Economic woes return to the fore

Transcription

1 Volume 9, Issue 2 12 January 2009 Economic woes return to the fore The ailing economy is back in the spotlight as negative news on the corporate, labour and consumer fronts overshadows hopes that aggressive policy action will get both economy and financial markets back on track. A rash of profit warnings, poor unemployment data and falling export numbers last week put an early end to an equity rally that began late last month. Most markets gave up gains made at the start of the year, and this even as the Bank of England cut interest rates to a historic low and US president-elect Obama announced details of his upcoming stimulus plan. Markets were also startled by the revelation of a billion-dollar accounting fraud at one of India s biggest IT companies, while Israel s ongoing incursion in Gaza rattled oil markets. Jan 9 return return return (USD) S&P 500: % -1.43% -1.43% DJ Euro STOXX: % +2.42% -2.22% Nikkei 225: % -0.26% -0.10% MSCI Asia ex Japan: % +0.95% +0.03% In this issue: US equities: Fairly optimistic in 2009 but expect bumps along the way Asia equities: Look at momentum to navigate bear rallies Page 1 of 9

2 S&P 500 (5/1/09 to 11/1/09) Monday Jan 5th Tuesday Jan 6th Wednesday Jan 7th Thursday Jan 8th Friday Jan 9th Day gain/loss Day gain/loss Day gain/loss Day gain/loss Day gain/loss S&P: -0.47% S&P: +0.78% S&P: -3.00% S&P: +0.34% S&P: -2.13% STOXX: +1.01% STOXX: +1.11% STOXX: -1.22% STOXX: -0.92% STOXX: -0.98% Nikkei: +2.07% Nikkei: +0.42% Nikkei: +1.74% Nikkei: -3.93% Nikkei: -0.45% MSCI Asia ex Japan: +2.66% MSCI Asia ex Japan: +0.69% MSCI Asia ex Japan: -0.34% MSCI Asia ex Japan: -3.82% MSCI Asia ex Japan: -0.73% US: Auto sales at the major automakers plunged in Dec to deliver the worst annual performance since In December, sales at GM fell 31%, Toyota 37%, Honda 35%, Ford 32% and Nissan 31% and Chrysler 53%. US: Nov construction spending fell 0.6%, less than half the consensus forecast of -1.4%. Sept and Oct spending were revised up so overall this is much better than expected. EU: Germany is considering spending an extra 50b euros, nearly double the amount expected a week ago, to counter the recession. EU: UK consumer confidence fell four points in Dec to the lowest level since at least 2004 as the recession deepened and unemployment rose. US: Pending home sales data showed a 4% decline in Nov, as mortgages were more difficult to obtain in the fall of. Further weakness in home sale closings is very likely ahead. US: The ISM manufacturing index for Dec rose to 40.6 from 37.3, above consensus expectations of a fall to But the trend remains firmly to the downside given slowing retail sales. EU: Euro zone inflation fell in Dec to the lowest in more than two years as oil prices plunged and consumer spending slumped. Consumer-price inflation slowed to 1.6% year-on-year, from 2.1% in Nov, moving below the ECB s 2% ceiling for the first time since Aug Lower inflation may give more scope for the ECB to extend interest-rate cuts. US: Payroll processor ADP estimated that 693,000 private jobs were lost in Dec. while estimates for Nov job losses were revised to 476,000, from 250,000 previously. EU: Producer prices fell 1.9% in Nov from Oct, the most in 27 years, as oil prices declined. This is an indication that inflation may slow further and give the ECB more scope to cut interest rates. Others: The chairman of Indian IT company Satyam Computer Services says he inflated the company s profits and assets by US$1b. The news sent Satyam s share price plunging 80% and rocked India s Sensex, which tumbled 7.3%. Others: Taiwan cuts its interest rate by 50bps to 1.5%, the 6 th cut since late Sept, and after reports showed an unprecedented decline in exports that threatens to push the economy into recession. Others: Indonesia cuts its benchmark interest rate by 50bps to 8.75%. Over the Weekend Saturday Jan 10th & Sunday Jan 11th US: Walmart cut its 4 th quarter earnings forecast, after disappointing Dec sales, and followed a series of glum corporate developments from blue chips such as Intel, Alcoa and Time Warner. US: Initial jobless claims fell unexpectedly by 24,000 to 467,000 in the week ended Jan 3, the lowest level in almost three months. But the total number of people getting benefits rose to 4.6m, a 26- year high. EU: The Bank of England cut interest rates as expected by 50bp to a record low of 1.5%. While the UK economy is likely to continue to contract, Citi analysts believes there may be a short-term window for pound appreciation as late- oversold positions reverse. EU: Economic confidence fell in Dec, to 67.1 points from Nov s 74.9 points. This record low was below the consensus forecast of 71.8 and Citi s forecast of This reading supports Citi s forecast of an ECB rate cut of 50 bps by next week. US: The US economy lost 524,000 jobs in December, the largest decline since The jobless rate rose to 7.2% in December from a revised 6.8% in November. Most job losses were in the service sector, which shed 273,000 jobs. Manufacturing jobs fell by 149,000 in December, the largest monthly decline since August EU: Industrial production plunged throughout Europe in November as the global recession deepened, adding pressure on the European Central Bank to cut interest rates. Industrial output in Germany fell a seasonally adjusted 3.1% from October, In France, production tumbled 2.4% from the prior month for the fourth monthly decline. Others: The Bank of Korea cut its policy rate by a halfpoint to a record low of 2.5%, to revive Korea s exportdependent economy. EU: Ukraine, Russia and the EU struck an agreement on Sunday that should enable the resumption of Russian supplies via Ukraine to Europe, large parts of which have been plunged into a mid-winter energy crisis. Others: Fighting continued to rage in Gaza between Israel and Hamas despite a UN Security Council Resolution passed on Thursday calling for an immediate ceasefire. Please note: Citi analysts' comments are in italics., Reuters, Citi Investment Research Page 2 of 9

