Quarterly Newsletter - January 2015
Major Indices (as of 1/1/2015)
* PE ratios (based on historical earnings)
Commentary - Past 3 months
The past 3 months for share markets was mostly good…..However, Russia and the Oil price collapsed, Australia and Europe did poorly, US and Japan did quite well and China BOOMED with Shanghai rising 38% for the quarter. Bear in mind Japan is rising due mostly to currency weakening, so zero net effect.
The US share market returned 13.55% for 2014, and its economy strengthened.
European shares returned a poor 2.86% for the year amid continued sluggish growth.
The Hong Kong share market returned 1.86% for the year as a lot of money shifted into the mainland Chinese markets.
Chinese equity market moved up a staggering 50.08% for 2014 despite all the talk of a slowing economy, and with Chinese Manufacturing remaining sluggish (Chinese PMI around 50).
The Indian share market moved up 29.44% for 2014 riding the popularity wave of their new leader President Narendra Modi.
The Japanese share market was up 9.69% for the year; however the currency was down heavily.
Asian shares overall had another very strong year of around 20% + return in AUD terms. The falling AUD helped this slightly however many Asian currencies fell also.
The Australian Share market did nothing in 2014 finishing up a 0.42%.
Global share market Prices to Earnings (PE) ratios are still well above fair value and their average is 20.52. USA, Europe and Japan are still the most overvalued. Australia PE is 15.17 and in fair value range... Emerging Markets are a bit expensive at a PE of 19.46 and Asia (Hong Kong, Korea, Taiwan and Singapore.) at a PE of 15.26 is the better value.
US employment is down again by 0.3% currently at
5.8%, and Australia up again by 0.2% to 6.3% unemployed. The US trend
is down and Australia is up.
USA economy is definitely stronger with last quarter GDP growth at 5% annualized. The IMF increased its forecasts for 2015 US growth to 3.1% .
Europe is still very weak and currently being weighed down by Russia and lower Oil prices.
Chinese manufacturing has been weak again; and Chinese property remains over supplied and weak. Some Government measures have been introduced to help, but the oversupply will take time to clear. The recent 0.4% interest rate decrease should also help. Additionally the growth mix is changing away from manufacturing to services.
India continues to be jubilant and has launched a new program “Make in India” to help their economy. Their GDP is improving.
South Asia (and ASEAN), South America and South Africa and the Frontier countries are generally still doing well. Jobs continue to move from West to East chasing cheaper labour. Wages are stagnant in the West and rising in the East. The exception to this is the large Oil producing nations (Saudi Arabia, Kuwait, Oman, UAE, and Indonesia) who are currently suffering from the Oil price collapse.
Global GDP is forecast by the IMF for 2015 at 4.0%. The Advanced Economies at 2.3%, and the Developing Economies at 5.2%. It also states;”falling oil prices will boost global GDP between 0.3 and 0.7 percent in 2015”.
Global Interest Rates have remained mostly the same this quarter except China decreasing by 0.40% to 5.6%. Interestingly the Swiss Reserve Bank decreased to negative 0.25% trying to slow the rush of Russian and other money into their country over inflating the Swiss currency.
US long term bonds rates fell again slightly over the quarter. This is conflicting with views that US interest rates will be going up soon.
Inflation has still been mild in most countries (except Russia) and currently not a great concern.
Currencies over the quarter were summarized by a
significant weakening (7%) in the Australian dollar again, from 0.87
down to 0.81 to the US dollar, and down against all major currencies.
That marks a fall in the past 6 months of 15% to the US dollar, and
in line with my forecasts.
2014 Share market returns summarized (% pa)
Oil collapsed over the quarter dropping further from USD 91 to USD 53 on oversupply concerns and weak Global demand; and Natural Gas also fell 25% to USD 3.09. This has sent severe shudders through the Oil producing nations and companies, but is also a win for consumers especially in importing nations (US, China, India).
Copper was weak dropping to $2.86 per pound. The other base metals were slightly down.
Iron Ore prices continued their shocking past year falling again this quarter ending at $71 a tonne, due to the China housing and construction slowdown, and oversupply.
