Just as I was preparing to analyse how much further US Treasury yields can fall, they staged a remarkable rebound the past week on stronger-than-expected data on employment and manufacturing in the US. The 10 year T-bond yield surged from a intra-week low of 2.46% to close the week above 2.7%.
The two most important data over the past week were the US non-farm payroll and the ISM Manufacturing index. Both came in better than expected. Also, in Asia, China and India continued to show strong momentum. China's PMI rose to 51.7 in August, marking an end to three consecutive months of declines and also the 18th straight month the index is above the boom-bust level of 50. India reported GDP growth of 8.8% in 2Q10 vs. 2Q09. Expansion in the manufacturing and services drove India's growth rate to its fastest pace since 2008.
So is it "risk on" again? The short answer is no as we do not expect these data to mark the bottom of the current mid-cycle. We should be expecting a further tug of war between strength and weakness in the global economy to play out for the next few quarters.
Ultimately, we see low rates and yields co-existing with a mildly bullish equities market as central banks remain accommodative and the global economy avoids another recession to chug along. In this "new normal", we expect capital to search for markets with superior growth as well as yield differential. We believe a focus on emerging markets assets with a buy on weakness strategy to yield absolute positive returns over the next year or so.
Monday, September 6, 2010
Friday, August 13, 2010
Get Ready For QE2...
After a very positive Q2 reporting season the focus of the investors is now shifting back to the economy. And here it seems that Ben Bernanke has seen some worrying signs. Or how else would one explain the QE2?
Thursday, July 15, 2010
China slows, Singapore grows...
Just a day after Singapore reported a sizzling second quarter GDP growth at 19.3% vs. the same period last year, China announced this morning that its economy grew by 10.3% for the same period. The data was better-than-expected for Singapore while a tad below for China.
For the first half, Singapore out-grew China with an 18% growth rate compared with China's 11.1%. The exceptionally strong growth for Singapore has been broad-based coming from stronger trade flows, banking services and visitor arrivals attributed to the two integrated resorts (Marina Bay Sands and Resort World Sentosa). With these figures, both the government and the private sector revised up their forecast for the full year 2010. The official estimate is now for growth between 13% and 15% while some economists predict a rate of up to 16.5%. This would place Singapore as the fastest growing economy globally, if realised.
Underscoring Singapore's strong performance is the economy's high leverage to its external environment. With the expected moderation in the G3 as these governments and their households cut spending to tackle their high debt levels, second half growth may be vulnerable. Still, even if growth turns out flat in the second half, full year growth would still be more than 15%. The upshot is with growth above trend, the MAS is likely to condone a stronger currency to contain price pressures. We expect the SGD to appreciate to 1.35 vs. USD in the coming months.
Meanwhile, China's 10.3% is no slouch. Although not as hot as Singapore's, it's still an incredible performance and must be seen in the context of policy tightening and a higher base of comparison. We have to remember that while the world was falling apart in early 2009, China still managed to pull in growth of 6%-8% due largely to the government's aggressive fiscal stimulus measures. As the fast pace of growth started to form pockets of bubbles, the government has since August applied brakes on certain sectors especially credit curbs to the real estate markets. The slowing growth may give policymakers slightly more breathing room to normalise policies. We do not expect a rate hike soon although we'll continue to see creeping appreciation of the RMB.
Even though China's economy seems headed in the right direction, there are still detractors. Some still see a rate above 10% as evidence that the economy is headed for a crash landing while others are worried that the slowdown coming at a time of global stress from sovereign debt crisis is a bad signal. It seems to me that when it comes to China, views are extremely polarised. What matters then is the markets. The Shanghai Composite Index rose immediately on the GDP news but by late morning drifted back into negative territory.
If indeed the economy achieves a soft landing as we expect, then we see further setbacks as long-term buying opportunity. Stocks have fallen almost 30% from its peak in August and is now trading at historically low valuation multiples. It may just be time for investors with longer horizon who are still bullish on China to drip back into this market.
