Correlations Revive as China’s Slowdown Beats Rates – Bloomberg 09-26-14

Salient to Investors:

  • China’s deepening slump is re-establishing the link between currencies and commodities, weakening the Australia dollar, New Zealand kiwi and Canadian loonie on concern their economies will slow and outweigh their relatively high interest rates.
  • Shahab Jalinoos at Credit Suisse said you can only resist gravity for so long as the tango between rates and commodities ultimately gives way to the weak commodity price story as the driver.
  • The Bloomberg Commodity Index at a 5-yr low means there is little to support the Aussie, New Zealand kiwi and Canadian loonie.
  • Luc De La Durantaye at CIBC Asset Mgmt said lower Chinese growth points to a correction in commodity prices and continued correction in commodity currencies and is short the Australian and New Zealand dollars, and increased his bearish bets on the Canadian loonie in July.
  • The median analysts expects China to grow 7.3% in 2014, the slowest pace in over two decades.
  • IEA said oil demand globally is growing at its slowest since 2011, while non-OPEC production is rising by the most since the 1980s.
  • An increase in US interest rates would erode the appeal of Australian and New Zealand assets, which is based on them having the highest benchmark interest rates in the developed world.
  • Steven Englander at Citigroup said commodity prices are more important to the loonie and the kiwi and the move in commodities and slowing US demand – the world’s primary locomotive of commodity purchases – is too big to ignore.
  • Steve Lee at Nuveen Asset Mgmt said the Aussie, the kiwi and the loonie have lost their appeal as they are now more vulnerable.

 

Read the full article at http://www.bloomberg.com/news/2014-09-26/correlations-revive-as-china-s-slowdown-beats-rates.html

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The Breakdown of the BRICs – Bloomberg Businessweek 07-12-13

Salient to Investors:

In Q1 2013, BRIC bonds, currencies, and stocks fell together for the first time since 2006.

Since 2003, the MSCI BRIC Index has returned 227 percent, but is down 17 percent in 2013 and trailing the S&P 500 by the most since 1998. The MSCI BRIC Index trades at 1.2 times net assets, a 36 percent discount to the MSCI All-Country World Index.

BRICs accounted for 62 percent of global growth in 2012 versus 11 percent a decade ago.

EPFR said from 2005 through 2012, investors put $52 billion into BRIC mutual funds, and in 2013 have withdrawn $13.9 billion.

Ruchir Sharma at Morgan Stanley Investment Mgmt said every decade has a theme that captures investors’ imagination: gold in the 1970s, Japan in the 1980s, tech in the 1990s, and BRICs in the 2000s, which has basically run its course.

Olivier Blanchard  at the IMF said the BRICs are beginning to run into speed bumps.

Read the full article at  http://www.businessweek.com/articles/2013-07-12/the-breakdown-of-the-brics

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UBS’s Friedman Favors U.S. Stocks, High-Yield Bonds – Bloomberg 06-28-13

Salient to Investors:

Alexander Friedman at UBS says:

