“In our opinion, Canadian assets (bonds and equities) punch well above their weight and, as we believe Canadian equities remain underweight in global portfolios, global investors should heighten their focus north of the U.S. border,” he said. “We would also point out that Canadian domestic investors should temper their international endeavours and stick to a higher domestic bias in their portfolios.”
Posts Tagged ‘Emerging Market’
Gold bullion – advancing in all currencies
Thursday, March 4th, 2010
The gold price is not only making headway in US dollar terms, but also in most major (and minor) currencies as illustrated by the table and graph below. Bullion veterans will recognise this phenomenon as a manifestation of solid investment demand (and a vote of no confidence in fiat paper per se).
The picture and the numbers tell the full story.
Source: Plexus Asset Management (based on data from I-Net Bridge).
Source: Plexus Asset Management (based on data from I-Net Bridge).
Illustrating the message even more vividly is the chart below of gold expressed in a basket of emerging-market currencies by dividing the dollar bullion price by the Wisdom Tree Dreyfus Emerging Currency ETF (CEW). Also note that the chart has again climbed back to above its 50-day moving average line.
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Source: StockCharts.com
I remain bullish on gold in the medium term, especially as I believe the vast money printing by central banks could set off strong inflation pressures down the road. I will not be surprised to see bullion remaining in a secular uptrend for some time to come. Add bullion to your portfolios but, given the notorious volatility of the metal, only do so on pullbacks.
Tags: Bullion Price, Central Banks, Dollar Terms, Dreyfus, Emerging Market, ETF, Gold, Gold Bullion, Gold Price, Headway, Inflation Pressures, Investment Demand, Line Advertisement, Line Source, Medium Term, Minor Currencies, Money Printing, Pullbacks, Solid Investment, Story Source, Uptrend, Vote Of No Confidence, Wisdom Tree
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PIMCO on Emerging Market Debt, Greece
Friday, February 12th, 2010
PIMCO’s Gomez, co-head emerging markets debt, says there are structural concerns about Europe complicating aid for Greece in the short term, but that the bailout issue will be resolved. In any event, the euro was overvalued and a due for a correction. He also says that ultimately, success will depend on Greece.
Source: Bloomberg (Youtube)
Tags: Bailout, Bloomberg, Emerging Market, Emerging Markets, Europe, Gomez Co, Greece, PIMCO, Success
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Emerging Markets Highlights (week ending 02/07/10)
Sunday, February 7th, 2010
- Hong Kong’s retail sales rose 16 percent year-over-year in December, the fastest pace in 20 months and ahead of market expectations. The growth was thanks to improving employment and a 14 percent year-over-year increase in tourist arrivals from mainland China.
- South Korea’s exports jumped 47.1 percent in January from a year earlier, the highest growth rate in more than 20 years, as the continued global recovery drove external demand for autos, appliances and electronics.
- Chile’s economic activity expanded by a higher than estimated 3.9 percent year-over-year in December, the country’s highest growth in 15 months, due to a rebound in services and retail sales.
Weaknesses
- China’s official Purchasing Managers’ Index moderated to 55.8 in January from 56.6 in December, partly due to seasonal factors.
- Fitch described Hungary’s fiscal prospect as uncertain ten weeks ahead of the country’s general elections and remained undecided whether to increase its credit rating outlook.
- Emerging market equity funds saw a $1.6 billion outflow in the week ended February 3, the biggest liquidity exodus in 24 weeks. The outflow came amid rising concerns on the sovereign debt situation in such European countries as Greece, Portugal and Spain.
Opportunities
- While China’s city population has been consistently growing in the last decade, over 40 percent of the counties in central China still have an urbanization rate of merely 20-30 percent. According to CEBM, consumer spending can be boosted by more than 45 percent when the urbanization rate rises by 10 percentage points to the 30-40 percent range. Expanded urbanization, especially in inland China, remains one of the policy solutions for stimulating domestic demand and bodes well for consumer plays in the long term.
