Will population ageing change the global economic equilibrium?

- "Population ageing (an increase in the proportion of elderly and pensioners in the population) normally leads to a fall in savings. In theory, this should lead to:
• in the short term, a situation of (ex ante) excess demand for goods and services, leading to inflationary pressures;
• in the long term, a rise in real interest rates that rebalances, ex post, savings and investment."
- "This situation would therefore be very different from that seen at present with excess savings, deflationary pressures and low interest rates."
- "The key question is when there will be a changeover from an equilibrium with excess savings to an equilibrium with a shortfall in savings: what is the pace of ageing? At what stage of ageing is there a decline in the savings rate?"
- "The example of Japan shows that the household and national savings rate falls when the share of the population aged over 60 in the total population increases, which will occur at a worldwide level from 2010-2012. The situation of global excess savings is therefore likely to gradually disappear, unless investment declines at the same time as savings, as in Japan."

Natixis Flash Economics 403 20100820

Worries are intensifying

- Market Movers ahead
• "Market focus is likely to remain on the US economy in the coming week. The minutes of the most recent FOMC policy meeting could reveal important information about the Federal Reserve’s decision to reinvest the proceeds of its MBS portfolio in Treasuries. There have been rumours that several FOMC members were in doubt about the decision. In addition, the ISM will give us an update on the pace of the slowdown in the US manufacturing industry. We expect the ISM to decline to 53.6 in August. The August employment report will finish off a hectic week on Friday. Early labour market indicators are pointing towards a weak report, with private employment set to grow a meagre 20,000."
• "In Europe, the key event of the week will be the ECB Governing Council meeting on Thursday. While policy rates are likely to remain unchanged, a key question is whether the ECB has become more worried about the effect of the increasingly disappointing US indicators on the European growth outlook. Another important question that might be addressed at the policy meeting is whether the ECB will extend the full liquidity allotment - we believe this is likely. In Sweden, we expect the Riksbank to hike policy rates by 25bp to 0.75%."
- Global Update
• "The flow of weak economic indicators out of the US continued in the past week. Home sales have plummeted following the expiry of the tax credit for homebuyers. This has raised concerns about the strength of the underlying trend in home sales. Also, durable goods orders have called the strength of business investment into doubt. However, the reduction of weekly jobless claims was a positive, with initial jobless claims retreating to 473,000."
• "The weakness in US indicators is likely to feed through to the European economy. In fact, new export orders in Europe’s manufacturing PMI weakened. The European economy, led by Germany, should nonetheless be able to continue delivering abovetrend growth in Q3. However, although it has remained strong so far, Germany’s Ifo manufacturing activity index is also pointing towards slowing growth."

Housing: An abnormally long journey back to normal

- We expect a sluggish U-shaped housing recovery "Housing data have been decidedly weak with home sales tumbling to record lows, housing starts spiraling lower and home prices slipping back. Part of the recent deterioration reflects the volatility induced by the homebuyer tax credit, but even more so, a slower-than-expected jobs recovery. The main factor determining the fate of the housing market will be the macro backdrop. If the economy falls back into recession, which we judge to be a 20% probability, the housing market will follow suit. Otherwise, we expect the volatile bottoming in the housing market to persist for some time, creating a long, painful, U-shaped recovery."
- Another five years until a “normal” housing market "We define a normal housing market to be one in which housing starts are trending at the historical average of 1.5 million homes a year. In our view, we are several years away from this state of normalcy. Housing supply has outpaced housing demand by about 2 million homes over the past few years and is on pace to add another 500,000 excess homes by the end of 2012. For this excess to clear, housing starts must remain at a depressed level, not returning to normal until 2015. This would make it the slowest housing recovery in post-war history."
- What to watch? Labor market and foreclosures "There are two primary interrelated factors that determine when the housing market will normalize: 1) the health of the labor market and 2) the pace of foreclosures. On the demand side, high unemployment and foreclosures will greatly reduce the pace by which new households are formed. Fewer new households will be created as young adults stay with their families longer or live with roommates amid high unemployment and concern about job security. In addition, the loss of homes due to foreclosure leads to doubling up and excess supply."
- Housing will not help, but should only hurt a little "The recession caused serious stress and imbalances in the housing market which will take considerable time to correct. Unlike in prior recoveries, this means that the housing market cannot be looked to for stimulating the recovery, but we do not see much of a drag left from housing construction. The bigger downside risk, in our view, comes from the trajectory of home prices. If foreclosures flood the market faster than we expect, home prices could take another serious leg down, tipping the economy back into recession. The interplay between the economy and the housing market should not be underestimated in our view."

