Markets Live: Soft start to profits season

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Shares eased after company reporting season got off to a disappointing start, with fund managers and equity strategists eager for evidence that the sharemarket’s recent six-year highs are justified.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each edged down 0.1 per cent, on Monday to 5577.4 points and 5569.9 points respectively.

Australian shares took a weak lead after major equity markets in the United States and around Europe declined on Friday night. Despite flirting with brief gains during the session the local bourse edged lower in late trade.

Resources giant BHP Billiton did the most to lift the index into the black, adding 0.3 per cent to $39.10. The miner said it is set to undertake a heap leaching trial at its Olympic Dam project in South Australia. Plans in 2012 to spend $US30 billion ($31.9 billion) expanding the mine were deferred.

Main rival Rio Tinto gained 0.4 per cent to $65.36, as the spot price for iron ore, delivered in China, added 0.7 per cent to $US94.30 a tonne. When the ASX closed Dalian iron ore futures trading in China was tipping a solid gain in the spot price overnight.

Mining was the best-performing sector, up 0.3 per cent. But while the nation’s biggest miners lifted the mood in the mining services sector remains grim.

Engineering contract services provider Leighton Holdings dropped 2.4 per cent to $22.10 after it showed a 20 per cent drop in first-half net profit. However the company maintained its full-year earnings guidance.

Mining services provider Boart Longyear rose 2.2 per cent to 23¢ despite the company warning it risks breaching its financial covenants if market conditions continue to deteriorate more than expected.

National Australia Bank lifted 0.3 per cent to $34.69 as it sold a parcel of distressed loans from its challenged United Kingdom business worth £625 million ($1.13 billion).

Among the rest of the big four banks Commonwealth Bank of Australia fell 0.3 per cent to $82, Westpac Banking Corporation lost 0.3 per cent to $34.18, and ANZ Banking Group shed 0.7 per cent to $33.52.

analysis

And here are the best and worst among the top 200 names.

Winner today was GUD Holdings, which more than made up for the falls it suffered on Friday following a poor earnings update.

Worst performing stock is Navitas, after is full-year earnings update. Who knows, like GUD, maybe investors will have changed their mind by tomorrow.

Best and worst performing stocks in the ASX 200 today.
Best and worst performing stocks in the ASX 200 today. 
market open

Shares had completely reversed early losses and looked set for a last-gasp gain, but fell in the closing minutes to record the slightest of falls.

The ASX 200 closed 6 points, or 0.1 per cent, lower to 5577.4, while the All Ords eased 4 points.

ANZ dropped 0.7 per cent and was the single biggest drag on the benchmark index, while CBA and Westpac dropped 0.3 per cent. NAB gained 0.3 per cent after it announced it was selling a portfolio of dud British commercial loans to a US private equity group.

Macquarie fell 1.5 per cent, and Telstra 0.4 per cent.

Wesfarmers and Woolies both fell 0.3 and 0.2 per cent, respectively.

Miners offset the losses among financials, with BHP rallying from early losses to gain 0.3 per cent, while Fortescue jumped 3.7 per cent. Rio added 0.4 per cent.

The catalyst for the bounce in miners may have been from Chinese stockmarkets, which looked set to record strong gains over their sessions.

housing
Making the case for stocks: Neilson says it would take "a leap of faith" for property prices to beat inflation.
Making the case for stocks: Neilson says it would take "a leap of faith" for property prices to beat inflation. Photo: Nic Walker

Billionaire investor and founder of Platinum Asset Management Kerr Neilson says shares are at least as good a bet as the property market, and it would take a “leap of faith” for house prices to beat inflation over the next decade.

Timing and the “cherry picking” of historical prices helped keep property in favour with investors, he said. 

But “when conditions change, a lot of the assumptions are found wanting,” he warned in a letter to clients of his funds.

Mr Neilson outlined four factors he argued undermine the case for housing as an investment: 

  • property returns were often exaggerated by inflation
  • the cost of taxes, rates and maintenance can absorb half of one’s rental yield; 
  • long-term value is determined by affordability
  • and “to be optimistic about residential property prices rising in general much faster than inflation is a supreme act of faith”.