3 S&P 500 (6/10/08 9/1/09) Oct-08 Nov-08 Dec-08 Jan-09 Economic Outlook Deteriorating labour markets point to further downside risks Despite signs of loosening credit, conditions in markets still appear far from accommodating, with recent data indicating that the recession still has some sustaining forces behind it. Leading up to last week s employment report, surveys and recent data have been pointing to a sharp deterioration in labour markets toward yearend, implying further downside risks. The Week Ahead 13/1 Citi analysts anticipate November s trade balance to come in at -US$49 billion against consensus estimate of -US$51 billion. 14/1 Total retail sales less autos in December expected to fall by 1.4%, slightly better than the 1.6% decline in November. Citi analysts anticipate business inventories to register a 0.3% loss in November against consensus estimate of - 0.5%. 15/1 Citi analysts expect Producer Price index to fall to -1.6% in December compared to consensus estimate of -2.0%. 16/1 Industrial production may to slow to -1.0% in December, down from -0.6% in November. In Citi s opinion, hopes for stabilising the economic slide, including unemployment, could likely hinge on potential boosts to final demand from fiscal plans taking shape. That said, Citi analysts maintain that a normalisation in financial conditions remain key, as recovery may not be sustainable despite large-scale fiscal expansion until conditions improve. Equities Fairly optimistic in 2009 but expect bumps along the way Prior week S&P 500: % -1.43% DJIA: % -2.02% Nasdaq: % -0.34% History has borne out that the direction of the S&P 500 in January is most often a good measure for the overall year s performance. However, Citi analysts caution that looking at historical data alone, especially in an environment that has not been seen in generations, seems a bit too simplistic. Instead, the response of markets to data such as employment figures, corporate earnings guidance, government policy, or even energy prices could be far more important to investors. Nevertheless, Citi s fairly optimistic view for the year overall remains unchanged, however they caution that bumps along the way are expected as the economic damage globally appears relatively severe. Prefer: Consumer discretionary, Financials, Health Care, Industrials, Information Technology Less in favour: Consumer Staples, Utilities Bonds High grade corporate bonds favoured for attractive risk-reward trade-off Jan Jan 2 Dec 26 2-yr Try: 0.76% 0.83% 0.89% 5-yr Try: 1.51% 1.65% 1.52% 10-yr Try: 2.39% 2.37% 2.14% Treasuries: Citi analysts remain underweight US treasuries, as current prices appear over-valued and may start to decline once conditions begin to normalise and supply concerns take hold. High-Grade Corporates: Citi analysts prefer high-grade corporate bonds given that the risk/reward trade-off seems more attractive and valuations appear compelling. High-Yield Corporates: Given the weak economic outlook, high-yield defaults are likely to increase. Citi analysts are thus cautious about the sector, favouring to wait on the sidelines until volatility subsides. EMD: Citi analysts remain neutral on emerging-market bonds. For investors who are seeking exposure, Citi analysts favour countries which have sound economic fundamentals and minimal amount of political risk. Currencies USD: May appreciate relative to other developed market currencies 3-month forecasts EUR/USD USD/JPY USD/CAD According to Citi analysts, the dollar s appreciation over the summer reflected, in part, evidence that economic weakness was not solely concentrated in the US, and that the current financial stress remains a global phenomenon. In particular, Citi analysts expect the greenback to continue to appreciate relative to other developed market currencies, especially the euro and the pound. Page 3 of 9

