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||Asean Affairs 15 October 2012
ASEAN Week Ahead
Economist Shayne Heffernan takes a look at the week ahead on equity markets
This week we are looking for the same basic themes as last week,
Market Correction Expected
EuroCrisis to Worsen
Selling USA, Hong Kong, Thailand and Indonesia
Buying Value in Shanghai and Singapore
Exiting USD and Euro
Buying Yen and SGD
The AAPL Effect will Reverse
Only buying Value Equities in the USA
Preparing for European Deleveraging
The global economy is facing its third major brake on expansion in five years as emerging markets slow from China to Brazil, provoking debate about how much policy makers should respond.
In addition to last weeks note, we can add the issue of lower corporate earnings in the USA, while QE3 mania lifted markets close five-year highs in September, reality is kicking in and U.S. stock market investors are shifting their focus back to corporate expectations, and that's going to be unpleasant.
Profits of S&P 500 .SPX companies are seen dropping 3 percent this quarter from a year ago, the first decline in three years, hurt by China's slowing growth and Europe's debt crisis, which recently prompted the International Monetary Fund to cut its 2012 economic growth outlook. With only 6 percent of S&P 500 companies having reported, 59 percent of companies have topped profit expectations - less than the average beat rate of 67 percent for the past four quarters, according to Thomson Reuters data. Half of companies have beaten on revenue, while a quarter missed profit forecasts.
Trading will also be influenced by the news flow in Europe, where a summit of European Union leaders will take place. The Wall Street Journal reported that a deal on austerity measures for Greece could be reached in time for the meeting.
In the realm of U.S. economic data, investors will look ahead to reads on retail sales, the Consumer Price Index and existing home sales. September retail sales are seen rising 0.8 percent, while the overall CPI for September is expected to gain 0.5 percent, and September existing home sales are forecast to fall 2 percent.
Inflation is back in the news, not that it ever left the market, after denying QE3 was inflationary the Fed has changed course, risking the wrath of politicians and the central bank's hard-won reputation for keeping prices stable, three top Fed officials are touting plans for boosting employment that explicitly allow for inflation to run above the Fed's 2.0-percent goal.
Investors are wondering just how high - and for how long - the Fed may allow inflation to rise to encourage borrowing, investment and hiring. In theory, more people working means higher output, which should narrow the gap between what American workers are currently producing and their potential.
A 1 percentage point drop in China's growth rate often leads to a 1.5 point decline in commodity prices over a couple of quarters, threatening resource-rich nations such as Canada, while about 80 percent of its imported inputs come from Japan, South Korea and Taiwan.
Chinese exports rose 9.9 percent in September year-on-year to a record monthly high, the government said on Saturday, but analysts warned the performance was unsustainable given the weak global outlook.
The national customs bureau also said the trade surplus of the world's second-biggest economy, a source of friction with China's trading partners, widened to $27.7 billion for the month, up from $26.7 billion in August.
Global concern has mounted over a weakening trend in the Chinese economy, an important driver of global growth, and in exports in particular as the broader global slowdown and European debt crisis have impacted shipments from China.
But exports, the key indicator of the health of China's vital manufacturing sector, climbed 9.9 percent in September, the General Administration of Customs said. Imports rose 2.4 percent.
Both figures beat the expectations of analysts polled by Dow Jones Newswires, which had predicted a median forecast of 5 percent growth for exports and 2 percent for imports.
The September data will come as good news in a year when export growth rates have softened significantly from the strong expansions of previous years.
hina's gross domestic product grew 7.6 percent in the second quarter of this year, the slowest rate since 2009.
Chinese authorities have been aiming for 7.5 economic percent growth for 2012 ― far less than the 9.3 percent achieved in 2011 and 10.4 percent in 2010.
The world's largest exporter has been pulled down by weakness in overseas economies including debt-saddled Europe, a major trading partner, as well as a sluggish property market and softening consumer spending.
Overall trade for the first nine months of the year was $2.84 trillion, up 6.2 percent from the same period in 2011, the customs bureau said, off the pace of the 10 percent target.
Overall trade with Europe was down 2.7 percent to $411 billion for the first nine months of the year, but trade with the United States grew 9.1 percent to $355 billion.
Following the trade data, markets will turn their eyes toward the release of third quarter GDP data on Oct. 18, and whether the Chinese economy deteriorated further.
Thornton said China was unlikely to come out soon with a significant economic stimulus package as leaders were gearing up for an important Communist Party meeting next month during which a new set of top leaders will be confirmed.
Major policy initiatives are typically put on hold in the run-up to such gatherings.
Trade with Japan slumped 1.8 percent to $248 billion for the year's first three quarters, according to the customs data.
A bitter dispute that erupted in recent months between China and Japan over an island group has stoked anti-Japan sentiment in China, impacting sales of Japanese products in September.
China's deputy chief central banker said Sunday his top priority is to control inflation, despite calls by developed economies to ramp up consumer demand and domestic pressure to chase growth.
"The first thing... is [to] control inflation is our number-one job. As a central banker, we have to control inflation," Yi Gang, deputy governor of the People's Bank of China told delegates to the annual meetings of the International Monetary Fund and the World Bank in Tokyo.
Yi stepped in to deliver the speech when his boss, bank governor Zhou Xiaochuan pulled out. He and Finance Minister Xie Xuren stayed away as part of what observers said was a protest over a territorial row with Japan.
