O’Neill Says Emerging-Market Selloff Creates Buying Opportunity – Bloomberg 02-04-14

Salient to Investors:

Jim O’Neill said:

  • We are closer to a buying opportunity in emerging-market stocks than to joining in the panic.
  • While some places in the emerging world have real problems, to herald an emerging-market crisis is ridiculous. Ukraine, Thailand, Argentina and Turkey have some serious issues.
  • The Fed decision to taper is amplifying the selloff in emerging-market assets. Tapering is more problematic for emerging economics but affects everywhere, but is not to be confused with individual emerging countries having genuine problems.

Read the full article at http://www.bloomberg.com/news/2014-02-04/o-neill-says-emerging-market-selloff-creates-buying-opportunity.html

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China Beige Book Shows Slowdown, Opposite Official Data – Bloomberg 09-25-13

Salient to Investors:

Leland Miller and Craig Charney at China Beige Book Intl said China’s economy slowed this quarter and demonstrates that the conventional wisdom of a renewed, strong economic expansion is seriously flawed. Their data reveal weakening gains in profits, revenues, wages, employment and prices.

The official pickup spurred analysts from Citigroup to Deutsche Bank to raise expansion estimates, but Nomura is among banks skeptical that any rebound will be sustained in 2014.

Jim Chanos at Kynikos Associates is maintaining short bets on China’s banks and says China will have a “credit event” in 5 years as the country fails to keep the same pace of loan growth.

Jim O’Neill expects China’s economy will double in 5 years to $16 trillion and says China is deliberately slowing the economy and is capable of putting the housing market and lending under control.

HSBC and Markit Economics said manufacturing strengthened more than estimated in September.

Paul Gruenwald at S&P said China’s growth may range from 7 percent to 7.5 percent during 2013 and beyond, becoming the “new normal.”

Read the full article at  http://www.bloomberg.com/news/2013-09-24/china-beige-book-shows-slowdown-opposite-official-data.html

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China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

Increases in business-investment and real estate revenue also slowed, while service industries picked up and employees became tougher to find, the survey from New York-based China Beige Book International said yesterday. The report is based on responses from 2,000 people from Aug. 12 to Sept. 4 as well as 32 in-depth interviews conducted later in September.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige BookPresident Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter — no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

The benchmark Shanghai Composite Index of stocks fell 0.4 percent at the close, while the MSCI Asia Pacific Index was down 0.2 percent at 4:50 p.m. in Tokyo.

Growth Measures

The report, like the Fed’s version, doesn’t give estimates of gross domestic product growth or other indicators beyond the survey results. The economy expanded 7.5 percent in the April-June period from a year earlier, slowing for a second quarter, according to China’s National Bureau of Statistics. The government has since introduced measures including faster railway spending and tax cuts to aid expansion.

Jim Chanos, the founder of Kynikos Associates Ltd., said he’s maintaining short bets on China’s banks and that the nation will have a “credit event” in five years as the country fails to keep the same pace of loan growth.

“My caution is related to the credit-driven model,” Chanos, who correctly bet in 2001 on the collapse of Enron Corp., said yesterday on a panel moderated by Tom Keene at the Bloomberg Markets 50 Summit in New York.

Jim O’Neill, the former chief economist at Goldman Sachs Group Inc., expects that China’s economy will double in five years to $16 trillion, about the same size of the U.S. economy currently.

Deliberate Slowdown

China’s leadership is “deliberately” slowing the economy and is capable of putting the housing market and lending under control, O’Neill, a Bloomberg View columnist, said on the panel. “They are not shy or scared about meeting the scale of some of the challenges.”

The first China Beige Book, from the second quarter of 2012, said the economy was picking up, a few months ahead of official data indicating arebound. This year’s second-quarter report showed expansion slowing across the country and a decline in companies taking out loans.

