To market, to market to buy a fat pig. Friday we saw the all share index crest the 42 thousand points mark and close there for the first time. All thanks (or no thanks) to a weakening currency. Now there has been a lot of talk, and perhaps much of the attention being given to one individual and their specific comments, I don't buy all of that. You will remember a couple of weeks ago, we have a post titled: Cooked. Wonky. In that post there was a specific image, a Google finance image of the Rand, Rupee and Real and over a five year period they pretty much all looked the same. So perhaps the Rand rout was a little overdue and that we had performed a bit better in the medium term.
But the rout has been recent, in the Rand that is. And that is why it has been attributed to the president, oh, he talks and guess what, the currency tanks. Not all true. Part truth. The first and possibly most important truth is that the Federal Reserve has indicated that they are going to be pulling back when they think the time is right, bring an end to quantitative easing. Their programs would be wound in, as they see the economy strengthen in the US. That is a good thing in my mind, because that means that the US economy can stand on their own two feet without the necessary support. And that all points towards a stronger Dollar. And normally, a stronger Dollar equals lower commodity prices. And also more importantly, at least for me, some folks are worried about the demand side for commodities.
Infrastructural development in China has been a key driver of commodity demand and prices over the last decade. Recently the fears about commodity demand has led to prices having settled lower. This impacts our exports, and it was clear in the April trade numbers released on Friday: South African Trade Statistics. Now if you look at that table, you can quickly tell that the solution for South Africa is to trade more aggressively with the rest of the continent. And we are heavily reliant on machinery and electrical appliances imports from Europe and Asia. So arguably a much firmer Rand is beneficial here for businesses of that nature. But the truth is, the perception is that a weak currency is good for local manufacturing, I am not too sure that is all true. Local manufacturers source their equipment from offshore, of which they have to pay more Rands for, as the Dollar firms.
And that is what is happening. Part Rand weakening as a result of poor fundamentals locally, and part Dollar strength against emerging markets, AND commodity export economies. Check: Global portfolio rebalancing hits emerging markets. Because we have a whole lot of Rand hedges as some of the majors here in our equity markets, we have to some extent been protected against the falling equity markets in other developing countries. The first sentence of that piece: "Brazil's Bovespa for example is down 14.5% year-to-date (vs. S&P500 up 15% YTD). This level of dispersion is unusual and indicates fundamental concerns about growth in emerging markets."
When you drill into the sector specifics of our markets, that is when you get a slightly clearer picture of the local market. Retailers have lost ten percent plus this year, the ones that sell food, 12 percent down for the year to date. Platinum miners have rebounded from their lows, thanks to the weaker currency, but are off 25 percent year to date, that is a massive improvement actually. Gold miners, collectively are down 32 percent. Keeping the overall market afloat are the industrials, which are collectively up nearly 18 percent for the year. This has propped the broader market up a whole 7 percent for the year. It has certainly been a tale of many different cities this year and not all boats are docked at the same wharf. So, when trying to understand the selloff in the local currency, know that it is a number of factors that have come to a head lately, some local, some not local.
Another anxiety creeping into the broader markets is that one we mentioned earlier and the related question: "When will the Fed step away from the markets?" I quite liked a Jeff Miller piece from the weekend titled: WILL THE INTEREST RATE SURGE CONTINUE?
Maybe, but not likely any time soon, the Fed will still keep their foot on the gas and are probably not likely to raise rates for some time to come. The risk I guess is, for the folks trying to time the cycle is that the economic strength might be greater than they anticipate, causing the Fed to raise rates sooner than anticipated. And that would not be an altogether BAD thing to happen. Not really, a better and improving economy is good, not so? And we will get the information that we need for another stamp of improving conditions from the nonfarm payroll numbers on Friday. It pleases me that people continue to be nervous, because that means that we are far from any consensus.
What the .....? Turkey is normally a poultry dish (a big bird) that goes with Christmas pudding on a specific day, but is also an old empire and historical place that is on my list of places that I must visit. In the capital and biggest city in Turkey however, Ankara and Istanbul, there has been protests, sending the Turkish markets into the toilet this morning. Hundreds arrested and over a thousand injured in what are called anti-government protests. The government has indicated that these protests by tens of thousands of essentially secular middle class Turks are protests by minorities. The state has tried to maintain a degree of separation from religion, with the military strangely making sure that is the case. So, from my reading and understanding of the country Turkey, it is a tough old balancing act over there.