Threats
- The current rally in the U.S. dollar may continue to be a headwind for investors in Asia given the longstanding negative correlation between the U.S. dollar and Asian equities.
Tags: Central China, China, City Population, Debt Situation, Emerging Market, Emerging Markets, Equity Funds, General Elections, Global Recovery, Headwind, Last Decade, Mainland China, Market Equity, Market Expectations, Negative Correlation, Outflow, Policy Solutions, Purchasing Managers Index, Seasonal Factors, Sovereign Debt, Term Threats, Tourist Arrivals, Urbanization Rate
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Robin Griffiths: A technical perspective of stock markets, the dollar and Turkey
Thursday, January 14th, 2010
The dollar has turned a corner against the yen, according to Robin Griffiths, technical strategist of Cazenove Capital. He sees stock markets going “a little higher for a little longer” and Turkey being the “breakout” emerging market this year, as well as London Brent crude continuing to rise.
Source: CNBC, January 11, 2010.
Tags: Breakout, Capital Markets, Capital Stock, Cnbc, Dollar, Emerging Market, Emerging Markets, London Brent Crude, oil, Robin Griffiths, Stock Markets, Technical Perspective, Technical Strategist, Turkey, Yen
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Mark Mobius on Leading Emerging Markets Regions
Friday, December 11th, 2009
The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.
Asia and Latin America are probably the most interesting emerging market areas in the world. This is not only because of their different cultures but also because their conomic histories have been so varied. If we consider the performance of markets in both areas, the Asian investor might be misled to think that Asian markets have outperformed Latin American markets but that is not necessarily the case in all time periods. For example up to November of this year, the MSCI AC Asia ex Japan Index was up 65% in US$ terms while the MSCI Latin America Index was up 100%. In 2008, the performance of both areas was about the same with Asia moving down 52% and Latin America falling 51%, a slightly better performance than Asia. In 2007, Latin America again beat Asia. While Asia was up 41%, Latin America was up 51%. Again in 2006, while Asia was up 34%, Latin America recorded a bigger rise of 44%. Of course there have been periods when Asia performed better than Latin America but recent history shows that Latin America has been the leader in performance rankings.
If we look at the demographic, geographical and economic characteristics of the two regions, there are some significant differences as well as similarities. Let’s take population; while Asia’s population numbers 3,600 million, Latin America’s population is only 550 million. Population growth in Asia has been slightly lower than that of Latin America. Between 2003 and 2008, Latin America’s population grew by 1.3% while Asia’s grew by 1.2%. One strong benefit that Latin America’s population has is that they have more land available to them. While Asia’s land mass is 25 million square kilometers to hold that 3,600 million people, Latin America has 20 million square kilometers to hold 550 million, a clear difference.
In the economic arena, growth in Asia has been superior to that of Latin America. Between 2003 and 2008, while the average annual growth rate in Asia was 8%, it was 5% in Latin America. This year we expect Asia’s growth to be flat but Latin American economies will shrink it’s economies by an average of 2.5%.
Of course despite the slower growth in Latin America, total GDP is, on a per capita basis, better than Asia. In 2008, Asia’s GDP totaled US$9,180 billion so that the per capita income was about US$2,600 while Latin America’s GDP was lower at $4,170 billion but its smaller population resulted in a per capita income of $7,580, significantly higher than that of the Asians.
In the foreign reserves area, Asia is definitely the superior with reserves now surpassing US$3,500 billion while in Latin America, total reserves amount to only about US$500 billion. Although Asian exports and imports amounted to US$7,300 billion in 2008, compared to Latin America’s US$1,700 billion, the growth of trade for both regions has averaged about the same during the last five years with an annual average growth of 19%.
Looking at the stock markets in both regions, the market capitalization of Asian stock markets has reached US$9,510 billion compared to Latin America’s US$1,814 billion. Asia also has many more listed companies with about 15,200 stock exchange listings compared to Latin America’s 1,300.