“Today, houses cost over four times the average household’s yearly disposable income. At the beginning of the 1990s, this ratio was only about three times household incomes... this looks like the peak,” Mr Neilson said. 

“To believe that home prices in the next 10 years will meaningfully outpace the consumer price index (CPI), as they have in the past, would require a remarkable set of circumstances,” he said - low interest rates, people's willingness to borrow more, greater work force participation, and wage growth that exceeds inflation.

Read more.

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Rates

ANZ has joined UBS today in pushing back the timing for an RBA hike, from the first quarter of next year to the second.

The economists at the locally-based bank now expect the central bank to tighten by 25 basis points in May, instead of February.

They are forecasting a further 50bps of hikes in 2016 and a 25bp hike in early 2017 to take the cash rate back to 4 per cent (see chart) - what they believe is now the neutral (or terminal) RBA cash rate.

"Despite an expected pick-up in global (and domestic) economic growth over the next three years, we believe interest rates will not need to be restrictive through this period given ongoing headwinds from a declining terms of trade and broader caution across business and households," they write.

UBS's economists are of a similar mind. They write in a new note that they also have pushed back a first 0.25 percentage point hike to the June quarter of 2015.

"We expect moderating 2H14 inflation, and a desire to remove upside AUD risks by getting closer to a likely Q2 Fed tightening, will provide the RBA enough incentive to wait until Q2, before stepping away from record low rates," they say.

They forecast the cash rate to be 3 per cent by June next year.

 

With the gap between US and Aussie rates set to narrow, the local dollar could come under pressure.
With the gap between US and Aussie rates set to narrow, the local dollar could come under pressure. 
earnings

In a preliminary filing ahead of the release of its interim final results on August 26, the embattled drilling services company said that it was compliant with all of its covenants as of June 30 and expects to remain compliant until the end of the year, should its assumption that the market is “at or approaching market bottom” remain accurate.

Boart Longyear has had a significant change in fortunes since its market capitalisation peaked at $4 billion in 2007.

A downturn in demand from miners caused by declining commodity prices and the cooling of Chinese demand hit Boart hard in late 2012 and the Utah-based driller has struggled to recover since.

The company’s market cap now sits at around $100 million and it is in the process of a Goldman Sachs headed strategic review of the company’s recapitalisation options, including asset sales, raisings and refinancing.

Boart chief executive officer Richard O’Brien told Financial Review that the company believes the market is beginning to flatten.

“Things feel like they are not trending down and that they are staying at these levels,” Mr O’Brien said.

Boart reported revenue of $224.1 million in the three months to June 30, down from $348.7 million in the previous corresponding period but up from $197.4 million in the first quarter.

Adjusted EBITDA fell to $14.1 million in the June quarter, from $40.1 million in the prior corresponding period but was up from $3.8 million in the March quarter.

Rig utilisation has improved marginally and O’Brien said that despite no change in conditions in Australia, a slight pick up has occurred in North America.

Exploration drilling “remains subdued” but the company noted “robust” demand for drilling at production focused projects.

The company’s drilling services division generated 63 per cent of the company’s revenue in the first half, with just 20 per cent coming from pure exploration drilling.

Boart also warned that analyst estimates for full-year revenue which range from $766 million to $936 million “may not fully reflect market conditions for demand”.

Investors look to have taken the view that "the only way is up", and pushed the company's stock 4.4 per cent higher to 23.5 cents.

wall st

Investors frustrated with AMP’s persistent laggard status may soon breathe easier.

The basket case stock of the ASX 20 looks poised for a re-rating, finally, and those of a more optimistic mindset are bracing for a potential takeover approach.

While no bidder has yet emerged, many in the market consider AMP a sitting duck given its open register, the absence of any regulatory hurdles to a merger and the staunch of negative news-flow from its embattled Life division. Yet even without a buyout play under way, AMP appears a more interesting proposition of late.

According to Bell Potter, the financial services group has touched a nadir with analyst Laf Sotiriou now predicting a re-rating of the stock, as the benefits begin to flow from a $200 million cost-cutting regime and revenue ticks up in its investment platform, banking operations and New Zealand subsidiary.

In a note titled AMP – Waking a sleeping giant, Bell Potter claims the group’s life insurance arm, which weighed heavily on 2013’s earnings, has passed the worst. There should be little adverse impact this year from lower interest rates.