Is it really all about one little park in Istanbul? Gezi Park? Really? I suspect that this is, and was the straw that broke the proverbial camels back. If anything it is once again a reminder that the situation is less fluid than one thinks, and whilst Turkey might have all of the characteristics that emerging market exudes, there are still tensions that exist. Like in many other places. Still, notwithstanding the five percent fall off in that market this morning, it is up a whopping 55 odd percent over twelve months. For the time being it is not for me to try and decide what is right for Turkey, nor for anyone else for that matter.
I read somewhere the other day (they all blend into each other), that by 2030, one in eight people globally will live in a Chinese city. That is truly amazing. One in eight? How did we get there, or how are we going to get there, and where did the momentum start? Well, I suspect that it all comes from the privatisation and liberalisation of the economy of China. And it was not a coincidence that this article: Towards the end of poverty, prompted my thoughts on this issue. Whilst socialism might be a noble idea, everyone being the same, the fact is that it fails at the first hurdle. We are not all the same.
And capitalism, which is evil for the workers, might just be the best of the "evils" of economic policy. It allows flexibility and encourages entrepreneurs, risk taking. Strangely, the people who perfected that approach are the ones becoming more risk averse, check out this WSJ article: Risk-Averse Culture Infects U.S. Workers, Entrepreneurs. Older Americans who have been dented by economic hardships are looking for the safer options.
Staying with the subject of why capitalism is better, of the economic policies, see what the Bank of Spain recommends: Suspending minimum wage to tackle unemployment. Well I never, a complete 360. When in doubt, try something very different. It is no coincidence that the strictest labour laws in Europe are that of Spain and the highest unemployment rate is also that of Spain. But, tell that to the fellows that are wearing little black caps and are interested in a tried and failed economic model. Just remind me how well it turned out for the people of North and South Korea after adoption of various economic policies?
Byron beats the streets
- When you think of countries with huge growth potential, enough to uplift global growth, India is one of the first that comes to mind. Unfortunately, due to badly thought through government policies which created unnecessary red tape for business, the country has struggled, not nearly living up to its potential. The latest GDP number which came through was 5% growth in the year to March. That may sound quite good but that is the slowest pace in 10 years and when you consider the dynamics of the economy you can see why this is disappointing.
According to a census conducted in 2011 the country had 1.2bn people. Nominal GDP comes in just short of $2 trillion. Per capita that is a measly $1592, ranking them 140th in the world. I gathered all of this from Wikipedia. As you can see things could get a lot better. To put things into perspective let's compare that to China. This info is also taken from Wikipedia. China has 1.35bn people but have a nominal GDP of $8.2 trillion, more than 4 times that of India. Per capita GDP comes in at $6075. Off this much higher base, China is growing between 7.5%-8%. This comfortably beats the 5% that India is growing at.
What actually sparked this piece was an article from the WSJ which I read on Friday India Can Only Look Up. Is states that corporate investment had slumped to 10.6% of GDP, down from 17.3% in 2008 largely due to red tape been installed by policy makers. But, as you can see from the title of the article, it has a positive spin.
"But there are signs of improvement. In December, New Delhi set up a high-level investment committee to fast-track approvals for major infrastructure projects. The committee has already cleared stalled projects worth around $20 billion, according to Citigroup. Regulators have also started to overhaul pricing in the energy sector, which should boost investment in the power sector.
The government has also made progress on such other important overhauls as reducing subsidies for fuel and fertilizer, as well as liberalizing foreign investment in airlines and retail."
It goes on to talk about lower inflation which could help drop interest rates. You see, falling commodity prices is net positive for the global economy in my opinion. Ironically a boost to the Indian economy due to lower inflation will eventually end up in higher demand for commodities.
There seem to be quite a lot of parallels here with South Africa. Although, where the two economies make their money are very different. Lots of potential but not a very business friendly environment. It is also election year in 2014 for India which should be interesting. My point is that India is still a beast waiting to be woken and when it does, it will be great for global growth. With 17% of the world's population the size and scale is absolutely massive.
Home again, home again, jiggety-jog. Home again, home again, jiggety-jog. Markets are lower here today, quite a lot lower. The Japanese market closed out at a six week low after getting another thrashing. European PMI looks better than expected, but Chinese PMI looked worse than anticipated, at least the HSBC number. Not sure what to make of all this backwards and forwards.
Sasha Naryshkine and Byron Lotter
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