The latest survey said 47 percent of manufacturers reported revenue gains, down 6 percentage points from the second-quarter survey. Growth in export orders was “stable” for the U.S. and Europe and “off a bit” in Asia and developing nations outside of Asia.

In transportation, including shippers, 51 percent of respondents said revenue rose, down 18 percentage points. Fifty-three percent of a broader sample of businesses said investment rose, a 4-point decline. Service revenue rose for 57 percent of respondents, up 3 points.

Borrowing Costs

The survey said bank-loan gains ebbed and borrowing costs declined while companies used non-bank channels more often. Forty-six percent of bankers said loans rose, down 14 percentage points from the prior survey, and there was a 20-point drop in the share expecting credit availability to ease in six months. The mean interest rate on all new loans fell 47 basis points to 6.63 percent, China Beige Book said.

So-called shadow lenders’ share of financing rose to 29 percent of loans in the third quarter, up 5 percentage points, the survey said.

Not all the China data showing a rebound have come from government sources. A report Sept. 23 from HSBC Holdings Plc and Markit Economics showed manufacturing strengthened more than estimated this month, mirroring an August increase in a similar government-produced index.

Asia Implications

Singapore Finance Minister Tharman Shanmugaratnam said in a speech today that while he doesn’t see a “hard landing” for China, a growth rate of less than 6.5 percent would have “major implications for the rest of the world, and especially for Asia.”

Paul Gruenwald, Standard & Poor’s chief Asia-Pacific economist, said in a report today that China’s growth may range from 7 percent to 7.5 percent during this year and beyond, a level that will become the “new normal.”

China’s statistics-bureau chief, Ma Jiantang, said earlier this month that the agency has “zero tolerance” for falsified data after it publicized cases of manipulated local numbers and the customs bureau cracked down on fraudulent export invoices. Li Keqiang, who became premier this year, said in 2007 that GDP figures were “man-made” and “for reference only,” according to a WikiLeaks cable.

Elsewhere in the world today, the Reserve Bank of Australia said banks must maintain loan standards as households take on more investment risk, according to the central bank’s semiannual financial stability review. New Zealand’s trade deficit widened to NZ$1.19 billion ($980 million) in August, the biggest shortfall since 2008, a report showed.

In the U.S., purchases of new homes probably rose in August from July, according to economists surveyed by Bloomberg News. Orders for durable goods probably fell a second month in August, another survey showed.

Chanos Undeterred by China Growth as O’Neill Bullish – Bloomberg 09-24-13

Salient to Investors:

Jim Chanos at Kynikos Associates said:

  • He is unconvinced by China’s improving economic growth and is maintaining bearish bets on the nation’s banks.
  • If you grow new credit by 30 percent to 40 percent of GDP a year, it is not difficult to reach the government’s expansion target, but China will have a “credit event” in 5 years as the country fails to keep the same pace of loan growth.
  • The mining industry will face difficulties.
  • A transition to focusing on consumption will be problematic for the credit cycle. Even as the central government acknowledges the needs to curb debt, it is difficult to keep local authorities from boosting borrowing and investing in new projects.

China Beige Book Intl said the China economy decelerated this quarter, contrasting with official data showing a pickup: increases in business investment and real estate revenue slowed, while service industries picked up and employees became tougher to find.

Jim O’Neill said:

  • China’s economy will double in 5 years to $16 trillion and said China is deliberately slowing growth and is capable of bringing the housing market and lending under control.
  • He is slightly surprised that China has allowed the yuan to appreciate this year, which shows their commitment to moving away from reliance on exports to spur growth.
  • The mining industry faces difficulties.
  • A new China focusing on consumption will lead to investment opportunities.

Read the full article at  http://www.bloomberg.com/news/2013-09-24/chanos-undeterred-by-china-as-o-neill-bullish-on-reforms.html

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Capital Flows Back to U.S. as Markets Slump Across Asia – Bloomberg 08-20-13

Salient to Investors:

Asia’s role as the world’s growth engine is waning as economies across the region weaken and investors pull out billions of dollars in favor of nascent recoveries in the US and Europe.

