good times ahead optimistic yellow road sign being positive and optimism for a bright future and great time Stock Photo - 14852055

 

This article has been reproduced with permission from Alan Kohler.

I returned to work last week even more optimistic than I was before I went, and not just because I was still glowing from the Bali sun.

While I was away the market rallied 2 per cent and although it’s looking ‘toppy’ and looks due for a pullback, I think we are now in the situation where buying on the dips is the best idea. The global recovery is on and, as I explained before Christmas, money is shifting back into equities around the world.

So bearing in mind Nassim Taleb’s dictum that “the only prediction one can safely make is that those who base their business on prediction will eventually blow up”, there are five reasons I am optimistic about 2013 without exactly predicting anything: China, America, Europe, Japan and Risk.

Risk

To start with the last of those, in my view 2013 will be a 'risk-on' year. Well to be honest this started half-way through 2012 when it became clear firstly that the global economy was recovering and secondly that the European Central Bank, with German support, really would do whatever it takes to keep the euro intact. The Fed was already doing whatever it takes to get the US dollar down, and the Reserve Bank was doing whatever it takes to get the Aussie dollar down (not that that’s working yet).

All of which means the returns from cash are miserable and falling. Time to invest then, which means taking more risk, but not too much – thus, bank shares returned 25 per cent in the second half of 2012.

In my view this trend has just begun. For five years investors everywhere have been more concerned with not losing their capital than with making a return and gradually that is changing; they are moving out along the risk curve.  Obviously taking more risk means just that, and the world is not yet a safe place (is it ever?). I think the greatest danger has passed, and while deleveraging will continue to hamper growth there are many positives offsetting that.

China

Sam Walsh must be the luckiest man alive. Not that he doesn’t deserve to be chief executive of Rio Tinto – of course he does, in fact he probably should have taken over years ago (I’m sure he agrees) – but because he takes over just as China’s economy bottoms and turns around and with $14 billion in writedowns tied to Tom Albanese’s tail. All new chief executives would dream of having their troublesome assets all written off and their main customer on the improve.

The data on China that came out last week contained several positives, apart from the fact that growth, at 7.9 per cent, was better than expected. The transition towards greater consumption and less reliance on investment has continued, with consumption now accounting for 4 per cent of GDP growth in the fourth quarter, higher than gross capital formation (3.9 per cent). Growth in retail sales improved from 11.6 per cent to 12 per cent in 2012 and car sales grew 6.9 per cent (5.4 per cent in 2011). The acceleration in consumption happened because income growth, at 9.6 per cent in the cities, was greater than GDP growth for only the third time in a decade.

So the project of converting China from an export and investment driven economy to one that is based on domestic consumption is intact. Income growth is being helped by the remarkable fact that the working age population actually fell in 2012, by 3.5 million – the first such fall ever.

This brings its own challenges of course. It makes it even more imperative that the Chinese authorities reform the economy to promote the return on capital, otherwise economic growth will stall. The state owned enterprise system is deeply inefficient, as you’d expect, which has never mattered too much while the labour force has been growing so rapidly. As it declines, productivity must rise.

But while the long-term picture is clouded, it’s clear that 2013 will see China’s economy continue to accelerate, which should support the iron ore price – if not at $150 a tonne, then certainly above $120. Happy New Year Sam!

America

China is recovering and so is the United States, with housing leading the way. The National Association of Home Builders Housing Market Index is at a six-year high and double the level of January 2011. The “prospective buyer traffic” component of the index is at the highest level since January 2006. The median house price is up 10 per cent year on year, as is the volume of sales. Residential construction has bottomed and the vacancy rate is heading down.

Thanks largely to housing, the US private sector is growing at a pretty rapid clip – about 3 per cent if the government sector is removed from GDP calculation. State and local governments are starting to join the private sector in recovery, with only the federal government continuing to shrink. Moody’s expects local and state governments in the US to expand employment by 220,000 in 2013, a huge turnaround from the previous three years of job losses.

Manufacturing has been slow to move, but that seems to be now happening as well. Industrial production expanded 0.3 per cent in December after a rise of 1 per cent in November. But the December number was held back by a fall in utilities generation: factory output jumped 0.8 per cent in December. As for this year, cheap energy is expected to produce a resurgence of US manufacturing.

