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China consumes mind-boggling amounts of raw materials
Capital Markets
<p>&nbsp;</p> <p>Over the last 20 years, the world economy has relied on the Chinese economic growth engine more than it would like to admit. The 1.4 billion people living in the world’s most populous country account for 13% of global GDP, which is significant no matter how it is interpreted. However, in the commodity sector, China has another magnitude of importance.</p> <p>&nbsp;</p> <p>Source: Visual Capitalist</p> <p>This story first appeared in ValueWalk<br /> Photo: Stefan Jürgensen</p>
Analysts haven’t been this negative on Emerging Markets since...
Capital Markets
<p>Analysts Haven’t Been this Negative on Emerging Markets Since the Financial Crisis Low in Stock Prices, and that’s Great for Investors!<br /> In simple terms, everyone has moved to the same side of the boat when it comes to expectations about the prospects of emerging market stocks. Not since the financial crisis nadir in stock prices have analysts of EM stocks been so bearish and quick to rerate expectations. Yet, amid all this negativity, there arises a fantastic opportunity for investors of EM stocks. As the famous Warren Buffet axiom states, “Be fearful when others are greedy and greedy when others are fearful”. To say that analysts are fearful would be an understatement. It could be that market expectations for EM stocks have moved to far negative and now could be an opportune time to increase exposure to this hated asset class. Enough commentary, let’s get to the charts.</p> <p>The first two charts below show the sales (first chart) and EPS (second chart) growth expectations for EM stocks. The blue line is the average stock’s growth expectation and the red line is the median stock’s growth expectation. Expectations for the next twelve months of growth have not been this low and falling since the market thought the world was going to implode in 2009.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>The next two charts show the percent of issues with higher sales (first chart) and EPS (second chart) expectations versus three months ago. These charts show for how many companies expectations are improving. The bottom line is that expectations are improving for the smallest percent of companies since the fall of 2008 when Lehman Brothers went bankrupt.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>Surely no one knows what the future holds and that is why investing is a game of probabilities. It seems to us the probability that expectations for EM stocks to be lower in six months time than they are now is slim.</p> <p>© GaveKal Capital</p> <p>This story originally appeared in Advisor Perspectives.<br /> Photo: Joe The Goat Farmer</p>
Daily Scan: Asian shares end the week higher
Capital Markets
<p>Updated throughout the day</p> <p>September 11</p> <p>Good evening everyone. With the Fed keeping the world on the edge of their seats, Asian shares went into risk-off mode once again with only the Shenzhen Composite and Japan’s broader Topix managing to eke out some gains. Here’s how Asia’s largest bourses did this week:</p> <p>&nbsp;<br /> Day<br /> Week</p> <p>Shanghai Composite<br /> +0.073<br /> +1.3%</p> <p>Shenzhen Composite<br /> +0.62%<br /> +3.8%</p> <p>Hang Seng Index<br /> -0.27%<br /> +3.2%</p> <p>Hang Seng China Enterprises Index<br /> -0.63%<br /> +6%</p> <p>Nikkei 225<br /> -0.19%<br /> +2.7%</p> <p>Topix<br /> +0.1%<br /> +2.5%</p> <p>The European markets meanwhile turned mostly negative, with the FTSE 100 slipping 0.2%, the Dax falling 0.5%, and the CAC sliding 0.3%. Since the Fed won’t give its decision until Thursday next week, I doubt anything’s going to change market-wise until then. Here’s what else you need to know:</p> <p>Non-OPEC oil production set to hit 24-year low. We all know that crude oil’s continued fall could mean bad news for the industry, but here’s the International Energy Agency to tell you just how bad it could get: “Oil's price collapse is closing down high-cost production from Eagle Ford in Texas to Russia and the North Sea, which may result in the loss next year of half a million barrels a day - the biggest decline in 24 years.” International Energy Agency </p> <p>Italian industrial output thrashes estimates. Proving how awesome Italians are, industrial output in the nation surged 1.1% in August, nearly double the 0.6% climb analysts have been expecting. Energy output’s 7.1% rise seemed to be the main driver behind the surge, while consumer good added another 1%. MarketWatch</p> <p>Indonesia sends troops to battle smog fires. More than 10,000 troops are being sent to fight fires in southern Sumatra, as smoke makes thousands sick, delays flights and pushes air quality to unhealthy levels in neighbouring Singapore and Malaysia. Channel News Asia</p> <p>Bank of Korea keeps rates unchanged. After slashing rates four times between August and June, the Bank of Korea kept its benchmark Base Rate unchanged this month at 1.50%. The prior cuts were mostly due to the MERS outbreak, which crippled the nation’s economy enough to force a government-backed stimulus package. While they’re not out of the woods yet economy-wise, the BOK “forecasts that the domestic economy will show a trend of recovery going forward.” Bank of Korea</p> <p>Moody’s takes on the SFC. In a closely-watched hearing at the Securities and Futures Appeals Tribunal, U.S.