If the wealth management heavyweight continue to avoid any negative news-flow investors may reap a 23.7 per cent total return on the stock, marking the end of a long-running period of under-performance.

AMP shares have already enjoyed a great run this year - up 24 per cent against the ASX 200's 4 per cent, and well ahead of the financials sub-index's 6 per cent return.

From feather duster to rooster: Shares in AMP - "the basketcase of the ASX 20" - are on a tear this year.
From feather duster to rooster: Shares in AMP - "the basketcase of the ASX 20" - are on a tear this year. Photo: Tamara Voninski
japan

Not even the yakuza can stop Japanese investors in their desperate hunt for yield

Orient Corp, the Japanese lender at the centre of a scandal over loans to gangsters that engulfed Mizuho Financial Group, sold debt at about a fifth of the premium global companies pay, as investors search for yield.

The consumer lender, an affiliate of Mizuho, offered 10 billion yen ($US98 million) of five-year notes at 18 basis points over yen swaps earlier this month, in its first public straight bond. That compared with the average spread of 11 basis points for Japanese company debt and 98 for global corporates, according to Bank of America Merill Lynch data.

Unprecedented Bank of Japan stimulus has cut local corporate bond spreads to a seven-year low, prompting investors to seek riskier debt to boost returns.

Two top executives at Mizuho resigned posts this year after Japan’s second-biggest bank by assets was penalized twice in 2013 for loans via Orient to organized-crime groups known as the yakuza. The scandal led to revelations of more lending to gangsters in the financial industry, prompting the nation’s regulator to expand its probe.

“In this environment of unprecedented low interest rates, there are few places to invest,” said Takayuki Atake, an analyst in Tokyo at SMBC Nikko Securities. “Financial institutions are having to invest in securities since their lending isn’t increasing, so they’re taking a degree of risk.”

Orient, known by its brand name Orico locally, is rated BBB+ by Japan’s Rating & Investment Information, the equivalent of its third-lowest investment grade. The provider of auto and credit card loans, bailed out by Mizuho in 2003 and 2007, was rated B+ in 2002, the fourth-highest junk score.

“There can’t be many investors that like Orico, with the anti-social lending issues and the black-box element of the consumer lending business,” said Mana Nakazora, the chief credit strategist at BNP Paribas in Tokyo. “It’s a credit bubble and this is an issuers’ market.”

Read more at Bloomberg.

airlines

Qantas has no plans to stop flying over Iraqi airspace on its Dubai-London flights, based on its latest security assessments

The news comes despite alliance partner Emirates planning to stop flying over Iraq within the next week to 10 days.

Emirates president Tim Clark said he was “not comfortable” with the security situation in Iraq given many of its flights passed over territory held by Islamic militants.

He said he had issued instructions to reroute his airline’s flights.

“We can’t do it all at once because we have got an awful lot going through it, but yes we will be doing that,” he told London’s The Times.

Qantas and Emirates have an alliance but they maintain separate operations teams and the avoidance of a flight path by one does not mean the other is required to do so.

A Qantas spokesman said the airline regularly reviewed its flight paths and made any adjustments it considered prudent.

“There is no suggestion that flying over Iraq is unsafe for commercial airlines, particularly given the cruising altitude that most, including Qantas, maintain,” he said. “We will continue to monitor the situation, with safety as our top priority.”

It is understood Qantas’s two daily A380 flights on the Dubai-London route generally fly over Iraq at an altitude of 38,000 to 41,000 feet.

The alternative routes planned by Emirates would either take aircraft across Saudi Arabia and the Red Sea over Cairo and into European airspace, in a move that would add around 45 minutes to flight times, or would involve flying over Iran.

“That is the kind of thing that will demonstrate to the public that we take this extremely seriously and that is exactly what we are doing,” Mr Clark said of potential threats to commercial aircraft after Malaysia Airlines flight 17 was downed over eastern Ukraine earlier this month.

Increasing the flight time requires more fuel and staff hours and therefore the carrier will take a financial hit unless it raises airfares to compensate.

Read more.

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budget
Australia''s richest don't take home as big a piece of the national pie as do their peers in the US, Britain and Canada.
Australia''s richest don't take home as big a piece of the national pie as do their peers in the US, Britain and Canada. 

