Global Investing

‘Ivanovs’ keen on new cars despite high inflation – Sberbank

Sberbank’s hypothetical Russian middle-class family metric – the ‘Ivanovs’- shows the average Russian family is concerned about high inflation, though that is still barely denting some peoples’ aspirations of getting behind the steering wheel of a new car.

April’s Ivanov index, a survey of more than 2,300 adults across 164 cities in Russia with a population of more than 100,000, notes people are still concerned about persistently high inflation, which in Russia is at around 7 percent.

Household budgets are most concerned by this factor (70 percent), up 1 percent from two months ago, as the average family spends around 40 percent on food. To put that in context, consumers in western Europe spend on average between 15 and 20 percent of income on food, according to the research. But more than 40 percent of respondents still plan to spend on one big-ticket item – to replace their car within the next two years. That is slightly down from 42 percent in the previous survey in February. Car markers have invested heavily in Russia, with sales growing more than 10 percent in 2012 according to AEB, the Association of European Business, as a relatively low level of car ownership and large numbers of older vehicles need replacing.

The Ivanovs’ worries are not surprising, given 10 percent of corporates are hiring new employees versus 47 percent seeing a headcount reduction.

A dent in consumer confidence has had a knock-on effect on the X5 retail group, according to the research. Shares in London-listed X5 retail group have shed 63.74 percent from a peak peak in Jan. 2011, but are still well above the post-crisis trough hit in 2008. The effect, the analysis concludes, is seen more in average spend, rather than because of reduced footfall. That is mainly because of a more limited assortment range, quality and freshness of the products.

Russia’s consumers — a promise for the stock market

As we wrote here last week, Russian bond markets are bracing for a flood of foreign capital. But there appears to be a surprising lack of interest in Russian equities.

Russia’s stock market trades on average at 5 times forward earnings, less than half the valuation for broader emerging markets. That’s cheaper than unstable countries such as Pakistan or those in dire economic straits such as Greece. But here’s the rub. Look within the market and here are some of the most expensive companies in emerging markets — mostly consumer-facing names. Retailers such as Dixy and Magnit and internet provider Yandex trade at up to 25 times forward earnings. These compare to some of the turbo-charged valuations in typically expensive markets such as India.

A recent note from Russia’s Sberbank has some interesting numbers on Russia’s consumer potential. Sberbank tracks a hypothetical Russian middle class family, the Ivanovs, to see how consumer confidence is shaping up (According to SB their data are broader in scope than the government’s official consumer confidence survey).

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

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)

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

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”:

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.