Economists forecast Malaysia will post its second straight quarter of sub-5 percent growth this week.

Stephen Jen at SLJ Macro Partners said the eye of the storm is directly above emerging markets and could be serious for Asia.

BlackRock Investment Institute said $155.6 billion poured into developed-market equity ETPs in the first 7 months of 2013: $102.4 billion into North American funds, $28 billion into Japan, and $4.3 billion into Europe, while $7.6 billion flowed out of emerging-market funds.

Shane Oliver at AMP Capital Investors said the pendulum is swinging back in favor of the advanced countries: this happens once a decade or so when you see a turn in relative performance. Oliver said Asia has entered a tougher, more difficult period and money continues to flow back to Europe and the US.  Oliver said Asia will still be a stronger part of the world than the US or Europe but compared to people’s expectations is likely to come in a little bit lower than expected.

The IMF in July cut its forecast for growth in 2013 in developing Asia to 6.9 percent, cut its global growth forecast to 3.1 percent and projected advanced economies would expand 1.2 percent in 2013. Economists expect the Fed to taper in September. The median economist expects Malaysia growth of 4.7 percent in Q2, its slowest rate since September 2009.

Nitin Mathur at Espirito Santo Investment Bank said the pain is going to be in the emerging markets, and expects sectors with higher valuations such as consumer goods to suffer the biggest declines. Mathur said the problems in India are not temporary blips but much more serious and will take a lot of effort to get resolved.

Krystal Tan at Capital Economics said Thailand’s private-sector credit as a share of GDP has increased significantly in recent years raising concern about financial stability.

Freya Beamish at Lombard Street Research is seeing a turning point, and says China’s competitiveness has been hurt by labor costs that are 30 percent too high and the region’s clouds are already here.

Indranil Pan at Kotak Mahindra Bank said the emerging Asia story is crumbling and the dollar is once again king, and India’s slump is worse than elsewhere in Asia because it failed to carry out long-overdue structural changes to the economy.

Richard Jerram at Bank of Singapore says the market declines reflect overly ambitious expectations rather than fundamental weakness in the economies. Jerram said there is a good structural story based on the underlying domestic demand, and what you see at the moment is reaction from expectations, unrealistically positive 12 months ago, becoming more realistic.

Shuichi Hirukawa at Mizuho Asset Mgmt said Asia still has potential in the next 3 years or more, but shorter term business momentum is slowing.

Jim O’Neill said some Asian countries, especially India, have their own significant domestic challenges, but China is slowing primarily to improve its growth model and at 7-7.5 percent annual growth is still delivering $1 trillion nominal GDP. O’Neill said Japan is looking better than it has done for a very long time.

Kaushik Basu at the World Bank said the slowdown in economies such as Indonesia and Thailand is part of a very, very global weakness, while the US recovery was so slow that even the slightest pick up is looking like a pick up. Basu said the Asian situation is no worse and, if anything, Asia is probably better off than the rest of the world.

Kiekie Boenawan at PT Schroder Investment Mgmt Indonesia sees the drop as an opportunity to buy stocks that had been overpriced such as banks and consumer shares.

Sanjay Mathur at RBS said in July that southeast Asian consumers have taken on much higher debt in the last few years, with the largest increase in Malaysia, where household debt increased by 20 percent of GDP between 2008 and 2012.

Edward Teather at UBS said there is a feeling that the rest of the world is getting a bit better and Asean had its burst of credit-enhanced growth and it’s raining already.

Read the full article at  http://www.bloomberg.com/news/2013-08-19/clouds-gather-over-asian-economies-as-capital-flows-back-to-u-s-.html

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A BRICS Bank Needs a Sense of Purpose to Succeed – Bloomberg 08-05-13

Salient to Investors:

Jim O’Neil writes:

In April, the BRICS said they would build their own development bank. Their difficulty in cooperating is simply because they are not very alike.

