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. 

Thus, in this year’s primary election, Scioli, the Governor of Buenos Aires Province and Vice-President Under Kirchner, represented the FpV Alliance as its lone candidate while ‘United For a New Alternative’ put forth lawmaker Sergio Massa and José Manuel de la Sota, the former three-time Governor of Córdoba Province. The ‘Federal Compromise,’ meanwhile, presented Senator Adolfo Rodríguez Saá as its candidate.

On the conservative end of the spectrum in the primaries was Mauricio Macri of the right-wing Republican Proposal (PRO). Macri headed the ‘Cambiemos’ (‘We Are Changing’) coalition, an unlikely alliance between his PRO party and the Radical Civic Union (UCR), a left-leaning centrist party that traditionally remains independent or unites only with much smaller parties. The Civic Coalition ARI (CC-ARI), a social-liberal party, is also in the coalition.

PRO is led by Macri, the Mayor of the Autonomous City of Buenos Aires since 2007 after a failed bid for the same position four years prior. Meanwhile, Ernesto Sanz heads the UCR and Elisa Carrió is the head of the CC-ARI. The primary was to determine who will lead the coalition’s candidacy but it was almost guaranteed to be Macri with the other two then running on behalf of the coalition for other prominent positions.

 

Governance is Everything but it is a relative consideration. Our basic consideration is not where the level is but is it getting better? Argentina’s October election will let us know whether the disastrous administration of the Kirchner’s will be prolonged or whether a new reform-minded government will be ushered in. At present the odds are not looking favourable.

Amazon.com Inc. held a Prime Day on July 15 to mark its 20th anniversary, featuring reduced prices on television sets, lawnmowers and other goods. The company said the promotion helped to drive orders surpassing Black Friday, an annual U.S. sales event following the Thanksgiving Day holiday that kicks off the year-end shopping season.

The job market is giving consumers the wherewithal to keep spending. Payrolls grew in July by 215,000 workers following a 231,000 gain in the prior month, and the jobless rate held at a seven-year low of 5.3 percent.

Low energy prices and cheaper imports have acted as an enabler for consumers which has helped Consumer Staples shares retain a position of relative strength. However, that does not negate the fact the retail sector remains intensively competitive particularly between bricks and mortar stores and online platforms. This has forced the former to open e-commerce sites while some youth oriented brands now maintain physical locations so potential customers can try on items but then buy them online. 

We are not convinced that the stock market needs higher commodity and oil prices in order to continue to rise. In our view, the shift in the direction of commodity prices since 2010 reflects a transfer of the benefits of higher commodity production from producers to consumers. That means basic industries and consumers should be the beneficiaries of falling commodity prices. Long-term, commodity prices should climb in response to increased consumption, which will drive up corporate earnings that are necessary to support higher share prices. A higher stock market can come without oil prices reaching new all-time highs, but they need to be higher than current levels for energy company earnings to rebound, that is unless substantial operating costs can be removed from the energy business. The energy business may get both, and investors will benefit from increased share prices. Unfortunately, this isn’t likely until sometime in 2016.

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

It strikes me as odd that anyone thinks you need a high oil price to support a bull market in equities outside the energy sector. The stock market does not need high oil prices to rally but it does need the perception that the future will be better than the past to justify progressively higher prices. Admittedly this is often associated with higher energy demand.

The concentration of revenues in the energy sector that occurred as a result of the high energy price environment is over. This has acted as an incentive for mergers. Consumers will be medium-term beneficiaries as energy savings accrue and spending power improves. But what about the short term?

Hello, that article on gold by Ambrose-Pritchard for The Daily Telegraph also refers to the $4.5 trillion in US dollars borrowed by emerging countries. With today's devaluation of the Yuan this Bloomberg article identifies the Chinese airline companies that got hammered because of the significant debt they hold in US$ terms. As the trend for rolling over US$ debt plays out in a couple of years perhaps we should trim some of our EM holdings ahead of the curve. If so, what to trim. It may be useful to know which EM sectors/companies hold significant US$ debt.

Thank you for the above article and this question which is sure to be of interest to subscribers. I would welcome some detailed research on emerging market issuers and their US Dollar exposure. Hopefully someone in the Collective has access to this information. 

At The Chart Seminar in Chicago last year a Peruvian delegate highlighted the risk of Dollar strength to the domestic market and the impact it was having on demand for consumer goods. He postulated that it was going to represent a problem for a number of Latin American issuers. This was a common sense point. 

Against a background where commodity related businesses have been under rather extreme pressure, farm machinery shares have exhibited relative strength. Crops have generally been favourable which has contributed to falling prices and the strength of the US Dollar has contributed to weakness. However as potential that agriculture prices have found at least a near-term low improves, the farm machinery sector may be worth studying in great detail. 

Warren Buffett said buying Mondelez International Inc., the maker of Oreo cookies and Ritz crackers, would be difficult for him and his partners at 3G Capital because they’re still working on last month’s purchase of Kraft Foods Group Inc.

“It’s quite unlikely that Kraft Heinz will be doing a big acquisition in the next couple of years,” Buffett said Monday in an interview on CNBC. “We’ve got our work cut out for us for a couple of years.”
H.J. Heinz acquired Kraft last month with the backing of 3G Capital and Buffett’s Berkshire Hathaway Inc.

Activist investor Bill Ackman revealed last week that he has built a 7.5 percent stake in Mondelez valued at $5.6 billion. Shares of Deerfield, Illinois-based Mondelez climbed after the announcement, contributing to a 12 percent gain since July 3.

“Most of the food companies sell at prices that would be very hard for us to make a deal even if we had done all the work needed at Kraft Heinz,” Buffett said.

 

Warren Buffet and 3G Capital paid an all-time high for Heinz in 2013 which was ultimately the correct decision. Capitalism trends towards consolidation as the strong acquire the assets of the weak and become stronger. Nestle, Unilever, Colgate Palmolive, Mondelez and Kraft Heinz represent heavy weights in the global processed foods sectors which continue to benefit from the growth of the global consumer and the desire for quick snack foods as the pace of life accelerates with the demands of a modern economy. 

RiverFront Investments have been telling us that European stocks are interesting investments now that a recovery of the EU economy is happening. Over the last few years you and David have correctly argued in favour of investment in European Autonomies because such a large proportion of their sales takes place outside Europe. If RiverFront is correct, should we not be investing in European firms that do most if not all their business inside Europe? Which European firms correspond to this criterion?

Thank you for a topical question of general interest. Europe has been through an extraordinary period of economic upheaval characterised by unprecedented fiscal austerity that has sapped enthusiasm for bullish future potential. The ECB’s decision to adopt a €1,000,000,000,000 stimulus package in order to boost availability of credit and devalue the Euro represents the same kind of bullish catalyst which the USA enjoyed for much of the last six years. This helps to explain the Euro STOXX Index’s relative strength, at least in nominal terms. 

In the past two years, a number of European companies—among them, H&M, Primark, and Tesco—began sourcing some of their garments from Ethiopia. The rest of the apparel industry took notice: since 2013, there has been rising interest in not just Ethiopia but also other East African countries as potential sourcing destinations for apparel. Also contributing to the buzz is the renewal of the African Growth and Opportunity Act (AGOA), which gives certain countries in sub-Saharan Africa duty-free access to the US market.

What is the true potential of East Africa to grow into a major garment-sourcing hub? To find out, we visited factories in the region; interviewed stakeholders, including manufacturers and buyers; and analyzed market data. In addition, we conducted our third survey of chief purchasing officers (CPOs), this time with a series of questions focused on East Africa. This year, 40 apparel CPOs, representing a combined $70 billion in 2014 purchasing volume, responded to our survey. We found that East Africa could indeed become a more important center for apparel sourcing, but only if stakeholders—buyers, governments, and manufacturers—work together to improve business conditions in the region.

Up-and-coming sourcing countries
Nearly three-quarters of survey respondents said, as they did in 2011 and 2013, that over the next five years they expect to reduce their purchases from Chinese firms. Chinese apparel production has indeed fallen since 2010—but China remains the undisputed giant of garment manufacturing, with approximately $177 billion in apparel exports in 2013.

Among CPOs surveyed, Bangladesh remains at the top of the list of future sourcing destinations, with 48 percent of respondents including the country in their top three (Exhibit 1). And 62 percent said they intend to increase their sourcing value from Bangladesh over the next five years. The next two up-and-coming countries are Vietnam and India, where, respectively, 59 percent and 54 percent of surveyed CPOs plan to increase their sourcing value in the next five years. Yet the combined apparel exports of Bangladesh ($24 billion), Vietnam ($17 billion), and India ($17 billion) still amount to less than one-third of China’s.

 

More than five years ago a Turkish delegate at The Chart Seminar who has been a cotton trader for decades told me how a number of Turkish apparel factories were moving their operations to North Africa. As Chinese wages have risen, they are also seeking to move their most labour dependent operations offshore and East Africa represents an attractive destination.  

Same-store sales fell 5 percent last quarter, excluding currency fluctuations. That was a slightly better performance than the 5.4 percent decline analysts predicted. Michael Kors expects comparable sales to decline by a low-single-digit percentage on that basis in the second quarter.

To help spur demand, the brand has been slashing prices on many of its products. Kors is contending with sluggish mall traffic and a strong dollar, which has reduced tourist spending.

The company also is adding new products in the second half and improving its digital operations.

Sales in the handbag business remain “robust,” though they aren’t growing at the same rates as previous years, executives said on the earnings conference call. Backpacks are getting more popular, and millennial customers in particular prefer smaller bags and cross-body purses, which typically have lower retail values. Watch sales also dragged down the company’s North American same-store sales, the company said.

 

Mid range luxury goods companies have been under pressure to offer more mass market offerings while even the uber-luxurious brands have been offering discounts in Hong Kong in order to spur demand. Michael Kors in particular boosted supply in order to capture market share from Coach, but suffered from the loss of its cache in doing so. Both companies are suffering from interlopers such as Tory Burch. The question now is how much of this is already in the price?

Speculation is mounting that Moody’s will be the second rating company to lower Brazil’s grade to the precipice of junk as the economy suffers its biggest contraction in a quarter century and a bribery scandal frustrates the government’s efforts to restore its finances.

Moody’s, which met with officials in Brazil last month, cited the country’s economic woes and deteriorating finances when it put the Baa2 rating on negative outlook in September.

Things have only gotten worse since then, with Moody’s predicting in a July 16 report that gross domestic product will shrink 1.8 percent this year.

Brazil’s real declined 0.7 percent to 3.4943 per U.S.dollar at 11:51 a.m. in New York. The currency declined 24 percent this year.

Just last week, Standard & Poor’s also revised its outlook on Brazil’s rating to negative. An S&P downgrade would plunge Brazil back into junk since the company rates Brazil BBB-, one level below Moody’s.

“Banks are a leveraged macro play and as such, given the recession, I see the bonds expensive,” Jorge Piedrahita, the chief executive officer of New York-based brokerage Torino Capital LLC, said in an e-mail.

The economic pressure Brazil is experiencing is perhaps most evident in the collapse of the Real which has almost completely unwound the bull market associated with the commodity bull market. The great tragedy is that the country squandered the economic dividend of an almost decade long commodity bull market by failing to introduce regulatory reform, build critical infrastructure and combat corruption. As Warren Buffett says “You don’t know who’s been swimming naked until the tide goes out” On the plus side the Olympics next year and World Cup in 2018 will be fun but are hardly relevant for investors. 

Even small gains in the weighting for frontier and ASEAN indices can have a significant effect on net foreign buying, in turn further helping market cap and liquidity.

The longer term benefit is accession to the MSCI Emerging Markets Index. MSCI announced in June they are adding Pakistan (9.2% Frontier weighting) to the review list for Emerging Market classification. The Karachi Stock Exchange (market cap $75bn) satisfies 14 of the 17 items in MCSI’s criteria. The HOSE meets just 7, although these latest reforms will help towards fulfilling 3 of the foreign ownership requirements. Additionally 2 more items, ‘clearing and settlement timescales’ and ‘investor registration and account set up’, are also being addressed in an attempt to make Vietnam more competitive.

 

Technical changes in how a market is considered by providers tend to have outsized results. Vietnam’s decision to further loosen foreign investment limits in its stock market represented an important development for its potential to represent a larger weighting in international benchmarks. 

Noble has bought back its stock at least 11 times since last month and built up a 2.8 percent stake from zero. Companies listed in the city-state aren’t allowed to repurchase their shares two weeks before reporting earnings, according to Singapore trading rules. The company is due to announce its quarterly results on Aug. 13.

“The share buybacks so far have been relatively limited so we don’t expect immediate impact on the company’s liquidity or financial leverage,” Cindy Huang, an analyst at credit-rating agency Standard & Poor’s, said by e-mail.

Noble’s stock declines do not in themselves impact the trading company’s credit position, Huang said.

“The larger issue would be if confidence is affected or lenders’ sentiment is significantly affected,” Huang said.