We continue to find good value in Latin American stock markets despite the smaller size compared to Asia. Currently, the price/earnings ratios of both areas average 14x, while the price to book value ratios are also the same at about 2x.
Dividend yields differ though, with Asia at 2% and Latin America with 3%. The large markets in Asia are China and India where the emphasis is on manufactured goods and services while in Latin America Brazil, the dominant country, is strong in commodity exports. Nevertheless, we are finding opportunities in almost all sectors in both regions with a number of good manufacturing, consumer and banking stocks throughout Latin America and Asia.
As such, the future of both regions is good and holds a great deal of promise for investors, which is why investors should have exposure to both regions. This will enable investors to benefit from the developments in Latin America and Asia.
Source: Mark Mobius, Franklin Templeton Investments - Emerging Markets Overview, December 11, 2009
Tags: America Index, Asian Markets, Asset Management Asia, China, Commodities, Different Cultures, Economic Arena, Economic Characteristics, Emerging Market, Emerging Markets, Executive Chairman, India, Japan Index, Land Mass, Latin America, Latin American Markets, Mark Mobius, Market Areas, Performance Rankings, Population Growth In Asia, Population Numbers, Square Kilometers, Templeton Asset Management, Time Periods
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Advisor Alert: Emerging Markets
Saturday, December 5th, 2009
The following summaries are part of the weekly Advisor Alert produced by US Global Funds for the week ending …
Emerging Markets
Strengths
- China’s November HSBC Manufacturing Purchasing Managers’ Index (PMI) rose to 55.7 from 55.4 in October, driven by stronger new orders, especially those for exports. The official PMI released by the government stayed unchanged at 55.2, an 18 month high, with only 3 out of 20 sectors still showing contraction.
- India’s third quarter GDP increased by 7.9 percent year-over-year, higher than market expectation and accelerating from second quarter’s 6.1 percent, reflecting robust manufacturing activity, a resilient domestic economy, and limited impact from weak monsoons.
- Hong Kong’s retail sales grew 9.9 percent in October, thanks to abating unemployment, rising stock and property prices, and a 23 percent surge in mainland tourist arrivals.
- Credit rating agency Fitch upgraded Turkey’s sovereign rating by two notches to BB+ and moved select industrial companies to investment grade. In the past, we highlighted in our Investor Alert the fact that Turkey’s CDS had traded at levels below those for better rated emerging market peers and that the country did deserve a higher credit rating.
Weaknesses
- Although South Korea’s exports registered a 18.8 percent rise in November from a year earlier, the first positive year-over-year reading since November 2008, the month-over-month increase was only 0.8 percent, lower than 6 percent on average in the third quarter and 10 percent in the second quarter, a reflection of moderating China demand and weakening U.S. demand.
- Malaysia is reviewing proposals to reduce subsidies (effectively raise taxes) on sugar, rice, and fuel to rein in budget deficit. Price caps on sugar, for example, also encouraged “profiteering” as some locals “smuggled” sugar across the border into Thailand to get prices twice as high. The country’s 2009 budget deficit is forecast to reach a 22-year high of 7.4 percent of GDP due to stimulus spending.
- According to Czech Energy Regulatory Office data, Czech electricity demand is down 6.5 percent year to date. Demand declined by 2.7 percent year-on-year in October, while consumption by the large industrial companies declined by 7.1 percent year-on-year.
Opportunities
- China aims to grow its tourism revenue by 11 percent a year through 2015 with a target for tourism spending to account for 10 percent of total household spending and 4.5 percent of GDP. Hainan, Hong Kong, and Macau are promoted as main destinations. This policy initiative should benefit domestic Chinese airlines.
- RusAl has announced that is has completed restructuring of its debt, clearing a path to an IPO in Hong Kong. The global aluminum surplus will narrow by 54 percent in 2010 to 1.19 million tons, said Japanese trading company Marubeni.