Coking Coal dropped heavily over the quarter at $72 per tonne.
Uranium seems to have passed its shocking lows now stable at around USD35 per pound.
Gold moved sideways to reach $1,200.
Soft commodities rallied strongly after a previous
bad last 6 months.
In summary, it was a terrible quarter for Oil and Natural Gas, also poor for Iron Ore and Coking Coal …..As a result of Oil oversupply and the China construction slowdown.
However, the bottom for many commodities seems to have been reached or is near. The next question is will there be a recovery in 2015. Looks likely but only a weak recovery for now, as still there are too many empty properties (oversupply) in China and an oversupply of Global Oil with falling Global demand as people turn to hybrid or electric cars.
Commentary - Forecast next 6 months
Leading indicators are neutral for global growth especially the BDI.
The Baltic Dry Shipping Index (BDI) – (the cost to ship raw materials such as coal & iron ore) has been flat moving from 1,147 to 1,053, a neutral sign of global and China recovery. It suggests no changes coming soon.
US Retail sales are forecasted to rise about 5% –a positive sign.
The HSBC Chinese Manufacturing PMI index – December 49.6 is indicating the Chinese manufacturing sector is stalling still. 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 “no immediate resources recovery and no China manufacturing recovery”. Commodities used in construction such as Iron Ore have been smashed the past year but should at least stabilize soon. The one positive is the US consumer happy to keep spending and hopefully this will spread more to the rising wave of Asian consumers.
Western (developed countries) share markets are likely to
move down, or sideways….. Expect Australia to continue to struggle
and 2015 may well see a recession in Australia.
On Nov 12, 2014, I emailed all clients recommending to make sure
they had enough Asia and China exposure as I was expecting the HK-China
connect to boom the China local share markets.
The Emerging markets of Brazil and Russia and Global Resources should start to recover at some point in 2015.
The ASEAN and Next 11 countries– led by Indonesia, Philippines, Vietnam, 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.
Oil, Natural Gas Iron Ore and Coal prices have all collapsed in the past year and Australia is now facing the consequences of this.
The mining capital expenditure is about to drop off a cliff in 2015 – leaving more unemployed. Are we heading back towards 10% unemployed? If you look at the underemployed or youth unemployment you will realize Australia is facing a jobs crisis. Little wonder when our minimum wage is about 10 times higher than in Asia ---
Perhaps Australia is about to have their recession.
The only bright light has been the residential property market propelled by ever lower interest rates. However this light will soon also go out.
Global Resources – Oil & Iron Ore update
Oil has dropped in half the past 6 months
falling from above USD 100 to around USD 53 a barrel.
Iron Ore has also dropped severely in the past year
from around USD 180 a tonne all the way down to about USD 71 per tonne.
China wants to build the world a railway
From CNBC, “The developing world is embarking on a massive infrastructure boom. And China wants to build it—and bankroll it.
On Thursday, Chinese officials announced the latest infrastructure megaproject—a $12 billion contract to build a railway stretching more than 850 miles (1,400 kilometers) along the coast of Nigeria. It was China's single-biggest overseas contract, according to state media.
With its domestic economy cooling, China is investing heavily outside its borders in multibillion dollar infrastructure projects, launching new financing plans to help developing countries pay for them.
Much of that investment will be geared toward transportation projects like the Nigerian railway, as developing countries seek to put in place the capacity needed to keep up with increased flows of people and goods brought by economic growth.
Much like the 19th century railroad expansion that opened up the American West, many of these projects are designed to expand growth to inland regions with little access.
More recently, China's three-decade economic transformation started with coastal manufacturing hubs served by ports that provided gateways to international trade”.
And China with almost USD 4 Trillion in currency reserves has the money to do it. See below graph.
The Australian Dollar (AUD) – Where to next?
The Australia Dollar is influenced by several factors in order of
Looking at the three areas above I see the following going forward;
Conclusion – I see the AUD steadily moving considerably down over the next decade (unless wages collapse or commodities boom again). Since I called this it has already dropped from 1.10 down to about 0.81 now. I expect it will settle at around 0.60 to 0.70 to the USD over the next 3 years. And by the end of the decade perhaps lower.