For the first half, Singapore out-grew China with an 18% growth rate compared with China's 11.1%. The exceptionally strong growth for Singapore has been broad-based coming from stronger trade flows, banking services and visitor arrivals attributed to the two integrated resorts (Marina Bay Sands and Resort World Sentosa). With these figures, both the government and the private sector revised up their forecast for the full year 2010. The official estimate is now for growth between 13% and 15% while some economists predict a rate of up to 16.5%. This would place Singapore as the fastest growing economy globally, if realised.
Underscoring Singapore's strong performance is the economy's high leverage to its external environment. With the expected moderation in the G3 as these governments and their households cut spending to tackle their high debt levels, second half growth may be vulnerable. Still, even if growth turns out flat in the second half, full year growth would still be more than 15%. The upshot is with growth above trend, the MAS is likely to condone a stronger currency to contain price pressures. We expect the SGD to appreciate to 1.35 vs. USD in the coming months.
Meanwhile, China's 10.3% is no slouch. Although not as hot as Singapore's, it's still an incredible performance and must be seen in the context of policy tightening and a higher base of comparison. We have to remember that while the world was falling apart in early 2009, China still managed to pull in growth of 6%-8% due largely to the government's aggressive fiscal stimulus measures. As the fast pace of growth started to form pockets of bubbles, the government has since August applied brakes on certain sectors especially credit curbs to the real estate markets. The slowing growth may give policymakers slightly more breathing room to normalise policies. We do not expect a rate hike soon although we'll continue to see creeping appreciation of the RMB.
Even though China's economy seems headed in the right direction, there are still detractors. Some still see a rate above 10% as evidence that the economy is headed for a crash landing while others are worried that the slowdown coming at a time of global stress from sovereign debt crisis is a bad signal. It seems to me that when it comes to China, views are extremely polarised. What matters then is the markets. The Shanghai Composite Index rose immediately on the GDP news but by late morning drifted back into negative territory.
If indeed the economy achieves a soft landing as we expect, then we see further setbacks as long-term buying opportunity. Stocks have fallen almost 30% from its peak in August and is now trading at historically low valuation multiples. It may just be time for investors with longer horizon who are still bullish on China to drip back into this market.
Friday, July 9, 2010
IMF raises forecast for 2010...
The International Monetary Fund raised its forecast for global growth this year to 4.6% in the latest update of its World Economic Outlook report. This is up a tad from its previous 4.25% only in April. Growth in 2011 is maintained at 4.3%.
On the face of it, the upgrade in forecast seems positive and indeed the markets seized that opportunity to trade higher in equities and commodities as risk aversion took a bit of a backseat. This is not surprising given investors have been spooked in recent weeks by a possible growth downturn stemming from fiscal consolidation in Europe and softer data from China.
But beyond the headline upgrade, which the IMF explains that it's because of a stronger than-expected first half, the document highlighted increased risks for the global recovery. In fact, it warned that the road ahead is strewn with obstacles and dangers.
One of the major risks is focused on Europe where fiscal consolidation is likely to retard growth and cautioned that the implementation of cutbacks as well as adjustments to social entitlements could risk endangering the already fragile state of economic affairs in the region.
Furthermore, banks in the euro area remain cautious in lending to each other on fears of the quality and strength of their balance sheets which are saddled with problematic assets from government bond holdings.
This is not much more than what we already know over the past months. We are not complaining that the markets chose to take it positively. Perhaps the fact that it did not downgrade estimates for 2011 even though it had reduced estimates for all advanced economies bar the US is a positive sign.
For now, we would wait eagerly for the results of the European bank stress tests. Overall, we expect the results should be well received by the markets and that should eliminate a source of uncertainty in the markets. But I wouldn't be surprised that some would remain critical of the assumptions and scenarios used for the stress testing.
If that does not turn the sentiment on the banking sector, perhaps we should expect the ECB to consider more desperate measures on quantitative easing or even a rate cut... That is certainly not a market consensus view at this stage but a move that should not be dismissed.
On the face of it, the upgrade in forecast seems positive and indeed the markets seized that opportunity to trade higher in equities and commodities as risk aversion took a bit of a backseat. This is not surprising given investors have been spooked in recent weeks by a possible growth downturn stemming from fiscal consolidation in Europe and softer data from China.
But beyond the headline upgrade, which the IMF explains that it's because of a stronger than-expected first half, the document highlighted increased risks for the global recovery. In fact, it warned that the road ahead is strewn with obstacles and dangers.
