Quarterly Newsletter - October 2013
Major Indices (as of 1/10/2013)
* PE ratios (based on historical earnings)
Commentary –- Past 3 months
The past 3 months saw mixed results for global share markets with the developed markets outperforming the developing – quite unusual. Due to fears the Fed will start to taper (reduce) the current US85 billion a month money printing program, there was somewhat of a rout in indebted emerging markets such as India, Indonesia, Brazil etc that rely on US funding and are currently running too large Government yearly deficits. It is probably a healthy warning and lesson for those countries. Money rushed out of some emerging markets for the safety of home. Interestingly the cheap HK and Shanghai markets went up despite the rout elsewhere. Japanese, US, Australia and European share markets continued to perform well.
Global share market Price to Earnings (PE) ratios is still mostly a bit above fair value (excluding China as somewhat cheap). USA, Europe and Japan are still overvalued. Australia’s PE is still about fair value provided no house collapse or severe commodity price falls. Market volatility has been mostly in the emerging markets this past quarter.
Global exports are still improving and the BDI has rallied sharply.
US employment is down by 0.3% currently at 7.3%,
and Australia 0.3% higher at 5.8%. Note however President Obama has
engineered this by penalizing employers if their workers work more
than 30 hours a week by having to pay expensive health care costs.
China is slowing down, but still reasonably strong
growth; recent PMI readings were positive giving some hope to a stronger
South Asia, South America and South Africa are doing well
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 2014
to 2.7% and World growth in 2014 to reach 4.0%. Some indebted (running
a yearly Gov deficit) emerging markets such as India, Indonesia and
Brazil have had their growth forecasts downgraded.
US long term bonds rates rose sharply (by about 1%) 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 for now.
Oil rose slightly over the quarter finishing at USD 102 on Syria concerns; while Natural Gas stayed about the same ending at USD 3.60 after last quarter’s rout.
Copper rose strongly over the quarter to $3.29 per pound, on China doing a bit better. All the base metals rose.
Iron Ore prices also rose this quarter back up to $136 a tone
Coal was steady.
Uranium is still very weak at $40/ tonne.
Gold rose slightly over the quarter back to $1,338 on talks the US money tapering would be minimal.
Soft commodities were mixed over the last quarter, Corn fell and Wheat rose.
In summary, it was a recovery quarter for most commodities and global resources funds did very well.
Australian house prices
Australian home prices have risen slightly due to 50 year low interest rates (currently the RBA rate is at 2.5%). Still household debt levels are very high, and properties still relatively unaffordable on most indicators.
Commentary - Forecast next 6 months
Leading indicators are now all positive for global growth late in 2013.
The Baltic Dry Shipping Index (BDI) has shot up
the last quarter and more than doubled from 900 to 1,904, a very positive
sign of global recovery. Metal prices support this also.
A summary of the above leading indicators is to expect “some recovery from China and the US to be steady”. The commodity markets have already reacted to this with strong rises.
Western (developed countries) share markets are likely to move sideways or down, while emerging country share markets and property should recover strongly from their recent sell off.
The US is doing ok, and China is recovering from a recent slowdown.
I think the recent talks of US money printing being wound down
are overstated (see article later in this newsletter titled “US
Underemployment rate at 14.3%--money printing really has to continue”).
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.
Australia (PE 15.87) is still looking reasonable however the economy is stalling and the labour market has become globally uncompetitive (wages are way too high). So, just a small exposure to Australian shares is ideal.
Asian, Emerging and Frontier markets shares and property
(as well as Global Resources) should do well despite some recent setbacks.
Countries running large annual deficits such as India and Indonesia
will need to amend this quickly or suffer.
If the US or Europe collapses under their mountain of debt then all
economies and share markets will suffer.
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
US Underemployment rate at 14.3% -- money printing really has to continue
The so-called underemployment rate in the US includes not only the unemployed but also people with part-time jobs who want full-time work and people who have stopped looking for work.
In June 2013, the underemployment rate rose from 13.8 percent to 14.3 percent. That’s still down from 14.8 percent a year ago. The rate peaked at 17.1 percent in April 2010.
The US unemployment rate is around 7.3% and stubbornly still above 7%. The US Federal Reserve chairman Ben Bernanke has said the Fed’s bond buying could end around the time unemployment reaches 7 percent. The Fed foresees that happening around mid-2014. I suspect under the next Fed chief (likely Yeller) this will change to 6.5% or start to focus more on the underemployed rate.