Merrill Lynch Economic Commentary 20100824

US worries could become EMEA worries

- Market movers ahead: PMI and Polish Q2 GDP "The recovery in the Polish economy continues and we expect this to be confirmed by Q2 GDP that is due to be published next week. Hence, we expect Polish GDP to have grown by 3.3% y/y Q2 – up from 3.0% y/y in Q1 and slightly more optimistic than the consensus expectation of 3.2% y/y. Nonetheless, it is now clear that Q2 probably was the peak for economic growth in Europe and concerns about growth in the coming quarter have increased sharply. Therefore, the GDP numbers look even more backward-looking than normal – everybody in the market realises that the recovery continued in Q2, but investors are increasingly worried about future growth. PMI data for August due for release across the region will provide a little more information about how the EMEA economies are holding up. Overall we expect PMI to have dropped across the region, but we also expect the PMIs in general to stay above the critical 50 level indicating continued expansion in the EMEA economies. That said the risk is clearly on the downside.
- Fixed Income Outlook: Be careful with the long-end of the curve "As we have emphasised in EMEA Weekly in the past couple of weeks we are likely to see EMEA central banks turning more dovish going forward – either by cutting rates or by not hiking as early and as much as previously expected. The only notable exception is Hungary where the MNB could be forced to hike rates more than previously expected. The outlook for lower rates in most EMEA countries continues to be supported by our Monetary Policy Tracker (MPT) which now points to monetary easing in the Czech Republic, Romania, Turkey, Israel and South Africa over the coming nine to 12 months, while it continues to point toward monetary tightening in Hungary and Poland."
- FX Outlook: Nothing to buy… "It is rather depressing to look at our EMEA FX Scorecard this week, as five out of seven currencies in the Scorecard score negatively indicating a potential for further weakness in the EMEA currencies on a one- to three-month horizon. The best scoring currency for the second week in a row is the Israeli shekel, but the score on ILS is only slightly positive – so it is not exactly a strong buy signal. The fact is that this looks more like an ugly contest than a beauty contest – as the general outlook for the EMEA currencies in the short run appears to be rather bleak."
- Scorecard-based trade of the week: Buy ILS/ZAR "The shekel remains the highest scoring currency in our EMEA FX Scorecard, while the South African rand remains the most negative scoring currency in the Scorecard. Hence, for the second week in a row our Scorecard-based trade of the week is to buy ILS/ZAR. Over the past week the cross is down somewhat."

DenDanske EMEA Weekly 20100827

LatAm: strong exports

- LatAm: strong exports "The strength of raw material exports keeps the trade balances of Argentina, Brazil and Chile in the black. However, Brazil’s current account is deteriorating rapidly, and Mexico’s is still negative. Bank lending in Brazil slowed in June, in line with other economic activity indicators. Public spending keeps growing fast in Argentina and Peru, but is still being financed by increasing revenues. Employment figures also improved in Argentina, where the unemployment rate fell to 7.9%; however, unemployment is worsening in Venezuela, having increased to 8.7%. On the other hand, the Central Bank of Argentina announced the relaxation of the Monetary Program for the last 2 quarters and Peru’s currency strength leads the Central Bank to raise the bank reserves requirement and to S&P to ratify the solvency of public debt, changing the outlook to positive."
- Fears about the global economic cycle had asymmetrical effects in Latin America due to local factors. The outlook is still positive for the region’s assets "Brazil and Mexico experienced the largest exchange rate adjustments following the release of negative economic indicators in the USA, whilst the currencies of Chile, Peru and Colombia strengthened. The appetite for LATAM issues (stocks and private debt) remains high in the face of positive economic differentiation in most of the countries in the region."

BBVA Latin Weekly Observatory 20100827

Readings

Sovereign Spreads Speak of Economic Reality - The Source
Clearing the air - Free Exchange
Is this it, Ben? - FT Alphaville
Estonia’s Long Awaited Recovery May Still Be Delayed Yet Awhile - A Fistful of Euros
Analysis: China Pushes Social Housing as Econ, Social Fix - iMarketNews

When the facts change

- "Weaker data, led by jump in claims, trigger US forecast downgrade"
- "Fed, BoE now expected to renew government bond-buying programs"
- "US, European core price disinflation to continue amid subpar growth"
JPMorgan Global Data Watch 20100820

Talking About MY Generation

- Demographics impact economies; as such, they also impact market — "The MY (middle age to young) ratio has often been used as a predictive tool for equity markets. While it shows a relationship in certain developed markets, its relevance is less obvious in Asia ex-Japan. For ASEAN in particular, the MY ratio and equity markets are unrelated. Where there have been many shocks − political and economic, among others − demographics are less important."
- The MY ratio works best in the mid-long term. Short term, it is useless. — "Demographics are slow moving; hence, they contains information but make no noise. Demographics can be used as a forecasting tool 5-8 years out, but they tell us nothing regarding market performance over the next week or month. In general, sectors with a high degree of industrial concentration have benefitted with a rising MY ratio more than sectors where fragmentation is high."
- The MY ratio is set to grow most in Indonesia, Taiwan and India. Least in Singapore and HK — "Indonesia will see its MY ratio expand by 2.2% p.a over the next decade, followed by Taiwan at 1.7% and India at 1.1%. Singapore shows the biggest contraction (-4.5% p.a.), ahead of Hong Kong (-1.1%) and Korea (-0.3%). In the latter markets, non-demographic factors will have to play a larger role in generating demand."