Threats
- Despite government infrastructure spending boom in China this year, Chinese companies have not aggressively deployed cash so far and corporate bank deposits kept soaring and reached around $3 trillion as of October. There exists a remote risk of “herd spending” down the road when domestic demand picks up strongly and profit cycle restarts, eventually resulting in economic overheating.
- The headline seasonally adjusted Russian Manufacturing PMI recorded a second monthly reading below 50 in November, after an expansionary reading in September, indicating an overall decline in business conditions, according to the latest survey from VTB Capital.
Tags: Budget Deficit, China, China Demand, Contraction, Credit Rating Agency, Domestic Economy, Emerging Market, Emerging Markets, Expectation, Global Funds, India, Investment Grade, Monsoons, Notches, Pmi, Price Caps, Purchasing Managers Index, Quarter Gdp, Retail Sales, Second Quarter, South Korea, Tourist Arrivals
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Will Emerging Market Outperformance Last?
Tuesday, November 24th, 2009
The MSCI Emerging Markets Index has notched up a massive 72.3% gain for the year to date, and an even more impressive 101.4% since the March 9 lows. Although emerging markets were the clear leaders during the initial months of the recovery, the MSCI World Index has subsequently done some catching up but still lags with gains of 26.7% and 69.3% for the two measurement periods.
The chart below shows the performance of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Needless to say, an upwardly sloping line means outperformance by developing stock markets.
Source: StockCharts.com
Should emerging markets be renamed “emerged” markets? Let’s consider two graphs to gain a better understanding of one of the key drivers of emerging stock markets.
As shown below, the Emerging Markets Index is primarily driven by commodity prices and in particular by metal prices as measured by the Economist Metals Price Index. Considering the historical relationship, emerging-market equities seem to be fairly priced given the level of metal prices.
Source: Plexus Asset Management (based on data from I-Net Bridge).
All other things being equal, the outlook for emerging markets, or at least the resource-related ones, appears positive given the favorable prospects for metal prices on the back of improving global industrial production and stronger global economic growth.
What is important is that the ratio of the Emerging Markets Index and World Index is also driven by commodity prices and specifically metal prices. As shown below, the relative risk of investing in emerging-market equities has increased as the ratio has outrun metal prices.
Source: Plexus Asset Management (based on data from I-Net Bridge).
Longer term I have little doubt that emerging markets will outperform their mature peers. However, over the next few months metal prices would need to rise quite substantially to ensure further outperformance by the Emerging Markets Index. At best, I would expect emerging markets to maintain the current relative levels against the MSCI Global Index should metal prices move sideways.
Tags: Commodities, Commodity Prices, Dow Jones, Economist, Emerging Market, Emerging Markets, Emerging Stock Markets, Favorable Prospects, Global Economic Growth, Graphs, Lows, Measurement, Metals, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Peers, Plexus Asset Management, Price Index, Relative Risk, Stockcharts, Year To Date
Posted in Emerging Markets, Markets | No Comments »
Nigel Rendell: Buy Brazil, Sell Eastern Europe
Tuesday, November 10th, 2009
Nigel Rendell, emerging market strategist of RBC Capital Markets, talks to Izabella Kaminska of FT Alphaville about a broad spectrum of emerging-market related issues.
Part 1:
Rendell talks about the differing fortunes of economies from Russia to Argentina. He says Brazil remains a great pick outside Asia.
Click here or on the image below to view the video.
Part 2:
With many analysts bullish on Chinese growth, the big challenge for investors is gaining exposure. Rendell says Korea and Taiwan offer the best proxy plays.
Click here to view Part 2 of the interview.
Part 3:
With interest at record lows in developed economies, investors are increasingly looking for yield in emerging markets. Rendell comments on whether this inflow of money is creating a fresh bubble.
Click here to view Part 3 of the interview.
Source: Izabella Kaminska, Financial Times (here, here and here), November 9, 2009.
