Just a ‘feel good’ global economy?

World Economic Outlook Update, January 2018
January 2018
Brighter Prospects, Optimistic Markets, Challenges Ahead
Global economic activity continues to firm up. Global output is estimated to have grown by 3.7聽percent in 2017, which is 0.1 percentage point faster than projected in the fall and 陆 percentage point higher than in 2016. The pickup in growth has been broad based, with notable upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 have been revised upward by 0.2聽percentage point to 3.9 percent. The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes … for more go to http://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018 

Just a ‘feel good’ global economy?

KUALA LUMPUR (January 2018): Is there a “feel good” global economy for 2018?

Is the worse over and the global economy is really growing? This is of cause the million-dollar question for veryone.

Blackstone equity group chairman and chief executive Stephen Schwarzman reportedly told the media that “everybody’s making money, and the clouds on the horizon don’t look very threatening”.

But he also cautions that the risks are just too great with asset prices already so high.

And, there’s also a report lamenting that China bank stocks are rallying too fast for comfort.

In Malaysia, The Star Online posted a report that record funds were flowing into emerging markets amid a weakening Greenback that’s fueling a hunt for yields and driving money into equities.

Whatever the speculations and assessments, I Love Malaysia-China Silk Road has reproduced the following three news reports for readers to digest:

"The global economy is doing great. Be afraid
Saturday, 27 Jan 2018
by james mackintosh

Schwarzman: Everybody’s making money, and the clouds on the horizon don’t look very threatening. —AP

Cognitive dissonance is in the air. This year’s mental split allows finance chiefs to believe that everything’s bullish, the world economy is finally in synchronised growth mode and markets are quite rightly on fire – while worrying that it is all just too good to last.

“Everybody’s making money, and the clouds on the horizon don’t look very threatening,” said Stephen Schwarzman, chairman and chief executive of private equity group Blackstone . “That’s enough to create a positive environment.”

Schwarzman is bullish on the economy, but like many others isn’t going all-in; the risks are just too great with asset prices already so high. Geopolitics and trade are the fears most often aired at the World Economic Forum this week, while an end to the easy money from central banks has a few concerned. Another danger comes from big investors buying into a rally they don’t really believe in, leaving them more tempted to race for the exit if there is any negative surprise.

“The consensus here is very, very upbeat,” said Michael Sabia, who runs US$300bil as CEO of Caisse de dépôt et placement du Québec. “This is a great period we’re in, but enjoy it while it lasts. I don’t think it will go away in a hurry, but over the long term the laws of gravity will come back.”

The twin questions are how far equities could rise before falling back, and when it might happen. Scott Minerd, chief investment officer at Guggenheim Partners, said he expects the Federal Reserve will increase rates four times this year instead of its forecast of three, and a recession is a danger next year as higher rates hit indebted corporate issuers.

But in the meantime, he says equity markets have “all the trappings of a mania” that could take the S&P 500 to 3600 this year, up 27% from 2839 on Thursday.

Minerd’s solution is to buy long-dated bonds to protect against the economy falling back, while buying cheap call options to capture a rise in share prices.

A simpler strategy can be followed by those who think things will probably be fine, but that there is a serious risk of Fed increases derailing the market. Buy banks and insurers, avoid technology and growth stocks that will be hurt by higher discount rates. Banks should do well in a growing economy and should benefit from rising interest rates and bond yields, at least until money gets so tight it hits corporate creditworthiness.

Nick Moakes, chief investment officer at British foundation Wellcome Trust, says he is “subtly altering the shape” of the trust’s £23bil portfolio after riding the market boom for the past nine years.

That means taking a little of the profit on the trust’s hefty technology-company holdings, and liking banks – in part because others will start buying them too to hedge against inflation risk.

“You would expect banks to become very well-owned,” he said.

The problem with this thesis, of course, is that it might already have happened. US bank stocks are up a quarter since the start of September, handily beating the market. Yet, for the past three years – broadly since investors started to believe that their capital problems were fixed – they have been an almost perfect leveraged bet on falling 10-year Treasury yields. Banks outperformed the wider stock market when bond yields rose, and underperformed when they fell.

Still, inflation and higher rates are minority concerns.

The predominant concern – aside from whether the next-door party might be better – is that no one is worried.

