Quarterly Newsletter - April 2014
Major Indices (as of 1/4/2014)
* PE ratios (based on historical earnings)
Commentary –- Past 3 months
The past 3 months saw the US share market move up slightly despite winding back of money printing. The Fed announced it will continue to taper (reduce) by 10 billion per month starting, and that it may raise interest rates in 2015 especially if unemployment falls below 6.5%. The US share markets continue to surprise by responding well to this, and the economy and employment continue to recover.
The Chinese equity market continues to struggle and is not cheap anymore, mostly on concerns of a China construction and manufacturing slowdown as the Government is tightening lending and trying to cool the property markets.
The Japanese equity market fell about 10% over the past quarter after going up very strongly last year on the back of massive Japanese Government money printing, and the Japanese Yen significant weakening to the US dollar.
The Australian Share market continues to go sideways, and India recovered strongly.
Global share market Prices to Earnings (PE) ratios are still well above fair value (except Russia is cheap). USA, Europe and Japan are still very overvalued. Australia’s PE is still about fair value provided no house collapse or severe commodity price falls. Emerging Markets PE is 19 and Asia is 14 (being the better value).
Global exports have stalled and the BDI has fallen.
US employment is down again by 0.3% currently at
6.7%, and Australia rose again to 6.0%. 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.
Northern Europe is still doing ok still thanks to Germany and the far Northern economies.
Southern Europe despite large debts is improving.
China is slowing down and a hard landing is feared at least in the fixed asset investment areas (property construction), but still has reasonably strong growth; recent PMI readings were weak indicating Chinese manufacturing is weak and slowing.
India is recovering helped by the currency that has weakened a lot in the last year.
South Asia, South America and South Africa are doing
The Philippines recently recorded a 6.8% 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, followed by Japan) with most of them hovering around 0-3%. The IMF has recently upgraded its US GDP growth forecast for 2014 to 2.8% 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 India increasing again by 0.25% to 8.00% to further bolster its currency.
US long term bonds rates have stopped rising for now and were much the same over the past quarter.
Inflation has been mild in most countries and currently not a great concern for now.
Currencies over the quarter were summarized by a slight strengthening in the Australian dollar (AUD) to settle at 0.92 to the US dollar. The Indian rupee also strengthened slightly.
Oil moved sideways over the quarter finishing at USD 99 on oversupply concerns and new concerns with Russia taking over Crimea; while Natural Gas fell slightly ending at USD 4.28.
Copper fell heavily ending at $3.03 per pound. The other base metals were flat, and Nickel rising.
Iron Ore prices fell heavily this quarter ending at $110 a tonne, due to a China construction slowdown.
Coking Coal also fell heavily ending the quarter at $99 per tonne.
Uranium is still very weak at $34/ tonne.
Gold rallied slightly to reach $1,284 as US money printing decreased.
Soft commodities were stronger over the last quarter,
In summary, it was a terrible quarter for iron ore and coking coal….as a result of the China construction slowdown.
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 negative for global growth due to the China construction slowdown..
The Baltic Dry Shipping Index (BDI) has fallen in the last quarter and moved from 2,330 to 1,477, a very negative sign of global recovery. Metal prices such as copper have crashed.
US Retail sales forecasts are forecasted to move sideways or up –a neutral to positive sign.
The HSBC Chinese Manufacturing PMI index – March 48.0 - (the earliest indicator of China's industrial activity), has remained has now hit 8 month lows over the quarter indicating a fall 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 “a China slowdown” and Global Growth to remain sluggish (BDI is weak). The commodity markets have already reacted to this with strong falls in the post quarter.
Western (developed countries) share markets are likely to move sideways or down, while emerging country share markets and property should do ok despite money being withdrawn back to the US. However this remains to be seen, so be cautious for now.
The US economy is recovering weakly, and China is changing its economy to a more service driven economy rather that just manufacturing and construction; however the US and Japanese share markets have gone up too quickly and are clearly overvalued. Especially with US money printing reducing and the possibility that someday soon US interest rates will rise.
Most markets PE ratios are at or above fair value with only Russia looking cheap…
As discussed with client’s in May 2013 expect the Aussie dollar to weaken further – 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 15.56) is still looking reasonable however the economy is stalling and the labour market has become globally uncompetitive (wages are way too high). Only low interest rates and Chinese buyers are propping up the property market. So, just a small exposure to Australian shares is ideal. Chinese slowdown is smashing our mining companies.
Asian, Emerging and Frontier markets shares and property
(as well as Global Resources) should do well over the next decade
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
With QE (money printing) gradually being withdrawn by
the US Fed (Janet Yellen) the effects are as follows.
After the share, property markets and currencies of
Southern Europe have been smashed in some cases losing 90% of their
value, some recovery is occurring and Governments are decreasing debt.