4 STOXX (6/10/08 9/1/09) Oct-08 Nov-08 Dec-08 Jan-09 Economic Outlook Further MPC easing expected in 2009 The sharp fall in inflation and inflation expectations and plummeting real economic indicators may see the European Central Bank (ECB) cut interest rates by 50 bps this January. Going forward, Citi analysts expect further interest rate cuts to around 1% in the middle of the year and see a rising possibility of interest rates to or at zero. The Week Ahead 13/1 Netherlands Industrial Production likely to increase slightly to -0.3% in November, up from -2.3% in October. 14/1 France s Consumer Price Index expected to come in at -0.3% in December, compared to -0.5% in November. Germany s annual GDP may drop to 1.4% in December 08, compared to 2.5% in December 07. Industrial Production in Italy may see a drop of 1.4% in November, down from - 1.2% in October. 15/1 Spain s Consumer Price Index likely to fall to -0.5% in December, compared to -0.4% in November. 16/1 Unemployment rate in Sweden could hit 4.0% in December, up from 3.5% in November. If rates reach this level, the ECB is likely to start quantitative easing through outright asset purchases. Equities Remaining focused on strong balance sheets and positive earnings trends Prior week STOXX: % +2.42% FTSE 100: % +0.32% DAX: % -0.55% has seen central banks around the globe cut interest rates aggressively. Citi analysts anticipate more rate cuts to come and see potential for unconventional policy action. While valuations have fallen to levels last seen since the 1970s, Citi analysts caution that risks continue to remain elevated. As a result, Citi analysts continue to focus on defensive growth and are sticking to their strategy of favouring high dividend yielding companies with strong balance sheets and positive earnings trends. Prefer: Basic Resources, Health Care, Insurance, Food & Beverage, Media, Telecoms Bonds Slowing growth prompts caution for Euro government bonds Jan Jan 2 Dec 26 2-yr Try: 1.51% 1.73% 1.75% 5-yr Try: 2.27% 2.29% 2.33% 10-yr Try: 3.02% 2.96% 2.94% Citi analysts see some opportunities among high quality, investment grade corporate bonds after credit spreads have risen to record levels. However, significant risks remain in the corporate bond space, in their view, with the rate of corporate failures expected to rise. Currencies EUR: Further weakening expected GBP: Likely to remain weak 3-month forecasts EUR/USD GBP/USD USD/CHF In Europe, the euro-area and UK economies appear headed for a more severe downturn than in the US, and this is likely to drag down the euro and pound against the dollar. The pound, in particular, is expected to remain weak well into the year, reflecting the UK s deep recession, ballooning fiscal deficit and falling interest rates. Page 4 of 9

5 Nikkei 225 (6/10/08 9/1/09) The Week Ahead 15/1 Citi analysts believe that November seasonally adjusted core private machinery orders (excluding volatile ships and electric power) likely rose 1.1% month on month after 4.4% decline in October Oct-08 Nov-08 Dec-08 Jan-09 Economic Outlook Drastic decline in exports to Asia Until recently, Asian and commodity-producing countries were the main drivers of Japanese exports. However, recent figures indicate that exports to these destinations have started to slow. After rising 0.2% quarter on quarter in the third quarter, real exports to Asia in the October- November period plunged 9.1% compared to the third quarter average. The primary factor for the sharply lower exports was the weakness in demand for intermediate part and capital good headed to Asia. These goods are used to make end products bound for Europe and the U.S. Citi analysts believe that in 2009, shipments to Asia are likely to see the largest falls compared to other Japanese export destinations. However, Citi analysts believe that exports to China may fare better and slow only slightly as domestic demand is expected to remain relatively solid. It is also expected that exports to commodity suppliers may avoid an outright decline, however they are likely to decelerate substantially. Equities Equity market recovery may come by Spring 2009 Prior week Nikkei: % -0.26% Topix: % -0.49% Faced with a once-in-a century crisis, the Japanese government may ignore fiscal discipline to jumpstart the economy. In light of large-scale US stimulus measures, dovish global monetary policy, and the prospect of a softening yen, Citi analysts believe that equities may recover by spring Promising picks include environmental and energy conservation sectors, and sectors positioned to gain from the growth of emerging markets. Citi analysts see strong growth prospects in solar power and car batteries, particularly with the Obama administration s plans to subsidize renewable energy and plug-in electric cars development, and the Japanese government s plans to subsidize residential solar power units Prefer: Financials, domestic demand sectors, capital goods, consumer durables Less in favour: Defensives, domestic cyclicals Bonds Increased issuance may limit downside on Japanese government bond yields Jan Jan 2 Dec 26 2-yr Try: 0.38% 0.39% 0.42% 5-yr Try: 0.75% 0.69% 0.74% 10-yr Try: 1.30% 1.17% 1.21% The Bank of Japan could likely maintain interest rates at 0.1% over the year, thus limiting upward movements in ten-year Japanese government bond yields. At the same time, Citi analysts believe that there are valid concerns over rising government deficits, higher government spending and declines in tax revenues, which may raise the issuance of Japanese government bonds in excess of 30 trillion yen. With risk appetite low among investors, there are doubts about the willingness of investors to absorb such an increase in supply without greater compensation, which could raise yields on 10-year Japanese government bonds. It therefore appears that Japanese government bonds could likely offer poor returns over the coming year. Currencies JPY: Modest depreciation expected 3-month forecast USD/JPY The Japanese currency is expected to appreciate against the greenback through the year, possibly touching low 80s to the dollar. The yen s gain, however, may be tempered if its rise overly hurts Japan s exportdependent economy. Japanese policymakers may intervene in the currency market to help the country s exports stay competitive in a weak global market. Page 5 of 9

