Jan. 29 (Bloomberg) -- Investors should buy Asian junk bonds as Treasury yields pushed higher by signs the U.S. economy is recovering erode the relative return from investment-grade debt, according to UBS AG.
“I’d pick high-yield over high-grade,” Edwin Chan, UBS’s head of Asian credit research, said in a phone interview from Hong Kong. Junk bonds pay a much bigger margin, so will continue to provide stronger returns regardless of fluctuations in debt sold by the world’s biggest economy, he said.
Two-year Treasury yields rose to their highest in two weeks yesterday and 10-year yields their highest in a week. President Barack Obama, delivering his first State of the Union address, called on Congress to pass tax cuts and spending that would further stimulate the economy and add jobs. Ten-year note yields, currently about 3.67 percent, may rise to 3.9 percent by the end of June, according to Mitsubishi UFJ Asset Management Co.
Signs the global economy is recovering after the worst recession since World War II is spurring demand for riskier assets. The extra return investors demand to own high-yield dollar debt in Asia has dropped 15.04 percentage points to 8.05 percentage points since Jan. 1 last year, according to JPMorgan Chase & Co. data. For Asian high-grade dollar debt it has decreased 4.51 percentage points to 2.5 percentage points.
Credit spreads will tighten further in 2010, especially for high-yield debt, as the economic outlook improves, Chan said. High-yield, or junk, bonds are rated less than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s.
Junk Sales
Corporate high-yield bond sales in either dollars, euros or yen in Asia outside of Japan total $1.1 billion this month, compared with $6.2 billion for all 2009, Bloomberg data show.
Evergrande Real Estate Group Ltd. sold $750 million of 13 percent notes on Jan. 22, the biggest Chinese real estate high- yield offering ever, according to Bank of America Merrill Lynch, which helped manage the sale. Evergrande’s bonds were yielding 12.8875 percent yesterday, prices from Calyon show.
It’s been the busiest start to a year in the U.S. in dollar terms for junk bonds in a decade, according to data compiled by Bloomberg. Virgin Media Inc., the U.K.’s second-largest pay- television company, this month helped push offerings of high- yield debt in Europe to a record.
“More supply of high-yield and high-grade bonds is not necessarily a bad thing for credit spreads,” Chan said. “The demand for bonds is still high.”
Thursday, January 28, 2010
Wednesday, January 27, 2010
Australian Rate Gains Signal Challenge for Retailers
Jan. 28 (Bloomberg) -- Further Australian interest rate gains, which investors expect as early as next week, will prompt consumers to cut spending, the head of Australia’s biggest retailer Woolworths Ltd. said.
“Interest rate rises are not good for consumers full stop,” Chief Executive Officer Michael Luscombe, 56, said in a interview in Sydney yesterday after a report showed consumer prices rose more than some economists forecast. “I think 2010 is going to be a challenging year.”
Luscombe’s comments underscore the downside for retailers of an economic recovery that prompted Reserve Bank Governor Glenn Stevens to raise borrowing costs in December for an unprecedented third month. Concern about inflation, which the central bank aims to keep between 2 percent and 3 percent on average, is increasing pressure on Stevens to keep raising rates.
Woolworths, which benefited early last year as Prime Minister Kevin Rudd’s government distributed more than A$20 billion ($18 billion) in cash to households, yesterday posted the slowest sales growth in a Christmas quarter since 1993. Consumer spending accounts for more than half of Australia’s economy.
“Like all retailers we harbored a secret hope that a miracle might happen and people might find they didn’t spend all their stimulus -- but they clearly had,” Luscombe said.
Woolworths shares fell 2.7 percent to A$26.09 at 1:06 p.m. in Sydney. The S&P/ASX 200 consumer staple index, which tracks retailers in the Australian benchmark, fell 1.6 percent.
Revenue Falls
Revenue at Woolworths’ general merchandise division fell last quarter for the first time in at least seven years as demand slowed at its Big W discount stores and Dick Smith Electronics outlets, the company said yesterday.
Traders are betting there is a 72 percent chance of a quarter-point increase in Australia’s overnight cash rate target to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11:13 a.m. Prior to yesterday’s report, the chances of a move were 56 percent.
“Inflation is probably not low enough for the Reserve Bank to pause in February,” said Paul Brennan, an economist at Citigroup Inc. in Sydney. “The medium-term inflation outlook will increasingly be shaped by high commodity prices, signs of inflation pick-up in Asia and the recovery in the domestic economy.”
Core Inflation
The central bank’s so-called weighted-median gauge of inflation advanced 0.7 percent in the fourth quarter for an annual increase of 3.6 percent. Economists forecast gains of 0.6 percent and 3.5 percent respectively. The consumer price index rose an annual 2.1 percent.
“Discretionary spending levels will continue to be influenced by macro-economic factors,” Luscombe said.
Policy makers meet next week for the first time since Dec. 1 as signs mount of a recovery in Australia’s economy.
While inflation may “moderate in the near term,” it probably won’t slow “as far as thought likely six months ago,” Governor Stevens said last month, after boosting the benchmark rate to 3.75 percent. The consumer price index “will probably rise somewhat” this year, he said.
Employers added 135,700 jobs in the four months through December, the biggest four-month gain since 2006, pushing down the jobless rate to an eight-month low of 5.5 percent, a report showed Jan. 14. Consumer confidence jumped in January by the most in six months, a survey by Westpac Banking Corp. showed last week.
‘Weather Eye’
The creation of jobs is “one half of the equation, the other half is keeping a very careful weather eye on inflation and making sure our economic policy is balanced,” Rudd told 5AA Radio in Adelaide yesterday. His government is due to face an election this year.
The International Monetary Fund said this week that Australia’s gross domestic product will rise 2.5 percent this year and 3 percent in 2011. In October, it forecast 2 percent growth in 2010.
Stevens’s concern that inflation may strengthen more than forecast last year contrasts with remarks from policy makers in other countries. The European Central Bank, which this month kept its benchmark rate at a record low of 1 percent, said Jan. 21 that inflation is “expected to remain moderate,” and Federal Reserve officials said last month that inflation will “remain subdued for some time.”