Citigroup_Asia_ex_Japan_Equity_Strategy_20100824

Lowering rate forecasts

- JGB yields less likely to rebound — "We have lowered our forecasts for the current 10-yr JGB yield from 1.00% to 0.95% for end-September, from 1.20% to 1.10% for end-December, and from 1.35% to 1.10% for end-March 2011. We now believe that upside and downside risks to our forecasts are basically in balance."
- "Financial deflation" worsening — "The impact of "financial deflation" looks set to be a key market theme over the next three to five years or possibly even longer, with balance sheet adjustments by governments and private-sector financial institutions—particularly in Europe—likely to remain a drag on global economic growth."
- Fiscal rebuilding strategies to be rethought — "While fiscal rebuilding throughout the world's developed economies is likely to continue, we expect to see at least some recalibration as concerns over worsening economic conditions highlight the need for safety net measures."
- Additional easing a matter of time — "The Bank of Japan opted not to hold an emergency monetary policy meeting last week, but will probably be forced to take some sort of action as the government prepares to submit a supplementary budget (required to fund additional stimulus measures) to the extraordinary Diet session in autumn."

Citigroup_JGB_Market_Strategy_20100823

How big is your balance sheet?

- "Central bank balance sheets have grown significantly throughout the financial crisis. The Fed’s has nearly tripled, while it more than doubled in the UK and almost doubled in the euro area. But discrepancies are emerging."
- "Whereas the Fed made a pro-active decision this month to effectively maintain the size of its balance sheet, the ECB’s balance sheet has shrunk recently. In large part that’s because the architecture of the ECB’s unconventional measures means that these shrink the balance sheet when they are allowed to run their course. And that’s exactly what happened when the 12-month LTRO rolled off a couple of months ago."
- "That reduction in the balance sheet has been associated with a small rise in short-term interest rates. So in effect the ECB is very marginally tightening inasmuch as it has not made a pro-active decision not to do so. Although the ECB is likely to maintain the current provision of liquidity into the new year, a gradual reversion back to variable-rate tenders in 2011, ahead of an increase in rates by the middle of the year, is possible."
- "In contrast to both the ECB and the Fed, the nature of the Bank of England’s quantitative easing programme means the MPC needs to make a conscious decision to reduce the size of its asset purchases and, consequently, its balance sheet. Such a decision still seems some way off."
- "But, one potential issue for the BoE’s balance sheet next year is the expiry of the Special Liquidity Scheme from April 2011, when over £200bn of assets will return to their originating banks (having been swapped for up to three years for Treasury bills). The SLS was an off-balance sheet operation for the BoE, but the Bank has already put in place the architecture to cope with greater demand for funding when the SLS expires. In particular, its new index-linked LTROs (for three and six months) can accept a broad range of collateral. Its
early operations suggest banks are prepared to pay up to refinance collateral that the market may still be unwilling to fund."

CreditSuisse European Economics 20100824

Crude Reality

- China demand slowing down in July and stays on 6+% demand growth trajectory "July 2010 total demand was 35.6 mn tones for the month. This is equivalent to 8.5 mn BOPD, up only 0.2 mn BOPD on July last year and down 0.5 mn BOPD on June 2010. YTD demand is up 12.4% on same period last year, while if we look at previous years' demand levels (Jan-July YTD) total demand is up around 6.5% CAGR relative to 2006, 2007 and 2008. This is equivalent to around 0.6x GDP growth rates in the same period. Diesel demand, IP and power demand are all less than 15% up y/y now and there are ever more indications of a slowdown in China. This is partially due to government action but data also look weaker now as we have much a more difficult comparison from June 2009. Diesel demand growth is now close to zero y/y, while gasoline still lingers only barely above zero. Even “Other” products categories are nearing zero growth y/y due to the slowdown in Chinese activity. China LNG imports have also come down from the record April month (1.2 mn tones), importing 1.05 mn tones of LNG in July, with average cost at US$5.6/mmBTU (down from US$7.40/mmBTU in May 2010)."