There’s a lot of talk that the budget deal will create a big headwind, but that seems to be overdone. There are two main elements to the deal that will produce fiscal drag: the payroll tax increase, which will cut
GDP by about 0.7 per cent, and the spending cuts due to be implemented in March – another 0.6 per cent of GDP. That 1.3 per cent of GDP fiscal drag seems large compared to 2.2 per cent average GDP growth since 2010, but as Anatole Kaletsky points out the IMF calculates that US fiscal drag on the economy was 1.3 per cent in each of 2011 and 2012. In other words, fiscal drag in 2013 will be no greater than the previous two years.

That is, as long as the politicians don’t snatch defeat from the jaws of victory by sending the US into default because of the debt ceiling. They have about six weeks to raise the limit, since the government will run out of money on March 1. Surely they will, although as usual it will probably be at the last minute.

Paste the below link into your web browser to read the full article.

http://www.businessspectator.com.au/bs.nsf/Article/markets-economy-2013-RBA-China-Rio-Tinto-US-pd20130122-478ZT?OpenDocument&src=mp

By Alan Kohler - from Business Spectator - 23rd January 2013

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

 

Published in Investment Advice
Wednesday, 19 September 2012 12:31

Positive Developments In The Euro Debt Crisis

There have been some very positive developments with respect to the Euro Debt Crisis over the past few months that many would argue is potentially the turning point of the crisis.

View 3 1/2 minute video by Mark Draper explaining some positive developments in Europe

Brandenburg Gate Berlin

In summary these developments are:

  1. The European Stability Mechanism, which has funds of EUR 500bn, will be available for operation in the second half of 2012.  This fund was the subject of a legal challenge to the German High court on constitutional grounds and this challenge was dismissed yesterday.  The purpose of this fund is for recapitalising European Banks as well as funds to purchase Government Bonds in countries such as Italy and Spain in order to keep borrowing rates affordable for those countries.
  1. The European Central Bank (ECB) has announced a program that will allow the ECB to purchase an unlimited amount of Government Bonds in the market for countries that seek assistance and accept strict conditions about aspects of their budgets.  The purpose of this is to guarantee access to funding for European Governments at affordable rates.  We have long argued that Spain and Italy are solvent countries, providing their borrowing costs do not become excessive.  This announcement is critical in keeping interest rates low and has seen borrowing costs for Italy and Spain come down significantly as can be seen below:
Spanish 3 Year Govt Bond Rate Spanish 10 Year Govt Bond Rate Italian 5 year Govt Bond Rate Italian 10 year Govt Bond Rate
Borrowing rate as at November 2011

6.25%

7.6%

(as of July 2012)

7.5%

7.2%

Borrowing rate now

4.4%

5.6%

3.7%

4.95%

  1. We continue to believe that there is very little risk of a financial meltdown resulting from the Euro Debt Crisis or Financial Armageddon.

The Head of the European Central Bank recently went on record as saying “We will do whatever it takes to keep the Euro together, and believe me this will be enough”.  He has backed up this rhetoric with the announcement to purchase an unlimited amount of European Government bonds for countries that request assistance.

Does this mean that this is the end of the crisis?  Unfortunately not, however, we see these developments as very important building blocks that should stabilise the Eurozone and allow the Governments to carry out the necessary reforms to put their economies on a sustainable path.  These reforms include tax, welfare, spending and labour market reforms.

In addition to these the other steps that the leadership of the European Union will need to take is to formulate plans for a Banking Union, and a closer Political union, which would result in individual countries surrendering some degree of control over their budgets in exchange for access to funding at cheaper rates and other economic benefits.

Currently the European Union is a currency union, arguably put together for political reasons, now they must bring together other aspects of their economies.  This is not something that can be done quickly given the political pressures.  The ECB however appear to have provided the necessary time for the politicians to get on with the job as the ECB alone can not resolve this crisis.  This is where we see the main risk – with politicians and potential for the balance of power to shift over time.

The other main source of risk would seem to be with the very high levels of unemployment in countries such as Spain where overall unemployment is around 25% and youth unemployment is around 50%.  This has potential to create social unrest which is difficult to predict.

Overall, we believe that the most recent steps are very positive moves forward that can provide the building blocks for the Euro Debt Crisis to be brought under control and financial markets have welcomed these moves in the form of lower borrowing costs for Italy and Spain.

There is an excellent video we produced earlier this year called “Fire Wall for the European Debt Crisis” that discusses the firewalls that have been created to ensure European Governments continue to have access to funding at affordable rates.  This can be found by clicking the YouTube icon on our website at http://www.gemcapital.com.au and is well worth viewing.  It runs for 6 minutes.

We trust you find this update useful and helps you put into context some of the information you are hearing in the media.

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Investment Advice