Quarterly Newsletter - October 2012

Major Indices   (as of 1/10/2012)

 
Currency
(AUD)
Interest Rate(%)
Share Index
* PE ratio
(historical)
GDP  Forecast (2012) IMF
GDP Forecast (2013) IMF
Population
(m=million)
Foreign Surplus (Debt) %GDP
Australia
1.00
3.50
All Ords
4,404
13.59
(All Ords)
3.0
3.5
22m
2011 - (3.0)
USA (Dollar)
1.03
0.25
S&P 500
1,440
19.11
2.1
2.4
300m
2011 - *(11.0)
Largest USD deficit, 14.6 trillion
Japan (Yen)
81
0.1
Nikkei 225
8,773
17.44
2.0
1.7
127m (declining)
China (Yuan)
6.50
6.00
CSI 300
2,293
Hang Seng
20,840  
China
12.72
Hong Kong
15.22
8.2
8.8
1,350m
2011 - USD 3.2 Trillion, 5.1% GDP, number 1 largest surplus in the world
India (Rupee)
55
8.00
BSE 200
2,313
6.9
7.3
1,150m
2009 - USD 277 billion surplus
Europe (Euro)
0.81
0.75
DJ Stoxx 50
2,454
15.97
0.6
(Germany)
1.5
(Germany)
725m (declining)
2011 - (4.0)
UK (pound)
0.64
0.50
FTSE 100
5,742
0.8
2.0
60m
2011 - (8.5)
Global
N/A
 
 
14.83
3.5
4.0
7,000
 

* PE ratios (based on historical earnings)
US 10 Yr Bond Rate –- 1.63%    US 30 Yr Bond Rate –- 2.75%
Source: Bloomberg
*NB: (11.0) refers to the % of GDP required to pay the interest on the national debt.

Commodities

Oil - Nymex (USD/barrel) 91 Iron Ore ($/tonne) spot price 95
Natural Gas (per million mbtu) 3.39 Copper (USD/pound) 3.72
Coal-thermal ($/tonne) 93 Nickel (USD/pound) 8.26
Uranium (USD/pound) 47 Zinc (USD/pound) 0.93
Gold (USD/ounce) 1,769 Aluminium (USD/pound) 0.93
Wheat (cents/bushel) 897 Corn (cents/bushel) 756

 

Baltic Dry Index (BDI) 735 (very low and maybe recovering?)
US Retail Sales forecast (USD trillion) Oct (forecast)
389
Nov (forecast)
409
Dec (forecast)
475
Chinese PMI manufacturing July (HSBC)
49.5
Aug (HSBC)
47.6
Sept (HSBC)
47.9
[www.kitco.com]

US Retail Sales

 

Commentary – Past 3 months

The past 3 months saw most share markets rise slightly (the exception being Japan) as the see –saw ride of the GFC/Euro Crises continues.
QE 3, that is US money printing, helped buoy markets on more false hopes, as did some monetary easing (falling interest rates) globally.
Global confidence remains fragile and generally low and for good reasons as the Western debt levels continue to rise despite lots of talk about austerity.
China is slowing, and the Philippines and India continue to get the new global jobs and consequently are booming still.
Global share market Price to Earnings (PE) ratios are mostly a bit above fair value (excluding China as cheap, and Japan and USA expensive) , but can be considered reasonable in a low interest rate environment, provided earnings hold up.. Australia’s PE is about fair value provided no house collapse or further commodity price falls.
Global exports are still sluggish, and economists are still very concerned about Western debt levels.
US employment is still dropping very slightly currently at 8.1% down from 8.2%, 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 continue in China with exports and manufacturing slowing as companies relocate to cheaper labour countries.
SE Asia and ASEAN continued strongly almost unaware that the western world is in crisis. The Philippines property and share markets are still booming and GDP is at 6%. ….. No GFC here.
Jobs continue to move from West to East. Wage inflation has begun.

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.
It is definitely a two speed world - the slow developed and booming developing economies.

