Posts Tagged ‘United States’

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When was the last time you had a pay rise? Many people might answer that question by saying “about five years ago.” Envy the Chinese, or Poles, or Mexicans, or Indians. According to PwC, they are likely to see their wages shoot up. This is set to be a very important development, with implications for investors and businesses seeking new opportunities. But maybe workers in the west don’t need to be too envious, the pay gap will still be pretty enormous. It’s a very important trend all the same.

Between now (2013) and 2030, real wages in the US and the UK are expected to rise by about a third. Let’s hope that’s right – relative to what we have seen over the last half decade that would be a result. But over that same time frame, average wages in India could more than quadruple in real dollar terms and more than triple in the Philippines and China.

Let this chart do the talking:

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So what are the implications? First of all see the expected rise in wages across these countries in the context of re-shoring. See: Is manufacturing coming home? It will clearly provide the impetus for companies re-shoring their manufacturing closer to where most of their customers are.

What we may see, as wages rise in China, is not only more manufacturing in home territories, but nearby too. Opportunity, as they say, knocks for Poland and Mexico.

Looking further ahead, PwC says places such as Turkey, Poland, China, and Mexico will therefore become more valuable as consumer markets, while low cost production could shift to other locations such as the Philippines. India could also gain from this shift, but only if it improves its infrastructure and female education levels and cuts red tape.

From a corporate/investment point of view, who will be the winners and losers? PwC reckons western companies who may emerge as winners will include retailers with strong franchise models, global brand owners, business and financial services, creative industries, healthcare and education providers, and niche high value added manufacturers.

As for losers: well, watch mass market manufacturers, financial services companies exposed in their domestic markets, and for companies that over-commit to emerging markets without the right local partners and business strategies.

© Investment & Business News 2013

 

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It is the largest corporate deal in history. Vodafone is selling its 45 per cent stake in Verizon Wireless to the Verizon parent company for $130 billion. Management at Verizon says the deal will prove transformational for the US company, but on the whole most comments across the internet suggest markets are worried about the level of debt that Verizon will be taking on. As for Vodafone, shareholders are delighted. Even UK plc should get a nice boost from the deal – although the tax man won’t make much. In fact the reason why both companies are looking interesting can be summarised by two letters, or if you want to make it even more interesting, add a further two.

Vodafone is getting $59.9 billion in cash, $60.2 billion worth of shares in Verizon – worth around 30 per cent of the company – and Verizon’s stake in Italy’s Omnitel. The plan is for Vodafone’s shareholders to get $23.9 billion of the cash, and the Verizon shares. The Inland Revenue will get around $5 billion.

Verizon is raising the money for the cash component of the deal largely via debt. The timing here is important. Right now interest rates are low, and the US firm should not have any major problems raising the necessary at a low interest rate. If it had waited longer, what with the Fed apparently in tightening mood, the interest payments on the resulting debt may have been prohibitive to the deal.

It begs the question: does this idea suggest a bubble? Let’s face it, mega M&A deals often do suggest a bubble. Remember AOL and Time Warner before the dotcom crash? Or if you want to go back further, remember when Saatchi and Saatchi tried to buy the Midland Bank just before the market crash of 1987?

But then again, there are differences this time.

The trend at the moment is towards bundled packages, fixed line and mobile deals. Both Verizon and Vodafone can now focus on building up their networks in their respective territories. In the case of Vodafone, Europe, emerging Europe and Africa provide opportunities – which is why Vodafone no doubt welcomes the Omnitel shares.

But it’s 4G that makes this deal more interesting still. It is 4G that has the potential to be transformational. Up to now, logging onto the internet via 3G was of questionable worth; the speed was just too slow, and unreliable. Some surveys have shown that many users are not that interested in 4G, but these surveys count for very little.

What the end user cares about is what he or she can get. They don’t care if they have 3G, 4G or 28G, but they will care if all of sudden they can get sports content on the move, or they can take part in video conferences when out about and about. As for social media, 4G will make video over Facebook more popular. Users will be willing to pay more for this. The two letters that make this even more interesting are 5G. Samsung says it will have 5G technology available at mass market prices before the end of the decade, at speeds roughly 1,000 times faster than 3G.