New Zealand central bank Governor Alan Bollard said today the bank will keep its benchmark lending rate at a record-low 2.5 percent until the middle of this year because inflation is likely to remain within its target range until at least 2012.
Australia “is going into an upswing in 2010 from a higher starting point for inflation than you would probably like, and with less spare capacity than previously thought,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “It all points to a quarter-percentage point move next week.”
“Interest rate rises are not good for consumers full stop,” Chief Executive Officer Michael Luscombe, 56, said in a interview in Sydney yesterday after a report showed consumer prices rose more than some economists forecast. “I think 2010 is going to be a challenging year.”
Luscombe’s comments underscore the downside for retailers of an economic recovery that prompted Reserve Bank Governor Glenn Stevens to raise borrowing costs in December for an unprecedented third month. Concern about inflation, which the central bank aims to keep between 2 percent and 3 percent on average, is increasing pressure on Stevens to keep raising rates.
Woolworths, which benefited early last year as Prime Minister Kevin Rudd’s government distributed more than A$20 billion ($18 billion) in cash to households, yesterday posted the slowest sales growth in a Christmas quarter since 1993. Consumer spending accounts for more than half of Australia’s economy.
“Like all retailers we harbored a secret hope that a miracle might happen and people might find they didn’t spend all their stimulus -- but they clearly had,” Luscombe said.
Woolworths shares fell 2.7 percent to A$26.09 at 1:06 p.m. in Sydney. The S&P/ASX 200 consumer staple index, which tracks retailers in the Australian benchmark, fell 1.6 percent.
Revenue Falls
Revenue at Woolworths’ general merchandise division fell last quarter for the first time in at least seven years as demand slowed at its Big W discount stores and Dick Smith Electronics outlets, the company said yesterday.
Traders are betting there is a 72 percent chance of a quarter-point increase in Australia’s overnight cash rate target to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11:13 a.m. Prior to yesterday’s report, the chances of a move were 56 percent.
“Inflation is probably not low enough for the Reserve Bank to pause in February,” said Paul Brennan, an economist at Citigroup Inc. in Sydney. “The medium-term inflation outlook will increasingly be shaped by high commodity prices, signs of inflation pick-up in Asia and the recovery in the domestic economy.”
Core Inflation
The central bank’s so-called weighted-median gauge of inflation advanced 0.7 percent in the fourth quarter for an annual increase of 3.6 percent. Economists forecast gains of 0.6 percent and 3.5 percent respectively. The consumer price index rose an annual 2.1 percent.
“Discretionary spending levels will continue to be influenced by macro-economic factors,” Luscombe said.
Policy makers meet next week for the first time since Dec. 1 as signs mount of a recovery in Australia’s economy.
While inflation may “moderate in the near term,” it probably won’t slow “as far as thought likely six months ago,” Governor Stevens said last month, after boosting the benchmark rate to 3.75 percent. The consumer price index “will probably rise somewhat” this year, he said.
Employers added 135,700 jobs in the four months through December, the biggest four-month gain since 2006, pushing down the jobless rate to an eight-month low of 5.5 percent, a report showed Jan. 14. Consumer confidence jumped in January by the most in six months, a survey by Westpac Banking Corp. showed last week.
‘Weather Eye’
The creation of jobs is “one half of the equation, the other half is keeping a very careful weather eye on inflation and making sure our economic policy is balanced,” Rudd told 5AA Radio in Adelaide yesterday. His government is due to face an election this year.
The International Monetary Fund said this week that Australia’s gross domestic product will rise 2.5 percent this year and 3 percent in 2011. In October, it forecast 2 percent growth in 2010.
Stevens’s concern that inflation may strengthen more than forecast last year contrasts with remarks from policy makers in other countries. The European Central Bank, which this month kept its benchmark rate at a record low of 1 percent, said Jan. 21 that inflation is “expected to remain moderate,” and Federal Reserve officials said last month that inflation will “remain subdued for some time.”
New Zealand central bank Governor Alan Bollard said today the bank will keep its benchmark lending rate at a record-low 2.5 percent until the middle of this year because inflation is likely to remain within its target range until at least 2012.
Australia “is going into an upswing in 2010 from a higher starting point for inflation than you would probably like, and with less spare capacity than previously thought,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “It all points to a quarter-percentage point move next week.”
Satyam’s Raju Earns Pauper Status in U.S. Investor Litigation
Jan. 28 (Bloomberg) -- Ramalinga Raju, who resigned as chairman of Satyam Computer Services Ltd. after saying he overstated the company’s assets by $1 billion, was granted pauper status in U.S. litigation brought by investors.
U.S. District Judge Barbara Jones in New York approved the status for Raju; his brother Rama Raju, Satyam’s former chief executive officer; and Srinivas Vadlamani, the company’s ex- finance chief. Proceeding “in forma pauperis” means the three men won’t have to pay filing fees and other court costs tied to the litigation because of their financial condition.
“The court finds that defendants have adequately demonstrated that they are unable to pay,” Jones wrote in a Jan. 26 order.
The three men have also been charged criminally and have been in custody in India since last January. Shares and American depositary receipts of the software-services provider based in Hyderabad, India, have plunged since Jan. 7, 2009, when Raju wrote a letter to the board explaining the financial irregularities. His letter touched off India’s biggest corporate-fraud inquiry.
In November, India’s Central Bureau of Investigation said it found $607 million of additional fraud at the company. Investors in the U.S. suits, who say Raju’s confession wiped out $4 billion in market capitalization, filed at least a dozen class-action lawsuits that have been consolidated before Jones.
Ramalinga Raju, 55, Rama Raju, 50, and Vadlamani, 49, also asked Jones to appoint lawyers for them that they wouldn’t have to pay.
Lawyer Request Denied
She denied that request “at the present time,” finding that, because of their incarceration in India, “it would be unusually difficult for appointed counsel to meet with and otherwise competently represent defendants under the circumstances.”
The judge said they could renew the request later.
