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January 28 2015

Commentary by David Fuller

Why India Will Keep Growing Faster Than China

Here is the opening of this topical article by Allison Schrager for Bloomberg Business:

The economic growth race between India and China started in the late 1940s, around the time India gained independence and adopted democracy and China turned to communism. Given the sheer size of their populations, each has the potential to dominate the global economy but until recently, it's been no contest: In 2013, China's per capita gross domestic product was 4.5 times larger than India's.

The latest forecast suggests that the tide may be turning in India's favor, possibly for good. The World Bank anticipates (PDF) that, by 2017, India will be growing faster than China:

This is a short-term forecast based on some very specific circumstances. India, for example, now has a credible central banker doing sensible things like tackling inflation. The country's popular new government is finally building infrastructure and cutting the red tape that held the economy back for so many years. If India keeps it up, the World Bank expects its economy to grow 7 percent in 2017, up from 5.5 percent in 2014. Meanwhile, the forecast calls for growth in China (PDF) to slow as its government reduces spending, tightens credit, and unwinds its housing bubble. The bank expects China's growth to fall from 7.4 percent in 2o14 to a modest 6.9 percent in 2017.

 

David Fuller's view

Allison Schrager’s hypothesis is interesting and the outcome is likely to be important for the global economy.  Potentially, we will have two Asia Pacific superpowers with huge populations.  Today, only China can claim this status.  Inevitably, governance will be a key factor in their continued development. 

China’s governance over the last three and a half decades has clearly been much more effective since Deng Xiaoping became leader in 1978.  Currently, both China and India have strong leaders in Xi Jinping and Narendra Modi.  Both face serious problems of corruption, which can be the biggest impediment for GDP growth.  Both are changing the course of their economies: Modi with a root and branch overhaul to increase efficiency and productivity; Xi by creating a consumer economy to reduce dependence on heavy manufacturing for export.

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January 28 2015

Commentary by David Fuller

With India Bulls Everywhere, a Rare Look at the Risks

Here is the opening of this informative article by Jeanette Rodrigues and Kartikay Mehrotra for Bloomberg:

There are times in financial-market rallies where the gains become so spectacular and the euphoria reaches such a pitch that it becomes easy to forget about the risks.

India, it could be argued, is going through such a moment.

The benchmark stock index is at a record high, having gained 43 percent in the past 12 months; the rupee is Asia’s best performer this year; and the nation is poised to become the world’s fastest-growing major economy in 2016.

But there are risks, of course. There always are. Here’s a look at five of the biggest of them -- events ranging from a faster-than-anticipated surge in U.S. interest rates to renewed religious tension in India. All of them are capable of halting, or at least slowing, the market rally.

David Fuller's view

When you really like a market, it is also worthwhile considering what could go wrong, if only to keep one’s feet on the ground.  I had not appreciated one of the five factors listed in this article.  Additionally, there is another one which concerns me and it is not mentioned in the article. 

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January 28 2015

Commentary by David Fuller

Asian Democracy Surrounds China

Here is the opening of another interesting article, this time by James Gibney for Bloomberg:

Some Chinese commentators have brushed off the defeat of Mahindra Rajapaksa, Sri Lanka's pro-Chinese president, as a tactical setback to China's economic and strategic expansion in the region. And it's true that Sri Lanka will continue to need, and to benefit from, Chinese investment.

The real threat posed to China by Rajapaksa's surprising loss, however, is different. This marks the third big Asian election in the last 12 months in which voters have installed a new leader: first in India, where Prime Minister Narendra Modi thumped the incumbent Congress Party; then Indonesia, where Joko Widodo, an outsider,won over voters with his record of competence as governor of Jakarta; and now Maithripala Sirisena's upset victory in Sri Lanka. That kind of turnover at the top must give pause to China's Communist Party leaders, who see the mandate of heaven as an institutional birthright.

A look at the map is instructive: As Freedom House notes, "Over the past five years, the Asia-Pacific region has been the only one to record steady gains in political rights and civil liberties." On China's border, autocratic Myanmar has just gone ahead with the first municipal elections in six decades in Yangon, its biggest city, and plans to hold general elections in late 2015. In Taiwan, the ruling Nationalists (who favor closer ties with mainland China) just got a drubbing in local elections. In China's near abroad, Afghanistan's recent election--for all its flaws--also marked a significant step forward for its fledgling democracy. 

China itself is wrestling with how to keep officials honest without a free press, and how to hold them accountable for their performance without elections. Since Deng Xiaoping's revolutionary ascendance in 1978, China's Communist leadership has made mind-boggling gains in reducing poverty and increasing economic output. But the severity and extent of President Xi Jinping's current anti-corruption campaign, not to mention its politically motivated targeting, reflect the inevitable shortcomings of China's top-down approach to governance, which has also imposed enormous costs on its citizens' human freedoms.

