CAPITAL WATCH A MESSAGE FROM IPP

Transcription

1 CAPITAL WATCH Oct 2010 Issue 23 Volume 5 A MESSAGE FROM IPP Since the beginning of 2010, IPP has maintained a view of the overall equity markets that is in favor of a broad sideway consolidation. Indeed, most major indices have been moving within a range. In more recent times, however, a more optimistic change appears to be revealing as India, Korea and Singapore have begun breaking out of said sideway patterns and are resuming bullish uptrends. There is a good possibility that other stock markets will follow this pattern in the months ahead. Fundamentally, we see strong Asian and Emerging Markets economies though the US and Europe are still en route to recovery. Equity valuation around the world is reasonable and definitely worth investing in for the long term. While unemployment in the west is still disappointing, we realise that the unemployment figure is a very lagging indicator. Companies refuse to resume hiring until they see a couple of years of good earnings and profits. Thus, when we finally see unemployment figures improving, markets should have already run up quite significantly. As such, we should not place too much emphasis on the weak employment data. It seems likely that we may be seeing the commencement of an uptrend and long-term investors should take advantage of the situation. Albert Lam Investment Director IPP Financial Advisers Pte Ltd

2 CAPITAL WATCH OCTOBER 2010 PAGE 1 WORLD IN PERSPECTIVE More Quantitative Easing to Sustain Recovery INSIDE THIS ISSUE: Federal Reserve Chairman Ben S. Bernanke signals a likely second round of quantitative easing, saying that the central bank s first round of large-scale asset purchases that ended in March was effective in spurring the economy and that further buying will probably help more. The central bank said in August it would use principal payments from its holdings of agency mortgage-backed securities and agency debt to buy Treasuries. It later announced late September that it is prepared to do more to help the economy and keep costs from falling. Many have speculated further quantitative easing to take place in attempts to bolster a stalling economic recovery in the US. Unemployment and the housing market remain sluggish and restrained, limiting recovery possible. Durable goods orders excluding transportation for August outperformed the forecast by more than two times, accompanied by more optimistic retail sales figures, indicating consumer sentiment might be gradually improving as scepticism about a second dip in the recession mounts. Despite inherent uncertainty, major US stock indices saw last month its biggest September rally in 71 years as risk appetites increased. Central banks in troubled economies are in the midst of a crisis of confidence, with monetary policies beginning to show limitations and markets responding by diverting their monies towards precious metals, commodities and other real assets as they doubt these monetary authorities abilities to regulate prices. 1 World In Perspective 2 US Update 3 UK & Europe Update 4 Asia & Emerging Markets Update 5 Potential Risks The Economy: At present, several issues weigh on the market; these include: US continues to face widespread unemployment, holding back its recovery. Europe s debt crisis gets more controversial; governments to repay a record 582bn of debt in 2011, up from 521bn this year, according to estimates. Japan s ailing economy has the Bank of Japan keeping its interest rate at a minimal, between 0% and 0.1%, and conducting comprehensive monetary easing a 5 trillion fund to buy government bonds and other assets. However, there are still optimistic points to consider: Improvements in weather in Russia, South America and Brazil bring crop prices back down to more sustainable levels after authorities announced more optimistic outputs. September s rally in major indices reflects improving investor sentiments. Bank of Japan s intervention successfully slows down the yen s dangerous advance. Data source: Bloomberg

3 PAGE 2 CAPITAL WATCH OCTOBER 2010 US UPDATE US ECONOMIC DATA Key Economic Data Points Expected Actual US Unemployment Rate (Aug) 9.6% 9.6% US Initial Jobless Claims (4 Sep) 470K 453K US Continuing Jobless Claims (28 Aug) 4445K 4569K US Nonfarm Payrolls -105K -54K US Pending Home Sales (MoM) -1.5% 5.2% Unemployment and housing data remain depressed, keeping consumer confidence at lows US Existing Home Sales (MoM) (Aug) 7.1% 7.6% US New Home Sales (MoM) (Aug) 6.9% 0.0% US Trade Balance (Jul) -$48.00B -$42.78B US Retail Sales (MoM) (Aug) 0.3% 0.4% US Retail Sales ex Autos (MoM) (Aug) 0.3% 0.6% The Fed considers second, smaller-scale, stimulus package to aid housing recovery US manufacturing industry sentiments disappoint Optimistic durable goods orders data tames concerns of a troubled recovery US NY Empire State Manufacturing Index (Sep) US Philadelphia Fed Manufacturing Survey (Sep) US Producer Price Index (MoM) (Aug) 0.3% 0.4% US Durable Goods Orders ex Transportation (Aug) 0.9% 2.0% Source: FXStreet Economic Calendar The major US stock indices round up September strong with the Dow and S&P500 up 5.86% & 6.38% respectively, and the NASDAQ up 9.44%. This can largely be accrued to investor sentiments gradually gaining resistance towards negative data coupled with the calming effects of optimistic reports on fears of a failing recovery. As unemployment hovers close to a 26-year high, a lack of government incentive for homebuyers and an increase in foreclosures taking its toll on the housing market, depressed home values and a lack of employment opportunities may keep shaking confidence, further holding back spending. The lack of jobs further contributes to an increasing number of foreclosures. Since the government tax credit on housing ended in April, the housing industry has struggled, answering for builder shares being depressed. Rife speculation of further quantitative easing to come Manufacturing sentiment cools; underscoring the Federal Reserve s forecast of modest US growth in coming months. More optimistically, however, its durable goods orders increases more than expected while capital equipment purchases rebounds 4.1% after falling in July, possibly limiting the downside on US s manufacturing sector. Our outlook for the US is neutral both short term and longer term.

