Wednesday, 21 December 2011

Wednesday, 14 December 2011

The Outcome of the European Summit

The reports as follows:

Last week European leaders gathered in Brussels to discuss and implement strategies to strengthen the euro zone. Though a historic agreement was announced to draft a new treaty for deeper integration, this euro summit proved to be disappointing for those that were looking for a grand and comprehensive solution that would draw a line under the euro zone debt crisis. Here are the three main points that came out of Friday's agreement:

1. The European Union agreed to provide up to 200 billion euros ($267 billion) in loans to the International Monetary Fund to reinforce the global lender as it helps to tackle fallout from the European sovereign debt crisis.
2. It was decided to accelerate the start of a planned permanent 500 billion euro ($667 billion) rescue fund, called the European Stability Mechanism.
3. Balance budget rules were introduced that puts in place automatic sanctions if a member country's deficit exceeds 3% of GDP unless a qualified majority of euro-area members is opposed.

Though these 3 points are steps in the right direction, they are far from the big 'Bazooka' plan investors were hoping for. This was evident when credit ratings agency, Moody's warned on Monday that it will review all EU credit ratings. This comes after last week's warning out of Standard Poor's of the same review.

This European agreement also did little to soothe the bond markets. Ten-year Italian yields rose as far as 6.8%, prompting the European Central Bank to intervene in the secondary market, and German Bunds rose more than 100 ticks on Monday.

Though the European summit disappointed, it doesn't necessarily mean we will have a major sell-off during the remaining few weeks of 2011. Analysts at French bank Societe General said, “The outcome of the EU summit may be good enough to keep the holiday season from being spoiled by nasty market disruptions. But we fear that it is not the bazooka that can carry us to the wall of Q1 supply with much confidence.”

However, the lack of 'firepower' out of the European summit means that the sovereign debt crisis will continue to plague global markets in 2012. That’s unfortunate for traders and investors as stock markets have been experiencing and will continue to experience higher volatility and low volume.

Thursday, 10 November 2011

Rich Lessons

Cees Bruggemans, Chief Economist FNB, writes about the lessons we (South Africa) should learn from the three rich regions of the world:                                        

All three major rich regions (Japan, America, Europe) have fundamentally stumbled in recent decades. Has South Africa something to learn from their experiences or can we afford to ignore them?

Japan stumbled first. Since WW2 Japan�s favoured economic model was government-led, export dependent and manufacturing focused. By the 1990s, this Japanese model fell out of touch with the changing global economy as other Asian economies started catching up, challenging Japanese dominance in core industries. Others had lower domestic cost bases, weaker currencies, larger economics of scale while getting access to the same technologies and marketing distribution channels. Yet Japanese policymakers keep clinging to this old model. Such inflexibility has resulted in decades of relative stagnation (minimal growth).

In Europe, many countries over a number of decades build elaborate welfare states, along the way accumulating high national debts. It took the recent sovereign and banking crises following a series of earlier financial shocks (Eastern Europe, Anglo-Saxon subprime securitisation) and a great recession for these countries to discover that fiscal space shouldn�t be taken for granted ever.

If a country wants a welfare system, it should pay its way from taxes and social security levies. The fiscal space (low national indebtedness) should be preserved as an emergency buffer, in case the Keynesian advice at a time of crisis needs to be followed (with government taking the lead as private agents withdraw and deleverage).

That�s not what happened in Europe. By the time recession hit, national debts in many countries were (excessively) high already and started to accelerate. When the need for fiscal austerity became obvious in order to arrest the debt spirals, it came at the wrong moment as crisis-induced weakness required more (not less) fiscal stimulus. But with the debt-reduction priority prevailing, it was found that democracies do not easily scale back acquired social �rights�. Europeans today are attached to their national welfare systems even though it is burying them in debt. Being inflexible about it threatens Japanese-type debt burdens and the stagnation that follows in its wake.
In the US, the country is so devoted to its version of the free market that it won�t get political backing for needed infrastructure because of public aversion to state intervention in the economy. Inflexibility on this score will undermine US growth in the long run, too.

In all three rich regions things should be done differently. In Japan there is need to address excessive regulation keeping back competition and entrepreneurship. Producers should be encouraged rather than discouraged in their attempts of changing the economy. Also, Japanese households should be encouraged to save less and consume more, allowing the country to acquire a better domestic balance while creating more domestic demand for producers. In the US there should be a clever restructuring of mortgages to repair the housing market. In Europe, more reform could be undertaken to reduce national trade barriers, within professions and among countries, with a better performing European-wide common market spurring faster growth.

