Quarterly Newsletter - October
Major Indices (as of 1/10/2012)
* PE ratio
Surplus (Debt) %GDP
2011 - (3.0)
2011 - *(11.0)
Largest USD deficit, 14.6 trillion
2011 - USD 3.2 Trillion, 5.1% GDP, number
1 largest surplus in the world
2009 - USD 277 billion surplus
DJ Stoxx 50
2011 - (4.0)
2011 - (8.5)
* PE ratios (based on historical earnings)
US 10 Yr Bond Rate –- 1.63% US 30 Yr
Bond Rate –- 2.75%
*NB: (11.0) refers to the % of GDP required to pay the interest on
the national debt.
|Oil - Nymex (USD/barrel)
||Iron Ore ($/tonne) spot price
|Natural Gas (per million mbtu)
|Baltic Dry Index (BDI)
||735 (very low and maybe recovering?)
|US Retail Sales forecast (USD trillion)
|Chinese PMI manufacturing
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
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
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
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
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%
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.
Oil rose over the quarter finishing at USD 91,
while Natural Gas significantly gained from USD 2.82 to USD 3.39 over
Copper and all the base (building) metals rose slightly
over the quarter. A sign that global construction is doing ok and
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
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
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
- 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 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
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
"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
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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