Tags: Alphaville, Argentina, Best Proxy, Brazil, Broad Spectrum, Chinese Growth, Eastern Europe, Emerging Market, Emerging Markets, Financial Times, Fortunes, Ft Alphaville, Inflow, Interview Source, Kaminska, Market Strategist, Rbc Capital Markets, Record Lows, Rendell, Russia
Posted in Emerging Markets, Markets | No Comments »
Paul Tudor Jones: Buying Gold and Curve Flatteners
Monday, November 2nd, 2009
Investing legend, Paul Tudor Jones’ has published his latest latest letter to investors.
Here are some excerpts:
Tudor Jones believes there is a better opportunity to buy equities in the year-end period, as he is expecting a pullback in the fall.
While 45% is nothing to ignore, one should take into account that the S&P through July 31 is still down more than 20% on a price basis year-over-year. The bottom line is that we are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.
The economy will remain strong until Q2 2010 as a result of ongoing support from the government, easy monetary policy, a weak dollar, and continuing inventory de-stocking:
The forceful policy response to avert depression tail risks posed by the financial crisis has likely unleashed a wave of liquidity which is probably greater than that of 2001-2003. Our job is to identify the best performing assets of this “Great Liquidity Race.” At present, it appears those assets are gold, emerging market equities denominated in local currencies, and commodity related stocks.
Liquidity is making its way into bond purchases by banks, into equity markets, into capital flows to emerging markets and into international reserve accumulation and related diversification away from the dollar. This will be the trend over the next quarter—or two—even before discussing potential portfolio shifts within it.
He likes gold on the basis of easy money and inflationary outlook:
Dealbook says:
Winning the race, Mr. Jones posits, will be gold, emerging-market equities denominated in local currencies and commodity-related stocks. “I have never been a gold bug,” he says in the letter. “It is just an asset that, like everything else in life, has its time and place. And that time is now.” (A link to the entire letter is below.)
Tudor Jones says:
“precious metals exposure has been increasing and is currently the largest commodity exposure. As a result we have included, for this quarter, a separate discussion on gold as an appendix. I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.”
Tudor notes that curve flatteners provide ‘tail risk insurance’ against the trades of long gold, short the US dollar, and long equities. Tudor writes, “As deflation recedes to the background, market participants will start expecting a removal of policy accommodation. If the markets begin to price early, fast and large tightening before inflationary expectations are allowed to take hold, then curves could bear-flatten significantly from current historically high levels.”
Tudor Jones also likes the Aussie dollar, and equity selections in Brazil and Taiwan. You may read the whole letter here, below inside the Scribd window.
Tags: Accumulation, Commodities, Dealbook, Easy Money, Emerging Market, Emerging Markets, ETF, Financial Crisis, Gold, Gold Bug, International Diversification, liquidity, Monetary Policy, Ongoing Support, Paul Tudor Jones, Policy Response, precious metals, Price Basis, Pullback, Related Diversification, Time And Place, Weak Dollar, Winning The Race
Posted in Emerging Markets, Gold, Markets | No Comments »
Goldman Recommends Companies with High Sales Exposure to BRICs
Friday, October 9th, 2009
Goldman Sachs recently put out a report, and continue to follow it up, in which they aggressively recommend overweighting US companies that have high sales exposure to BRIC economies, as they have been outperforming the market and are expected to continue to do so.
The basis of this is Goldman’s outlook for growth in the BRICs next year. GS expects BRICs combined GDP to grow by 8.7% vs. the consensus 7.2%, with China and India leading the way. For China and India, Goldman’s outlook for growth is also more aggressive with China registering 11.9% and India 7.2% in 2010.
Goldman’s BRICs hit list of 50 companies makes the case, with Year-To-Date performance of 43% vs. 17% for the S&P 500. Its hard to argue with Goldman, given that they rule the BRICs trade, and to their credit, coined it themselves.
Goldman said:
We favor exposure to Brazil, Russia, India and China (BRICs) over developed markets given the significantly higher GDP growth outlook. We believe investors should use this basket to identify stocks with high exposure to emerging market growth. Long/short investors should consider buying this basket against the S&P 500 to gain exposure to higher growth in the BRICs countries versus slower growth in developed regions.