Keith Fleischman, a lawyer for the investors at Grant & Eisenhofer PA in New York, declined to comment on Jones’s rulings.
After Raju’s disclosures, India’s government fired the Satyam board and appointed new directors. Tech Mahindra Ltd., the Pune, India-based software company, gained control of Satyam in May.
American depositary receipts are issued by U.S. banks to allow investment in non-U.S. companies. Satyam raised $161.9 million from the May 2001 sale of its ADRs.
Satyam ADRs, each representing two ordinary shares, fell 17 cents, or 3.4 percent, to $4.85 yesterday in New York Stock Exchange composite trading. The ADRs have risen 5.2 percent this year.
The case is In re Satyam Computer Services Ltd. Securities Litigation, 09-md-02027, U.S. District Court, Southern District of New York (Manhattan).
U.S. District Judge Barbara Jones in New York approved the status for Raju; his brother Rama Raju, Satyam’s former chief executive officer; and Srinivas Vadlamani, the company’s ex- finance chief. Proceeding “in forma pauperis” means the three men won’t have to pay filing fees and other court costs tied to the litigation because of their financial condition.
“The court finds that defendants have adequately demonstrated that they are unable to pay,” Jones wrote in a Jan. 26 order.
The three men have also been charged criminally and have been in custody in India since last January. Shares and American depositary receipts of the software-services provider based in Hyderabad, India, have plunged since Jan. 7, 2009, when Raju wrote a letter to the board explaining the financial irregularities. His letter touched off India’s biggest corporate-fraud inquiry.
In November, India’s Central Bureau of Investigation said it found $607 million of additional fraud at the company. Investors in the U.S. suits, who say Raju’s confession wiped out $4 billion in market capitalization, filed at least a dozen class-action lawsuits that have been consolidated before Jones.
Ramalinga Raju, 55, Rama Raju, 50, and Vadlamani, 49, also asked Jones to appoint lawyers for them that they wouldn’t have to pay.
Lawyer Request Denied
She denied that request “at the present time,” finding that, because of their incarceration in India, “it would be unusually difficult for appointed counsel to meet with and otherwise competently represent defendants under the circumstances.”
The judge said they could renew the request later.
Keith Fleischman, a lawyer for the investors at Grant & Eisenhofer PA in New York, declined to comment on Jones’s rulings.
After Raju’s disclosures, India’s government fired the Satyam board and appointed new directors. Tech Mahindra Ltd., the Pune, India-based software company, gained control of Satyam in May.
American depositary receipts are issued by U.S. banks to allow investment in non-U.S. companies. Satyam raised $161.9 million from the May 2001 sale of its ADRs.
Satyam ADRs, each representing two ordinary shares, fell 17 cents, or 3.4 percent, to $4.85 yesterday in New York Stock Exchange composite trading. The ADRs have risen 5.2 percent this year.
The case is In re Satyam Computer Services Ltd. Securities Litigation, 09-md-02027, U.S. District Court, Southern District of New York (Manhattan).
Tuesday, January 26, 2010
BHP, Rio Set to ‘Bounce Back’ to Record Profits on Recovery
Jan. 27 (Bloomberg) -- BHP Billiton Ltd. and Rio Tinto Group, the world’s biggest and third-largest mining companies, are set to return to record profits faster than estimated because of a quicker rebound in the global economy.
Brokers have increased London-based Rio’s 2010 earnings estimates and Melbourne-based BHP’s fiscal 2011 predictions by more than $1 billion in the past four weeks, according to Bloomberg data. Rio’s shares may gain 14 percent in the next 12 months and BHP’s almost 10 percent, according to the data.
The World Bank has raised its forecast for global growth in 2010 as the economy in China, the world’s biggest consumer of metals, expands at the fastest rate in three years. UBS AG and Citigroup Inc. are among brokers who’ve boosted profit estimates for BHP and Rio after they reported record iron ore output.
This year “is just about in the bag in terms of earnings,” said Ken West, who helps manage in Melbourne the equivalent of $1.9 billion at Perennial Investment Partners Ltd., including Rio and BHP shares. There’s no reason why profit at BHP and Rio shouldn’t be “bouncing back to those pre-global financial crisis earnings levels,” he said.
BHP declined 1 percent and Rio fell 1.1 percent in London trading yesterday. BHP spokeswoman Kelly Quirke and Rio spokesman Tony Shaffer declined to comment.
Rio may have net income of $9.3 billion in 2010, according to the median of 12 analyst estimates compiled by Bloomberg. That would beat its record in 2006 of $7.4 billion. BHP may report profit of $16 billion in fiscal 2011, according to 13 analyst estimates, beating 2008’s record $15.4 billion. BHP reports earnings on Feb. 10 and Rio on Feb. 11.
‘Picking Up’
Mining company profits plunged after the global financial crisis struck in 2008. Now, Rio, BHP and South Korea’s Posco, Asia’s most profitable steelmaker, are raising production as demand from carmakers and builders rebounds.
Alcoa Inc. the largest U.S. aluminum maker, expects earnings to improve this year and Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, posted fourth-quarter profit that topped analysts’ estimates.
“We are hearing from not just Rio but other companies, demand is picking up,” Glyn Lawcock, managing director of resources research at UBS AG in Sydney, said in an interview on Bloomberg TV after Rio’s production report Jan. 14. He’s forecasting a 10 to 15 percent gain in Rio’s stock this year.
BHP may report profit of $18 billion in fiscal 2011, according to UBS. BHP reported second-quarter output Jan. 20.
‘Volatile Year’
To be sure, the World Bank said the global recovery may lose momentum in the second half of the year as stimulus programs wind down and unemployment persists. Stocks fell in Asia and Europe last week after Chinese regulators told some of the nation’s banks to limit lending. Asian stocks had the biggest weekly drop since March on concern the pace of economic growth will prompt central banks from China to India to curb price increases. Australian mining stocks fell amid concern the nation may raise taxes on mining projects.
