Quarterly Newsletter - January 2014
Major Indices (as of 1/1/2014)
* PE ratios (based on historical earnings)
Commentary –- Past 3 months
The past 3 months saw the US market continue its strong year
ending up about 27% for the year. The Fed announced it will slowly
taper (reduce) the current US85 billion a month money printing program
by 10 billion per month starting in January 2014, but would keep interest
rates low. The share markets responded well to this as it is seen
as a slow orderly withdrawal of stimulus provided the economy and
employment continue to recover.
Global share market Prices to Earnings (PE) ratios are 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.
Global exports are still improving and the BDI has rallied sharply.
US employment is down again by 0.3% currently at 7.0%, and Australia steady 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.
US corporates continue to do well, and the US housing market has had a recovery and is now pausing. The IMF forecasts 2014 US growth at 2.7%.
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; recent PMI readings were neutral to positive giving some hope to a stronger China.
India is slowing down due to money outflows, and the currency has weakened a lot.
South Asia, South America and South Africa are doing
The Philippines recently recorded a 7.0% growth rate for the last quarter. That’s the second fastest growth rate in Asia, just behind 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 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.
Global Interest Rates have remained mostly the same this quarter except Europe dropping 0.25% to 0.25% and India raising rates by 0.25% to 7.75% to bolster further its currency.
US long term bonds rates continue to rise over the quarter indicating Bond investors seeing a US recovery coming and the end to money printing. Also lack of interest in foreign countries to continue to fund US debt for a low return – they are demanding higher return as risks of US default rise.
Inflation has been mild in most countries and currently not a great concern for now.
Currencies over the quarter were summarized by a further 10% fall in the Australian dollar (AUD) to settle at 0.89 to the US dollar.
Oil fell slightly over the quarter finishing at USD 99 on oversupply concerns and resolution in Syria; while Natural Gas rose very strongly ending at USD 4.40 after this year’s rout.
Copper moved sideways ending at $3.35 per pound. Zinc rose strongly and the other base metals were flat.
Iron Ore prices were flat this quarter ending at $132 a tone
Coking Coal rose.
Uranium is still very weak at $34/ tonne.
Gold continued it’s year long fall ending the year at $1,198 on talks the US money printing would be phased out.
Soft commodities were weaker over the last quarter, Corn and Wheat both fell significantly.
In summary, it was a sideways quarter for most commodities and global resources funds did not change much.
Australian house prices
Australian home prices rose slightly (up to 10%) during 2013 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 in 2014.
The Baltic Dry Shipping Index (BDI) has again gone up strongly in the last quarter and moved from 1,904 to 2,330, a very positive sign of global recovery. (See graph below) Metal prices are neutral.
US Retail sales forecasts are forecasted to move sideways –a neutral sign.
The HSBC Chinese Manufacturing PMI index – Dec 50.5 - (the earliest indicator of China's industrial activity), has remained very slightly positive or neutral over the quarter indicating a slight recovery in Chinese exports and manufacturing. A figure below 50 suggests contraction, and above 50 suggests expansion. Note the new Government is trying to shift the economic growth from manufacturing industries to service industries, and consumer consumption.
A summary of the above leading indicators is to expect “slow and steady recovery/growth from China and the US” and Global Growth to improve (BDI is strong). The commodity markets have already reacted to this with strong rises earlier in the year.
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 economy is recovering weakly, and China is recovering from slowdown earlier in the year; however the US and Japanese share markets have gone up too quickly and are now quite overvalued.
Most markets PE ratios are at or above fair value with only China looking cheap…
As discussed with client’s in May expect the Aussie dollar to weaken significantly – an HSBC report in May 2013 suggested the AUD to be as much as 60% overvalued. It has fallen 20% since it’s peak and could fall another 20% + next year and end below US 0.75 at end of 2014.
Australia (PE 15.35) 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.
The Next 11 countries– led by Philippines, Indonesia, Cambodia, Turkey Pakistan, etc… That is, the cheap labour countries that are getting all the jobs…will show the best returns.
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.
NB: Western companies whose main client markets are in the emerging markets can still do well.
US and Europe Update
On Dec 19 the US Federal Reserve announced a $10 billion
reduction in its bond-buying program to $75 billion a month –
thereby reducing the stimulus or “tapering”.
The Euro region is doing slightly better but still a lot of debts and problems there. Continue to avoid.
Baltic Dry Index (blue) continues to improve – a good sign for Global recovery
Australia – The recession we didn’t have to have?
After an amazing ride, and a 10 year resources boom in Australia, we've come out of the boom in MORE DEBT than when we went in to it. And it looks likely Australia is headed for recession or near recession.
The Government blew it all on stupid spending – middle class welfare etc.
So don’t be surprised to see middle class welfare disappear, and even negative gearing could be phased out – The Government can no longer be so generous.
Meanwhile personal debt to GDP doubled in the past 10 years. See the graph below.
So massive Government and personal debts, a declining mining boom, an overvalued dollar (with a dead manufacturing and tourism industries), rising unemployment…………….
Australia will soon be in recession or near recession.
And with Australia having one of the most over paid labour rates (minimum wages in Australia are $160 per day compared to USA at $80 a day and Philippines at $12 a day), jobs will continue to go off shore…If the mining sector is no longer going to save Australia then what will.
The baby boomers are selling out, and soon the sucker generation X , will be left with the mess again…So expect a rough decade ahead for Australia.
If interest rates in Australia are forced upwards (maybe as US rates rise or foreigners perceive Australia is riskier), then watch out for a spectacular collapse in housing prices.
So it is quite likely the next 5 years in Australia will see the Aussie dollar get smashed, property prices to fall, and wages and jobs to be lower.
The Aussie share market may also struggle under this load, however it is important to remember that companies can still do well based on selling products abroad etc such as our miners.
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