Brazil, Russia, India and China are the world’s largest emerging economies, while China is bigger than all the others put together – China effectively grows a new India every 2 years, or a new South Africa every few months.

Brazil, India and South Africa are democracies; China and Russia are not. China and India are major commodity importers; Brazil, Russia and South Africa are major commodity exporters.

Russia’s annual per capita income, adjusted for purchasing-power parity, is $24,000 versus $9,000 to $12,000 for Brazil, China and South Africa, and $4,000 for India.

China is the real odd man out, not just because of its size but because it is the only one that so far this decade has met my expectations for growth.

China may see a BRICS bank as a low-risk rehearsal for the role they are fated to play at the IMF and the World Bank, within G-20 and maybe even at the UN.

Nigeria will soon have a bigger economy than South Africa.

Fast-growing emerging economies have rapidly expanding middle classes, who see governments wasting public money on pet projects instead of investment in things that will make them proud and more prosperous, and combat.

Three areas are vital for emerging economies to escape the so-called middle-income traps. Better government not more, education, including at the most basic levels, and access to modern technology.

Read the full article at  http://www.bloomberg.com/news/2013-08-05/a-brics-bank-needs-a-sense-of-purpose-to-succeed.html

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China 3% Growth Risk Seen by Barclays Signals Likonomics Anxiety – Bloomberg 07-28-13

Salient to Investors:

Sudakshina Unnikrishnan and Jian Chang at Barclays say should China’s growth dip to 3 percent in the next 3 years, copper would fall more than 60 percent, zinc by up to 50 percent, and oil to $70 a barrel. They cite risks of slowing industrial production and of financial stress due to debt of companies and local governments, and Likonomics inflicting short-term pain.

Zhang Zhiwei at Nomura sees a 1-in-3 chance of Chinese GDP dropping to below 5 percent for four consecutive quarters starting at or before Q4 2014, and says a growth rate of 5.9 percent in 2014 would lead metal prices to fall as much as 30 percent and oil prices as much as 20 percent. Nomura expects Chinese growth of 6.9 percent in 2014, but said a growth rate of 5.9 percent would trim 0.3 percent from world economic growth.

Societe Generale sees a non-negligible risk of less than 6 percent growth in 2013 and an outside chance of 3 percent average expansion for half2 2013 and half1 2014. In the event of a hard landing, Societe Generale said 1.5 percent would be shaved off global expansion in the first year, and would recommend selling copper call options and buy copper puts, buying the US dollar and Treasuries, and selling the Russian ruble, South African rand and the Chilean peso.

Andrew Polk at the Conference Board said trying to slow gradually is very difficult, partly because it’s a self-enforcing mechanism and can become a vicious cycle, and sees average growth in China of 5.5 percent over the next 5 years. Polk sees a distinct possibility that the slowdown could get out of control. Polk said Australians are overly reliant on China and the export trade, and have not done enough to diversify their own economy, so would be hurt.

Orville Schell at the Asia Society said he does not know if the world is ready for China’s growth below 7 percent – the Chinese economy is mortal and ultimately subject to the same kinds of cyclical growth as every other economy.

Stephen Roach at Yale said China wants enough growth to maintain social stability and prevent the economy from a more serious shortfall, so does not see a hard landing.

Jim O’Neill at Bloomberg said the notion of a soft or hard landing is simplistic, and China is adjusting in the right direction as gauged by the relationship between real retail sales and industrial production. O’Neill said 7.5 percent growth in 2013 and this decade is reasonable, and equivalent to the US growing by 4 percent in terms of world contribution – any further Chinese slowing would be big.

Barclays said quarterly growth dropping briefly to 3 percent within the next 3 years was increasingly likely, but expects 7.4 percent growth in 2013 and 2014. Barclays said even if growth slowed that much, China would bounce back rapidly afterwards.