How does South Africa shape against this background?

Recent South African government policy initiatives champion a government-led, export-promoting and manufacturing focus. While Japan benefited from this approach in its early economic recovery years post-WW2, the world has moved on. Japan has become more costly while many countries now try to use incentives, low cost labour and weak currency to boost their manufactured exports.

It is late in the global catch-up game, and a busy space for South Africa to try to gain some advantage. Similarly, we are ambitious to build bigger social safety nets, whose extensions (pensions, health, education) increasingly look like a European welfare state.

Providing social services while paying for them through taxes and levies is one thing. Allowing borrowing and national debt to carry part of the initial burden would be folly as can now be daily observed in Europe.

South Africa cannot be said to show excess zeal in favour of free markets. Instead, it shows a relative lack of zeal in strengthening its economy�s supply side, meaning more infrastructure, better education, better performing labour markets, but also more affordable housing. But also like all three rich regions, South Africa exhibits a love for regulations whose overall effect may be more costly in growth foregone than perhaps fully appreciated.

Japan, Europe and America became rich by doing certain things well. They have stumbled and have started to stagnate by doing certain things wrong. South Africa would do well to study these experiences closely, and not to repeat the mistakes. As things stand, we seem to be repeating the mistakes of all three of them, even if we have only barely begun doing so.

Risk Of Another ‘Lost Decade’ Looms, Says IMF Chief

Risk Of Another ‘Lost Decade’ Looms, Says IMF Chief

How PIIGS Defaults Could Affect The Markets -

How PIIGS Defaults Could Affect The Markets -

Thursday, 22 September 2011

Offshore (outside SA) investing: The lost decade

Offshore Investing - The Lost Decade

By Jeremy Gardiner, director, Investec Asset Management

If I had written ten years ago that in 2011 the common investment themes would be that the rand has been too strong for too long (and looks set to continue); that the SA equity market has outperformed most other markets over the past ten years, including the US, the UK and Europe; and that the developed world would be grappling with a financial crisis, with many countries teetering on the brink of bankruptcy, I would have been accused of looking through even rosier-tinted spectacles than the ones I was accused of wearing back then, when I merely stressed that South Africa actually wasn’t in such bad shape and that fundamentally things were looking OK.

The nineties were the glory years for the US and indeed developed markets and their currencies. Thanks to exchange controls, this was a party to which South African investors were not invited. It was a party that looked like enormous fun and one that went on for most of the decade.

Finally, in 1998, then Finance Minister Trevor Manuel allowed South Africans to take some money offshore. Eager to join the celebrations, they squirreled what they could offshore and invested it into the developed equity markets and their currencies, primarily the UK, US and Europe, content in the belief that they had finally invested in stock markets and currencies that seemingly only appreciated in value.

The rush offshore was exacerbated even further by a dismal 2001, which saw the rand start the year at R7.70 to the US dollar, plunging to R10.26 by December and plummeting even further to R13.84 towards the end of the month, as the chart below illustrates. This caused even the most bullish South Africans to run for the door, resulting in a mass exodus of South African investment flows into the developed world.

Chart 1: Rand depreciation in 2001

Source: Morningstar, daily data from January 2000 to July 2002

The rush offshore couldn’t have been more ill-timed – the South African currency was weak and SA and emerging markets were trading at deep discounts to their developed market peers. This meant that investors were not only buying Dollars and Euros expensively, but they were selling out of undervalued markets and buying into markets that were trading at large premiums not only to emerging markets but to their own history as well.

For these investors (and there were many) – spurred on both by the emerging markets equity collapse and the rand collapse – who invested offshore over the period between 1999 and 2002, the past ten years have been pure hell from an investment perspective. Chart 2 below illustrates that R100 invested in the FTSE/JSE All-Share Index at the end of 2001 would be worth roughly R400 by the end of June this year, versus only around R94 if invested in the MSCI World Index over the same period. The S&P500 is today still roughly 10% below its peak in 2000 in rand terms. The combination of developed market stock markets yielding zero returns for a decade and the US dollar losing roughly half of its value has had a devastating impact on these portfolios.

