Quarterly Newsletter - July 2012
Major Indices (as of 3/07/2012)
* PE ratios (based on historical earnings)
Commentary – Past 3 months
The past 3 months saw most share markets fall slightly (the exception being China).
The UK economy shrank in the first quarter as Britain slid into its first double-dip recession since the 1970s. Spain’s unemployment rate has risen to 24.4 per cent, the highest in 18 years, as the Euro zone’s fourth-largest economy entered its second recession since 2009. Added to this Standard & Poor's has cut its credit rating on Spain by two notches.
Things in Europe are very bleak indeed.
Global confidence weakened somewhat on Europe debt concerns spreading to Spain and Italy and others, and on some lower than expected (but positive at least) US employment numbers. China rallied from very low valuations, and the Philippines (PSE) continues to set new highs.
Global share market Price to Earnings (PE) ratios are still around 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, and commodity prices will hold up.
Global exports are slowing slightly and economists are still very concerned about Western debt levels.
US employment is still dropping very very slightly currently at 8.2% down from 8.3%, and Australia at 5.1% 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.
SE Asia and ASEAN continued strongly almost unaware that the western world is in crisis. The Philippines property and share markets are still booming. ….. No GFC here.
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%, some slipping into recession, with optimistic hopes for world growth in 2012 to reach 3.5% (IMFs most recent forecast), and 4.0% in 2013.
Global Interest Rates have not changed in the major Western countries this quarter. However Australia dropped 0.75% and China and India also dropped. This is a sign that the Asia Pacific region has weakened a bit, not surprising given the collapse of Europe and slow US.
Currencies over the quarter were summarized by a steady Aussie dollar with the Australian dollar (AUD) settling at 1.02 to the US dollar. The Japanese Yen gained and the Euro fell.
Oil dropped over 20% this quarter finishing at USD 843, while Natural Gas gained after previous quarter severe falls to close the quarter at $2.82.
Copper fell back after the previous quarters strong rally with Chinese growth concerns as did all the other base metals over the past quarter.
Iron Ore and Coal prices continue to slide weaker. Not good for the Aussie miners.
Uranium is still weak at $51/ tonne.
Gold moved down very slightly over the quarter to $1,607.
Soft commodities were the bright spot rising strongly. Perhaps a sign of the future!
The commodities continue to factored in for a mild slowdown in growth in China, with Iron Ore heading to new lows.
Australian house prices
Australian home prices have been flat (0.5% increase in June) in the past quarter despite the RBA dropping interest rates three times or 0.75% due to weak economy concerns as a side effect of a slowing China and dropping commodity prices, and a smashed tourism sector (due to the high Aussie dollar). Further falls are very possible as the sector is still quite overvalued.
Commentary – Forecast next 6 months
At some point in time someone with some ‘guts and common sense’ will step in and say lets break up the Euro. At this point we may finally see some rallying. The question is when ‘common sense and guts’ will return – maybe never with politicians now heavily involved.
The Euro and USD currencies should weaken further in any case as money continues to be printed recklessly.
Asian and Emerging markets shares as well as Global Resources should consolidate and soon do better, as some great value is appearing here.
The Baltic Dry Shipping Index is still weak and falling at 924…Another sign of how fragile the economy is still. Copper has weakened also, indicating a weaker construction sector globally.
US Retail sales forecasts are forecasted to move sideways. This is suggesting a stalling US recovery as retail sales make up about 70% of US GDP. The US is awaiting the elections in 2012.
The HSBC Chinese Manufacturing PMI index (the earliest indicator of China's industrial activity), recovered has been falling lately and is still below 50. Not good. A figure below 50 suggests contraction, and above 50 suggests expansion. It is far above readings of the low-40s reached during the depth of the global financial crisis in late 2008 and early 2009.
A summary of the above leading indicators is to expect “continued slow or no growth’ especially in the West, but spreading somewhat to China and Asia.
Western (developed countries) share markets are likely to move sideways or down, while emerging country share markets should continue to do better than their Western peers but maybe at a slower pace than before, that is if Europe does not totally collapse.
Most markets PE ratios are fair value with China looking cheap if you look at their growth and undervalued currency. Australia (PE 11.83) and the Resources sector (PE 8.6) 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.