JPMorgan Asia Oil Gas 20100824

China: A volatile bottoming process ahead

- Reviewing our calls in July: "(1) We predicted a near-term rebound of MSCI-China on the back of monetary loosening expectations. (2) We expected more volatility after the near-term rebound due to concerns about continued downward earnings revision risk. (3) Among others, we identified investment opportunities in: (a) China’s mid-cap consumer space; (b) beneficiaries of western China development strategy; (c) and China's visible railway capex (such as China Railway Group). Looking back, the rebound did occur, with MSCI-China rising 4.1% in July FY10. Yet, the rally was much shorter than we expected, with MSCI beginning to correct on August 10 on renewed slowdown concerns."
- Bottom building amid volatilities: "We expect China’s equity market to experience more volatility in the coming months due to downward earnings revision pressure as the economic slowdown ripples through the whole economy, but recommend buying on dips because: (1) China’s real GDP growth, on a sequential basis, may have bottomed out at 7.2% QoQ in 2Q10. Yet we believe China’s final demand growth will not bottom out until late FY10, because the modest sequential rebound in GDP in 3Q will be driven by a slowdown in de-stocking and the widening of the trade surplus on sharply falling imports, rather than by a decent recovery in final demand; (2) improving liquidity conditions – (a) China’s M2 growth (which tends to lead H-shares performance), on sequential terms, is expected to bottom out, with trend growth reaching a trough of 11.8% 3m/3m, saar in September before rising to 16.8% in December; (b) we estimate new loans made by Chinese banks in 2H10 will reach around Rmb3 trillion, up 37% YoY; (3) we believe the worst of the policy tightening environment may be behind us."
- Key investment risks: "(1) The market may be concerned about a return of government tightening measures, if CPI continues to surprise on the upside. (2) Asset-inflation risks, mainly on the property front. (3) China’s A-share market to face potential supply side pressure in 4Q10."
- Sector views: "In our model portfolio, we are overweight on (1) mid-cap consumer names in the staple, low-end discretionary, and service areas, (2) menswear, (3) beneficiaries of western China development strategy and China’s visible railway capex, (4) insurance, and (5) mid-cap banks. We stay neutral on telcos, and underweight on commodities, energy, and property. We reduce our weighting in IPPs from OW to UW."

Hey, There’s M&A!

- The investment community seems enthralled by a pickup in deal activity. "A few
friendly and hostile transaction announcements have energized investors, who are
almost desperately seeking some reason of late to be enthusiastic about stocks,
given macroeconomic uncertainties. Indeed, fund managers are seeking possible
takeout candidates even as the business outlook remains unclear and corporate
leaders may be unwilling to make such commitments en masse yet based on
preliminary work given out to law firms."
- Funding costs are down sharply and high yield issuance is soaring. "With money
flowing heavily into bond funds, the cost of doing a deal is fairly attractive given
the spread to cash flow yields, such that it may be challenging to not do accretive
transactions unless the prices paid get exorbitant. Moreover, there appears to be
a very willing buyer of new junk bonds being issued given poor yields elsewhere."
- M&A trends often lead stock prices, but more linked to big cap gains. "While
investors may perceive them to be coincident, there does seem to be respectable
correlation between M&A volume and future stock price direction. However, the
analysis shows that this is far more accurate for large cap indices rather than for
small cap stocks, despite arguments to the contrary. Should more deals transpire,
the S&P 500 is likely to be higher a year from now."
- Energy and Telecom Services have the widest cash flow yield to high yield spreads.
"When studying cash flow yields to high yield financing cost, it becomes evident
that both the Telecommunications Services and Energy sectors look the most
intriguing in terms of their acquisition potential given their widest spreads.
Regulatory issues and recurring capex requirements could explain the
differentials."
- Industrials, Technology and Financials have the lowest spreads. "Several sectors
have the tightest spreads, making successful acquisitions harder as business plan
execution could make or break a deal’s potential for success. The IT, Industrials
and Financials sectors have the tightest spreads between cash flow yield and junk
bond yield, thereby providing much less margin for error. From a purely
fundamental approach, select industrials are preferred to technology names, from
our perspective."

Citigroup_Equity_Strategy_20100823

The pirate inside us: In the depths of copyright

- "The tide of information online is rising inexorably. Second by second, terabyte upon terabyte of new images, songs, films and other forms of digital content are being uploaded onto the internet. New digital content is being created, consumed, modified, shared and disseminated virally with no loss in quality at low cost."
- "The internet is altering our requirements and our consumption habits. Many consumers find themselves faced with the question of whether to buy digital content stored on a physical medium or to simply download their preferred artists or favourite films online. While the sales of physical media are trending down, fans are using their computers to download individual songs or entire albums by their favourite bands."
- "The majority of files downloaded from the internet are pirated copies since they infringe copyright."
- "This is the fate being suffered by the music and film industries, along with the computer games and digital book markets."
- "Is this solely a threat or is it also an opportunity for change? Are creative minds and thus innovation online hindered or promoted by traditional intellectual property rights? Can free licensing models be an alternative to traditional copyright and help to broaden the knowledge commons with greater creative freedom?"

