SPDR Utilities Index – With bond yields beginning to rise, “bond proxies” like the Utilities ETF, which yields 3.47%, has now broken to a new low and is trading below its trend mean. A clear upward dynamic will be required to stem the decline. 

“It’s not just the FTSE 100 -- this is a buy U.K. phenomenon,” said Alan Higgins, chief investment officer at Coutts & Co. in London. His firm oversees 14.6 billion pounds ($19 billion). “We have a really nice combination of sterling weakness, reasonably robust economy and generally not a bad environment for risk assets.”

The FTSE 100 and the FTSE 250 climbed 1.8 percent at 3:06 p.m. in London, while the FTSE Small Cap excluding investment trusts index advanced 1.7 percent.

The falling pound is helping the three gauges because their members get a big chunk of their revenues from overseas -- almost three-quarters for FTSE 100 companies, and about half for those on the FTSE 250, according to JPMorgan Chase & Co. and UBS Group AG. JPMorgan Asset Management has estimated the measure of smaller shares also gets about half of its sales from abroad.

The pound fell to its lowest level since 1985 on Tuesday, surpassing the bottom reached following the June 23 vote, after three senior figures in Prime Minister Theresa May’s administration said financial-services companies will get no special favors in secession talks. That increased concern that the nation is heading for an exit that would restrict access to the EU’s single market. May said on Sunday she will trigger the process of leaving the bloc by the end of March, which will mark the formal start of a two-year negotiation process.

Recent data have reinforced optimism that the domestic economy is weathering the aftermath of the vote. The construction industry unexpectedly grew in September, while a manufacturing gauge jumped to its highest level in more than two years. A Citigroup Inc. index tracking economic surprises in Britain is near a three-year high, and the International Monetary Fund upgraded its outlook for the nation, predicting growth of 1.8 percent this year from the 1.7 percent projected in July.

 

With the weekend announcement that the UK government is planning to begin negotiating to leave the EU in Q1 2017, and to a large extent signalling it is willing to risk the passporting rights of the City’s financial services companies, a high stakes period of brinksmanship is unfolding. That is putting pressure on the Pound and it extended its downtrend today by breaking to a new low. While a short-term oversold condition is evident a clear upward dynamic would be required to check the slide and signal of low of near-term significance.

Lowe’s key challenge -- like many of his developed world counterparts -- is generating inflation; part of that involves trying to tame a currency that’s up more than 10 percent in around nine months. The Aussie’s revival, even if partly justified by a jump in iron ore and coal prices and a better outlook for key trading partner China, puts pressure on services industries that are key growth drivers for the post-mining boom economy.

The new governor offered insights to his strategy in the RBA’s renewed agreement with the government, stressing financial stability concerns as part of monetary policy. The risk of further stoking Sydney’s housing boom should discourage him from further cuts, especially as the economy grew an annual 3.3 percent last quarter and unemployment has fallen to 5.6 percent amid rising terms of trade, or export prices compared to import prices.

Coking coal prices have surged more than 150 percent this year as output from China, the world’s biggest miner, tumbles under government pressure to cut overcapacity. Iron ore, Australia’s biggest export, has rebounded 30 percent, though analysts are skeptical about the rally’s durability. Still, the jump in prices for Australia’s biggest exports is a boon for the economy and a government struggling to rein in its budget deficit.

 

The recovery in commodity prices from depressed levels at the end of last year has been a benefit to just about all commodity exporters. Australia’s dependence of some of the major resources China’s economy requires not least  iron-ore, coal and natural gas means that the rebound in all three has been a major influence on the advance in the stock market this year. 

Data shows Mexicans are sending more dollars back home than they have in years, a surge explained in part by the rush to take advantage of the attractive exchange rate. What’s more, some experts even believe that more Mexicans could eventually be tempted to cross into the U.S. in search of work if the peso remains at these levels for months to come.

“If you’re saving to buy a house or have a big expense coming up,” said Carlos Vargas-Silva, an economist with Oxford University’s Migration Observatory, “this is the moment” to ship back the money.

Lozano understands that part, of course. Like most Mexicans here, he follows the peso’s fluctuations closely and has been scrambling of late to repatriate every dollar he can. Some weeks, he sends as much as $200, double what he used to. That’s part of the reason his wife has had so much extra spending money. He just hadn’t realized that it was Trump that was triggering those swings in the peso.

It plunged to a record low of 19.93 per dollar early last week before recovering some of its losses as Trump’s campaign showed signs of faltering weeks before the November vote. Investors worry that if elected, Trump would try to seize migrant remittances; or force American manufacturers to close plants in Mexico and re-open them at home (he’s called out Ford Motor Co. and Carrier Corp. on this point); or wind up accidentally weakening the U.S. economy, the buyer of four-fifths of all Mexican exports.

 

MXN 20 represents a psychological resistance level for the Dollar and some consolidation of its impressive rally is now underway. Nevertheless, a sustained move below the trend mean would be required to question the medium-term uptrend. The fact that the Dollar has been trending higher against the Peso since 2014 highlights the fact that while Donald Trump’s antagonistic rhetoric may have been a factor in the currency’s recent strength it is far from the only challenge facing the economy. 

"Based on the information at its disposal, (the HCFP) considers as uncertain that the nominal deficit will be brought to less than 3 percent of GDP in 2017," it said in a report issued as Hollande's government prepares to publish its 2017 budget on Wednesday.

Finance Minister Michel Sapin dismissed the watchdog's concerns, saying that it was skeptical every year and yet the deficit targets had been met.

"I therefore reaffirm the seriousness of the budget and the government's determination to bring the deficit to less than 3 percent in 2017," Sapin said in a statement.

Paris hopes to rebuild its fiscal credibility with its European partners by targeting a deficit of 2.7 percent of GDP for 2017, the lowest in a decade and under the EU's limit of 3 percent.

A serial offender of the EU's fiscal rules, France has delayed bringing its deficit below 3 percent several times under both Socialist and center-right governments in recent years.

EU Economic Affairs Commissioner Pierre Moscovici, who in effect polices government finances to ensure they are living up to their promises, said he expected France to get the deficit below the 3 percent threshold next year.

"I think it's possible," Moscovici, a former finance minister in Hollande's first government, said in an interview with L'Opinion newspaper.

France's fiscal watchdog said government forecasts for 1.5 percent GDP growth this year and next were optimistic, noting they were higher than what most private sector economists expected.
"The government's growth outlook, which is based on a number of favorable assumptions, does not display the caution necessary to best meet public finance targets and commitments," it said. 

 

More than any other country France exemplifies that within the EU there is one set of rules for large countries and quite another for smaller ones. If any smaller country had failed to adjust its fiscal deficits in the same way that France has it would have come under severe scrutiny from the EC, ECB and possibly even the IMF. Yet for France there has been no such talk despite the fact it has been a serial offender. 

The 65-year-old chairman and chief executive officer of Walt Disney Co. is scheduled to retire in June 2018. He’s already achieved a number of milestones, including Disney’s revival of the “Star Wars” film series and the opening in June of the company’s $5.5 billion Shanghai resort. But one issue bedevils him and most other media executives: how to transition to a world where mobile devices, not TV screens, dominate news and entertainment.

The question underscores Disney’s interest in Twitter Inc. The Burbank, California-based company has hired an investment bank to advise on a possible Twitter merger, Bloomberg News reported Monday. A deal would unite the world’s largest entertainment company, the home of ABC, ESPN and Mickey Mouse, with the technology pioneer that created the 140-character tweet. It could let Iger leave knowing he’s given Disney a big presence in digital media and advertising.

“That would be his final stamp on Disney,” said Tim Galpin, a professor of management at Colorado State University and co- author of “The Complete Guide to Mergers and Acquisitions.” “If he could get that behind him, he could walk off with a final major success story.”

Twitter, whose co-founder and CEO Jack Dorsey sits on the Disney board, has already been dipping his toes in live sports, airing National Football League’s night games. That’s a business that Disney, the parent of the leading sports TV network ESPN, knows well and that clearly intrigues Iger

The acquisition and successful reboot of Star Wars coupled with the opening of the Shanghai resort were major successes for Disney. However that does not obscure the fact that the company’s broadcasting and cable divisions represent almost half of revenues and face challenges from interlopers like Netflix, Hulu and YouTube. These challenges have yet to be addressed. 

The Brussels-based SRB, the resolution authority for 142 banks including Deutsche Bank AG and BNP Paribas SA, will use the minimum capital requirement set by the European Central Bank as a proxy for capital that would be needed to absorb losses in a crisis, Koenig said in an interview this month. The ECB last year set an average requirement for the highest-quality capital of 9.9 percent of risk-weighted assets.

Requiring banks to have at least that same amount again in loss-absorbing liabilities will ensure that they can recapitalize themselves quickly after restructuring, Koenig said. This minimum requirement of own funds and eligible liabilities, or MREL, is calculated at the “30,000-foot level,” and more precise levels tailored to each bank will follow after the ECB sets new capital requirements and changes are made to capital, bank-failure and insolvency rules, she said.

“We want to avoid confusing the markets by saying, this is our decision this year, knowing that it will be different next year,” Koenig said. “So we take an indicative step this year. For next year, we hope that some of the dust has settled.

When reading about the increasingly high obstacle of regulation, higher and higher capital requirements for banks and stricter requirements for what constitutes Tier 1 capital I am put in mind of the adage that “generals are always fighting the last war.” These are policies that would have been appropriate before the crisis in order to mitigate risks. They represent a barrier to lending activity today that deters banks from acting as liquidity providers, regardless of where short-term interest rates are set. 

We're not talking about de-criminalization, or police de-prioritization.

We're talking about alcohol-style regulation and sale of marijuana to adults, age 21 and up. We're talking about legally allowed personal cultivation, state/local taxation of retail sales/distribution, and re-evaluation of sentences/records for people charged with marijuana offenses.
We're talking about outright, full-on legalization of marijuana. And in the world's sixth largest economy, that means billions of dollars. 

If California's Proposition 64 passes on November 8, and sales begin by January 1, 2018, California's looking at an additional $1.5 billion flooding into the marijuana market. That number swells to just shy of $3 billion in 2019, and nearly $4 billion by 2020, based on the latest report from New Frontier Data and ArcView Market Research.

And to be clear, that's on top of the already booming medical marijuana market — the total size of the cannabis market would reach $4.27 billion in 2018, and would grow to $6.45 billion by 2020.
The ballot initiative has overwhelming support in California: Over 60% of respondents support Prop. 64, compared to just 34% opposed, according to Ballotpedia's average of polls.

 

Evidence from companies like GW pharmaceuticals and others means that the Drug Enforcement Agency’s (DEA) assertion cannabis is a Schedule 1 narcotic with no medical use and a high probability for misuse is looking increasingly outdated. Arguments for full legalisation go a step further and promote the view cannabis is no more dangerous for consenting adults than alcohol. Considering the damage abuse of alcohol is capable of that’s not a particularly high barrier. 

Taiwanese shares jumped the most in a year amid speculation Apple Inc.’s latest iPhone model will prove popular, boosting earnings for the island’s suppliers.

The Taiex index advanced 2.8 percent at the close, its biggest gain since September 2015. Taiwan Semiconductor Manufacturing Co., a major Apple supplier, posted its biggest gain in a year, while Hon Hai Precision Industry Co., the main assembler of iPhones, added 3.9 percent. Apple has jumped 6.5 percent since Taiwan’s markets last traded on Wednesday amid holidays. The island’s dollar strengthened by the most since Aug. 1 against the greenback.

“It’s the Apple story again,” said Michael On, president of Beyond Asset Management in Taipei. “There’s a revived optimism that Apple will increase orders for Taiwanese suppliers after better-than-expected sales of the iPhone 7.”

T-Mobile US Inc. and Sprint Corp. said they’d received almost four times as many orders for the iPhone 7 as previous models, fueling speculation that the new product is off to a faster start than usual. Expectations for the iPhone 7 line had been muted before it was unveiled in San Francisco this month amid slowing growth in global smartphone sales.

 

As the world’s largest company Apple outsources all of its manufacturing which means it has a vast ecosystem of suppliers that are responding favourably to the release of the company’s new products as well as to the relative difficulties being experienced by Samsung. 

President Barack Obama said he would lift economic sanctions on Myanmar after meeting at the White House on Wednesday with the country’s de facto leader, Aung San Suu Kyi, a former political dissident whose government took power in March.

"The United States is now prepared to lift sanctions that we have imposed on Burma for quite some time. It’s the right thing to do," Obama said after the meeting, calling the country’s ongoing transition to democracy a "good news story."

U.S. companies have been watching closely for any sign they’ll get more access to the fast-growing Southeast Asian nation, known as Burma before its former military rulers changed the name to Myanmar in 1989. Business groups in the U.S. have complained that sanctions hinder them from competing with major rivals in an economy that the Asian Development Bank projects will expand 8.4 percent this year and 8.3 percent in 2017, making Myanmar Asia’s best performer.

"We are very interested in successful businesses" entering Burma, Suu Kyi said after the White House meeting. "We think our country is ready to take off."

She said that U.S. sanctions helped drive the country’s military junta to surrender power, but that the time had come to lift them.

 

Myanmar is a resource rich country with a number of unique attributes not least in jadeite, rubies and rosewood in additional to oil and gas. With a clear trend of improving governance the argument for dropping sanctions and internationalising the economy is a compelling one not least as the US needs as many allies in the region as it can get. 

The majority of ASEAN markets have benefitted from increasing international investor flows over the last few months and Thailand is no exception. It has received net inflows of nearly $16 billion year-to-date but this has done little to support the stock market in currency adjusted terms. Just about every Asian market pulled back today but Thailand has been leading on the downside. 
 

“The latest incident raises concern that President Duterte’s unpredictable behavior in politics will be disruptive and could eventually spill into economics and business,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc., the Philippines’ biggest lender. It’s “further weakened a market that’s already been made vulnerable by uncertainty over U.S. interest rates, elevated valuations and overseas fund withdrawals,” he said.

The Philippine index is trading at 18.3 times 12-month estimated earnings. While that’s down from 19.6 in July, it’s still the highest in Asia and at a 32 percent premium to the MSCI Asia Pacific Index. The country’s economy expanded 7 percent last quarter from a year earlier, after 6.8 percent growth in the first three months of 2016.

Investors may be better off holding cash in the near term as the index could test its 7,500 support level, said BDO Unibank’s Ravelas. The gauge could fall as low as 7,330 in the next two months over concerns the budget deficit will rise when taxes are cut and spending raised, April Lee-Tan, head of research at COL Financial Group Inc. in Manila, said Monday.

“Smart investors should take advantage of the weakness and accumulate because this is all sentiment-driven," said Rizal’s Palma Gil. “Other than incendiary statements and killings related to the drug war, investors like Duterte’s economic and fiscal policies or at least what has been communicated so far,” he said, adding that he expected the index would go back up to 8,000.

 

Duterte was elected on a law and order and anti-corruption ticket and admitted in his inaugural address that his methods were unorthodox and would not be approved of by many observers. Here is a link to a video of that address. 

"The failure of Russia and Saudi Arabia to take any steps to support the market is sending us lower," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "The Saudi oil minister actually talked the market lower, which is going to cost his country billions." 

Brent rose the most in three weeks on Friday after President Vladimir Putin said he’d like OPEC and Russia to agree to an output freeze, speaking before he traveled to China to meet Saudi Deputy Crown Prince Mohammed bin Salman. Oil had rallied in August on speculation that members of the Organization of Petroleum Exporting Countries and other producers would agree to cap output when they meet informally in Algiers later this month. A similar proposal was derailed in April over Saudi Arabia’s insistence that Iran participate. 