One of the major risks is focused on Europe where fiscal consolidation is likely to retard growth and cautioned that the implementation of cutbacks as well as adjustments to social entitlements could risk endangering the already fragile state of economic affairs in the region.
Furthermore, banks in the euro area remain cautious in lending to each other on fears of the quality and strength of their balance sheets which are saddled with problematic assets from government bond holdings.
This is not much more than what we already know over the past months. We are not complaining that the markets chose to take it positively. Perhaps the fact that it did not downgrade estimates for 2011 even though it had reduced estimates for all advanced economies bar the US is a positive sign.
For now, we would wait eagerly for the results of the European bank stress tests. Overall, we expect the results should be well received by the markets and that should eliminate a source of uncertainty in the markets. But I wouldn't be surprised that some would remain critical of the assumptions and scenarios used for the stress testing.
If that does not turn the sentiment on the banking sector, perhaps we should expect the ECB to consider more desperate measures on quantitative easing or even a rate cut... That is certainly not a market consensus view at this stage but a move that should not be dismissed.
Wednesday, June 30, 2010
A Bump, Not A Slump...
Here's our latest investment outlook. This time, it’s not about football, although there would be a lot to write again... How important football really is was once again demonstrated in Australia: the day after the Socceroos were eliminated Prime Minister Rudd stepped down! However, unlike the coaches of some of the eliminated teams, he did not have to take the blame for the exit of the Socceroos. But perhaps his stepping down will pave the way for a review/amendment of the rather unpopular mining tax.
While we closely monitor the World Cup we don’t take our eyes off the financial markets. This month's edition of the Investment Outlook focuses on the threats to growth. While there are dark clouds out there, we remain in the camp of those who do not see a “double dip”.
Monday, June 21, 2010
China finally makes its move on RMB. But is this the real deal?
After months of intransigence, Beijing has finally announced a move to end the yuan's 23-month old peg at 6.83 against the USD. The announcement was made by the People's Bank of China at 7 p.m. on Saturday, 19-June-2010.
So is this the real deal the financial community has been eagerly waiting for?
For sure, those clamouring or hoping for an outright revaluation of the renminbi against the greenback were disappointed. Some even accused Beijing of posturing ahead of the coming G20 meeting in Toronto this weekend. They were hoping to prevail with a clear and transparent exchange rate policy from China.
But for us, this is the real deal. It is an unequivocal abandoning of the fixed rate regime for a managed float. Yes, we agree that they could have offered more in terms of details rather than a few statements couched in broad terms referencing "flexibility" in the exchange rate and ruling out "large scale" adjustments.
But what do you expect from China? Transparency is not exactly a hallmark at this stage of their development. And besides, in a managed float regime against a basket of currencies similar to Singapore's, the idea is not to give away the mechanics and the whole kitchen sink. In other words, don't expect predictability from them but you can be sure they'll strive for stability in their exchange rate with orderly movements. China simply doesn't want a volatile exhange rate that exist now amongst the G3 currencies.
The implications for this move is enormous. For one, this flexibility in the exchange rate frees up its monetary policy which theoretically had to be subsumed under the US Federal Reserve because of the peg. A stronger currency will also cap inflationary pressures in the country.
The longer term impact of a stronger RMB bodes well for domestic consumption as overall purchasing power increases. This will surely help China rebalance its economy towards a consumption orientation from the current investment and export driven model. Of course, this is no magic bullet. China still needs to look into helping its citizen reduce precautionary savings for education, health care and old age to boost disposable income for consumption.
We reckon that the central bank will probably move very cautiously and slowly in the initial months. With the RMB having appreciated substantially by 16% against the EUR since the start of the year, its current account surpluses shrinking and its terms of trade expected to deteriorate over wage hikes in the coming months, there is limited room to move against the USD from current levels.
Still, we think it is reasonable to expect a rate of 6.60 and below per USD within the next 12 months. The current spot rate is 6.8167.
So is this the real deal the financial community has been eagerly waiting for?
For sure, those clamouring or hoping for an outright revaluation of the renminbi against the greenback were disappointed. Some even accused Beijing of posturing ahead of the coming G20 meeting in Toronto this weekend. They were hoping to prevail with a clear and transparent exchange rate policy from China.