Vodafone itself may now be vulnerable to takeover. But in both Europe/Africa and the US the potential represented by 4G and 5G will enormous. In the US Verizon, and over here Vodafone (or maybe its new owner), will have an opportunity to convert this opportunity into big bucks.

Vodafone has already agreed to licence football coverage from BSkyB for use over its 4G Network, but expect much bigger things than that to follow.

© Investment & Business News 2013

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Asia is in crisis mode. Europe, or so it appears, is in recovery mode. In Asia we are set to see a re-run of 1997, or so they say, when Asia suffered one very nasty crash. In Europe years of pain are set to pay dividends, or once again so they say. Yet, look beneath the surface and things look different. Asia today is nothing like Asia in 1997. Parts of Europe on the other hand do.

Déjà vu. We all get it from time to time, but presumably it is an illusion. It has been theorised that we may get that feeling of that having done or said something before, because our subconscious can perceive something before our conscious. Déjà vu when applied to Asia may be an illusion too.

At the moment many are trying to draw a lesson from the 1990s. In 1994, the US Federal Reserve began a cycle of tightening monetary policy. As US interest rates increased, money flowed from the so-called tiger economies of South East Asia into the US. The 1997 Asian crisis resulted. The IMF stepped in. Some countries, that had previously seemed to be on an unstoppable road to riches, suffered a very nasty recession/depression.

Many fear a repeat of this today. The Fed is set to tighten. The biggest victim to date has been India. Brazil, Turkey and Indonesia have also seen sharp currency losses. Indonesia’s central bank has responded by increasing rates four times in just a few months. Don’t forget, however, that despite the severity of the 1997 crisis, within a short time frame output across South East Asia had passed the pre-1997 peak. It will be like that again. Indeed Indonesia, perhaps along with the Philippines, is one of the most interesting territories in the world right now – from an investor’s point of view that is. This time around savings rates are higher in South East Asia, while external debt – especially in the case of Indonesia, the Philippines and India – is relatively modest.

Contrast this with what is happening in the euro area, where many countries in the region are facing the tyranny of a fixed exchange rate, which is causing the recession/depression to drag on and on.

But the latest Purchasing Managers’ (PMIs) Indices relating to Europe look promising. The PMI for Spain hit a 29 month high, for Italy it was at a 27 month high. Ireland’s PMI was at a 9 month high. For Greece the story is sort of better still; the PMI is now at a 44 month high.

However, the Greek PMI still points to recession. In Spain, Italy and Ireland the growth looks only modest. Just remember that these countries have massive levels of unemployment – especially in Spain and Greece. For them to cut government debt to the levels required, they have to impose austerity for years and years.

And just consider what might happen, if the markets expect an even higher return on the money they lent to troubled Europe as rates rise in the US.

The markets are panicking over Asia. They should perhaps be looking towards Europe.

© Investment & Business News 2013

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The threat to quantitative easing – or QE – is like a nuclear deterrent. If rates are forced up by the markets, we will use QE, suggests the Bank of England, and therefore there is no need for it, as markets price in what might happen if they don’t heed the bank’s words. That is the theory. It is as if Mark Carney bestrides the banking stage, with his finger always near the red button marked QE, and as a result the markets dare not release their venom, for fear that they will be caught out by detonation. The reaility seems quite different, and yesterday Mark Carney had another go; putting on his poker face and staring at the markets: “Go ahead,” he seemed to be saying, “make my day.” Alas, the markets are still not buying it.

The markets have been pushing up yields. The yield on UK government ten year bonds has risen from a low of around 1.5 per cent a year ago, to 2.8 per cent at the time of writing. The Bank of England says rates are going to stay low until 2016, but the markets are far from convinced.

It is presented as bad news but actually it may be quite the opposite. The Bank of England says rates may rise once unemployment falls to 7 per cent, providing inflation does not show signs of rising sharply. The markets are saying they think this will happen in 2015; the Bank of England is saying 2016. So to try to convince the markets, Mark Carney has to try to talk down the prospects of the UK recovery without – and get this for an impossible mission – dampening confidence.

Yesterday Mark Carney spoke. In fact he was speaking at the East Midlands Conference Centre. So that’s quite a journey for Mr Carney, from Canada to the East Midlands Conference Centre – whatever next, the Andromeda galaxy perhaps?