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 we are seeing food prices rising globally.
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. Maybe, before 2030 !
Euro Update – ‘Eurogeddon’ is coming!!
Europe continues its dramas and most politicians don’t want to see the truth – that is, the Euro experiment has failed. It was never going to work anyway… How can completely different areas (economies and climates) act under one currency? It gives no buffer for failure.
Chinese PMI (Manufacturing Index to see how the Chinese economy is doing
The above graph shows the Official Chinese Government PMI (NBS) and the HSBC PMI.. In the past few months they have been somewhat diverging with the NBS at 54 (indicating slight expansion) and HSBC at 49 (very slight contraction). So is Chinese manufacturing expanding or contracting? Most likely both. The NBS figures give more weighting to the large Chinese owned conglomerates and the HJSBC to the smaller private companies…. Overall it looks like Chinese manufacturing is steady and certainly a lot better than in late 2008 when global trade almost came to a standstill. The Chinese GDP has fallen from about 8.9% to 8% …still doing rather well.
The TIPs are the breakout nations tipped to do better than the BRICs
I have been saying it for 3 years and now Morgan Stanley are now saying it. The “TIPs are the “breakout nations” set to have the best growth in the world – better than the BRICS (Brazil, Russia, China and India)… The TIPs are Turkey, Indonesia and the Philippines….
Demographics tells the future
Demographics is the study of people. Where they live, what they earn, what they do etc.
In the above chart you can see that the growth in the number of people joining the work force in Australia starts to decline around 2006. And by 2010 has dropped quite significantly but it is still a positive. This is suggestive that (excluding immigration) there will be less demand for property and shares than there was previously and is generally weak for the economy.
In Japan, we see the population working turns negative in 1994. This is a very bad demographic that coincided with terrible property and share performances in the 1990s and 2000s as you would expect reading this graph. Japan has one of the worst demographics in the world.
In USA, we see the demographics are not good either with the decline starting around 2005, and a significant weakness in growth from 2010 to 2025, and then the Latino effect to improve things after 2025.Baby boomers in USA, Europe, UK, Japan, Canada and Australia are starting to retire. This is a major demographic group with a lot of money. In summary the past 30 years has seen rapidly declining birth rates in the developed western countries compared to high birth rates in the Emerging countries. Hence the differences in the various charts and one of the reasons I like investments in many Emerging markets.
In China, the demographics are not good also. Luckily for now, in China there are still about 20-40 million Chinese moving from the country to the city each year. But beware once this urbanisation stops, as the one child policy has ruined Chinese demographics. China is heading down.
In India, demographics are peaking now but still reasonable til about 2025. Also they have a rapid urbanisation similar to China.
In Emerging Countries economies the urbanization rate and work force wave (20-24yos) is more important than the spending wave (no of 46-50yos) as these countries are not yet driven by retail spending like the West, they are driven by increased workforce numbers, rising salaries and urbanization.
My favourites are Philippines and India because of their excellent English skills and ability to compete highly successfully globally for service jobs with cheap labour. Also they are both urbanizing and have stable political systems at present. Myanmar, Laos and Cambodia for those wanting high risk/high return.
The worst countries in the World to invest in now are as follows-
Neutral and still risky countries can include --- China, Australia, NZ, Canada
In summary demographics are telling us to avoid investing in the West and focus on the countries that are growing their workforces such as India, Philippines and most of South Asia, South America and some parts of Africa….
Myanmar (formely known as Burma) – Investment opportunity
On 1 April, Myanmar held a landmark by-election, which could soon sweep the recently freed Aung San Suu Kyi to power. If the election is deemed fair, the EU and the US will lift some of their long-standing trade sanctions. Myanmar is also set to float its currency, the kyat, to attract investments and reduce corruption.
Anyone who visits a Thai construction site will observe all the workers are Burmese not Thai. Little wonder when they work for about $5 a day compared to $20 a day for a Thai.
Australian Government May 2012 Budget Update
Below are some key changes as the Government tries to bring the budget back into Surplus.
