Quarterly Newsletter - July 2014
Major Indices (as of 1/7/2014)
* PE ratios (based on historical earnings)
Commentary –- Past 3 months
The past 3 months saw the US share market continue to move up slightly despite winding back of money printing. The Fed announced it will continue to taper (reduce) by 10 billion per month, and that it may raise interest rates by mid 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 appear to recover.
The Hong Kong share market had a strong quarter, while Chinese equity market moved sideways, mostly on concerns of a China construction slowdown as the Government is tightening lending and trying to cool the property markets. There is talk that China has 50 million empty condominium units. China manufacturing is at least improving (Chinese PMI turned positive in June).
The Indian share market surged 16% for the quarter with the popular landslide election result of President Narendra Modi seen as positive for India.
The Japanese share market gained about 10% over the past quarter making up for last quarter’s 10% falls. The Japanese Government money printing continues with President Abe’s third arrow. The Japanese Yen was steady to major currencies.
Asian shares overall had a strong quarter rising about 10%, after a poor first quarter to 2014.
The Australian Share market continues to go sideways.
Global share market Prices to Earnings (PE) ratios are still well above fair value and their average is 19.27. USA, Europe and Japan are still overvalued. Australia PE is 15.95 and in fair value range... Emerging Markets PE is 19.2 and Asia is 13.34 (being the better value).
Global exports are sluggish still and the BDI has fallen sharply to 831 (concerning).
US employment is down again by 0.4% currently at 6.3%, and Australia actually fell slightly also to 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.
USA corporate and US job creation continue to do well, and the US housing market recovery is continuing with record home sales. The IMF still forecasts 2014 US growth at 2.8% despite the poor first quarter of minus 2.9% (alarming) due to the cold spell….
Argentina’s likely debt default is not worrying share markets for now.
Europe is continuing to recover from the GFC with anemic growth.
Chinese manufacturing has been recovering; however Chinese property remains over supplied and weak.
Indian elections have lifted sentiment and hope for their economy under Prime Minister Modi.
South Asia (and ASEAN), South America and South Africa are generally still doing well. Jobs continue to move from West to East. Wages are stagnant in the West and rising in the East.
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 slightly lowered Global growth forecasts for 2014, due to a negative first quarter US GDP, and many new geo-political concerns mostly in Iraq.
Global Interest Rates have remained mostly the same this quarter except Europe decreasing by 0.10% to 0.15% to further bolster its sluggish economy.
US long term bonds rates fell slightly over the quarter perhaps due to the negative first quarter US GDP.
Inflation has still 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 0.94 to the US dollar. Mostly due to some US dollar weakness from the poor first quarter negative US GDP figure blamed on a severe cold weather snap keeping people inside and not spending.
Oil moved up over the quarter finishing at USD 106 on Iraq instability; while Natural Gas rose also ending at USD 4.46.
Copper recovered to $3.18 per pound. The other base metals all rose significantly.
Iron Ore prices fell heavily again this quarter ending at $95 a tonne, due to a China construction slowdown.
Coking Coal also recovered slightly ending the quarter at $113 per tonne.
Uranium is extremely weak at $28 tonne.
Gold rallied slightly to reach $1,327 as US money printing decreased and US GDP stuttered.
Soft commodities were weaker over the last quarter, Australian Resources Price Earnings Ratio is still very cheap at 10.66, factoring in large falls in the iron ore price.
In summary, it was a terrible quarter again for iron ore …..as a result of the China construction slowdown.
Australian house prices
Australian home prices were down 0.2% for the quarter, after a 10.1% gain in the 2014 financial year; 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 mixed for global growth due to the China construction
A summary of the above leading indicators is to expect “a
China housing slowdown” and Global Growth to remain sluggish
and more fragile at present (BDI is very weak). Commodities used
in construction such as Iron Ore are weakest, however the other base
metals are recovering slightly.
Western (developed countries) share markets are likely to
move sideways or down, or grind slightly upwards as Bonds and Term
deposits are so low clients are desperate to get a better return so
chase the share market. Meanwhile emerging country share markets and
property should do ok despite money being withdrawn back to the US.
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.
Asian, Emerging and Frontier markets shares and property (as well as Global Resources) should do well over the next decade despite some recent setbacks.