4 CAPITAL WATCH OCTOBER 2010 PAGE 3 UK & EMU UPDATE UK & EMU ECONOMIC DATA Key Economic Data Points Expected Actual UK GDP (YoY) (Q2) 1.2% 1.2% UK RICS House Price Balance (Aug) -11% -32% UK Jobless Claims Change (Aug) -5.0K 2.3K UK Retail Sales (MoM) (Aug) 0.3% -0.5% UK Consumer Price Index (MoM) (Aug) 0.3% 0.5% UK s GDP advances the fastest in 9 years, backed by massive government spending and thriving construction Germany Factory Orders (MoM) (Jul) 0.5% -2.2% Germany Industrial Production (YoY) (Jul) 12.5% 10.9% Germany ZEW Survey Economic Sentiment Germany IFO Business Climate (Sep) EMU GDP (QoQ) (Q2) 1.0% 1.0% UK s housing prices fall the most in 18 months in September EMU Retail Sales (MoM) (Jul) 0.2% 0.1% EMU Industrial Production (MoM) (Jul) 0.1% 0.0% EMU ZEW Survey Economic Sentiment EMU M3 (YoY) (Aug) 0.5% 1.1% Source: FXStreet Economic Calendar Germany s surging continues exports to bring show down signs unemployment of better consumer rates, boosting sentiment personal with sentiment consumption readings and Eurozone retail sales unemployment reading up remained at 10%, while inflation remains muted Doubts over Europe s ability to tide through its sovereign debt crisis Europe still faces a difficult economic recovery The UK experiences its fastest quarter of growth in nine years, fuelled by the biggest jump in government spending since 2008 and a surge in construction. The RICS Housing Market Survey, however, displays the lowest reading since May 2009, with more surveyors continuing to see falling than rising prices; and the number of claims for unemployment benefits rises in August for the first time in 7 months. Bank of England policy makers hold their bondpurchase plan at 200bn and leave the benchmark interest rate at a record low of 0.5%, signaling a move closer to adding stimulus to the economy. German business confidence unexpectedly rises in September to its highest level in three years. Though other data may indicate a loss of momentum since it posted its higher-than-expected GDP growth for Q2, the Bundesbank said in September that the recovery remains intact as companies raise profit forecasts and falling unemployment boosts private consumption. Even as export growth slows, Germany s recovery may be bolstered by rising consumer spending. Growth in Europe slows as the global economy cools and austerity measures targeted towards reigning in budget deficits and reducing borrowing costs undermine the recovery. Reviving exports helped the euro-area expand 1% in the second quarter, the fastest pace in four years. This recovery is, however, evidently uneven among the European countries. We do not recommend Europe in the short term but it appears underweight in the longer term.

