Influential economist Stephen Roach penned a piece for Project Syndicate overnight that has caused a bit of a stir.
In an article titled “America’s False Dawn”, the former chief economist of Morgan Stanley argues that financial markets are overestimating the recovery in the US economy.
“My advice is to keep the champagne on ice. Two quarters of strengthening GDP growth hardly indicates a breakout from an anaemic recovery.”
He argues that the stronger economic data “has been bloated by an unsustainable surge of restocking”. That restocking is unlikely to continue, which means “consumer demand holds the key to America’s post-crisis malaise”.
But American households are still struggling under historically high levels of debt, and consumption is growing at a subdued rate and has not rebounded from the steep fall post-GFC.
And falling unemployment is more the result of people dropping out of the workforce rather than job creation.
“Yes, there has been some progress on the road to recovery,” he sums up. “But post-crisis healing is typically slow and painful.”
“Notwithstanding the Fed’s claims that its unconventional policies have been the elixir of economic renewal in the US, the healing process still has years to go.”
Funds management firm Cooper Investors released their quarterly updates this morning, including for their Australian Equities Fund.
Over 10 years the fund has generated average annual returns (before fees and expenses) of 13.4 per cent, against 9.6 per cent for the S&P/ASX 200 Accumulation Index (which includes dividends).
Their portfolio (which is significantly underweight in banks and resources) is “currently positioned around the following themes”:
Offshore earnings. We have a cautious view of the domestic environment and we continue to seek out well managed companies with exposure to developing markets that should continue to grow and other developed markets that have reset and are now showing positive trends, eg Brambles, Amcor, and Fisher & Paykel.
Structural growth. Companies with a strong position in an industry that has structural growth characteristics (such as air travel, healthcare, or content) or which has a small market share in a large industry with a differentiated value proposition that allows them to increase market share, eg Fox, TPG, and Auckland Airport.
Turnarounds. We believe that companies and industries go through hubris to humility cycles. This transition is typically accompanied by a “reset” event, such as a new management team, new capital structure, industry rationalisation/consolidation, or efficiency savings/reset of cost base.
Such periods can be extremely painful for pre-existing shareholders but can provide an attractive opportunity for new shareholders. We also like government to private turnarounds and demergers, eg Fletcher Building, Aurizon, and Macquarie Bank.
Stalwarts. These are companies with a long corporate track record, focused business model, very conservative balance sheet, attractive growing dividends and growth options. Firms like Telstra, Woolworths, and Sky TV.
Westpac's online banking system has been hit by technical problems, preventing customers from accessing their online accounts for at least the last hour.
Customers trying to log in are told the service is unavailable and the bank is sorry for the inconvenience.
"We’re currently experiencing issues with online banking for desktop, mobile and tablet. We are investigating this as a matter of urgency, and will provide further updates in due course. Please accept our apologies for the inconvenience," a company spokesman said.
Here's how some of the blue chips performed:
- BHP: +1.5%
- Rio: +2.3%
- ANZ: +0.8%
- CBA: +1.1%
- NAB: +0.8%
- Westpac: +1.4%
- Woolies: +1.5%
- Wesfarmers: -0.1%
- Telstra: -0.4%
And the main winners and losers:
The sharemarket has closed at the day's highs, led by strong gains in miners.
The benchmark S&P/ASX200 jumped 53.9 points, or 1 per cent, to 5229.0, while the broader All Ords gained 52.6 points, or 1 per cent, to 5240.6.
Among the sectors, materials rose 1.6 per cent, financials added 1.1 per cent and consumer discretionary gained 1.6 per cent. Telcos slipped 0.3 per cent.Back to top
One of the biggest gainers of the day is Atlas Iron, which has soared more than 10 per cent to $1.05 after posting its Q2 output report.
"A close above $1 is a near term positive for AGO shares and could be the beginning of a steady recovery, after having been drastically sold off over the past few weeks," IG's Stan Shamu says.
"However, the fact that iron ore prices continue to struggle heading into the Lunar New Year could be a source of downside risk."
Atlas Iron shares are still down 8.5 per cent since the start of the year.