But for us, this is the real deal. It is an unequivocal abandoning of the fixed rate regime for a managed float. Yes, we agree that they could have offered more in terms of details rather than a few statements couched in broad terms referencing "flexibility" in the exchange rate and ruling out "large scale" adjustments.
But what do you expect from China? Transparency is not exactly a hallmark at this stage of their development. And besides, in a managed float regime against a basket of currencies similar to Singapore's, the idea is not to give away the mechanics and the whole kitchen sink. In other words, don't expect predictability from them but you can be sure they'll strive for stability in their exchange rate with orderly movements. China simply doesn't want a volatile exhange rate that exist now amongst the G3 currencies.
The implications for this move is enormous. For one, this flexibility in the exchange rate frees up its monetary policy which theoretically had to be subsumed under the US Federal Reserve because of the peg. A stronger currency will also cap inflationary pressures in the country.
The longer term impact of a stronger RMB bodes well for domestic consumption as overall purchasing power increases. This will surely help China rebalance its economy towards a consumption orientation from the current investment and export driven model. Of course, this is no magic bullet. China still needs to look into helping its citizen reduce precautionary savings for education, health care and old age to boost disposable income for consumption.
We reckon that the central bank will probably move very cautiously and slowly in the initial months. With the RMB having appreciated substantially by 16% against the EUR since the start of the year, its current account surpluses shrinking and its terms of trade expected to deteriorate over wage hikes in the coming months, there is limited room to move against the USD from current levels.
Still, we think it is reasonable to expect a rate of 6.60 and below per USD within the next 12 months. The current spot rate is 6.8167.
Thursday, June 17, 2010
"Investment Outlook"
The world seems to stand still from 11 June to 11 July. The World Cup is here and that means, at least in this part of the world, people pay more attention to football than to financial markets. Perhaps that is good...
As a firm with Swiss roots, we are of course delighted with the results so far. We believe that Switzerland has gone from a penny stock to a real growth story overnight. On the other hand, Spain’s budgetary problems seem to have affected the players. It is probably a pure coincidence that Spain is borrowing EURO 3.5 billion the day after the historic defeat against the Swiss. Rumours that these funds would be used to motivate the players are probably just that: rumours.
Among the blue chips, most nations have disappointed with their performance so far. England continues to have pretty lousy risk management (goal keeper!), while the French players bicker among themselves, just like in domestic politics. Not surprisingly, the best performance so far was “made in Germany”. “Die Mannschaft” played excellent football and the resource-rich Socceroos were unable to get something from the game, except some experience perhaps.
We can’t really see a decoupling of Emerging Markets and Developed Markets. While some Emerging Markets (Brazil, Ivory Coast) have done well, others have bitterly disappointed (South Africa, Cameroon). On the other hand, there were surprising performances from developed nations like the US and Japan, while others were less than convincing (Italy, France, Denmark). The first game of the Greek team was very much a reflection of the state of the nation. Nobody really wanted to work hard. No surprise then, that the hard running and working South Koreans were all over them.
One country remains closed to investors: North Korea. If we could, we would buy a call option on North Korea. There is genuine potential in that team.
Despite the disappointing results, the PIGS (Portugal, Italy, Greece, Spain) will recover, perhaps with the exception of Greece, and they can avoid a default in the group stage.
The World Cup now goes into the second round of group matches and we believe that the excitement is about to start. Let’s hope that we will have less excitement in the financial markets and that the markets will continue to stabilize. We can do with a bit less volatility for a while. At least for the duration of the World Cup!
Enjoy the games!
Best regards,
Urs Brutsch
PS: We will be back with a slightly more serious Investment Outlook soon
As a firm with Swiss roots, we are of course delighted with the results so far. We believe that Switzerland has gone from a penny stock to a real growth story overnight. On the other hand, Spain’s budgetary problems seem to have affected the players. It is probably a pure coincidence that Spain is borrowing EURO 3.5 billion the day after the historic defeat against the Swiss. Rumours that these funds would be used to motivate the players are probably just that: rumours.