 

Russia, more than most countries, must want to see oil trading at higher prices. It’s by far their most important export and is responsible for funding not only public services but the country’s adventurism in Eastern Europe and The Levant. Saudi Arabia on the other hand has deliberately used oil as a policy tool in its attempt to deprive Iran, against whom it is engaged in open conflict in Syria, Yemen and Iraq, from deriving any advantage from the loosening of sanctions. If Saudi Arabia were to agree to Russia’s terms without a commensurate move from Iran it would be an admittance of failure which would be hard to countenance at this stage. 

The accord is only the beginning: As many have already commented, after the agreement comes the hard work of building peace. This can be broken down very broadly into reestablishing government control over rural areas where state presence has historically been limited or absent, addressing the needs of victims of the conflict, and demobilizing and reintegrating former combatants in ways that contribute positively to society. On the security front, the Disarmament, Demobilization, and Reintegration process (DDR) is already a concern to Colombia watchers. It is unclear if all members of the various FARC combat and support units will agree to demobilize or if they will instead migrate into other insurgent organizations such as the Ejercito de Liberación Nacional or join Colombia’s vast network of criminal organizations. In fact, a recent experience with the demobilization of right-wing paramilitaries affiliated with the Autodefensas Unidas de Colombia under President Uribe showed that a substantial number of former combatants joined criminal organizations, known as BACRIM or Bandas Criminales. The state will have to move swiftly to establish its presence in those areas where the FARC once operated, or else these gaps will be filled by organized crime. For those insurgents that do demobilize, their success will depend on their ability to find legitimate work and the people’s ability to accept former combatants as members of their community.

In Freakonomics Dubner and Levitt make some very instructive points on the incentives drug dealers have to persist in what is typically a dangerous, competitive environment where death is a realistic possibility before the aspiration to achieve riches is every achieved. If we accept that demand for illicit narcotics is a relative constant, subject to a moderate growth rate, then volatility arises as a factor of supply. 

Gordhan, 67, was named finance minister in December after Zuma roiled markets by firing Nhlanhla Nene from the position and replacing him with a little-known lawmaker. His relationship with Zuma has been a fractious one, with the president denying his requests to fire the nation’s tax chief for insubordination and appoint a new board at the state-owned airline.

“President Jacob Zuma wishes to express his full support and confidence in the minister of finance and emphasizes the fact that the Minister has not been found guilty of any wrongdoing,” the Presidency said in a statement. “The negative effect of these matters on our economy, personal pressure on the individuals affected as well as the heads of institutions, however disturbing, cannot be cause for the president to intervene unconstitutionally.” 

The National Prosecuting Authority hasn’t received a docket from the police and there was no indication when they would receive one, Luvuyo Mfaki, a spokesman for the national prosecutor, said by phone. City Press reported that the docket would be handed to the NPA on Friday after the police questioned tax agency officials including Ivan Pillay, the former deputy commissioner, and Oupa Magashula, the ex-commissioner.

 

Standards of political governance have been declining steadily since the ANC assumed what is in effect single party rule. Institutions and laws which support the free market, such as the independence of the judiciary, minority shareholder and property righrs have all been under attack. Continued political turmoil and the volatility of Zuma’s administration are additionally not good for confidence. 

The most common type of banana the western world eats is the Cavendish, which is produced through vegetative reproduction – instead of growing from seeds, cuttings of the plant's shoots are replanted and cultivated, making all Cavendish bananas essentially "clones" of one specific plant. Without genetic variety, as diseases gain a foothold over the fruit, they're equipped to potentially take out the entire worldwide crop.

"The Cavendish banana plants all originated from one plant and so as clones, they all have the same genotype – and that is a recipe for disaster," says Ioannis Stergiopoulos, plant pathologist at UC Davis.

Currently, close to 120 countries produce about 100 million tons of bananas each year, but 40 percent of the yield is spoiled by Sigatoka, a fungal disease complex comprised of three strains: yellow Sigatoka, black Sigatoka and eumusae leaf spot. To combat the ever-present threat, farmers need to apply fungicide to their crops 50 times a year, which isn't only costly, but can pose a threat to the environment and human health.

"Thirty to 35 percent of banana production cost is in fungicide applications," says Stergiopoulos. "Because many farmers can't afford the fungicide, they grow bananas of lesser quality, which bring them less income."

 

The susceptibility of bananas to bacterial attack, due to their lack of genetic diversity, puts me in mind of the Irish potato famine where reliance on a single breed of tuber left the population bereft of a major portion of their diet when blight destroyed the crop. Of course no one is as heavily reliant on bananas yet they do form a constituent part of many people’s diet globally. It should be possible, given today’s technology, to protect the crop from infection and potentially even enhance yields which could flatter profitability for major producers.   

Asked whether hundreds of thousands of refugees in Turkey would head to Europe if the EU did not grant Turks visa freedom from October, Cavusoglu told Bild: "I don't want to talk about the worst case scenario - talks with the EU are continuing but it's clear that we either apply all treaties at the same time or we put them all aside."

Visa-free access to the EU - the main reward for Ankara's collaboration in choking off an influx of migrants into Europe - has been subject to delays due to a dispute over Turkish anti-terrorism legislation, as well as the post-coup crackdown.

Brussels wants Turkey to soften the anti-terrorism law.Ankara says it cannot do so, given multiple security threats which include Islamic State militants in neighboring Syria and Kurdish militants in Turkey's mainly Kurdish southeast.

European Commissioner Guenther Oettinger has said he does not see the EU granting Turks visa-free travel this year due to Ankara's crackdown, which has included the round-up of more than 35,000 over alleged involvement in the coup.

Cavusoglu said the migration deal with the EU stipulated that all Turks would get visa freedom in October, adding: "It can't be that we implement everything that is good for the EU but that Turkey gets nothing in return."

 

It is a bit disingenuous of Turkey to say they get nothing in return when the EU is paying a multi-billion euro stipend to contain migrants in Turkey, instead of having to deal with them within the borderless EU. However the Turkish administration is understandably on edge and feeling defensive following the foiled coup and is probably looking for a win, internationally, to bolster confidence in its ability to govern successfully. 

European equity markets are by far the most global, more than their economies, and are most exposed to Emerging Markets (EM)

US equity market is the most closed of the Developed Markets (DM), a key ingredient to the US’s relative ‘safer-haven’ status

Japanese overseas revenues have grown sharply in recent years, but are now threatened by yen strength

EM stock markets are the most closed, accounting for the bottom seven countries in our ranking
Economies are not stock markets. DM and EM have similar exports/GDP levels, but DM stock markets are twice as global

Chinese corporates going abroad, but only generate 10% overseas today. Brazil corporates only 20% overseas after commodity slump 

Italy and India have ‘globalized’ the most in recent years

IT is the most global US sector; Healthcare the most global European sector. Utilities and telecom are respectively the most local

Overall overseas revenue contribution has stalled (at 44%) the last three years, as globalization has come under pressure

Looking at indices based on revenue rather than domicile transforms the investment universe: EM much larger, whilst US a lot smaller

 

A link to the full report is posted in the Subcsriber's Area.

With the growth of the global consumer base we began to pay attention to large international businesses that dominate their respective sectors from about 2011. I developed the list of Autonomies by looking at data similar to that compiled in this report; using it to identify companies that have global businesses. In perusing the report veteran subscribers will no doubt be familiar with many of the names. 

After taking over in May, Temer has yet to drive through any major policy proposals amid concern that painful spending cuts or unpopular reforms could weaken Senate support for his administration ahead of the impeachment vote. His economic team is expected to propose changes to social-security laws immediately after the ruling, and support for that and other measures will be an important indicator of whether Brazil’s world-beating currency, bond and stock rallies have staying power.

Optimism about political change in Brazil “is somewhat being reflected in year-to-date momentum, but it’s not completely priced in,” said Sean Newman, a senior portfolio manager for emerging markets at Invesco Advisers in Atlanta.

Investors will likely remain bullish on Brazil’s corporate and government debt throughout August, and credit default swaps may extend this year’s gains once Rousseff is removed for good, he said. In the swaps market, the cost to hedge against losses on Brazil’s bonds has fallen by almost half since February. The currency, meanwhile, has rallied 26 percent against the dollar, the most in the world, and the benchmark Ibovespa index’s 68 percent increase in dollar terms in 2016 outperforms all other major benchmarks.

 

Foreign investors had been waiting for a catalyst to re-enter the Brazilian market and the prospect of a new reform minded president has seen the Real surge and the iBovespa challenge a six-year progression of lower rally highs. The big question is to what extent these rallies have already priced in much of the good news since none of the expected fiscal reforms have yet been passed.

Indonesia – The Jakarta Composite is now testing the March 2015 peak and while overbought in the short-term a clear downward dynamic will be required to signal more than temporary resistance in this area.
. 

Emerging-market currencies rallied after the Bank of England cut its key rate for the first time in more than seven years, boosting speculation that policy makers around the world will continue to ease monetary conditions and the U.S. Federal Reserve will delay rate increases. After keeping its Selic rate at 14.25 percent at a meeting last month, Brazil’s central bank said there is no room for monetary flexibility, citing the need for further fiscal adjustment and an unfavorable climate that is harming global food production.

"The real is gaining momentum as most central banks across the globe continue to ease further their monetary policy," said Arnaud Masset, an analyst at Swissquote Bank SA in Gland, Switzerland. "Investors are desperately chasing higher returns, while volatility in the FX market is at multi-month low, which creates an enabling environment for carry trade and definitely drove the real higher over the last few months."

Buying the real with borrowed dollars in a carry trade has returned 32 percent this year, the most among 42 currencies tracked by Bloomberg.

Bank of England officials voted to reduce the benchmark rate to a record-low 0.25 percent and also to expand quantitative easing, as they slashed economic growth forecasts by the most ever.
"The BOE actions help foster expectations that other central banks might follow and improve liquidity worldwide," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo. "And when the general market mood improves, the search for returns causes the high yielding real to outperform."

 

Brazil has an overnight deposit rate of 14.15% which is attractive to investors, particularly those residing in negative interest rate jurisdictions, despite the obvious issues the economy is subject to that require such a high rate. 

Governance is Everything has been a mantra at this service for decades. Brazil represents another great example of how a failure to improve standards of governance during the good times means the drawdown during the bad times is often worse than anyone might have expected. 

HSBC Holdings Plc. rose the most since April after it announced a $2.5 billion stock buyback for this year and said it plans more share repurchases while keeping its dividend at the current level for the foreseeable future.

Chief Executive Officer Stuart Gulliver is returning half the equity freed up from selling the bank’s Brazil unit, with the rest boosting the firm’s capital ratio to 12.8 percent. That outweighed concerns about profitability, as pretax earnings fell 45 percent to $3.61 billion from a year earlier, and the bank removed a target of surpassing a 10 percent return on equity by the end of next year.

“There is absolutely an intention to be in a position to do further buybacks,” using capital no longer needed by its shrinking U.S. operations, Finance Director Iain Mackay said on a conference call with analysts. The Federal Reserve approved the firm’s U.S. unit returning “substantial” capital to the parent company next year, which “could lead to another buyback,” he said.

 

HSBC does what very few lenders can do at present; it pays a substantial dividend. By keeping the level unchanged, the 12-month yield of 6.86% will be maintained for another year which ensures investors at least three more dividend payments before the rate is next questioned. 

In the laboratory, mosquito eggs are collected from breeding cages containing 5,000 females and 1,600 males and injected with the wolbachia bacteria. Xi's facility has the capacity to breed up to five million mosquitoes a week.

While a female mosquito that acquires wolbachia by mating is sterile, one that is infected by injection will produce wolbachia-infected offspring. Dengue, yellow fever and Zika are also suppressed in wolbachia-injected females, making it harder for the diseases to be transmitted to humans.

Xi set up his 3,500 square meter (38,000 sq ft) "mosquito factory" in 2012 and releases the males into two residential areas on the outskirts of Guangzhou.

Xi said the mosquito population on the island has been reduced by more than 90 percent.
One villager on the island, 66 year-old Liang Jintian, who has lived there for six decades, said the study was so effective he didn't have to sleep with a mosquito net any longer.

"We used to have a lot of mosquitoes in the past. Back then some people were worried that if mosquitoes were released here, we would get even more mosquitoes," he said. "We have a lot less mosquitoes now compared to the past."

 

Zika virus has been making headlines because it poses a risk to unborn children but yellow fever, dengue, West Nile virus and especially malaria all kill and/or debilitate more people and have been with us for eons. There have been headlines recently to the effect that malaria is the biggest killer in human history. When looked at in those terms, the efforts to control the spread of these diseases represent a major contributing factor in the potential for economic growth in high population countries residing in prime mosquito breeding territories. 

“The opportunity is huge,” said Jasper Cheung, president of Amazon Japan. “We have already increased the selection that we can export by the millions over the last several weeks.”

Chinese shoppers are looking for authentic Made-in-Japan products, spooked by tainted baby milk and fake merchandise proffered on web stores in China. While that’s helping to drive an influx of shoppers to Japan -- 3.08 million Chinese tourists have visited the archipelago so far this year, up 41 percent -- it’s also boosting demand for Amazon.co.jp, Wandou and other web outlets featuring Japanese goods.

Rakuten Inc., the Japanese online store, also lets people shop for stuff from Japan in Chinese, as well as in Korean and English. Amazon’s Japan website has been available in English for years.

The new iteration of Amazon Japan’s shopping portal, in simplified Chinese, offers millions of products with more coming, the company said. Consumers in Asia’s biggest economy are demanding access to authentic brands and quality, from clothing and cosmetics to baby products and health goods. That’s why Costco Wholesale Corp. has a shop on Alibaba’s Tmall.com, while Macy’s Inc. and other U.S. retailers are tapping into China’s dominant online-payments system by accepting Alipay on their sites.

 

For billions of new consumers entering the middle classes their first taste of consumerism is likely to be via their mobile phones where they are aggressively marketed to via Wechat, Facebook, Instagram and a host of other social media sites. That puts dominant online marketplaces like Amazon, Alibaba, Ebay and Rakuten in a favourable position to compete for their business and China represents a major battleground. Uber’s experience in China highlights the difficulty of doing business in that country where one is competing with a domestic copycat operation. Amazon’s strategy of building out its Japanese operation may act as a hedge to domestic Chinese operations where it competes directly with JD.com and Alibaba.  

There’s also politics. What set the stage for the peace negotiations was, in part, the creation of the office of land restitution. The nation has always had a drastically unequal distribution of land, and displacement exacerbated that trend. Today, less than 1 percent of the Colombian population owns more than 60 percent of the land, one of the world’s most inequitable ratios. When the government showed a willingness to address this issue, FARC came to the negotiating table.

The government now says that giving back their land may make its citizens less restless, less inclined to support radical forces. This stability would help attract foreign investment. Unlike other Latin American countries, Colombia has been a loyal U.S. ally and reliably market-friendly. “What’s held back development has been the security situation. The war made many parts of the country ungovernable and, thereby, untapped,” Colgate University’s Ballvé says. With a peace agreement forthcoming, that will change. “The country has vast mineral and oil reserves in areas that will be newly coming online—in part, thanks to initiatives like the land restitution program.”