Give the new governor at the Bank of England credit, he was transparency itself. He said: “Our forward guidance provides you with certainty that interest rates will not rise too soon. Exactly how long they stay low will depend on the progress of the recovery and in particular how quickly unemployment comes down. What matters is that rates won’t go up until jobs and incomes are really growing.” He also said: “We will have to see the rate of unemployment, currently 7.8 per cent, fall at least to a threshold of 7 per cent before even beginning to consider whether to raise Bank Rates.” Note that: even considering raising rates.

He then went at great lengths to spell it out: getting unemployment down to 7 per cent will be tough. So why then are markets pushing up rates? Mr Carney said one possibility is that: “Markets think that unemployment will come down to 7 per cent more quickly than we do. Since the aim of our policy is to secure recovery as quickly as possible, that would be welcome. But policy is built not on hope, but on expectation. And we estimate there is only a 1 in 3 chance of unemployment coming down that quickly.”

So note that: he is saying there is a one in three chance that rates will rise before 2016.

Finally, he made a reference to the US. When the Fed revealed plans to start reducing QE soon, many assumed the Bank of England would follow – leading to yields on bonds rising, and fast. You may be interested to know, that for the last three months, the yield on US government bonds has been higher than the UK equivalent. This changed this week, however, as markets rushed to safety over fears of a Syrian conflict escalating. On the subject of US and UK rates, Mr Carney said: “While much has been made of the special relationship between the US and UK, it is not so special that the possibility of a reduction in the pace of additional stimulus in the US warrants a current reduction in the degree of monetary stimulus in the UK.”

So it’s all pretty clear. The Bank of England has no plan to up rates soon. The markets responded by pushing up market rates. Soon after Mr Carney sat down yesterday, the yields on UK government bonds rose.

The markets are not buying it. Carney may yet be forced to push the ‘more QE button’ after all – it is just that the decision is not just his. Carney has a politburo – or a Monetary Policy Committee – that must vote to extend QE. And the markets don’t believe Carney’s colleagues will allow him to press the button.

© Investment & Business News 2013

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There are almost as many opinions as there are Chinese. Some say the Chinese growth miracle is at an end. Others see a temporary lull. Others still, point to demographics and see problems ahead. Yet others say we are confusing western culture with that of China; that it is unstoppable. Some go even further and say that China – via its system of central control – has been deliberately manipulating a system and it will soon reign supreme over the global economy. Or to put it another way: some say ‘this time it is different’, and although China portrays many of the hallmarks of a bubble, it is just different from the West, while others say the claim that ‘this time it is different’ is always – and without fail – a sign that things are set to come very badly unstuck.

You may have picked up on the irony. After 1989, the consensus seemed to be that capitalism had won; that any system of central control was doomed to fail. Now there seems to be a view held by many that China is unstoppable precisely because it has so much central control that its state can force through reforms and regulations that western governments can only dream of.

This view is almost certainly wrong. For one thing, to argue that China is unstoppable because of its central control appears to be ignoring the lesson of the history of the last half of the 20th century. For another thing, it is debatable how much power the Chinese government really has. China is a massively complex country, and while Beijing may issue directives on how things must be done, the extent to which they are followed across the country is open to debate. In any case, China’s government is terrified of social discontent. For the country’s government there is always the fear of how the people will react if the government mismanages the economy.

This fear of popular discontent can often stop the government from doing precisely the things it should do for longer term prosperity. Take as an example its policy regarding its currency – the yuan. The US government is screaming at China to let the yuan trade freely. Many US politicians blame a cheap yuan on just about all of the US ills. They are surely wrong, but there is no doubt that if the yuan were to rise, US exporters would benefit, but how much is open to debate? But what people often overlook is that there is very strong evidence to suggest that China too needs a more expensive currency.

A consequence of China’s currency policy has been too low interest rates, which has all kinds of undesirable consequences – among them a credit bubble, too much emphasis on investment, and there appears to be evidence that low interest rates have led to Chinese companies paying out lower dividends, which has helped to accentuate imbalances in the economy.

