Quarterly Newsletter - January 2013
Major Indices (as of 2/1/2013)
* PE ratios (based on historical earnings)
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
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
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
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).
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.
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.
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
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.
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!
And the winner is? --- Miss Venezuela !!!!!
Top Ten Global Share Markets in 2012
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
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
A World of Debt – especially in the advanced economies
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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.