Although land restitution is key to long-term stability, it’s causing turmoil in the short term. Leading international human-rights organizations have documented intimidation campaigns targeted at those trying to return home. Families going back to their land have received death threats, and in 2015, 105 activist leaders were killed, a 35 percent increase from the previous year. Judges who issue land restitution decisions are given personal security details, says Sabogal, the director of the government office. Colombia’s landed elite used to employ right-wing paramilitaries to enforce their claims. Now they’re colluding with drug trafficking groups.

The evolution of chemically based narcotics such as fentanyl might be the best news to hit countries like Peru and Colombia in years. The cultivation of coca for processing into cocaine helped fuel civil unrest and funded rebel groups like FARC. With the increasingly legal availability of cannabis and the ability of Mexican cartels to manufacture both opioids methamphetamines the market for cocaine must be evolving. 

“Macau’s gaming industry and the whole economy will continue to adjust, but the decline may shrink to 7.2 percent this year and even resume growth in 2017,” Chief Executive Fernando Chui said in a televised session of the city’s legislature Wednesday. “It’s a good time for Macau to re-position after a 25-month gaming revenue drop.”

Gross domestic product in Macau declined 20.3 percent in 2015, worsening from the 0.9 percent drop the year before, as the world’s largest gambling hub was hurt by China’s anti-corruption campaign that scared off high-rollers. The casino industry, which accounts for half of Macau’s GDP, is in the midst of a casino building boom to boost revenue from mainstream gamblers and tourists.

Recreational Gamblers
Macau’s government is working with its six casino operators to “improve synergies” between gaming and non-gaming pursuits, Chui said. The city is trying to reduce its reliance on gambling and is targeting to raise the proportion of casinos’ non-gaming revenue to 9 percent by 2020 from 6.6 percent in 2014.

 

The outlook for the gaming sector and China are inextricably linked. Macau represents a much larger gambling market than even Las Vegas and that city also depends on the largesse of Chinese high rollers to drive profitability. With the outlook for growth improving in Macau that may be an initial sign that the Chinese tourist market is still healthy. 

Chinese consumer stocks are in the cross- hairs of Hong Kong’s short-sellers.

Bearish bets on Tingyi (Cayman Islands) Holding Corp. and Want Want China Holdings Ltd. soared to record highs since May, data compiled by IHS Markit Ltd. show. The instant noodles and snacks manufacturers, together with sanitary-napkin maker Hengan International Ltd., make up three of the four most-shorted stocks on Hong Kong’s benchmark index. Hengan this month spun off its food business into a separately listed unit that’s down 27 percent from its first close through Thursday.

Bears are betting that China’s shift toward an economy driven by middle-class spending will leave some consumer stalwarts behind. Even after valuations on Tingyi and Want Want fell to all-time lows at the start of the year, the stocks are still too expensive as Internet retailing helps foreign brands grab market share in China, according to Ample Capital Ltd.

Shoppers are showing a preference for healthier food, UOB Kay Hian Holdings Ltd. says. “Consumers have been changing their pattern to more nutritional products so their business growth is declining,” said Johnson Hu, a Shanghai-based analyst at UOB Kay Hian. “We don’t see that changing in the foreseeable future.”

Short interest in Want Want and Tingyi has risen to 7.6 percent and 4.9 percent of their outstanding shares as of Tuesday, Markit data show. Bearish bets in Tingyi surged to a record level this month, and those in Want Want are close to all-time highs last seen in May. The average of similar wagers for the 50 Hang Seng Index members was about 1.3 percent.

 

The evolution of online retail has had a dramatic effect on the ability of bricks and mortar stores in North America and now that pattern is likely to be repeated elsewhere as the convenience of online shopping trumps the toil of driving and walking to a store only to have to carry home the goods afterwards. The additional fact that diabetes is a major problem in both China and India suggests the potential for concerted drives to eat healthier more nutritious foods is more likely than not. 

Volatility in Brazil’s real dropped to the lowest level in a year as the central bank acts to limit gains in the world’s best-performing currency amid speculation that a new government will pull the nation from its deepest recession in a century.

Three-month implied volatility on the real declined 0.05 percentage point to 16.78 percent, the lowest level since July 22, 2015, at 12:25 p.m. in Sao Paulo. The currency advanced 0.3 percent to 3.2393 per dollar.

Brazilian assets have led gains globally this year amid speculation that Acting President Michel Temer will trim a budget deficit, end credit-rating downgrades and restore confidence. Concern that the currency’s rally would hamper exports at a time when Latin America’s largest economy already faces its worst recession in a century has led the central bank to sell almost $50 billion of reverse swaps to stem gains. While the offerings are unlikely to change the direction of the real, they can mute volatility, Morgan Stanley strategists led by Gordian Kemen wrote in a report published last week.

“The domestic reform narrative in Brazil is an important qualifier for the currency and for the decrease in its volatility," said Mike Moran, the head of economic research for the Americas at Standard Chartered Plc in New York.

The Brazilian Real is the best performing currency this year; gaining over 30% year to date. The chronic mismanagement of the economy that prevailed under Dilma Rousseff’s administration is now in the past and the new government has the opportunity to introduce unpalatable reforms early in its tenure so that it might benefit from the results by the time the next election needs to be called. Whether that eventually translates into improving governance and a sustained reduction in corruption and graft is an altogether different question, but we can conclude that at least for now governance is improving from a low base.

Too much property; curbs could turn permanent 
Unless property prices plunge suddenly and dramatically, we think that property-cooling measures may not be lifted. Singapore households have SGD840b of capital or 209% of GDP tied up in residential property. This has resulted in lower disposable income which has impeded consumer spending and muzzled entrepreneurship. Another less obvious implication of property “overinvestment” is that home-price appreciation fuels wage inflation, reducing Singapore’s cost competitiveness. We think turning property-cooling measures permanent could be an effective way to steer investments away from this asset class to more productive uses in the long run, which may be what the government is contemplating. As this would put developers at the losing end, we turn less bullish on the residential property sector and downgrade it to NEUTRAL. Wing Tai and CityDev are most exposed to Singapore’s residential market. Additionally, given the knock-on effects on loan demand, continue to sell banks, which are already grappling with asset-impairment risks and likely fewer lending opportunities. OCBC and DBS are least preferred. 

Wage pressures: we think government will step in 
Short-term relief to wage pressures is required, in our view, as wage growth has outpaced productivity gains. Wages now hit 43.4% of GDP. Historically, such levels preceded a recession, as in 1985, 1997 and 2000. Without intervention, retrenchments could rise. Although cutting CPF rates can offer a direct reprieve, it runs counter to concerns about retirement financial security and may be politically unpalatable. We think that the ideal solution may be for the government to co-pay wages and increase social spending. Businesses could receive a shot in the arm, especially those with high labour content. 

Boost consumption! 
At 37% of GDP, Singapore’s household consumption is one of the lowest among developed countries. What’s more, it has been declining. If a diversion away from property investments and wage relief are successful, we foresee a consumption boost. Such domestic-led growth should be more desirable amid rising anti-globalisation sentiment in parts of the world. Consumer staples could offer the best exposure to this, we believe. We recommend Sheng Siong.

A link to the full report is posted in the Subscriber's Area. 

Singapore has seen living costs rise precipitously over the last decade with the result the island economy has seen its competitiveness come under pressure. Enhancing standards of living has allowed the PAP to stay in power since 1959 because it has not shied away from central planning supported by world class management of public resources. It will need to continue to deliver on succeeding in making tough decisions that deliver long-term positive results if its record is to be sustained through what is a difficult environment for its major trading partners. 

Clearly, Turkey’s democracy has taken a severe blow—cushioned only by the unequivocal stance of the opposition leaders and the media against the coup. Once again, the nation managed to break this pattern of ten-year coups. This offers the country a matchless opportunity for reconciliation. Granted, Erdogan has had an exceptionally rough weekend and his frustration with those responsible for or implicated in the coup is understandable. He is correct in calling “for their punishment under the full force of the law of the land.” It will, however, now be critical that he ensure that the rule of law is upheld and rises to the challenge of winning the hearts and minds across a deeply polarized nation. He has the tools for it in his repertoire and had successfully wielded them in the past—especially between 2003 and 2011, when he served as prime minister. In hindsight, this period is often referred to as AKP’s “golden age,” when the economy boomed, democracy excelled, and Turkey was touted as a model for those Muslim-majority countries aspiring to transform themselves into liberal democracies.

As he steers the country from the brink of civil war, Erdogan needs to rise above a majoritarian understanding of democracy and do justice to the aspirations of a public that heeded his call by pouring into the streets and squares to defeat the coup attempt. This is the least that the Turkish public deserves. This would also be a move in the right direction for Turkey’s neighborhood, which desperately needs a respite from the turmoil resulting from the war in Syria, the instability in Iraq, Russia’s territorial ambitions and now Brexit. This is the moment when a stable, democratic, transparent, accountable and prosperous Turkey needs to come to the fore on the world-stage. The United States needs it too. As much as the White House declared its faith in the strength of Turkey’s democracy and its support for the elected leadership, there is a clear chance for forging closer cooperation between the two countries. The first step in cooperation should be in bringing to justice the perpetrators of this coup, followed by measures to enhance Turkey’s capacity to address and manage the many challenges facing Turkey and its neighborhood.

 

With mass killings in Europe, civil unrest becoming a factor in the US election cycle, wars in Syria, Iraq and Yemen, an increasingly expansionary geopolitical attitude in Russia and China exhibiting an adventurous proclivity it is easy to conclude standards of governance are deteriorating. Yet we should not forget that Argentina has a new reform minded president, India and Indonesia are led by reform minded administrations and even Nigeria is making strides towards improving conditions albeit from about the lowest base imaginable. 

Global funds have injected a net $1.4 billion into the territory’s stocks this week through Wednesday, the most among eight Asian markets tracked by Bloomberg. Developing-nation currencies are recovering this month after plunging in the aftermath of the U.K.’s vote to leave the European Union in June. Futures are now pricing in less than even odds of a Fed rate increase in 2016.

“The market thought that, after Brexit, funds would leave Europe and go to the U.S., but it seems some are entering emerging markets because U.S. rate hikes will be delayed," said Cary Ku, an economist at Jih Sun Securities Co. in Taipei.

"Taiwan stocks’ higher yield also attracts foreign investors."

 

Despite the fact the Chinese Renminbi remains in a consistent, though somewhat oversold, downtrend against the Dollar, the majority of ASEAN currencies found medium-term support last year. For example the Indonesian Rupiah hit a low in October, the Thai Baht in October and the Taiwan Dollar in January and that was following multi-year declines in all cases. 

It’s a match made in milk heaven: Danone, the French dairy giant behind brands like Activa, Oikos and Dannon yogurt, announced Thursday morning that it will buy Silk Soy Milk maker WhiteWave Foods in a deal worth $10 billion.

Danone said Thursday that it will pay $56.25 per share to acquire WhiteWave, a price that marks a 24% premium to WhiteWave’s average closing price ($45.43) over the last 30 days. Including debt and other WhiteWave liabilities, the companies are valuing the deal at $12.5 billion. The deal is expected to close by the end of the year, pending all customary shareholder and regulatory approvals.

The acquisition is expected to be fully financed with debt. Danone said that it has received commitment from its banks for this debt, and that it expects to maintain a “strong” investment grade rating.

While the companies are calling the merger a “perfect match of vision, culture, and business,” the financial benefits are even more compelling: the acquisition will serve to almost double the size of Danone’s U.S. business, taking its North American footprint from 12% of Danone’s overall portfolio to 22%. Danone also said that merging with WhiteWave will make it one of the top 15 food and beverage producers in the U.S.

The companies are projecting $300 million in synergies by 2020, and Danone is saying that the merger will be accretive to its earnings within the first year of the deal’s closing.

 

Danone, despite being listed in France, has been relatively unaffected by the travails that have affected the majority of Eurozone shares this year. It is helped considerably by the fact that the vast majority of its revenue is sourced outside the EU and this acquisition brings its operations improved diversity. The result will be that about a third of revenues will come from the Americas, Asia and Europe respectively. 

At the beginning of the year, Vietnam installed a new Prime Minister, replacing a candidate widely viewed as having spearheaded reforms over the past decade. The Philippines also elected a new President in May, but he is widely viewed as taking a hard-line stance on issues such as crime and domestic and foreign policy (Washington Post, 10 May 2016).

By contrast, and perhaps more reassuringly, over in Indonesia the pro-reform ruling coalition has been benefiting from shifting political allegiances, and its initial minority presence in parliament has now turned into a majority. Then there’s Malaysia. Despite the troubles with sovereign wealth fund 1MDB, the results of a state election and two federal by-elections suggest that the ruling coalition remains in a strong position ahead of general elections in 2018. Last but not least, there’s Thailand, which will vote in a referendum on the draft constitution in August. If approved, this could lead to an election in 2H 2017, potentially paving the way for the country to emerge from over two years of military rule.

What will the above political shifts mean for structural reforms and the longer term economic outlook? In the following sections, we look at the reform agenda of each country in detail, and how the recent or upcoming political changes might impact these. Some of the desired reforms, such as the need for greater investment and in particular, infrastructure, recur across the region. Government balance sheets in some places will also need to be kept in check, and trade liberalization pursued. But policymakers are approaching all of these issues in their own unique ways, and change is afoot.

A link to the fullre report is posted in the Subscriber's Area. 

The ASEAN region is unlikely to escape unscathed if European and UK demand for its exports deteriorates. However the majority of ASEAN companies do not have large investments in Europe and are more leveraged to the demand growth stories that continue to benefit from improving standards of governance at home. 

The victory of the “Leave” campaign stunned many investors who’d put wagers on riskier assets over the past week as bookmakers’ odds suggested the chance of a so-called Brexit was less than one in four. MSCI’s Asian measure dropped 3.7 percent on Friday, led by losses in Japan, South Korea, Australia and Hong Kong. A gauge of Asian currencies weakened the most since China devalued the yuan in August.

“This is just a knee-jerk reaction,” said Tony Chu, a Hong Kong-based money manager at RS Investment Management, which oversees about $17 billion. “Most stocks we look at in Greater China have little to do with the U.K. or the European economies.

We still like Internet-related stocks, consumption and health- care stocks. That’s where we see relatively better earnings prospects.”

The Shanghai Composite Index slid 1.3 percent on Friday, while volume increased less than other major Asian benchmark gauges. Foreign investors are limited by quotas from buying and selling mainland Chinese equities, with local individuals accounting for about 80 percent of trading.

Most Asian markets advanced on Monday. The Topix index rebounded 1.8 percent at the close, as the Shanghai gauge climbed 1.5 percent. Australia’s S&P/ASX 200 Index added 0.5 percent. Hong Kong’s Hang Seng Index dropped 0.2 percent, trimming an earlier loss of 1.4 percent.

To be sure, in the short term, fund managers are girding for higher volatility and a flight out of all but the safest assets. Asia can’t escape a global deterioration in risk sentiment, Harvest Global Investments Ltd. says.

 

Europe, and most particularly the Eurozone, represent the epicentre of global risk. The UK certainly represents a lightning rod for bearish sentiment and that pressure is falling primarily on the Pound. However, potential future issues reside with how the EU will deal with what is an existential threat. 

“The FARC are looking at their Plan B, and their obvious Plan B is the ELN,” he said by phone from Medellin. “Certainly in the 60-odd municipalities where they co-habit, we think it’s very likely that there will be a transfer of these criminal economies, gold and coca, to their revolutionary cousins.”