All of which is why I think US money printing is here to stay for a few years yet.
Interestingly many of the US job gains were in lower-paying industries, a trend that emerged earlier this year. The hotels, restaurants and entertainment industry added 75,000 jobs in June. This industry has added an average 55,000 jobs a month this year, nearly double its average in 2012. Retailers added 37,000. Temporary jobs rose 10,000.
The health care industry added 20,000 jobs, construction 13,000. But manufacturing, which includes many higher-paying positions, shed 6,000.
This is why the US needs to keep money printing to weaken further the US dollar and to save jobs from disappearing off shore.
Other reports say the US job participation rate is the lowest since the 1970s, and the real unemployment (calculated on a consistent basis) is 23%, workers' real wages have not gone up for decades, 50 million people are on food stamps, government deficit runs at $1 trillion per year and government debt including unfunded liabilities is $220 trillion and growing exponentially.
So, in summary the US people are in crisis, but the US companies are doing ok because they are increasingly using cheap outsourced labour from the emerging world and selling their goods globally…. So quite a dichotomy.
Europe Update - You may be shocked!
Greece’s economy contracted 4.6 percent in the second quarter of 2013 compared with a year earlier. While that is slightly less than in the previous quarter, it still leaves the country in an economic hole that some have termed a depression. The official forecast is that growth will only return in 2014, and it will take years before the economy reaches pre-crisis levels. The policy of spending cuts and tax increases demanded by creditors to cure public finances has reduced the deficit but savaged the economy and society. The economy has shrunk by roughly 24 percent since 2008, business bankruptcies have skyrocketed and unemployment is at a record 27.6 percent — and 64.9 percent for people under 25. The statistics bear some resemblance to those during the Great Depression in the United States, when gross domestic product fell 27 percent in 1929-1933 and unemployment climbed to over 20 percent.
Spain’s economy shrank in the second quarter of 2013 by 0.1 percent from the quarter before but the contraction was better than the 0.5 percent fall recorded in the first three months of 2013. The country has been stuck in recession for most of the past four years after its property market collapsed, causing several banks to fail and require bailouts. Spain looks like it could finally post some quarterly economic growth before the end of the year. Nonetheless, Spain has an unemployment rate of 26.3 percent, which the International Monetary Fund forecasts will only fall slightly over the next two years.
Italy’s economy shrank by less than expected in the second quarter of 2013. The 0.4 percent decline compared with a quarterly rate of 0.6 percent in the first quarter. Italy has also embarked on the austerity path to control its high public debt, which has grown to 130 percent of annual economic output. The economy has contracted for eight straight quarters, a record, and unemployment is at 12 percent. There are concerns that the government, a broad coalition of parties, will not last long and be too weak to implement the tough economic reforms needed to reduce debt and get the economy growing again.
Portugal returned to growth in the April-June quarter of 2013 with 1.1 percent growth from the quarter before, after contracting for 10 straight quarters. Yet the country has a long way to go to reduce unemployment of 17.4 percent and to generate enough growth to repay debts that fall due in coming years. Portugal needed a bailout in 2011 after a decade of meager growth and mounting debts. The country’s creditors expect GDP to contract by 2.3 percent this year before growing 0.6 percent in 2014 and 1.5 percent in 2015.
Cyprus needed a bailout this year after its banks collapsed due to losses on defaulted Greek government bonds. A part of deposits at its two largest banks were seized to help pay for the bailout. The banking collapse is expected to contribute to a big drop in investment and spending. Cyprus’ international creditors project that its economy will shrink by a cumulative 13 percent by the end of 2014. Most analysts predict it will be worse.
For investors this means invest in all of the above countries with caution. Better to focus on the rising tigers in South Asia, Arabia, and even Africa. All have young demographics with rising middle classes. The days of lazy investments are gone.
Australian Manufacturing is the worst in the World
Australia now has a trade deficit, the end of a mining boom and a shrinking manufacturing sector – Not a good combination. Not to mention an overpriced property and uncompetitive wages globally… I think Australia is in for a rough decade ahead.
The Demographic Time Bomb for the ‘Developed and Ageing countries” – Forget 4% GDP, Expect 1% GDP
The above graph is from the reasearch paper “Mind the (Expectations) Gap: Demographic Trends and GDP”.