-based Moody’s has locked horns with Hong Kong’s Securities and Futures Commission over complaints that a 2011 report from the ratings agency was “shoddy.” The report was apparently titled “Red Flags for Emerging Market Companies: A Focus O</p>
Daily Scan: Stocks barely end with gains; Dems block Republican Iran disapproval resolution
Capital Markets
<p>Updated throughout the day</p> <p>September 10</p> <p>U.S. stocks had an up and down morning, dipping slightly at the open and rising a bit more midday. The Dow closed with a 0.5% gain, as did the S&amp;P 500. The Nasdaq added 0.8%. Prices for imported goods posted the biggest decline since January last month. Prices were down 1.8%, compared to expectations of a 1.7% drop. Oil gained 4% Thursday, edging close to the $46/barrel mark. The yield on the 10-year Treasury note rose to 2.227%. Don't forget to set your fantasy lineup! The NFL season kicks off tonight.</p> <p>Here is what else you need to know:</p> <p>Senate blocks GOP measure to kill Iran nuclear deal. Senate Democrats voted 58-42 to kill the Republicans'disapproval resolution of President Obama's nuclear deal with Iran. Politico</p> <p>U.S. to "scale up" acceptance of Syrian refugees. President Obama wants to admit at least 10,000 Syrians in the next fiscal year. These refugees would boost the total number of refugees allowed in the U.S. to 75,000 for 2016. CNN</p> <p>New species of human found in South Africa. Scientists have identified a previously unknown species of early human lineage dubbed Homo naledi. Naledi, which means "star" in Sesotho, is a nod to the area where the bones were found. New York Times</p> <p>Three Colombians charged in global money laundering ring. The U.S. is charging the men in laundering billions of dollars of drug trafficking money through bank accounts in China and Hong Kong. Other defendants remain at large. Reuters</p> <p>Died: Former Giants safety Tyler Sash. The 27-year-old professional football player died after being found unresponsive in his home Tuesday. Sash played two seasons for the Giants, including their Super Bowl win, but was cut in August 2013. Foul play isn't suspected, but Sash's death is under investigation. ESPN</p> <p>The Justice Department is asking companies to rat out their employees. Stung by accusations that the top cop in the nation let executives get away with criminal activity in the years leading up to the financial crisis, Justice says it won't consider cutting deals with corporations unless they get names of individuals who promoted allegedly illegal activities. A nationwide memo to prosecutors essentially says it's not enough to prosecute corporations and get fat fines. It's time to get the people who made the corporate decisions. New York Times (paywall)</p> <p>Weak data in China and Japan slap markets. So much for yesterday's soaring optimism. Concerns over China, fueled by producer prices falling for the 42nd month straight, and a surprise drop  in Japanese machinery orders, a gauge for capital spending in the country, helped put Asia's markets in reverse today. The Shanghai fell 1.39% and the</p>
Betting on Japan, Inc.’s recovery
Capital Markets
<p>Japanese stocks have outperformed their peers the past few years, and we don’t think their run is over. Policies to improve profitability, capital use and productivity should provide a stronger foundation for further gains.</p> <p>The run started when the Liberal Democratic Party, led by Prime Minister Shinzo Abe, returned to power in December 2012. Abenomics brought a weaker yen, providing a tailwind to Japanese-based global corporations. It also boosted import prices, helping break the deflationary trend in Japan. As a result, the profitability of Japanese firms, as measured by return on equity (ROE), has recovered to near historical highs (Display).</p> <p>At this point, there are questions as to how much energy Japanese equities have left: whether it’s mixed macro data, worries about China, or uncertain policy direction. Meanwhile, Japanese equities are trading nearly on par with those of other developed markets based on the price-to-forward-earnings ratio, indicating limited potential for further multiple expansion at current earnings levels.</p> <p>So, is it time to trim our overweight to Japanese equities? We don’t think so.