“We expect another volatile year in 2010 as the removal of fiscal and monetary stimulus in the U.S., Europe and Asia is likely to be accompanied by a period of relatively weak growth,” Deutsche Bank AG analysts led by Paul Young said in a report this month.
Steel output in China, the largest maker, rose to a record last year as government stimulus spending boosted demand from builders and automakers. Copper production also rose to a record. A stimulus-driven rebound is helping boost confidence in the global economy as equity markets rally from last year’s low and industrial production rises worldwide.
‘Faster Turnaround’
“Throughout 2009, China has surprised on the upside every reporting period,” said Grant Craighead, managing director of Sydney-based Stock Resource. “Whatever the consensus view was amongst economists China always came in a bit stronger.”
There may be a faster turnaround in China as infrastructure spending improves the demand for BHP’s products and drives spot prices higher, Royal Bank of Scotland Group Plc. analysts led by Warren Edney said in a report. Edney is forecasting BHP will report profit of $16.1 billion in the 12 months ending June 30, 2011.
The global steel market will grow by 9.2 percent in 2010 on rising demand from the U.S., Japan and Europe, the World Steel Association has said. Domestic demand will continue to grow driven by housing, automakers, shipbuilding and machinery, the China Iron & Steel Association said Jan. 22.
Brokers have increased London-based Rio’s 2010 earnings estimates and Melbourne-based BHP’s fiscal 2011 predictions by more than $1 billion in the past four weeks, according to Bloomberg data. Rio’s shares may gain 14 percent in the next 12 months and BHP’s almost 10 percent, according to the data.
The World Bank has raised its forecast for global growth in 2010 as the economy in China, the world’s biggest consumer of metals, expands at the fastest rate in three years. UBS AG and Citigroup Inc. are among brokers who’ve boosted profit estimates for BHP and Rio after they reported record iron ore output.
This year “is just about in the bag in terms of earnings,” said Ken West, who helps manage in Melbourne the equivalent of $1.9 billion at Perennial Investment Partners Ltd., including Rio and BHP shares. There’s no reason why profit at BHP and Rio shouldn’t be “bouncing back to those pre-global financial crisis earnings levels,” he said.
BHP declined 1 percent and Rio fell 1.1 percent in London trading yesterday. BHP spokeswoman Kelly Quirke and Rio spokesman Tony Shaffer declined to comment.
Rio may have net income of $9.3 billion in 2010, according to the median of 12 analyst estimates compiled by Bloomberg. That would beat its record in 2006 of $7.4 billion. BHP may report profit of $16 billion in fiscal 2011, according to 13 analyst estimates, beating 2008’s record $15.4 billion. BHP reports earnings on Feb. 10 and Rio on Feb. 11.
‘Picking Up’
Mining company profits plunged after the global financial crisis struck in 2008. Now, Rio, BHP and South Korea’s Posco, Asia’s most profitable steelmaker, are raising production as demand from carmakers and builders rebounds.
Alcoa Inc. the largest U.S. aluminum maker, expects earnings to improve this year and Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, posted fourth-quarter profit that topped analysts’ estimates.
“We are hearing from not just Rio but other companies, demand is picking up,” Glyn Lawcock, managing director of resources research at UBS AG in Sydney, said in an interview on Bloomberg TV after Rio’s production report Jan. 14. He’s forecasting a 10 to 15 percent gain in Rio’s stock this year.
BHP may report profit of $18 billion in fiscal 2011, according to UBS. BHP reported second-quarter output Jan. 20.
‘Volatile Year’
To be sure, the World Bank said the global recovery may lose momentum in the second half of the year as stimulus programs wind down and unemployment persists. Stocks fell in Asia and Europe last week after Chinese regulators told some of the nation’s banks to limit lending. Asian stocks had the biggest weekly drop since March on concern the pace of economic growth will prompt central banks from China to India to curb price increases. Australian mining stocks fell amid concern the nation may raise taxes on mining projects.
“We expect another volatile year in 2010 as the removal of fiscal and monetary stimulus in the U.S., Europe and Asia is likely to be accompanied by a period of relatively weak growth,” Deutsche Bank AG analysts led by Paul Young said in a report this month.
Steel output in China, the largest maker, rose to a record last year as government stimulus spending boosted demand from builders and automakers. Copper production also rose to a record. A stimulus-driven rebound is helping boost confidence in the global economy as equity markets rally from last year’s low and industrial production rises worldwide.
‘Faster Turnaround’
“Throughout 2009, China has surprised on the upside every reporting period,” said Grant Craighead, managing director of Sydney-based Stock Resource. “Whatever the consensus view was amongst economists China always came in a bit stronger.”
There may be a faster turnaround in China as infrastructure spending improves the demand for BHP’s products and drives spot prices higher, Royal Bank of Scotland Group Plc. analysts led by Warren Edney said in a report. Edney is forecasting BHP will report profit of $16.1 billion in the 12 months ending June 30, 2011.
The global steel market will grow by 9.2 percent in 2010 on rising demand from the U.S., Japan and Europe, the World Steel Association has said. Domestic demand will continue to grow driven by housing, automakers, shipbuilding and machinery, the China Iron & Steel Association said Jan. 22.
Australian Economic Recovery to Strengthen in 2010, Access Says
Jan. 27 (Bloomberg) -- Australia’s economic recovery will accelerate this year and next, helped by China’s demand for raw materials including iron ore and a rebound in consumer confidence, Access Economics says.
Gross domestic product will rise 2.5 percent this year and 3.5 percent in 2011, after gaining 0.9 percent last year, the research company said in a report released in Canberra today.
The nation’s economy was one of the few to skirt the global recession in 2009, as Prime Minister Kevin Rudd’s government distributed A$20 billion ($18 billion) in cash to households and Asian demand for exports rebounded. Signs that the economy will strengthen further this year prompted central bank policy makers to raise borrowing costs last month by a quarter-percentage point to 3.75 percent, the third move in as many months.
“Recovery should continue through 2010 and 2011,” Access said in the report. While government spending will slow and consumers may be hurt by higher borrowing costs, housing construction will “lift notably” amid a surge in population growth.
