Quarterly Newsletter - January 2013

Major Indices   (as of 2/1/2013)

 
Currency
(AUD)
Interest Rate(%)
Share Index
* PE ratio
(historical)
GDP  Actual (2012) IMF
GDP Forecast (2013) IMF
Population
(m=million)
(July 2012)
Public Debt as a % GDP
(%)
Australia
1.00
3.00
All Ords
4,722
14.04
(All Ords)
3.3
3.0
22m
27
USA (Dollar)
1.05
0.25
S&P 500
1,426
19.16
2.2
2.1
314m
74
Japan (Yen)
91
0.1
Nikkei 225
10,395
18.49
2.2
1.2
127m (declining)
224
China (Yuan)
6.54
6.00
CSI 300
2,522
Hang Seng
23,182 
China
12.89
Hong Kong
17.17
7.8
8.2
1,343m
16
India (Rupee)
57
8.00
BSE 200
2,469
4.9
6.0
1,205m
23
Europe (Euro)
0.79
0.75
DJ Stoxx 50
2,635
16.83
0.9
(Germany)
0.9
(Germany)
725m (declining)
83
(Germany)
UK (pound)
0.64
0.50
FTSE 100
5,897
~11
-0.4
1.1
63m
91
Global
N/A
 
 
15.19
3.3
3.6
7,062
 

* PE ratios (based on historical earnings)
US 10 Yr Bond Rate - 1.83%    US 30 Yr Bond Rate - 2.95%
Source: Bloomberg

Commodities

Oil - Nymex (USD/barrel) 93 Iron Ore ($/tonne) spot price 125
Natural Gas (per million mbtu) 3.35 Copper (USD/pound) 3.66
Coal-thermal ($/tonne) 85 Nickel (USD/pound) 7.91
Uranium (USD/pound) 45 Zinc (USD/pound) 0.94
Gold (USD/ounce) 1,682 Aluminium (USD/pound) 0.94
Wheat (cents/bushel) 780 Corn (cents/bushel) 698

 

Baltic Dry Index (BDI) 1,086 (low but recovering)
US Retail Sales forecast (USD trillion) Jan (forecast)
376
Feb (forecast)
391
Mar (forecast)
430
Chinese PMI manufacturing Oct (HSBC)
49.5
Nov (HSBC)
50.5
Dec (HSBC)
51.5
[www.kitco.com]

US Retail Sales

 

Commentary – Past 3 months

The past 3 months saw most share markets rise quite well including Australia, India, China, Japan, Hong Kong, Europe, UK and the Philippines, mostly due to better data out from China indicating some strengthening in the Chinese economy….while the US market went sideways on fiscal cliff concerns, after a strong rally earlier in 2012.
QE 3, that is US money printing, and record low interest rates continue to stimulate the US and global economies but at what long term cost?
Global confidence and share markets have improved slightly despite the US debt levels continuing to rise to 16.4 Trillion.
(http://www.usdebtclock.org/ or http://www.economist.com/content/global_debt_clock )
Company profits in the US are increasing -- partially due to out-sourcing overseas of jobs and wages decreasing. This makes for happy companies (shareholders) and unhappy workers.
China’s manufacturing is recovering, and the Philippines and India continue to get the new global jobs and consequently are still booming.

Global share market Price to Earnings (PE) ratios are mostly a bit above fair value (excluding China as cheap, and Japan and USA as 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.
Retirees have started to move back into equities desperately seeking yield due to low interest rates.

Global exports are still sluggish but improving, and economists are still very concerned about Western debt levels.

US employment is still dropping steadily currently at 7.7% down from 8.1%, and Australia at 5.2% unemployed is up 0.1% due to weakness in tourism, financial services and housing.

Europe and the UK are still awash with debt and the politicians continue to delay the day of reckoning for Greece and the PIGS…

China and India continue to do well overall with some recovery in China with exports and manufacturing picking up….China is facing demographic problems in future years….

South Asia, and South America and South Africa are doing well--- go South young man!!!, Also parts of the Middle East – Egypt and Pakistan… Emerging and frontier markets are leading the way (take a look at the chart below for 2012 Share market returns).
Jobs continue to move from West to East. Wages are stagnant in the West and rising in the East.

Global GDP is still low in all the western countries (especially bad in Europe, Japan and UK) with most of them hovering around 0-2.0%, some slipping into recession, with hopes for world growth in 2013 to reach 3.6% (IMFs most recent forecast).
It is definitely a two speed world - the slow developed and booming developing economies.

Global Interest Rates have remained the same this quarter except Australia lowering rates by 0.5% on the back of a weaker commodities/China led slow down and strong Aussie dollar.
US long term bonds rates rose very slightly over the quarter as money went into the US share market chasing yield, indicating slightly lower risk aversion from investors.

Inflation has been mild in most countries and currently not a great concern.

Currencies over the quarter were summarized by a very resilient Aussie dollar despite interest rate cuts with the Australian dollar (AUD) settling at 1.05 to the US dollar. The Japanese Yen weakened considerably, and the Euro gained slightly.