Only one month in, 2014 is shaping as a very different year, CMC's Michael McCarthy notes:
- The intertwining of emerging growth and consequent stimulus withdrawal suggests the volatility of the last week is likely to continue throughout the year. The Australian volatility index has calmed from yesterday’s spike, but at 15% is still substantially above the 11% measured earlier this month.
- Additionally, the sleeping giant of inflation is stirring, although investors took comfort from the surprise lift in Indian rates and the much higher than expected hike in Turkey.
- The moves are not only an attempt to choke off inflationary pressures but are seen as supportive of weakened currencies.
The again, exactly why the rate hikes have contributed to pushing up stocks and the Australian dollar isn't really that clear, Arab Bank's David Scutt says:
I'm yet to see, hear or read a convincing argument as to why the Turkish Central Bank action o/n is bullish for risk assets #challenge— David Scutt (@David_Scutt) January 29, 2014
Sticking with our columnists, did Michael Pascoe like The Wolf of Wall Street? No he did not...
Sure, it has a big star and a bigger director and has won and been nominated for numerous awards, but The Wolf of Wall Street is a lousy movie.
It doesn’t deserve an Oscar for anything – unless there’s a category for multi-faceted indulgence.
There is only one small saving grace in the three hours it took Martin Scorsese to remake Ben Younger’s 2000 Boiler Room (by adding more money, more sex, more drugs and vast wads of Leonardo DiCaprio to no better effect).
That brief moment is when the movie shows snatches of “infomercials” made by DiCaprio’s character - the real-life scumbag, fraudster, rat and conman, Jordan Belfort. They’re the standard “get rich quick” ads with the usual patsies and actors claiming it worked for them.
Hopefully, people watching the movie will recognise the genre and have nothing to do with anything like that sales pitch, because it remains as common as grass.
The rubbish is easy to spot, whether it’s promising that trading forex is an easy way anyone can make money, flogging a computer program that magically picks winners, or featuring the latest shyster with some other secret for wealth he (or she) just can’t wait to give away. Yeah, right.
The dramatic central bank response by India and Turkey to stabilise their currencies and rein in consumer prices has helped calm global investors but it may not be enough to heal these economies without an adequate fiscal policy response in the longer-term, analysts say.
Blackrock’s head of fixed income in Australia, Steve Miller, says these central banks have few levers to pull when evaluating policy and higher rates will have to be followed up with further measures:
- The ones that have been troublesome by and large have had current account deficits and political risk-slash-bad public policy. Their vulnerability is highlighted at a time when the Fed is probably going to keep tapering: that puts them between a rock and a hard place.
- That does require in the short term that these central banks do raise rates and it needs to be supported by other measures, probably things like getting their public spending under control.
Miller suggests a more serious concern could be China, whose problems are unique to its own economy, but relevant to Australia and other commodity exporters were China to falter:
- The Chinese problems are Chinese and the issue is if China’s got a problem it becomes a lot of other countries’ problem.
- None of us have a great track record in calling China... I’d be the first to admit that because that’s unknown, and because that’s unknowable, that’s probably a bigger worry. At the moment I’m on the more sanguine side of the spectrum.
Commonwealth Bank of Australia chief currency and rates strategist Richard Grace says some central banks are caught in a “catch-22” situation:
- So what they’re trying to do is raise interest rates to discourage further falls in the currency and combat inflation. There’s depreciation pressure on the currency if you’ve got persistent inflation, a current account deficit, and in India’s case, if growth is slowing.
- In spite of what began as widespread indiscriminate selling of emerging markets, one thing to consider is emerging markets on aggregate are now running current account surpluses which is very different to 15 years ago... what we are seeing is more isolating cases of currency weakness.
A certain high profile and former high flying investment bank - before it was laid low by the GFC - will be back in the news soon, reckons BusinessDay columnist Michael West...
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Psst psst, Babcock & Brown class action coming. Can't say too much— Michael West (@MichaelWestBiz) January 29, 2014
And here's a quick summary of the sharemarket action courtesy of IG:
The local market took off this morning with the cyclical names leading the charge as investors reacted to the developments out of Turkey.