By 2011, engineering construction will also add to growth, it said.
Gross domestic product will rise 2.5 percent this year and 3.5 percent in 2011, after gaining 0.9 percent last year, the research company said in a report released in Canberra today.
The nation’s economy was one of the few to skirt the global recession in 2009, as Prime Minister Kevin Rudd’s government distributed A$20 billion ($18 billion) in cash to households and Asian demand for exports rebounded. Signs that the economy will strengthen further this year prompted central bank policy makers to raise borrowing costs last month by a quarter-percentage point to 3.75 percent, the third move in as many months.
“Recovery should continue through 2010 and 2011,” Access said in the report. While government spending will slow and consumers may be hurt by higher borrowing costs, housing construction will “lift notably” amid a surge in population growth.
By 2011, engineering construction will also add to growth, it said.
Sunday, January 24, 2010
New Zealand May Lag Behind Australia in Raising Interest Rates
Jan. 25 (Bloomberg) -- New Zealand may lag behind Australia in raising interest rates this quarter as its economic recovery trails its larger neighbor and inflation remains within central bank Governor Alan Bollard’s target range.
The Reserve Bank of New Zealand will leave the official cash rate at a record-low 2.5 percent in its decision at 9 a.m. in Wellington on Jan. 28, according to all 14 economists surveyed by Bloomberg. Australia’s currency has outperformed New Zealand’s as traders bet Governor Glenn Stevens will boost his rate by a quarter percentage point to 4 percent next week.
Bollard is seeking to strengthen an economy emerging from its worst recession in three decades, while Australia skirted the global slump and is forecast to record faster growth this year as demand for exports such as iron ore increases.
“Inflation is moderate for now and the Reserve Bank still has some time on its side,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “There is nothing to prod the bank to move as early as January or March.”
Bollard, who has kept the cash rate at 2.5 percent since April last year, said Dec. 10 that conditions may support higher borrowing costs from the middle of 2010.
He said he wants to be sure that domestic demand will remain “solid” as Prime Minister John Key’s government withdraws fiscal stimulus measures, including extra spending on infrastructure, implemented to boost the economy.
Just two economists expect a rate increase in March, with 12 forecasting a move in April or June.
‘Imprudent’ Level
“It will be imprudent to leave monetary policy settings at exceptionally low levels for too much longer,” said Tuffley, who expects a half-point increase on April 29.
Economists forecast the cash rate will be 4 percent by the end of the year, according to the survey. Traders are betting rates will rise to 4.25 percent over the next 12 months, according to a Credit Suisse index based on swaps trading.
New Zealand’s dollar rose to an eight-week high of 74.42 U.S. cents on Jan. 15 amid speculation Bollard may raise rates as early as March. It fell to 71.3 cents late in Wellington on Jan. 22 as expectations waned. The currency has declined 2.1 percent this year against the U.S. dollar compared with a 0.3 percent gain in the Australian currency.
Central bankers around the world are assessing when to remove stimulus measures as the global economy recovers. Australia and Norway are among countries that have started raising rates and the U.S. Federal Reserve has committed to scale down buying of mortgage-backed debt.
Australian Rates
Reserve Bank of Australia Governor Stevens is forecast to boost his benchmark lending rate by a quarter percentage point to 4 percent next week, adding to similar moves in October, November and December, according to 16 of 18 economists surveyed by Bloomberg.
New Zealand consumer prices fell 0.2 percent in the fourth quarter, according to a government report on Jan. 20. Annual inflation was 2 percent, in the middle of the 1 percent-to-3 percent band that Bollard targets. Last month, the governor forecast inflation will be 2 percent or less until early 2011.
The housing market slowed in December, easing pressure on prices, according to a Real Estate Institute report last week. House prices fell for the first time in six months as the number of properties sold declined for a third month.
“The stabilization in prices should ease concerns about a possible renewed bubble in house prices and consequent impacts on domestic demand,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.
Inflationary Expectations
Bollard expects the pace of inflation will accelerate to 2.6 percent by the end of 2011 as the economy expands. Gross domestic product will increase 3 percent this year and 4.1 percent in 2011, he forecast Dec. 10.
Manufacturing grew in December for a fourth month, buoyed by new orders, according to an index published Jan. 21 by Business New Zealand and Bank of New Zealand Ltd.
Retail sales also rose for a fourth month in November, according to a government report last week. Consumer confidence surged to a three-year high in December, according to an ANZ National Bank-Roy Morgan Research index released Jan. 21.
Companies are more likely to hire workers and to invest in the coming months, the New Zealand Institute of Economic Research said Jan. 12. Its survey, conducted in early December, also showed that companies have less spare capacity, meaning they will have to raise prices as they increase production.
Bollard “was looking for spare capacity built up during the recession to damp inflationary pressures,” said Michael Gordon, an economist at Westpac Banking Corp. in Wellington. “Inflation pressure could be building again.”
The central bank can wait until a review on April 29 before raising rates, allowing Bollard to assess data on how the economy ended 2009 and how inflation tracked in the first three months of this year, said Gordon.
The Reserve Bank of New Zealand will leave the official cash rate at a record-low 2.5 percent in its decision at 9 a.m. in Wellington on Jan. 28, according to all 14 economists surveyed by Bloomberg. Australia’s currency has outperformed New Zealand’s as traders bet Governor Glenn Stevens will boost his rate by a quarter percentage point to 4 percent next week.
Bollard is seeking to strengthen an economy emerging from its worst recession in three decades, while Australia skirted the global slump and is forecast to record faster growth this year as demand for exports such as iron ore increases.
“Inflation is moderate for now and the Reserve Bank still has some time on its side,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “There is nothing to prod the bank to move as early as January or March.”
Bollard, who has kept the cash rate at 2.5 percent since April last year, said Dec. 10 that conditions may support higher borrowing costs from the middle of 2010.
He said he wants to be sure that domestic demand will remain “solid” as Prime Minister John Key’s government withdraws fiscal stimulus measures, including extra spending on infrastructure, implemented to boost the economy.