“The complacency is what’s really alarming,” said Martin Gilbert, co-CEO of Aberdeen Standard Asset Management. “Everyone’s worried about not being worried.”

China bank stocks are rallying too fast for comfort

Saturday, 27 Jan 2018
by shuli ren

Uptrend: Major Chinese lenders are leading the record-breaking 19-day run in Hong Kong’s H shares. — AFP

Bankers get a bonus and I have a job because we’re still in a bull market.

But the fast and furious rise in China bank stocks is making even this Hang Seng Index bull nervous.

Recall the mainland’s stock frenzy in the spring of 2015. Lenders were the laggards then, but once they started climbing, the rally soon went belly up.

Now, major lenders are leading the recordbreaking 19-day run in Hong Kong’s H shares.

Investors didn’t even flinch when the government this month slapped a 462 million yuan (US$72mil) fine on Shanghai Pudong Development Bank Co. for hiding nonperforming assets through 1,493 shell companies.

Are China’s largest banks getting safer or is this the beginning of the end.

Analysts are betting these institutions will emerge as winners of China’s deleveraging campaign.

Faithful followers of policy, the big four Industrial & Commercial Bank of China Ltd, Bank of China Ltd, China Construction Bank Corp and Agricultural Bank of China Ltd have stayed away from shadow banking, the primary target of the clampdown.

In the first half of 2017, the quartet’s exposure to off-balancesheet lending was a negligible 2%, versus 17% for other listed banks, Deutsche Bank AG estimates.

In addition, a reduction in the reserve ratio for lenders that engage in inclusive financing kicked in on Jan 1.

As I argued at the time of the October announcement, this cut was a largescale monetary loosening that will free up big banks’ deposits for new loans and boost their profits.

Indeed, the one month Shanghai interbank offered rate has come down to 4.1% this month from as high as 4.9% in December.

But rosy expectations are already baked in. The shares are rallying so fast that even analysts, who have been raising their price targets, no longer see any upside.

Let’s face it: Much of the strength in bank stocks has more to do with flows than fundamentals, and we can thank Donald Trump for that.

The greenback seems to be going only one way straight down as administration figures from the president to Treasury Secretary Steven Mnuchin extol the virtues of a weak dollar.

That’s making Hshare bank stocks, with their yuan denominated earnings and generous dividend yields of 3% to 4 %, suddenly more attractive to hot money from the mainland.

After a 6.9% rally last year, the yuan has appreciated 2.8% against the dollar in 2018 to reach its November 2011 high.

One argument that sector analysts like to make is that if a bank’s badloan book is no longer a concern, the relevant valuation metric should shift from pricetobook to priceto earnings.

While Japan’s banks are the world’s cheapest by book value, China’s large caps are by far the most unloved by earnings standards.

This is false comfort, because any new regulations can cause profits to tank.

Beijing has been talking about deregulating deposit rates for years, and this threat is as real as ever.

As China opens its doors to foreign banks, competition for consumer deposits will only go up, not down.

The cheap funding enjoyed by large banks currently 0.3 % for demand deposits may soon disappear.

When that day comes, their margins will look a lot less comfortable.

Sure, it’s not pleasant to bring up the 2015 bust during bonus season.

But after you’ve had a “meltup,” to use a favorite word of strategists, a meltdown may be unavoidable.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Record funds flow into emerging markets

Saturday, 27 Jan 2018
by fintan ng

Weaker US dollar and hunt for yields continue to drive money into equities

There is optimism in the air, at least that’s what’s making investors pour money into equities and move out of bonds, where yields have risen.

According to Bloomberg, citing a Bank of America Merrill Lynch report, investors bought US$33.2bil of equities in the week to Jan 24, further stoking a global stock rally.

Global economic growth momentum, US tax reforms and rising corporate profits are just some of the reasons why investors are bullish on stocks.

For equities to still attract the sort of flows it’s attracting, they must have better returns, especially when compared to investing in high-grade, lower risk and very liquid government bonds like US Treasuries.

The US tax overhaul will boost corporate earnings.

In fact, companies over there are planning to reward their employees with higher pay while the listed ones are also looking to reward their shareholders.

The most recent data show that low unemployment, higher wages and business investments continue to drive the US economy with analysts indicating that plans to spend on infrastructure will boost growth.

The US corporate earnings season has begun and indications are that its looking good.

That is being reflected in the US equity indices.