6 MSCI Asia ex Japan (6/10/08 9/1/09) Oct-08 Nov-08 Dec-08 Jan-09 Economic Outlook Falling exports and rising unemployment to spur rate cuts Export weakness is deepening as the external environment continues to weaken, not least evident in the US labour market. Trade data from China and the Philippines this week is likely to paint a similarly poor picture as last week s figures from Indonesia, Malaysia and Taiwan. In particular, China s exports may be set for even sharper contraction going forward as they catch up with the even sharper falls recorded by the country s imports so far. The country is expected to record a US$10 billion shrinkage in trade surplus in December and this is likely to be a turning point for its trade balance. Still, China is likely to post a US$288 billion trade surplus for, up from US$262 billion in But this year, trade is expected to subtract from GDP growth for the first time since Beyond export deterioration, the global recession is starting to hurt labour markets as retrenchments rise and job creation falls. The unemployment rate in Korea is expected to hit 3.3% as the pool of jobs declines amid economic contraction. In Singapore, rising retrenchments, coupled with falling tourist arrivals, should mean leaner times for retailers. The good news is that with the inflation threat largely out of the way, there is greater scope for monetary easing, as seen in Korea, Indonesia and Taiwan last week, and as expected in Thailand this week. The Week Ahead 10-13/1 China: December exports probably fell 9.4% year-on-year, accelerating from November s 2.2% decline. 12/1 India: Factory output likely grew 3.6% year-on-year in November, rebounding from October s 0.4% contraction, as base effects offset deteriorating global and domestic markets. 13/1 Philippines: November exports likely plunged 11%, amid falling commodity prices and a global recession. 14/1 Korea: The unemployment rate in December should clock in at 3.3% as severe economic contraction suggests a significant decline in the number of jobs from the previous month. Thailand: Another 50bp cut in the policy rate to 2.25% is expected as deflationary risks rise amid weak economic prospects. 15/1 Singapore: Retail sales probably shrank 4.5% in November, worse than October s 3.6% contraction, as rising retrenchments and falling tourist arrivals take their toll. Equities Look at momentum to navigate bear rallies Prior week MSCI Asia ex Japan: % +0.95% Asian stocks appear cheap and oversold, with the average price-to-book value ratio at 1.4 times. In 27 of the past 33 years, the region has traded at a higher multiple. Still, it is too early to call for a full recovery, and history suggests that the current cycle is only about half-way through. Valuation downcycles typically last 21 to 23 months and the current cycle is in its 15th month. In the meantime, oversold markets may give rise to bear market rallies, even before a full recovery is underway. Given current valuations and sentiment, investors may wish to look for opportunities to invest. Based on past recessions, Citi analysts warn against shifting to small- and medium-sized companies. Prefer: Big companies, cash flow generators, dividend payers Bonds Remaining cautious on the corporate bond outlook The financial crisis is only starting to hurt real Asian economies, suggesting that growth is likely to decelerate in the region. This should favour high-grade corporate bond issuers as they should be better positioned generally to deal with tighter economic and liquidity conditions, even as earnings and high-grade credit quality are likely to weaken. Investor de-leveraging and a near capitulation in the US and EU financial systems have seen Asian highgrade spreads soar even into uncharted territory. But Citi analysts believe credit spreads could potentially widen more in the first quarter of 2009 as poor economic news continues to stream in. Thus Citi analysts remain cautious on the Asian fixed income space and prefer corporate bonds issued by defensive, stable/ cash generative, unleveraged sectors. For investors with a longer-term perspective, the region s investment-grade corporate bonds may still offer select opportunities despite expected volatility in the immediate future. Currencies AUD: Expected to remain volatile amid deleveraging of carry trade 3-month forecasts AUD/USD USD/SGD USD/CNY Falling commodity prices and interest rate cuts are expected to cast a pall over the Australian dollar in the near term. But the currency may recover some lost ground later in the year, especially if China, the biggest buyer of Australia s commodities, avoids the worst of the global downturn. Page 6 of 9

