Quarterly Newsletter - April 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 slightly including Australia, USA, and the Europe. Japan rose about 20% (thanks to the currency weakening about 20%).
Global share market Price to Earnings (PE) ratios are mostly a bit above fair value still (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.
Global exports are still sluggish but improving, and economists are still very concerned about Western debt levels.
US employment is the same currently at 7.7% , and Australia slightly higher at 5.4% unemployed is up 0.2% due to weakness in tourism, financial services and housing.
Northern Europe is doing ok thanks to the German manufacturing machine.
India having slowed last year is recovering somewhat. The Mumbai property bubble which sent prices above USD 11,000 psqm, is deflating somewhat.
South Asia, and South America and South Africa are doing well
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 India lowering rates to 7.5%.
Australian house prices
The Graph below shows how ugly it might get. "Real" prices are adjusted for inflation.
Commentary - Forecast next 6 months
Leading indicators are now mixed for global growth in 2013, and whilst the US avoided the "fiscal cliff" the debts are ever increasing (16.837rillion) 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 (BDI) is still weak and lower than the last quarter - bearing sign.
US Retail sales forecasts are forecasted to move sideways or slightly up. This is suggesting more of the same.
The HSBC Chinese Manufacturing PMI index (the earliest indicator of China's industrial activity), has continued to be mildly positive indicating a weak 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 weak and mildly positive growth out of the US and China" thereby helping global growth. The exception to this is the BDI which is bearish. So remain cautious.
Western (developed countries) share markets are likely to move sideways, while emerging country share markets and property should continue to rise despite concerns from the West.
Most markets PE ratios are at or 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 14.89) is still looking reasonable (depending on where commodity and property prices go from here) especially as retirees are entering the market to chase yield.
I expect the emerging (BRIC, N11) economies led South 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 decades. I see salaries and asset prices being equal between West and East by 2030.
US and Europe Update
US corporate are doing well for now on the back of their Global reach and Global incomes...but still the US economy is weak..... The US official unemployment rate still hovers near 8%. Three million fewer Americans are employed now than in January 2008. Median household income has dropped 9% since the end of 2007. GDP growth since 2007 has been just over half a percent annually. Leave Wall Street and talk to people on Main Street, and you quickly learn that consumer sentiment is dismal. College graduates are underemployed or can't find any jobs. There are as many as 20 million homeowners that are still underwater on their homes, and 44 million people relying on the Government for food stamps.
Maybe, after 10 years when global wages equalize, and the Latino demographic effect kicks, in the US will become a powerhouse again.
So the question is can the US share market continue to do well despite a very weak local consumer and economy.... I think it will have to struggle for another decade, and certainly the US dollar will continue lower and at least help Global minimum wages to head towards equalizing... the cure to the GFC.
Europe is really a complete mess.... Southern Europe is broke with massive unemployment and many countries will ultimately have to abandon the failed Euro currency experiment....
The South China Sea (West Philippines Sea) - Is it the next big oil discovery?
ASX listed Otto Energy and El Nido Petroleum think so....and Chinese experts say that over 200 billion barrels of oil lie under the seafloor, the biggest oil reserves outside the Middle East. In the past few years conflicts have been going on between China and Vietnam. Both countries want the area in which the biggest oil fields are thought to be. The Philippines, Malaysia and Brunei also demand parts of the South China Sea.
As China's economy is booming the country needs more and more energy. Great reserves in their backyard would be more than welcome and make Asia's largest economy less dependent on Middle East oil. On the other side, Vietnam and the Philippines may not be so interested in the oil and natural gas but in the South China Sea's fishing grounds. China insists that there is enough oil in the sea for everyone and points out that Malaysia, Brunei and the Philippines are already exporting oil.
The South China Sea is also one of the busiest shipping routes in the world. It is becoming more and more crowded, so an armed conflict between the countries involved would be a disaster for the local economies. The United States has been dragged into this dispute as well. The world's number one superpower has close ties with the Philippines and is expected to strengthen their naval bases on the islands if asked to do so.
Palawan Philippines sitting just 165 km from potentially massive Oil fields
Currency Wars - Will the Western Government Debts ever be repaid???
As Global debts of Western Governments spiral out of control what will be the end point of this mess???
A few possibilities:
Conclusion. Avoid investing in indebted counties, and low quality credit based products. Invest in countries with cheap assets, cheap labour, jobs growth, low debt, cheap currencies and sound Governments....
Airplane Orders tell you what countries are doing well and growing rapidly
How many new planes has Australia or US ordered lately???
Actually Qantas has been busy cancelling orders as its International Business continues to lose money.
Meanwhile, Indonesia's budget carrier Lion Air's 18.4-billion-euro ($23.8 billion) ordered last week 234 medium-haul Airbus jets. Yes. 234 planes in one order.
The potential is massive -- only six percent of Indonesians have travelled by air, according to officials, in a nation of 240 million people that has consistently clocked annual economic growth above six percent.
By 2021, some 180 million passengers are expected to fly domestically in Indonesia, triple the 2011 number, according to the CAPA Centre for Aviation. .... Ask yourself if you have money invested in the Emerging Markets, and if no why not?
Philippine upgraded to Investment Grade by Fitch ratings agency
Fitch Ratings raised the Philippine credit rating to investment grade on March 27, a move expected to boost investments. S & P and Moody's are expected to follow this year.
The Philippine Stock Exchange index rallied today by 2.74 %. Its best ever finish of 6,847.47. As a result of the credit upgrade. This marked the 24th record finish for the index this year. The local stock market upswing, which is now on its fifth year, or 17.8 percent this year alone.
The upgrade is the first for the country, prompting a euphoric President Benigno Aquino III to highlight the dramatic shift of a largely impoverished nation from the "perennial laggard of Asia" to an economy finally "taking off."
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