The Colombian government and the ELN announced the start of a formal peace process on March 30, although negotiations have yet to start. The ELN has no intention of sitting down to talk until first seeing how the FARC agreement pans out, Builes said.

The ability of Mexican drug cartels to import the raw materials for fentanyl directly from China and manufacture pills either in Mexico or the USA, therefore bypassing Colombia entirely, represents a major threat to the latter’s business model. More than any other factor that may have played a role in the FARC’s decision to agree to talks. Nevertheless, the market for cocaine might not be growing as quickly as it once did but it still represents a multibillion Dollar business. Logically, someone will ensure it keeps going regardless of deals with the government. This article by also be of interest. 

Industry insiders say the outlook depends on whether the incoming government of President-elect Rodrigo Duterte can help develop enough of the tailored education programs needed to produce skilled for a more sophisticated range of tasks.

Climbing the value ladder won’t be easy. TaskUs, a U.S.-based outsourcing with operations here, is among those that are trying. Innovation is the key to survival, said Bryce Maddock, chief executive of the company, which provides a range of back-office functions for tech startups, including the mobile dating site Tinder and the message service Whisper.

“We’re trying to ‘un-call center’ the call center,” said Mr. Maddock, who tries to battle the endemic turnover in industry hotspots like Manila by offering a modern workspace modeled on the casual vibe of Silicon Valley.

He says just a tenth of the company’s 5,000 employees are actually answering phones. Most are managing content on websites or handling customer relations via online chat.

The shift reflects an industrywide trend. TaskUS reflects an industrywide trend. A decade ago, nearly all Philippine outsourcing work was phone-based. Now, it’s just 60%, a figure that’s bound to keep declining, outsourcing executives say, even as the industry as a whole continues to expand.

 

It takes a village to run a successful ecommerce site so while automated systems are increasingly taking over the phone lines we still need humans to conduct search engine optimisation (SEO) and manage website content. These tasks are still heavily labour dependent so demand for call centre operatives is likely to remain on an upward trajectory but the sophistication of the work is likely to increase. 

Oil producers in Nigeria are facing a renewed wave of violence in the delta region that accounts for most of the country’s crude. Nigeria’s output dropped to the lowest in almost three decades as armed groups intensified attacks to rupture pipelines in recent months. Total volume of crude shut due to the attacks range from 700,000 to 800,000 barrels per day, according to the state-owned Nigerian National Petroleum Corp.

The weakness of the Dollar against commodity producing currencies and continued supply disruptions in both Nigeria and Canada are helping to boost demand among traders for the most important commodity and are at least partially offsetting the boost in supply from Iran since sanctions were lifted. 

Southeast Asian countries, with the exception of Thailand and Singapore, have better economic prospects than the rest of Asia, according to Nomura Holdings.

In a Tuesday media briefing, senior Nomura economists and researchers say that the countries they are positive about – Malaysia, the Philippines, and Indonesia -- are strong structurally and have the right policies in place.

Euben Paracuelles, Nomura’s Senior Economist on Southeast Asia, says they have a neutral outlook on Malaysia, but is positive overall noting the sentiments around the country.

“The economy is really quite resilient despite this combination of shocks from low commodity prices, fiscal consolidation [and] the political noise… because there was quite a bit of diversification in the economy in the last couple of decades,” Paracuelles says. 

He says Malaysia’s manufacturing sector is doing well because it has a competitive currency and the right product mix that can cater to the current US consumer demand and their recovering housing market.

With manufacturing making up 60% of the export sector, and commodities making up 30%, the manufacturing gains is enough to offset the loss in commodity profits, he adds.
For the Philippines, Paracuelles noted that the new president, Rodrigo Duterte, would “take a very pragmatic approach [for the economy].”

He says that it is unlikely for Duterte to reverse the current economic reforms, and the eight-point agenda he released after his win highlighted that policy continuity is key.

 

China is Asia’s regional heavyweight so when the Renminbi found at least short-term support in the region of the January low on Friday it removed some pressure from its neighbours and competitors to seek weaker currencies to maintain their relative positions. 

The Asia Dollar Index formed an upside weekly key reversal last week to confirm support above the January low and has followed through to the upside so far this week. A sustained move back below 106 would be required to question potential for additional upside. 

Governance in South Africa. I agree fully with your current assessment of the deterioration of governance in this country. My wife and I retired to St. Lucia, KZN some 14 years ago when Rand to GBP was 11, now almost 23. The present ANC administration under Jacob Zuma in the opinion of most thinking South Africans has been little short of disastrous. At the present time we have a power struggle going on in which the internationally respected finance minister is in danger of losing his job. We are also seeing a disturbing trend where sections of the population are fire bombing educational institutions. 27 schools in Limpopo province were torched a fortnight ago. In the face of this criminal behaviour the police seem unwilling or unable to take decisive action

And

Governance in South Africa Post Script Both India and South Africa held general elections 2 years ago. One just needs to look at the chart for INR/ 1ZAR to see how the two countries have diverged in terms of governance in that time

 

Thank you for sharing your perspective. I have had a warm regard for South Africa since holidaying in KZN in 2000 and again in 2002. Minority shareholder rights, a free press and an independent judiciary are all important considerations when considering what the status of governance is in a country. Black empowerment introduced a question about the continuity of South Africa’s standards of governance, albeit for laudable reasons, and the country has required closer attention to political events since. 

world. Zurich leads the way, followed by Sydney, London, Milan, Stockholm, Copenhagen, NYC, San Francisco, Amsterdam and Madrid. Tokyo is amongst the most expensive cities on most measures but surprisingly cheap hotel rooms (more akin to EM prices) help push it below many others. Our cheap date index sees Zurich, Copenhagen, Tokyo, Stockholm and Amsterdam as the most expensive cities to woo a partner. One might choose to settle down at a younger age in these countries or risk expensive courtships. London has dropped 2 places this year and out of the top 5. At the other end of the scale, cities in Malaysia, India and South Africa are the cheapest for a weekend away and around a third of the cost of the most expensive places. For those wanting a real cheap ‘cheap date’, India, Indonesia, the Philippines and South Africa are the places to go. Indeed in all of these places you can have at least 4 dates for the price of one in Zurich but please don’t tell the other 3 people! 

Don’t lose your phone while away in Brazil, India, Sweden, Denmark or Italy as a new iPhone is most expensive there. The US remains the place to buy a new one, followed by HK and Japan. Interestingly there are signs that perhaps Uber is making its mark on the world as taxi prices in many places are falling sharply. Indeed in San Francisco (where Silicon Valley resides), taxi prices have fallen more than anywhere in the DM world over the last 12 months (-30%). 

Bad habits cost you most in Melbourne, Singapore, Auckland, NYC and London as our ‘sin index’ of cigarettes and beers suggests. Singapore and Copenhagen really don't want you to own new cars as prices are nearly 4 times and 2 times the cost of NYC here. Buying a new car in India is half the price of NYC if you can find a way of driving it home. In addition to the aforementioned items this report also looks at the cost of various goods and services across the world. The index page provides the full list.

A link to the full report is posted in the Subscriber's Area.

Scrolling through the constituents of this index, the same group of countries crop up at the top and bottom of the most and least expensive. Part of the reason for this is because of relative states of economic development but the declines in many emerging market currencies is another consideration and helps to highlight how much competitiveness can be gained from a prolonged period of currency devaluation. 

I would also be grateful for an update of your view on the Vietnam market, which has broken out above its 200 day MA and is approaching the top of a multi-year trading range.  The government has announced the merger of the Hanoi and HCM stock exchanges as well as other market friendly initiatives which could perhaps be behind the recent outperformance of Vietnam vs other Asean indices.

Vietnam’s Communist Party is attempting to improve the governance of the economy and has been through a painful period where inflation has been running ahead of expectations. The Dong took the brunt of selling pressure but has been reasonably steady so far this year. Nevertheless, a sustained move below the MA would be required to question medium-term Dollar dominance. 

I was a little perturbed to see both of you mentioning Duterte's rise to power as if this was a move in the direction of good governance.  

The man is a complete maverick. He is a populist who has been compared to Donald Trump, but he sounds much more dangerous.  His main claim to fame is ridding his city Davao from crime, which was done by supporting death squads. He has said that he will kill 100,000 criminals.  He made fun of the rape of an American missionary in a prison by saying she was so beautiful that he should have been first in line to rape her.

Nobody has any real clue about what he will do in office.  He probably doesn't know himself.

Here is the best article I have been able to find about that.

 

Thank you for sharing your view and here is a link to an article from the Sydney Morning Herald referring to the episode when Duterte made a wholly inappropriate comment on the rape and murder of an Australian missionary during a prison riot in 1989. He also claims to have been the person to fire the first shot during the subsequent storming on the prison where a significant number of the perpetrators were killed. 

The scandal and crisis have taken on a quality of endlessness and many here are growing numb to each development.

A decision from Fitch Ratings to downgrade Brazil’s sovereign credit rating yet again was relegated to page 27 of O Globo newspaper. The detention of former Finance Minister Guido Mantega for questioning this week wasn’t even the top story for most papers.

By law, Temer would be in charge for 180 days or until the Senate permanently ousts Rousseff. She is charged with having illegally tapped state banks and taken loans to cover up budget deficits. Most analysts agree it will be very difficult for Rousseff to recover support in the Senate and avert a final ouster, not least because she will no longer have control over discretionary spending for legislators’ public works projects.

Rousseff is expected to remain in the official residence, but the Senate will determine whether she will lose other executive privileges, such as the right to use the presidential plane, or take a cut of her salary.

Temer aides say that as soon as Rousseff is notified of the Senate vote, he will take office and quickly nominate a new cabinet. Former central bank chief Henrique Meirelles is the front-runner to become his finance minister, they said.

While financial markets have rallied this year on the prospect of a more business-friendly Temer taking over, there are also concerns that an ongoing corruption scandal and wide- spread disillusionment with the political establishment could come back to haunt the 75 year-old constitutional lawyer.

A Datafolha poll published last month showed 61 percent of respondents support Rousseff’s removal from office, while Temer fared only slightly better with 58 percent calling for his ouster.

 

In addition to the corruption charges levelled against her Rousseff was also unlucky that her premiership occurred during a lengthy decline in commodity prices. With her ouster the potential for reform is still cloudy considering how much of the political establishment are embroiled in the corruption scandals. As a result the makeup of a new cabinet will have a significant bearing on how well the new administration is received by investors. The fact commodities prices have in all likelihood bottomed should act as a tailwind for the economy and leave some room for manoeuvre as the budget deficit is tackled.  

"Politics in Southeast Asia are always volatile and unpredictable," Alex Klein Tank, a managing director at Bangkok- based Civetta, said. "But we stick with the fundamentals and I don’t think the growth trajectory on the Philippines will be derailed by the election."
     
Civetta’s long-only equity fund has about 40 percent of its portfolio invested in the Philippines. It holds shares of four companies: EEI Corp., a Quezon City-based construction company; San Miguel Pure Foods Co.; 8990 Holdings Inc., a low-cost housing developer; and Xurpas Inc., a mobile e-commerce company, Klein Tank said in a telephone interview. The fund, which returned 15 percent this year through April 30, may add to its holdings if there is weakness in coming weeks, he said.
     
"Foreign hedge funds get nervous, but things will go back to normal and countries like the Philippines will continue to grow," Klein Tank said.

 

Above all else Duterte is anti-crime and has been a vocal critic of ineffectual governance so his accession to the Presidency is a potential positive if he can impose stronger standards in government. 

The power struggle at the top of Turkish politics may come to a head later on Wednesday, with Prime Minister Ahmet Davutoglu planning to tell President Recep Tayyip Erdogan he needs to respect the premier’s office and let him get on with the job, a person familiar with the matter said.

Davutoglu is considering calling an emergency convention of the ruling AK party, in which delegates would vote on the leadership, should he not receive a favorable response, the person said, asking not to be named due to the sensitivity of the matter. Davutoglu has been facing intensifying opposition within the party from a group of hardline Erdogan supporters, the person said.

A party summit could be held in about 45 days should Wednesday’s meeting not end in agreement, the person said.

Tensions between the two men, and the rift among their supporters in the party, are more explosive than generally acknowledged, the person said.

Erdogan, who served as prime minister for more than a decade until 2014, has transformed the typically ceremonial role of the president to a new center of power and is seeking to formalize that by rewriting the constitution. Davutoglu, his handpicked successor, is seeking to establish his own credentials as an independent policy maker.

 

There is no evidence to contradict the view that Erdogan is an aspiring despot. The increasingly assertive position taken by the prime minister is a medium-term positive subject of course to whether he is successful. 

In the first quarter of 2016, each of the four trends reversed. Recent weeks have brought rebounds in inflation hedges, emerging market currencies, diversifying markets, and global value stocks relative to growth. Do these last few weeks represent “the turn”? Perhaps. The question, however, is irrelevant because the answer is simply impossible to know. But what we do know is that if we want peak exposure to these markets when the turn comes, we must begin to “average in” in the face of adversity. 

We also know that these out-of-favor markets average a 3.0% yield premium versus a U.S.-centric 60/40 portfolio, which represents a powerful performance advantage to those who can patiently wait for mean reversion’s inevitable grip on the market. Once the market turns, history has shown the upswing will be fast and vigorous.  

Real Potential
In the 5 and 10 years following December 1998, assets other than U.S. and developed-market equities and U.S. notes and bonds outperformed 60/40 by an annualized 8.8% and 6.2%, respectively. Developed value stocks also outperformed their growth counterparts by nearly 6% a year in the 5 years following December 1998. Are these markets poised to repeat this strong outperformance? Only time will tell, but we believe the potential is very real. Our view today is that real return–diversifying asset classes5 could improve on a traditional 60/40 allocation by approximately 3.5% a year over the next 10 years. Real return–oriented diversifiers and value strategies may not experience the same magnitude of outperformance as they did starting in 1999, but we’re confident they will outperform in the years to come. Now is the time to rotate into these markets.  

 

The MSCI Emerging Markets Index is market cap weighted so it is heavily influenced by what happens to Chinese, South Korean, Taiwanese, Indian and South African shares. These five countries account for 67.25% of the Index. It’s an awfully big world out there and the emerging market universe is much more diverse than these five countries which raises the question of how good a barometer it is. 

As GDP goes, so does consumer products consumption
In these volatile times, the relationship between commodities, currency, pricing and consumption is as pronounced as ever, with inflationary pricing to offset f/x transaction driving bulk of EM growth as benign commodities and modestly improving macro drives modest growth in developed markets. As we discuss in this report, GDP growth is the primary industry consumption driver, with multiples tracking this growth trajectory. For instance, in 2010, when EM growth was solid and commodities high, US and EM-centric CPG companies traded at roughly the same 12% PE premium to the market; by 2015, US centric names jumped to a 40% premium versus 22% for the EM exposed names. With commodity complex still depressed and geopolitical risks omnipresent, we understand the consensus negative views on emerging markets but several stocks in our coverage have substantial leverage to improving trends in these demographically privileged markets.

BRIC by brick
Noting clear cultural, geopolitical and demographic differences across Brazil, Russia, India and China, in addition to myriad other developing markets, the per capita consumption opportunity is significant for branded consumer packaged goods manufacturers. Despite the recent malaise, emerging markets are still growing at least 3x faster than demographically challenged developed markets, with often cited but still powerful dynamics of younger, upwardly mobile populations, urbanization, female workforce participation and shift from agrarian to services jobs supporting sales, margin and cash flow growth for those who have already built the critical infrastructure.