"Leaders of local governments are eager to develop the economy in their regions. So everybody is enthusiastic about development and they want investment, they want to have FDI [foreign direct investment].
"Desire for higher growth is all over the country," he said.
"As a central banker, you have to constantly remind the whole country, the central government as well as local governments... [of] the danger of inflation."
Yi argued that the value of the yuan was "close to the equilibrium rate" set by the market, with Beijing authorities refraining from direct intervention in recent quarters.
Critics argue China keeps its currency artificially low to give its exports a competitive edge just like the American Government does with the US Dollar.
Asia Remains a Worry
We provided data last week that pointed to a slow down in Asia, today and IMF study has supported the Heffernan research.
"Right now due to the relative low values I am shifting investments out of the USA, Hong Kong, Thailand and Indonesia towards Shanghai and Singapore both exchanges remain cheap in PE terms.
The European debt crisis and weakness in the United States have long been drags on Asian growth, but throw in China's difficult leadership transition and the outlook is grim.
As Asia's powerhouses China and India slow faster than many had expected" said Shayne Heffernan.
The economic growth in the Asia- Pacific region has slowed, according to the Asia and Pacific Regional Economic Outlook, released by the International Monetary Fund (IMF) Friday morning during the annual meetings of IMF and World Bank.
"For Asia as a whole, GDP growth fell to its lowest rate since the Y 2008 global financial crisis during the 1-H of Y 2012," said Anoop Singh, IMF Asia and Pacific Department Director on the press conference.
The economic slowdown, bigger than previously projected, in Asia and Pacific region was caused by the euro area crises and fiscal shock through trade-channel effects, as the recovery in advanced economies suffered setbacks, the report said.
But looking forward, growth is projected to pick up very gradually, and Asia should remain the global growth leader, expanding over 2 percentage points faster than the world average next year, it added.
IMF considered China as an important engine of growth for the region and each one percentage-point decline of investment growth in China would lower GDP growth by more than half of a percentage point over four quarters in those economies with the closest regional supply chain links to China, including South Korea, Malaysia and China's Taiwan.
IMF's outlook on Asia-Pacific economy in near-term remains subdued, as the downside risks still remain, so the policymakers need to support stable noninflationary growth, maintain financial stability and lay the foundations for sustained and shared prosperity over the medium term.
Discontent simmered among fast-growing economies like China and Brazil which seek a bigger voice at the IMF as the last-resort lender wrapped up annual talks dominated by Europe's debt crisis.
The talks had originally been expected to see the passage of key reforms that would give such nations a greater say at the International Monetary Fund, historically controlled by the US and Europe.
But final approval for the changes, which shuffle the Fund's voting rights formula, is stalled in the US Congress with little movement expected before presidential elections next month.
Critics have warned that the changes are crucial to reflect the new face of a world economy dependent on emerging nations for growth, as some countries voiced growing impatience with the pace of change at the 188-member Fund.
Brazilian Finance Minister Guido Mantega charged that the reputation and relevance of the IMF - founded towards the end of World War II to help nations rebuild their shattered economies - was on the line.
"Resistance to reform undermines efforts to transform the IMF into a truly multilateral and representative organisation," he said in Tokyo.
China, now the world's second-largest economy and a potential key beneficiary of the reforms, issued its own diplomatic nudge to Washington.
"To safeguard the IMF's legitimacy and effectiveness, we call on member countries to conclude the 2010 quota and governance reforms by completing the domestic approval process," Yi Gang, deputy governor of China's central bank, said in a statement.
The reforms, which must be approved by 113 countries that represent 85 percent of IMF voting rights, cannot come into force without support from the US, which accounts for nearly 17 percent of votes at the Fund.
The Group of 24 - including nations from South America, Africa and South Asia - said the shuffle would "better reflect the growing role of [emerging nations] ... in the global economy, while enhancing the voice and representation of poor and small low-and middle-income countries".
Meanwhile, the so-called BRICS nations - Brazil, Russia, India, China and South Africa - have been studying the feasibility of a new development bank for themselves and other developing nations.
The idea has been endorsed by the top economist at the World Bank - which also held its annual meeting in Tokyo this week - who said enormous growth in the world economy has left room for such an institution.
"The idea is not a bank for BRICS, but BRICS taking the initiative for a bank that is focused on emerging countries," said Kaushik Basu, the World Bank's chief economist.
"That was really something that complements the space of the World Bank and IMF... there is a scope for other clusters of banks which can do a lot of lending," Basu added.
With Europe in crisis and the US charting an uncertain recovery, the IMF called on emerging nations to find their own ways to guard against shocks stemming from the fiscal and economic challenges in rich nations.
Brazil's finance chief Mantega said the five-member BRICS club was pushing ahead with a move toward a self-managed reserve fund to "help forestall short-term liquidity pressures and provide mutual support".
Such moves challenge the relevance of the IMF and underscore the need for quick change, critics said.
"The United States urgently needs to authorise IMF governance reform," said Elizabeth Stuart, a spokeswoman for global aid agency Oxfam.
"This process has been dragging on far too long, and emerging economies need their rightful place at the table."
Shayne Heffernan Ph.D.
Linda Johnson, Business Development Director - Private Client Group, Heffernan Capital Management
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