In its morning notes yesterday GS said:
BRICs-exposed companies outperform during earnings season Our basket of 50 stocks with high sales exposure to BRICs economies has posted stronger sales growth and surprises than the S&P 500 during the past 10 earnings seasons. We believe this outperformance will continue.
Here is Goldman’s list:
Download the GS Slideshow: goldman-research-where-to-invest.
Tags: Advertisement, Amp, Brazil, BRIC, BRICs, China, Consensus, Countries, Earnings Season, Emerging Market, Emerging Markets, GDP, GDP Growth, Gold, Goldman Sachs, Growth Outlook, High Exposure, India, Investors, Leading The Way, Outperformance, Russia, Stocks, Surprises
Posted in Emerging Markets, Gold, Markets | No Comments »
Canada: There’s no place like home
Thursday, September 10th, 2009
Scotia Capital has published a research report discussing “reasons to own” Canada. Canadians have never really had to think about this one. Now Canadians should prepare for the onslaught of capital that will come from global investors who agree, by positioning ahead of it. Let the record show that PetroChina’s largest North American investment to date, made in Canada just a few weeks ago, is early evidence of this.
When RSP (for non-Canadians, the near-cousin of the 401K) rules mandated it, we invested at home, now and then discovering ways to circumvent the rules with a clone fund or some other RSP strategy. We didn’t like having Canada rammed down our throats, so we, and this country’s best domestic equity fund managers, became really good at stockpicking in Canada.
When the RSP rules were loosened so that there were no longer restrictions, it came at a time when we were complacent, enjoying the benefits derived from investing in Income Trusts and the boom that ensued, and we didn’t care about the repealed mandate. Then one Halloween, the axe fell, when Jim Flaherty killed income trusts, and gave us reasons to look at the global alternatives.
Finally, Canada, has universal appeal. Canada really may finally be the best, safest place in the world, for us to invest.
A strong, and perhaps the healthiest, banking system in the world, a massive natural resources and commodities-based economy, and a sound fiscal disposition, irrespective of the US- and UK-centric credit and economic crisis.
“Canada’s main attributes are emerging market exposure with lower volatility, cheaper valuations relative to MSCI World, stronger domestic fundamentals, Canadian dollar strength relative to the U.S. dollar and British pound, proximity to the U.S. economy and above average market capitalization in financials, materials, technology and Industrials,” portfolio strategist Vincent Delisle wrote.
…
Mr. Delisle said the country’s “superior” risk-reward profile makes it a compelling destination for investors. In the last 10 years, the compounded annual growth rate for Canadian stocks outpaced the MSCI world index by 8.5 per cent.
…
“Hence, Canada offers the stability of a developed economy with an exposure to growth in developing nations through its commodity sensitivity,” he wrote. “Admittedly, Canada’s marginal size doesn’t initially attract attention and puts it alongside other mid-tier specialized markets such as Australia, Sweden or Norway.”
…
Also, Macleans Magazine features “Our Big Chance,” an excellent article about our chance as a country to shine, to pull away from the rest of the western world. We have what the fastest growing countries of the world need. In fact, for this last reason, we do, perhaps, need to realize as a nation of investors, that we need to protect our greatest assets by funding them and owning them ourselves. I’m not suggesting for one second that we adopt a protectionist stance, but lets stop giving away our best businesses and resources to dragons in return for funding, and start supporting and sponsoring them ourselves. Let’s lead, not follow, foreigners into our markets.
Our big chance, Macleans Magazine, August 27, 2009
For Canada, a country that has spent the better part of 20 years nervously wringing its hands over its perceived inadequacies, the dramatic reversal over the past year has been striking. Our banks were once seen as lacking innovation; now world leaders hail the boring Big Five as being among some of the safest and most profitable banks in the world. We fretted that our economy was overly reliant on commodities; now our rocks, oil and gas are seen as a natural hedge against havoc in the manufacturing sector. We worried that Canada’s strict mortgage rules were a drag on our housing market; now we can brag that we don’t put people into homes they can’t afford. Almost any way you look at it, Canada is uniquely positioned. So as other developed nations struggle, the question is: will we squander this once-in-a-generation opportunity or take advantage of our good fortune to punch above our weight?”