Valuation supports market perform view on group
Group is trading above average relative to the market on historical P/E multiples; and industry DCF, which we use to derive our target prices and assumes 2.5% sales growth and 0.6 pts of margin expansion per year through 2023 (7% WACC, 1.5% TVG) suggests group is about 2% undervalued relative to its cash flow. Downside risks include cost inflation, rising rates, dollar strength, consumption declines and EM slowdown. Upside risks are US recovery, M&A rational pricing, flat commodities and f/x, accelerated restructuring, EM stabilization, and cost savings, and aggressive balance sheet redeployment.

 

A link to the full report is posted in the Subscriber's Area.

The Consumer Staples and Consumer Discretionary sectors have been consistent outperformers over the course of the medium-term bull market from the 2009 lows. Part of the reason for this is because they offer exposure to the rise of the global middle class but also because they dominate their respective niches and often have reliable cash flows. 

I noted the Nifty & Sensex indices did a weekly reversal early March, which you mentioned in your Comment of the Day. At that time you were looking for a move above the moving average to confirm upside potential, which if I am correct has happened now. How do you now interpret the prospects for the Indian market?

Thank you for this email sure to be of interest to subscribers. The Indian stock market trended lower for a year; losing about a quarter of its value in nominal terms before finding support in February.

The rupee’s relative strength since February has flattered the performance of foreign denominated funds and as you point out the main stock market index is now trading back above its 200-day MA.

Cunha is the showmaster, a Brazilian Democratic Movement Party member who came out against Rousseff last year, around the time that prosecutors revealed he was under investigation for allegedly hiding money related to corruption in a Swiss bank account.

The speaker is just one of many caught up in a long-running anti-corruption blitz that has put top executives and politicians behind bars. And more than half the members of the congressional panel that recommended the impeachment vote take place are under investigation for everything from alleged campaign financing irregularities to environmental offenses.

As for Rousseff, the current impeachment accusation against her is that she used accounting tricks to hide a budget deficit, which she says isn’t a crime that warrants impeachment. The president has denied any wrongdoing. Still, in the view of many Brazilians, she’s guilty of far worse, presiding over an economy that has sunk into a crippling recession.

 

Unfortunately being bad at your job and taking office just ahead of a major commodity price decline are not impeachable offenses. Rousseff’s close ties with those being investigated for wholesale corruption within Petrobras and a host of other state owned companies is a different matter. 

Robusta Coffee – pushing back above its trend mean for the first time in a year, in defiance of the recent weakness in Arabica. A clear downward dynamic would be required to question potential for additional upside. 

Researchers estimate that excess weight caused 3.4 million deaths worldwide in 2010. Being overweight or obese is a risk factor for chronic conditions like cardiovascular disease and diabetes. Those are rising worldwide, too. There were an estimated 422 million adults with diabetes in 2014, a rate of 8.5 percent, compared to 4.7 percent in 1980, according to new estimates published by the World Health Organization April 6.

Diabetes is rising fastest in low- and middle-income countries. It’s most common in the region that includes the Middle East and North Africa, where levels of physical inactivity are high.

The number of people who are overweight or obese is going up pretty much everywhere. The world has made progress against health threats from smoking and malnutrition to malaria and waterborne illnesses. No country has yet reversed the obesity epidemic. “Not only is obesity increasing, but no national success stories have been reported in the past 33 years,” researchers in the Lancet wrote in a 2014 report funded by the Bill & Melinda Gates Foundation.

A United Nations plan published in 2013 calls for halting the rise in diabetes and obesity by 2025. Though the pace of increase has slowed in some places, Lancet researchers recently called the chances of the world meeting that target “virtually zero.”

The vice sector including tobacco, alcohol, gambling, marijuana and pornography exists and thrives because as a species we have poor impulse control and are often slaves to the pleasure centres of our brains. Sugary and fatty foods and drinks target the same parts of the brain and this helps to explain why abstinence, self-control and regular exercise remain a hard sell despite the obvious health benefits.    

As world population growth slows, global consumption growth—the demand that fuels much of the world’s economic expansion—will depend heavily on how much each individual spends. Knowing which consumers are likely to be spending robustly, where they are, and what products and services they prefer to purchase becomes even more important for companies, policy makers, and investors.

Until the turn of the century, more than half of global consumption growth came from an expanding number of consumers in the world. In the period to 2030, population growth will generate only 25 percent of global consumption growth with the rest coming from rising per capita consumption. For decades, companies serving consumer markets could rely on expanding numbers in most segments—but no longer.

Nine groups of urban consumers are projected to generate three-quarters of global urban consumption growth from 2015 to 2030—and just three groups about half of that growth:
Developed retiring and elderly (60-plus years in developed regions). This group will grow by more than one-third, from 164 million in 2015 to 222 million in 2030. It will generate 51 percent of urban consumption growth in developed countries, and 19 percent of global urban consumption growth.

China’s working-age consumers (15 to 59 years). Their number will expand by 20 percent—an additional 100 million people. Their per capita consumption is expected to more than double. By 2030, they will spend 12 cents of every $1 of worldwide urban consumption.

North America’s working-age consumers (15 to 59 years). The already large numbers and per capita consumption of this group will grow modestly by 7 percent and 24 percent, respectively, from 2015 to 2030. Many younger consumers are under income pressure and are cost conscious in their spending.

Consumption is shifting toward services, reflecting two trends: heavy spending on health care among aging consumers in developed regions, and increasing spending by consumers in emerging economies as their incomes rise to thresholds where consumption of services such as communications, transport, restaurants, and catering takes off.

Cities matter. By 2030, consumers in large cities will account for 81 percent of global consumption and generate 91 percent of global consumption growth from 2015 to 2030. Global urban consumption is extraordinarily concentrated—just 32 cities are likely to generate one-quarter of the $23 trillion in urban consumption growth projected from 2015 to 2030, and 100 cities will be responsible for 45 percent of that growth.

Consumption and growth are now coming under pressure in many cities as population growth slows and urbanization plateaus in many countries. Six percent of large cities—most of them in developed regions—are already experiencing declining populations. However, others, particularly in emerging economies, continue to grow, and will be home to rising numbers of consumers to watch. Roughly 700 large cities in China alone will account for $7 trillion, or 30 percent, of global urban consumption growth to 2030.

Companies need to understand how shifting demographics impact their organization’s footprint. If that footprint doesn’t match the most promising consumer markets, they may need to adjust their strategy 

Knowing which cities—and even neighborhoods within cities—are home to key consumers of the future will matter. Companies need to navigate their way through arguably the most diverse consumer markets in history, managing parallel products and channels for increasingly disparate consumer groups. And, finally, the growing importance of services needs to be factored into the thinking of all consumer-facing businesses.

 

A link to the full report is posted in the Subscriber's Area.

The global birth rate has peaked so people are having fewer children and therefore will spend on each one of them. This helps to explain why people with two children in developed cities often complain they cannot afford a third child while people in less developed countries have many more children without the same consideration. The birth rate may have peaked but if the path taken by developed countries is any guide the expenditure per child will grow. 

South-east Asian markets are rebounding as accelerating economic growth and calmer currencies attract investors seeking refuge from the volatility rocking markets in China and Japan this year. That is a reversal of fortunes from 2015 when the region's equity gauge plunged 21 per cent as prospects for higher US rates spurred capital outflows.

"The risk-on trade is back on. This is a short term rebound after a tumultuous fourth quarter," said Mr Geoffrey Ng, director at Fortress Capital Asset Management Sdn in Kuala Lumpur, which oversees about US$238 million (S$322 million). "This is fueled partly by greater certainties of the path of US interest rates."

South-east Asian assets have stabilised after Federal Reserve Chair Janet Yellen signaled in early February policy makers will not rush to raise rates amid turbulence in global markets. The Fed earlier this week scaled back expectations for interest-rate increases this year.

 

A point made repeatedly by this service is that when a currency has been falling for years, competitiveness improves and all foreign investors are waiting for is a sign that the central bank is willing to stem the slide for them to begin bargain hunting. 

A number of court injunctions have stopped Luiz Inacio Lula da Silva from taking a job in Rousseff’s cabinet, dashing hopes that the former president would use his political abilities to rebuild the government coalition and defuse the impeachment threat.

The decision to block Lula’s appointment “will deprive Rousseff’s government of a crucial power broker capable of rallying her base,” Neil Shearing, chief emerging market economist with Capital Economics, wrote in a note to clients. “Her term in office looks increasingly likely to be curtailed.”

The first injunction against Lula’s nomination was issued by a federal judge just one hour after his swearing-in ceremony on Thursday. It was later struck down by a higher-court judge but the legal battle is set to continue, with several others cases being considered all over the country, including in the Supreme Court.

Rousseff said her government respects the courts but that the judicial system “can’t be politicized.” She lambasted federal judge Sergio Moro’s decision to release phone recordings that critics say show she appointed Lula to shield him from a corruption probe.

According to Brazilian legislation, only the Supreme Court can probe, indict or imprison presidents and cabinet members.

 

With the kind of protections from prosecution enjoyed by the President and cabinet of Brazil there is no chance Rousseff will resign of her own accord. To do so would immediately result in her being indicted for her role in the Petrobras bribery scandal as well as a number of other payment schemes that have come to light since she became President. That means impeachment is the only route to a new government. 

In Argentina’s case, the move to a free float in December eliminated the 4.2-peso gap between the official and black market rates. In the months prior to the move, it cost as much as 50 percent more to buy the currency on the street than at the central bank rate.

That premium is similar to what currency vendors in Nigeria’s capital Abuja are charging for dollars now, while hawkers in Tashkent are demanding more than double to convert the Uzbekistani soum. The cost to buy the U.S. currency in unregulated trading in Egypt keeps rising even after the central bank devalued the pound three times last year.

The street rate “is a better reflection of where a market- based rate should be," said Simon Quijano-Evans, the chief emerging-markets strategist at Commerzbank AG in London. It shows “how domestic participants and individuals really feel about their currencies,” he said.

 

The Nigerian Naira has unwound its oversold condition relative to the trend mean following the last devaluation in early 2015. The black market for the Naira suggests the relative strength of the stock market may be pricing in an impending devaluation rather than any particular strength in the underlying shares. With oil prices as low as they are, the pressure coming to bear on producers, that have not maintained control of their budgets, suggests we have not seen the end of devaluations. 

Regardless of whether one agrees or disagrees with the merits of road building it is incontrovertible that plans for a Pan American Highway began in early 1920s while Pan African roadways are still a long way from being complete. That alone helps to exemplify how underdeveloped infrastructure and intragovernmental cooperation is on the continent.  

Two, pessimism is setting in just when the city's benchmark interbank borrowing rate is climbing. To the extent Singapore banks' net interest margins in recent years have been hostage to the abundance of cheap money, investors had a reason to be optimistic. Clearly, China-related jitters are trumping any hopes of them being able to turn their low-cost deposits into higher-priced loans, especially without a revival in the property market:

Three, the pecking order has changed since China's shock Aug. 11 devaluation. Before that, UOB, the smallest of the trio by market value, had the lowest price-to-book ratio. Now it has the highest. Interestingly, this shift has occurred even as analysts have marked down their estimates of UOB's 2015 per- share earnings by almost 3 percent over the past four weeks. It seems investors are giving UOB the benefit of the doubt because of its lower exposure to Asia's biggest economy:

Ultimately, though, it's impossible to accurately assess Singapore banks' actual vulnerability to a China meltdown. All three are regional lenders with significant corporate loan books at a time when companies in Asia are facing deep distress because of the way China's flagging demand for commodities has caught them off guard. Ripples in the high-yield bond market are giving a strong signal that 2016 may well turn out to be a year of accelerated loan-loss provisions for them. Investors may be right to seek cover.

Singapore has benefitted enormously from its status as a private banking centre over the last decade. The rise of China, India and wider ASEAN has created plenty of demand for the strong governance and professionalism to be found in the city state. That’s worth remembering as the banking sector is buffeted by currency market volatility, China’s slowdown, the commodity bear market and rising interest rates. 

“Markets have a deep skepticism that we’ll ever see a pickup in inflation,” Stanley said in an interview. But market participants are implicitly assuming energy commodity prices will continue to fall as fast as they did in late 2014, when energy prices dropped more than 20%. “The bulk of the movement took place roughly a year ago,” Stanley said.

The Fed expects headline and core inflation to drift higher in 2016 to about 1.6%, and Stanley believes that forecast is the key to what the Fed will do this year. If inflation doesn’t begin to move higher soon, it’s likely that the Fed won’t raise rates more than one or two times. But if inflation surprises the Fed, as Stanley believes it will, then the Fed would be more aggressive.

“It wouldn’t shock me if inflation is higher than the Fed thinks it will be, and they may go one or two more times than is baked in,” he said.

Although markets are intensely focused on the global economy, Stanley argues that the domestic economy is what matters most. “The U.S. is a relatively closed economy,” with global trade accounting for only about 15% of the economy.

“The global economy won’t be entirely healthy, but it won’t deteriorate, deteriorate, deteriorate,” he said.

As for the U.S. economy, Stanley sees a relatively healthy household sector, with rising incomes and an improving housing market, continuing to do better than the business sector, with its soft investment spending.

 

A point both David and I have made, particularly in the Subscriber’s Audio, is that the sharp declines in commodity prices will have a transitory effect on inflation figures because they cannot continue to fall at the current pace indefinitely. Once prices stabilise the effect on inflation statistics will wash out in a couple of quarters and the rising cost of services and wages will be more apparent. There is also the possibility that rebounds in commodity prices, from very oversold levels, will have an inflationary impact. I believe that is why the Fed continues to believe inflation will be higher later this year. 

What are the implications for Tate and Lyle of a secular bull market in sugar?

I agree there is a secular demand growth story for sugar but that does not mean there is a secular uptrend in sugar prices considering the ability of farmers to increase supply over the medium term. Nevertheless, the current outlook is for additional strength is sugar prices following the break of the five-year downtrend. 

According to the report, while Hon Hai — known as Foxconn Technology Group (???) outside Taiwan — has proposed acquiring Sharp at a high premium, it also wants Sharp’s current management team, including president and chief executive officer Kozo Takahashi, to step down.
Hon Hai would send a team to Sharp to manage the firm, the report said.

Hon Hai also plans to take over the debt shouldered by Sharp to help the firm address its financial problems, the report said.

However, the report also said that Hon Hai has yet to talk with Sharp’s bank creditors.

The report said that Sharp was shouldering about ?760 billion in debt as of the end of September.
Hon Hai is not the only potential suitor seeking to buy Sharp, the report said, adding that the Innovation Network Corp of Japan (INCJ), which is sponsored by the Japanese government, is studying a buyout of Sharp.

The report said that the INCJ still needs some time to map out a concrete acquisition deal, and the proposal is unlikely to come out until next year, so Hon Hai is taking advantage of the vacuum created to make a deal.

 

Hon Hai Precision is best known for assembling Apple’s iPhone as well as being one of the world’s largest employers. As a fabless manufacturer it generally does not promote its own brands so the potential acquisition of a manufacturer with global brand recognition such as Sharp is an interesting development. 

Over the period between Christmas Eve and New Year a lot of people take some time off with the result there are fewer traders around to execute orders. Market liquidity tends to dry up. We occasionally see enterprising traders take this as an opportunity to pressure stops in an attempt to reverse short-term overbought or oversold conditions. 