The share of national income going to Australia’s top 1 per cent of earners has levelled out for the best part of a decade – and in some cases fallen – to erode claims that inequality is worsening.

The stability in the share of Australia’s highest income earners could continue, as the Abbott government jacks up the top marginal tax rate to 49 per cent by introducing the controversial debt levy.

An analysis of tax data by the University of Melbourne, which is being fed into a global database maintained by French economist Thomas Piketty, shows the top 1 per cent took home 7.7 per cent of total income in 2011.

That ratio has remained virtually unchanged since 2006 and is only fractionally higher than at the turn of the century when it came in at 7.5 per cent.

The data confirms an end to an upward trend that was entrenched between the early 1980s to the early 2000s in the share collected by the highest income earners – a category of around 180,000 taxpayers who earn at least $211,000 and an average of just under $400,000 a year.

The figures also show that compared to Canada, Britain and the United States – where debate about rising inequality has become a mainstream political issue since the global financial crisis – Australia’s top earners take home far less of the national pie.

For instance, in the US, the top 1 per cent collected almost 20 per cent of incomes, one-third more than was the case a decade earlier.

Read more at the AFR ($).

US news

The decade that preceded the 2008 financial crisis was marked by massive global trade imbalances, as the United States ran large bilateral deficits, especially with China. Since the crisis reached its nadir, these imbalances have been partly reversed, with America’s trade deficit, as a share of GDP, declining from its 2006 peak of 5.5 per cent to 3.4 per cent in 2012, and China’s surplus shrinking from 7.7 per cent to 2.8 per cent over the same period.

But is this a temporary adjustment, or is long-term rebalancing at hand?

Many have cited as evidence of more durable rebalancing the “onshoring” of US manufacturing that had previously relocated to emerging markets.

Apple, for example, has established new plants in Texas and Arizona, and General Electric plans to move production of its washing machines and refrigerators to Kentucky.

Several indicators suggest that, after decades of secular decline, America’s manufacturing competitiveness is indeed on the rise. While labour costs have increased in developing countries, they have remained relatively stable in the US.

In fact, the real effective exchange rate, adjusted by US manufacturing unit labour costs, has depreciated by 30 per cent since 2001, and by 17 per cent since 2005, suggesting a rapid erosion of emerging markets’ low-cost advantage – and giving America’s competitiveness a substantial boost.

Moreover, the shale-gas revolution in the US that took off in 2007-2008 promises to reduce energy costs considerably. And America’s share of world manufacturing exports, which declined by 4.5 percentage points from 2000 to 2008, has stabilised – and even increased by 0.35 percentage points in 2012.

Upon closer inspection, however, the data for 1999-2012 present little evidence of significant onshoring of US manufacturing. For starters, the share of US domestic demand for manufactures that is met by imports has shown no sign of reversal. In fact, the offshoring of manufacturing increased by 9 per cent (see chart).

Read more at Project Syndicate.

Increased competitive is supposed to be bringing manufacturing back to the, but there's no evidence of an "onshoring" ...
Increased competitive is supposed to be bringing manufacturing back to the, but there's no evidence of an "onshoring" trend. Source: Project Syndicate. 
michael-pascoe_127x127

Headlines of any form involving housing bubbles or busts, mortgage stress or real estate forecasting remain sure-fire clickbait. Given Australians' love affair with bricks'n'plasterboard, is there a week without one or all of the aforementioned?

After a couple of prominent examples last week, releases on new home sales, building approvals and housing prices should provoke a few more over the next five days. And they are as likely as the last lot to be overblown.

Fortunately there are a few level heads around trying to hose down the worst excesses, be they on the up or down side.

They just don't seem to attract nearly as many eyeballs. Whether it's been Glenn Stevens reminding people that housing prices can fall as well as rise, or Rory Robertson wagering Professor Doom, Steve Keen, to a long walk, perspective is out there.

And thus to AMP chief economist Shane Oliver, who takes just four paragraphs to debunk the latest fears of a mortgage crisis erupting as soon as interest rates rise.

But his rebuttal also provides a reason for the chase for yield on the sharemarket to continue and it underlines the folly of retirees hoping to live off income from term deposits.