 

Noble Group is currently trading on a Price to Book of 0.51 not least because its primary business is in coal, coke and petrochemical supply chains which have been under pressure as commodity prices have declined. With a forward P/E of 4 and a yield of 2.12% traders are pricing in either a major write down of their assets or are simply using the share as a vehicle for expressing a bearish view on commodities generally. 

Viet Nam's garment and textile export turnover to countries taking part in the Trans-Pacific Partnership (TPP) negotiations increased by 69.66 per cent in the first five months compared with the same period last year, according to the latest report from the Viet Nam Textile and Apparel Association (Vitas).

Exports to this market also accounted for 66.8 per cent of the sector's total export turnover. Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Viet Nam are members of the TPP.

Exports to the US ranked top with US$4.05 billion, accounting for nearly 50 per cent of the export value to the countries joining the TPP agreement, a 53 per cent increase on the year.

Viet Nam's textile and garment export turnover to the US is expected to reach $11 billion by the end of the year, Dang Phuong Dung, Vitas deputy chairwoman told Hai Quan (Customs) newspaper.
Textile and garment export turnover to the US has increased dramatically in the past 20 years from zero to $9.8 billion in 2014.

The turnover could be doubled once the TPP is signed, she said, adding that it would benefit local enterprises. Garment products' import taxes would be reduced by 7 to 8 per cent, replacing the current 15 to 16 per cent.

 

The devaluation of the Dong has been a major benefit for Vietnam’s export sector and the fact that inflation is now slowing may raise hopes that the devaluation will continue to pause. 

Under rules coming into force on July 1, 2016, the average risk weight on residential mortgage exposures will rise to at least 25 percent from about 16 percent, the Australian Prudential Regulation Authority said in a statement. That will increase the capital requirements of the biggest four banks by about A$12 billion ($8.9 billion), according to Goldman Sachs Group Inc. and Morgan Stanley.

“The timing and magnitude of today’s announcement should come as no surprise,” Goldman Sachs analysts Andrew Lyons and Yu Chuan Leong said in a note to investors. “However, the approximately one-year time frame is shorter than we would have expected.”

The regulator is forcing banks to shore up their capital after a government review last December recommended they should rank among the top 25 percent of lenders globally. The capital increase forms part of the regulators’ attempt to ensure the financial system can cope with any downturn in the housing market, where prices have climbed almost 30 percent in the past three years.

Australia & New Zealand Banking Group Ltd. Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Macquarie Group Ltd. will be affected by the new rules, which equate to increasing minimum capital requirements by about 80 basis points, APRA said. The cost of holding more capital may force the lenders to raise their mortgage rates, according to Morningstar Inc. and Bell Potter Securities Ltd.

 

The S&P/ASX 200 Finance Index represents a weighting of 47.85% in the overall index and 43 of the 200 companies.  That’s a large weighting and therefore a potential concern. Measures to ensure the ability of the sector to withstand a downturn in its business are to be welcomed. Meanwhile Financials are likely to benefit from the prospect of additional rate cuts.

Same-store sales in Japan dipped 12 percent in June as the cooler weather curbed demand for summer clothes, the company said earlier this month.

Net income surged 36 percent in the three months ended May to 27.6 billion yen, based on nine-month figures the company released Thursday in Tokyo. Sales gained 23 percent to 398.4 billion yen in the quarter.

Investors have bet billionaire Tadashi Yanai’s clothing retailer, which offers basic designs made with advanced materials at low prices, will grow by exporting its model to faster-growing markets like China and the U.S.

The shares trade at about 41 times projected earnings, compared with about 31 times for Inditex, which sells Zara casual clothes and is Uniqlo’s bigger global rival and 24 times for Hennes & Mauritz AB, which retails the H&M brand.

 

As the largest company in the price weighted Nikkei-225, Fast Retail exerts an influence on the direction of the overall market. As it expands internationally, the company will be consolidating more foreign earnings into a Yen which continues to weaken. 

Also, last week's opening of the State Securities Commission investment promotion conference in the United States helped bolster domestic investors' psychology. Leaders of the Ministry of Finance and the commission presented new policies to help upgrade the Vietnamese investment environment, including newly-issued Decree 60 which allows foreigners to raise their stakes in Vietnamese listed companies.

Meanwhile, Minister of Finance Dinh Tien Dung said the ministry would soon issue a circular to provide instruction to implement Decree 60 in July. This eased investor concerns about the delay in the implementation of the raising foreign room regulation.

The foreign sector reacted positively to this movement, causing an increase. They picked up the combined net buy values of more than VND1.1 trillion ($50.5 million) worth of shares in the two markets, of which 90 per cent of their purchases focused on the HCM City market's shares.

"Although the market outlook remains in an uptrend in the medium- and long-term period, the markets remain exposed to substantial risks of a short adjustment this week," analysts at Bao Viet Securities Co wrote in a report. They added that the market rallies would heavily depend on leading stocks and foreign movements in the context that domestic money flows were still modest.

 

Foreign investment interest in Vietnam has been curtailed by restrictions on ownership of shares. Once the limit on ownership was hit there was no way to buy more and it was difficult to sell because there was the risk that it would be impossible to re-enter the position later. The prospect of Vietnam removing or at least loosening ownership limits represents a potentially important catalyst for the market not least if it helps gain admittance to the MSCI Emerging Market Index.  

“They have to reach out to the U.S.,” Vuving said by phone, speaking of Vietnam. “They need to do something to strengthen Vietnam’s capability to stand up to China. It has reached a tipping point.”
Trong said Vietnam “appreciates” statements from the U.S. supporting a peaceful approach to settling disputes between claimant states to the South China Sea, through which some of the world’s busiest shipping lanes run.

“We are all aware of the strategic location of the East Sea,” he said, using Vietnam’s term for the South China Sea.

“I hope that the U.S. will continue to have appropriate voice and actions to contribute to peaceful settlement of disputes in the East Sea in accordance with international law.”

Trong is viewed as friendlier toward China than the U.S., and thus his visit to the U.S. is even more significant, Le Dang Doanh, an economist and former government adviser in Hanoi, said by phone. While Vietnamese leaders have increased their meetings with U.S. officials, they also often visit China.

 

Vietnam has a long coast line and an interest in what goes on in the South China Sea not least because of the resources to be found underneath it. Sitting between major power blocks such as China, India and Japan, Vietnam has an incentive in developing as many friends, with an interest in seeing the country flourish as an independent nation, as possible. The decision to expand the ability of foreign investors to hold positions in corporations can be viewed in this context in addition to the stated aim of MSCI Emerging market membership.

The world still needs more platinum despite the fall in Autocat loadings
The rise in electric vehicles (EV’s with very low or no PGM’s) will reduce the average vehicle platinum loading and contribute to lower demand growth than we have seen historically. Importantly however, under what we consider reasonable (2.6% CAGR) vehicle demand growth, we still forecast growth in gross Autocat demand. A modest increase in fuel cell vehicles (with high platinum loadings) is likely to offset some of the platinum demand destruction from EV’s. Furthermore a “catch-up” in emission standards in the emerging markets such as India and China should also offset the general trend in declining loadings. We outline our forecasts for platinum. Under our base case, we forecast that an additional 1.5Moz will be required by 2030.

The Auto sector is nearly self sufficient due to recycling.
We forecast a continuation in the trend of the increasing metal units being returned to the market over the next fifteen years. The three major Autocat producers (BASF, Johnson Matthey and Umicore) are all adding recycling refining capacity, specifically targeting recycled material. Furthermore, the tranches of Autocats being returned to the market over the next few years all have higher PGM loadings, especially in platinum. We forecast Autocat platinum volumes to double by 2030, which equates to a CAGR of 4%. 

However, the CAGR between 2014 and 2021 is likely to be closer to 8%.
We estimate that the Autocat industry will be a net supplier to the market up until 2020, whilst the additional new ounces required by 2025 will be negligible. By 2030, the additional requirement should be 300koz, equivalent to a large platinum mine, or a two mid-sized mines. The net result is that Platinum demand (post recycling) growth should be slower over the next fifteen years, compared to the historical trend. We estimate a CAGR of 1.1% versus the trend (1975 – 2014) of 2.2%.

Enough replacement ounces from the existing supply base until 2021
The amount of new platinum ounces required from the Southern African mining industry is limited, especially over the next seven years. The existing fleet of development and replacement projects should be sufficient to offset the endemic grade decline and mine depletion (see Figure 6). Furthermore, these projects have favourable economics relative to the current production base, as most projects have also sunk significant capex, lowering the return requirement as a result.

 

The automotive sector is in a process of evolution with China mandating greater use of electric vehicles and tighter emission control while Tesla represents the cool side of the sector. Toyota, Linde, among others, and the platinum miners are championing the build out of hydrogen fuel cells. Both represent corollaries to innovation of solar and wind technology that is making distributed electricity production possible. Sergio Marchionne at Fiat is arguing for fabless manufacturing in the automotive sector which has the potential to act as an additional catalyst for the sector. 

“It’s probably a combination of more pigs, chickens and cows eating corn, and USDA overestimating last year’s production,” said Dale Durchholz, the senior market analyst at AgriVisor in Bloomington, Illinois. “Supplies are tighter, and God forbid we have any hot, dry weather in July that damages this year’s crop.”

Feed and residual use for the grain in the three months ended in May climbed 31 percent, according to AgriVisor. The inventory of broilers, dairy cows and hogs suggests that such demand could be as much as 200 million bushels larger than the 5.25 billion bushels projected by the USDA, said Durchholz.

As of Sunday, 68 percent of the corn crop was rated in good or excellent condition in the top 18 producing states, down from 75 percent a year earlier.

Wet fields and declining crop conditions suggest a national yield at 162 bushels an acre, below the USDA’s estimate of 166.8 bushels,  Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis, said Tuesday. That would leave a carryover next year of 1.2 billion bushels, below the 1.771 billion that the USDA forecast on June 10.

“The tightening supply and deteriorating crops in the field are a big change from the outlook a month ago,” Schultz said. “Most livestock producers were waiting for lower prices into the harvest, and now they will be scrambling to extend purchases.”

 

El Nino is a major weather phenomenon and this year’s event is expected to be stronger than normal. With droughts in some parts and floods elsewhere the potential for crop yields to undershoot is being priced into agricultural commodities. There has been a significant rally in corn, wheat and soybean prices which is a little overbought in the short term. There is room for some consolidation but clear downward dynamics would be required to question potential for some additional upside. 

Aetna Inc. is said to be nearing an acquisition of Humana Inc., Bloomberg reported last week. And on June 20, Anthem Inc. went public with a bid for Cigna Corp. UnitedHealth Group Inc., the largest U.S. health insurer, could also make a bid for Aetna.

It’s also possible UnitedHealth could jump in with a competing offer for Health Net, said Ana Gupte, an analyst at Leerink Partners LLC.

Centene will assume about $500 million in debt as part of its transaction with Health Net, which the companies expect to close in early 2016. The buyer plans to fund the purchase using its existing cash and debt financing, with Wells Fargo & Co. providing $2.7 billion in financing commitments, the companies said.

The combined company would have more than 10 million members and an estimated $37 billion in pro forma premium and service revenues for 2015, and the acquisition would boost earnings by about 10 percent in the first year, according to the statement.

 

The Supreme Court’s decision on June 25th to strike down the most recent challenge to subsidies under the Affordable Care Act has acted as a green light for M&A activity in the health insurance market. Health insurers have been some of the greatest beneficiaries of Obamacare and the removal of a major challenge to its permanence is great news for the sector. 

U.S. airline shares tumbled, erasing an earlier gain, after the initial Associated Press report on the inquiry. Citing a document, the AP said the department was investigating whether carriers were colluding to help prop up airfares.

The Bloomberg U.S. Airlines Index slid 4.7 percent, the biggest intraday drop since June 8, at 2:03 p.m. in New York. The gauge rose as much as 1.7 percent earlier.

Messages left with the four largest U.S. carriers -- American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co. -- weren’t immediately returned.

Airlines have benefitted enormously from the fall in oil prices, the recovering economy and consolidation in the aftermath of the credit crisis. If you have booked a summer holiday in the last month you will have noticed that the price of airline tickets has not come down and differences in pricing between airlines is almost non-existent. Little wonder then that the Justice Department is asking why?

Vietnam eased curbs on foreign ownership as the government seeks to boost inflows to the nation’s stocks and an upgrade to emerging-market status.

Overseas investors can increase holdings in “a number” of industries to 100 percent from 49 percent effective in September, according to a government decree published late Friday. Other companies will keep their 49 percent limits, while holdings in sectors that are governed by separate ownership regulations such as banks will remain at 30 percent, according to the decree.

The restrictions have been “a major hurdle” to developing the capital markets and deterred many foreign investors, said Andy Ho, chief investment officer of Ho Chi Minh City-based VinaCapital, which manages about $1.4 billion in assets.

Money managers including Templeton Asset Management and Dragon Capital Group Ltd. have said they’re unable to buy as many equities in Vietnam’s $58 billion market as they want because of the caps. The plan to ease restrictions was delayed last year after originally being proposed in 2013.