</p> <p>Further Gains Require Structural Economic Changes</p> <p>However, we think the next round of outperformance will come from Japan closing its substantial ROE gap versus its global peers. By closing this gap, our research suggests, Japanese companies could generate more than 30% excess earnings growth over the medium term. But narrowing the gap requires fundamental changes in the way businesses operate.</p> <p>Why should this happen now?</p> <p>The current Japanese ROE gap relative to the US is primarily driven by lower operating margins, but we see signs of improvement that could set the stage for progress.</p> <p>Tightness in labor markets. Over the past three years, overall labor participation has improved from 59.4% to 60.0%, but labor is likely to be in shorter supply as it becomes challenging to further increase participation. As labor markets tighten, businesses will need to find ways to better use their workforces.</p> <p>Potential increases in capital investment. One way to improve productivity would be with greater capital investment, and government policy seems to be encouraging it. Meanwhile, thin manufacturing capital investment has left aging equipment. The yen’s decline has also fostered signs that Japanese firms may be bringing manufacturing capacity back onshore. As a result, increased capital spending could help improve productivity over the long term, and create a source of domestic demand in the short term.</p> <p>Government encouragement of improved earnings power. Government reform efforts include the introduction of the JPX-Nikkei 400 Index, featuring companies with high returns on equity, high operating profits and at least two outside directors. Index companies must adopt international financial reporting standards and report earnings in English.</p> <p>The Government Pension Investment Fund has increased its domestic equity allocation, which will use the JPX-Nikkei 400 for passive investment. And the Bank of Japan will include the index in its quantitative easing purchases.</p> <p>Reform measures also include a stewardship code and a corporate governance code, which asks firms to set return-on-capital targets, appoint at least two independent directors, and explain the economic rationale for cross-shareholding. A reduction in the corporate tax rate could als</p>
Daily Scan: Fears return; Asia takes a dive
Capital Markets
<p>Updated throughout the day</p> <p>September 10</p> <p>So much for yesterday's soaring optimism. Concerns over China, fueled by producer prices falling for the 42nd month straight, and a surprise drop  in Japanese machinery orders, a gauge for capital spending in the country, helped put Asia's markets in reverse today.</p> <p>The Shanghai and Shenzhen Composite indices closed down 1.39% and  1,58%, respectively, while the Hang Seng expand its losses in the morning to close down 2.57%. The Nikkei meanwhile - after gaining nearly 8% yesterday on hope Japan would expand its stimulus program - was down 2.7%.  The other Asian markets:</p> <p> Straits Times: -1.37%<br /> Seoul Composite: +1.44%<br /> Jakarta Comp: -0.09%<br /> KLSE Comp: +0.66%<br /> Taiwan Weighted: -0.22%<br /> AS51:-2.29%</p> <p>Here is what else you need to know:</p> <p>Yen falls on stimulus speculation. The Japanese yen fell as much as 0.7% against the dollar today following Kozo Yamamoto’s – one of Shinzo Abe’s closest political allies – calls for more stimulus. The world has been jonesing for more stimulus from the land of the rising sun lately, seeing it as practically needed at this point. Financial Times (paywall)</p> <p>Aussie unemployment falls to 6.2%. Bumps in full-time male and female employment down under helped the Australian unemployment rate drop to 6.2% from 6.3% in August, in line with the Australian Bureau of Statistics’ expectations and probably the only positive news we've had all morning. The majority of the increase came from full-time employment for males, which punched in at 10,100 of the 17,000 jobs added last month. Sydney Morning Herald</p> <p>Chinese core price inflation hits 13-month high. Chinese CPI came in at 2% for August – its fastest rate since July 2014 – versus a 1.6% climb from the month before. It’s still well below the PBOC’s 3% target though, and pork prices – which surged nearly a fifth from the year before – appeared to be the main driver responsible for the increase. Financial Times (paywall)</p> <p>Bombardier rejects offer for railway unit. Canada’s Bombardier, the makers of Learjets and Global Express planes, rejected an offer from the state-owned Beijing Infrastructure Investment Co to buy 60% to 100% of its prized Bombardier Transport unit, one of the world’s largest suppliers of monorail and high-speed trains. SCMP (paywall)</p> <p>The Donald shows up in a Mexican soccer ad. He may be trying to rally the U.S. behind him, but Donald Trump’s controversial remarks on immigration are being used to rally something completely different; the Mexican soccer team. The Mexican team is set to play against the U.S. next month in Cali, and a local TV station has been splicing Trump’s remarks to make it look like the U.S. team is in for a world of hurt. CNN</p> <p>The new iPad Pro is gigantic. Featuring an enormous 12.9 inch screen and an optional keyboard, the new iPad Pro seems to be quite a pivot from the previous models. Wall Street Journal (paywall)</p> <p>RBNZ cuts rates. The Reserve Bank of New Zealand slashed its official cash rate by 25 basis points to 2.75</p>