Global risk appetite for riskier markets has suffered a blow since South African President Jacob Zuma dismissed Finance Minister Nhlanhla Nene and replaced him with David van Rooyen, a lawmaker who is little known to investors. The developments are weighing on emerging-market countries, including Turkey, and sapping investment interest that has been pounded amid heightened tensions in the Middle East and expectations for a Federal Reserve interest rate increase next week.

“When something negative happens in one EM currency, especially such a popular one as the rand, it has an impact on other currencies,” Piotr Matys, an emerging-markets currency strategist at Rabobank Group in London, said by e-mail on Friday. “While a strong reassurance from the Fed that it will raise interest rates very gradually should keep USD/TRY below the all-time high at 3.0752, all bets will be off if USD/ZAR extends its gains well above the 16.00 threshold.” The South African currency was trading 2 percent lower on Friday at 15.7750 per dollar.

 

Open warfare in two bordering countries, a dispute with Iraq about how many troops it should have on the ground, fears the Kurds, whom Ankara considers terrorists, might be the ones to forge a new country out of the current crisis and sharply deteriorating relations with Russia all represent headwinds for Turkey. 

The reckless firing of South Africa’s finance minister is far from good news because Turkey has so often been lumped together with South Africa in the Fragile Five. The term was coined two years ago by an analyst at Morgan Stanley. Here is a link to a piece I wrote in early 2014. 

“The government has crossed a line which it hasn’t crossed for the last 20 years,” Steven Friedman, director of the Center for the Study of Democracy, said by phone from Johannesburg. “This is really, effectively, the first finance minister to be fired since 1994. The accurate perception is that the reason he was fired is that he was doing his job, insisting on fiscal discipline.”

While Zuma announced in February that the government had taken a decision to build new nuclear plants, Nene insisted that South Africa had to be able to afford them. Nene also clashed with the chairwoman of South African Airways, Dudu Myeni, a former schoolteacher who also heads Zuma’s charitable foundation, after he refused the national carrier permission to restructure a plane-leasing deal.

“It is common knowledge that Nhlanhla Nene sought to rein in excessive government spending and was causing too much of a blockage for President Zuma in respect of the nuclear procurement deal and SAA,” Mmusi Maimane, the leader of the main opposition Democratic Alliance, said by e-mail. This is “yet another example of how President Zuma puts himself first and the country second.”

 

Some of the best vacations I’ve had have been to South Africa and with the Rand making historic lows against a host of currencies the Sardine Run in 2016 is sounding increasingly enticing. While the Rand’s decline certainly makes South Africa more attractive as a tourist destination, the slide in standards of governance mean the country will be less attractive for foreign companies seeking manufacturing and services venues.  

VF hasn't publicly announced any deals for four years -- its longest drought ever, according to data compiled by Bloomberg.

It's last big takeover was the $2 billion purchase of boot maker Timberland in 2011, and  it dropped a pursuit of surf brand Billabong in 2013 after the company wanted more than VF thought it was worth.

The dearth of new deals is starting to make itself felt: Analysts are projecting VF's sales will rise just 2.8 percent this year, the smallest gain since 2009.

Part of that slowdown is tied to a broader trend among retailers from which VF hasn't been immune. Cheap, fast-fashion brands such as H&M and Zara are drawing customers away from middle-of-the-road purveyors of basics like jeans and T-shirts, just as they get slapped by the strong dollar. Weaker demand and piled-up inventory forced VF to cut its profit forecast in October, sending the shares into a tailspin. 

VF still has a lot going for it. The company's brand mix is diversified enough to help shield it from downturns in specific categories and a robust supply chain lets it better manage inventory levels in response to changes in demand, says Canaccord analyst Camilo Lyon. All of that should position VF to ride out the retail industry's current hardships. But taking advantage of opportunities to bargain shop for more brands as others struggle would put it in an even better position.

 

Companies like H&M and Inditex have new lines hitting stores every week. As I mentioned on my return from China in November there are shops in major cities with new lines every day. For companies still wedded to the idea they can do a new collection for every season this represents a major wakeup call and there are clear winners and losers. 

While investors in the past have been split about whether impeachment would be positive for Brazil, some now say that the decision could finally lead to a resolution of a months-long political stalemate. Rousseff’s administration has struggled to push through fiscal changes she says are needed to reverse the biggest budget deficit in more than two decades and ward off further credit-rating cuts for Latin America’s largest economy.

"This euphoric reaction of the stock market today shows how much investors are eager for some kind of solution that ends this turmoil and paves the way for the country to get back on track," Alvaro Bandeira, an economist at Banco Modal, said from Rio de Janeiro. "There’s still a lot to happen before a final settling, so we should be prepared for more volatility in the coming weeks."

The president, who started her second term in January, has been fighting for her political survival for months, leaving Congress in disarray, rattling financial markets and deepening an economic slump poised to be the worst since the Great Depression. The political crisis has made the real the worst-performing major currency in the world this year, and set stocks on pace for a third year of losses.

At first blush the surge in Brazil’s stock market today could have been related to the Dollar’s weakness against the Euro or the fact that oil prices steadied. However if one looks at the performance of a range of other Latin American commodity exporters there is no confirming evidence for this contention. 

The impeachment of Dilma Rousseff on the other hand is a decidedly Brazilian affair and has been overhanging the market since she won the election last year. Since she was a senior executive at Petrobras during a time when avarice was consuming revenues at a depressing rate and is now the President, the obvious conflict of interest represented by her administration represents a major headwind to governance improving.

The creation of a new energy ministry speaks of the increasing importance of Argentina’s burgeoning oil industry.

Aranguren, former CEO of Shell Argentina, will be in charge of attracting investment to the Vaca Muerta formation, the world’s second-largest shale gas deposit and fourth-largest shale oil reservoir. He’ll also head up attempts to unravel the current government’s system of utility bill subsidies that contributed to an estimated budget deficit of 7.2 percent of gross domestic product this year.

An outspoken critic of the current government who frequently sparred with some of its officials, Aranguren has already made clear his different outlook, saying he would prefer to import energy while prices are low rather than maintain subsidies on oil. His double role as mining minister suggests Macri’s government may be more proactive in developing that sector after years of stagnation.

 

Argentina is not Iran but they both share the ignominy of having been locked out of the international markets for a long time. Argentina is blessed with abundant natural resources and an educated workforce. A trend of improving standards of governance has been lacking for decades but, with expectations so low, the potential for a positive reaction from investors from even a modest uptick has to be the base case. 

(2) Commodity exporters (top three EM in this group are Brazil, Russia and Indonesia): While USD appreciation was already resulting in an exogenous monetary tightening in these countries, a simultaneous downward trend in commodity prices and weakness in non-commodity exports hit these economies hard. Domestic demand in these economies has been impacted adversely since 2Q15, as reflected in the trend for real imports.

(3) Commodity importers (top three EM in this group are India, Korea and Turkey): Commodity importers in EM have also seen a slowdown in exports but their domestic demand has seen a positive offset in the form of the terms of trade, which has also helped to improve their current account balance. Lower inflation has encouraged the central banks to ease monetary policy even as the dollar has been rising.

Advanced Stage of Adjustment, EM Drag to Decline
While we think the EM adjustment is not yet complete, we expect the EM drag on global growth to reduce as all three factors – terms of trade, real rates needed in response to the rise of the dollar and unwinding of domestic misallocation – will become less onerous. Particularly on the issue of real interest rates, the top ten EM excluding China have now lifted their real interest rates about 270bp higher than US real rates. With real rates remaining high as EM continues on the adjustment path, a number of them, though not all, are likely to see improvement in macro stability indicators including their current account balances and inflation. Indeed, we expect more EM central banks to cut policy rates, though still on a selective basis, in 2016.

 

A link to the full report is posted in the Subscriber's Area. 

2015 has already seen some major declines in emerging market currencies with a number of Asian currencies testing their Asian Financial Crisis lows while commodity related currencies are also testing historic lows. A crisis needs to be seen to be getting worse for it to continue to have such a marked effect on prices. Rather than focus on the extent of the problem, the better question at this stage is to ask how much worse is it likely to get? 

The most important next step will be as and when VW will conclude its internal investigations,” Arndt Ellinghorst, a London-based analyst for Evercore ISI, wrote in a note Monday. A program the company set up to encourage whistle-blowers expires Monday, and VW plans to present interim results of its internal inquiry in mid-December.

The carmaker is facing an emissions scandal on three fronts: cheating software it installed in about 11 million cars worldwide; irregular carbon dioxide ratings on about 800,000 vehicles in Europe; and additional questionable emissions software in about 85,000 VW, Audi and Porsche cars with 3.0-liter diesel engines in the U.S. Approval of repairs in Germany, and by extension the rest of Europe, doesn’t guarantee a thumbs-up in the U.S., where regulators first uncovered Volkswagen’s diesel deception.

For the smaller diesels, the German manufacturer has submitted a plan to repair nearly half a million cars to U.S. regulators. A response is due in December. For the bigger diesels, the company plans to alter the questionable software, known as an auxiliary emissions control device, and resubmit it for approval.

 

Volkswagen has sustained a great deal of damage to its reputation as a result of its subterfuge in marketing “clean diesel”. The big question is how they can contain the cost of fixing it and if that can be achieved with introducing an additional filter which does not impact performance that would be very good news. 

Goldman Sachs predicted that developing countries will grow 4.9 percent next year, from an estimated 4.4 percent in 2015, marking the first acceleration since 2010. While it is still below the long-term trend, the improvement can only help boost investor confidence given the current “widespread bearishness,” the analysts wrote.

“We would part ways with the extreme pessimism that we sometimes encounter about the long-term prospects for EM assets,” they said.

The MSCI Emerging Markets Index rose 0.5 percent at 10:31 a.m. in London, extending its weekly advance to 2.5 percent. A gauge of 20 developing-nation currencies gained 0.8 percent in the past five days, paring this year’s slide to 12 percent.

Goldman Sachs said the biggest risk is a “significant depreciation” of the yuan. A stronger dollar and slower growth in China may prompt policy makers to allow the currency to fall with a spillover effect rippling through emerging markets, the report said.

“In our view, the fallout from such a shift is the primary risk,” the analysts said.

 

Falling commodity prices and competitive devaluation have played havoc with Eastern European, Latin American and Asian currencies. At the Singapore venue for the Chart Seminar earlier this year the majority of the currency discussion focused on the need to hedge exposure to the Euro while delegates considered the risk represented by the Chinese Yuan too much trouble since the market has been inert for so long. There is career risk in being too early particularly if another market is offering greater short-term opportunities, but is also worth remembering that we define a range as “an explosion waiting to happen”. When the status quo shifts there can be meaningful changes in trend. I suspect this will be a topic of conversation at next week’s London venue for The Chart Seminar now in its 46th year. 

The Dollar has been firm, that’s not news, but it experienced a sharp pullback against most currencies following the market low in risk assets from early September. This rebound has not influenced every currency equally and while most have held their gains, a number posted new lows.  These are the Philippine Peso, South African Rand, Norwegian Krone, Peruvian Sol and the Canadian Dollar is testing its low. 

The world will need an estimated 5mt of additional mined copper by 2025

Copper demand has grown 3.2% each year since the end of WWII. However, we estimate that this growth rate will drop over the next 15 years to be below trend at 3%. This takes into account our GDP expectations, ongoing industrialisation of the emerging market economies and further substitution.

Despite the strong growth in copper demand in China over the past decade (2000-2010, near 15% CAGR), global copper demand was a more muted 2.4% The high price environment of 2005-2008 led to demand destruction of around 2.2mtpa, with widespread substitution.

Taking into account increased secondary supply (+3% pa), mine depletion from falling grades (see Figure 29) and supply additions already underway, we estimate the world will need an additional 5Mtpa of mined copper by 2025, or around 500kt each year. This is more than a Collahuasi-sized mine each year (445kt in 2014) or two Andina-sized mines (232kt in 2014).

Time to first production is now at least 12 years
As shown here, for a typical Greenfield copper mine, the time to first production is at least 12 years. For diamond mines, the time frame has extended to an average of 22 years. For gold mines, the average time frame for the mines currently producing in Cote d’Ivoire was 15 years to get to first production (see Figure 32).

And 

Most major known deposits are currently exploited across Chile, Australia, North American, Russia and China. As shown earlier (in Figure 1 on page 4), Africa has a wealth of mineral resources, hosting 95% of the world’s known platinum, 65% of its manganese, 50% of its diamonds and cobalt, 40% of its gold, 30% of the world’s bauxite, and approximately 10% of the world’s known copper sits in the Central African Copperbelt. Yet today, Africa supplies only 11% and 12% of the world’s copper and gold respectively, plus just 9% of its thermal coal.

 

A link to the full report is posted in the Subscriber's Area. 

This report carries a very interesting graphic illustrating the number of conflicts that occurred in the 1990s compared with the last decade. Relative peace has broken out across the continent despite some high profile trouble spots grabbing attention. The question then is to what extent higher commodity prices contributed to this easing of tensions? 

In an environment characterised by a dearth of capital, the potential for armed conflict increases as access to basic resources such as food, energy and shelter is inhibited. The commodity bull market meant revenues increased and reduced the incentive for conflict. The question now is how many of the gains achieved in the last decade can be held onto and improved upon. Standards of governance are integral to this question because without improvement the potential for a number of major African countries to miss out on development over the next decade increases. 

The 10 year weekly chart of General Electric suggests an important break out from a long term range and a move towards the old highs.

General Electric floated the idea of dispensing with its finance arm more than a year ago but confirmed the decision in April with the aim of getting back to its industrial roots. We are now seeing the fruits of that decision. GE represents a dominant player in a number of finance businesses not least aircraft leasing and had become among the world’s largest banks ahead of the financial crisis. It had fallen into a practice where it was making more money from financing the sale of its products than it was from selling them and this left the company exposed to a credit shock which saw the share fall 75% in 2008. 

For the second time in Brazil’s 30-year-old democracy, the country finds itself lurching toward the impeachment of its president.

A group of high-profile lawyers plans to file a request Wednesday to begin the proceedings, nudging President Dilma Rousseff closer to being ousted after months of will-she or won’t-she-be-impeached speculation that has paralyzed Congress, rattled financial markets and deepened an economic slump.

If lower house President Eduardo Cunha, a Rousseff rival, accepts the request, it will trigger a months-long process and exacerbate the drama of corruption and political infighting that has highlighted Brazil’s fall from emerging-market darling.

Weakened by a bribery scandal that started at the state-run oil giant and has helped push her approval ratings to record lows, Rousseff is accused of doctoring the government’s 2014 and 2015 fiscal accounts. While the outcome of the impeachment effort is far from clear, economists and investors agree: The political stalemate needs to be resolved -- and quickly.

Without stability in the capital, they say, Latin America’s biggest country will struggle to shore up its soaring budget deficit, win back investors and rebound from what’s projected to be the longest recession since the Great Depression.

 

Ahead of the 2014 election I was hopeful Dilma Rousseff would be defeated and believed that her ouster would be a positive catalyst. Unfortunately she won and the market didn’t like it. The subsequent decline in oil prices has exposed additional problems with Petrobras and examination of those issues has revealed just how much corruption there is and how inextricably linked the President is to it. Eduardo Cunha ran against Rousseff in last year’s election so he will need to tread delicately in possibly sanctioning an impeachment lest he be seen as simply taking revenge. 

Yum! Brands Inc., whose restaurants have been selling crispy chicken in Beijing since 1987, plans to split its China business off into a separate publicly traded company following pressure from activist investor Keith Meister.