The baby boomer countries (most Western countries, China and India)
from now until 2050 will face the economic headwind created by retiring
Urbanization in India and China may offset this somewhat and India’s demographics are not so bad as China’s…But is does show you we need to start to move beyond the BRICs (Brazil, Russia, India, China) to the Next 11 countries. The Next 11 are Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam.
Take a look at the graph above (predictions) and compare to the graph
below (actual GDP)…
As you can see above the new reality (likely until about 2050) is for Developed economies (especially those with an excess of baby boomers and low immigration) to grow at 1% pa or less,,, and for Developing economies (especially with young populations and high immigration) to do a lot better, with growth rates at 5% or above. That alone tells you where you need to invest.
If you don’t think this will happen think again – it is happening now
Philippines about to enter the magic “Demographic Window” in 2015
The “demographic window”
is the period when the bulk of an economy’s population is of
working age. In particular, it is the time when the proportion of
the population aged 15 years old and younger falls below 30 percent
and when the proportion of the population aged at least 65 years old
drops to less than 15 percent.
The Aquino administration said the demographic window would add icing to the cake for investors, citing the favorable macroeconomic indicators, including low inflation, sustained economic growth, a healthy banking sector, and strong remittances from overseas Filipinos that help fuel household consumption.
Citing a study by the United Nations, the government said the Philippines would follow the lead of strong Asian economies that previously entered the demographic window.
“The Philippines is the last major Asian economy to benefit from this demographic dividend, which is typically associated with accelerated economic growth,” the government said.
The country is expected to enjoy a robust growth rate of more than 7 percent over the long term starting 2015, saying some Asian countries, led by Japan, Hong Kong, Singapore, South Korea and China, experienced fast growth rates in the long term following their entry to the demographic window.
Japan entered the demographic window in 1965, Hong Kong and Singapore in 1980, South Korea in 1985, China in 1990 and Thailand in 1995.
Other neighboring countries have entered this window fairly recently. Indonesia and Vietnam did so in 2005, and Malaysia and India in 2010.
The average economic growth rate of selected countries for 10 years following their entry to the demographic window was 7.3 percent, the government said.
The Aquino administration aims to woo more long-term foreign investors into the country in the belief that investments from abroad were necessary to help create more jobs and reduce poverty.
The Philippines continues to lag behind other emerging Asian economies in terms of cornering foreign direct investments (FDIs), however this is set to change.
The Aquino administration said the Philippines was up for a “promising future” that investors should take advantage of, saying there was a good chance the economy would grow more than 7 percent a year for at least 10 years after 2015.
In 2012, Wells Fargo moved 125,000 jobs from the US to the Philippines……this kind of job growth is spurring a property boom in Manila.
On top of the country’s favorable economic fundamentals, the administration said the so-called “demographic window” that the Philippines would enjoy by 2015 could make the country a good investment destination.
Property Boom Multiplier effect on an economy-Eg: Philippines
Find a country having a property boom and invest there early in the boom. Take the Philippines for example. There is a massive pent up demand for affordable housing, and now the jobs are arriving from off shore (just one company alone, Wells Fargo, moved 125,000 jobs to the Philippines last year), the properties are being built. For example in Cavite Manila a developer is developing 10,000 hectares of land and building over 100,000 new homes over 10 years.
The economic impact of the housing industry, wherein for every peso invested by the private outfits in the housing sector, the multiplier effect is 17 times in terms of other investments. This is because the industry is interrelated to 60 other industries, making it one of the country’s most labor- and capital-intensive industries.
So, just one project in Cavite Manila will be creating hundreds of thousands of jobs. It becomes a snowball…. Total real estate loans country-wide soared by 42% to PHP546.51 billion (US$12.47 billion) in 2012 from the previous year, based on figures from the BSP, the country’s central bank. Despite the spectacular growth, the size of the mortgage market remains small at about 5.5% of GDP in 2012. The fact that Filipinos are starting to use bank finance to purchase a property, and the pent up demand for housing, (estimated at 3.9m houses), and you have a massive boom – making the Philippines the fastest growing economy in Asia and almost the fastest growing in the World. In the past year Philippine property went up 9.98% (after inflation adjusted), and was the fifth best property market in the world.
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