Commodities

Oil was little changed over the quarter finishing at USD 93, as was Natural Gas ending the quarter at USD 3.35.

Copper and the base metals (building materials) were mostly unchanged over the quarter despite some signs of US house recovery. Chinese property market has been sluggish—it is the major driver of base metals prices..

Iron Ore staged a spectacular recovery rising up from lows of $85 a tonne to $125 a tone.

Coal prices have fallen slightly.

Uranium is still weak at $45/ tonne.

Gold fell slightly over the quarter to $1,682 despite all the global money printing by Japan and USA.

Soft commodities had a bad quarter with Wheat and Corn both dropping over 10%...Perhaps some profit taking after spectacular gains earlier in 2012.

Australian house prices

Australian home prices fell slightly 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 in the upper and middle price ranges 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

Leading indicators are very positive for a pickup in global growth in early 2013, however
whilst the US avoided the “fiscal cliff” the debts are ever increasing (16.4 Trillion) and the looming Debt Ceiling talks in the US and the ongoing debt dramas of Europe will again cause investors to be concerned.

The World will continue on its agonizing path to equalize… That is, the West will decline more while the Emerging countries rapidly catch up… all due to Globalization and the Internet moving jobs from West to East.

All Western currencies should weaken further in comparison to emerging country currencies. This is due to money printing and Western wages being uncompetitive globally.

Asian, Emerging and Frontier markets shares and property as well as Global Resources should do well.

The Baltic Dry Shipping Index is still weak but recovering lately a good sign the World is trading more actively.

US Retail sales are forecasted to increase. This is suggesting some US recovery as retail sales make up about 70% of US GDP. The US election is over but the next debt ceiling debate looms.

The HSBC Chinese Manufacturing PMI index (the earliest indicator of China's industrial activity), has just posted its strongest activity in 21 months and has been above 50 for the past 2 months…very positive about some recovery in Chinese exports and manufacturing. A figure below 50 suggests contraction, and above 50 suggests expansion.

A summary of the above leading indicators is to expect “some positive growth out of the US and China’ thereby helping global growth.

Western (developed countries) share markets are likely to move sideways, while emerging country share markets should continue to rise despite concerns from the West.

Most markets PE ratios are above fair value with only China and the UK looking cheap…China may be worth a look but beware after 2016 it’s demographics suggest the work force will start to shrink… certainly the Chinese Yuan appears undervalued.
Australia (PE 14.04) is still looking reasonable (depending on where commodity and property prices go from here) especially as retirees are entering the market to chase yield.
Of course, direct SE Asian property or safe emerging markets 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 Pakistan, 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.

The Euro, Yen 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 if investing in Western markets. The US debt ceiling talks will soon resume. The US debt of 16.4 Trillion is out of control and large US Government spending cuts will have to occur soon.

  • 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. AUD likely to fall soon.
  • 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 good demographics, jobs growth, low debt 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

And the winner is? --- Miss Venezuela !!!!!

Top Ten Global Share Markets in 2012

Global Ranking
Country
% Return in 2012
1
Venezuela
302.8
2
Turkey
53.3
3
Eygpt
49.6
4
Pakistan
49.3
5
Kenya
39.3
6
Estonia
38.2
7
Thailand
35.8
8
Laos
35.1
9
Nigeria
34.4
10
Philippines
33.0

As you can see above, to get high growth these days you have to travel to the frontier markets… I am currently trying to find ways for adventurous clients to access such emerging markets…not easy…IShares or Next 11 Funds, Asia shares, Emerging Markets Funds…

 

US Households worse off than 22 years ago – Why?

The US's median household income in 2011 of $50,054 was $570 less than its median household income in 1989 – that’s 22 years ago.
The US has 111.4m private sector jobs today… about as many as there were 12 years ago.
Why?
Because, jobs are moving to the cheap labour countries of the Emerging countries.
That should give you a clue where you need to invest.

The IMF estimates that US citizens will have to endure a 35% hike in tax rates plus a 35% cut in benefits, in order to keep America's social welfare systems from going broke.

On health care alone, a couple retiring this year should reap about $200,000 more in benefits than they paid in taxes. As for the next generation... they'll be very lucky if the system is still functioning

 

IMF – Growth Forecasts – Advanced Economies weak, Emerging Strong

The key summary of the October IMF forecasts is that the Advanced economies are expected to grow at a pathetic 1.5% in 2013 and the Emerging economies at 5.6% , and Developing Asia still booming at 7.2% -- now ask yourself where is your money invested?

 

World Growth Forecasts 2013 – South Asia still a standout

 

World Interest Rates – Green areas have higher rates due to higher growth

We can see above that World Interest rates are only high in a select number of countries that have strong growth…Namely Egypt (9.5%), India (8%), Brazil (7.25%), China (6%), Indonesia (5.75%), Turkey (5.75%), Chile (5%), Mexico (4.5%), Poland (4.5%), Philippines (3.5%), Australia (3%)….
Note most of these are Next 11 type developing economies that are doing well….

 

A World of Debt – especially in the advanced economies

 

 


 

To find out more please contact an adviser at contactus@hnwfinancialadvising.com.au .

 

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.