Iron ore names have finally enjoyed some gains led by Atlas Iron, which put in a solid performance on the back of its Q2 output report, resulting in its stock trading back above a dollar. A close above $1 is a near term positive for Atlas shares and could be the beginning of a steady recovery, after having been drastically sold off over the past few weeks.
However, the fact that iron ore prices continue to struggle heading into the Lunar New Year could be a source of downside risk.
Apart from materials, the consumer discretionary and infotech sectors also put in a solid performance while the healthcare space has remained resilient.
The bold action taken by the Turkish central bank at its emergency midnight meeting (a 4.25 percentage point rate rise) has sparked a relief rally around local markets. Here's a round up of our neighbourhood:
- Japan's Nikkei is up 2.2 per cent.
- Hong Kong's Hang Seng up 1 per cent.
- Shanghai composite index up 0.3 per cent.
- Korea's KOSPI is up 1.2 per cent.
- The Jakarta Composite Index is up 1.6 per cent.
- And our S&P/ASX 200 is now up 0.8 per cent.
The Aussie dollar is trading above US88 cents.
The amount of money in exchange-traded funds continues to soar, with total assets in the listed index trackers increasing by more than 50 per cent in 2013 to $9.9 billion.
Analysts at Morningstar, which produced the report, reckon that growth for the sector will continue in the coming years, and that as the funds get bigger they should get cheaper - a key benefit of ETFs versus unlisted actively managed share funds.
One of the lesser known economic indicators is "the velocity of money". If you're thinking that it measures how fast your cash moves out of your bank account and into the shops tills, then you're pretty much right.
"In essence, this is the speed at which a dollar moves from one transaction to another," writes Bloomberg Businessweek. "The more times a dollar is used to buy something, the greater its velocity, and the quicker the economy grows."
Unfortunately the velocity of money in the US is at its slowest since at least 1959, mostly thanks to the sheer amount of it that has been pumped into the economy.
"Of the $11 trillion in bank accounts (not to mention all the cash stuffed under mattresses), each dollar was spent just 1.5 times over the past year. That’s down from 2 times in 2006 and a high of 2.2 times in 1997."
“We’re simply not going to get inflation until velocity gets back to something normal,” Austan Goolsbee, a former chairman of President Obama’s White House Council of Economic Advisers, told Businessweek.
ANZ is conducting a sweeping review all of its home loan, savings and small business accounts to ensure they are operating correctly, after a major glitch forced it to refund $70 million to 235,000 home loan customers.
Last week the bank commenced sending out letters to the customers, who were charged incorrect interest rates through their mortgage offset accounts due to processing errors by the bank. Some of the errors dated back to 2003, and occurred because key processes were carried out manually, leaving the door open to human error.
Customer complaints first alerted the bank to problems with the offset accounts in 2010, which then led to a four-year review led by PwC.
The head of the bank’s Australian operations, Phil Chronican, said the bank had also decided to put all of its products under the microscope as part of a separate review taking in several million accounts.Back to top
Here's the latest standing of the "real" Champions' League: the top 12 earning clubs in international football.
Number one is Real Madrid - no surprise there, the Spanish powerhouse has now been in top spot for nine years running. The club earned €519m ($805m) in the 2012-13 season, reports The Economist.
Bayern Munich knocks the backsliding Manchester United out of the top three for the first time after the Bavarians secured a domestic and European treble in 2013.
The biggest climber is Paris Saint-Germain, which shot from outside the top 30 into fifth place with turnover up by 81 per cent from the previous season, thanks largely to the highest-ever commercial revenue for a football club.
Over a third of the top 20 clubs are now controlled by non-Europeans.
Mining investment is tipped to decline sharply from the middle of this year, hitting Australia's growth, but a rise in the export of resources is expected help to boost the economy in future years.
Capital investment by resources companies from this year to 2016 is forecast to fall from a previous estimate of $312 billion to $280 billion, as existing developments are completed and construction activities for major LNG projects draw to a close, ANZ economists Dylan Eades and Justin Fabo say in a research note today.
The fall-off in investment, which has also been flagged by the Reserve Bank when it lowered its GDP forecasts for this year and 2015 in its last Statement on Monetary Policy, meant stronger growth in the non-mining sectors of the economy was needed to fill the gap.