David Fuller's view

This is unquestionably a problem for China’s unelected, authoritarian and generally unaccountable leaders, except to their party.  For decades China has buffered itself with dysfunctional and certainly undemocratic neighbours, but this is beginning to change.  More importantly, millions of Chinese citizens now travel abroad, as tourists and also students.  They will be increasingly aware of both the weaknesses and successes of democracies.  China’s authoritarian rulers can only maintain their control in a developing economy with an increasingly educated population, by outperforming their neighbouring countries.  That will not always be easy but since Deng Xiaoping China’s rulers have established a successful record by improving living standards.    

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January 28 2015

Commentary by David Fuller

Three Charts Showing Why the Fed Shrugged at Low Inflation

Here is the opening of Bloomberg’s summary following the Wednesday’s Fed meeting, written by Craig Torres and Aki Ito:

Here's the biggest news out of the Federal Reserve today: Janet Yellen and her colleagues acknowledged some measures of slowing inflation but didn't panic. An epic collapse in oil prices has dragged down what were already too-low readings on consumer prices, relative to the Fed's target of 2 percent inflation. Those developments didn't convince the Fed to change its tune.

The Fed statement did have some notable additions on inflation. First, Fed officials told us that lower oil prices will support growth because they have "boosted household purchasing power." Second, they blamed the low readings on inflation "largely" on energy prices, instead of "partly," the word they used in December.  The Fed policy committee nodded toward the bond market's perception that inflation risk is very low and said "market-based measures of inflation compensation have declined substantially in recent months." They also said they expect inflation to rise "gradually toward 2 percent over the medium term." The time horizon in that phrase is new, and underscores that officials still see low inflation as a temporary issue.

David Fuller's view

This is a good article.  I think the Fed will also assume that low oil prices are good for the global economy, although they will surely be factoring in a sharp slowdown in the USA’s fracking sectors.

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January 28 2015

Commentary by David Fuller

The Markets Now

Monday 23rd February at the East India Club, 16 St. James Square, London, SW1Y 4LH

 

David Fuller's view

If you live near London and attend our next seminar on 23rd February, you will meet another subscriber, David Brown, who has attended Markets Now and will return next month as our guest speaker.  He is a fascinating, visionary and accomplished individual whose subject will be The Third Industrial Revolution.  

You will find the speakers’ short bios in the latest brochure, and if Bruce Albrecht can join us once again in London he will also participate.  Delegates will be limited to 35 so I would not delay if you are interested in this event.  At approximately 8:30pm, following the presentations, speakers and many delegates adjourn to the East India Club’s American Bar for refreshments and further conversation.  I hope you can stay on and join us if you have the time. 

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January 28 2015

Commentary by Eoin Treacy

Sliding Oil Triggers LNG Drop as Indian Demand Seen Rising

This article by Anna Shiryaevskaya for Bloomberg may be of interest to subscribers. Here is a section: 

LNG prices in Japan, the world’s biggest buyer of the fuel, will probably plunge 35 percent in 2015 and Indian costs will decline 33 percent, according to Energy Aspects Ltd., a London- based consultant. Costs in Asia will this year average below $10 per million British thermal units for the first time in four years as new projects in Australia and the U.S. boost supply through 2016, Bloomberg New Energy Finance said.

Most LNG in Asia is linked to crude costs with a time lag of several months, so Brent’s 49 percent drop in the second half of 2014 hasn’t fully filtered into prices. Global demand for the gas chilled to minus 170 degrees Celsius (minus 274 Fahrenheit) will rise 9.8 percent this year amid increased imports by India and southeast Asia, after climbing 0.5 percent in the first nine months of 2014, according to Sanford C. Bernstein.

“We are already seeing, at current prices, renewed interest from Indian buyers,” Laurent Vivier, vice president for strategy and market analysis at Total Gas & Power, said Monday by e-mail. “There is some flexibility in the demand as well. When prices fall to current levels, it creates additional demand.”

 

Eoin Treacy's view

Consumers have bemoaned the link between natural gas pricing and crude oil over the last decade but the pendulum has swung back in their favour over the last six months. As major energy importers without significant domestic supply Japan and India are major beneficiaries of the decline in oil prices. 

For Japan, the fall in oil prices gives the BoJ additional room to stimulate the economy while consumers will see they have additional cash. The Nikkei-225 continues to firm within its three-month range and a sustained move below 16,500 would be required to question medium-term potential for a successful reassertion of the medium-term uptrend. 