Vietnam is building its case for an upgrade to emerging- market status from frontier classification by index provider MSCI Inc., the State Securities Commission said in October. An emerging-market ranking, which would increase the pool of eligible investors for Vietnam, requires “significant” openness to foreign ownership and ease of capital flows, as well as minimum levels of liquidity and market value, according to MSCI’s website.

 

Vietnam holds a great deal of promise with a competitive manufacturing sector, proximity to China’s markets and a government which is attempting to reform. However continued inflation is evident in the devaluation of the Dong which remains on a downward trajectory. An easing of restrictions on foreign ownership has long been anticipated by investors but would probably have been more beneficial almost three years ago when it was first mooted. Nevertheless it is good news. 

But growth has slipped to its lowest level in more than five years, and Mr. Widodo’s team, in place for almost eight months, has failed to arrest the fall. Indonesia’s stock index recently hit its lowest level in more than a year, wiping out all gains made since Mr. Widodo’s election. Lackluster corporate earnings were partly the cause, along with waning confidence in the president’s ability to shepherd his team to quickly implement his program.

Mr. Kalla acknowledged the economy was a problem, and said one of his and the president’s priorities is to speed up spending on stalled infrastructure projects that are expected to inject billions of dollars into the economy. He pointed to a new law that makes it easier for the state to acquire land -- a long-standing sticking point for projects ranging from power plants to factories. The new rules are set to pave the way for a Japanese-funded $4 billion power plant to proceed after years of delay, Mr. Kalla said.

As falling global oil prices cut into Indonesia’s oil-gas revenue, and tax collection so far coming up far short of targets, the government is working to attract more foreign direct investors. Mr. Kalla said that many companies “don’t need more incentives” to invest in Indonesia, pointing to the large population and low labor costs that attract consumer companies and manufacturers. He said the government is trying to address old problems of acquiring permits for foreign workers, improving the roads and access to electricity, and helping to clear land.

 

Unfortunately for Widodo he did not receive the groundswell of support that Modi did in India which would have given him carte blanche to implement his reform agenda. Political infighting and obfuscation have characterised the environment in Indonesia since before Widodo’s victory. Despite the fact a number of the policies he fought for have grudgingly been implemented, perceptions are that little has been achieved. 

Among the largest Brazilian banks, Santander is the one with the highest capital ratios, Victor Martins, an analyst at Planner Corretora de Valores, said by phone from Sao Paulo.

“If the economy picks up, they’ll be in a better position to take advantage of that,” Martins said. “It’s all in their hands to do it.”

Santander Brasil’s capital ratio of 16 percent compares with 16.02 percent at Banco do Brasil SA at the end of the first quarter. It exceeded Itau’s 15.3 percent and Banco Bradesco SA’s 15.2 percent.
Santander declined to comment on its performance since the share-swap offer, which began in April 2014. That’s when the bank offered to buy back the 25 percent stake in the Brazil unit it didn’t already own at a price 20 percent above where it was trading at the time. The deal was to exchange shares of the local unit for those of the parent.

The majority of analysts covering the company recommended investors accept the offer, citing what they saw as a fair price and the risk of holding a stock with low liquidity.

“The market doesn’t believe in our franchise, but we do,” Javier Marin, Banco Santander’s chief executive officer when the deal was announced, told reporters at the time. “That’s why we’re carrying out this transaction.”

 

Brazil remains mired in a political scandal which throws light on the inadequate standards of governance that prevailed over the last decade. Now that commodity prices have fallen and excess capital from exports has dried up, the ability of the economy to thrive without reform in how the country is administered is in question. The Real offers a powerful representation of just how much stress the economy is under. It has more than halved since 2011. Some additional evidence of steadying would be a welcome development from the perspective of foreign investors. 

The Dutch supermarket operator Ahold and the Delhaize Group of Belgium said on Wednesday that they had agreed to an all-share merger that would create one of the largest supermarket chains in the United States.

The deal would combine Delhaize, the owner of the American supermarket chains Food Lion and Hannaford, with Ahold, which owns the Stop & Shop and Giant stores in the United States, amid increasing competition in the grocery sector.

The combined company would be called Ahold Delhaize and would be worth about 26.2 billion euros, or about $29.5 billion, based on market capitalization. It would have more than 6,500 stores and 375,000 employees in the United States and Europe, and sales of €54.1 billion.

The companies, while based in Europe, generate more than half their sales in the United States. The deal is expected to allow them to compete better with the likes of Walmart Stores, the world’s largest retailer, and with discount grocers such as the German companies Aldi and Lidl, and Costco in the United States.

Economies of scale represent a major competitive advantage in a market where inefficiency represents higher costs consumers will simply not accept. While Ahold sold off its Asian and Latin American operations in the 1990s as a result of an accounting crisis, Delhaize still has its Indonesian unit. The merged companies will have substantial footprints in both Europe and the USA. 

The price of solar power will continue to fall, until it becomes the cheapest form of power in a rapidly expanding number of national markets. By 2026, utility-scale solar will be competitive for the majority of the world, according to BNEF. The lifetime cost of a photovoltaic solar-power plant will drop by almost half over the next 25 years, even as the prices of fossil fuels creep higher.

Solar power will eventually get so cheap that it will outcompete new fossil-fuel plants and even start to supplant some existing coal and gas plants, potentially stranding billions in fossil-fuel infrastructure. The industrial age was built on coal. The next 25 years will be the end of its dominance.  

2. Solar Billions Become Solar Trillions
With solar power so cheap, investments will surge. Expect $3.7 trillion in solar investments between now and 2040, according to BNEF. Solar alone will account for more than a third of new power capacity worldwide. Here's how that looks on a chart, with solar appropriately dressed in yellow and fossil fuels in pernicious gray:  

3. The Revolution Will Be Decentralized 
The biggest solar revolution will take place on rooftops. High electricity prices and cheap residential battery storage will make small-scale rooftop solar ever more attractive, driving a 17-fold increase in installations. By 2040, rooftop solar will be cheaper than electricity from the grid in every major economy, and almost 13 percent of electricity worldwide will be generated from small-scale solar systems.

 

The pace of technological innovation in solar is rapid and the argument that Moore’s law is applicable is gaining ground as the sector attached increasing research and development spending. The difficulties reported in getting the Ivanpah concentrated solar facility, in the Mojave Desert, up to peak performance is a setback suggesting the time required to deliver new technologies might be longer than some are currently envisaging. Here is a section from a Huffington Post piece dated November 17th: 

"During startup we have experienced ... equipment challenges, typical with any new technology, combined with irregular weather patterns," NRG spokesman Jeff Holland said in a statement. "We are confident that Ivanpah's long-term generation projections will meet expectations."

The technology used at Ivanpah is different than the familiar photovoltaic panels commonly used for rooftop solar installations. The plant's solar-thermal system — sometimes called concentrated-solar thermal — relies on nearly 350,000 computer-controlled mirrors at the site, each the size of a garage door. 

We believe earnings momentum is building in the European and Japanese equity markets, and this trend may be the catalyst for higher equity markets, and this trend may be the catalyst for higher equity returns for the remainder of the year. Developed markets should benefit from gradual economic improvements in these regions. Corporate earnings reversions in these markets have turned positive for the first time since 2011. In addition to supporting business and consumer sentiment, another round of quantitative easing (QE) measures launched by the European Central Bank (ECB) and Bank of Japan (BoJ) should provide a nice cushion for equity prices. Equity valuations have increased ahead of improvements in fundamentals and earnings, and stocks are no longer priced as cheaply as they have been in prior years. The MSCI Europe, Australiasia and Far East (EAFE) Index, a primary measure of equity market performance of developed markets outside of the U.S. and Canada, trades at 16.08 times our 2015 estimate. We estimate that price multiples may stay somewhat elevated as investors await the profit cycle to accelerate. 

We are maintaining our overweight to developed market equities. Key risks to this view that bear watching include another rapid slide in the euro against the U.S. dollar, a relapse of economic weakness, particularly in Europe and Japan, and a dip in corporate earnings. Inflated equity market valuations could become a relevant headwind if we do not see earnings growth start to rebound. 

 

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

The drama, or melodrama, of the unfolding situation in Greece has obscured the fact that two of the largest central banks in the world are engaged in outsized quantitative easing programs. As David has said for years “monetary policy trumps just about everything else most of the time” As potential for a deal between Greece and its creditors looks more likely, the attention of investors is returning to the fountain of liquidity coming from the ECB and BoJ. The relative weakness of bonds is potentially reflective of some liquidation of safe haven positions while the bounce in equities will be pressuring shorts. 

The whole world is focused on Greece with theatrics among the main participants escalating as we approach the next deadline. The ECB has finally engaged in looser monetary policy which is only likely to get more lax if Greece in fact exits the currency union. An export led economy such as Ireland’s remains a beneficiary of these developments no least because of the relative weakness of the Euro.    

In our base case, we expect sector RWA inflation of 14% or EUR 1.2tn. We expect a Basel 4 ratio of 9.9% on 2015, a 1.7% reduction from Basel 3, or EUR 120bn in equity. Given sector 2017 profits of EUR 130bn and 2019 implementation period, we think on average the sector is well placed to absorb the changes. By country, Nordics have the highest B4 ratios and France the lowest. Despite having the highest RWA inflation, Nordics still end up with the strongest B4 ratio because of high pre-existing buffers. France has the lowest B4 ratio by country given starting points and RWA inflation.

A wide range of outcomes is still possible depending on finalization
The range of outcomes could be wide, or impact sooner, depending on how the proposals are finalized. Two risks are; i) more granular, portfolio-based, RWA floors could lift sector RWA inflation to 22% and catch out more banks costing a further 0.6% of CT1; ii) national regulators may move faster than 2019 on harmonizing RWA by adjusting banks’ internal models tackling so called model risk. Our feedback is that management may have this higher up the immediate agenda because it may come sooner. In our 9 June 2014 Truth in Advertising report we looked at the issue of model risk.

We screen stocks on Basel 4 and potential for payout surprise
Despite finalization of rules in the next year, and implementation not before 2019, guidance from banks will likely impact perceptions around capital and payout. Stocks we like on our base case are Lloyds, Unicredit, Banco, Danske, CBK and Bankinter. For Unicredit and CBK in particular, perceptions around relative capital strength could be weak, wrongly in our view. Our analysis shows they are better placed on Basel 4 than some may think with reasonable valuation. Out of this list, Lloyds and Banco could be more impacted if we get a tougher implementation of more granular RWA floors.

 

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

European banks were decimated by the financial crisis and the ongoing lack of appetite for consumer credit remains a headwind. Nevertheless, if the USA is any guide the introduction of a concerted effort to inflate money supply and steepen the yield curve should help some of the better positioned banks back onto a growth trajectory over the medium term. 

The Europe STOXX 600 Banks Index (P/E 22.3, DY 3.61%) rallied to new four-year highs following the introduction of the ECB’s QE program and has been consolidating that gain since. It found at least near-term support today in the region of the 200-day MA. 

China is decelerating – (a fairly consensual view) and this is coinciding with additional production ramp-up as projects started years ago come to fruition. The net outcome is over supply (again, a consensual view) and prices should fall (as they have done). A risk is to use pre China boom commodity prices as a guide to the future, because this is too bearish as many commodity prices hit century lows in the early 2000’s. Iron ore hit an annual low in 2002 for instance at US$36/t (real CIF) – so market fears of sustained iron ore prices of US$30-40/t would require iron ore to retrace to century low levels, into perpetuity. We do not think this is likely. Meanwhile, a number of the miners offer good value on their existing assets alone at normalised prices, the potential growth upside and high yields justify buying them – on top of that, dividends are both attractive and maintainable into the foreseeable future. Now is a good time to selectively pick up some value, in our view.

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

Investment in new green field projects has stopped and is unlikely to become a significant factor until there is evidence metal prices are tending higher. Having embarked on developing new mines, companies have little choice but to complete the projects and these sources of supply continue to come to market. This situation favours lower cost, more established companies. 

There is an important difference between Chinese demand growth and absolute demand. As a major economy, per capita demand has increased substantially over the last decade. A great deal of mine expansion was predicated on the trend of demand growth persisting indefinitely. The pace of growth has moderated considerably but there is no evidence it has reversed. Any major economy has an annual consumption rate for industrial resources. Generally speaking, commodity bull markets don’t end because demand decreases. Rather supply increases to overwhelm demand. This is exactly what we have seen happen and a new demand growth model will have to evolve in order to change the environment. 

I read this article about luxury goods in today's FT  and then ran through your luxury goods section in your Favourites in the Chart Library. I cannot see a common pattern in the charts. Since this a major element of what you teach in the Chart Seminar, I would like your thoughts on this particular case.

Remy Cointreau was among the greatest beneficiaries of the largesse of Chinese officialdom since its expensive liquors were consumed at so many dinners. This all came to a halt in 2013 when Xi Jinping’s corruption crackdown gained traction. Conspicuous consumption suddenly became unfashionable as bloggers posted photos of cadres wearing luxury watches. This was highlighted most poignantly at this year’s annual Party meeting when a number of high profile wives of senior officials were seen holding cheap plastic handbags rather than the Chanel and Hermes bags of previous years. 

