Quarterly Newsletter - January 2012
Major Indices (as of 1/01/2012)
* PE ratios (based on historical earnings)
Commentary – Past 3 months
The past 3 months saw most share markets continue to slowly fall or move sideways as if the World is waiting to see if Europe implodes or not. The Aussie dollar held up surprisingly well considering our interest rates dropped and global growth outlook dropped, as global confidence weakened on fears over US and European debt problems and stalling Western economies. The news has been focused on the schizophrenic Eurozone , meanwhile Europe is heading into recession and the US is sputtering along with low growth of about 1.5%pa. Perhaps the only hopes for 2012 are that we will see a lot of leaders toppled in 2012.
The ECB and IMF alongside Germany and France continue to talk bailouts…. when they should be talking breakups of the Eurozone….further cementing their demise.
Global share market Price to Earnings (PE) ratios are still quite low (excluding Japan, and US) and are generally suggestive of low valuations provided earnings hold up.
Global exports are steady and economists are concerned about global debt levels.
US employment is dropping slightly currently at 8.6% down from 9.0% , and Australia at 5.3% unemployed is steady despite the mining boom, thanks to layoffs in financial services.
Europe and the UK are still awash with debt particularly in the PIGS countries supported only by Germany and France. Their economies are weak. Europe is about to crack!
China and India continue to do well overall but signs of weakness are emerging in China. Chian has growing concerns about their exports and manufacturing growth, as they are clearly slowing and the property bubble in the major cities is deflating. India is probably better shielded during a Global depression/correction. An IMF GDP forecast for 2012 of 9.0% and 7.5% growth respectively. Still impressive growth.
SE Asia and ASEAN continued strongly almost unaware that the western world is in crisis. The Philippines has seen some slowing of its electronics exports. No GFC here.
The Baltic Dry Index (BDI) has moved sideways currently at 1,888 but remains weak, at least higher than it was 6 months ago.
US retail sales forecasts are steady or slightly improving following the usual post Christmas lull.
Global GDP is still low in all the western countries (especially bad in Europe and UK) with most of them hovering around 0-2.0%, almost slipping into recession, with optimistic hopes for world growth in 2012 to reach 4.0% (IMFs September 2011 forecast).
It is definitely a two speed world - the slow developed and booming developing economies.
Global Interest Rates have mostly remained steady
except for Europe and Australia dropping by 0.5% and India rising 0.25%
to 8.50%. Incredible India indeed!!!!
Currencies over the quarter were summarized by a slight strengthening in the Aussie dollar against all currencies with the Australian dollar (AUD) settling at 1.02 to the US dollar. The Euro decline was relatively minor considering the Euro Debt Crisis.
The commodities have factored in for a mild slowdown in growth in China, with Iron Ore very bearish. Probably correct given property prices are now falling in much of China.
Australian house prices
Australian home prices have fallen slightly again especially in the prestige market. Sydney again bucked the trend and remained steady, two interest rate decreases and signs of more may help confidence. Further falls are very possible as the sector is still quite overvalued.
Commentary – Forecast next 6 months
It is clear the western World is just struggling along waiting for a miracle to fix the debt problems….the past 3 months saw all the markets moving sideways or slightly down as the European politicians muddled along from one disaster to the next. There answer for now is “bailouts” or more precisely “money printing”. This will only cause inflation in the West and devalue their currency. Still combined with some austerity it may help the Western world adjust to the new world order… That is, the rise of the East.
It also helps to slowly fix the cause of all this mess --- overspending Western Governments that bailed out Wall Street and much of the banking sector and inequality in global labor rates.
The Euro and USD currencies should weaken further. Or the Euro will break up - unlikely for now.
Asian and Emerging markets shares as well as Global Resources should consolidate and soon do better, as some great value is appearing here, however Global debt issues will likely continue to cause very negative sentiment until we see these problems begin to be solved either by default, money printing or Government austerity plans. The money printing will cause currency weakening and inflation in the US and Europe. Maybe this is not so bad if you don’t live there.
The US and China may lead a Global recovery after 2012 if the new US President (Romney, Paul, or Trump?) makes drastic changes and starts to pay down the USD 16 Trillion debt. A lot has to change in the US and Europe, and also in the way Global trading is done.
The Baltic Dry Shipping Index is steady, as was Copper. Both are signals of a stagnant economy.
US Retail sales forecasts are forecasted to be steady or a small rise. This is suggesting a continuing sluggish US economy as retail sales make up about 70% of US GDP.
Western (developed countries) share markets are likely to fall further, while emerging country share markets may start to rise, that is if Europe does not totally collapse.
Some market commentators are forecasting that the Dow and Gold will meet at 6,000…. Certainly a worrying thought for US equities (currently 10,913) and good for Gold sitting at 1,603.
Most markets PE ratios are fair or undervalued and China is looking cheap if you look at their growth and undervalued currency. Australia (PE 11.71) and the Resources sector (PE 11.6) are also looking attractive depending on where commodity prices go from here.
Of course, direct SE Asian property is still very attractive and quite resilient to the GFC.