7 Global Indices (As at 9 January, 2009) Previous Week's Close 52-Week High 52-Week Low (USD) United States DJIA % -2.02% -2.02% S&P % -1.43% -1.43% Nasdaq % -0.34% -0.34% Europe DJ Euro STOXX % 2.42% -2.22% FTSE % 0.32% 4.36% DAX % -0.55% -5.05% Japan Nikkei % -0.26% -0.10% TOPIX % -0.49% -0.34% Asia MSCI Asia ex Japan % 0.95% 0.03% Hong Kong Hang Seng % -0.07% -0.16% Shanghai Composite Index % 3.93% 4.45% Taiwan Weighted Index % -1.16% -3.08% Korea KOSPI % 9.22% 5.78% Mumbai Sensex % -0.63% -1.66% Singapore Straits Times Index % 2.52% -0.76% Kuala Lumpur Composite % 4.83% 2.44% Thai Stock Exchange % 2.02% 1.74% Jakarta Composite Index % 4.52% 2.60% Philippines Stock Exchange Index % 5.98% 6.82% Australia All Ordinaries % 0.58% 0.80% Commodities Gold % -2.23% -3.16% Oil % -8.45% -8.45% Fixed Income Citigroup World Government Bond Index % -0.54% -0.54% Page 7 of 9

8 Global Currencies (Data as at 3 December, ) Source: CitiFX Asian Currencies (Data as at 8 January, 2009) Source: The Week Ahead Asia Edition Page 8 of 9

9 GENERAL DISCLOSURE Citi analysts refers to investment professionals within Citi Investment Research and Citi Global Markets (CGM) and voting members of the Global Investment Committee of Global Wealth Management. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information in this document has been obtained from reports issued by CGM. Such information is based on sources CGM believes to be reliable. CGM, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGM's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits or other obligations of, guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Some investment products (including mutual funds) are not available to US persons and may not be available in all jurisdictions. Investors should be aware that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If an investor changes residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Citibank does not provide legal and/or tax advice and is not responsible for advising an investor on the laws pertaining to his/her transaction. COUNTRY SPECIFIC Australia : This document is distributed in Australia by Citigroup Pty Ltd. Citigroup Pty Limited ABN , AFSL For a full explanation of the risks of investing in any investment, please ensure that you fully read and understand the relevant Product Disclosure Statement (PDS) prior to investing. Hong Kong : This document is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL"). Prices and availability of financial instruments can be subject to change without notice. Certain high-volatility investments can be subject to sudden and large falls in value that could equal the amount invested. Indonesia : This report is made available in Indonesia through Citibank, N.A. Indonesia Branch, Citibank Tower Lt 7, Jend. Sudirman Kav 54-55, Jakarta. Citibank, N.A. Indonesia Branch is regulated by the Bank of Indonesia. Malaysia : This document is distributed in Malaysia by Citibank Berhad. Philippines : This document is distributed in Philippines by Citicorp Financial Services and Insurance Brokerage Phils. Inc, Citibank N.A. Philippines, and/or Citibank Savings Inc. Investors should be aware that Investment products are not insured by the Philippine Deposit Insurance Corporation or Federal Deposit Insurance Corporation or any other government entity. Singapore : This document is distributed in Singapore by Citibank Singapore Limited (CSL). Co Reg. No K Where material is distributed by CSL, investors should note that Investment products are not subject to the provisions of the Deposit Insurance Act 2005 (Act 31 of 2005) of the Republic of Singapore or eligible for deposit insurance coverage under the Deposit Insurance Scheme. United Kingdom : This document is distributed in U.K. by Citibank International plc., it is registered in England with number Registered office: Citigroup Centre, Canada Square, London E14 5LB. Authorised and regulated by the Financial Services Authority. Page 9 of 9