“Several Chinese producers -- a higher number than people realize -- have already left the business,” Vale’s Ferreira, said Wednesday at a Rio de Janeiro conference. “I think we will have a better second half in China than the first half in terms of steel.”

On top of raw-material shares, banks also helped push the Ibovespa higher. Banco Bradesco SA recovered from an 11-month low while Itau Unibanco Holding SA was set for the best day since February. Still, Fides’ Vieira said the advance may not be sustained as Latin America’s largest economy continues to disappoint.

Inflation has accelerated as President Dilma Rousseff increases government controlled prices to shore up public accounts. That has sent annual consumer prices to the fastest pace in more than a decade, and the central bank has responded by boosting borrowing costs six consecutive times.

Bets on a further slowdown at a time when the economy is already forecast to show the worst recession in 25 years have dragged down the Ibovespa from this year’s high. The benchmark gauge had entered a bull market April 24, after rallying more than 20 percent from its 2015 low, on speculation government measures would revive growth and help Brazil keep its investment-grade credit rating.

 

The Brazilian market has been the subject of a number of challenges over the last couple of years not least the collapse in iron-ore and coal prices and the entanglement of the current administration in Petrobras’s corruption scandal. 

The Index has been rangebound, in nominal terms, for much of the last two years and found support today in the region of the 200-day MA. A sustained move below 52.500 would be required to question current scope for some additional upside. 

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

Following Erdogan’s historic setback in the Turkish election a higher degree of political uncertainty has entered the nation’s stock and currency markets

Why is China’s lurch into deflation on the GDP deflator, but not the CPI measure, so important? We have pointed out before (unfortunately we don’t have space for the chart here) that in Japan during the 1990s the thing to watch to see the havoc that deflation was wreaking on nominal revenues and debt/income loads was not the CPI, but rather the GDP deflator, which fell far faster than the CPI. Economic agents produce far more than just consumer goods and services and the GDP deflator is a much wider basket of goods and services and includes exports and investment goods. Clearly the descent into outright GDP deflation in China explains the more aggressive, even slightly panicky, policy easing measures there.

We also pointed out last week that China’s move into BoP deficit imposes a substantial monetary headwind on the economy. China may wish to keep the renminbi stable at this time while the IMF is currently considering including it in the SDR currency basket. But the economy is simply not in a position to withstand a major yen decline bringing down the currencies of its competitors in the region (and the additional deflationary impulse). I remain convinced that China must start guiding its currency down against the dollar and it can do that easily now it has a BoP deficit by doing absolutely nothing (ie not intervening any longer to hold it up)! China will also take the IMF’s recent declaration that the renminbi is no longer undervalued as justification for these actions - link.

Worrisome deflation is already being imported into the US, especially from Japan (see chart below). China (blue line) has yet to participate, but a further round of Asian devaluations will inevitably see waves of deflation heading westwards – as in 1997/98. Watch this data closely.

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

The Yen has been a catalyst for competitive currency devaluation across the Asian region since the BoJ initiated its QE program in 2012. As the Yen extends its downtrend there is potential that it will act as an additional incentive for regional competitors to devalue their currencies.

The US Dollar broke out against the Yen last week and a sustained move below ¥122 would be required to begin to question medium-term scope for continued upside. 

"Today's GDP data underscores why we shouldn't be too concerned about the economy right now," Aberdeen Asset Management senior investment manager Jasmin Argyrou said. "Some of the worrying trends in confidence we saw late last year have reversed and although investment activity is subdued, household consumption has held up surprisingly well. This is ultimately the key for the investment outlook."

The reason the sharemarket did not respond to the data, Credit Suisse analyst Damien Boey said, was that investors are focused primarily on yield rather than growth. "Stocks have reached a point where changes to the earnings outlook or the GDP outlook at the margins don't really have a big impact, given that valuations are kind of extended," he said. "Maybe they're looking for more rate cuts as the only way up."

Bond yields rose on Wednesday and that was enough to send the market lower, he said.

 

Australian investors have been heavily invested in high yielding domestic shares, primarily banks, in order to benefit from full franking. The relative value proposition has also been bolstered by historically low interest rates and a resources sector which has been a subpar performer since 2009.

Australian 10-year government bond yields share a high degree of commonality with their other developed market counterparts. The yield has jumped over the last couple of weeks to break the yearlong progression of lower rally highs and is now trading in the region of the 200-day MA. The 3% area represents an area of prior resistance and a sustained move above it would confirm more than temporary supply dominance. 

Most of Malone’s $8.6 billion net worth can be traced back to that decision. Well, that and a whole bunch of other decisions that followed. TCI shareholders enjoyed a 5,000-fold gain from 1974 to the end of 1997, Robichaux calculated. In his book “The Outsiders,” private-equity manager Will Thorndike describes Malone as one of a rare breed of CEOs who act mainly as capital allocators -- disciplined enough to buy when the price is low and sell when it is high. Thorndike also offers this Malone quote from 1982: “The key to future profitability and success in the cable business will be the ability to control programming costs through the leverage of size.”

YouTube celebrated its 10-year anniversary today. I was discussing that fact with my daughters on the way to school this morning. My eldest was 9 in March so she has a hard time understanding that a world without Wi-Fi and iPhones was all we had before she was born. She aspires to being a computer game programmer when she grows up but what she and her younger sister want now is their own YouTube channel. The fact that such a feat is within reach of young children is an additional testament to how much the world has changed.

They and their friends consume most of their media content online rather than from TV channels. This has to be music to the ears of people like John Malone. They now pay nothing for a considerable portion of the content being consumed by their customers and as a result can force tougher terms on the content they do pay for. Regardless of what content you consume, cable or Wi-Fi access is a prerequisite. 

Entering China would let Netflix, the broadcaster of “House of Cards” and “Orange Is the New Black” take advantage of what’s forecast to be explosive growth in online TV in the nation of 1.4 billion people. The market is estimated to almost triple to 90 billion yuan by 2018, according to Shanghai-based Internet consultant IResearch.

A local partnership would be essential given the Chinese government’s strict controls over licensing for online content. Netflix wants a partner that has licenses for content on all devices -- including mobile phones, computers and set-top boxes, according to the people. China’s State Administration of Press, Publication, Radio, Film and Television has given Internet TV licenses to seven companies, including Wasu.

Wasu didn’t respond to an e-mail seeking comment. Two phone calls to Wasu’s general line weren’t answered.

 

Gaining a foothold China would be a major prize for Netflix but it will have to tread carefully and approach the right partner if it is to succeed in this venture. Additionally there are a number of Chinese competitors it will need to face down regardless of which partner it chooses. 

“Corporate results from some of the largest Indonesian companies confirmed that the economy is weakening,” said Audrey Goh, Singapore-based investment strategist at Standard Chartered Bank. There’s probably “some negative sentiment” from the planned executions, she said.

President Joko Widodo’s resumption of executions for drug smugglers after a hiatus under his predecessor has increased international focus on Southeast Asia’s largest economy and the world’s fourth-most populous nation. Australia, which has a history of spats with its northern neighbor, has warned the deaths may damage ties and hasn’t ruled out sanctions or diplomatic action.

 

Joko Widodo does not have a wide margin of support in parliament so there is the possibility that the resumption of executions for drug smuggling represent an attempt to bolster his strongman credentials as the economy weakens. Commodities continue to represent a major source of income for the Indonesian economy despite the increasing potential for growth in the consumer economy. The fall in oil, tin and coal prices all represent headwinds but the possibility of the country attracting negative attention as a result of executions represents an additional issue.  

Minutes after the Nasdaq Composite closed at a record, three of the biggest bellwethers in technology reminded the market precisely why investors are so bullish on companies that do business through the Web.

Amazon.com Inc. for the first time broke out sales from its division that sells computing power and software via the Internet, reporting a 49 percent jump last quarter. Microsoft Corp. posted profit that topped analysts’ estimates, also underscoring healthy demand for software delivered through the cloud. Google Inc. benefited from rising volume of online ads.

The numbers are a testament not only to the endurance of the Internet as a conduit of commerce and information, but also to the ways it has revolutionized how the world’s biggest corporations operate. All three companies have been at the heart of these changes since the Web’s inception as a business tool, and are now vying for a bigger slice of the still-fledgling market for cloud computing.

Google is seeking to extend its lead in online search and advertising, Amazon is spending billions of dollars to expand in e-commerce and data centers, and Microsoft is building on its dominance of the business-software market.

“We are innings one or two of the cloud,” said Kim Forrest, an analyst at Fort Pitt Capital Group Inc., which oversees about $1.8 billion in Pittsburgh.

 

This is a big day for the Nasdaq. Back in 2003 no one anticipated the Index would surmount its bubble peak in little more than a decade. Of course the relative weightings of the Index have changed almost beyond recognition in that time but above all else, the Nasdaq’s performance is a testament to how successful the USA is at creating companies that fill market niches we never knew existed. 

He calls the mixture Bulletproof coffee. Drink it, the name implies, and you’ll feel invincible. “Fats and caffeine help stimulate the brain,” Asprey says in his office, taking another sip. The coffee, along with the drug cocktail he’s just downed, which includes vitamins K and C as well as aniracetam, a pharmaceutical designed to improve brain function, is intended to provide hours of enlightenment. “There’s a sense of cognitive ease, where everything you want to say is at the tip of your tongue,” he says. “It’s like getting a new computer—you never want to go back to the old one.”

In the videos on Mr.Asprey’s website he is sporting the near ubiquitous beard of the hipster generation and his fad is likely to be popular among those searching for the next new health craze. The evolution of demand for grass fed dairy and beef products could not be more welcome news for Irish and New Zealand dairies and beef exporters.

Last week’s event was another enjoyable visit to Singapore and was an apt time to ruminate on Lee Kwan Yew’s legacy of turning a tropical backwater into a first world private banking and high end manufacturing centre. Delegates came in from Argentina, Australia, Japan and of course Singapore which led to some interesting and varied discussions.

Singapore’s stock market is being led higher by the banking sector and shares a high degree of commonality with Taiwan and South Korea. The Index is somewhat overbought in the short-term and some consolidation of recent gains in looking likely. However a sustained move below the 200-day MA, currently near 3400, would be required to question medium-term scope for additional upside.

As one might imagine the main topic of conversation was on the outlook for the Asian region not least following China’s explosive breakout over the preceding three weeks.  Delegates were also interested in the outlook for the European region and we also looked at the S&P 500. We looked at the oil price and a number of related instruments. We also looked at gold prices and a number of miners, select Singapore shares as well as a wide range of international bank shares. We also had a wide ranging discussion on currencies. 

Buhari, a 72-year-old former military ruler who heads the All Progressives Congress, won 52.4 percent of votes cast in all 36 states and the Federal Capital Territory in Africa’s biggest oil producer, according to tallies by the electoral authorities.

Jonathan received 43.7 percent in the March 28-29 election. He called Buhari to congratulate him, an opposition spokesman, Lai Mohammed, told reporters in the capital, Abuja.

“It’s a massive, massive democratic revolution for Nigeria,” Clement Nwankwo, executive director of the Policy and Legal Advocacy Center, which monitored the election, said by phone from Abuja. “It’s a boost to accountability, to the power of the people to bring a government to account through the ballots.”

Buhari, a northern Muslim, faces the tasks of ending a six- year-old war against the Islamist militant group Boko Haram that’s killed more than 13,000 people and restoring investor confidence in an economy that’s reeling from a 50 percent drop in the price of oil, its main export, since June.

“We are putting our feet on the first rung of the ladder of democracy,” Folarin Gbadebo-Smith, managing director of the Center for Public Policy Alternatives in Lagos, the commercial capital, said by phone. “We have been able to change a government that did not meet our expectations.”

 

The first true test of a nascent democracy is in the willingness of an incumbent to accept the will of the people, give up power and engage in an active opposition within parliament. The initial signs are positive that Nigeria can achieve this feat and as such it represents a significant step forward for the both the country and region’s standards of governance. Even more important is that Buhari has a record of integrity and a desire for reform which puts in good standing with other democratically elected reform minded leaders in countries like India and Indonesia.   

“U.K. stocks have had a strong rise given the headwinds,” Richard Hunter, head of equities at Hargreaves Lansdown Plc in London, said by phone. “Mining, oil and bank stocks make up a big part of the index, and we all know the difficult time these three sectors have had. Despite that, the FTSE 100 has managed to make progress.”

It’s been a good week for the benchmark: Chancellor of the Exchequer George Osborne on Wednesday unveiled higher economic growth and lower deficit and unemployment forecasts along with help for the North Sea oil industry. The latter has helped energy stocks trim declines spurred by a rout in oil and metals prices. Banking shares have been hurt by a series of scandals ranging from manipulation of interest-rate benchmarks to tax- evasion schemes.

Even with the FTSE 100 at a record, the advance in British equities this year is about a third that of gains in European peers, which was boosted by additional stimulus from the region’s central bank.

Clicking through the constituents of the FTSE-350 sector Indices section of the Chart Library, we can see that the UK stock market’s rally is well supported, It is also worth noting that the banking, resources and oil & gas sectors are no longer acting as headwinds, have all found at least near-term support this week. 