Chart 2: SA Equities relative to Global Developed Market Equities - cumulative returns in SA Rand since December 2001

Source: Morningstar

The motivation for most of that investment was driven by both fear and greed, with scant regard for investment fundamentals. Had one at the time invested according to valuations, it would have been clear that the South African equity market and the rand were cheap relative to developed markets and their currencies, which were overpriced and expensive.

The tragedy is that a lot of these investors, having watched with horror over the last ten years as the rand doubled in value and the JSE delivered enormous returns, are once again considering switching at the wrong time – this time out of developed markets back into South African equities and the rand. Yet again, this decision is made on the basis of emotional frustration rather than recognising that both South African equities and the rand are now relatively overvalued.

Yes, emerging markets and their currencies are currently in vogue. Yes, the South African equity market and the rand have performed well, and yes, this may continue for some time to come. However, no financial asset goes up or down forever. A lot of bad news is currently priced into developed markets and their currencies and from a valuation perspective there are probably more opportunities offshore.

One of the quickest ways to lose money is by investing emotionally and when it comes to our own money we are all guilty in this regard. Stop yourself each time before you make an investment decision and ask yourself if it is an emotional or fundamental decision. If it’s the former, make sure you’re aware of the risks.

U.S. stocks drop hard after Fed move - Market Snapshot - MarketWatch

U.S. stocks drop hard after Fed move - Market Snapshot - MarketWatch

Tuesday, 13 September 2011

Problems in Europe and markets plunging

The reports:

Last Friday Chief Economist Jurgen Stark surprisingly resigned from his position at the European Central Bank (ECB). Stark, Germany’s top representative at the ECB, claimed that his departure was due to “personal” reasons but it is assumed that his decision was fueled by his frustration over the bank’s expanding role in backstopping the eurozone’s peripheral members.

Stark is the second senior German official to leave the ECB in recent months over ideological differences. These resignations couldn’t come at a worse time for the ECB as they deal with southern Europe’s sovereign debt issues. Which is why some economists are now predicting a major ” shake up” in the eurozone in the near future.

“The announcement fuels two paths of speculation,” writes BTIG chief global strategist Dan Greenhaus. “Either the Germans are slowly laying the groundwork for removing themselves from the eurozone or pressure from Germany will eventually lead to the ouster of Greece from the zone.”

Personally, I think it’s more likely that Greece leaves the euro. The country is once again teetering on insolvency and it’s already been bailed out. Yet the concern is what the repercussions will be for the global economy if this were to happen.

As a result investors from around the world are getting increasingly nervous. On Friday the Dow Jones Industrial Average dropped 304 points, or 2.7%, the German DAX fell 4%, and Italy’s FTSE MIB finished down 4.9%. The euro had its worse one-day drop since July 11 and is trading at 7 months lows and the 10-year Treasury tumbled below 1.90% intraday, the lowest level since World War II, before settling at 1.92%.

Thursday, 4 August 2011

Wall Street: The longest down stretch for stocks since October 2008

From The

Fear is gripping the market place. Though the US government avoided a debt default, investors are worried that growth is slowing down across the world. Yesterday, the Commerce Department reported that consumers cut their spending in June for the first time in nearly two years. Analysts had predicted a slight increase. The report comes a day after a weak manufacturing report and last Friday’s report that the economy grew at its slowest pace in the first half of the year since the recession ended in June 2009.

As a result, stocks closed down yesterday for the eighth day in a row. That hasn’t happened since the bout of declines ending on October 10, 2008.

As of Tuesday, the Dow Jones Industrial Average is below 12,000 and it has lost almost 900 points, or 7% in just eight days. The S&P 500 has dropped about 90 points, or 6.8%, and closed at its lowest levels for 2011.

Investors are fleeing out of stocks and into safe haven investments. Yesterday, gold rallied to all time highs of $1,660 and silver moved up to $40.80. Treasuries surged, driving 10 and 30 year yields to the lowest levels seen in 2011.

Investors have also been buying the Japanese yen and the Swiss Franc. Typically people buy the yen as a haven for their cash because Japan’s current-account surplus reduces the country’s dependence on borrowing abroad. As for the rally in the Swiss Franc, investors are attracted to Switzerland’s lack of credit problems.