Alaistair Chan at Moody’s Analytics said China is a gray swan, not a black one, because a hard landing won’t be totally unexpected and there may be a recession sooner or later, in which case it won’t be pretty for commodity exporters in the short run.

Read the full article at  http://www.bloomberg.com/news/2013-07-28/china-3-growth-risk-seen-by-barclays-signals-likonomics-anxiety.html

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Emerging Markets Are Stuck on Fed’s Elevator Ride – Bloomberg 07-10-13

Salient to Investors:

Jim O’Neill writes:

  • Too much of the world’s trade and finance is conducted in dollars. The exorbitant privilege has lasted too long. It is time one or two of the emerging-market governments did something about the US’s ability to borrow in its own currency – an advantage the rest of the world has to pay for, one way or another.
  • As QE ratcheted up, many investors chose to believe they’d devised a smart investment strategy when all they were doing was looking for yield pickup. However, escalator up, elevator down.
  • In general, emerging economies should avoid running too large a “basic balance” – the current-account deficit minus long-term capital inflow – which rarely ends well. Strong net inflows of foreign direct investment are relatively reliable, but portfolio inflows, sensitive to interest rates, are much less so. India and Turkey are exposed in this way, and Brazil is creeping in the same direction.
  • Fed hints at a change in the direction of a well-established monetary policy are disruptive because investors all over the world tend to be trend followers and have adopted the mantra “Never fight the Fed.”
  • China is too big an economy to give US monetary policy as much power as it has over its business cycle. Beijing should continue to free up trade and liberalize the capital account of its balance of payments and consider greater movement of its currency.
  • The recently announced oil deal between Rosneft and China National Petroleum will be transacted in rubles and renminbi – that’s how to deal with the mighty dollar and the Fed’s domestically directed monetary policy.

Read the full article at  http://www.bloomberg.com/news/2013-07-10/emerging-markets-are-stuck-on-fed-s-elevator-ride.html

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Lost Decade for Bonds Looms With Growing Return for Equities – Bloomberg 06-24-13

Salient to Investors:

10-year Treasuries yield 2.61 percent versus the S&P 500 aggregate earnings yield of 6.4 percent – more than double the average spread of 1.9 points since 2000.

Investors are avoiding longer-term Treasuries, concerned that returns will be depressed for years, and money managers foresee the end of a rally that began in the early 1980s.

Howard Ward at Gamco Investors said the lost decade for bonds has begun, and stocks are likely going to be the asset class of choice over the next 10 years. Ward said the tide has turned and the economy is doing better, so bond investors will have a hard time making any money.

Lipper said investors withdrew $9.1 billion from fixed-income mutual funds and ETFs last week , the second-highest total in more than 20 years.

JPMorgan Chase, Barclays, Bank of America, Morgan Stanley and Goldman Sachs all recommend stocks over most bonds as equity returns outpace company debt by the most since at least 1997.

Jim O’Neill ex-Goldman Sachs said the global economy is in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair with bonds. O’Neill said when game starts to change with central banks, it is inevitable bonds will suffer.

Mohamed A. El-Erian at Pimco said liquidity is king and what we are getting is cascading liquidity failures – when you change the liquidity paradigm, you get massive technical unwinds and volatility.

Average analyst estimates predict profits for S&P 500 companies will rise more than 10 percent in each of the next two years after almost doubling since 2008. That would translate to yields of 8.3 percent assuming no change in the stock index. The S&P 500 is at a14.7 times 2013 profit forecast.

Leon Cooperman at Omega Advisors said the stock market multiple is low relative to interest rates and there is room for rises – fair price for the S&P 500 is 1,600 to 1,700.

Jeffrey Gundlach at DoubleLine Total Return Bond Fund said you will lose less in Treasuries for the next few months if rates rise than many other asset classes. Gundlach said government bonds are also caught up in price deflation of assets and commodities, but if bond yields rise further then equities and commodities will clearly tank.