We are in the final stages of testing for the new filter system and hope to re-launch it soon. Perusing the results of this high/low filter for the FTSE-350 we can see that the majority have been trending for some time which highlights just how much of a brake the above sectors have represented for the UK stock market. 

In the table, the columns represent performance over 1 month, 3 months, 6 months, 12 months, 3-years and 5-years. It will only show data for when the respective share has hit a new high. Therefore at the top of the table you will see all the columns are filled because prices have hit new five-year highs while further down the list a share may only have hit a new 3-month high. 

No signs of improvement. Since our previous adjustment of gaming revenue assumptions in early-January, Macau’s gaming market has shown further deterioration. In 2M15, gross gaming revenue (GGR) dropped 48.6% yoy to MOP43.3b, with VIP and mass-market GGR falling 40.3% yoy and 25.8% yoy respectively. As the trend suggests that 1Q15 GGR will fail to meet our previous MOP75.1b expectations, and various factors suggest fundamentals may deteriorate further before reaching the bottom, we further cut our expectations on future gaming revenue assumptions, with growth assumptions reduced to -21.2% (from -3.1%) for 2015 and +9.0% (from 12.7%) for 2016.

Besides declining revenue, we foresee that rising labour cost due to a labour shortage will put additional pressure on casino operators’ earnings. Several casino operators will be raising casino workers’ salaries by 5% in 2015. Hence, we lower 2015 and 2016 industry EBITDA assumptions by 27.0% and 32.4% respectively vs our previous estimates. We also lower our valuation multiples for casino operators because of the worsening market outlook

 

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

The anti-corruption campaign in mainland China has taken a toll on the fortunes of casinos, luxury goods and luxury drinks manufacturers. However while the leather goods and spirits companies are showing signs of renewed investor interest, Macau casinos are accelerating lower. 

“What’s really sad is that we’ve seen this movie before -- it’s on repeat,” said Paulo Bilyk, chief investment officer of Rio Bravo, a Sao Paulo-based fund with $10 billion under management.

Indeed, the unraveling of Collor’s presidency amid allegations of corruption and hyperinflation draws parallels to the current situation. Collor, the first elected president after Brazil’s dictatorship ended in 1985, was barred from holding public office for eight years after his impeachment on accusations he condoned an influence-peddling scheme run by his campaign treasurer. He was cleared of all accusations in 2014 by the Supreme Court, which cited insufficient evidence.

Collor won re-election for the state of Alagoas from a party allied with Rousseff shortly before his appearance at a campaign stop with the President. Collor’s political base is in Brazil’s northeast, one of the poorest regions of the country, where Rousseff’s Workers Party is also popular.

 

Governance is Everything. For a country like Brazil this is even more important now that commodities are no longer trending higher. Money swelling state coffers helps to paper over a lot of cracks. The problem is that when the flows of money reverses, in a lower commodity price environment, administrations often fail to realise that they need to improve governance in a meaningful way if investors are to be placated. Brazil under Dilma Rousseff has not demonstrated that it has grasped this fact.

Investors are concerned that Jokowi’s administration will take a more “hands-on” approach to state-owned companies, said Joshua Tanja, head of research for Indonesian equities at UBS AG in Jakarta.

The government is considering lowering interest rates on government-subsidized loans to buyers of low-cost homes, Bisnis.com reported on Jan. 20. The online version of Indonesia’s largest business newspaper cited Basuki Hadimuljono, minister for housing and public works, for the proposal.

PT Bank Tabungan Negara, the state-owned lender that acts as an agent for government’s home-loan program, tumbled 8.2 percent the day after the report and is down 12 percent this year. Maryono, the president director of Bank Tabungan who goes by one name, didn’t answer calls to his mobile phone.

Investors should shift money into industries that have a lower chance of government intervention, including mobile-phone retailers and cigarette makers, John Rachmat, the head of research at PT Mandiri Sekuritas in Jakarta, wrote in a Jan. 19 research report.

 

The victory of Widodo in last year’s presidential election was watched closely in the hope that, as an outsider, he might hold the same promise of improving governance for Indonesia that Narendra Modi has for India. He has so far taken a proactive attitude to state owned enterprises and has attempted to lower the cost of infrastructure development by limiting the price of commodities such as cement. The limitations on ore exports have also remained in place. In late December he took advantage of lower oil prices to scrap gasoline subsidies and cap the payment on diesel. 

“With low oil prices and Petrobras’s financial difficulties, the incentives to lean more on international oil companies to help develop the pre-salt have grown substantially,” the Eurasia analysts wrote about the company’s offshore discoveries. “It is clear that any substitute to Graca is likely to be someone with industry credentials and capable of conducting a ‘house cleaning’ of the firm.”

The scandal has also engulfed Brazil’s largest construction companies, which may bring public works projects to a halt, and threatens the presidency of Dilma Rousseff, who served as Petrobras chairman during some of the time when the alleged graft was occurring.

Foster, a frequent guest at the presidential palace in Brasilia, had offered to resign “one, two, three times” after the company was forced to delay quarterly results because of the scandal, she told reporters on Dec. 17. Foster said then that she would stay in the job as long as the president trusted her.

Rousseff has been a personal friend since the two worked together at the Ministry of Mines and Energy in 2003.

An issue faced by many nationalised industries is that they become subject to the avarice of their politically appointed boards as well as rent seeking public officials. For Petrobras this was particularly poignant since the President of Brazil is a former executive. In the run up to the October election Petrobras rallied in anticipation of Dilma Rousseff losing. Unfortunately for shareholders she won and the additional decline in oil prices contributed to the share more than halving from what was already a depressed level. 

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

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

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

 

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

Other companies, like Honeywell International Inc., were able to anticipate the currency changes. Back in October, Honeywell CEO Dave Cote reversed his policy and started using currency hedges because he was -- rightly -- concerned the euro may sink further.

3M Co. today was another example of a global business weathering the dollar strength, partially with currency hedges. The St. Paul, Minnesota-based manufacturer beat fourth-quarter earnings estimates, countering the negative effects of foreign- exchange rates with stronger sales, especially in fast-growing markets.

P&G, which makes about two-thirds of annual sales outside of the U.S., said currency effects will continue to be a drag in the current fiscal year and reduce sales by 5 percent, leading to a decline of as much as 4 percent from a year earlier. Like Kimberly-Clark Corp. and other consumer companies, Cincinnati- based P&G was especially hurt by a slump in Venezuela, where falling oil prices have heightened the bolivar’s volatility.

Bristol-Myers, the New York-based maker of cancer treatments such as Yervoy for melanoma, gets about half its sales outside the U.S. The dollar’s strength weighs down the company as it pursues growth by focusing on a new class of cancer drugs.

 

The big fall in oil prices and the big rally in the Dollar continue to influence decisions in boardrooms. 3M and Honeywell were little changed today following their results not least because their currency hedging strategies paid off. Following a quarter where companies that hedged their exposure outperformed, we can anticipate that more companies will be hedging their currency exposure by the end of this quarter. 

You might think that such striking progress would be widely celebrated, and that people would rush to figure out what is working so well and do more of it. But they’re not, at least not in proportion to the progress. In fact, I’m struck by how few people think the world is improving, and by how many actually think the opposite—that it is getting worse.

I believe this is partly because many people are in the grip of several myths—mistaken ideas that defy the facts. The most damaging myths are that the poor will remain poor, that efforts to help them are wasted, and that saving lives will only make things worse.

I understand why people might hold these negative views. This is what they see in the news. Bad news happens in dramatic events that are easy for reporters to cover: Famine suddenly strikes a country, or a dictator takes over someplace. Good news—at least the kind of good news that I have in mind—happens in slow motion. Countries are getting richer, but it’s hard to capture that on video. Health is improving, but there’s no press conference for children who did not die of malaria.

The belief that the world is getting worse, that we can’t solve extreme poverty and disease, isn’t just mistaken. It is harmful. It can stall progress. It makes efforts to solve these problems seem pointless. It blinds us to the opportunity we have to create a world where almost everyone has a chance to prosper. 

If people think the best times are in the past, they can get pessimistic and long for a return to the good old days. If they think the best times are in the future, they see things differently. When science historian James Burke wrote about the Renaissance in The Day the Universe Changed, he pointed to one source for many of the advances that happened in that amazing period: the shift from the belief that everything was decaying and getting worse to the realization that people can create and discover and make things better. We need a similar shift today, if we’re going to take full advantage of the opportunity to improve life for everyone.

 

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

Apart from its deep pockets the Gates Foundation sets itself apart by exuding a sense of optimism that the problems affecting large portions of the global population can be solved within our lifetimes. The rise of China and India has already lifted a billion people out of abject poverty and improving governance is likely to achieve a similar feat in the next decade for even more countries. 

The ECB’s massive QE program will put pressure on the BoE to delay any plans it may have had to raise short term interest rates. Along with its own easy monetary policy, the prospect of recovering demand on mainland Europe should be a positive for the UK’s economy and it may also be subject to additional capital flows since not all the money created by the ECB will stay inside the Eurozone. 

I thought it might be an opportune time to look at the FTSE 350 since its constituents may be among the beneficiaries of ECB largesse. The Index has surged over the last two weeks to retest its peak and a while some consolidation is possible in the current area a sustained move below 3500 would be required to question medium-term scope for additional upside. 

I clicked through the constituents of the FTSE 350 this morning and also created a section for the FTSE All Share REIT Index in the Chart Library. Here is a link to an Excel sheet of the FTSE350’s constituents ranked by sector then by market cap. 
Among Autonomies:

In the banking sector HSBC (Est P/E 10.65, DY 5.27%) has firmed in the region of 600p. It is now testing the 200-day MA and a sustained move below 600p would be required to question potential for additional upside.  

Improving economics and govt actions increase probability of ratings upgrade
We assign a high likelihood of a sovereign ratings upgrade for India as most macro indicators have exhibited improvements in past 2 years. A rating upgrade will likely entail multi-layered benefits for Indian economy and markets. Over the past decade we have witnessed 4 instances of rating upgrades by S&P and Moody’s and on an average Sensex has returned 9% in the following 6 months and 40% in the following 12 months of ratings upgrade. Boost to capital inflows and improved perception of India on the back of rating upgrade should help moderate volatility associated with US rate normalization and create some headroom for RBI to ease monetary stance.

India likely to remain one of the favored emerging markets
Expectations of normalization by the US Fed and a subdued commodity pricing environment will continue to drive multi-asset differentiation within Emerging markets. India's embrace of long pending, supply side reforms together with an investment driven macroeconomic stabilization will allow it to deepen its relative attractiveness in 2015. Among key EMs, India has demonstrated one of the best improvements on external front with CA deficit now in comfort zone at (2.1% in Sep’14 qtr. 4.7% in FY13), appreciable FX reserves accumulation and sharp uptick in capital inflows.

Government must ensure its economic agenda is not side tracked 
While the urgency in moving ahead on key ordinances is indicative of the commitment to reform, passing bills in parliament will be vital to ensure that reform is structural, enduring and getting institutionalized. Translation of many of the recent ordinances into law in the next session of parliament will be viewed as crucial determinants of the government’s execution prowess. Other risks: Faster- and steeper-than-anticipated Fed rate normalization and any systemic risk associated with steep decline in oil prices.

 

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

There are few countries that benefit more from weak oil prices than India so the recent energy market moves represent something of a windfall for Narendra Modi’s government.  This might yet allow the RBI to cut interest rates but the broader question is over how bold the administration will be in its legislative agenda. A great deal of enthusiasm has already been priced into the market and it will be interesting to see how much is delivered upon this year. 

With a large young upwardly mobile population India represents a fertile market for global Autonomies, a number of which maintain listed subsidiaries on the Munbai exchange. Many of these trade on aggressive multiples not least because supply is reasonably thin. 

Our country bank analysts have studied the financing of the local energy production chain in 12 Asian markets and in this report evaluate the risks arising from sharply falling global oil prices. For the oil production countries, namely Australia, Malaysia and China, bank lending is primarily extended to the state-owned or globally established MNCs engaging in E&P (Exploration and Production), with some of them engaging in diversified energy businesses; for example, gas, that can help offset part of the losses from falling oil prices. In Australia, banks have set aside economic overlays (3-6% of the exposure) to buffer against potential risks from the worsening asset quality of the mining and energy sectors.

Impact for banks financing refinery businesses and overseas projects
While the refinery businesses of the major oil importing countries (India and Thailand) should benefit from falling global oil prices, the banks have less than 1% of loans pledged to the related industries, implying limited positive earnings impact. For Asian banks, such as Japanese banks, that have financed overseas projects, the borrowers are primarily strong companies with limited default risks.

Indian, Indonesian and Chinese banks historically the best performers
Since 2006, we identified four periods of global oil prices falling by an average of 46% within six months and we observed that global equity indices have been negatively affected, with MSCI Asia-ex JP financial index underperforming the S&P Index by 2%, but outperforming the global MSCI EM index by 4.7%. The best performers were India (+19%), Indonesia (+8%) and China (+4%), while HSBC (-14.5%), Standard Chartered (-21%) and Korean banks (-16%) were the worst. This order of performance is consistent with our preference among Asian financials based on our fundamental analysis.

