Quarterly Newsletter - July 2013
Major Indices (as of 1/7/2013)
* PE ratios (based on historical earnings)
Commentary –- Past 3 months
The past 3 months saw mixed results for global share markets. Australia, China, and Europe were slightly weaker; whereas USA, Japan and India rose slightly. The general theme was a strengthening US economy and some strength from Japan also thanks to successful currency weakening (money printing) programs. The talk from the US has been that the Fed may wind down money printing if employment in the US improves further.
Global share market Price to Earnings (PE) ratios
are mostly a bit above fair value (excluding China as cheap). USA,
Europe and Japan are now overvalued. Australia’s PE is still
about fair value provided no house collapse or further commodity price
Global exports are still sluggish but improving, and economists are still very concerned about Western debt levels.
US employment is the down by 0.1% currently at 7.6%,
and Australia 0.1% higher at 5.5%.
Northern Europe is doing ok still thanks to the Germany and the far Northern economies.
Southern Europe is still awash with debt and massive unemployment but appears to be making improvements to cut Government spending.
China is slowing down, but still reasonably strong growth; however there are some concerns over debt levels in the shadow banking system and over too much expansion into non-productive areas, as well as a slowdown in manufacturing.
India having slowed last year is continuing to recover. The Mumbai property bubble which sent prices above USD 11,000 psqm, is still deflating.
South Asia, South America and South Africa are doing well. Jobs continue to move from West to East. Wages are stagnant in the West and rising in the East.
The Philippines recently recorded a 7.8% growth rate for the last quarter. That’s the fastest growth rate in Asia, surpassing China.
Global GDP is still low in all the western countries (especially bad in Europe and the UK, followed by Japan and the US) with most of them hovering around 0-2.0%, some slipping into recession. The IMF has recently upgraded its US GDP growth forecast for 2013 to 3.0% and World growth in 2014 to reach 4.0%.
Global Interest Rates have remained mostly the same this quarter except Australia, Europe and India lowering rates all by 0.25%.
US long term bonds rates rose sharply over the quarter indicating Bond investors seeing a US recovery coming and the end to money printing.
Inflation has been mild in most countries and currently not a great concern.
Currencies over the quarter were summarized by a 10% decline in the Australian dollar (AUD) to virtually all other currencies, settling at 0.91 to the US dollar.
Oil was virtually unchanged over the quarter finishing at USD 96; however Natural Gas weakened badly ending the quarter at USD 3.56 probably due to shale gas’s rising popularity and abundance.
Copper fell heavily (about 20%) over the quarter to $3.05 per pound, on China slowdown concerns. All the base metals except Zinc fell heavily. The Chinese property market has been sluggish—it is the major driver of base metals prices.
Iron Ore prices fell lower this quarter dropping from $137to $115 a tonne.
Coal prices have also fallen.
Uranium is still weak at $43/ tonne.
Gold fell heavily over the quarter to $1,235 despite all the global money printing by Japan and USA, based on more positive global sentiment, and fears US money printing will end soon.
Soft commodities fell heavily over the last quarter, after spectacular gains in 2012.
In summary, it was a very bad quarter for most commodities (oil was an exception).
Australian house prices
Australian home prices have been falling despite 50 year low interest rates. No wonder with a Mortgage debt to GDP ratio at 84%....people cannot take on any more debt…So really the only future for Australian residential property is sideways or down for the next decade. 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.
The US is improving from a low base and China is slowing from a
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.
I think the recent talks of US money printing being wound down are overstated (see article later in this newsletter titled “Currency wars”). The US Government and Fed will prioritize reducing unemployment – and that will mean money printing will continue in order to further weaken the US dollar. Japan has certainly learnt this lesson and so soon will Australia I believe.
Asian, Emerging and Frontier markets shares and property (as well as Global Resources) should still do well despite some recent setbacks.
The Baltic Dry Shipping Index (BDI) is slightly higher than the last quarter, but weak – a neutral sign.
US Retail sales forecasts are forecasted to move sideways- a neutral sign
The HSBC Chinese Manufacturing PMI index – June 48.3 - (the earliest indicator of China's industrial activity), has turned negative over the quarter indicating a slowdown 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 further slowdown from China and the US to be steady”. The commodity markets have already reacted to this as has the Australian dollar.
Western (developed countries) share markets are likely to
move sideways or down, while emerging country share markets and property
should continue to rise.
Most markets PE ratios are at or above fair value with only China
and the UK looking cheap…
Australia (PE 14.10) is still looking reasonable
however the economy is stalling and the labour market has become globally
uncompetitive (wages are way too high). As a result the mining sector
has seen around 100 billion dollars of projects shelved so far this
year. An ominous sign indeed.
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 USD, Euro, Yen, and AUD should be avoided, as should any currency where the country has excessive debt levels or high labour costs, 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 two decades. I see salaries and asset prices being equal between West and East by 2030.
US and Europe Update
Recent concerns in the US about the winding back of
money printing have caused markets to fall.
Europe is still a mess with unemployment at massive levels in southern Europe.