5 PAGE 4 CAPITAL WATCH OCTOBER 2010 ASIA & EMERGING MARKETS UPDATE ASIA & EMERGING MARKETS ECONOMIC DATA Key Economic Data Points Previous Current Brazil GDP Growth (Q1) 2.74% 1.20% Brazil Inflation Rate (Aug) 4.60% 4.49% Brazil Jobless Rate (Aug) 6.9% 6.7% Brazil Current Account (Q2) -5.03B -5.18B Russia GDP Growth (YoY) 2.9% 5.2% Brazil s central bank intensively buys dollars to curb its real s advance Russia Inflation Rate (Aug) 5.50% 6.10% Russia Jobless Rate (Jun) 7.3% 6.8% Russia Current Account (Q1) $16.26B $33.32B India GDP Growth (YoY) 8.60% 8.80% Russia s central bank deems current inflation acceptable India Inflation Rate (Jul) 13.73% 11.25% India Jobless Rate 7.32% 7.32% India Current Account (Q1) -$12.187B -$12.998B China GDP Growth (YoY) 11.9% 10.3% Indian stocks soaring China Inflation Rate (Aug) 3.30% 3.50% China Jobless Rate (March) 4.30% 4.20% China Current Account (Q2) $53.6B $70.5B Source: Trading Economics China s yuan faces pressures of revaluation Swings in the Brazilian real decline towards a two-year low ahead of presidential elections as the central bank steps up dollar purchases to offset a surge in investment in the country s stock and fixed-income markets. Policy makers are attempting to curb a rally on its real that has gained 35% since end Banco Central do Brasil bought $5.9bn in the first 12 days of September, the most in 11 months. It has purchased dollars every day since 9 July, swelling its foreign reserves to a record $274bn. The real continues to advance as record low borrowing costs in US and Europe prompt investors to seek higher returns in faster-growing developing nations. Russia s central bank maintains benchmark interest rates as it decides inflationary pressures are acceptable and makes known no intention to alter borrowing costs in the coming months. This quarter, Russia borrows a record 293bn rubles, seeking to raise 300bn rubles in the next, to finance its budget deficit after the worst economic slump last year since the Soviet era. Indian stocks have attracted a record foreign investment this year of 834.7bn rupees, an increase of 55%, fuelling a rally that made its equity index the best performer among the world s 10 biggest markets and the most expensive in Asia and among the BRIC markets. The central bank sets the reference rate at yuan per dollar on 29 September, the strongest since a fixed exchange rate ended in July The US House of Representatives is due to vote on legislation allowing American companies to petition for higher duties on Chinese imports. China s currency has risen 2.1% since a two-year dollar peg was scrapped on 19 June. In the short term, Asia and Emerging Markets appear overweight and neutral respectively, while both are overweight in the longer term.

6 CAPITAL WATCH OCTOBER 2010 PAGE 5 POTENTIAL RISKS High US unemployment & consumer indebtedness continue to threaten delinquency and decline in US home values. Persistently high unemployment and a growing shadow inventory building up in the US this month as new record high foreclosures are hindering recovery though positive data elsewhere are diminishing threats of a second dip in recession. Consumer-driven growth in the US has improved but remains weak. Retail sales numbers are a key data point to watch going forward since some 70% of its economy comprises of consumer-led growth. A collapsed US real estate market threatens to remain depressed, alongside the risk of the bursting of a potential Chinese real estate bubble. Currency movements may swing investment portfolios performance. A falling US dollar alongside mounting pressures to revalue the Chinese yuan, in particular, will be essential to keep an eye on. Corporate earnings results have proven to be good thus far, with heavyweights largely reporting better-than-expected earnings. However, whether the earnings pace can keep up remains to be seen with Q3 earnings to be reported next month. It is interesting to note that some major financial institutions such as Morgan Stanley, has posted its lowest trading revenue since December 2008 this quarter. Though economic data on the US and Emerging Markets suggests recovery is in place, the ending of the first-time buyers credit incentive and other stimulus programs leaves investors worried that the recovery can be derailed by a crisis in Europe. Home sales amounts have already fallen close to 30% since the stimulus has come to an end. However, there is speculation regarding a possible second stimulus package of a smaller scale to give the housing industry another much-needed boost. The Treasury is scheduled for three notes sales in the first week of October. This is likely to affect the American currency and its bonds further. Sentiments regarding the US appear to be improving gradually though still weak in general. Deflationary risks represent serious problems in countries in Europe while emerging markets suffer inflationary risks. India has hiked interest rates rapidly to combat this. Bonds with higher dollar duration and convexity are likely to be highly susceptible to potential rate hikes while high-yield bonds and inflation-linked bonds are more resistant since they are generally of shorter durations. European debt is a concern not to be overlooked. Recently, the yield on Irish bonds has risen to a record high against the German bund, and Portugal s borrowing cost has also increased as the countries struggle to rein in their budget deficits. Chinese curbs to keep growth sustainable may backfire on the government should the economy cool more than expected. The risk of this, however, is not substantial at this point in time. The tension between China and Japan over the sovereignty of the uninhabited islets in the Eastern China Sea could disrupt the market should it escalate into a conflict. Important Notice: Capital Watch is intended for general information only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Opinions expressed in this newsletter are subject to change without notice, and no part of this publication is to be construed as an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. The information herein was obtained from various sources; IPP do not guarantee its accuracy or completeness. IPP will not accept any liabilities whatsoever whether direct or indirect that may arise from the use of information in this newsletter. The company, its directors, connected persons or employees may from time to time have interest in the securities mentioned in this newsletter. Past performance is not necessarily a good indicator for future returns. Please consult your IPP FAR for any intended implementation.