 

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January 28 2015

Commentary by Eoin Treacy

Email of the day on Caterpillar earnings

I've attached below the transcript of CAT's conference call following its latest earnings report-I believe the company is a good bellwether for the global economy. A bit depressing, but does give you a good picture of slow growth worldwide.  Note how Chairman expects stronger dollar & how that will hurt US manufacturing.  Also note how CAT expects that there might be a quarter or 2 delay in a slowdown of their sales (they'll work off their inventory first which will hit profits right away).  Company has cautious view on mining and expects flat oil & gas prices for 2015.

Eoin Treacy's view

As a globally diversified company with operations in power systems, construction and resources Caterpillar is heavily influenced by both the extraction and construction sectors. The sharp declines in oil, iron-ore and copper represent significant headwinds for the company’s customers who have been cutting back on spending plans. Since investment in energy projects in particular represents a significant source of income for the company the outlook is likely to remain uncertain for the foreseeable future as spending on new projects is cancelled. 

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January 28 2015

Commentary by Eoin Treacy

Pizza Boxes in Play as Rock-Tenn Heralds More Mergers

This article by Brooke Sutherland for Bloomberg may be of interest to subscribers. Here is a section: 

There are other forces driving consolidation. An improving job market and the drop in oil prices are helping to stoke demand for consumer-related packaged products, said Panjabi of Baird. International Paper Wednesday reported fourth quarter sales that beat analysts’ estimates.
At the same time, materials costs are coming down, Panjabi said.

“The idea of increasing your exposure to that paradigm makes more sense,” he said. Companies are going to want to “capitalize on that dynamic” and merging with a peer will help reduce costs even further.

Packaging Corp. could be a potential takeover target or a merger partner, Anthony Pettinari, a New York-based analyst at Citigroup, wrote in a report on Tuesday. The company could also be an acquirer, according to Mark Wilde, a New York-based analyst at BMO. After buying Boise Inc. in 2013, it has the balance sheet flexibility to start looking at deals, he said.

 

Eoin Treacy's view

As energy costs fall and consumers have more cash, the demand for and cost of manufacturing packaging should improve. The sector has been a solid outperformer over the last few years as consumer demand globally improved in line with the growth of the middle class but the fall in oil prices is an additional bullish catalyst. 

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January 28 2015

Commentary by Eoin Treacy

Singapore dollar drives other Asian currencies lower as MAS move may fan regional easing

This article appeared in today’s edition of the Strait Times. Here is a section: 

The surprise move sent the Singapore dollar to 1.3570 per U.S. dollar, its weakest since August 2010, on hedge funds selling.

Malaysia's ringgit and Thailand's baht also fell, reflecting perceived risks that the central banks of those countries could surprise with interest rate cuts later in the day.

"Bank of Thailand is a potential candidate. We see risks of a move today," said Jonathan Cavenagh, senior FX strategist with Westpac in Singapore, when asked if other central banks will ease.
South Korea's central bank is also expected to cut its interest rate, he added.

 

 

Eoin Treacy's view

In the aftermath of the Asian Financial Crisis the majority of the Asian tigers allowed their currencies to appreciate in tandem with the Renminbi and the Yen. This helped to keep inflation in check and allowed competition between countries to evolve on an even keel. Japan’s policy of devaluing the Yen has introduced an additional dynamic to the region whose effects are still being felt. Against this background the MAS’s commitment to a strong Singapore Dollar can be viewed in the same context as the US Treasury’s commitment to a strong Dollar in the last decade. 

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January 28 2015

Commentary by Eoin Treacy

The Chart Seminar 2015

Eoin Treacy's view

Following a productive collaboration last year we have agreed to co-host another Chart Seminar with the CFA Institute in Singapore. This is provisionally booked for April 16th and 17th.

This year we only intend to hold one seminar in the UK so please let us know whether you would prefer a May or November schedule. Additionally if you are interested in attending a seminar in either Australia or the USA this year please let us know. If we have critical mass we would be happy to arrange one. 

To book your place or express interest, please contact Sarah Barnes at sarah@fullertreacymoney.com

The full rate for The Chart Seminar is £950 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires two months ahead of the event start date. Subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

Private Seminars and Partnering Opportunities
We are also available to conduct private seminars and occasionally agree to speaking engagements at investment conferences and professional societies. 

 

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January 28 2015

Commentary by Eoin Treacy

Twitter

Eoin Treacy's view

FullerTreacyMoney set up a Twitter feed in December but I didn’t start updating it until yesterday. In the era of social media many people tend to look more at their Twitter accounts than free daily emails so we will post content both on our website and via Twitter.

Additionally, I will post interesting charts on a daily basis when I have completed by morning click though of markets. Today I posted charts of the historical oil price, Canadian Dollar, Singapore Dollar / Swiss France cross rate, Check Point Software and Veolia.

Please feel free to follow us on Twitter at https://twitter.com/FullerTreacy  We would also be happy to follow the Twitter account of any of our subscribers who follow us. 

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