The new company will be led by Micky Pant, who was named the China unit’s chief executive officer in August, the Louisville, Kentucky-based company said Tuesday in a statement. Greg Creed will continue to lead Yum.

Yum is hiving off the China business after a prolonged sales slump caused by food-safety scandals and increasing competition from local fast-food chains. Meister, a protege of billionaire Carl Icahn, has said the company’s Asian market could be better served with a more focused business and that the move could boost Yum’s value by $7 billion. The company said Tuesday that it is committed to returning "substantial capital" to shareholders in connection with the split.

Yum shares rose 4.2 percent to $74.75 at 7:09 a.m. in early trading in New York. The stock had slid 1.6 percent this year through Monday.

Splitting up the company is a big decision which was probably precipitated by the large profit miss earlier this month. KFC has been enormously successful in China but the question now is whether it has reached capacity. It is certainly ubiquitous in the larger cities so the company’s Chinese growth will depend on incomes rising, for what is a premium product, in tertiary cities particularly in the west. 

Can you access the DAXK on Bloomberg? It’s the DAX without dividends reinvested. Then we can compare apples with apples as it were!

Thank you for this suggestion. The DAX is a total return Index so its 2.92% yield helps to flatter total return over the medium-term and makes shorting the Index a rather expensive proposition relative to nominal indices. I’ve added the DAXK to the Chart Library and you will observe that it has a similar chart pattern but I agree it makes sense to compare nominal indices with nominal indices in one’s analysis. 

Mr. Cook, appearing later, disagreed on the latter point. “I don’t know a way to protect people without encrypting,” he said. “You can’t have a backdoor that’s only for the good guys.”

Apple and federal officials have been at odds for more than a year, since Apple issued a new version of its mobile-operating system that it said safeguards user information, even from law enforcement. But the White House signaled recently that it won’t seek new laws to force tech companies to make products that allow law enforcement to eavesdrop.

 

The USA is finally introducing chip and PIN technology and not before time. My credit card details have been compromised at least four times in the last two years. I’ve now got identity protection from ULCA Health, Anthem, Target, Home Depot but the letter I received yesterday was the one I was most surprised about. Experian, the firm other companies use to check the credit of a customer has been hacked with the loss of untold quantities of client data. In many respects I hope its Chinese government backed hackers since they have little interest in me specifically but after so many incidents one simply has to assume that our most personal data is out there in the public domain. 

“Everyone is fighting over the same drivers,” said Dan Pallme, director of the Intermodal Freight Transportation Institute at the University of Memphis. “Eventually, what has to happen is salary has to rise, and the only way motor carriers can do that is by increasing the costs to their customers.”

The long-haul trucking industry, which employs about 800,000 people today, needs an additional 48,000 drivers, according to the American Trucking Associations, a trade group. That is a tall order at a time when unemployment is falling. Many who might have considered trucking are opting for construction work, a job that doesn’t involve long stretches away from home and pays competitive wages.

 

There is little commonality in the performance of trucking shares as they grapple with attracting more workers while also being required to carry lower cost items and facing competition from railroads. It’s still a number of years away but haulage is a prime target for autonomous vehicle manufacturers and the incentive to come up with a workable solution is all the more compelling with wage hikes such as those detailed in the above article. 

Myanmar has ambitious growth plans [12]. Officials in Naypyidaw have forecast a national growth rate of 9.3 percent for the 2015–16 fiscal year through a combination of job creation and activity in tourism, telecommunications, agriculture, and other sectors. Inadequate power proves particularly troublesome for the manufacturing sector. In Mandalay, one foundry prices its production of pumps differently depending on whether they are produced during rainy season, when hydroelectric and grid power is available at lower prices, or during the dry season, when the company must supplement supply through diesel-powered backup generators. Making matters worse, the nation’s use of subsidized tariffs means that the government provides power to citizens at a loss. Several years ago, it was estimated these subsidies created an annual deficit of over $275 million. Under past regimes [13], when economic development and domestic energy use were less of a priority, revenue gained from oil, gas, and other resource exports was used to finance the country’s survival in the face of a harsh sanctions regime. These programs largely benefited a small group of elites and select institutions and are now unpopular, even though the capital and expertise that is derived could potentially fund power sector development.

According to the World Bank, universal electrification should be both “achievable and affordable” in Myanmar by the year 2030 [14]. To this end, the organization has committed $1 billion in financial support [15] to expand electricity generation, transmission, and distribution for the national grid as well as off-grid development. The funds will be utilized to support a National Electrification Plan [16], which the government has developed in cooperation with the World Bank over the past few years. An initial $400 million loan was recently approved by Myanmar’s National Assembly as well as by the World Bank Board of Directors. Coordination meetings between donors, interested private firms, and other parties are now under way, with an anticipated program launch for the first phase before the end of the year.

South East Asia has a wonderful record of previously underdeveloped countries emerging as vibrant manufacturing and consumer economies. With that kind of record there was considerable enthusiasm expressed at the potential for Myanmar to following in the footsteps of many of its neighbours as the political climate evolves. Despite the fact this frontier market has vast upside potential it still suffers from the issue that the number of investment vehicles one might choose from is very limited. 

Patent applications in India for Sovaldi, also known as sofosbuvir, and Daklinza, also known as daclatasvir, are being challenged by groups of patients, lawyers and scientists. Decisions on whether Indian patents will be awarded to the two U.S. companies are pending. If they don’t win patents, it would pave the way for Indian generics and combination pills.

India’s patent office has rejected patents for drugs including Novartis AG’s cancer treatment Gleevec and Roche Holding AG’s HIV treatment Valcyte. In 2012, an Indian patent appeals board revoked patent protection for Roche’s hepatitis C injection Pegasys. The patent office didn’t answer calls seeking comment.

Generic Licenses
If the patent challenges on the Gilead and Bristol-Myers drugs fail, Indian companies would need to win licenses to copy the patented drugs and combine them. Bristol-Myers is in advanced discussions with Indian drugmakers for licenses to make and sell generic daclatasvir in 90 countries, spokesman Rob Perry said via e-mail. The intended agreements would allow the development of combination medicines if the licensee has rights to other drugs, Perry wrote.

Gilead last year licensed 11 generic drugmakers including Hetero Labs Ltd., Cipla and Aurobindo Pharma Ltd. to make and sell generic sofosbuvir in 101 developing countries. Those agreements also allow the development of combination medicines with other companies’ drugs, Cara Miller, a Gilead spokeswoman, wrote by e-mail. Spokespeople for Cipla, Hetero and Aurobindo didn’t respond to e-mails seeking comment.

 

Indian drug makers enjoy a charmed existence within a loose regulatory framework, large domestic population and international exposure to a host of countries with similar values and an inability to pay the same prices as North American and European customers. This has allowed a number of companies to develop significant positions within the global generic pharmaceuticals sector. 

Veteran subscribers will be familiar with our distaste for the acronym “emerging markets” because it is a very big world out there and it rarely pays to group them all together. Nevertheless, there is no denying that many investors do group them all together and the performance of indices like the MSCI Emerging Markets has an impact on sentiment.

The constituents of the Index have evolved quite considerably over the last few years, moving from a heavy focus on Brazil, Russia and China to China (18%), South Korea (15.24%), Taiwan (12.3%), India (8.75%), South Africa (7.91%) and Brazil (6.39%) at present.

The Index broke down from a lengthy medium-term range in July and has stabilised in the region of 800 over the last month. Potential for a reversionary rally is now looking more likely than not. 

DuPont shares surged Tuesday by the most in six years in anticipation that more value will be unlocked. The Wilmington, Delaware-based company said Kullman will be replaced later this month as both CEO and chairman on an interim basis by board member Edward Breen, who oversaw the dismantlement of Tyco International Plc.

Earlier on Monday, Trian Fund Management, the activist investor that argues DuPont would be worth more as two companies, announced it had added to its stake in the company.

In May, Trian co-founder Nelson Peltz led the firm in its proxy fight in a doomed attempt to get three board seats.

"It’s kind of bittersweet, because Trian is vindicated in some respects," said Hank Smith, who helps manage $6.5 billion as chief investment officer at Haverford Financial Services Inc.

in Radnor, Pennsylvania. "If DuPont had embraced Trian earlier on and welcomed Peltz on the board, Ellen Kullman would still be CEO."

 

Speciality chemicals is an amorphous terms used to describe businesses leveraged to everything from agriculture, energy, healthcare, home improvement and anything in between. The drawdown in commodity prices affected at least two of those segments and the difficulties experienced by Latin American countries has been an additional headwind particularly for DuPont. 

One of the original reports on the potential of unconventional gas was written by analysts at Citigroup and titled “Shale Gas: a gamechanger for the chemical sector”. The boom in unconventional oil and gas drilling was a major benefit for chemical companies supplying the “mud” that lubricated the drill bit and keeps the fractures open so oil and gas can flow. The reduction in drilling activity has been an additional headwind and contributed to the relative underperformance of chemical companies. 

The track record suggests that brands that have focused on productivity already in past years – such as Hermes, LV, and Cartier – are already reporting sustainable outperformance in sales and profitability. Higher levels of productivity give room to invest in the brand equity for the long term and finally create unprecedented levels of cash flow. In this volatile environment, these qualities are even more valuable than catch-up opportunities, in our view. At the opposite side of the spectrum, brands that have lower-than-average productivity are likely to face increasing margin pressure: the risk is a short-term reaction, at the expense of the brand equity, with a potentially higher toll to be paid in the longer term.

We have therefore summarized into a unique Brand Power Index the weighted average combination of the quartile ranking across seven dimensions for each brand. Three quantitative measures have received a 20% weight each: retail productivity, brand productivity, and Return on Capital. Four more qualitative and therefore discretionary variables have received a 10% weight each: pricing discipline, exclusivity, brand momentum, and organic opportunity to improve margins. Based on the relative positioning across several variables, we have identified, as shown in Figure 5, the brands that rank in top quartiles. This provides a framework, as objective as possible, to evaluate brand productivity, margin sustainability, and opportunities to improve. An interesting fact about this index is that successful implementation of appropriate strategies can help companies improve their scores.

 

A link to the full report is posted in the Subscriber's Area.

Before Xi Jinping cracked down on extravagant displays of personal wealth among the Communist Party’s elite, there was high demand for just about all luxury brands and strong commonality was evident right across the sector. The more recent slowdown in the Chinese economy has exacerbated the issues facing luxury goods with the result that there are some clear winners and losers. 

Two weeks after the Latin American country lost its investment grade at one of the three major ratings providers, CDS investors are punishing other emerging markets facing similar challenges, sending their implied ratings at least five levels below their official grades, according to data from Moody’s Corp. Malaysia is A3 at the company, though traders see it six levels lower at Ba3. South Africa, which is a Baa2, is viewed as a B1 borrower. Three Aa3 nations including China are perceived by the markets as deserving the lowest investment grade.

Most developing nations are confronting the same issues that saw Brazil losing its investment-grade rating at Standard & Poor’s -- a plunge in commodity prices, a slumping currency and political turmoil. Sputtering growth in China and the prospect of higher U.S. interest rates are also boosting concern of more downgrades across emerging markets. Having been censured for laxity during previous market meltdowns, the ratings providers won’t want to be caught failing to act this time round, Per Hammarlund of SEB AB said.

“The deterioration in commodity-dependent economies’ credit-risk metrics can lead to more downgrades in emerging markets in the next three to six months, if not earlier,” said Hammarlund, the chief emerging-markets strategist at SEB in Stockholm. “The rating agencies were roundly criticized for being slow to react during the 2008 crisis as well as the 2011 euro-zone crisis. They are going to be much more trigger happy this time.”

 

The 2037 Brazilian US Dollar denominated benchmark with a coupon of 7.125% traded at a price of 155 at its 2012 peak. It traded below par for the first time since 2009 this week as the outlook for Brazil’s capacity to repay its debts has deteriorated with commodity prices and the realisation that governance has not improved to any measurable extent. The downgrade to junk status by S&P is an important development. 

The new CEO’s top priority will be getting to the bottom of a scheme intended to dupe regulators and consumers about emissions of diesel engines installed in 11 million cars worldwide -- more vehicles than VW sells in a year. The automaker set aside 6.5 billion euros ($7.3 billion) on Tuesday to cover potential costs.

VW’s Achilles heel remains the American market. Even before the revelations of the last week, the VW marque was struggling in the U.S., despite investing $1 billion on a new factory in Tennessee to build a stripped-down, cheaper version of the Passat sedan. The brand’s U.S. sales have dropped, in contrast to growth in the overall market, as VW delayed decisions on building sport utility vehicles that would appeal to American consumers. The automaker is also grappling with a slowdown in China, the company’s biggest national market.

Working in the new CEO’s favor is an automaker that for the moment is financially sound. Volkswagen’s automotive division had net liquidity of 21.5 billion euros at the end of June, and posted record profit of 12.7 billion euros in 2014, helped by its strong presence in China and the expansion of the Audi and Porsche nameplates in the lucrative luxury-car segment. VW surpassed Toyota Motor Corp. in the first half to take the top spot in worldwide vehicle sales -- a goal that Winterkorn set early in his tenure to reach in 2018.

 

Unfortunately this is not corporate Germany’s first corruption scandal. Over the last decade there have been a number not least at Siemens, Commerzbank, Deutsche Bank, Man AG, and Infineon among others. Often these have centred on faking expenses and bribery but this may be the first exhibiting outright fraud. These articles from NBS News in 2005, the New York Times in 2008 and the Economist in 2009 may be of interest for historical perspective. Despite these lapses in the standards of governance at large corporations the German stock market has been among the strongest in the region. 

The DAX has paused in the region of the August low but a sustained move below that level would be required to question scope for some additional steadying in this area which would at least allow the oversold condition relative to the trend mean to be unwound. 

As this article points out cheating on emissions isn’t exactly new either. 

The Indonesian parliament’s finance commission agreed late on Tuesday to lower the expansion projection in the 2016 budget to 5.3 percent from 5.5 percent. A preliminary factory gauge released Wednesday in China, Indonesia’s largest trading partner, missed estimates and dropped to the lowest since 2009.

Investors are still waiting to see when the Federal Reserve will raise interest rates, a move that’s expected to sap demand for emerging-market assets.

The rupiah declined 1 percent, the most since Aug. 12, to close at 14,647 a dollar, prices from local banks show. It fell to 14,661 earlier, the weakest level since July 1998, and is down 15 percent this year in Asia’s worst performance after Malaysia’s ringgit.

“The rupiah continues to decline as markets pare their expectations,” said David Sumual, chief economist at PT Bank Central Asia, the nation’s largest lender by market capitalization. “This growth estimate is more realistic. At this stage, with the Fed still clouding the outlook and China continuing to slow, it’s better to be conservative than see another revenue shortfall.” 

 

Indonesia has CPI of more than 7.5% and overnight rates of 5.75%.

The Dollar’s uptrend against the Indonesian Rupiah has picked up pace over the last month and a clear downward dynamic will be required to signal mean reversion is underway. 

Amidst a macro slowdown, Chinese consumer upgrades continued in 1H15, illustrated by the sustainable outperformance of high-end beer, high-quality infant formula, natural water, new premium beverages, high-end diapers, etc. This favours foreign brands, and we view premiumization as the most challenging trend for local brands.

