Monday, October 15, 2012

Global Economy

As an investment strategy, “Stay Home” has mostly outperformed “Go Global” this year. It may continue to do so in 2013. However, I’m starting to get cabin fever. It may be time to get out a little bit and see the world. Here is what I am seeing:

(1) China. China’s new leaders, who will be formally appointed at the Communist Party Congress during November, are likely to spend lots of money to revive economic growth when they take charge in March. Before then, the People's Bank of China is likely to avert a hard landing by continuing to ease monetary policy.

The latest data out of China suggest that the country’s economic growth may be bottoming. M2 rose 14.8% y/y during September, up from a recent low of 12.4% during January 2012. The CPI inflation rate, which recently peaked at 6.5% during July 2011, seems to be stabilizing around 2% over the past three months. Exports edged up during September, but have stalled in recent months. On the other hand, September's PPI for industrial products fell 3.6% y/y, the weakest since October 2009.

(2) India. Over the past month, India’s government unveiled a series of reform initiatives long demanded by investors and business leaders frustrated by years of policy inaction in New Delhi. They include lifting the bar on foreign investment in the airline, insurance, pensions, and retail sectors. That’s already pumping up the financial markets. The next step is expected to be a roadmap for cutting the fiscal deficit.

The Bombay Sensex stock price index has rallied smartly on the government’s reform announcement. It is now up 20.8% ytd, about twice as much as the 9.9% increase in the MSCI World index. During September, India’s M-PMI remained flat at 52.8, while the NM-PMI rose to 55.8.

(3) Indonesia. In Southeast Asia’s largest economy, September car sales jumped 28% y/y back to near-record monthly numbers, driven by a rising middle class and low interest rates. Carmakers are expanding their Indonesian production. Their exports surged 58% on an annual basis in the year through August. On the other hand, exports and imports fell the most in three years in August, suggesting weakening third-quarter growth. Yet the World Bank forecasts that Indonesia’s real GDP will grow 6.1% in 2012 and 6.3% in 2013.
The Jakarta Composite stock price index is at a record high and up 12.8% ytd.

(4) Brazil. The Brazilian central bank reduced interest rates for the 10th straight time Wednesday to spark local growth amid concerns about a prolonged global slump. The bank cut its benchmark Selic interest rate by a quarter of a percentage point to a record low 7.25% and signaled the end to a cycle of cuts that started in August 2011. The central bank's rate-setting committee was divided, with five directors in favor of the cut and three directors voting to hold interest rates steady.

(5) Mexico. The IMF estimates Brazil has an economy twice the size of Mexico's at $2.4 trillion, but Nomura’s economists predict that the gap could disappear by 2022 if Mexico grows at the top end of their forecast range and Brazil at the low end. New Mexican President Enrique Pena Nieto aims to lift annual economic growth to 6% by overhauling Mexico's labor market, state-run oil sector, and tax base. Mexico’s IPC stock price index is up 12.4% ytd, well ahead of Brazil’s 3.3% gain.

Today's Morning Briefing: Beantown. (1) The weather in Boston. (2) Blankfein says avoiding fiscal cliff would be very bullish. (3) Second Recovery is underway. (4) Foreclosures at five-year low. (5) Earned income at record high. (6) Rising stock and home prices boosting confidence. (7) Lots of applications to export US oil and LNG. (8) Tax receipts at cyclical high. (9) Time to Go Global? (10) China may be bottoming. (11) “Argo” (+ + +). (More for subscribers.)

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