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

A number of Asian markets have been subject to some quite extreme volatility over the last couple of weeks as the impact of meaningfully low oil prices have shaken the status quo. 

With higher chicken prices and lower feed costs, the industry has been “operating under the most advantageous conditions possible,” Francesco Pellegrino, a New York-based analyst for Sidoti & Co LLC, who recommends buying Sanderson Farms shares, said in a telephone interview yesterday. He doesn’t cover Pilgrim’s Pride. Short interest has risen because investors are questioning how much longer “peak” conditions can persist, he said.

Whole chickens sold by farmers in Georgia, the biggest producing state, rose 9.4 percent this year to an all-time high of $1.14 a pound, which has held through much of November. A retail gauge of composite wholesale-chicken prices has climbed 24 percent this year to average 90.404 cents a pound in October, USDA data show.

Chicken production will climb 3 percent next year to an all-time high of 39.206 billion pounds, the USDA forecasts.

That’s at least 65 percent higher than estimated beef or pork output. A USDA index of chicken-feed costs was 24 percent lower in September than a year earlier as American farmers collect record corn and soybean crops.

While there is no futures contract for chicken we do have the price of boneless chicken breast in the Chart Library Library. Prices have been volatile but a progression of higher reaction lows is evident since 2008 and a sustained move below 180 would be required to question medium-term potential for continued higher to lateral ranging. 

Private Banker International (PBI) said on Friday (Oct 17) that DBS Private Bank kept its ninth place in the ranking of wealth managers for the rich, with assets under management (AUM) of US$54 billion (S$68.7 billion) as at December 2013, up from US$46 billion the year before.
Bank of Singapore, the private banking arm of Oversea-Chinese Banking Corp (OCBC), stayed at number 10, with AUM of US$46 billion at the end of 2013, an increase from US$43 billion at end-2012. 

Looking ahead, Bank of Singapore said it expects to see further growth. Said its chief executive officer Mr Renato de Guzman: "We now have more than 300 relationship managers and we think there is more room for them to grow their asset base. 

“So organically we have within the organisation room to grow from existing resources that we have. Secondly, part of our strategy is to really work closely with OCBC, and they are very successful in areas or countries with a strong presence. The recent acquisition of Wing Hang Bank with OCBC is a big opportunity for Bank of Singapore."

 

At the Singapore venue for The Chart Seminar earlier this year, the majority of attendees were private bankers which was a departure from the event we held in Singapore during 2012. The growth of the sector in the city state reflects concerted long-term policy initiatives to grow the business and this is unlikely to change as the region’s major population centres increasingly seek private banking services. The opening up of China’s capital market and the increasing ability of capital to leave the country should be net benefits for the private banking sector. 

The Sub’s upscale design plays into the growing trend of more refined at-home drinking -- fancy cocktails, fine wine, craft beer -- which “communicates a certain status” among consumers, said Ben Voyer, a social psychologist at the ESCP Europe Business School. While mainstream beer volumes are falling, sales of premium-priced beers such as Heineken’s Affligem and the tequila-flavored Desperados are on the rise. In Italy, half of all Torps sold are Affligem, an ale started at a Belgian abbey founded in 1074.

Heineken fell 0.6 percent to 61.12 euros at 1:23 p.m. in Amsterdam. Even for the man who has everything, though, the Sub is “ridiculously” expensive, said Euromonitor analyst Spiros Malandrakis, who predicts it will fail unless Heineken licenses its technology to other brewers to widen the selection of brands. That strategy helped make Keurig Green Mountain Inc.’s coffee machines ubiquitous in American kitchens.

That won’t happen with the Sub, however, according to Nasard. “We’re not a service provider.” Instead, Heineken -- which has introduced a cheaper $235 plastic version of its machine -- plans to keep this Christmas gift in the family.

 

Most people who own a capsule coffee machine will testify that consumption and expenditure rise while tolerance for lower quality products such as instant decreases. That’s music to the ears of companies such as Nestle and it is inevitable that others seek to adopt a similar high profile business plan for their products. It remains open to question whether Heineken will succeed with its Torps but the innovation is admirable. 

Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

Thank you for your kind words and your question. This is a topic we cover almost daily in the written commentary and the audio but it is a good time to summarise our views. 

Let’s ruminate for a moment though on the timing of your question. Generally speaking, the last six weeks of the year is given over to thinking about the possibility of a Santa Claus rally and people don’t generally look at the outlook for the next year until the last week of December or the first week of January. It made headlines during the week that Goldman Sachs had released its prognostication for the coming year, which may have prompted your email. However I believe it is worth considering that the stock market is a discounting mechanism and as a bull market progresses we tend to want to discount cash-flows from increasingly further into the future. It is a measure of how strong the market has been over the last month that investors are already planning for next year. Five consecutive weeks to the upside suggest some consolidation is increasingly likely.

Levy, who is head of Bradesco Asset Management Ltd., was treasury secretary from 2003 to 2006 under President Dilma Rousseff’s predecessor, Luiz Inacio Lula da Silva. He will replace Guido Mantega, Brazil’s longest-serving finance minister, Folha de S.Paulo newspaper reported in its online edition. The president’s press office said Rousseff won’t announce cabinet changes today.
“Levy is investors’ favorite name for the finance ministry because he is very close to the markets,” Jason Vieira, an economist at consulting firm MoneYou, said in a telephone interview from Sao Paulo.  “He is also known as a good manager for what he did at the Treasury.”

 

Dilma Rousseff acknowledged the failure of her last administration in her acceptance speech but the market will need to see evidence of real change before giving Brazil the benefit of the doubt once more. Appointing a finance minister who understands the market is a positive development. 

On October 10th I reviewed the constituents of the Autonomies section of the Chart Library. At the time approximately half were trading above or in the region of their 200-day MAs, while the remainder were in varying stages of trend deterioration. Since then the wider market has rebounded impressively, the Japanese market has been given a new injection of liquidity and the US Dollar has been quite firm. I clicked through the constituents once more this morning to identify those exhibiting relative strength. 

The presidents of Nigeria and Ghana are in Burkina Faso to press the army to cede power to civilians after its takeover last week.

Ghana’s John Dramani Mahama, chairman of the Economic Community of West African States, and Nigeria’s Goodluck Jonathan arrived in Ouagadougou, the capital, today to join mediation efforts. The African Union yesterday labeled the military’s takeover a coup, and reiterated a demand for army chiefs to step down within two weeks or face sanctions.

The army took charge of the country last week as President Blaise Compaore, who had held the office for 27 years, was ousted amid protests against his efforts to extend his rule. Lt. Col. Isaac Zida, the transitional leader, told religious chiefs yesterday that he will step down and have power to civilians.

Governance is a relative consideration rather than an absolute. There is no doubt that the Ebola crisis in West Africa has highlighted just how underdeveloped the region is in absolute terms but on a relative basis, the macroeconomic condition of an increasing number of countries is improving albeit from a low base. If Burkina Faso does in fact embrace a democratic model, it will be another step forward for the continent in terms of a desire to improve the standards of living for the majority. 

Quantitas Gestao de Recursos, a Porto Alegre-based investment boutique that manages 15 billion reais ($6.1 billion), estimated last week there is a 50 percent chance Brazil could be cut to junk in her second term.

“Unfortunately, this is very negative for Brazil,” Bianca Taylor, a Boston-based sovereign analyst and strategist at Loomis Sayles, which oversees $223 billion of assets, including Brazilian bonds, said in a telephone interview last night.

Taylor expects a “natural negative reaction” in bond markets this week. “She has not managed the country in a good way so far.”

Rousseff has boosted spending and stepped up government control of state-run companies, discouraging investment and helping sink the economy into stagflation. The country’s gross domestic product shrank in the first half of the year while annual inflation soared to 6.75 percent in September, above the top end of the government’s target range.

Bonds Fall
Brazil’s benchmark dollar bonds due in 2025 fell 0.44 cent to 100.87 cents on the dollar at 8:51 a.m. in New York while yields on local fixed-rated notes maturing in 2023 rose 0.57 percentage point to 12.61 percent. The Ibovespa benchmark equity index slumped toward a bear market, falling 4.9 percent to 49,408.11. The real posted the world’s biggest drop as it sank 2 percent to 2.5248 per dollar, a nine-year low.

Brazil’s dollar bonds returned 8.7 percent this year, trailing the average 10 percent advance for investment-grade developing nations, JPMorgan Chase & Co. indexes show. In Rousseff’s first three years in office, the notes posted an annual gain of 5.04 percent, lagging behind the 5.6 percent return for similarly rated sovereign peers.

 

In her victory speech Dilma Rousseff acknowledged her poor performance in stoking economic growth and said she wanted to do better the second time around. It is all well and good to commit to dialogue but reigniting growth in a declining commodity price environment is going to take courage and imagination which was not on show during her first term. The burden of funding social programs is likely to continue to be put on major state run enterprises such as Petrobras and might increase. 

 Incumbent Dilma Rousseff’s lead over Aecio Neves will be bigger than margin of error, Veja columnist Lauro Jardim reports today without saying where information was obtained.

It will be 1st time in the second round an Ibope poll shows Rousseff statistically ahead in valid votes: Veja

Ibope poll to be published at 6:00 p.m. local time on O Estado website: Veja

 

The heightened volatility seen on international currency markets over the last year highlights the fact that investors are no longer willing to assume all emerging markets will move in concert. The fact is that each needs to be addressed on its individual merits and perceptions of improving governance are more important than ever. 

“China has a real serious problem in regard to availability of beds,’’ said Benjamin Shobert, managing director of Seattle-based Rubicon Strategy Group, which advises health care companies entering China. The shortage led the Chinese government two years ago to allow outsiders to invest in and provide expertise for the country’s health care system.

Since then, Mass. General, which is the largest hospital in New England, has developed a relationship with China. A Chinese medical tourism firm, Beijing Saint Lucia Consulting, refers patients to the hospital. The firm opened a Boston office last year to provide translators, chauffeurs, and other services for wealthy Chinese coming to Mass. General and other Boston hospitals for cancer treatment, orthopedic procedures, and other medical care.

“There is still a large gap between China and America when it comes to medical technology and service,’’ said Joseph Zhao, the company’s deputy general manager in China. With doctors in high demand there, “physician-patient communication only lasts 5 to 10 minutes,’’ he said.

 

Wealthy Chinese consumers have resources to buy just about any material possession imaginable but domestic healthcare is still developing relative to other countries. World class healthcare is as much an attribute of the upper middle class as luxury brands, property or other services and demand is increasing. Medical tourism continues to expand as demand for services represents growth in Asia while desire for lower cost is fuelling demand elsewhere. 

But Widodo’s reform efforts -- including plans to reduce a popular fuel subsidy that eats up around one-fifth of the national budget -- are likely to face opposition in a hostile parliament where the opposition, led by his election rival Subianto, holds 63% of seats. Subianto refused to accept his election defeat and has threatened to block Widodo’s agenda.

“While he has attracted plenty of plaudits for his clean style of government, he is untested at the national level and could struggle to push through critical reforms,” reported Capital Economic, a London research group.

Last month, Subianto won a vote to end Indonesia’s system of direct elections for local officials, which helped Widodo get his start in politics in Solo nine years ago. The change has raised concerns about the future of democracy in a country usually lauded as a successful example of transition from dictatorship.

Analysts say Widodo may have to cut deals with the opposition and possibly offer Cabinet positions to members of Subianto’s coalition. That could disappoint some supporters but also weaken resistance to his reforms, said professor Tim Lindsey, who directs the Center for Indonesian Law, Islam and Society at the University of Melbourne in Australia.

“Jokowi is a canny operator, and has shown the ability to broker deals while leading minority governments as mayor of Solo and as governor of Jakarta,” Lindsey said.

Widodo visited Subianto last week, their first meeting since the election, and mentioned him by name during his inauguration address. Subianto stood and gave Widodo a military salute -- a sign, according to experts, that he was offering his rival at least temporary support.

 

The election of a non-elitist to power in Indonesia is a major achievement and reflects the power of a democracy to deliver on improving standards of governance when needs must. Widodo will need skill and luck in order to push through his reform agenda and with an opposition led parliament this will not be easy. Indonesia became a net oil importer by 2004 yet the hefty oil subsidy it pays to keep the domestic price of fuel low is still intact. Any progress that can be made in reducing this burden will be seen as a win and would free up capital for more productive uses. 

“The political debate tends to remain the main driver for currency trading,” Deives Ribeiro, a foreign-exchange manager at Fair Corretora de Cambio e Valores in Sao Paulo, said by phone. “Investors liked to see Neves ahead of Rousseff.”

Neves would have 52.4 percent of votes in the runoff, compared with 36.7 percent for Rousseff, according to a Sensus poll published on the website of IstoE magazine. The survey of
2,000 people Oct. 7-10 has a margin of error of plus or minus 2.2 percentage points. Ricardo Guedes, director of research firm Sensus, also conducts internal polls for the Neves campaign.

