Quarterly Newsletter - April 2012
Major Indices (as of 1/04/2012)
* PE ratios (based on historical earnings)
Commentary – Past 3 months
The past 3 months saw most share markets rise strongly on the back of a debt bailout for Greece. Especially strong were the US, Hong Kong, India, SE Asia and Japan. Japan recovered from previous falls related to the Earthquake, while the US market rallied well on the back of good job numbers. Australia was flat held back by China concerns.
Global confidence strengthened somewhat on debt deals being reached with Greece; however remains fragile on US and European debt problems and stalling Western economies.
SE Asian markets and India continue to do well. China moved sideways on concerns of a slowdown.
The ECB and IMF alongside Germany and France continue to talk of further bailouts…. when they should be talking breakups of the Eurozone….further cementing their demise.
Global share market Price to Earnings (PE) ratios are back to fair value (excluding China as cheap, and Japan expensive) and are generally suggestive of fair valuations provided earnings hold up. Australia is also quite cheap, as are resources if you think China and India will continue to build new cities etc.
Global exports are steady and economists are concerned about global debt levels.
US employment is still dropping slightly currently at 8.3% down from 8.6%, and Australia at 5.2% 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.
China and India continue to do well overall but signs of weakness are emerging in China and especially in the property markets. The Chinese Government announced that they expect growth to slow slightly but still to be strong.
SE Asia and ASEAN continued strongly almost unaware
that the western world is in crisis. The Philippines property and share
markets are booming. ….. No GFC here.
The Baltic Dry Index (BDI) has dropped in half in January, but is very weak..
US retail sales forecasts are slightly improving.
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 not changed in all the major Western countries this quarter.
US long term bonds rates rose slightly over the quarter as global confidence strengthened.
Currencies over the quarter were summarized by a steady Aussie dollar with the Australian dollar (AUD) settling at 1.03 to the US dollar. The Japanese Yen was the largest decliner.
Oil was unchanged this quarter finishing at USD 103, while Natural Gas dropped even further to $2.29 on news of further large discoveries of Coal Seam Gas. Copper rallied strongly despite Chinese growth concerns and the other base metals were fairly steady over the past quarter.
Iron Ore and Coal prices were steady.
Uranium is still recovering from the Japan Nuclear accident rising to $60/tonne.
Gold moved up slightly over the quarter to $1,669, after a bad previous quarter.
Soft commodities were steady.
The commodities have already factored in for a mild slowdown in growth in China, with Iron Ore now recovering slightly from last quarter’s lows. Probably correct given property prices in China have already corrected significantly.
Australian house prices
Australian home prices have flat lined in the past quarter with talk the RBA may again lower rates on weak economy concerns. Further falls are very possible as the sector is still quite overvalued.
Commentary – Forecast next 6 months
Don’t be fooled by the share markets recovery of the first quarter 2012….Perhaps due to false optimism that Europe has solved its debt problems. This may likely be a “bear market trap” for Western markets. That is, markets do a small rise, then continue to fall.
Western Governments 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, Santorum,Gingrich,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 dropped severely in Jan but is now recovering and sits at a weak 930…Another sign of how fragile the economy is still. Copper has strengthened so some hope there in the construction sector.
US Retail sales forecasts are forecasted to rise steadily. This is suggesting a continuing slow US recovery as retail sales make up about 70% of US GDP.
Western (developed countries) share markets are likely to move sideways, while emerging country share markets should continue 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
13,212) and good for Gold sitting at 1,669.
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. The Philippine Stock Exchange (PSE) has risen over 30% the past year.
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
As I discussed in my 2011 UTube 9 minute video Global Financial Crisis Solutions (copy the above link to view it in your browser) the true underlying cause of the GFC is the “inequality of global wages” and hence the only real long term solution is “equalizing the global minimum wage”. The graph below shows this is happening but still might take another 20 years or until about 2030. By then expect asset prices (houses and shares) to be equal in value between the West and East.
Australian Private Debt to GDP ratio and House prices--Have they peaked?
Both USA and Australian private debt to GDP ratios appeared to have now peaked in 2010 and are heading lower after 40 years of increasing. The great de-leverage and correction is underway.
No longer can increasing debt levels support the economy and asset prices as debt levels have peaked.
This would suggest now only one thing--- Asset prices in the USA and Australia are heading lower.
Of course we have already seen that with the GFC and the USA house price crash.
Surely the Australian house price crash/correction is next. It will crash if rates go up, China goes down… or will just go sideways for at least 10 years. See graph below if you have any doubts.
If the house prices collapse, expect the Australian bank share prices to come under pressure.
S&P downgraded the Aussie banks in November 2011, and then Fitch downgraded Commonwealth Bank, NAB, and Westpac to AA - from AA in February saying “A high reliance on wholesale funding makes maintaining investor confidence key. Factors such as Australia's high household debt levels, elevated house prices and increasing reliance on Asia for trade may all impact this confidence, particularly if economic conditions in the region were to deteriorate significantly”.
Australian Share Market now linked more to China Share Market
As you can see from the share market graphs below Australia (orange) has been following China (black)… This can tell us that Australia is about to fall or China to rise. I favour the Chinese market to do relatively better given current valuations where the Australian PE ratio is about 13, and China is also at 13.
Philippines economy continues to boom
In 2011, driven by consumer spending, call centers generated $US 9 billion p.a. or 5% of GDP, Overseas Foreign Workers (OFW's) $US 16 billion p.a.
Gross international reserves stood at USD 76 billion at the end of 2011. 74 % of the total reserves are denominated in US dollars, 16 % in yen, 4 % in euro. 6% in gold.
In 2012, the Philippines economy is forecast by the BOP to grow by a booming 8% pa.
The only negatives at the moment for the Philippines are that the electronics exports have weakened on weak global demand, and the US has proposed a bill to ban US companies from outsourcing services such as call centers. Especially as about 50% of the Philippine’s call centers service US consumers. Despite this the number two retail bank in America Wells Fargo recently announced that they will be moving 125,000 jobs to the Philippines. Citibank already employees about 6,000 workers in the Philippines, to serve their global customer base.
Maybe now people can see where all the jobs are going – from West to East – and the wealth follows.
Finally the Philippine Stock Exchange (PSE) has rallied hard the past year and is currently on a PE of 17 (arguably a bit overvalued), compared to Shanghai on a PE of only 13.
Condominiums (apartments) also have rallied strongly rising from USD 2,400psqm to 3,200 psqm in 2011, but are still very cheap compared to their Asian peers.
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