DeutscheBank Current Issues 20100824

Why The Yen Defies, Befuddles and Dazzles

- "Earlier this month, USD/JPY fell to 84.7 - its lowest level in fifteen years. The all-time low of
79.7 was reached in April 1995 and is now in sight (see chart). This comes in the face of the consensus of opinion consistently looking for yen weakness. Indeed, currently the consensus of analysts’ forecasts expects USD/JPY will trend higher, rather than reach new lows over the coming quarters. We have been looking for yen strength consistently since May 2009 (see FX Blueprint for Summer ’09, 12 May 2009). Part of this view was premised on US rates being low for long and the possibility of risk aversion. The link between US interest rates and the yen is well known and widely followed, however it is not the whole story for the yen. There are have been three important, but less well known developments that provide further support to the yen: the smaller gains for the yen in real terms than nominal terms, Japan’s growing income balance and foreigners being underweight JGBs. Taken all these factors together, we maintain our view of yen outperformace, and look for USD/JPY to reach 80 over the next six months, and possibly even 75."

DeutscheBank Exchange Rate Perspectives 20100824

Is it possible to explain the performances of exports to emerging countries?

- "In an environment where domestic demand in OECD countries will be subdued and where growth in emerging countries is set to be brisk, it is important for OECD countries to export as much as possible to emerging countries (and commodity-exporting countries). We will therefore try to understand the differences between large OECD countries’ performances in terms of exports to emerging and commodity-exporting countries (looking only at exports makes it possible to neutralise the country size effect, as we will see)."
- "These performances may depend on:
• price-competitiveness;
• size of the manufacturing industry (which itself depends on other variables);
• innovation drive; level of product range and labour skills;
• determinants of the supply of goods: tax burden, productivity gains."
- "We show that the capacity to export to emerging and commodity-exporting countries (which is significant in Japan, Germany and the Netherlands, but very weak in Canada and Spain) is linked to cost-competitiveness, the R&D drive and the weight of capital goods and transport equipment in total exports, which represents the product range level of exports."

Natixis Flash Economics 402 20100820

A comparison of bubbles and deflation in Japan and the US

- Lessons from Japan’s burst bubble and deflation

• Concern over deflation in the US — There is growing concern that economic sluggishness and a declining inflation rate in the US will become protracted, just as happened in Japan. Compared with Japan, the damage caused by the bursting of the bubble in the US has been smaller as the bubble was far smaller. The response of the US government has also been more effective.
• US housing bubble was small — In Japan, official residential land prices rose 88.0% during a five-year period from 1986 to 1991. In the US, land prices increased only 47.1% during the five years from 2001 to 2006, which is the reason why the aftereffects have been milder.
• No stock bubble in the US — Between its low in October 1982 and its high in December 1989, TOPIX rose 5.5x, while the S&P500 increased only 2x between its low in March 2003 and high in October 2007.
• Serious structural problems specific to Japan — The reasons behind Japan’s protracted low economic growth and deflation lie in the combined effect of two factors: (1) serious damage caused by the bursting of the bubble, and (2) a decline in Japan’s potential economic growth rate. The latter factor became a serious issue after Japan resolved its non-performing loans problem in 2004.
• Factors exacerbating Japan’s bubble — A distorted shareholder composition and fragile corporate finances exacerbated Japan’s problems. The entrenched practice of cross-shareholdings magnified the impact of the bubble breakdown. The scale of the damage inflicted on corporate balance sheets resulted in excess debt becoming a long-term issue that dragged on until around 2004.
• Differences in demographics and corporate sector competitiveness — We think the core scenario for the US will be a gentle decline in the economic growth rate and a low inflation rate. However, unlike in Japan, which has been hurt by an aging society and the weakening international competitiveness of the corporate sector, we see only a remote possibility of declining economic growth and excessively low inflation becoming a long-term problem in the US.