The ASEAN and 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 & Australia Update
Current indicators for the US are mixed. First quarter
GDP was a shocker at minus 2.95% blamed on the cold weather keeping
consumers inside…. However jobs growth is improving and unemployment
is falling and the housing market is doing well. US corporate are
also doing well.
Europe is plodding along with anemic growth
Australia continues to lose mining and other jobs and now has a similar
unemployment rate to the US – the first time since the GFC began.
Perhaps Australia is about to have their GFC.
Minimum daily wage (USD) – Country by country comparison
I have started a new column on page 1 of the newsletter listing the
minimum daily wage.
We can see from the figures that India (USD 3.40 per day) has the cheapest labour costs followed by China (USD 9.60 per day). This gives India a big advantage over China for now. In the Western countries USA (USD 56 per day) is the one of the most competitive now, but still cannot compete with the developing countries.
Australia (USD 136 per day) has no chance to compete and is severely globally uncompetitive. This is the main reason why the mining companies have cancelled 150 billion dollars of projects in the past year. It is also why Australian manufacturing is dead, and property prices are so high.
Unless the Australian wages halve (to get closer to Western wages) then Australia will face a huge unemployment problem. That will lead to social unrest, and likely house price falls and recession. It will also lead to large trade deficits and Australia going broke.
The easiest way to solve this major structural problem is for the Australian dollar to collapse by 50-60% as predicted by HSBC. So in the next decade expect the Aussie dollar to move steadily down relatively to all currencies and settle somewhere near US 0.50 to 0.60…. Or expect severe unemployment, house price collapse and recession such as the US and Europe experienced in the GFC. This would also likely crash Australian wages lower in a painful adjustment to become globally competitive.
Global Debt Watch – “Likely Outcome of all this Western debt”
At some point interest rates will normalize (rise) either through inflationary pressures or from the risk of sovereign default. When this happens, governments with excessive levels of debt will be in a trouble as we saw in Greece, Iceland and others before. Welfare, health, education and defense spending will be subjected to brutal cuts, .and currencies will collapse.
The GFC was a banking sector crisis backstopped by Government. A GFC Mark II is likely to be a Government debt crisis backstopped by nothing...the end of the debt guarantee line will have been reached.
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..
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.
Solution: Minimise your debt. Adopt a more conservative asset allocation. Expect taxation to rise and entitlements to reduce.
For complete information visit http://www.economist.com/content/global_debt_clock.
Asia in 2020
According to Deutsche Bank research. See link below.
Just imagine your Asian shares (companies) will have a tripling of
their customer base in just 6 short years…..Is this not the
best investment opportunity ever seen before?
Asian Economic Miracle
– “A Germany in 3.5 years, three Euro zones in 25 years or more”!!!!!!
“Every three and a half years, Asia adds the equivalent of
Germany’s economy to its GDP – even with China slowing
down, according to DBS. In the next 25 years, Asia will add the equivalent
of three euro zones.
But if Asia’s currencies were to appreciate by one to two percent per year over the coming 20 years, that would be the norm for developing economies, not the exception . In that case, Asia wouldn’t be adding three new Euro zones to the map by 2039 – it would be adding five or six.
The shift in economic gravity is the biggest structural change underway in the global economy today. That makes it one of the biggest, if not the biggest, game changer out there.
For the most part, it’s brute force growth – catch-up with the West after lagging for 150 years. But force is force and the shift in gravity that most denied just five years ago is bound to bring enormous change.
The Singaporean bank argues that the renminbi will supersede the
dollar, and that Chinese urbanization is inevitable and that energy
demand in Asia will continue to soar, steering the price of global
energy. G3 central banks will lose the ability to control domestic
inflation, passing the buck on to the People’s Bank of China,
while capital will flow to Asia even faster than it is already.”
See below in brown the graph of the MSCI Asia Index (excluding Japan) from the past 10 years. It shows investors in Asian shares would have achieved 220% growth over 10 years…Not bad….but a lot more to come in the next 15 years as the Asian middle class increases 5 times in size.
Asian Shares 2004 - 2014
Demographics Update - Median Age Country by Country
We can see from the above chart the older population countries
(Japan, most of Europe, and most Western countries). These countries
have older populations and typically poor demographics leading to slow
growth and poor share markets and property markets outlook. Younger
countries with more people working generally equal a stronger economy
and asset markets.
The most indebted countries have the highest median ages. The combination of our elderly living longer, the boomer demographic bulge and smaller families has skewed the Western median age higher.
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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.