  • What Fed has done is not unexpected and the market reacted because it was ahead of itself. All the Fed was saying was that the US is doing OK, that the data is trending as it should, and that it has confidence that in the future it will be able to unwind QE, which is a positive.
  • Some investors were caught overleveraged in fixed income so there is unwinding of the carry trade. In countries like Australia, India and some emerging markets, a lot of investors hold bonds in local currencies which is a risk so expect significant volatility on the emerging market side.
  • China less a risk than perceived because it is just trying to re-balance and is willing to sacrifice some short-term growth to get control over the credit situation and avoid bubbles.
  • Biggest risk to investors is in misinterpreting the Fed, which creates a buying opportunity.
  • Last week the market saw much of the repricing of the tapering risk and so we won’t see a repeat in September. Assuming we see the positive economic data for the next few months which is necessary for the Fed to begin tapering then the market will focus away from life support and more on underlying growth.
  • Buy where underlying monetary policy will match the underlying  requirement and where there is economic growth: meaning US equities, US high yield equities which are oversold and now offer 6 to 8 percent returns over the remainder of 2103.
  • Wary of gold, which was an emotional trade against currency debasement and so has room to decline further.
  • Wary of emerging markets, including Australia, neutral on Europe.
  • Not yet seen bond money switching to equities as most of the money into equities has come from cash and money markets. We will see a shift from bonds to equities for many reasons, not least the immutable force of  demographics such as the elderly selling fixed income savings over time and there is no yield in them.
  • US high yields with equity characteristics are attractive.
  • Expect tapering around December although market is pricing in September. When it happens, US economic data will be trending positively and rising rates will accelerate the housing recovery story as it will cause fence sitters to buy to avoid the mortgage rates increases. Tapering of $10 billion a month is priced into the market and do not expect to see rates rising until 2015.
  •  US financials and insurance companies are a bet that rising interest rates will help their profitability.
  • The Russell 2000 stocks are more attractive because they have more cyclical exposure and exposure to the recovering US story as opposed to the global story where there is still sub-trend growth. With dividends and share buybacks, stocks offer a 4.5%- 5%  yield in 2013 which is attractive.
  • Long the dollar against many alternative currencies because of recovering economy and the Fed slowly winding down QE.
  • Less optimistic about Eurozone, and short Australia.
  • China rebalancing a good thing as banks have been lending too aggressively and China wants to avoid a credit bubble since shadow banking is such a huge proportion of their credit market. Clamping down on lending means it will be more expensive for companies to borrow so GDP will suffer a little bit. China growth could slow to as low as 7 %  causing more volatility short-term but OK over the longer term. Less concerned about China, which has great foreign reserves and is less reliant on foreigners owning local bonds with risk of money exit, unlike Australia, South Africa and India
  • The emerging market is a decent to good place to have a strategic allocation and you want exposure there for the longer term but short-term there is a lot of volatility.  Most worried about countries who have financed deficits with foreign money so when that money leaves they end up in a scary spiral. Countries like South Africa, India, Brazil.
  • Before the end of the year expect to see re-escalations of crises in the Eurozone for many reasons. The Eurozone periphery is like the emerging market with the same concerns including the unwinding of leveraged positions and volatility. After the German election we won’t see a path to true fiscal integration and banking union but instead a recognition that France is very weak, Germany won’t act alone, and that France and Germany are not acting together. Europe needs true labor reform in countries that are not competitive and that is very difficult
  • France is a concern because it has poor underlying economics and Hollande is weak politically.
  • Biggest concern is Spain, which is too big and quite vulnerable and will enter a program with the troika that will be put off politically until the last-minute after volatility spikes over the next 4 to 6 months.

Watch the full video at  http://www.bloomberg.com/video/ubs-s-friedman-favors-u-s-stocks-high-yield-bonds-p2pzBodIRoqFJMPLPcixdg.html

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Norway Fund Lifts Aussie Debt Holdings, Raises BHP Stake – Bloomberg 03-12-13

Salient to Investors:

In 2012, Norway’s sovereign wealth fund, the world’s largest:

  • near doubled investments in Australian bonds and equities
  • increased sovereign debt fourfold and added provincial debt securities
  • increased investments in emerging markets including Turkey, Russia and Taiwan
  • lowered debt holdings of U.K. and France.

Read the full article at http://www.bloomberg.com/news/2013-03-13/norway-fund-boosts-aussie-debt-holdings-four-times-adds-states.html

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Shale Takeovers Looming as Texas Discounted in Australia – Bloomberg 09-28-12

Salient to Investors:

Bloomberg calculates that Australian stocks of explorers of shale rock in the U.S. and Canada sell for a median of 11 times reserves versus 14.3 times for equivalent North American companies. RBS Morgans say this valuation gap may lure acquirers.

Ben Griffiths at Eley Griffiths Group expects many more transactions involving Australian players and the huge number of U.S. and international players currently looking to open up and exploit shale carbons.

Krista Walter at RBS Morgans said oil shale assets sales are common but company takeovers can happen as well. Walter said some lower valuations are because the companies have  higher levels of debt than Australian investors like – less of a problem for U.S. investors.

Johan Hedstrom at Bell Potter Securities said Australian companies aren’t fetching the valuations they deserve, and we are much better informed and educated about shale than 12 months ago.

Read the full article at http://www.bloomberg.com/news/2012-09-27/shale-takeovers-looming-as-texas-discounted-in-australia.html

Beyond Wall St., Curbs on High-Speed Trades Proceed – The New York Times 09-26-12

Salient to Investors:

Germany advanced legislation that would force high-speed trading firms to register with the government and limit their ability to rapidly place and cancel orders. The European Commission agreed on even broader rules for all of the EU if governments also give their approval.

Celent estimates high-speed trading accounts for 30 percent of all trading in Australia stocks versus 65 percent in the US. Australia intends to bring computer-driven trading firms under stricter supervision.

Michael Aitken at the Capital Markets Cooperative Research Center said the push for regulation in Australia and much of the rest of the world has been driven by hysteria rather than evidence based policy.

Canada has increased the fees it charges firms that flood the market with orders, and in October will curtail the growth of dark pools that have proliferated in the United States.

Near 15 percent of all American stock trading occurs in dark pools.

Read the full article at http://www.nytimes.com/2012/09/27/business/beyond-wall-st-curbs-on-high-speed-trading-advance.html?partner=rss&emc=rss&src=igw