Citigroup_Japan_US_Bubbles_&_Deflation_Part_1_20100817

- Structural problems that prolonged Japan’s deflation
• Macro factors — We think that demographics and fiscal deterioration had a large part to play as macro factors in the low growth rates Japan experienced in the wake of the collapse of the Bubble and in exacerbating and prolonging deflation. According to IMF forecasts, Japan’s government debt-to-GDP ratio is set to hit a lofty 222.3% in 2010, versus 92.6% for the US.
• Large tax increases almost inescapable — We believe that big hikes in Japan’s consumption tax rate are all but inescapable because of the deterioration in the fiscal position. Consumer unease about social security and tax hikes is depressing consumption and keeping the savings of the elderly elevated. Homes where the head of household is over 60 have 60.7% of total savings.
• Demographics — The US population has risen by 12.6% over the last decade, while Japan’s has risen by a mere 0.7%. Growth in the working-age population in the US is rapid and growth in the population under 15, the workforce of the future, is also firm.
• Micro factors — The US overwhelms other countries in its international competitiveness in the craft of manufacturing. US corporations also boast impressive profit growth potential. Japanese corporations’ international competitiveness in manufacturing, growth potential, and profitability fell a long way after the collapse of the Bubble. Apple and Sony are good examples of this.
• Japan’s manufacturing prowess on the wane — It used to be said that Japan was good at manufacturing but in contemporary high-tech fields such as computers, semiconductors, LCDs, telecom equipment, pharmaceuticals, and aerospace, Japanese firms cannot compete with giant overseas corporations.
• US firms highly profitable — Of the world’s top 100 manufacturers (excluding energy firms) ranked by net profit in fiscal 2009, just five were Japanese. The top-ranked Japanese firm, Takeda Pharmaceutical, only placed 34th. There were 46 US firms in the top 100.

Citigroup_Japan_US_Bubbles_&_Deflation_Part_2_20100817

- Deflation in Japan and the US structurally different
• Differences with Japan — The long-term downtrend in inflation rates is not a phenomenon peculiar to the US but something we have observed worldwide. We also note that cyclical factors specific to the US are pushing down the nearterm inflation rate. We do not believe that the US will experience long-term deflation, as its potential growth rate is higher than that of Japan.
• Inflation rates falling globally — Inflation rates have been falling substantially in China—to an average of 1.9% in the first decade of the 21st century from 7.8% in the 1990s—and in India—to 5.6% from 9.5% over the same span. We think that global inflation rates have undergone a structural decline that has nothing to do with GDP growth rates.
• Structural factors in common around the world — Growth in imports from emerging economies such as China and falling import prices have kept down the rate of goods price inflation in the US. Supply chain management has grown more sophisticated as IT costs have come down and technologies have spread. Falling prices for IT equipment have also had a considerable impact on inflation rates.
• Cyclical factors unique to the US — In July 2010, the US core CPI was low, at 0.9% YoY. Rent, which accounts for 41.6% of the core index, fell 0.7% YoY. We expect rent to remain on a downtrend over the near term, depressing US interest rates.
• No change in the uptrend for equities globally — Over the last year (as of August 17), the S&P Global Equity Index (ex Japan) has risen 10.6%, the US index 10.1%, the Europe index 8.9%, and the emerging index 19.0%. However, the Japan index has fallen 12.7%, battered by the strong yen.
• Domestic-demand stocks may have the near-term edge — The S&P Global Equity Index PER (forward fiscal-year basis) has fallen to 9x, making us think that much of the concern has been priced in, as exemplified by the rapid decline in the US long-term interest rate. While yen strength and falling share prices may continue near term, we forecast a rally in Japanese equities from autumn.

Citigroup_Japan_US_Bubbles_&_Deflation_Part_3_20100818

Little room for error

- "The past month’s rally has left emerging market spreads priced nearly to perfection."
- "The environment is likely to remain supportive of EM assets, but the upside/downside is looking increasingly asymmetric."
- "EM bonds have been a top performer, mostly from the Treasury rally, but also from relatively strong spread performance compared to other risk assets."
- "With this outlook, we prefer relative value opportunities, especially in high yield names. We continue to like basis in Venezuela, and now believe the 23s are the most attractive bond on the curve. Poor handling of new issuance will continue to hinder the credit, but the bonds offer a lot of upside. We also still like Argentina EUR-denominated."
- "Bond spread curves should continue to flatten as the long end of most curves still offers more value than the short end."

Citigroup_Emerging_Market_Debt_Outlook_20100820

Markets Eye China's US Treasury Investment Strategy

- "On February 22 we published our first note on China’s investment strategy in US Treasuries, prompted by the US Treasury Department’s February 16 release of its Treasury International Capital (TIC) report for December 2009. This showed that China’s holdings of US government bonds had declined by a sharp $34.2 billion. Since the latter half of 2009, China’s holdings of US treasuries have remained on a downtrend."
• "As we analyzed from the February 16 report, the decline of China’s Treasury holdings from 2H 2009 was, we thought, a correction following the surge of its holdings from the latter half of 2008. Figure 2 plots the YoY change in China’s forex reserves and the YoY change of its US Treasury holdings. As markets fell into turmoil following the Lehman shock, China arguably increased its allocation to Treasuries, a relatively safe asset. Then, as the financial crisis abated and the real economy began to recover, China sought to return the level of its Treasury holdings to the original trend (Figure 1). We concluded, therefore, that there was probably “no reason to overreact to China’s current short-term moves”."