Bill Gross, at Pimco said sellers of  Treasuries in anticipation that the Fed will ease out of the market might be disappointed unless we have inflation close to 2 percent. Gross recommends buying Treasuries while the Fed continues to purchase debt, even given the 30-year bull market for bonds is over. Gross said real growth to lower unemployment below 7 percent is a long shot over the next 6 to 12 to 18 months.

Laszlo Birinyi said the S&P 500 could climb to 1,700 as we still haven’t seen the real rush to equities – the market has a long ways to go.

The Fed says equity investors may reap unusually high returns during the next 5 years because stocks are inexpensive as measured by the Fed Model, which compares earnings yield for equities with government bond yields. The spread was a record high of 6.6 percent in March 2009 and then fell to 0.3 percent in December 2009.

Rick Rieder at BlackRock said with 10-yr yields rising, equities represent better value than Treasuries, particularly on the longer end of the curve – we have seen the lows on interest rates. Rieder recommends government debt due in less than 5 years, estimating that 10-yr Treasury yields will move closer to 3 percent in 2014.

David Rosenberg at Gluskin Sheff says the only way bond yields will come down and revisit those lows is if the economy relapses, and the odds of that happening at least in the next year have dropped significantly – the economy has managed to crawl through. Rosenberg is shorting government debt and buying high-quality corporate and speculative-grade securities, and bank stocks and insurer stocks. Rosenberg said the stock market would not be where it is without the bond market where it is, and the Fed is using the bond market as a tool to generate a higher stock market and it’s certainly working – the secular bull market is over.

Read the full article at http://www.bloomberg.com/news/2013-06-23/lost-decade-for-bonds-looms-with-growing-return-seen-for-equity.html

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A 10-Step Program for India’s Economy – Bloomberg 06-23-13

Salient to Investors:

Jim O’Neill writes:

  • Emerging-market gloom is overdone. I disagree with the view that as the US recovers, the global cost of capital will rise, holding back investment, that avoiding the next crisis is the best that most emerging economies can do.
  • India could teach the pessimists a lesson. India is on track to grow its workforce by 140 million between 2000 and 2020 – equivalent of the working population of France, Germany, Italy and the UK combined.
  • Even with unspectacular growth of just over 6 percent a year, India’s economy could be 40 times bigger by 2050 than it was in 2000, as big as the US economy will be. Growth of 8.5 percent is possible, and 10 percent over the next 15 to 20 years is not out of the question.
  • India scores poorly on productivity measures, worse than Brazil, China and Russia. To change that, it needs to improve its governance, fix education, adopt an inflation target, introduce a medium to long-term fiscal-policy framework, increase trade with its neighbors, liberalize financial markets, innovate in farming, build infrastructure, and protect the environment.

Read the full article at http://www.bloomberg.com/news/2013-06-23/a-10-step-program-for-india-s-economy.html

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Jim O’Neill Says Get Used to U.S. Yields Nearer 4% Than 2% – Bloomberg 06-11-13

Salient to Investors:

Jim O’Neill said:

The US is returning to normality so expect 10-yr T-yields to rise toward 4 percent  in the next couple of years as the 30-year bull market in bonds comes to an end. There will be quite ugly days.

The global economy is in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair with bonds.

Speculation the Fed may taper may damp demand for emerging-market bonds as well as US debt.

When the game starts to change with central banks, it is inevitable bonds will suffer and we will see further reaction in many emerging markets, particularly where those with current account deficits, like Turkey.

India is the weakest BRIC and sometimes smothers decision-making.

Prefer Bangladesh assets over their Indonesian counterparts.

There remains value in assets from China and peripheral euro-area nations, and the safest bonds may become less fashionable.

Read the full article at http://www.bloomberg.com/news/2013-06-11/jim-o-neill-says-get-used-to-u-s-bond-yields-nearer-4-than-2-.html

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