Three snapshots for Tuesday
The euro zone just avoided recession in the first quarter of 2012 but the region’s debt crisis sapped the life out of the French and Italian economies and widened a split with paymaster Germany.
Click here for an interactive map showing which European Union countries are in recession.
The technology sector has been leading the way in the S&P 500 in performance terms so far this year with energy stocks at the bottom of the list. Since the start of this quarter financials have seen the largest reverse in performance.
Trading the new normal in India
After a ghastly 2011, Indian stock markets have’t done too badly this year despite the almost constant stream of bad news from India. They are up 12 percent, slightly outperforming other emerging markets, thanks to fairly cheap valuations (by India’s normally expensive standards) and hopes the central bank might cut rates. But foreign inflows, running at $3 billion a month in the first quarter, have tapered off and the underlying mood is pessimistic. Above all, the worry is how much will India’s once turbo-charged economy slow? With the government seemingly in policy stupor, growth is likely to fall under 7 percent this year. News today added to the gloom — exports fell in March for the first time since the 2009 global crisis.
So how are fund managers to play India now? According to David Cornell, who runs an India portfolio at specialist investor Ocean Dial, they must simply get used to the “new normal” — subpar growth and high cost of capital. In this shift, Cornell points out, return on assets in India has fallen from a peak of almost 14 percent in 2007 to less than 10 percent now. While that is still higher than the broader emerging asset class, the advantage has dwindled to less than 1 percent as companies suffer from margin compression and falling turnover. Check out these two graphs from Ocean Dial:
Cornell is playing the new normal by focusing on three sectors — consumer goods, banks and pharmaceuticals. These companies, he says, have pricing power and structural barriers to entry (banks); provide access to still-buoyant demand for services such as mobile phones (consumer goods) and are well-run and profitable (pharmaceuticals). And the export-oriented pharma sector is also an effective hedge against the weakening rupee.
If cost of capital is high, you want to avoid leverage, you want to be in banks which have pricing power. In pharmaceuticals you have 20 percent earnings growth and transparent accounting. In an uncertain environment these sectors should perform well. (Cornell says)
Three snapshots for Friday
The U.S. economy expanded at a 2.2 percent annual rate in the first quarter, slightly weaker than expected. Consumer spending which accounts for about 70 percent of U.S. economic activity, increased at a 2.9 percent rate – contributing two percentage points to the overall growth rate.
Sell in May and go away? Here are the average numbers for the MSCI world equity index:
More awful economic numbers from the euro zone, Spanish unemployment hit 24.4% in Q1 2012 with youth unemployment rising to 52%.
from MacroScope:
UK recession in charts
Britain's economy slid into its second recession since the financial crisis after official data unexpectedly showed a fall in output in the first three months of 2012:
Starting real GDP at 100 in 2003 for the UK, U.S. and euro zone shows UK GDP flat since mid-2010 and well below the 2007 peak.
Survey data had been suggesting a stronger GDP number and perhaps points to upwards revisions to come.
As this chart shows past revisions have been substantial.
Three snapshots for Thursday
OECD growth forecasts released today show the euro zone countries lagging behind other G7 countries:
Reuters latest asset allocation polls showed global investors cut government debt from portfolios in March:
Germany’s unemployment rate fell to a record low of 6.7% in March, bucking the trend in other euro zone countries:
Three snapshots for Wednesday
Spanish stocks jump out as the only only major equity market to miss out on the strong first quarter:
Euro zone money supply growth picked up in February but growth in private sector loans dipped.
The UK faces bigger hill to climb after fourth quarter GDP cut.
State vs entrepreneurial capitalism
The post-crisis world has been in part shaped by the growing presence of sovereign wealth funds, which have become an important source of funding with their $4 trillion assets, replacing private equity and hedge funds. But some people are wondering whether state capitalism really is the way forward, to boost the potential growth rate of the post-crisis world.
Robert Litan, senior fellow at the Brookings Institution, believes that in fact it’s entrepreneurs who would play a key role, and it’s important for policymakers to come up with a mechanism to help them.
Litan estimates that the United States needs 30-60 new “home-run” firms a year with annual sales of $1 billion to boost U.S. growth rate by one percentage point beyond its post-war average of 3 percent. This is double the past 150-year average of 15 firms a year.
