Market Updates May to Jul 2010
The past 3 months has been a ride for most investors and money managers. With a variety of issues such as Yuan value, China property bubble, European debt crisis, stake holders have been watching each reported data like hawks and volatility shot up.
We have reached a stage where things have settled down a bit. And also arrived at a realization that there is going to be a new normal in the global economy. I do feel that the new normal is a good thing if it eliminates the pattern of peaks and troughs in the economy.
Singapore Fastest growing in the world
Singapore’s growth accelerated to a record 18.1 percent pace in the first half of 2010, spurring the currency, putting pressure on policy makers to check inflation with a stronger currency, and putting the island on course to be the fastest-growing economy in the world this year.
The government predicts GDP will rise 13 percent to 15 percent in 2010 with forecasts for the ranging from 12.7 percent to 16.3 percent among the economists surveyed by Bloomberg. By comparison, estimates for China range from 9.5 percent to 10.1 percent in recent weeks
The expansion is part of a rebound across Asia that has prompted South Korea, Malaysia, Taiwan and India to raise interest rates in recent weeks, even amid concern Europe’s debt crisis may impair global growth.
Growth in the trade-related sectors including pharmaceutical output was bolstered by healthy global trade flows, while the openings of the integrated resorts and higher visitor arrival numbers contributed to the growth in the tourism-related sectors. The financial services sector also grew strongly.
Singapore’s benchmark stock index has climbed 28 percent in the past year, more than Hong Kong’s Hang Seng and Taiwan’s Taiex, while the Shanghai benchmark has fallen 22 percent.
Price pressures are increasing and inflation may reach 5 percent by the end of 2010, from 3.2 percent in May. We expect the central bank to be watching inflation expectations. There are now higher odds for the MAS to tighten further in October via a steeper appreciation.
Singapore’s ties to the global economy mean it’s unlikely to escape the impact of any renewed slowdown. Governments in Europe are embarking on austerity programs to cut budget deficits and households in some of the world’s largest economies are holding back spending, clouding the outlook for the rebound.
I see STI resistance at 3,000 points, a level every amateur will also conclude at. However, I believe we will end this year trying to break 3,200. I expect the USDSGD to appreciate to 1.35 in the coming months.
Full Article Here
IMF Raises Growth Forecasts
The International Monetary Fund raised its forecast for global growth this year to 4.6% in the latest update of its World Economic Outlook report. This is up a tad from its previous 4.25% only in April. Growth in 2011 is maintained at 4.3%.
On the face of it, the upgrade in forecast seems positive. Markets have been spooked in recent weeks by a possible growth downturn stemming from fiscal consolidation in Europe and softer data from China.
But beyond the headline upgrade, which the IMF explains that it’s because of a stronger than-expected first half, the document highlighted increased risks for the global recovery. In fact, it warned that the road ahead is strewn with obstacles and dangers.
Euro Bank Stress Test
European regulators found that most European banks passes the stress test and seven banks need to raise a combined 3.5 billion euros ($4.5 billion) of capital. Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks didn’t have adequate reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said on July 23.
Before the results were published, analysts at Goldman Sachs Group Inc. estimated that lenders would need to raise 38 billion euros and Barclays Capital said they would require as much as 85 billion euros.
The stress test results weren’t the disaster that some thought it would be and as time goes on, the likelihood of a double dip recession seems to be diminishing, but economic growth is going to be tempered.
The bond market is saying that the threat of a European banking crisis is ending. The gap between European and U.S. benchmark credit-default swap indexes, used to hedge against losses or speculate on creditworthiness, narrowed to 0.7 basis point yesterday, the lowest since June 4. This represents the difference in risk between European and U.S. is narrowing.
Overall, the results are well received by the markets and should eliminate a source of uncertainty in the markets. However, some parties will remain critical of the assumptions and scenarios used for the stress testing.
China’s Growth
China’s 10.3% is might not be as stellar as compared to Singapore’s. However, it is an extraordinary performance when seen in the context of policy tightening and a higher base of comparison. While the world was crumpling in early 2009, China managed to grow 6%-8% due largely to the government’s aggressive fiscal stimulus measures. The Chinese government has made measures to cool off certain sectors especially credit curbs to the real estate markets since August.
The slowing growth will actually be a welcome sign for policymakers to normalise policies. Stocks have fallen almost 30% from its peak in August and are now trading at historically low valuation multiples.
Chinese Yuan Revaluation
China’s shift toward a stronger exchange rate will have the effect of altering the shape of the world economy’s expansion. The currency move is likely to affect the composition of global gross domestic product rather than the growth rate
People’s Bank of China said the shift would reduce the economy’s “overreliance on exports”. Chinese consumers might buy more as the rising yuan boosts their purchasing power, while their counterparts in the U.S. cut back on their spending as the cost of goods imported into America rises.
A stronger yuan may make the recovery more durable by reducing its reliance on debt-laden American consumers. The longer-term benefit to the world economy may be to make it less susceptible to a cycle of boom and bust. The recent financial crisis and global recession happened as China recycled the dollars it accumulated from exports into U.S. debt, depressing global yields and fanning housing and credit booms.
Full Article Here
Risks of a bubble and hard landing have decreased slightly. I see now and especially further dips as long-term buying opportunity for investors who are looking for long term investments. I do not expect a rate hike soon although we’ll continue to see creeping appreciation of the RMB
Risks
Even though China’s economy seems headed in the right direction, there are still detractors. Some still see a rate above 10% as evidence that the economy is headed for a crash landing while others are worried that the slowdown coming at a time of global stress from sovereign debt crisis is a bad signal. It seems to me that when it comes to China, views are extremely polarised.
The new normal for the world economy may be arriving as the U.S., Europe and China all decelerate simultaneously. It seems like the most robust rebound data has ended and the world is reaching a weaker expansion even as they show signs of dodging a double-dip
Global growth may average 3.25 percent to 3.5 percent in the next three to five years, well below the 4.7 percent pace of the five years leading up to the 2008 slump, estimates Stephen Roach, non- executive chairman of Morgan Stanley Asia.
Behind the deceleration in the long-run noninflationary growth rate: consumer retrenchment in the U.S. and fiscal consolidation in Europe, as well as weaker bank lending and employment in both. Chinese growth also may ebb as the world’s most populous country reorients its economy away from manufacturing and exports.
The new normal means investors may have to accept lower returns and greater volatility in their portfolios. It may imply a lower overall nominal return” than the historical average of 6 percent to 8 percent, he said.
Developed economies will be “lucky” to grow 2 percent annually for the next seven years. Jim O’Neill, chief global economist at Goldman Sachs, while acknowledging the economic cycle “is clearly slowing,” he estimates the global growth trend is about 4 percent and may be rising, driven by emerging markets.
Investors may need to manage risk by going beyond traditional diversification strategies of splitting portfolios between stocks and bonds. That might involve the use of hedges against outsized market declines and other portfolio-insurance strategies.
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