Just two economists expect a rate increase in March, with 12 forecasting a move in April or June.
‘Imprudent’ Level
“It will be imprudent to leave monetary policy settings at exceptionally low levels for too much longer,” said Tuffley, who expects a half-point increase on April 29.
Economists forecast the cash rate will be 4 percent by the end of the year, according to the survey. Traders are betting rates will rise to 4.25 percent over the next 12 months, according to a Credit Suisse index based on swaps trading.
New Zealand’s dollar rose to an eight-week high of 74.42 U.S. cents on Jan. 15 amid speculation Bollard may raise rates as early as March. It fell to 71.3 cents late in Wellington on Jan. 22 as expectations waned. The currency has declined 2.1 percent this year against the U.S. dollar compared with a 0.3 percent gain in the Australian currency.
Central bankers around the world are assessing when to remove stimulus measures as the global economy recovers. Australia and Norway are among countries that have started raising rates and the U.S. Federal Reserve has committed to scale down buying of mortgage-backed debt.
Australian Rates
Reserve Bank of Australia Governor Stevens is forecast to boost his benchmark lending rate by a quarter percentage point to 4 percent next week, adding to similar moves in October, November and December, according to 16 of 18 economists surveyed by Bloomberg.
New Zealand consumer prices fell 0.2 percent in the fourth quarter, according to a government report on Jan. 20. Annual inflation was 2 percent, in the middle of the 1 percent-to-3 percent band that Bollard targets. Last month, the governor forecast inflation will be 2 percent or less until early 2011.
The housing market slowed in December, easing pressure on prices, according to a Real Estate Institute report last week. House prices fell for the first time in six months as the number of properties sold declined for a third month.
“The stabilization in prices should ease concerns about a possible renewed bubble in house prices and consequent impacts on domestic demand,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.
Inflationary Expectations
Bollard expects the pace of inflation will accelerate to 2.6 percent by the end of 2011 as the economy expands. Gross domestic product will increase 3 percent this year and 4.1 percent in 2011, he forecast Dec. 10.
Manufacturing grew in December for a fourth month, buoyed by new orders, according to an index published Jan. 21 by Business New Zealand and Bank of New Zealand Ltd.
Retail sales also rose for a fourth month in November, according to a government report last week. Consumer confidence surged to a three-year high in December, according to an ANZ National Bank-Roy Morgan Research index released Jan. 21.
Companies are more likely to hire workers and to invest in the coming months, the New Zealand Institute of Economic Research said Jan. 12. Its survey, conducted in early December, also showed that companies have less spare capacity, meaning they will have to raise prices as they increase production.
Bollard “was looking for spare capacity built up during the recession to damp inflationary pressures,” said Michael Gordon, an economist at Westpac Banking Corp. in Wellington. “Inflation pressure could be building again.”
The central bank can wait until a review on April 29 before raising rates, allowing Bollard to assess data on how the economy ended 2009 and how inflation tracked in the first three months of this year, said Gordon.
Japan Price-to-Assets Makes for Cheapest International Stocks
Jan. 25 (Bloomberg) -- Not even the slowest economic growth in the industrialized world or deflation can keep Byron Wien, David Herro and John Alkire away from Japanese equities.
Wien, the Blackstone Group LP adviser who predicted last year’s rallies in stocks and oil, says Japan shares are his favorites. Harris Associates LP’s Herro, Morningstar Inc.’s international manager of the decade, says stocks at the cheapest ever relative to assets will gain even if the economy stagnates. Alkire of Morgan Stanley Asset & Investment Management is betting low debt levels will spur an advance that beats the U.S.
Japan, the world’s second-biggest equity market, is up 3.7 percent this year as measured by the Topix index, the most among the world’s 10 largest economies. Overseas investors pumped almost $13 billion into Japan during the two weeks ended Jan. 15, the most since 2004. Companies trade for an average 1.2 times book value, almost half the valuation for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.
“My best investment idea is Japan,” said Wien, 76, a former market strategist at Morgan Stanley and at hedge fund Pequot Capital Management Inc. who predicted the end of the technology bubble in 2000. “The Japanese market looks relatively attractive assuming the earnings come through, which I think they will.”
More investors are looking at net assets instead of earnings after the economy posted its lowest production since 1991 in the third quarter and stagnant profit growth left companies in the Topix trading at an average 37 times estimates for this year’s income. The price-to-earnings ratio is the highest among the world’s 10 biggest markets.
1989 High
The index fell 2.6 percent last week to end at 940.94. While the Topix remains 67 percent below the high reached on Dec. 18, 1989, investors profited in nine of the past 20 years, including a 58 percent gain in 1999 when the S&P 500 rose 20 percent.
Since the end of 2005, the Topix has fallen 43 percent, compared with the MSCI World Index’s 8.6 percent drop, as successive prime ministers including the current Yukio Hatoyama battled deflation and faltering growth. Bank of Japan Governor Masaaki Shirakawa said on Jan. 18 that he will keep borrowing costs near zero to help end the worst postwar recession. Hatoyama unveiled a 7.2 trillion yen ($80 billion) stimulus package last month.
Wien, Herro and Alkire’s predictions are based on valuations instead of economic prospects. Wien favors export- related companies, technology makers, and drug and cosmetics suppliers. Gauges of automakers and electronics companies in the Topix have climbed 11 percent and 6.2 percent, respectively, in the past three months, more than the broader index’s 4.3 percent advance.
Priced In
“Japan doesn’t have to be a strong economy to attract investor interest,” Wien said. “Things aren’t getting good there, but they’re not getting bad either. The bad news is diminishing.”
Companies in the Topix are projected to turn profitable in 2010 after a combined loss of 40 yen per share in the past 12 months, according to data compiled by Bloomberg. The Topix’s book value is 33 percent below its average dating back to 1993 of 1.8 times, according to data compiled by Bloomberg.
“Japan is extremely cheap on fundamentals,” said Herro, the chief investment officer for international equities at Harris, with $55 billion in assets. “When you combine the two concepts of low price and high quality to get a value proposition, especially if we see a movement towards more sustainable operating profitability by corporate Japan, this could be one of the best-performing markets over the next couple of years.”