In his weekly market wrap, Oliver takes specific aim at the idea that Australia's high level of mortgage debt will inevitably cause disaster when the Reserve Bank starts lifting rates again.

He notes there were similar warnings at the bottom of the 2009 cycle that didn't amount to problems when rates tightened.

Read more.

Keeping a lid on things: Glenn Stevens has consistently reminded people that housing prices can fall as well as rise.
Keeping a lid on things: Glenn Stevens has consistently reminded people that housing prices can fall as well as rise. Photo: Glenn Hunt
mining

The federal government has approved Indian mining giant Adani's proposal to develop one of the world's biggest coal mines in Queensland.

The tick from Environment Minister Greg Hunt comes two months after the state government gave its approval.

Mr Hunt said 36 strict conditions would be imposed on the coal mine and rail project in the Galilee Basin.

"The absolute strictest of conditions have been imposed to ensure the protection of the environment, with a specific focus on the protection of groundwater," he said in a statement.

"I am pleased that we have been able to apply some of the strictest environment conditions in Australian history as part of this decision."

The project would have a resource value of $5 billion a year during its 60-year life, Mr Hunt said.

In May, Queensland Premier Campbell Newman said environmental concerns had been addressed in approving a project forecast to produce 60 million tonnes of thermal coal a year for export.

Adani's project is expected to create 2,475 construction jobs as a 300-kilometre rail line is built to connect and develop its Carmichael Coal Mine, northwest of Clermont, to the controversial Abbot Point coal port, near the Great Barrier Reef.

Another 3,920 jobs would remain during mine operation.

But Greenpeace said the project would be Australia's largest coal mine, if built, adding that the government appointed Independent Expert Scientific Committee had voiced concerns about groundwater.

The activist group's program director Ben Pearson said Mr Hunt had "laid out the red carpet for a coal company with a shocking track record".

Read more.

The proposed $16.5 billion Indian-owned Adani Carmichael coal mine project in the Galilee Basin has been given federal ...
The proposed $16.5 billion Indian-owned Adani Carmichael coal mine project in the Galilee Basin has been given federal government approval. Photo: Rob Homer
analysis

We’ve all seen the disclaimer when it comes to fund managers’ returns: “past performance is no indicator of future performance”.

Well, in a way it is - just not in the way you think.

In fact past performance is a strong counter-indicator of future performance, in that only a tiny fraction of professional stock picking houses are able to stay at the top of the performance charts over three consecutive 12-month periods.

According to a study by S&P Dow Jones Indices, 3.8 per cent of the 687 actively managed US funds who were among the top 25 per cent of managers in March 2012 were still there two years later. Only 19 per cent were still in the top half of the performance league tables.

“An inverse relationship exists between the measurement time horizon and the ability of top-performing funds to maintain their status,” write the researchers. “It is worth noting that no large-cap or mid-cap funds managed to remain in the top quartile at the end of the five-year measurement period.”

“The figures paint a poor picture of the lack of long-term persistence in mutual fund returns.”

S&P don't have anything like this study for the local market, but research by van Eyk suggests a similar dynamic at play in Australia and goes one step further: when it comes to choosing funds, to find tomorrow's winners you'd be better off picking today's losers. 

Only a fraction of the top US fund managers in March 2012 were still among the top performers two years later. Source: ...
Only a fraction of the top US fund managers in March 2012 were still among the top performers two years later. Source: S&P Dow Jones Indices 
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asian markets

Shares are just about back to level pegging with Friday's close, after Asian stocks shrugged off a drop in Wall Street to hover near three-year highs, with China taking the lead after data showed a robust jump in profits earned by industrial firms in the world's second-largest economy.

Profits earned by Chinese industrial firms rose 17.9 percent in June to 588.08 billion yuan ($US94.98 billion) from a year earlier, up sharply from an 8.9 percent rise in May, the National Bureau of Statistics said.

Recent data have reinforced market expectations that the Chinese economy is powering through its recent soft patch as the government uses targeted stimulus measures to support growth.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2 percent, close to a three-year high of 509.23 scaled on Friday.

China's CSI300 jumped 2.3 percent and the Hang Seng climbed 0.8 percent.