Among the blue chips, most nations have disappointed with their performance so far. England continues to have pretty lousy risk management (goal keeper!), while the French players bicker among themselves, just like in domestic politics. Not surprisingly, the best performance so far was “made in Germany”. “Die Mannschaft” played excellent football and the resource-rich Socceroos were unable to get something from the game, except some experience perhaps.
We can’t really see a decoupling of Emerging Markets and Developed Markets. While some Emerging Markets (Brazil, Ivory Coast) have done well, others have bitterly disappointed (South Africa, Cameroon). On the other hand, there were surprising performances from developed nations like the US and Japan, while others were less than convincing (Italy, France, Denmark). The first game of the Greek team was very much a reflection of the state of the nation. Nobody really wanted to work hard. No surprise then, that the hard running and working South Koreans were all over them.
One country remains closed to investors: North Korea. If we could, we would buy a call option on North Korea. There is genuine potential in that team.
Despite the disappointing results, the PIGS (Portugal, Italy, Greece, Spain) will recover, perhaps with the exception of Greece, and they can avoid a default in the group stage.
The World Cup now goes into the second round of group matches and we believe that the excitement is about to start. Let’s hope that we will have less excitement in the financial markets and that the markets will continue to stabilize. We can do with a bit less volatility for a while. At least for the duration of the World Cup!
Enjoy the games!
Best regards,
Urs Brutsch
PS: We will be back with a slightly more serious Investment Outlook soon
Thursday, June 10, 2010
Singapore to grow 9% in 2010...
According to a recent survey of 19 economists by the Monetary Authority of Singapore (MAS) released yesterday, Singapore's economy is expected to expand 9% this year. This median forecast of 9% is at the upper bound of the government's own forecast of between 7% and 9% and is up from a previous survey of 6.5% done just 3 months ago.
The reasons: bigger jumps in manufacturing, exports and wholesale & retail trade. The much stronger than expected Q1 GDP print at 15.1% yoy was also factored into the latest forecast. Apparently those surveyed have also accounted for the recent developments in Europe which probably explains the wider distribution of forecast this time round which ranged from 6.5% to 12%. At the upper end of the range, Singapore's growth this year may even surpass China's. In fact, Nomura now expects Singapore to grow just slightly behind China for this year at 10.2% vs. the latter's 10.5%.
Underscoring this forecast upgrade is how Singapore's fortune is so strongly tied to the global trade cycle. The flip side of this leverage, as in any type of leverage, is higher volatility in either direction. Given the situation in Europe where governments are forced to retrench to contain debt, the dampening impact on global trade bears scrutiny.
The reasons: bigger jumps in manufacturing, exports and wholesale & retail trade. The much stronger than expected Q1 GDP print at 15.1% yoy was also factored into the latest forecast. Apparently those surveyed have also accounted for the recent developments in Europe which probably explains the wider distribution of forecast this time round which ranged from 6.5% to 12%. At the upper end of the range, Singapore's growth this year may even surpass China's. In fact, Nomura now expects Singapore to grow just slightly behind China for this year at 10.2% vs. the latter's 10.5%.
Underscoring this forecast upgrade is how Singapore's fortune is so strongly tied to the global trade cycle. The flip side of this leverage, as in any type of leverage, is higher volatility in either direction. Given the situation in Europe where governments are forced to retrench to contain debt, the dampening impact on global trade bears scrutiny.
Wednesday, June 9, 2010
Current perspective...
Perhaps before we start to blog, we ought to preface this with our current perspective on the markets.
We are on balance optimistic about the global economic recovery. We feel the current problems related to the European sovereign debt crisis will have a negative impact on the global economy but the recovery will remain intact.
Following from that, we remain positive on equities vs. bonds over the next year or so. And within equities, our preference is to stay constructive in Emerging Asia notwithstanding the enormous balancing act these economies have to perform to contain pockets of inflation and asset bubbles amidst a global rout caused by the sovereign debt crisis.
It remains to be seen if Greece and its political leaders will have the fortitude to continue implementing such severe austerity plans. The massive EUR750 bn package has bought it time. But the risk of a restructuring sometime down the road cannot be dismissed. Meanwhile, we expect the EU will have a mechanism to prevent such a scenario from happening again and this mechanism may also see some members voluntarily exiting the zone – more for political expediency rather than for economic reasons. Meanwhile, the EUR will remain structurally weak.