I expect the emerging economies led by BRIC and SE Asia to continue to do well, and the oil and resource economies. For now their share markets may not reflect this, but they will be great buying opportunities soon (maybe in 2012).
Remember for now, if the US or Europe collapses under their mountain of debt then all economies and share markets will suffer.
Inflation is still a global concern and it would be wise to hold some commodities in your portfolio. Ideally you could hold a mixture of soft (food) and hard (energy/resource and precious metals such as Gold and Silver) commodities to hedge against the rising cost of living (inflation).
The Euro and USD should be avoided as should any currency where the country has excessive debt levels as at last the world has begun to realize the huge problems it faces with many countries heavily in debt and no real solution to fix their trade deficits.
The West (developed economies) may likely move sideways for another decade or two while they sort out their debt problems (personal and Government debts), meanwhile the emerging economies that participate successfully in Globalization will become increasingly wealthy. In effect a massive transfer from West to East or a steady equalization of the World over the next 2-3 decades. I see salaries and asset prices being equal between West and East before 2050.
Global Financial Crisis Solutions
Below is a summary of where we are heading and some GFC solutions.
I think the best solution is number 1)…. It will get to the root cause of the problems --- that is, inequality of global wages and hence massive trade imbalances (debts /surpluses) and Western unemployment and low growth.
US and Euro Debt Update
Whilst the ECB and EU have managed to provide a boost help European Banks this is not solution of the cause, merely a bandage on the wound.
Until the US and European countries start to pay down their huge Sovereign debts and to balance their budgets then the Western economies will remain very weak.
USA to impose trade sanctions/tariffs on China
Whilst the US has talked about imposing trade sanctions/tariffs on China since 1991, but never acted, maybe now with the US in crisis (and losing about 273 billion in 2010 trade with China), the time to act has arrived.
A stronger Chinese Yuan will mean that Chinese consumers will enjoy greater buying power and that should help global growth.
American consumers will lose some of the buying power they've enjoyed over Chinese goods. Their dollars will buy less. But it will slowly help America have a neutral trade balance with China and to remove US debt, and in time bring jobs back to the USA.
As discussed in the October 2011 newsletter, I believe that equalizing Global minimum wages (via currency changes and wage increases in China) is the solution to solve the Global Crisis and help global poverty.
So, any steps in that direction as above can only be good for global markets. Stay tuned.
1USD = 6.4 Yuan (this needs to change towards
1USD = 3.2 Yuan)
World Population hits 7 billion people
In early Nov 2011 the Philippines (and others) announced that that they had the World’s seven billionth baby.
One thing for sure is that agricultural land and food supply to feed the World’s burgeoning population is certainly going to become a more important issue and business every year. By 2050 the World population is expected to be 9 billion people.
The World is Equalizing
Below is a quote from a newsletter I read and it speaks the ugly truth. Suggesting the West is in for a tough few decades as the World equalizes its wages and asset prices.
Philippines booming – now the number one call centre country in the World
According to the New York Times in 2011 the Philippines took over from
India (350,000 call centre workers) as the number one call centre country
in the World with about 400,000 call centre workers. What’s more
the Philippine workers are paid more (about $300/month) compared to
the Indians ($250/ month), due to their “lightly accented”
accent and better cultural fit to the US. Additionally Manila has better
infrastructure and transport for workers.
Philippines economy rising rapidly
The economy of the Philippines is the 45th largest in the world according to the International Monetary Fund (IMF) with an estimated 2010 gross domestic product (nominal) of $200 billion, it is estimated that by 2015 the ranking of the Philippines would go up to the 18th… Wow!!!!!!
S&P upgrades Philippines Credit rating to a positive outlook
Dec. 16 (Bloomberg) -- The Philippines’ credit rating outlook
was raised by Standard & Poor’s Ratings Services, boosting
the nation’s chances of an upgrade that would bring it closer
to investment grade.
Philippines Government Debt to GDP in 2011–
Australia - After the mining boom – the next big thing will be food supply to Asia
Here in 2012, the Australian economy is doing very well thanks to the $200 billion of export earnings from the mining industry…. However if China’s demand (about half of all exports) slows then Australia will feel it….and hopefully this next decade, the rising India will take up any slack.
The other big threat is increased supply from other countries, in particular, Mongolia, and our own Government taxes which will dampen profits somewhat.
However, overall I expect the mining boom to continue for as long as China and India are urbanizing--- likely to be another 10-20 years. Australia’s supply of resources is not a problem, as most of our mines have 50+ years of mining life.
Food Supply to Asia (The soft Commodities boom)
As the Asian population and wealth grows rapidly so will the demand and price for food. Arable land is already running out and many Australian farms are being bought by foreign companies to secure future food supply for their people.
This will be the next big boom for Australia provided we don’t sell of all the farms.
To invest in this you can buy farm land, soft commodities, or soft commodity funds.
To find out more please contact an adviser at firstname.lastname@example.org .
NB : High Net Worth Financial Advising attempts to enhance overall return for clients by investing in undervalued regions of the world and undervalued asset classes, that have positive growth stories.
NB : The contents of this newsletter does not constitute personal
advice and is general in nature, please see your adviser for personal
advice suitable to your own needs and objectives.