JPMorgan Japan Equity Strategy 20100823

India Jun-Q review: Not a weak quarter after all

- After a weak start, Jun-quarter ended on a positive note for Sensex "While Jun-qtr earnings season began on a disappointing note it ended with strong positive surprises from few large cap companies. Initial earnings disappointments from NTPC (-21% vs. DB est), Hero Honda (-18%), Maruti (-19%) and Sterlite (-9%) were neutralized by positive surprises from large caps - Tata Motors (+43% vs. DB est), ITC (+18%), BHEL (+12%), Tata Steel and SBI (both +8%), leading to overall Sensex’ yoy EBITDA & PAT growth of 22% & 16% respectively. On free float basis, the corresponding growth numbers were 29% & 31% - largely driven by
strong growth and comparatively higher free float of Tata Steel. Sensex numbers (ex-Oil PSUs) were above our estimates at all levels i.e. Sales (+1.1% vs. DB est), EBITDA (+4.5%) and PAT (+0.6%). Tata Steel (strong turnaround at Corus) helped shore up yoy growth, while Oil PSUs posted negative surprise driven by under recoveries and volatility over subsidy sharing."
- Metals, Cap Goods, Financials lead, Telecom and Cement drag "Metals posted strongest PAT growth (+1.4% vs. of DB est) due to low base and robust turnaround at Corus. Capital Goods followed with 27% yoy PAT growth (+6% vs. DB est), as BHEL, despite a difficult environment, recorded strong numbers on the back of output improvement, indigenization and favorable RM/Sales ratio. Strong NII growth and lower than expected credit costs led to robust growth in Financials (+24% yoy and +4.6% vs. DB est). Unsurprisingly, Telecom witnessed weakest yoy PAT growth at -41% (-29% qoq) – although at revenue and EBITDA level, our Telecom analyst noticed improving competitive position for incumbents on qoq basis. Cement & construction followed with a -28% yoy PAT growth, which was 7% below our already lower estimates."
- We do not see any meaningful risk to our full year Sensex earnings estimate "We believe that street concerns over FY11 Sensex’ earnings growth are overdone. Despite a largely mixed quarter and soft growth (ex- Tata Steel), overall revision to FY11 Sensex EPS was marginal. During the earnings season, there were earning revision to 10 Sensex stocks with four upward and six downward revision - but the overall impact on Sensex PAT was only marginally negative at -1.6%. Earnings upgrade in Tata Motors (+57%) largely neutralized downgrades in Sterlite (-25%), NTPC (-13%) and DLF (-9%)."
- Better than expected monsoon to further stimulate aggregate demand, reiterate Sensex target of 22000 "We reiterate our year-end Sensex target of 22,000 driven by expectation of earning CAGR of ~25% over FY11-12, strong macro economic momentum and robust FII inflows - which have aggregated US$12bn YTD, and hold potential to exceed the annual peak levels of ~US$18bn. Besides, the ongoing monsoon season appears to be one of the best in almost five years and will help further stimulate - already elevated - aggregate domestic demand. We are therefore reiterating our overweight on the consumer discretionary sector."

DeutscheBank India Equity Strategy 20100822

Changes in the position of equities in the risk/return trade-off

- "The crisis has led to a fall in share prices and a rise in the variability of their return. We seek to ascertain to what extent this development has made equities less attractive for investors, relative to other assets. To this end, we look at changes in the positioning of equities relative to other assets (sovereign bonds, corporate bonds) in the risk/return trade-off."
- "We see that:
• if investors have a long-term horizon and a long memory (15 years for example), the relative appeal of equities is only barely reduced;
• if investors, however, have a short-term horizon and a short memory (8 years for example), they believe that investment in equities is completely dominated by investment in bonds."