NB: Interesting to see that the AUD seems to track the Iron Ore Spot
Chinese Share market – The beginning of the next big boom as China “goes Global”
Six positives for a China share market boom in the next
Three negatives to remember are;
On balance to me the positives outweigh the negatives especially as I see Chinese corporates becoming Global multinationals just as the US corporate did the past 20 years.
China to increase from 18.9% of MSCI Emerging
Markets Index to 27.7%
Asian equity rises nothing like US, so less
affected by QE ending
Note how little gain the PRC (Local Chinese market has
had despite strong Chinese GDP the past decade)…That market is
expected to open up next year and China A shares to be included in the
So all in all.... time to be cautious but to hold your biggest stake in Asia.
“The Great Depression Ahead” written 2008/9 by Harry S Dent – Demographer
Harry S Dent is a well renowned demographer who picked
the 1990s share market boom in his book, “The Great Boom Ahead”
(written 1992), the 2000 Tech bust and the GFC.
Of note most Asian countries demographics look strong
especially South Asia including India and the Philippines. China not
so good after 2020 thanks to the one child policy. Also many Asian cities
will benefit from continued urbanization, and job creation.
In summary demographics suggest tough times especially for Western markets (The Great Depression Ahead) from now until 2020-23, then after that a strong Global Growth and commodities period from around 2020 to 2035-40.
Take a look at www.hsdent.com
2015 predications from some arguably the top 4 market forecasters – Dent, Roubini, Schiller and Paulson
Harry Dent (US Demographer) predicts
2010-2020 to have horrific share market falls (particularly in the US),
and a Global Depression similar to 1929-1930’s. Harry believes
a Chinese property crash may be the trigger to set off GFC mark II.
He forecasts the US Dow will drop from 17,000 to below 6,000 - that’s
a 65% fall. See graph below.
Nouriel Roubini (who was famous for
successfully predicting the GFC) believes 2015 will be a good year for
the US economy and hence the US share market can do ok despite being
a bit overvalued. On Australia he says, “The slowdown in China
and a tighter federal budget will pull Australia's growth down to as
low as 2 per cent next year, prompting interest rate cuts and a 20 per
cent slump in the value of the Australian dollar, a prestigious global
forecaster says”. Roubini predicted this when the AUD was at 89
cents that makes it fall to about 71 cents to the US dollar.
John Paulson – US Hedge Fund owner
famous for shorting the subprime mortgage market, Paulson & Co.
Inc. generated a $15 billion gain. He is currently keen on Gold.
Warren Buffet – The Worlds 2nd richest man and multi-billion-dollar investor is rumored by some to be preparing for a crash. The "Warren Buffett Indicator," also known as the "Total-Market-Cap to GDP Ratio," is breaching sell-alert status and a collapse may happen at any moment. Other reports are that Buffet is still positive on US stocks and the US economy.
Jeremy Grantham of GMO with $117 b under management is forecasting “another horrific stock market crash is coming”, and the next bust will be "unlike any other" we have seen”.
Matthew Bohlsen’s thoughts:
Or take a further look at “Best and worst predictions
of the past 25 years”.
Predicting a gigantic shift of money from Government Bonds to Shares
“2015 is the year that the US stock market will turn exceptionally bullish. The Aussie should follow, aided by a falling Aussie dollar and positive investor sentiment. I wouldn’t be surprised to see the Aussie dollar trading at 75 US cents sometime next year. We’re in the midst of a tremendous government bond bubble. 2015 will be a year when you see a GIGANTIC shift from debt to equity (share) markets. Governments are bankrupt all over the world. Europe is a basket case and is driving this debt to equities shift .France is bankrupt and will default (or delay payment) on its debts within the next three years. Portugal, Italy, Greece and Spain will also default on their debts. The European Union (EU) is falling apart. 2015 will be a year when punters hunt for yield and may be the year that the government bond bubble bursts.
Complete Summary of 2014 Share market Returns
Overall Global stocks rose a meager 3 percent this year, according to the MSCI All Country World Index, which is made up of stocks from both emerging and developed markets.
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