"With resources investment expected to decline sharply, it’s critical that other sectors of the economy respond further to low interest rates and the decline in the Australian dollar," the economists write. "While housing market activity has improved sharply, the strength and timing of an upswing in non-mining business investment remains somewhat uncertain."
The economists expect capital expenditure for existing projects - those that have been committed to and those already under construction - to lift from $160 billion to $180 billion amid cost increases, a shift in the timing of some developments and more clarity around spending by state governments' on infrastructure.
Despite the forecast declines for investment, the shift towards the production phase of the mining boom is expected boost Australia's growth levels through the strong increase in exports.
The economists forecast iron ore production to rise to 685 million tonnes next year from 550 million tonnes last year. LNG output is also tipped to expand from 2015.
High profile fund manager Simon Marais is predicting this earnings season could disappoint shareholders in the retail sector. But if it does go badly, and the market reacts by selling, the director and portfolio manager at Allan Gray will use the opportunity to load up.
“This earnings season will be tough to a large extent for a lot of the retailers,” says Marais, who is a top shareholder in David Jones among other retail-consumer stocks, including Harvey Norman, Pacific Brands and grocery, liquor and hardware wholesaler, Metcash.
Marais is a long-term investor – he’s held significant stakes in retail stocks for the past year-and-a-half. He’s betting there will be a bounce back in the value of retailers from the group’s recent trading lows, but tells Smart Investor this earnings season could be another tough one for the beleaguered segment.
Time for a recap: local shares are up 0.6 per cent, recovering slightly from a six-week low, as investors find some relief from a rate hike by Turkey's central bank and pick up stocks that were sold off in the previous sessions.
The news of Turkey's rate increase has stirred hopes that the move would short-circuit a vicious cycle of selling in emerging markets and revive risk appetite in the developed world.
A recovery in resources stocks, which tumbled yesterday, has helped edge the Australian market into positive territory.
BHP is up 1.1%, Rio has gained 1.2% and Fortescue 2.5%, while Atlas Iron has jumped 7.3% after the company raised its full-year iron ore production guidance after a record second quarter. The big banks are all flat to slightly higher.
"There is some relief that comes with positive trading in the US and Europe," says Scott Schuberg, CEO at Rivkin Securities. "The theory that traders still assume the Federal Reserve will continue to step in if it witnesses market shocks wasn't the only thing that helped market last night," Schuberg says, adding that India and Turkey's rate hikes also buoyed sentiment.
Overnight will bring the conclusion of the Fed's two-day policy meeting, with investors anxious to hear whether the Fed will cut another $US10 billion from its monthly bond-buying program, which it began tapering in December.
Mal Maiden: market bounce?
Business columnist Malcolm Maiden takes a look at the news in this week's business market.
The International Monetary Fund says there is no panic in emerging markets even as countries such as India, Turkey and Argentina are facing sharp capital outflows and currency pressures.
‘‘This is not like May, this is not a panic situation,’’ said Jose Vinals, director of the IMF’s Monetary and Capital Markets Department. He called the turbulence in emerging economies ‘‘a combination of idiosyncratic factors’’ across the countries affected, unlike the broad-based capital outflows earlier this year that was sparked by the expected tightening of US monetary policy by the Federal Reserve.
‘‘We don’t see the commonality that existed in May, which was the US tapering. This (the recent turbulence) is something where the US monetary policy tapering expectations have so far not played an important role,’’ he says.
The Fed finally began to cut back its massive stimulus program this month, long after US interest rates had risen in anticipation, and Vinals dismissed that as the spark for the newest challenges hitting those countries.
Instead, the jitters are signs that the emerging economies ‘‘have yet to complete their adjustment to more volatile external conditions and higher risk premiums,’’ he said separately in a report on recent market developments.
‘‘Some of these headwinds may be homemade, and some others could come from abroad,’’ he told journalists.
After the Turkish lira sank more than 30 per cent against the dollar since mid-2013, Turkey’s central bank earlier this morning jacked up interest rates sharply to defend the currency, despite opposition from Prime Minister Recep Tayyip Erdogan.Back to top