“Enterpreneurial capitalism is the defining concept of 21st century economics. The state firm model might work for countries that are behind, but at some point we need entrepreneurship,” Litan told a briefing hosted by Legatum Institute, an independent public policy think tank.
Litan, who is also vice president for research and policy at Ewing Marion Kauffman Foundation, says “crowd funding” is one innovative way to help entrepreneurs.
Currently popular with film, tech and art start-ups, crowd funding is a new capital-raising technique that allows investors to take small equity stakes in new firms over the Internet.
Three snapshots for Monday
China’s trade balance plunged $31.5 billion into the red in February as imports swamped exports. It followed reports on Friday that inflation cooled in February while retail sales and industrial output fell below forecast, all pointing to a gradual cooling.
Investors ploughed more money into hedge funds over the past month as performance has picked up after last year’s losses.
Final Q4 Italian GDP growth came in at -0.7%q/q. This chart showing GDP vs the Markit purchasing managers’ index shows the current recession may continue into this year.
The haves and have-nots of the (energy) world
Nothing like an oil price spike to bring out the differences between the haves and have-nots of this world. The ones who have oil and those who don’t.
With oil at $124 a barrel, the stock markets of big oil importers India and South Korea posted their first weekly loss of 2012 on Friday. But in Russia, where energy stocks make up 60 percent of the index, shares had their best day since November, rising more than 4 percent. The rouble’s exchange rate with the dollar jumped 1.5 percent but the lira in neighbouring Turkey (an oil importer) fell.
Emerging currencies and shares have performed exceptionally well this year. Some of last year’s laggards such as the Indian rupee have risen almost 10 percent and stocks have jumped 16-18 percent. But unless crude prices moderate soon, the 2012 rally in the stocks, bonds and currencies of oil-poor countries may have had its day. Societe Generale writes:
As oil prices are now flirting with $125 per barrel, it is reasonable to start thinking about the potential impact on global emerging markets of an oil price shock and the currencies likely to gain the most from elevated oil prices and those that won’t….Russia appears as the clear winner of a potential oil price shock, and the rouble is therefore the best hedge against this risk
The bank advises its clients to buy the rouble and sell the currencies of oil importing Israel and Hungary. In Asia it suggests selling the Korean won. It also recommended exiting long positions on the Turkish lira.
Russia is the clear winner. Revenues from the energy sector provide half the state’s income and according to the graphic below from SocGen, oil exports account for 15 percent of Russia’s economy. At the other end of the spectrum are Taiwan, Korea and Turkey where oil imports make up between 7-12 percent of GDP.
Central banks and the next bubble (2)
In the previous bubble blog earlier in the week I wrote that G4 central bank balance sheets are expanding to a whopping 26% of GDP.
In what Nomura’s Bob Janjuah called “Monetary Anarchy”, some analysts worry that central bank liquidity expansion is a timebomb which if/when it explodes would have very negative consequences.
Swiss private bank Lombard Odier, weighing in on the debate, warns that not only has the quality of central bank balance sheets deteriorated, there has been no visible impact on the real economy.
Stephanie Kretz, member of the investment strategy team for private banking at Lombard Odier, points out that a sharp fall in the money multiplier, defined as the ratio of broad money (M3) to the monetary base, means the impact on the real economy has been almost non-existent.
What about the real economy? Ballooning and riskier central bank balance sheets will not generate sustainable growth or reduce unemployment and debt levels, but could well induce at a later stage unintended consequences that include bouts of hyper-inflation, loss of trust in fiat money and loss of central banks’ credibility as to their capacity to maintain strong currencies and stable prices.
The huge increase in the monetary base has not flowed into the real economy, and is sitting in the excess reserves of still reluctant-to-lend banks whilst the world is deleveraging, thus capping the demand for credit.
What happens when a recovery eventually kicks in, interest rates go up, the velocity of circulation of money comes back and real economy is flooded with paper currency that does not correspond to real human production? Monetary base expansion will need to be reversed in large, non-incremental steps if it is to be non-inflationary. This is uncharted territory for central banks and poses significant longer-term policy risks.