Tokyo's Nikkei, which hit a six-month closing high Friday, was up 0.5 percent.

Korea's KOSPI was also 0.5 per cent higher.

world news

President Vladimir Putin's intensifying standoff with the US and its allies over the situation in Ukraine has stock investors pulling money out of Russia as they pile into other emerging markets.

Last week, traders took $US12.3 million ($13 million) out of the Market Vectors Russia ETF alone, the largest US-dedicated exchange-traded fund tracking the nation's stocks. The moves added to redemptions of $US90.8 million in July, putting it on pace to be the biggest monthly outflow since February.

Withdrawals from the Russian exchange-traded fund are accelerating as the US and European Union seek to punish Putin for supporting separatists in eastern Ukraine with deeper sanctions intended to squeeze the $US2 trillion economy. The International Monetary Fund said last week that Russia's gross domestic product will expand 0.2 per cent this year after increasing 1.3 per cent in 2013, less than half the government's forecast of 0.5 per cent growth.

Irene Bauer, the chief investment officer at Twenty20 Investments, said emerging-market ETFs make up about 25 per cent of the firm's portfolio, versus "hardly any exposure" six months ago. But it is avoiding Russia altogether.

"We are not investing in Russia because the tail risk is too high," Bauer said. "You just don't know where the crisis in Russia is going. Political risk is higher than in other emerging markets, and the economics don't look very good."

Read more.

The rear fuselage of downed flight MH17: Investors are pulling money out of Russia amid expectations of deeper sanctions ...
The rear fuselage of downed flight MH17: Investors are pulling money out of Russia amid expectations of deeper sanctions after the plane tragedy. Photo: Kate Geraghty.
legal
Andrew Flanagan outside the Melbourne Magistrates Court.
Andrew Flanagan outside the Melbourne Magistrates Court. Photo: Jason South

The American businessman recently hired and then sacked by Myer on his first day — after it found he had allegedly falsified his credentials — has been charged by Victorian police with fraud.

Andrew Flanagan was appointed last month by Myer as its group general manager for strategic and business development.

But Mr Flanagan, 46, was dismissed after Myer announced he had falsified his CV and references to get the job.

It was reported that he claimed to have been a former managing director and vice president of a Spanish retailer which owns the international fashion chain Zara.

Both companies later denied they ever employed Mr Flanagan, who was introduced to Myer by recruitment firm Quest International.

Mr Flanagan appeared on Monday morning in the Melbourne Magistrates Court for a filing hearing on a charge of obtaining a financial advantage by deception at Docklands on June 6.

Read more.

IPO_float

Healthscope has had a subdued start to its life as an ASX-listed stock, trading half a cent down from its offer price of $2.10.

The private hospital, pathology and medical centre operator was sold at a premium to its healthcare peers, at 22 times forward earnings, against 18 times for the sector, and 14 times for the market.

It trades under the ticker HSO.

dollar

Exporters may be bemoaning the "stubbornly high" Australian dollar, but according to the Big Mac Index, its valuation is spot on.

That’s right, you heard correctly, burgernomics is a serious business, particularly in determining whether currencies are at their “correct” level.

The price of a Big Mac in America was $US4.80 in July. In Australia it was $US4.81 at market exchange rates, meaning that the Aussie was overvalued by a mere 0.4 per cent, according to The Economist’s raw Big Mac Index.

It is the third time in the past 14 years that the Australian dollar has been valued at the so-called correct level. The other times were in 2013 and 2009 before the local unit began its meteoric rise.

The Economist newspaper invented the Big Mac Index in 1986 in an effort to make exchange rate theory more digestible.

It is based on the theory of purchasing-power parity – a technique used to the measure the relative vale of different currencies. In an ideal world, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in The Economist’s case, a burger) in any two countries.

Before 2009 the Aussie had been heavily undervalued, according to the Big Mac Index. In early 2001 a Big Mac cost $US1.52 at market exchange rates, undervaluing the Aussie at 40.3 per cent.

Read more.

The culinary art of currency valuation - the Big Mac index says the Aussie is not terribly overvalued.
The culinary art of currency valuation - the Big Mac index says the Aussie is not terribly overvalued. Photo: McDonald's; Thomson Reuters; IMF
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