Natixis Flash Economics 401 20100819

Strategy Forum

- "Markets are gripped by pessimism about a global slowdown and the risk of deflation. We think that pessimism is overdone, leading to our constructive view on risky assets. On today’s Strategy Forum we explore two aspects of that more constructive view."
- "First, we see cyclical and structural reasons why Asia will do well despite tepid developed-market growth. Chetan Ayha (Asia-Pacific economics) and Ridham Desai (India equity strategy) will discuss why they see the growth baton passing from China to India by 2013-15, highlighting the investment implications of that shift. Second, do you want to get paid for owning risky assets? Graham Secker (Europe equity strategy) offers a menu of stocks that exploit dividend yields exceeding bond yields. Rashique Rahman (EM macro strategy) outlines the case for EM debt, where yields are still high. And Hussein Allidina (commodities strategy) explores the allure of gold as a tailrisk hedge, based on low real rates."
- "As an aside, after meetings in Asia last week, I believe Asian investors are generally aligned with our views, especially on relative performance. Not surprisingly, they are upbeat on their region and on commodity prices. Big Asian investment funds are increasingly interested in EM
equities."

Morgan Stanley Strategy Forum 20100823

A Credit Crunch Ceases

- Bank lending standards continue to ease. "The most important news in the past 10 days has not been the Fed’s outlook or the corporate enterprise spending forecasts put out by a leading technology bellwether, but rather the latest data from the Fed’s quarterly bank lending standards survey. Indeed, the results showed a continued trend towards easing conditions and its track record with respect to forward business activity is hard to dispute given that the cost of capital and thereby credit is very instrumental to business investment decision making."
- Commercial & Industrial (C&I) loans generally lag conditions by six quarters. "While there is and has been great frustration expressed about the seeming lack of a pickup in bank loans, it is critical to understand that credit standards lead loan trends by six quarters in either direction (with respectable correlation), and the current lag is typical. Indeed, lending standards even lead credit markets by a few months, but it must be recognized that capital markets offer far better terms than banks do when the credit environment improves – plus, with record junk bond issuance, it is hard to suggest that risk-oriented credit is severely limited."
- Corporate balance sheet strength may limit the need for more loans. "The attempt to create so-called “bullet proof” balance sheets after the near collapse of the financial system in 1Q09 has led many corporate financial executives to build up huge cash reserves in a bid to prevent liquidity-driven internal crises. Yet, as money begins to flow towards business investment, management teams do not need to borrow more when they can tap their own respective cash hoards."
- Business investment activity has rebounded without a loan pickup. "One can see that business investment already has picked up based on GDP data. Furthermore, our studies of capital spending plans of more than 625 US nonfinancial publicly traded companies demonstrates planned actions that show increased activity. However, it is not well understood that capital spending moves in tandem with employment trends more so than consumer spending does and thus a turn in hiring plans is relatively important, too."
- Jobs should rebound modestly alongside the normal nine-month wait. "The angst over high and stubborn unemployment is both understandable and warranted, but the trends are shifting and the lending standard results show the likelihood for continued albeit modest jobs recovery over the next three quarters which should also benefit capex and industrial production trends. Thus, beneficiaries of better business activity in the next six to nine months should be able to report improved trends in the next several quarters, though commodities have spiked faster than in the past so that area may be less affected; thus, we prefer the Capital Goods and Energy industry groups."

Citigroup_Monday_Morning_Musings_20100820

Reform progress in the euro area periphery

- "Sovereign spreads have widened considerably during the past two weeks"
- "The market is concerned that countries will get caught in a vicious circle of budget cuts and faltering growth"
- "Our primary concern is that public support for necessary reforms may falter"
- "The rescue packages give the periphery countries time to get their houses in order"
- "But a positive outcome is dependent on the willingness of the countries to accept tough but necessary reforms"
- "We believe that the ECB will stand ready to purchase large amounts of government bonds if needed"

DenDanske Research Euroland 20100823

Japan: BOJ move to stem strong JPY is imminent

- "In our view, the Bank of Japan (BoJ) will soon step in and try to stem the recent appreciation of JPY. However, we do not expect direct intervention in the FX market, although this possibility should not be ruled out completely. Instead, we expect the BoJ to step up its quantitative easing."
- "A BoJ move should be able to create a much more solid platform below USD/JPY. However, unless it delivers aggressively, we are unlikely to see JPY weaken significantly until the financial markets regain confidence in global growth."

DenDanske Flash Comment 20100825

Hong Kong Property Sector: Hard or soft landing in 2012?

- Traces of 96/97 bubble? Home prices up 14% YTD and 47% from 2008 trough. Increasing call for some kind of housing subsidy?
- Public consultation already underway. Two key dates: Sep 17 and Oct 13
- Theory Vs. politics?
• The Hong Kong government theoretically favours a free market
• Subsidy will short circuit the market’s natural restraint
- Is it a bubble? Health check OK
• No excessive use of leverage
• Speculative demand in check
- Three new sources of demand
• Demolition displacement
• Return of mainland babies
• Negative real rates
- Valuations are still very supportive
- Landbank duration important in case of a hard landing?
• SHKP, Cheung Kong and HK Land are our top picks

Nomura HK Property Sector August 2010