The ‘anyone but Rousseff’ camp appears to be gaining ground ahead of the October 26th run-off. With Marina Silva throwing her weight behind Aecio Neves the opposition has gained some important coherence. However, we can anticipate continued volatility until the final result is known. 

One strategy employers are using to soften the increase in health spending in 2015 is adding a low-cost, high-deductible health plan for the newly eligible employees – or for all employees.  Consumer-directed health plans (CDHPs) that are eligible for a health savings account cost, on average, 20% less than traditional health plans. Health reform is clearly accelerating that trend. While about half of large employers offer a CDHP today, nearly three-fourths (73%) say they will have a CDHP in place within three years.  And 20% say it will be the only choice available to employees (today, only 6% of large employers have moved to “full-replacement” CDHPs.)

“The move toward high-deductible consumer-directed plans is spurring other changes as well, such as more voluntary options,” said Ms. Watts. “While some employees are comfortable with a lower level of coverage, offering supplemental insurance alongside a high-deductible plan gives employees access to more protection if they want it.”

 

The Affordable Care Act is the gift that just keeps giving for insurance companies. The imposition of a 40% excise duty on so called “Cadillac plans” due to come into effect in 2018 is necessitating that employers revise the coverage they offer employees now. Untaxed health, dental and eye care benefits that were an attractive part of the total compensation package for a considerable number of white collar workers are now being rewritten in an attempt to avoid an even greater commitment on behalf of the employer.

The shake-up of the system, the fact that the value of health coverage offered by the employer now has to appear on the W2 (P60 in the UK) and the passing on of costs to the insured potentially means that people expecting a tax refund may not get one while others may get more than they anticipated. The evolution of the high deductible health plan (HDHP) means that upwards of a $1000 in deductibles will be passed onto workers before health coverage kicks in.  A couple of trips to the doctor or a routine test in the space of 12 months will quickly take that money out of one’s account and ensure it won’t get spent elsewhere. 

President Dilma Rousseff and Marina Silva still stastistically tied, according to MDA poll published on CNT’s website.

In previous poll released Sept. 9, Marina Silva had 45.5% support in runoff vs 42.7% for Rousseff 
In 1st round, Rousseff would win 36% of votes vs 27.4% for Silva and 17.6% for Aecio Neves

 

Speculation in the Brazilian stock market has ebbed and flowed along with the prospects of incumbent Dilma Rousseff losing next month’s Presidential run-off. Rather than especially favouring Marina Silva investors appear to have adopted an “anyone but Rousseff” preference. In all likelihood the October 5th election will result in a run-off which will take place on October 25th.  

We hold an optimistic view on the metal casings industry. On the demand side, we are confident about its robust shipment momentum within the next three years due to (a) the design trend toward ultra-slim and lighter form-factor, and larger panel-screens on mobile devices (NBs, smartphones and tablets), (b) Apple’s preference for using metal casings (its adoption rate at 86%, Figure 19) for iPhone, iPad and Macbook products, and (c) the increasing adoption rate from other smartphone and tablet brand vendors. On the supply side, the disciplined procurement of CNC (Computer Numerical Control) machines by major casing suppliers in Asia (hence controlled supply increase) and the higher entry barriers in metal casings manufacturing and surface treatment solution can help ease the Street’s concerns about the industry’s oversupply risks.

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

It is easy to become desensitised to photos of long lines of people sleeping outside Apple stores in order to be among the first to own the next new product. However these people represent the loyal customer base that is the envy of every other consumer electronics company. News last week that privately held, discount smart phone manufacturer Xiaomi would be moving to metal cases exemplifies the trend of Apple imitators, not least in the build quality end users have come to expect.

Brazil votes next month on whether to reinstate incumbent President Dilma Rousseff or elect Marina Silva. The two are running in a statistical tie, with a Vox Populi poll published last week showing Silva would get 42 percent of votes in a runoff, compared with 41 percent for Rousseff.

“We’re overweight because we’re looking and we’re continuing to look for change,” Landers said in a Sept. 12 interview at BlackRock’s New York office. “We have good reasons to believe that the election will go towards Marina.”

Landers said Silva is signaling that she will allow the private sector to be “in charge of its own destiny,” instead of trying to control every aspect of the economy, and that she will bring inflation down. Rousseff has been using Petrobras and other state companies as fiscal and monetary policy tools, driving their value down, Landers said.

As part of Rousseff’s effort to contain inflation, she limited Petrobras’s ability to increase fuel prices.

If Rousseff wins in October, Petrobras will return to the nine-year low it hit in March, Landers said, and BlackRock would reduce its exposure to Brazil. “We would significantly have to rethink our portfolio,” Landers said. The Latin America fund shrank from $4.5 billion in December on flows.

Petrobras is the second-largest holding in Brazil after Itau Unibanco Holding SA in BlackRock’s Latin America fund. Earlier this year, various BlackRock funds bought 500,600 shares of Petrobras, as the Rio de Janeiro-based company is known, according to data compiled by Bloomberg.

The Brazilian Bovespa Index pulled back sharply from early this month in the aftermath of polls that showed Rousseff with a wider lead than many had expected. This year has seen a number of heavily contested elections which have seen pro-reform candidates assume power. If Brazil votes for Silva it will probably be seen as another green light for foreign investors to return to Brazil after a particularly difficult period. 

Your comment on the Uranium price is of interest to me. Prior to Fukishima , Geiger Counter was very much in vogue. Then came the collapse. I wondered what the view was now concerning the above and perhaps suggest other companies listed in London that have positive chart patterns .    

Thank you for this question which others may have an interest in. Geiger Counter generally runs a concentrated portfolio of high potential explorers and developers although its current holdings are peppered by some larger uranium names.  

I highlighted it as a potentially interesting fund offering exposure to the uranium market on August 22nd. 

Ng, who calls deep learning a “superpower,” will build a new generation of such systems at Baidu. Services that may result remain in the brainstorming stage, but he will hint at what they may be. He dreams of a truly intelligent personal digital assistant that puts Apple’s Siri to shame, for example. Looking further ahead, the technology could transform robotics, a pet subject for Ng—his engagement photos were taken in a robotics lab—and make autonomous cars and unmanned aerial vehicles much more capable. “We’re going to do some cool things here,” he says with a grin.

They’ll have to if they are to compete: Google, Facebook, Microsoft, and others have been hiring lots of deep-­learning experts for their labs, sometimes even from each other. And Baidu still has a lot to prove. Fairly or not, it has the reputation many Chinese companies do for copying the products and business models of U.S. Internet leaders. It’s a process cynics dub C2C—“copy to China.” Baidu has seemingly tried to emulate Google in countless ways over the years, from its spare search homepage to a head-mounted computer, Baidu Eye, that looks a lot like Google Glass. Baidu has even begun working on self-driving cars. With its new star hire, it appears to be following Google’s lead once again.

Ng insists that the C2C stereotype is no longer accurate, particularly for his new employer. “I used to work for the USA’s Baidu,” he jokes. Then he picks up his phone and says in English, “Please call a taxi for me.” A moment later, Baidu’s translation app utters the same phrase in Mandarin Chinese and shows the equivalent ideograms on the screen. It’s slick—but is it better than Google’s translation app, which appears to do the same thing? That’s not clear. It’s Ng’s job to develop cutting-edge technologies that will leave no doubt who is ahead.

As a country develops, the logical path both in the governance and commercial fields is to look at what worked elsewhere and employ it at home. The more successful companies eventually branch out to create their own novel solutions to problems and compete on the international stage. China’s companies are well capitalised and have a government willing do take major steps to promote their wellbeing. As high population countries in Asia, Latin America and Africa develop and their middle classes increase, the opportunity is ripe for internet companies to benefit. Chinese companies are well placed to compete in this environment. 

Brazil’s economy slipped into recession for the first time in more than five years as investments contracted on lower confidence before the October presidential election.

Gross domestic product shrank by 0.6 percent in the April- June period from the previous three months, after contracting a revised 0.2 percent in the first quarter, the national statistics agency said today in Rio de Janeiro. The contraction in the second quarter was bigger than the median estimate of 42 economists surveyed by Bloomberg, who expected a 0.4 percent drop.

President Dilma Rousseff has attempted to revive growth with tax cuts, billions of dollars in credit and higher social spending. With inflation hovering around the upper limit of the target range, consumer and business confidence eroded in the run-up to the first round vote on Oct. 5. It’s the first time the economy contracted for two consecutive quarters since the aftermath of the global financial crisis in 2008.

“This is the last thing that Dilma would have wanted, today’s data is the worst-case outcome for her,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone from London. “This is clearly going to put pressure on the central bank to loosen policy in order to support growth.”

In the bad news is good news department, the underperformance of the Brazilian economy increases the likelihood that Rousseff will not win the October election. Investors are betting that a victory by a pro-business candidate will boost stock market returns because of expected regulatory changes, not least a removal of the oil price subsidy. 

So-called linkers due June 2023 lost 1.8 percent this month, data compiled by Bloomberg show. Notes maturing in 2021 indicate inflation of 1.56 percent over their lifetime, less than the Bank of Korea’s target of 2.5 percent to 3.5 percent through 2015. Governor Lee Ju Yeol lowered the benchmark rate to 2.25 percent from 2.5 percent on Aug. 14 and said price pressures are “not high.”

The first reduction in borrowing costs since May 2013 came after the BOK lowered its living cost estimates and Finance Minister Choi Kyung Hwan unveiled an 11.7 trillion won ($11.5 billion) spending plan to boost the slowest growth in more than a year. While most analysts predict Lee will keep interest rates unchanged, Samsung Asset Management Co. and Eastspring Asset Management Co. see room for a further cut.

“Another rate cut within the year is possible as one isn’t enough to support the government’s growth push,” Jack Kim, who helps manage 700 billion won of fixed-income assets for Eastspring in Seoul, including Korean linkers, said in an Aug.26 phone interview. “Low inflation should make it feasible.”

 

Falling interest rates, low inflation, a government flush with cash and keen to promote growth results in South Korea being an interesting prospect right now. The strength of the Won throughout the last year, especially during a time when currency market volatility has been an issue for a number of neighbouring countries is an additional positive consideration from the perspective of foreign investors. 

South Korea’s stable of highly successful world class companies is a logical place to start one’s investigation of the domestic stock market but neither the major electronics companies, at 22% of the Index, nor the Korean automakers are responsible for the recent return to outperformance of the Kospi. 

Indonesia’s leaders want to wean the country off of commodities and push investment in value-added manufacturing and services to emulate the success of countries like South Korea and create a more even distribution of wealth. With a population hungry for jobs, there is fertile ground for the elite to paint the issue in nationalist terms and blame foreigners to win votes and serve its own interests. After all, countries from Australia to Zimbabwe are pursuing similar drives to earn more from their resources. Critics including the World Bank say such policies often backfire, and that driving away investors could cost Indonesia more than $6.5 billion in lost taxes and royalties over the next three years. That could exacerbate an economic slowdown and cripple efforts to build roads, schools, hospitals and other infrastructure.

It will still be a while before Joko Widodo’s victory is confirmed by the Supreme court and his administration takes over. Indonesia ranks towards the top of global corruption rankings so anything a new government can do to reduce graft and streamline planning will help improve perceptions that the country of 300 million can begin to reach its productive capacity.

The last few days of the previous administration’s rule saw an easing of export restrictions on ores but it remains to be seen what Widodo’s attitude to the ban is. In attempting to ensure greater benefit from its natural resources, Indonesia is attempting to mirror China’s development where a focus on infrastructure development in its early stages paid off. 

Management communication, credibility “appear on the line” after profit warning, Berenberg says in note.

In golf, mkt “over-bloated” with inventory, U.S. chains such as Dicks have to right size existing goods, cut future orders

TaylorMade-adidas Golf restructuring may cost ~EU25m-EU30m ex loss of sales, profit anticipated in 2H14

In Russia has done an about-face, will now accelerate store closings, big effect is associated loss of 2H sales, profit, as E. Europe ~14% sales, 20% Ebit, Russia is >90% of that region

Scope of downgrade hard to quantify

Baader Bank says share price reaction “adequate,” sees potential downside revision for mkt consensus of 20%-25%

Profit warning expected, but sharper than seen.

Adidas’ expansion into Eastern Europe has not been as successful as planned and the closing of stores in Russia reflects this. Tighter sanctions imposed on Russia by Europe may have been the final catalyst for this decision. By contrast the reorganisation of TaylorMade is a significant but much smaller issue.  

Adidas’ share price has been deteriorating since late last year and it began to encounter resistance in the region of the 200-day MA from March. Today’s action represents an acceleration of the downtrend but there is no evidence yet that it is over. Some scope for a reversionary rally exists but a potentially lengthy period of support building will be required before investors are likely to support significantly higher levels. 

The slowdown in price gains and the prospect of realizing profit tied up in London homes could tempt wealthy foreigners to head elsewhere, economists say. Those who bought homes in the priciest districts of town in dollars, rubles, rupees or riyals during 2009 would double their money if they sold today, Hamptons’ Morris said.