According to Societe Generale's analyst Albert Edwards, Australia isn't exactly well placed when it comes to a slowdown in China. 'All we have in Australia is, at its simplest, a credit bubble (consumer debt) built upon a commodity boom, dependent for its sustenance on an even greater credit bubble in China'. And now our marginal real estate buyer looks like it's pulling out because of trouble at home. And what happens when interest rates start rising?
Global Debt Watch (see my table RHS above)
The developing world governments are mostly heavily indebted, while the developing world Governments debts are mostly low.
Japan still leads the developed world with the biggest Government debt to GDP at a whopping 239% and increasing. One has to wonder what will happen here – a debt default and Yen collapse perhaps?? US has the biggest dollar amount of debt and 82% debt to GDP (down from over 100% last year), and Australia at 27% of GDP is doing quite well with a relatively low Government debt.
The BRICS and developing countries debts are mostly low – Brazil 55%, Russia 8%, India 52% and China 16%.....Philippines 48%, Indonesia 25%
If you take at a look at the link below studying the ”public debt per person” also gives you an idea as to which countries can escape the debt trap..
Eg: US debt per person is $42,228, Australia $17,070, Philippines $1,335, China $1,184, India $997
So I would argue the better places to invest are those with a low debt per person and a growing economy…The numbers speak for themselves. Of course we need to remember that debt will most likely effect currencies, company share prices of the globalised companies may not be affected.
For complete information visit http://www.economist.com/content/global_debt_clock
What are some Global Experts saying --
Harry Dent – US Demographer
Of some note for those interested investing in the USA, best you read Harry Dent’s book first titled ,”The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019”
A few quotes:
“I have worked in the highest level of U.S. politics and see a disaster in the making as the government employs endless stimulus plans and bailouts that destroy the very free market capitalistic system that has made it the richest major country in the world. Harry Dent adds the reality of aging societies and slowing demographic trends to show why such reckless debt-driven policies are certain to fail.”
“Europe, Japan, and USA will face mounting pressures as population’s age and baby boomers retire”.
On CNBC Feb 10, 2014, Harry made some bold forecasts including;
Well worth listening to as he did pick the GFC.
Of interest around 18% of new homes in Sydney and 14% in Melbourne are bought by Chinese investors.
Christine Lagarde – Head of the IMF – Feb 2014
At her “New Multilateralism for the 21st Century: the Richard Dimbleby Lecture “ she spoke about a few themes that we face this century;
With this inequality the masses have good reasons to protest, and
so they should.
2014 is a century since the First World War and a great period of Global conflicts running until 1945 and the end of WW11. Will 2014 mark a new era of conflict as the poorest on the planet rise to demand equality or can we peacefully achieve inclusive growth and equality.
I have offered my ideas on this way back in 2010 with my UTube Video
- Global Crisis Solutions - solving inequality.
The key is to raise the minimum daily wages in the poor countries with wage rises and currency changes.
This is slowly happening….but will it be quick enough to avoid Global uprisings, suffering and turmoil?
To view the full Christine Lagarde speech go to,
The Asian Century
Please read this sentence below 3 times.
Over the next 15 years the Asian middle class is predicted to grow 5 times in size from 600 million to 3 billion people.
This presents investors with an unparalleled opportunity to grow
But whichever ways you choose don’t miss this opportunity. It is the single biggest investment opportunity you are likely to see in the next decade or two.
Just think what happened in Australia when its middle class rose, wages grew and bank lending exploded. The past 50 years saw median house prices in Australia increase a massive 46 fold.
My opinion is, that is the end now to a massive boom enjoyed by the
West, led by the baby boomers demographic. The next boom will be in
Asia – the demographics (excluding China and Japan) say so and
that statistic highlighted above is massive… Also Africa and
Arabia will do well.
A five times increase in the middle class leads to a property boom, and a boom in company profits (shares)…
So while the Aussie dollar is still relatively high and Asian Shares relatively cheap (PE currently 13.9) with undervalued currencies, it is time to be steadily buying into Asia.
Interest Rates – a key driver in the modern indebted World
Traditionally we look at countries Price Earnings (PE)
Ratios as a measure of value and then the GDP growth rate to determine
where we should invest.
Australia v China - Six key measures
So, comparing the case above to invest in the Australian Share market or the Chinese I would draw the following conclusions.
China looks better as a cheaper market (lower PE), much higher growth rate, neutral interest rates (compared to Australia where rates could rise and severely hurt the economy), undervalued Chinese Yuan, much lower labour costs (so getting new Global jobs).
Australia looks poor on all measures
except perhaps more immigration to make the demographics rank higher
than China. But if the immigrants cannot get jobs then it is of questionable
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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.