1H15 review: volumes down, prices up, input costs down
In 1H15, the combined revenue/NPAT of HK-listed FMCG stocks under DB coverage (ex-meat) were down 4%/up 2% yoy, largely as volumes were down, prices were up and input costs were down. In the midst of the macro slowdown we saw premiumization, continuous channel destocking and channel shifts. After the completion of destocking, the revenue/NPAT of the major A-share baijiu companies rose 5%/3% in 1H15, Nestle (NESN VX, Hold) recorded mid-single-digit growth in 2Q15, and Unilever (ULVR LN, Buy) returned to modest growth in 1H15 in China. Premium foreign infant milk formula, high-end diapers and beer continued to outperform.

2H15 outlook: de-stocking to ease, yet no signs of macro bottoming out 
After 12 months of channel destocking, we expect pressure to ease in 2H15, while the input cost inflation risk remains low. However, headwinds from the macro slowdown and channel shifts remain strong. Longer term, we think the most challenging trend for local brands is premiumization (both branding and product), as foreign brands are more experienced.

 

The wealth gap is China has created a challenge for domestic brands because the lower middle class has not yet achieved the disposable income levels required to afford many consumer goods while the upper middle class demand premium products and the security of quality that comes with foreign brands. 

Total pay in the U.K. including bonuses rose an annual 2.9 percent in the three months to July, up from a revised 2.6 percent in the previous month, the Office for National Statistics said Wednesday. The median prediction of economists in a Bloomberg survey was for a 2.5 percent increase. The jobless rate fell to 5.5 percent, matching the lowest since 2008, from 5.6 percent in the second quarter, the ONS said.

Before the Fed’s decision on Thursday, investors will also get to scrutinize U.K. retail-sales data to gauge whether, like their counterparts in the U.S., British consumers looked beyond the turbulence in global markets and boosted spending.

Sterling stayed stronger as BOE Governor Mark Carney said there’s a chance that interest rates may need to increase from a record low in early in 2016 if the economy continues to grow and inflation pressures pick up. The Monetary Policy Committee will have “feel its way as it goes” when facing a decision on tightening monetary policy within the next few months.

“The prospect of sustained momentum in the U.K. economy and the gradual firming of underlying inflationary pressure will likely put the decision as to when to start the process of gradual monetary policy normalization into sharper relief around the turn of this year,” he said in testimony to lawmakers in London.

 

The UK benefitted enormously during the credit crisis by being the first to devalue its currency. This put the economy in a sound competitive position as the crisis and eventual recovery took hold. By tolerating higher than trend inflation from 2010 the Bank of England was able to chip away at the quantity of debt outstanding and continued monetary accommodation has been a benefit for companies of all sizes. 

It’s possible that if China’s coal consumption dramatically declines, India will be there to fill the hole. Macquarie estimates that by 2025, India’s energy demand will rise 71 percent, with coal taking the lead among oil, gas, hydro, nuclear and others. The south Asian country is already the second-largest importer of thermal coal, and it might very well surpass China in the coming years. Macquarie writes:

Although all energy use will rise [in India], coal is the major theme as consumption and local production are both set to almost double by 2025 on the back of large-scale coal power plant construction plans.

The group adds that, unlike China, India has no present interest in reigning in its use of coal. Most emerging markets, India included, recognize that coal is an extremely affordable and reliable source of energy, necessary to drive economic growth.

Even if these predictions don’t come to fruition, the consensus is that we haven’t yet seen peak coal use in Asia. Estimates vary depending on the agency, but everyone seems to agree that demand in the medium-term will rise before it retreats. A 2014 MIT study even suggests that Chinese coal consumption could rise more than 70 percent between 2012 and 2040.

 

North America and Europe engage in a great deal of navel gazing when it comes to climate change and yet US emissions have been falling because of natural gas boom and the EU has seen aggregate emissions decline not least because of its sluggish economic recovery. The main future contributors to carbon emissions are the up and coming developing economies. If governments are truly interested in tackling the issue, doing everything possible to help China and India migrate from coal is in everyone’s interest. This is no small task because above all else coal is cheaper now than it has been in a decade. 

The two largest brewers have been seen as the end game for global beer mergers. An acquisition of SABMiller, led by CEO Alan Clark, would give AB InBev access to more than $7 billion of revenue in Africa with brands including Castle lager and almost $4 billion of sales in Asia, reducing AB InBev’s dependence on the Americas and Brazil.

With Latin America representing SABMiller’s biggest market, a deal would also broaden AB InBev’s presence in countries such as Colombia, Ecuador and Peru. Its Latin American brands include Cristal and Aguila.

AB InBev’s growth has been based largely around acquisitions since it was formed through a series of purchases by a group of Brazilian businessmen led by Jorge Paulo Lemann. Some analysts have speculated that Lemann’s 3G Capital could help orchestrate a takeover of SABMiller, just as it did when InBev NV bought Anheuser-Busch in 2008.

 

Capitalism trends towards concentration as the strong consume the weak. This has created a situation where groups of companies we might consider oligarchies control substantial footholds in a large number of sectors. A potential tie up between Anheuser-Busch InBev and SAB Miller would represent a further iteration of this trend. 

After the Tresiba setback, Novo quickly began a heart safety trial demanded by the U.S. Food and Drug Administration. The company submitted a revised application in the U.S. this March -- almost a year ahead of plan. It will know around Oct. 1 whether interim trial results point toward the introduction of Tresiba in the U.S. next year.

Even without that, Soerensen insists Novo has enough products in the pipeline to sustain sales for years. The company in August said it would proceed with late-stage testing of an oral version of a GLP-1 -- until now only available as an injection. And it’s working on an oral insulin, a formidable challenge given the difficulty of regulating absorption through the gut and managing swings in blood glucose. Though even many of Novo’s top researchers doubted the idea of pills to treat diabetes, “I said: ‘Do it anyway! Try it!”’ Soerensen said. 

 

Unfortunately diabetes is a growth sector. It thrives in an environment where people eschew exercise and indulge in sugary, savoury and spicy foods. There have been some encouraging advances in treatment and awareness of the need for lifestyle change helps, but the fact that it is a chronic condition means demand for treatment remains on a growth trajectory. 

Brazilian companies that piled on $270 billion in international debt during the boom years are seeing their funding costs rise after the nation’s credit rating was cut to junk.
     
The spread for five-year credit-default swaps to protect against a government default, one benchmark for setting what Brazilian companies must pay for external funding, has jumped 7.5 percent to 400 basis points since the downgrade, the highest since 2009. Adding to the pain, the dollar surged to a 13-year high, making principal and interest on international borrowing more costly for local firms.

“Even very small, unknown companies issued international bonds when Brazil was considered one of the most promising economies after the 2008 financial crisis,” Salvatore Milanese, a partner at debt-restructuring adviser firm Pantalica Partners, said in an interview in Sao Paulo. “Now many of them are facing the consequences.”

Standard & Poor’s last week lowered Brazil’s sovereign credit rating one level to BB+ and said it might cut it further in response to the administration’s inability to shore up fiscal accounts as the economy falters. President Dilma Rousseff has failed to win support for her initiatives amid an investigation into corruption at the state-controlled oil company, some of which allegedly occurred while she was its chairwoman, sending her popularity to a record low and generating calls for her impeachment.

Dilma Rousseff rode to power on the coattails of President Lula’s endorsement but she was never the best candidate from a governance perspective and the currency has collapsed under her watch. An ability to ignore contradiction is characteristic of every crowd. It is not until the cohesion of the crowd deteriorates that these contradictions regain their importance for participants. 

The Bernstein report contained a chart showing LNG terminals in existence, under construction and planned globally as of late 2011. The chart actually understates the number of LNG export terminals in the United States.

One area of concentration is Australia where huge offshore gas reserves and gas from coal fields are feeding into new LNG export terminals that when all are completed will position the country as the world’s largest gas exporter, surpassing Qatar. Virtually all of this gas has been targeting Asian markets, but with the slowing economies there and now the resumption of nuclear power plants in Japan, that may be smaller than previously anticipated. A report from consultant EY shows projected global LNG demand beginning in 2012 through 2030. While the demand from Japan and Korea was projected to grow, it rose very slowly. The more dramatic growth was projected to come from other Asian countries including China. Since this forecast, China and Russia have agreed to a deal to ship Siberian natural gas into the Chinese pipeline system reducing the need for China to buy as much LNG as originally planned

Even with the projected demand growth, the EY report shows that the planned construction of LNG export terminals globally would exceed demand beginning as early as 2015 but certainly by the end of the forecast period in 2025. At that point, all the speculative liquefaction capacity as of 2011 would be surplus for meeting the world’s gas needs. 

A link to the full report is posted in the Subscriber's Area. 

Natural gas is becoming an increasingly globally fungible commodity just like crude oil. With a more efficient global market it is reasonable to expect arbitrages to narrow. This is a significant consideration when long voyages are planned to the destination market not least when such a huge amount of capital has been invested in building export capacity in the USA and Australia. For the USA at least the opening up of the expanded Panama Canal early next year is good news. For Australia relatively close proximity to its destination markets is a positive.

1. No work
Brazil’s economy bled almost 900,000 jobs over the last year. That's unheard of, even in the aftermath of the 2008 Lehman Brother’s crisis.

2. Less money
For those who still have a job, real wages contracted as much as 5 percent in May from a year ago, before easing to a 2.4 percent annual drop in July. Annual real wages, as well as moving averages for retail sales and formal job creation have all contracted this year, according to government statistics. The declines are all worse than in 2009 when the economy also shrank, as the charts illustrate.

3. No more retail therapy
As the labor market deteriorates, Brazilians have cut back the most on shopping since the start of the century. Retail sales in June dropped for the fifth straight month, the longest declining streak since 2001, data from the national statistics agency show.

During the boom in the balance of payments associated with surging commodity exports, Brazil went from being a serial defaulter to a creditor to the World Bank. However, the economic effect of the collapse in commodity prices has been exacerbated by the failure of successive administrations to improve governance. As a result the boom from massive surpluses has been wasted on corruption, vanity sports projects and inefficiency. 

NYSE Amex Gold BUGS Index – has been ranging in the region of 100 since early August but a sustained move above the 120 area will be required to confirm more than temporary support.

The central banker's task of keeping inflation just right has become a permanent tussle with the global currency markets. Too weak a currency equals too rapid price gains. Too strong, and disinflation looms.

That's the well-worn argument under the microscope Friday at the Jackson Hole Symposium, the U.S. Federal Reserve's annual policy getaway. Gita Gopinath, a scholar at Harvard University, says that it just isn't that simple.

"The greater the fraction of a country's imports invoiced in a foreign currency, the greater its inflation sensitivity to exchange rate fluctuations at both short and long horizons,'' she says. Because the dollar is by far the dominant currency in world trade, "U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it.''

The strength of the US Dollar is a much bigger headache for emerging markets that from the USA. There is both a push and pull to this argument with a weak Dollar encouraging capital to migrate and allowing borrowers to increase leverage to lower costs. The reversal of the trend sees capital flight from emerging markets and increases the risk of default among the most leveraged debtors. 

The ECB has not stopped its QE program. In fact the volatility on stock markets only increases potential it will increase its stimulus. The ECB’s Balance sheet remains on an upward trajectory and still has more than €500 billion to go before it gets back to the stated objective of reaching 2012 peak. 
 

The slowdown in China’s economy and tumbling commodities are stoking deflationary concerns, with a measure of euro-area inflation expectations for the next year signaling a potential return to deflation.

The euro-area one-year inflation swap rate, a market gauge of the outlook for consumer-price growth over that period, was at minus 0.012 percent, after falling to minus 0.057 percent, matching the lowest since February, according to data compiled by Bloomberg.

“The extent to which government yields rise is probably less than people once thought because of those lower inflation expectations,” said Nicholas Gartside, London-based chief investment officer for fixed-income at JPMorgan Asset Management. “Bonds have two classic enemies -- higher growth and higher inflation. Both of those are weaker right now.”

Yesterday’s action on global stock markets which saw an early sell-off whose ferocity took traders and investors by surprise was pegged back before the close. In a change of tack today’s bounce was completed retraced today suggesting this is still a very nervous market environment. The majority of bonds futures had rallied in early trading in response to the panicky environment in stock markets but gave up the entire advance by yesterday's close and pulled back sharply today. 

Just as growth is slowing, currencies are weakening, compounding the debt service difficulties of those with external currency obligations. Indeed, looking at the ratio of central bank reserves to gross external financing (defined as the sum of current account balance and debt due this year), Indonesia and Malaysia have the worst external metrics in Asia. Consider a typical commodity producer in Indonesia or Malaysia with external currency debt, facing a 50% decline in the price of exports and a 15% depreciation of the exchange rate.

Clearly the pressure on profitability would be substantial and debt sustainability risk would rise. We understand that Indonesian exporters have been nudged into increasing their hedge ratios in recent years, which may mitigate their difficulties to some degree, but if the exchange rate continues to slide into uncharted territory, systemic stress is bound to emerge.

The traditional metric of looking at an economy's reserves cover is gross international reserves in months of imports. What we do below however is apply a stricter criterion. Instead of gross reserves, we estimate usable reserves, i.e. excluding gold, SDR, IMF assets from the gross figure and netting out the central bank's forward position. Indonesia and Malaysia, using this metric, end up with around 7 months of imports. Malaysia in particular looks vulnerable to capital outflow as its reserves cover has been declining steadily. A study in contrast is India, which has improved its reserves cover considerably, rising markedly from the same level as Indonesia?" just two years ago.

 

A link to the full report is posted in the Subscriber's Area.

Developing ASEAN markets were among the first to bottom in 2008 and were already retesting their highs when Wall Street bottomed. They were also among the best performers in the subsequent few years but have been underperforming for two years. They had no exposure to the US housing market and had very little debt. Improving governance, an expanding middle class, relatively steady commodity prices and abundant global liquidity all contributed to their pre-eminence. So what changed?

Germany, which has taken a tough line on Greece, has profited from the country's crisis to the tune of 100 billion euros ($109 billion), according to a new study Monday.

The sum represents money Germany saved through lower interest payments on funds the government borrowed amid investor "flights to safety", the study said.

"These savings exceed the costs of the crisis -- even if Greece were to default on its entire debt," said the private, non-profit Leibniz Institute of Economic Research in its paper.

"Germany has clearly benefited from the Greek crisis."

 

No country has benefitted more from the creation of the Euro than Germany. Not only did it create a massive market centred on its currency but its competitive advantage was cemented by the Euro. Against the current background, the Deutsche Mark would be among the strongest currencies in the world rather than benefitting from the Euro being among the weakest. Its borrowing costs are now lower than even the most bullish analyst could have ever imagined before the crisis. 

The wave of declines is rooted in the problems in Taiwan's economy, Alan Tseng, vice president at Capital Investment Management Corp. in Taipei, said on Wednesday. "The electronics industry is facing the toughest competition in 10 years because of China. The index will fall below 8,000."
     
There is a "looming new bear cycle" in emerging markets, with the weaker yuan adding competitive pressures to Taiwan, Malaysia, Thailand and Vietnam because of their dependence on exports, Lim Say Boon, the Singapore-based chief investment officer at the private banking unit of DBS Group, wrote in a report dated Aug. 17. The MSCI Emerging Markets Index entered a bear market on Aug. 12.

 

China's economy is transitioning away from fixed asset investment. If it is to be weaned away from infrastructure development and housing, the value of other sectors of the economy has to increase. This explains the concerted push to develop the service and high end manufacturing sectors. In this strategy China is following the same path tread by its neighbours in their development.