expensive relative to equities when compared to the average over the last 20 years.
It isn’t surprising that the performance of equities relative to bonds tends to be closely correlated with economic activity. However as the chart below shows this does break down from time to time, equities are currently still trailing bonds over a 12-month period while an ISM above 50 suggests equities should be winning.
Fed Chairman Ben Bernanke poured some cold water on the recent improvement in the U.S. jobs market yesterday. Today’s consumer confidence numbers were mixed, the “jobs hard to get” index rose to 41.0 per cent from 38.6 per cent the month before, but the “jobs plentiful” index also rose to 9.4 per cent from 7 per cent
As gasoline prices rise a handy map of which countries subsidise fuel.
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:
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.
Never mind that these products are largely assembled back in their home country, Chinese tourists buy their designer bags on Bond Street and elsewhere in Europe to avoid China’s luxury sales tax. More importantly, these status-conscious buyers have the assurance that they are not being sold knock-offs — a risk rampant in a country notorious for its lack of regard for intellectual property.
Those reasons are similar to those that drive the wealthy elite in many emerging economies to London, a city that Goldman Sach’s Jim O’Neil has dubbed the “BRIC capital of the world“.
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
All that bodes ill for shares in companies selling so-called consumer discretionaries in developing countries – non-essential items such as autos and high-end cosmetics.
But someone’s loss is someone’s gain. Shares in companies selling consumer staples –food, beverages, prescription meds and tobacco — are starting to pick up. In short, everything that outperforms during economic downturns. MSCI’s index of emerging market staples is flat on the year, doing only slighly better than consumer discretionaries. But guess what? In August, when everything was selling off staples did ok. They fell 2.4 percent, much better than MSCI’s discretionaries index which lost 8 percent.
Bank of America/Merrill Lynch’s monthly survey shows fund managers went overweight consumer staples in August for the first time this year. Back in January when investors were optimistic about the U.S. economic outlook, almost 60 percent of fund managers were underweight staples. They still like discretionaries but cut that position pretty sharply last month.
What of Brazil? Carlos de Leon, a fund manager at RCM still sees opportunities there, especially as minimum wages will rise by an above-inflation 12 percent next year. But unsurprisingly, his picks are consumer staples and defensives including toll road operators, fuel distributors and utilities.
Another nail in the Malthusian coffin?
All the talk of addressing the global imbalances throws a spotlight on contrasting demographic trends in the world’s two most populous nations — China and India.
Prior to the financial crisis, India’s annual growth rate of about 9 percent seemed positively moribund next to China’s double-digit economic expansion. But purely on demographics, the dimming power of the US consumer could give India an edge over its neighbour in the longer run.
That’s what India’s trade minister Anand Sharma seemed to suggest last week when he reminded the audience at a London conference that the country had “20 percent of the world’s children”:
We know that when we talk about emerging countries the consumption patterns are different. Most of China’s production is meant for (markets) abroad. India consumes two-thirds of what India produces.
Indeed, Goldman Sachs projects that India’s middle class will outstrip China’s by 2045. This is some 15 years after half of China’s population becomes either too old or too young to be part of the workforce.
Beijing’s mandarins are taking note of this monumental shift in dependency ratios. After decades of enforcing a ‘one-child’ policy in the face of an human rights outcry, China appears to be relaxing its stance on population control. Family-planning officials in Shanghai have begun to urge eligible couples to have two children.
What happened with $200 oil super spike theory of Goldman Sachs?Goldman Sachs should stop to misuse statistical methods.I can not trust Goldman Sachs reports.
The Big Five: themes for the week ahead
Five things to think about this week:
APPETITE TO CHASE? - Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally’s momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week — as much from China as from the major developed economies — will show how much appetite there is to keep chasing the rally higher.
TAKING CONSUMERS’ PULSE - A better picture of the health of the consumer will emerge this week as U.S. retailers’ earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers’ profit margins, are the only thing that will tempt them to shop — both key issues for the macroeconomic and corporate outlook.
CENTRAL BANK WATCH - After last week’s Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE’s expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 — and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead.
PRICE PROTECTION -This week’s inflation data (from Germany, France, Italy, euro zone, U.S.) is unlikely to contain any nasty surprises. But the U.S. Treasury’s willingness to consider bringing back the 30-year TIPS suggests that enough investors and reserve managers are looking beyond current subdued price data to future inflation risks from QE programmes, etc. That will ensure a close eye is kept on breakevens and whether the main issuers of inflation-linked products in the euro zone are inclined to increase issuance of such products.
TRADE - Official resistance to currency appreciation has been evident in some developed countries (Switzerland, RBA, RBNZ, among others) and there are suspicions that some Asian central banks may also be inclined to check such trends given the fierce competition among the world’s exporters to grab what orders there are. Trade data this week will show how trade flows are faringand the extent to which Chinese economic activity is driving them.