Year-to-Jan 25, the Dow Jones Industrial Average (DJIA) is up 6.77%, the S&P 500 has risen 6.20% and the technology-heavy Nasdaq has gained 7.36%.

S&P 500 companies are expected to see earnings rise well above 10% for the last three months of 2017 while technology companies are looking at double-digit percentage growth for profit and revenue.

Investors can be forgiven for their exuberance when taking into account that profit at S&P 500 companies grew 15.5%, 10.8% and 7.1% in the first, second and third quarters respectively.

And its not just US companies, European companies are also looking at a better year ahead after earnings recovered last year.

Analysts say margins are improving while, especially for the eurozone, the economic outlook looks good.

Private consumption is driving growth, the jobless rate is declining while a tight labour market is pushing wages higher and boosting household incomes.

Emerging markets bonanza

A weaker US dollar and persistent hunt for yields continue to drive funds into emerging markets with fund investors’ emerging market exposure reaching the highest level since April 2015, says the latest report from the Institute of International Finance.

Confidence in a positive spillover effect into emerging markets from the mature markets have also been a driver of these flows as many emerging-market economies are tied into the supply-chain that ultimately feeds into the mature markets’ consumers.

Corporate earnings should improve with better demand from these consumers.

“Emerging market fund flows amounted to some US$35bil since mid-November – a rise of more than 50% compared to the previous two months. Inflows have been particularly strong in recent weeks. Over the first three weeks of the year, funds investing in emerging market bonds and equities have attracted US$8.8bil and US$11.5bil, respectively,” it says.

The flow of funds has supported emerging market equities and currencies. A Jan 24 Maybank Investment Bank Research report show that foreigners remained net buyers of Malaysian equities in the first three weeks of January, at RM2.4bil, after buying RM900mil worth of equities in December.

But its not just equities, foreigners were also net buyers of Malaysian bonds, which saw RM2.7bil in net inflows last month after RM6.7bil in net flows in November as they wrote on the momentum of ringgit strength and the widely anticipated interest rate hike by Bank Negara, which was announced on Jan 25.

Maybank’s fixed-income research team expects foreign flows to remain positive in the local bond market despite the maturity of RM2bil worth of Malaysian Government Securities (MGS) this month. The team believes that the risk of maturity-driven foreign selling in the domestic bond market is reduced, citing net foreign buying of RM6.6bil between September and October despite RM24.8bil of MGS maturing in the same period.

The yield differentials also remain attractive for bond investors, with 10-year MGS closing with a yield of 3.92% on Jan 25 compared to similar duration US Treasuries, which closed at 2.63%. The difference in yield is 129 basis points.

Technical analysts see the local bourse continuing the positive trend, with the benchmark FBM KLCI gaining 8.82 points on Jan 25 supported by bank stocks and rising another eight points to end the week at 1,853. The index is just 40 points from all-time high of 1,896 that was achieved in July 2014.

Maybank’s forex research team also expects the ringgit to strengthen against the US dollar to 3.95 by the end of this year and average 4.05 for the whole year, after ending 2017 at 4.05 and averaging at 4.30.
A giant panda plays in snow at Xi'an Qinling Zoological Park at the foot of Qinling Mountains in Xi'an, capital of northwest China's Shaanxi Province, Jan. 7, 2018. (Xinhua/Gou Bingchen)
China's economic growth remains solid: World Bank

Source: Xinhua| 2018-01-10 11:02:15|Editor: Yang Yi
LONDON, Jan. 9 (Xinhua) -- Growth in China remained solid throughout 2017 and its growth slowdown was well managed, the World Bank (WB) said on Tuesday. China's trade flows recovered markedly in 2017, with tighter enforcement of capital flow management which "helped ease capital outflows and exchange rate pressures and reverse a reduction in foreign reserves," WB said in its report "Global Economic Prospects" published Tuesday evening. In the latest report, the bank forecast China's annual economic growth in 2017 at 6.8 percent, a two-basis point increase on its forecast six months ago. "Currently the growth slowdown in China is very well managed. It is very steady and gradual and the authorities have managed to calibrate it properly," Franziska Lieselotte Ohnsorge, manager of development prospects group at WB, told Xinhua on Tuesday afternoon … for more, go to http://www.xinhuanet.com/english/2018-01/10/c_136884677.htm