“With the prospect of increasing interest rates, and resultant strengthening of the pounds, the temptation for overseas investors to cash in is getting bigger,” Morris said.

Chancellor of the Exchequer George Osborne is adding a capital-gains tax next year on homes sold by people living abroad after raising a transaction tax to 7 percent from 5 percent for properties priced at more than 2 million pounds in 2012.

London property was a safe haven in the aftermath of the financial crisis not least because of low supply and the swift devaluation of the Pound. With transaction taxes set to increase and the prospect of Russian investment being curtailed, the market has lost a potent source of demand which will likely sap potential for additional upside. 

Beer takes share from a readily addressable market in the form of cheaper,  often illicit and non-commercial alcohol. The level of local alcohol in a market  is strongly correlated to national income as per Figure 9.

This readily available market accounts for over 50% to 90% of alcohol consumption in Africa, with growing markets like Nigeria, Democratic Republic of Congo and Ethiopia particularly attractive. Other emerging markets have lower, but nevertheless interesting figures which range from 15% to 40%. Markets like Latin American Ecuador and Peru and Asian markets such as Myanmar and Cambodia looking interesting to the brewers. 

Beer is a luxury 
The barrier to conversion from illicit alcohol to beer is the affordability of beer.  Per capita consumption in a market is relation to the amount of time a consumer has to work to afford a beer. As seen in Figure 11, the first inflection point for growth acceleration is around 120 minutes of work to afford a beer.

A second inflection can be found at 30 minutes worked for a beer. Not only does beer consumption accelerate to the levels seen in developed markets, consumers also move up in the portfolio towards more premium brands. 

There are market dependent limits to per capita growth 
There is a limit to how much alcohol and beer one can drink. For beer, the per capita average of 10 liters of pure alcohol translates to 200 liters which approximates consumption in core beer markets such as Germany and Czech. 

As markets mature, our analysis indicates a range of 70-90 liters per capita being the developed market norm over time. For most emerging markets with favorable population and illicit alcohol profiles, this is a growth destination; for developed markets this may translate into more declines.

 

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The last few paragraphs above highlight just how important international expansion is for larger brewers. The profile of consumption in emerging middleclass economies represents where they have the best potential to grow their businesses. The pace of M&A activity within the sector highlights the fact that international expansion and establishing  brand loyalty remains a priority. 

The deal positions a unified Zillow and Trulia to capture a larger share of digital real estate ads as more people shift house hunting onto the Web and property agents deploy more marketing dollars onto the Internet. While there are other real estate websites such as Move Inc. and Redfin Corp. that are growing, Zillow and Trulia are the top two most-visited property sites in the U.S. tracked by ComScore Inc.

“The opportunity here is very large -- both companies are growing extremely fast,” said Ron Josey, an analyst at JMP Securities who rates Zillow the equivalent of a buy. “They should be able to benefit from some sort of brand awareness and the network effect just grows with this deal alone.” 

The housing recovery is well established and while some areas of California appear to be fully valued, the prospects of another crash appear remote. Real estate agents compete for access to the consumer base and online databases represent a great way of marketing so that personal interaction can be reserved for the most serious prospects. As a result, online real estate search engines represent potent marketing venues not least via mobile apps. 

China has posted high rates of labor productivity growth in recent years, but its progress began from a very low base. As a result, its labor productivity remains well below the levels in advanced economies (Exhibit 3). China created $15,500 of GDP per worker in 2013, significantly lower than levels in the United States ($107,200), Japan ($76,700), and Germany ($67,300). A closer look at the sector level bears this out: US labor productivity in the ICT and manufacturing sectors, for example, was 12 and ten times higher than China’s average labor productivity in those sectors, respectively, in 2013.

China faces a growing imperative to continue making strong gains in productivity. The rapid economic growth of recent decades was fueled by an expanding labor force and heavy capital investment, but this model is coming under pressure, particularly as the population ages. In fact, China’s labor force is projected to begin shrinking by 2015. As the dependency ratio doubles over the next two decades, the savings rate is also likely to decline as older Chinese draw down their savings. To avoid a slowdown and continue to improve living standards, China will have to make its existing labor and capital stock more efficient—and wider technology adoption will be central to this effort.

The rapid growth of China’s Internet economy is not yet reflected in its labor productivity performance. From 2010 to 2013, China’s labor productivity increased by 26 percent, while the contribution of Internet-related output to GDP increased by 35 to 60 percent (depending on whether C2C e-commerce is included).

However, China appears poised to capture large gains as its companies step up their adoption of Internet technologies. According to McKinsey’s latest survey of Chinese CIOs, the typical Chinese company spends 2 percent of revenue on IT, far below the 4 percent international average. These same respondents predict their IT spending will increase to 3 percent of revenue by 2015—and while that still leaves a large gap, it indicates clear momentum.26 As Chinese companies digitize their operations on a wider scale, they will gain the ability to streamline operations, open new sales channels, accelerate the R&D process, and become leaner.

The Internet is likely to usher in disruptive change, but it is also a catalyst for faster productivity growth. We project that the new applications described in this report could contribute 7 to 22 percent of China’s overall labor productivity improvement by 2025. Capturing this potential will be critical for China’s future competitiveness, particularly as the country’s labor costs increase and its demographic dividend diminishes. 

 

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

China has succeeded in transforming its economy by leveraging its low labour costs and enormous population. However as the population ages and wages increase, delivering productivity gains is essential if the country is to succeed in attaining its long-term development goals. 

A large number of countries have succeeded in moving from low income to middle income economies but the number that have persisted with their goal of moving into the high income bracket is considerably smaller. Continued zeal for the policy objectives that deliver productivity growth will be worth monitoring as a result. China’s digital economy represents a promising development and suggests that it will succeed in continuing to move up the ranks of GDP per capita. 

Rising burden of debt reinforces importance of sustaining fiscal policy, Finance Minister Nhlanhla Nene tells lawmakers in Cape Town during debate on national budget.

Nene also says:

“Rising interest rates have increased the cost of servicing our debt, commodity prices have declined and the depreciation has pushed up inflation”

Fiscal space built up in the early 2000s has diminished

Govt has taken measures to reduce consumption spending

 

The weakness of the South African Rand has been a tailwind for the stock market in local currency terms but does little to stimulate foreign investor interest in the country. Therefore it is worth monitoring the Rand for signs it may be stabilising as a clue to when foreign investors will revisit the South African market. 

The US Dollar accelerated to a medium-term peak near ZAR11.5 versus the Rand in January and encountered resistance near ZAR11 from June. It is now testing the region of the 200-day MA and a failure at this level would further challenge the consistency of the three-year uptrend. 

Shaping up a handful of employees is one small part of Zhang’s quest to profit from Huajian’s factory wages of about $40 a month -– less than 10 percent the level in China.

“Ethiopia is exactly like China 30 years ago,” said Zhang, 55, who quit the military in 1982 to make shoes from his home in Jiangxi province with three sewing machines and now supplies such brands as Nine West and Guess?. “The poor transportation infrastructure, lots of jobless people.”

Almost three years after Zhang began his Ethiopian adventure at the invitation of the late Prime Minister Meles Zenawi, he says he’s unhappy with profits at the Dongguan Huajian Shoes Industry Co. unit, frustrated by “widespread inefficiency” in the local bureaucracy and struggling to raise factory productivity from a level he says is about a third of China’s.

And

Cost inflation in countries including China has prompted Hennes & Mauritz AB, Europe’s second-biggest clothing retailer, to work with three suppliers in Ethiopia. The nation has “great potential” for production, H&M head of sustainability Helma Helmersson said in an April interview.

China’s average manufacturing wage is 3,469 yuan ($560) per month. Pay at the Huajian factory ranges from the basic after- tax minimum of $30 a month to about twice that for supervisors.
By contrast, average manufacturing wages in South Africa, Africa’s biggest manufacturer, are about $1,200.

The duty-free and quota-free access that Sub-Saharan Africa enjoys for the U.S. and EU markets gives additional savings thanks to the African Growth and Opportunity Act for the U.S. and the EU’s Everything But Arms accord for the poorest countries. Import tariffs on shoes made in China range from 6 percent to as much as 36 percent, Zhang said.

 

Textiles is one of the most price sensitive industries and therefore is the first to migrate to cheaper locales when wage pressures appear. Therefore watching where textile companies choose to situate their factories offers a good indication of where rapid economic growth is likely to manifest itself next. As governance improves in much of Africa, the challenge of mobilising increasingly large populations to realise their productive capacity is a daunting one. However when starting from such low levels, administrations can follow a path well-paved by Asian countries over the last half century. Little wonder then that Chinese manufacturers spot parallels between China and Ethiopia.

The discussions between Yang and his Vietnamese counterpart, Deputy Prime Minister and Minister of Foreign Affairs Pham Binh Minh, were not strictly convened to discuss South China Sea issues; but it is clear the oil rig crisis dominated talks. In private remarks Yang strongly advised Vietnam not to take legal action against China in the interest of repairing bilateral relations.

Yang also held meetings with Prime Minister Nguyen Tan Dung and party Secretary General Nguyen Phu Trong. The latter meeting was especially significant because it led to an informal understanding to find a mutually acceptable way out of the current impasse. In order to clear the way for bilateral discussions both sides agreed to conduct follow up discussions by party officials responsible for external affairs.

While Chinese and Vietnamese party foreign affairs specialists began sounding each other out, Vietnamese party leaders agreed to convene a meeting of the Central Committee specifically to focus on the South China Sea dispute and the proposal to initiate legal action against China. Given the ground swell of anti-China opinion in the party and society at large “to break out of China’s orbit,” it appeared likely that the Central Committee would not only approve legal action against China but also approve steps to align more closely with the United States. Foreign Minister Minh’s trip was approved and he is scheduled to visit Washington in September.

It was in this context that China decided to announce the early withdrawal of HYSY-981 from contested waters. According to retired General Nguyen Trong Vinh (xuandienhannom blog, July 16), China deliberately withdrew the oilrig to influence the outcome of the forthcoming Vietnamese party plenum. The coincidence of Typhoon Rammasun provided the pretext. If Chinese officials were concerned about the safety of HYSY-981 they should have left it in place rather than tow it towards Hainan Island where Typhoon Rammasun was headed.

 

The ratcheting down of tensions between China and Vietnam, at least temporarily, is a welcome development suggesting China is interested in keeping Vietnam within its sphere of influence. How the Chinese will act once Vietnam’s 9th plenum has ended remains open to question. 

 

Saudi Arabia is keeping as much as $40 billion of foreign investor capital waiting as it decides which institutions can participate in the Arab world’s biggest stock exchange.
     
The regulator will publish rules next month allowing participation for the first time by qualified foreign financial institutions starting in the first half of 2015, the Capital Market Authority said on its website yesterday. The announcement sent the benchmark Tadawul All Share Index to its highest level since May 2008 yesterday, and the strongest level since February
2008 today.

The world’s biggest crude exporter is opening one of the most restricted major stock exchanges as King Abdullah pushes to diversify the economy from oil and create new jobs. Entry to MSCI Inc.’s benchmark emerging-markets index could mean $40 billion of inflows to Saudi stocks, said Rami Sidani, the head of frontier markets investing at Schroder Investment Management in Dubai. Buying shares may be restricted initially to long-term institutional investors, according to Shuaa Asset Management.

“They have been very clear about what they are looking for, which is very large institutional investors, sticky money with long investment horizons,” Amer Khan, a senior executive at Shuaa in Dubai, which oversees more than $300 million in assets, said by telephone yesterday. “They have seen what happened during the financial crisis and they want to limit hot money.”

We began to highlight the fact that a number of Middle Eastern stock markets had catch up potential in 2011. As valuations increase for large cap markets such as the USA, investors naturally begin to look for markets with lower valuations and those that have not experienced substantial gains. This year the resources sector is where the Saudi Arabian Index was in 2011. 

While IoT spans a variety of industrial sectors, the focus of this report is on Home Automation. Previous reports in this series addressed the applications of IoT to CommTech, Semiconductors and Software. In this report, we address the impact of the IoT on the industrials space, with a deeper dive into Home Automation within the Building Automation opportunity below. We expect a series of follow-up reports touching the following topics.

Building Automation focuses on improving energy efficiency and occupant comfort/utility within the home or commercial building. Key advantages include improved security, remote monitoring of devices, and energy management.

Manufacturing applications of IoT could help facilities to reduce downtime through predictive maintenance, have better visibility into inventory and energy management, and improve operational efficiencies overall.

Resources could benefit from real-time equipment monitoring, energy efficiency (smart meters), and fuel reduction (O&G).

 

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

The frivolity of much of the social media space has led some to believe that future productivity gains will be limited. However, the increasing application of new technologies to the industrial sector almost certainly insures that this assumption will prove false. Rapid prototyping, embedded sensors, processors and transmitters are driving efficiencies that are transforming the industrial sector. This is important because productivity growth is a necessary component in the evolution of a secular bull market. It is for this reason that veteran subscribers will be familiar with our continued emphasis, particularly in the Friday audio, that we are in a technological golden age more commonly referred to as the Third Industrial Revolution.