Currency Wars continue – the new GFC solution - Aussie dollar to fall hard
It seems the US and Japan has realized the only solution to the GFC and their trade deficits and slow economic growth is to weaken their currencies so they can compete with the cheaper labour countries such as China. And I think they are correct.
In the past 6 months Japan has increased their money printing which has weakened their currency by over 30%. This has lead to a massive boost for the Japanese economy as their exports are now 30% cheaper…and their share market 30% higher.
The US has been doing the same and the US dollar is down relative to most currencies since they started money printing (Quantitative easing (QE)…
I have said for several years now, the cure to the GFC is to equalize global minimum wages – and the easiest way to do this is for the expensive labour countries (Australia ranks very high) to weaken their currencies……
The Aussie dollar to fall hard
As the mining boom subsides in Australia, I think it is only a matter of time before the RBA (Australia) announces money printing, which will weaken the Australian dollar, so we can become globally competitive again.
Minimum Australian daily wages are about USD 160 per day, compared to US at USD 80 per day, and China/Philippines at about USD 10-20 per day.
Recently HSBC announced they believed that the Aussie dollar was
as much as 60% overvalued…
The Australian dollar’s fall has also reopened the door to its link with commodity prices. In the past two years, the currency has remained strong despite the weakness in commodity prices - defying the historical correlation between the two. But that divergence - a result of higher Australian interest rates compared to other countries, Australia’s “safe haven” image and the mining investment boom - is ending, Credit Suisse and UBS analysts said. (see graph below)
The currency has continued to fall as it was losing the “premium” it had in the market for maintaining a AAA-rated, commodity-backed and relatively strong ‘Australia Inc’ balance sheet, Credit Suisse said.
“This premium is now coming out of the Australian dollar as budget deficits rise and the interest rate differential falls on the expectation of a poorer growth outlook given economic rebalancing post the [mining capital expenditure] boom.”
“This change in tone signifies intent by the RBA to ensure a weaker [Australian dollar].”
The bank said the success of central banks’ in influencing the foreign exchange market - sparked off by the Swiss National Bank’s success in capping the franc, coupled with low inflation, has kept the “currency war” going.
“Effectively, selling one’s own currency means that central banks now have unlimited ammunition to weaken their currency and with inflation no longer a hindrance they have begun to seize the opportunity and use this firepower,” the analysts wrote.
So Australians, enjoy your cheap imports (TVs, cars etc) and cheap overseas holidays as that may soon disappear…. Once the RBA announces money printing the Aussie dollar will start a massive long term correction…. Finishing when global minimum wages are more equal.
The Big Mac Index
The above graph shows how many McDonalds big Macs hamburgers can be bought in each different country.So it is measuring purchasing parity between nations currencies - based back to 1975…So what it shows is that the upper countries such as Norway and Switzerland have very strong currencies…whereas China, Malaysia, Thailand, Indonesia have all weak currencies…..
It can be argued that those emerging market countries have manipulated their currencies to stay weak so their exports are the most competitive.
I think now the Western countries of USA, Europe and Japan are now combating this and are rapidly printing money to deflate their currencies to again become globally competitive.
Probably the right move….
So countries like Australia will have to follow one day, our strong dollar and high labour costs are already causing the mining industry to move off shore.
So the next step will see the Australian dollar fall – and wages stagnate or fall.
Despite strong prices for materials such as Iron Ore, Coal, Gas and Gold many Australian projects are now being cancelled due to high expenses in Australia.
The past few months Australia has lost about $100 billion of projects (Woodside Browse $45b, BHP Olympic Dam $20b, Rio’s coal projects etc)…
If the Aussie dollar falls and wages fall, and the Government does not get greedy, then Australian projects can prosper once again.
Remember, even if Australia is missing resource projects the global miners (such as BHP) are still able to do well elsewhere.
Government’s reforms to Superannuation announced 5 April 2013
Earnings on superannuation assets
Currently, the earnings on superannuation assets supporting
income streams are tax free.
This proposal is a significant change to the current tax
treatment of earnings on pension assets.
Client impact: Advisers should ensure their clients understand the difference between the headline rate of return a client may experience in their super fund which will include un-realized capital gains and the earnings actually realized on the assets held within their income stream. Further, as outlined above, any realised capital gains relating to existing assets will not be captured until 2024.
Deeming of superannuation income streams for social security purposes from 1 January 2015
More info to come before 2015.
Super Contributions Caps (see table below for summary)
A concessional cap of $35,000 pa
The higher cap will apply regardless of the member’s
total superannuation balance (the Government has decided not to proceed
with limiting a higher cap to those with a super balance under $500,000
due to industry feedback
Note that the Government estimates that the standard concessional
contributions Cap currently $25,000 p.a., will reach $35,000 p.a. due
to indexation by 1 July 2018.
Additional 15% tax on concessional contributions for those earning over $300,000 which has not yet been legislated.
Note: that these are announcements only and the Government has said that it is unlikely the legislation supporting these reforms will be introduced into Parliament before the Federal election in September.
To find out more please contact an adviser at email@example.com .
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.