Wednesday, 13 July 2011

European sovereign debt crisis

From "" the following excerpt:

The European sovereign debt crisis is spreading

In an effort to stop the European sovereign debt crisis from spreading, of the five peripheral European countries (PIIGS) – Portugal and Ireland have already received a bailout and Greece in the midst of receiving a second. However, these bailouts might not have been enough for the markets as things have taken a turn for the worst for Spain and Italy.

The yield, or interest rate, on Italian and Spanish government bonds shot up Monday. The rate on Italian 10-year bonds jumped to 5.7 percent from 5.3 percent at the beginning of trading, following sharp rises on Thursday and Friday. Yields on Spanish 10-year bonds meanwhile rose to 6 percent from 5.7 percent

As a result, equity markets around the world plunged. Germany’s Dax fell 2.33%, France’s CAC 40 – 2.71%, the Stoxx Europe 600 lost 1.4%, the Dow Jones Industrial Average was down 1.2%, or 151 points, and the S&P 500 dropped 1.81%, or 24 points.

In response, the Eurozone finance ministers had an emergency meeting yesterday at which they said they are ready to make their existing bailout fund more flexible in an effort to better support struggling governments and stop the currency union's debt crisis from spreading to larger economies like Italy and Spain.

To understand the severity of this problem, if it gets out of control, I put together a list of facts and figures about these two massive economies –

Italy is the world’s eighth largest economy and Spain is twelfth. 
Italy is the Eurozone's third largest economy and Spain is the fourth.
Italy's economy is six times larger than Greece's and Spain’s is 4 times.
Italy's debt-to-GDP ratio is more than 118% and Spain is 60%
Italy's debt is so large that it is about 25% of Europe's total GDP.

The big fear is that while Europe's euro750 billion-bailout fund can support Portugal, Ireland, and Greece, which makes up only 6 percent of the eurozone economy, Spain and Italy are too big to be bailed out. Without the possibility of a major bailout, these two economic powerhouses could default and the effects would be felt all over the world.

Tuesday, 15 March 2011

Consumer confidence lost momentum, but still relatively high

Cees Bruggemans, Chief Economist FNB, reports that the FNB/BER consumer confidence index declined by 5 index points during the past quarter.

The 1Q2011 results yielded the first noticeable decline in consumer confidence in over a year. Consumer confidence has remained stable at a level of about +15 for the whole of 2010. The 1Q2011 decline pulled consumer confidence back to about the same level as at the end of 2009.

The FNB/BER CCI combines the results of three questions posed to 2 500 predominantly urban adults in February 2011, namely the expected performance of the economy, the expected financial situation of households and the rating of the appropriateness of the present time to buy big ticket items, such as furniture, appliances and electronic equipment.

During 1Q2011, fewer consumers answered in the positive to all three questions compared to 4Q2010. Fewer consumers expect the economy and their own finances to improve over the next 12 months and also rated the present as the right time to buy durable goods.

Consumer optimism about the performance of the South African economy has declined continuously since the 2Q2010 peak. It did so once more during 1Q2011.

During the last half of 2010, rising optimism about their own financial positions and an increased willingness to buy durable goods countered consumers' declining confidence in South Africa's economic prospects.

However, in 1Q2011 consumers' confidence in their own financial situation and their willingness to buy durable goods also declined and consequently did not make up for their further waning optimism about the economy.

Another reason for the decline in the FNB/BER CCI is the fall in the confidence of high income earners (i.e. people with household incomes of R5 000 or more per month) from +19 in 4Q2010 to +11 in 1Q2010.

In contrast, the confidence of low income earners (with less than R5 000 per month) remained almost unchanged � it edged marginally upwards from +5 in 4Q2010 to +6 in 1Q2011.

Despite the 1Q2011 fall, the confidence of high income earners remained relatively high. At +11, their confidence matches the level that prevailed at the end of 2009.

The virtually unchanged confidence of low income earners must be seen against the backdrop of the fall from +10 in 3Q2010 to +5 in 4Q2010.

Despite the 1Q2011 fall, the confidence of high income earners remained higher than that of low income earners.

Consumer confidence tends to fluctuate between quarters. So, the fall in the high income earners' confidence may be reversed next quarter. Only when confidence settles at a certain level for at least two consecutive quarters will it become an apt time to search for additional reasons.

The decline in consumer confidence is consistent with the lower business confidence of retailers reported last week.

Japan quake will delay growth until Q3 - Nomura

Japan quake will delay growth until Q3 - Nomura

Thursday, 3 February 2011