In the EM, especially Asia, central banks will have to start normalising rates sooner rather than later. The current debt crisis was a perfect excuse for some countries to hold off rate hikes. There was a genuine concern on the implications of the debt crisis on growth. But the real issue is the impact of more capital flows arising from higher rates, which the authorities have difficulty sterilising. China seems to be mulling some form of capital controls before actually moving on rates. Ultimately, I expect these economies to use a combination of policy rates, currency appreciation and administrative measures to tackle their problems. From a currency perspective, it continues to make sense to overweight a basket of emerging currencies against the G3 over the medium term, even if the USD remains king in the short term.
And finally for those concerned that we have not seen the end of the sovereign debt problems and that at some stage, the markets will frown upon Japan’s and America’s situation, Gold remains one of the better hedges against a debasement of paper currencies.
We are on balance optimistic about the global economic recovery. We feel the current problems related to the European sovereign debt crisis will have a negative impact on the global economy but the recovery will remain intact.
Following from that, we remain positive on equities vs. bonds over the next year or so. And within equities, our preference is to stay constructive in Emerging Asia notwithstanding the enormous balancing act these economies have to perform to contain pockets of inflation and asset bubbles amidst a global rout caused by the sovereign debt crisis.
It remains to be seen if Greece and its political leaders will have the fortitude to continue implementing such severe austerity plans. The massive EUR750 bn package has bought it time. But the risk of a restructuring sometime down the road cannot be dismissed. Meanwhile, we expect the EU will have a mechanism to prevent such a scenario from happening again and this mechanism may also see some members voluntarily exiting the zone – more for political expediency rather than for economic reasons. Meanwhile, the EUR will remain structurally weak.
In the EM, especially Asia, central banks will have to start normalising rates sooner rather than later. The current debt crisis was a perfect excuse for some countries to hold off rate hikes. There was a genuine concern on the implications of the debt crisis on growth. But the real issue is the impact of more capital flows arising from higher rates, which the authorities have difficulty sterilising. China seems to be mulling some form of capital controls before actually moving on rates. Ultimately, I expect these economies to use a combination of policy rates, currency appreciation and administrative measures to tackle their problems. From a currency perspective, it continues to make sense to overweight a basket of emerging currencies against the G3 over the medium term, even if the USD remains king in the short term.
And finally for those concerned that we have not seen the end of the sovereign debt problems and that at some stage, the markets will frown upon Japan’s and America’s situation, Gold remains one of the better hedges against a debasement of paper currencies.
Welcome to our blog!
Dear friends and business partners
We are trying out "new" technology to reach out to you in a more timely manner with our views and thoughts on the markets.
Perhaps to some of you who are more technologically savvy, weblogging is not new but already passe. Apparently, according to some study, people are losing interest in long-form blogging because attention span in the cyberspace is getting increasingly brief and mobile. The rage at least from what we know is micro-blogging and social networking where your status or what you want to say can be updated in a jiffy.
Anyway, so be it. Our intention is not to bore you with any long form investment analysis. That we do with our monthly investment outlook :). Instead, we just want to give you a flavour on what we are thinking at the moment and how they may eventually shape our investment views and strategy.
The format is informal and the frequency is whenever we have something to say. We really hope that you will find it interesting, if not useful. As usual, your feedback is most welcomed!
Best
Michael
We are trying out "new" technology to reach out to you in a more timely manner with our views and thoughts on the markets.
Perhaps to some of you who are more technologically savvy, weblogging is not new but already passe. Apparently, according to some study, people are losing interest in long-form blogging because attention span in the cyberspace is getting increasingly brief and mobile. The rage at least from what we know is micro-blogging and social networking where your status or what you want to say can be updated in a jiffy.
Anyway, so be it. Our intention is not to bore you with any long form investment analysis. That we do with our monthly investment outlook :). Instead, we just want to give you a flavour on what we are thinking at the moment and how they may eventually shape our investment views and strategy.
The format is informal and the frequency is whenever we have something to say. We really hope that you will find it interesting, if not useful. As usual, your feedback is most welcomed!
Best
Michael
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