Part of China’s problems can be dated back to 2008, when the West hit the crisis button. China responded with a massive stimulus of its own. It kept growing during the worst days of 2008 and 2009 but at what cost? According to the IMF, in 2008 China’s money supply jumped 30 per cent – and that is ironic. While China was accusing the West of debasing its currencies via QE, and lecturing the US on living within its means, China began to apply the kind of policies that got the West into its mess in the first place.

Then there is credit. In 2008 total outstanding credit in China was 130 per cent of GDP – a level that had pretty much been unchanged for several years. Now the ratio is at 187 per cent – that was a massive hike for just half a decade. The IMF has said that when a country sees credit increase by 3 per cent of GDP or more in a year, there is a good chance that a crisis may follow. Yet In China the rate of credit growth dwarfs what the IMF might refer to as the danger level.

For China corporate sector debt is the real danger. This has risen from just over 20 trillion yuan in 2007 to over 60 trillion in 2012.

This may all sound like western cynicism, but just remember it was the man who until last year was China’s premier – Wen Jiabao – who described China’s economy as, “unstable, unbalanced, uncoordinated, and unsustainable.”

It is not all woe, however. Recent anecdotal evidence such as the latest Purchasing Managers’ Indices, and data on freight transport, electricity output and volume of cargo all point to China’s economy seeing a mild pick-up. It is not going to see growth in excess of 10 per cent again for a while – if ever – but the recent data is consistent with growth of around 7.5 per cent, which is much better than many had warned.

The pick-up may be occurring because once again China is implementing short-term policies to push up growth via the very things that it has too much of anyway – namely investment, government spending, credit. But with signs that the US economy is at last on the mend, it may be possible for China to tighten up monetary policy allowing the yuan to rise, without taking too big a hit on exports.

Looking further forward, what China really needs is higher wages. Well this is happening. McKinsey has forecast that by 2022, 75 per cent of China’s urban workers will earn between $9,000 and $34,000 – a level that sits half way between current levels in Italy and Brazil. To put this figure in context, in 2000 just 4 per cent of Chinese urban workers had earnings falling within that band. McKinsey also forecasts that by 2022 urban income will double from current levels. These are precisely the developments China needs.

Then there is education. The OECD measures pupil skills in reading, numeracy and science, in a test known as PISA. The BBC recently quoted Andreas Schleicher, a leading figure behind these PISA tests, saying there are signs that China is closing – if it has not already closed – the education gap with the West. Shanghai has excelled, but said Mr Schleicher: “What surprised me were the results from poor provinces that came out really well. The levels of resilience are just incredible.” He said that he gets the impression China is investing in the future. Unlike the US, there are indications of a high degree of education equally between rich and poor.

China’s next big challenge is how it can manage being a middle income country. Over the last half a century only a handful of countries managed that transition. Many saw rapid growth, but then stopped before income levels had reached anything like western levels. Will China be one of those rare successes?

It does have one major hurdle to climb, however, and that is demographics. According to the UN, the population of China aged between 15 and 59 is set to fall by 7 per cent between 2010 and 2030. The policy of one child per family is about to be relaxed, but even so, many Chinese couples don’t want more than one child. In any case, even if the birth rate shot up overnight, it would take the best part of two decades before this showed up in the work force.

Associated with demographics is the question of the so-called Lewis Turning Point – a point familiar to economists – when a country runs out of workers to migrate into urban areas.

Let’s finish with what the IMF says on this subject: “Within a few years the working age population will reach a historical peak, and will then begin a precipitous decline. The core of the working age population, those aged 20–39 years, has already begun to shrink. With this, the vast supply of low-cost workers—a core engine of China’s growth model—will dissipate, with potentially far-reaching implications domestically and externally. The reserve of unemployed and underemployed workers (which is currently in the range of 150 million)—will fall to about 30 million by 2020 and the LTP [Lewis Turning Point] will be crossed between 2020 and 2025.”

For more see:

IMF: Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? 
Trading Economics: China Labour Costs 
Ernst and Young: China’s productivity imperative 
FT: China’s debt in charts
McKinsey: Mapping China’s middle class 

© Investment & Business News 2013

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You may have heard of Solomon Asch. He was the psychologist who helped to introduce us to the idea of group compliance. In his famous experiment, subjects were handed two pieces of paper. On one was drawn a line; on the other three lines. One of the lines on the second sheet was the same length as the line on the first; the other two lines were obviously different.