Global Interest Rates have remained similar this quarter except the Euro, China and some emerging economies such as Philippines lowering rates. Australian rates remained at 3.5%. This is a sign that Europe and the Asia Pacific region has weakened a bit, not surprising given the collapse of Europe and slow US.
US long term bonds rates fell again slightly over the quarter as money continues to seek so called safety in US Bonds.
Currencies over the quarter were summarized by a steady Aussie dollar with the Australian dollar (AUD) settling at 1.03 to the US dollar. There have been very little changes in currency over the quarter.

Commodities

Oil rose over the quarter finishing at USD 91, while Natural Gas significantly gained from USD 2.82 to USD 3.39 over the quarter.
Copper and all the base (building) metals rose slightly over the quarter. A sign that global construction is doing ok and picking up.
Iron Ore and Coal prices fell heavily and have now started to recover in the past few weeks. This may well see the low point passed for the Aussie miners.
Uranium is still weak at $47/ tonne.
Gold rose over the quarter to $1,769 due to more global money printing by Japan and USA.
Soft commodities were the bright spot rising strongly again. Definitely a sign of the future and a growing world demand for food.
In summary, the bare essential commodities for living did well - food, shelter and energy…

Australian house prices

Australian home prices have been flat with just a 0.4% increase in 2012.despite the RBA dropping interest rates three times or 0.75% down to 3.0% 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. However, low rates seem to be propping up the cheaper new home buyer’s end of the market.

 

Commentary – Forecast next 6 months

The World will continue on its agonizing path to equalize… That is West will decline more while the Emerging countries rapidly catch up… all due to Globalization and the Internet moving jobs from West to East.
The Euro, Japanese Yen and USD currencies should weaken further in any case as money continues to be printed recklessly. In fact all Western currencies will weaken in comparison to emerging country currencies.
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 very weak and maybe recovering at 735…Another sign of how fragile the economy is still. Copper has strengthened slightly, indicating some recovery 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), has now had 11 consecutive bad readings (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 low growth’ especially in the West and China.

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 a bit above fair value with China looking cheap if you look at their growth and undervalued currency. Australia (PE 13.59) is looking reasonable 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. Especially the Next 11 – led by Philippines, Indonesia, Cambodia, Turkey etc… That is, the cheap labour countries that are getting all the jobs.
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 especially last quarter.
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 !

Ideas?
Continue to be very cautious. Wait to see the outcome of the US election and/or a Euro break up.

  • Aggressive and Growth investors should be patient and not buy aggressively yet. The exception to this would be in certain emerging markets.
  • Keep alot of Cash or safe fixed interest. At least 60% for Growth clients, 80% for Moderate clients and 100% for Conservative clients. Interest rates may collapse if we get another financial crisis; so long dated Term Deposits at good rates may be very worthwhile.
  • Avoid US and Euro/UK/Japanese currency.
  • Consider Term Deposits (will do well if rates fall), in safe countries.
  • Sell Australian residential property unless it's your home.
  • Invest in countries with currency surpluses and positive GDP
  • Hold some commodities or resources companies as well as soft commodities.
  • Slowly increase exposure to Emerging Markets (EM) shares or EMs direct property. Especially South Asia.
  • Buy direct property in countries that are benefitting from Globalization and where property is still cheap. Eg: Philippines, Thailand, Indonesia, Malaysia, Vietnam, Brazil, Mexico....
  • Buy Chinese Yuan currency

The commodity price boom is over for now

'The commodity price boom is over. But commodities will not collapse.
Iron ore down from $US180 to $US95 a tonne. Coking coal is down from $US320 a tonne to $US220 a tonne. Thermal coal is down from $US220 to $US93 a tonne.

India’s surge in Infrastructure will create the next mining boom……however don’t expect 300% price gains as happened in the last boom…

China's economic planning body recently approved projects to build highways, ports and airport runways, that analysts estimate at more than 1 trillion yuan ($150 billion), roughly a quarter the size of the massive stimulus package unleashed in response to the global financial crisis in 2008.