H/T: G&M Market Blog, , Steve Ladurantaye, September 8, 2009
Reasons to Own Canada, PDF, Scotia Capital, September 9, 2009
Tags: 401k Rules, American Investment, Banking System, Canada, Canadian Dollar, Commodities, Delisle, Dollar Strength, Domestic Equity, Economic Crisis, Emerging Market, Emerging Markets, Equity Fund, Fund Managers, Global Investors, Income Trusts, Industrials, Jim Flaherty, Market Capitalization, Market Exposure, Materials Technology, oil, Petrochina, Portfolio Strategist, Risk Reward, Rsp, Scotia Capital, Universal Appeal, Valuations, Volatility
Posted in Emerging Markets, Markets | 4 Comments »
RGE: China’s Impact on Financial Markets
Wednesday, August 26th, 2009
Nouriel Roubini’s RGE Monitor has just published a report examining China’s direct and indirect influences on global asset markets, and particularly equity, commodity and forex markets. Although the full report is only available to RGE’s subscribers, the abridged version nevertheless provides useful insight as reported in the paragraphs below.
Chinese equities
The Shanghai composite index has fallen almost 20% from its August 4 peak, putting it within the traditional definition of a bear market. Thus far this year, however, the index has risen over 50%, and it has surged even more since its low in late 2008. Yet Chinese equities remain vulnerable given the liquidity outlook and the challenges of using relatively blunt tools to guide asset markets.
Correlations between Chinese and global equities (especially emerging market equities) have increased since 2007. Economies most reliant on Chinese investment, or on the commodities consumed by China, tend to show the most significant correlations. Yet even the markets of Central and Eastern Europe have shown greater co-movements. While Mainland markets are dominated by domestic investors and foreign investment is heavily restricted, they have vaguely led global markets, being among the first to begin to fall from overheated heights in early 2008 and the first to climb in late 2008 following China’s stimulus announcement.
China’s linkages with global markets, to the extent that they exist, seem more macro than financial. The same government policies designed to avoid bubbles and limit further misallocation of capital – including the slowing of credit extension currently underway – could not only restrain frothy Chinese equities, some investors worry, but also suggest that the Chinese and global recovery will be weaker.
Thus steps taken to “fine-tune” Chinese monetary policy and cool overheating in some sectors of the economy, could contribute to more global market volatility. A burst Chinese bubble could reduce Chinese demand and prefigure poor performance in other markets as liquidity is withdrawn. While markets in the US and Europe seem more likely to take their cues from local trends–particularly the corporate earnings and economic growth outlooks than Chinese markets, a slowdown in Chinese demand, could give pause. An increase in exports to China is among factors supporting European exports in Q2.
Chinese equities were looking very bubbly in July and early August, and in our most recent economic outlook, we highlighted developing asset bubbles in China’s property and equity markets as one of several potential risks of China’s stimulus. Chinese liquidity has begun to be less loose, even if it is not yet tight and inflows to Chinese equity markets have slowed from July onwards. Several trends which supported equity markets in H1 2009—record bank lending with few restrictions, the improvement in consumer confidence, the deferral of IPOs—are no longer supportive. Inflows to the Chinese equity market slowed in July 2009 as bank lending slowed and government regulators suggested a closer look would be taken at the allocation of funds. Meanwhile price/earnings ratios are no longer as cheap, having almost doubled from their late 2008 lows. Corporate earnings may stay weak given the difficulty in passing on higher production costs. All of these factors suggest that Chinese equities might have farther to fall.