Subjects were asked to identify which line on the second sheet was the same length as the line on the first. It was an easy test, and nearly all subjects got it right.

Then he played a trick on them. Subjects were put into a group situation. Unknown to them, the rest of the group were actors, and each actor deliberately pointed to the wrong line. It is not hard to imagine how the subjects reacted; their sense of panic or of self-doubt. In fact, in the original Asch experiment no less 74 per cent of those who took part complied with the group, getting the obvious right answer wrong on at least one occasion.

The Asch experiment illustrates how bubbles, even wars, can occur, as individuals comply with the crowd. It is interesting to note, however, that if one actor goes against the rest, and guesses correctly – or perhaps wrongly but with a different wrong answer from everyone else – the subject was far more likely to go against the crowd. It does not take much to break crowd compliance.

The Asch experiment has been repeated worldwide, and it was found that group compliance tended to be slightly higher in countries seen as having a more cooperative and less individualistic culture, such as China. Now don’t over-egg this one. The difference is not that great, but it does go to show that – contrary to what some argue when they say China is different – there are reasons to think China is just as susceptible to bubbles as the rest of us.

© Investment & Business News 2013

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The ONS revised again. It always does, but it can be hard to keep up. You may recall, back at the end of 2011 the UK fell back into recession, suffering what we called a double dip — except it didn’t. Subsequent revisions of the ONS data on GDP revised the contraction away. You may also recall that the UK grew by 0.6 per cent in Q2 of this year, which was good, but working against this was that much of the growth came on the back of rising consumption, or falling savings. Given the high level of UK household debt, some might say that this development was a tad worrying — except that they didn’t. The data has been revised, and this time the story revealed is much more encouraging.

The first revision was to the headline figure. The ONS is now saying the UK economy expanded by 0.7 per cent in Q2. To put that in context, the US expanded by 0.4 per cent and the Eurozone by 0.3 per cent in the quarter. On an annual basis the economy expanded by 1.5 per cent.

Drill down, however, and the data looks more encouraging still.

It turns out – or at least this is what the latest data says – that investment jumped by 1.7 per cent quarter on quarter and net trade rose by 0.3 per cent. Okay, the poor old indebted consumer spent more too, largely by adding to his and her debt. Consumer spending was up 0.4 per cent – boosting retail sales in the process, but then again, it is all the more encouraging that at a time of growing consumer spending, net trade provided a positive contribution to growth.

As another story today shows that there has been a gradual rise in the UK’s export sector at a time when global trade is seeing only modest growth and this provides reason to hope that this time the UK recovery is for real. See: The UK’s export-led recovery

Drill down further still in the UK GDP data, and it emerges that both manufacturing and construction grew faster than services – or to remind you of the caveat, so says the latest data, which may get changed again.

Vicky Redwood, chief UK economist at Capital Economics, said: “Looking ahead, the economy still faces some serious constraints (including the fiscal squeeze and weak bank lending), so it may struggle to keep growing at quite such robust rates.”

It is not hard to be cynical about the data. Sure, manufacturing and construction are growing, but from very low levels. Considering where we are in the economic cycle, a growth rate of 0.7 per cent is pretty modest, and there are reasons to think growth will slow later in the year.

The point is, however, that the UK does appear to be recovering. The recovery is slower than we might like and there are reasons for caution, but compared to what we have seen over the last half a decade, the growth rate is pretty good. Relative to what we are used to, the UK is booming. In China, growth is around three times faster, but relative to what China is used to, it feels like a crisis. This time, unlike in 2010, the recovery does fell a little more real.

Let us finish on a qualified positive note. Other recent data from the ONS reveals that UK total net worth at the end of 2012 was estimated at £7.3 trillion; this was equivalent to approximately £114,000 per head of population or £275,000 per household. The estimated increase in UK net worth between 2011 and 2012 was £74 billion. Okay, the increase in wealth was largely down to rising house prices and equity values and they can fall as well as rise. The jump in asset values goes some way to justify rising consumer spending.

One question remains, however. How sustainable are rises in consumption at a time of high household debt on the back of rising house prices, at a time when they already seem too high?

© Investment & Business News 2013