Toyota, Canon
Herro bought shares of Toyota Motor Corp., the world’s largest automaker, and Canon Inc., the biggest camera manufacturer. Analysts surveyed by Bloomberg project Toyota will return to an operating profit this year, while Tokyo-based Canon’s may climb 64 percent from 2009.
Japanese equities underperformed industrialized nations since the MSCI World Index of 23 developed countries reached a record on Oct. 31, 2007. The fallout from the global recession has left the MSCI World 32 percent below that peak, compared with 30 percent for the S&P 500 and 42 percent for the Topix.
Alkire, the chief investment officer for Morgan Stanley Asset in Tokyo, says Japanese stocks may beat the U.S. and Europe in 2010 as falling expenses and low debt bolster profits. Forty-three percent of Japanese companies have no borrowings, compared with 18 percent in the U.S. and 17 percent in Europe, Alkire said in a presentation to pension funds in Tokyo.
‘Never Say Never’
“For most of the past year, foreign investors said, ‘Never buy Japan,’” said Alkire, whose firm oversees about $39 billion. “But this year, I say, ‘Never say never.’ Global markets will likely focus on Japan.”
Standard Life Investment Ltd.’s Frances Hudson isn’t as bullish because price drops may erode profits and hamper the recovery. Consumer costs fell 1.7 percent in November from a year earlier, the ninth month of declines. Japan has deflation for the first time in three years, according to the government.
“I wouldn’t write off the whole of Japan, but I would struggle to find anyone feeling positive on the domestic situation,” said Hudson, who helps oversee $197 billion at Standard Life in Edinburgh and advises staying “very light” on Tokyo-listed shares in global funds. “The government doesn’t seem to be able to make any headway in reforms. Neither in stimulating consumer spending or ending deflation.”
Speculation drove the Nikkei 225 Stock Average to a record 38,915.87 on Dec. 29, 1989. What followed was the popping of an asset bubble and a plunge in stock and real-estate values in what became known as Japan’s Lost Decade.
Worst Drop
The Nikkei has lost 73 percent from that peak, the worst performance of the world’s major markets. Japan’s nominal gross domestic product rose 23 percent between 1989 and 2008, while the U.S. increased 163 percent, according to data compiled by Bloomberg.
Japanese gross domestic product shrank to an annualized 471 trillion yen in the third quarter, the lowest level since 1991, according to Cabinet Office figures. It’s forecast to expand 1.4 percent in 2010 after a projected 5.3 percent contraction last year, according to the median estimate of economists surveyed by Bloomberg. That’s less than the 2.7 percent growth the World Bank in Washington is predicting globally.
U.S.-based funds that invest in Japanese equities attracted new money equal to 2.7 percent of total assets in the week ended Jan. 13, the most inflows since October 2005, according to data from EPFR Global in Cambridge, Massachusetts, and Frankfurt- based Deutsche Bank AG.
Weakening Yen
Money is returning as investors speculate Finance Minister Naoto Kan will bolster exports by weakening the yen, which touched a 14-year high against the dollar on Nov. 27.
Kan said Jan. 7 on his first day in office that he would welcome a weaker currency, compared with his predecessor, Hirohisa Fujii, who opposed “easy intervention.” The yen has dropped 5.9 against the dollar since Nov. 27, while the Nikkei average has rallied 17 percent.
A weaker currency will spur a rebound in stocks, according to Seiichiro Iwasawa, chief strategist at Tokyo-based Nomura Holdings Inc., the country’s largest brokerage, who predicted last month the Topix will climb to 1,200 by the end of 2010.
Operating Profit
A five-yen appreciation against the dollar that holds for a year would trim 0.2 percentage point from gross domestic product, according to Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities Co. in Tokyo. Every 1 yen drop by the Japanese currency against the dollar raises Toyota’s operating profit by about 30 billion yen and Honda Motor Co.’s by about 12 billion yen, according to figures supplied by the automakers in November.
Toyota soared 13 percent in December after plunging 14 percent the previous three months. The Toyota City, Japan-based company gets 32 percent of revenue from North America. Tokyo- based Honda, Japan’s second-largest carmaker, jumped 15 percent in December after a three-month, 8 percent drop. The company makes 81 percent of its sales from abroad.
The “change in attitude by the government is significant,” said Phillip Schwartz, a New York-based director at ING Investment Managers who helps oversee $1.3 billion and has been buying Japanese exporters. “Having been underweight for so long, fund managers fear being left out.”
To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.
Last Updated: January 24, 2010 10:01
Wien, the Blackstone Group LP adviser who predicted last year’s rallies in stocks and oil, says Japan shares are his favorites. Harris Associates LP’s Herro, Morningstar Inc.’s international manager of the decade, says stocks at the cheapest ever relative to assets will gain even if the economy stagnates. Alkire of Morgan Stanley Asset & Investment Management is betting low debt levels will spur an advance that beats the U.S.
Japan, the world’s second-biggest equity market, is up 3.7 percent this year as measured by the Topix index, the most among the world’s 10 largest economies. Overseas investors pumped almost $13 billion into Japan during the two weeks ended Jan. 15, the most since 2004. Companies trade for an average 1.2 times book value, almost half the valuation for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.
“My best investment idea is Japan,” said Wien, 76, a former market strategist at Morgan Stanley and at hedge fund Pequot Capital Management Inc. who predicted the end of the technology bubble in 2000. “The Japanese market looks relatively attractive assuming the earnings come through, which I think they will.”
More investors are looking at net assets instead of earnings after the economy posted its lowest production since 1991 in the third quarter and stagnant profit growth left companies in the Topix trading at an average 37 times estimates for this year’s income. The price-to-earnings ratio is the highest among the world’s 10 biggest markets.
1989 High
The index fell 2.6 percent last week to end at 940.94. While the Topix remains 67 percent below the high reached on Dec. 18, 1989, investors profited in nine of the past 20 years, including a 58 percent gain in 1999 when the S&P 500 rose 20 percent.