On the plus side, further correction might have only a limited effect on the Chinese economy, given lower wealth effects than in developed markets. Market capitalization is a much smaller share of GDP and equity investment is a much smaller share of savings. Sentiment is affected. New accounts opened by Chinese retail investors have fallen since their late July peak. The reluctance of retail investors to incur losses could contribute to a boom and bust cycle, negatively affecting Chinese and global asset markets.
Chinese commodity demand
Record commodity imports, particularly of metals, contributed to the commodity price climb in H1 2009 (pumped up by the ample liquidity from zero interest rate policies and quantitative easing). A sustained reduction in Chinese imports of commodities is perhaps the biggest risk to global commodity markets, particularly metals. In fact there is some preliminary evidence that the extensive stockpiling that contributed to the record volumes of commodity imports early in 2009 may be slowing as prices rise. The volume of imports of key metals like copper, tin and aluminum has slowed in either June or July 2009. While this reduction may reflect seasonal trends, with stockpiles filled and costs high, a further slowdown should not be ruled out.
Chinese imports of commodities, especially base metals, grew sharply in the first half of 2009 as China sought to restock depleted reserves and build up new stockpiles. Even the infrastructure-heavy stimulus likely absorbed only some of the imports, suggesting that China might be on the verge of a commodity glut Further purchases, particularly later in Q2, may have extended beyond the official stockpiling to include investors who took physical delivery as a hedge.
Yet, not all of the increased demand is due to stockpiling. Metal processing has been a key part of China’s fiscal stimulus – with any excess production purchased by the government. There have been reports that some of the state metal and grain reserves became net sellers domestically, suggesting the pace of imports might slow. The Baltic Dry Index, a measure of shipping costs that reflects demand for bulk commodities, has fallen from its 2009 highs. Import volumes of several key metals fell in June and July 2009. Should they fall further, and should global stock piles grow, commodity prices could correct from their current levels.
Chinese commodity purchasers are in part price-sensitive. In 2008, Chinese producers made due with cheaper alternatives to expensive ores. Purchases of scrap copper and aluminum rose in July 2009 even as the imports of higher-grade ore and materials fell. While the continued demand for scrap metal does suggest some underlying metal demand from Chinese consumers, they have their price.
Despite China’s role as the largest consumer of many commodities, it has had limited success as a price setter despite its influence as one of the largest demanders of most commodities. Unwilling to accept the 33% negotiated by Japanese companies and their ore suppliers for bulk shipments, China held out for 40-50% reductions – a concession suppliers were reluctant to give. Only one – Fortescue, a relatively small producer, agreed to a 35% price cut.
Unlike metal ore imports, whose volumes have doubled and in some cases tripled from 2008 levels, oil imports have only recently topped 2008 levels. Chinese oil imports did report a sharp increase to 19 million tons in July, well above recent levels, perhaps due to demand from new refineries. Yet end user demand in China and globally has not climbed much even as supply has inched up again – OPEC members have been increasing production. Worse than expected macro news, meanwhile, would likely contribute to a correction, to the $50 range more in line with supply/demand fundamentals.
Yet, liquid financial conditions and the improving “less bad” macro climate may keep commodity prices in their current US$ 70 range, despite weak demand and an increase in storage Should oil prices keep climbing, they could put a damper on the economic recovery and on the revival of energy demand. Yet over the next few years, supply constraints supply, limited investment and high production costs for the new supplies that are entering the market could keep prices elevated and a damper on global growth, especially among the oil importers like China, India and the US
Source: RGE Monitor, August 26, 2009.
Tags: Asset Markets, Bear Market, Central And Eastern Europe, Chinese Investment, Commodities, Correlations, Domestic Investors, Emerging Market, Emerging Markets, Fine Tune, Foreign Investment, Forex Markets, Global Equities, Global Markets, Global Recovery, Government Policies, India, Indirect Influences, Market Volatility, Misallocation, oil, RGE Monitor, Sectors Of The Economy, Shanghai Composite Index
Posted in Emerging Markets, Markets | No Comments »