But the resources boom cannot always rely on just one country (China) and let’s hope India and the other emerging economies can sustain demand and prices for commodities at profitable levels for the Aussie miners. I am sure they can.

China’s manufacturing

 

China’s manufacturing activity contracted in September for the 11th straight month, though at a slightly milder pace than in August, preliminary data showed recently, with one economist saying the result suggested some stabilization for the critical sector.
China’s exports are slowing as the US and Europe buys less….. No surprises there.

 

US money printing again – QE 3

The US Fed last month said it would buy $40 billion in mortgage-backed securities each month to in an effort to boost employment, and pledged not to stop buying until the labor market improves substantially, as long as inflation remains under control. Watch the US dollar continue to weaken as a result--a good thing to equalize global minimum labour rates – the solution to this crises.

 

RAPID wage increases are threatening China's competitiveness, but improved productivity and other advantages mean it will continue to attract investors

Labour costs in China would match those of the United States within four years, catching up with Euro one countries in five years and with Japan in seven, the French bank Natixis forecast in a study last month. China "will soon no longer be a competitive place for production given the strong rise in the cost of production", the bank said.

It is a view backed by the respected Boston Consulting Group (BCG), which said in a study last August that by around 2015 manufacturing in some parts of the United States would be "just as economical as manufacturing in China". Examples of major manufacturers leaving China abound - BCG said US technology giant NCR has moved its manufacture of ATMs to a factory in Columbus, Georgia, that will employ 870 workers as of 2014.

Adidas announced recently that it would close its only directly owned factory in China, becoming the latest major brand to shift its manufacturing to cheaper countries, though it maintains a network of 300 Chinese contractors. Chinese workers making athletic shoes are paid at least 2000 yuan ($300) a month, while their Adidas colleagues in Cambodia only earn the equivalent of $130, the German company said.

Underlining the trend, the salaries of Chinese urban-dwellers rose 13 per cent in the first half of 2012 compared with the same period last year, the government said in mid-July. Migrant workers, who are among the lowest-paid in the country, saw raises of 14.9 per cent for an average of 2200 yuan a month. The most significant wage hikes in 2010 and 2011 often came following strikes at Japanese companies such as Toyota and Honda.

Natixis said the increases could spur manufacturers to relocate to South and South-East Asia, where labour costs are much lower, and could also benefit countries such as Egypt and Morocco, or even European ones like Romania and Bulgaria.

However, not all economists believe China will lose its manufacturing edge, thanks in part to improvements in productivity. "Most of the increase in wages has been offset by strong productivity growth," said Louis Kuijs, project director at the Fung Global Institute, a research body that specializes in Asian economies.

Worker productivity has increased at a faster rate than wages in the southern Pearl River Delta, the heart of China's vast manufacturing industry, according to 200 companies surveyed early this year by Standard Chartered Bank.

"China's share of the world's low-end exports has started to fall after years of rapid rises in wages, land costs and appreciation of renminbi (the currency)," said Wang Qinwei, a China economist at Capital Economics.

"But this has been offset by a growing market share in high-end products."

Capital Economics said in a research note published in March: "China's export sector overall appears no less competitive now than a few years ago. "Average margins in light industry have increased over the past three years thanks to rapid productivity growth."

China's coastal areas offered an effective business environment that would continue to draw investors, as would lower costs in inland provinces, said Alistair Thornton, China economist at IHS Global Insight.

Asia Pacific Property Prices per sqm Comparison

NB: Based on the price per square metre in USD of a 100 sqm Condo in the centre of the main city.

Looking at the bar graphs above I observe the following;

  • HK, Singapore, and Japan(Tokyo) are ridiculously priced and should fall (limited land helps justify these lofty prices).
  • India is now more expensive than China.
  • Australia is not that expensive in comparison, yet still considered overvalued on many measures.
  • South Asia (Philippines, Thailand, Cambodia) are bargains. Especially Philippines with their English skills and cheap labour force. Matched only by India, yet almost 4 x cheaper.
  • Malaysia and Indonesia are Muslim countries therefore carry greater risk.


 

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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.