Since the end of 2005, the Topix has fallen 43 percent, compared with the MSCI World Index’s 8.6 percent drop, as successive prime ministers including the current Yukio Hatoyama battled deflation and faltering growth. Bank of Japan Governor Masaaki Shirakawa said on Jan. 18 that he will keep borrowing costs near zero to help end the worst postwar recession. Hatoyama unveiled a 7.2 trillion yen ($80 billion) stimulus package last month.
Wien, Herro and Alkire’s predictions are based on valuations instead of economic prospects. Wien favors export- related companies, technology makers, and drug and cosmetics suppliers. Gauges of automakers and electronics companies in the Topix have climbed 11 percent and 6.2 percent, respectively, in the past three months, more than the broader index’s 4.3 percent advance.
Priced In
“Japan doesn’t have to be a strong economy to attract investor interest,” Wien said. “Things aren’t getting good there, but they’re not getting bad either. The bad news is diminishing.”
Companies in the Topix are projected to turn profitable in 2010 after a combined loss of 40 yen per share in the past 12 months, according to data compiled by Bloomberg. The Topix’s book value is 33 percent below its average dating back to 1993 of 1.8 times, according to data compiled by Bloomberg.
“Japan is extremely cheap on fundamentals,” said Herro, the chief investment officer for international equities at Harris, with $55 billion in assets. “When you combine the two concepts of low price and high quality to get a value proposition, especially if we see a movement towards more sustainable operating profitability by corporate Japan, this could be one of the best-performing markets over the next couple of years.”
Toyota, Canon
Herro bought shares of Toyota Motor Corp., the world’s largest automaker, and Canon Inc., the biggest camera manufacturer. Analysts surveyed by Bloomberg project Toyota will return to an operating profit this year, while Tokyo-based Canon’s may climb 64 percent from 2009.
Japanese equities underperformed industrialized nations since the MSCI World Index of 23 developed countries reached a record on Oct. 31, 2007. The fallout from the global recession has left the MSCI World 32 percent below that peak, compared with 30 percent for the S&P 500 and 42 percent for the Topix.
Alkire, the chief investment officer for Morgan Stanley Asset in Tokyo, says Japanese stocks may beat the U.S. and Europe in 2010 as falling expenses and low debt bolster profits. Forty-three percent of Japanese companies have no borrowings, compared with 18 percent in the U.S. and 17 percent in Europe, Alkire said in a presentation to pension funds in Tokyo.
‘Never Say Never’
“For most of the past year, foreign investors said, ‘Never buy Japan,’” said Alkire, whose firm oversees about $39 billion. “But this year, I say, ‘Never say never.’ Global markets will likely focus on Japan.”
Standard Life Investment Ltd.’s Frances Hudson isn’t as bullish because price drops may erode profits and hamper the recovery. Consumer costs fell 1.7 percent in November from a year earlier, the ninth month of declines. Japan has deflation for the first time in three years, according to the government.
“I wouldn’t write off the whole of Japan, but I would struggle to find anyone feeling positive on the domestic situation,” said Hudson, who helps oversee $197 billion at Standard Life in Edinburgh and advises staying “very light” on Tokyo-listed shares in global funds. “The government doesn’t seem to be able to make any headway in reforms. Neither in stimulating consumer spending or ending deflation.”
Speculation drove the Nikkei 225 Stock Average to a record 38,915.87 on Dec. 29, 1989. What followed was the popping of an asset bubble and a plunge in stock and real-estate values in what became known as Japan’s Lost Decade.
Worst Drop
The Nikkei has lost 73 percent from that peak, the worst performance of the world’s major markets. Japan’s nominal gross domestic product rose 23 percent between 1989 and 2008, while the U.S. increased 163 percent, according to data compiled by Bloomberg.
Japanese gross domestic product shrank to an annualized 471 trillion yen in the third quarter, the lowest level since 1991, according to Cabinet Office figures. It’s forecast to expand 1.4 percent in 2010 after a projected 5.3 percent contraction last year, according to the median estimate of economists surveyed by Bloomberg. That’s less than the 2.7 percent growth the World Bank in Washington is predicting globally.
U.S.-based funds that invest in Japanese equities attracted new money equal to 2.7 percent of total assets in the week ended Jan. 13, the most inflows since October 2005, according to data from EPFR Global in Cambridge, Massachusetts, and Frankfurt- based Deutsche Bank AG.
Weakening Yen
Money is returning as investors speculate Finance Minister Naoto Kan will bolster exports by weakening the yen, which touched a 14-year high against the dollar on Nov. 27.
Kan said Jan. 7 on his first day in office that he would welcome a weaker currency, compared with his predecessor, Hirohisa Fujii, who opposed “easy intervention.” The yen has dropped 5.9 against the dollar since Nov. 27, while the Nikkei average has rallied 17 percent.
A weaker currency will spur a rebound in stocks, according to Seiichiro Iwasawa, chief strategist at Tokyo-based Nomura Holdings Inc., the country’s largest brokerage, who predicted last month the Topix will climb to 1,200 by the end of 2010.
Operating Profit
A five-yen appreciation against the dollar that holds for a year would trim 0.2 percentage point from gross domestic product, according to Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities Co. in Tokyo. Every 1 yen drop by the Japanese currency against the dollar raises Toyota’s operating profit by about 30 billion yen and Honda Motor Co.’s by about 12 billion yen, according to figures supplied by the automakers in November.
Toyota soared 13 percent in December after plunging 14 percent the previous three months. The Toyota City, Japan-based company gets 32 percent of revenue from North America. Tokyo- based Honda, Japan’s second-largest carmaker, jumped 15 percent in December after a three-month, 8 percent drop. The company makes 81 percent of its sales from abroad.
The “change in attitude by the government is significant,” said Phillip Schwartz, a New York-based director at ING Investment Managers who helps oversee $1.3 billion and has been buying Japanese exporters. “Having been underweight for so long, fund managers fear being left out.”
To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.
Last Updated: January 24, 2010 10:01
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