Daily Scan: Stocks lose Tuesday's gains; Apple rolls out new iPad Pro
Capital Markets
<p>&nbsp;</p> <p>Stocks trimmed practically all their gains after a jobs surveyed revealed the biggest number of job openings in the 15-year-old series. According to the JOLTS report for July, released Wednesday, job openings surged to 5.75 million from 5.32 in June. Job openings are up 22% year-over-year. Quits are up 6% year-over-year and are likely to expand as workers become more confident that they can find new jobs. The good news on employment may embolden the Fed to take the gigantic, ginormous, improbable step of raising interest rates one whole quarter of a percentage point at its meeting next week. So now we know what Wall Street finds really scary: 25 basis points. The Dow closed down 1.45%. The S&amp;P 500 lost 1.4%, and the Nasdaq fell 1.15%. Oil slipped too, falling below $45/barrel.</p> <p>Here is what else you need to know:</p> <p>Hey, Siri, wassup?  Apparently, a lot. Apple revealed its new giant iPad Pro, as well as updates to the Apple Watch and the new iPhone 6s and iPhone 6s Plus. Rolling out with the super-cool $799 iPad Pro is the $99 Apple Pencil. We promise, it's way better than a No. 2. ABC News</p> <p>Died: BlackRock co-president Charles Hallac. Hallac, a 27 year BlackRock veteran, has died after a four year battle with cancer. Hallac was responsible for developing the Aladdin investment operating system for the asset manager. Reuters</p> <p>United Airlines hangar collapsed at Newark Liberty International Airport. Several workers were injured. The collapse was triggered by workers prepping the building for demolition. Talking Points Memo</p> <p>Mortgage applications drop 6.2% as refinancings dry up.  For the week ending September 4 the Mortgage Bankers Association said higher rates prompted a 10% drop in refis.  New home purchase applications rose 1% week-over-week and are 41% year-over-year. CNBC</p> <p>Hillary Clinton apologizes for using private server as Secretary of State. The Democratic candidate for president said in a televised interview: "That was a mistake. I'm sorry." Clinton has dodged apologizing and her standing in the polls has suffered. She now lags behind rival Bernie Sanders in New Hampshire. ABC</p> <p>European Commission President announces plan for 120,000 migrants. Jean-Claude Juncker is proposing a mandatory quota system that would force member countries to take in asylum seekers. BBC</p> <p>World Bank chief economist warns Fed to delay rate rise. Chief economist Kaushik Basu has warned the US Federal Reserve that it risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing. Financial Times (paywall)</p> <p>China leader firms up plans for US state visit. President Xi Jinping will </p>
Daily Scan: Global rally continues as U.S. stocks gain 1%; Juncker proposes solution to refugee problem
Capital Markets
<p>Is the worst behind us? Asia surged overnight again, bringing the Shanghai Composite 10% above its August low. The U.S. markets gained about 1% at the open, with the S&amp;P 500 now standing at 1988 Wednesday, continiuing a global rally. And, after days and days of speculation, we will learn Wednesday afternoon what Apple is planning for its TV and next generation of phones at its "Hey, Siri" event. Overall, look for incremental changes. Maybe a bigger iPad, a zippier phone, a new payment system. Tune in for online coverage at zillions of media outlets at 1 p.m. ET.</p> <p>Here is what else you need to know:</p> <p>Mortgage applications drop 6.2% as refinancings dry up.  For the week ending September 4 the Mortgage Bankers Association said higher rates prompted a 10% drop in refis.  