Higher tax on concessional contributions for very high income earners
From 1 July 2012, the Government proposes that individuals with income greater than $300,000 will have the tax on non-excessive concessional contributions increased from 15% to 30%. What this means is that high income earning clients will pay an increase of up to $3,750 (ie 15% of $25,000) on concessional contributions. At this stage, individuals on the highest marginal tax rate may still choose to make excessive concessional contributions in the knowledge that the overall tax of 46.5% is the same as receiving that income as taxable income.
Higher concessional contributions deferred
The Government’s previously announced proposal to provide a higher concessional cap for individuals aged 50 and over, with super balances below $500,000, will be deferred for a further two years. From 1 July 2012 to 1 July 2014, the general $25,000 concessional cap will apply to these individuals.
The table below summarises the concessional caps for the current and subsequent three financial years.
Concessional contributions caps 1 July 2011 to 1 July 2014
*Where the individual’s super balance is less than $500,000
Lower concessional caps will reduce the tax-effectiveness of super contributions strategies in varying degrees for clients aged 50 or more. This is summarised below:
Effect of reduced concessional caps
Note: Assumes $50,000 of pre-tax income used either wholly for concessional contributions or contributions are reduced by $25,000 due to the reduction in the concessional cap and taxed at marginal tax rates.
Further impacts will be felt by those clients implementing transition to retirement (TTR) strategies, particularly those aged 60 or over whose ability to swap significant levels of tax-free pension income for concessionally taxed super contributions will be limited.
Means testing of net medical expenses tax offset
From 1 July 2012, people with adjusted taxable income above the Medicare levy surcharge thresholds will be means tested. This applies to singles earning over $84,000 and couples earning over $168,000 in 2012-13. People with income below the surcharge thresholds will not be affected.
Mature age worker tax offset
For workers born on or after 1 July 1957 (ie 55 or over), the mature age worker tax offset will be phased out from 1 July 2012. Access to this offset will be maintained for taxpayers who are aged 55 or older in the current financial year, 2011-12.
Increased Medicare levy low income thresholds
The Government will increase the Medicare levy low income threshold to $19,404 for individuals and $32,743 for families for 2011-12, back dated to 1 July 2011. The additional amount of threshold for each dependent child or student will also increase to $3,007.
From 1 July 2012, the Government will introduce a new Schoolkids Bonus that will replace the Education Tax Refund. From January 2013, these payments will be automatic and every family with a child at school will be guaranteed $410 pa for each primary school student and $820 pa for each secondary school student.
Eligibility for the payment will remain open to families with children enrolled and attending school who are in receipt of the Family Tax Benefit A (or other qualifying income support payments or allowances under a prescribed educational scheme that precludes the family from receiving the Family Tax Benefit A).
Eligibility and increase for the Family Tax Benefit A
From January 2013, eligibility to Family Tax Benefit A will be limited to those students under 18 years of age. Families with children in school will be the primary target group for Family Tax Benefit A payments. Youth Allowance will be the primary form of assistance for those young adults 18 years and over.
The maximum rate of Family Tax Benefit A will be increased by $300 pa for families with one child and $600 pa for families with two or more children. Single child families on the base rate will receive $100 pa, those with two or more children will receive $200 pa.
Low income Family Tax Benefit and Commonwealth Seniors Health card recipients not required to lodge a tax return
From 1 July 2012, streamlined income reporting processes will be implemented within the Department of Human Services. This will allow people in the $6,000 to $18,200 income range (who will no longer be required to lodge an income tax return) to provide estimates of their income online, via telephone or in person without providing proof of income.
New income support supplement
From 20 March 2013, recipients of certain Government support payments will receive a non-taxable payment to assist with cost of living pressures. The new supplement will provide $210 pa for singles and $175 pa for each member of a couple. Eligible Government payments include Newstart Allowance, Sickness Allowance, Youth Allowance and Parenting Payment.
Liquid Assets waiting period
From 1 July 2013, the maximum reserve amount for the liquid assets waiting periods for Newstart, Youth Allowance, Sickness Allowance and Austudy will be increased to $5,000 for singles and $10,000 for couples combined or those with dependants. The increase will provide those who have become unemployed earlier access to income support payments as it means that the full waiting period is not imposed until liquid assets are $11,500 for single and $23,000 for couples or those with dependants.
Previous proposals shelved
In this 2012 Budget, the Government has announced that it will not implement three measures it had previously announced in the 2010 Budget. These are:
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