New home purchase applications rose 1% week-over-week and are 41% year-over-year. CNBC</p> <p>Hillary Clinton apologizes for using private server as Secretary of State. The Democratic candidate for president said in a televised interview: "That was a mistake. I'm sorry." Clinton has dodged apologizing and her standing in the polls has suffered. She now lags behind rival Bernie Sanders in New Hampshire. ABC</p> <p>European Commission President announces plan for 120,000 migrants. Jean-Claude Juncker is proposing a mandatory quota system that would force member countries to take in asylum seekers. BBC</p> <p>Stimulus promise drives Japan's Nikkei  7.7% higher. The index is back from a seven-month low after Prime Minister Shinzo Abe told a Bank of America-Merill Lynch conference in Tokyo Wednesday that he pledged to cut corporate tax rates by a least 3.3% next year. AP</p> <p>World Bank chief economist warns Fed to delay rate rise. Chief economist Kaushik Basu has warned the US Federal Reserve that it risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing. Financial Times (paywall)</p> <p>Bittersweet victory for Serena. On her way to making history on the professional tennis circuit, Serena Williams needed to defeat her sister and "best friend" Venus -- which she did at the U.S. Open in three sets. ESPN</p> <p>UK suffers worst drop in exports in five years. Weak demand  and a drop in car manufactuing were behind a surge in the trade deficit to £3.4 billion pounds in July from  £2.6 billion in June. The Guardian</p> <p>Southeast Asian reserves shrinking rapidly. The lowering of the yuan's reference rate and expectations of a U.S. interest rate hike has spurred sell-offs of South Asian currencies.  From July to August, Malaysia and Indonesia saw the steepest drops in their currency reserves. Nikkei<br /> China leader firms up plans for US state visit.</p>
Tesco sale is Asia’s biggest private-equity Deal
Capital Markets
<p>Private-equity firm MBK Partners sealed an over $6 billion deal for U.K. retailer Tesco’s South Korea business, the biggest-ever in Asia, including debt. WSJ's Rick Carew looks at why Tesco sold and why MBK wants to own the retailer, known as Homeplus. Photo: Reuters</p> <p>This video originally appeared in the WSJ<br /> Photo: Gordon Joly</p>
That was not a crash
Capital Markets
<p>Following the market decline of recent weeks, the most reliable valuation measures we identify now project average annual nominal returns for the S&amp;P 500 of about 0.5% in the next 10 years. On a broad range of historically reliable valuation measures (see Ockham’s Razor and the Market Cycle) the May peak in the S&amp;P 500 reached valuations averaging about 114% above run-of-the-mill historical norms – more than double the valuation levels that have historically been associated with the 10% average expected market returns that investors have enjoyed over the long-term. At present, those measures have retreated to about 92% above historical norms.<br /> Keep in mind that low interest rates don’t raise the estimated 10-year expected return on stocks from the current 0.5% level. Low interest rates only make the low expected return on stocks somewhat more “acceptable” because the alternatives are similarly dismal. The Federal Reserve’s policies of zero interest rates and quantitative easing have done nothing but to encourage yield-seeking speculation, bringing valuations to extreme levels, and leaving prospective future investment returns equally depressed.<br /> Those who assert that high equity valuations are “justified” by low interest rates are actually (and probably unknowingly) saying that 0.5% expected returns on equities over the coming decade are a-okay with them. But it’s critically important to understand that while low interest may help to explainwhy current market valuations have been driven to obscene levels, low rates do not change the relationship – the correspondence – between elevated valuation levels and dismal subsequent long-term market returns.<br /> The chart below shows the relationship between the most reliable valuation measure we identify (MarketCap/GVA) versus actual subsequent S&amp;P 500 total returns over the following decade. The current level of valuations is associated with a likely range of 10-year returns between about -3% and +4%, with an average expectation of 0.5% annually.</p> <p>The following chart shows the same data from a time-series perspective. Try the identical analysis with other popular valuation indicators and you’ll see why we rely on MarketCap/GVA and similar variants such as price/revenue, market cap/GDP and our margin-adjusted version of the Shiller P/E. We see all kinds of valuation metrics trotted out by analysts as if they’re meaningful. It’s only when investors examine the historical data (or live through the consequences of failing to do so) that they realize how little relationship many popular valuation metrics have with actual subsequent market returns. For our part, we insist on evidence. It makes us much less fun to hang around with at parties if the conversation turns toward the markets.</p> <p>Market conditions will change. Look at every market cycle in history, and you’ll see that prospective market returns have always approached 9-10% or more in every market cycle – even when interest rates were similar to current levels (prior to the mid-1960’s). The best opportunity to boost investment exposure is at points in the market cycle where a ma</p>