AdviserVoiceemerging market Archives - AdviserVoice https://www.adviservoice.com.au/tag/emerging-market/ Financial planner information & financial planner education/CPD - AdviserVoice Thu, 23 Jul 2026 20:30:20 +0000 en-US hourly 1 https://wordpress.org/?v=7.0.2 Does debt matter? The diverging tales of the eurozone and the emerging markets https://www.adviservoice.com.au/2014/03/debt-matter-diverging-tales-eurozone-emerging-markets/ https://www.adviservoice.com.au/2014/03/debt-matter-diverging-tales-eurozone-emerging-markets/#respond Thu, 13 Mar 2014 20:40:20 +0000 https://adviservoice.com.au/?p=28736

Bond markets are full of surprises. Core government bonds have been one of the strongest performing asset classes in 2014, propelled in part by worrying signs of emerging market stress.

Emerging market (EM) debt has suffered relentlessly for nearly a year, scant reward for those emerging economies that spent most of the last decade bolstering their finances. Meanwhile, in the eurozone, Greece, Portugal, Spain, Italy and Ireland are among the world’s most indebted countries, and yet their bond markets have witnessed one of the most explosive rallies in history. Is this fair, and what explains this dichotomy?

 Figure 1: Peripheral bond spreads vs. EMD bond spreads

Thread-Figure1Source: Bloomberg, February 2014. EM denotes the spread on the JPM EMBI Global Index. All the periphery plots show the spread between the periphery country’s 10-year yield and the 10-year Bund.

In reality, the stock of debt is a poor indicator of the level of interest rates, sovereign default risk, or the near-term likelihood of a debt crisis. More important is the type of debt (external vs. internal) and factors affecting the ability of a country to refinance. If we are to assess whether EM debt is a crisis-in-the-making, or whether the eurozone periphery is overvalued, we must first ask: how much debt is too much debt?

Figure 2: Debt-to-GDP ratios versus bond yields

Thread-Figure2

Source: Bloomberg. For some countries, debt-to-GDP calculated using 2012 GDP as 2013 data not available at time of writing. For Brazil, the 2023 government bond yield has been used.

An elevated level of external or foreign currency debt is the poison that undermines sovereign debt stability. The lesson of emerging markets historically is that excessive foreign-denominated debts grow more ominous in the face of domestic deterioration. As strains grow, the accompanying currency devaluation makes these debts increasingly expensive to service. The combination of domestic weakness and higher debt burdens created a toxic and self-reinforcing downward spiral, ultimately imploding when foreign creditors turned off the lending taps.

Debt denominated in domestic currency is a different matter. The solution here is easier, as it requires policymakers to simply create more money, buying their own debt if necessary. Default can be averted but often at the expense of currency debasement and other economic side-effects such as inflation.

The toxic external debt dynamic is mostly absent today. We do not see an EM debt crisis unfolding. Economic rebalancing has reduced EM reliance on external debt, domestic conditions are more stable, and in many cases reserves have ballooned.

 Figure 3: Aggregate amount of internal vs. external debt for EMs 

Thread-Figure3Source: Threadneedle, January 2014. Based on countries which are present in both the JPM GBI EM (local currency debt) and JPM EMBI Global (external credit) indices and then comparing the dollar equivalent outstanding/face value debt amount.

This is not to say the recent EM sell-off is unfounded. Idiosyncratic risks are extreme in some regions such as Argentina, Venezuela and Ukraine. In others, such as the BRICs, rapid credit growth and misallocation of capital have fostered broken economic models that are now in desperate need of structural reform. There is more work to do, but the likely release valve in this cycle should be weaker currencies rather than crisis and default. Much of this adjustment is already behind us.

The eurozone is an entirely different matter. The region in aggregate does not have a serious debt problem, but individual countries most definitely do. In a robust monetary union, this would have been easily overcome via reflationary policies. Central banks can address liquidity problems through reflationary policies, which allow countries such as Italy and Spain to go on refinancing their enormous debt loads. The ECB was always going to struggle with Greece and Cyprus; even central banks cannot rectify true insolvency. But the ECB’s mistake was that it nearly allowed liquidity problems to morph into a solvency crisis. Nearly all eurozone debt is denominated in domestic currency – euros. By exposing deep fissures within the EMU, policymakers allowed the market to price peripheral debt as external debt. Speculation of a eurozone break-up and debt restructuring were evidence of the lack of faith in the monetary union.

In July 2012, Mario Draghi made his famous proclamation that the ECB would do ‘whatever it takes’ to preserve the euro. The ECB followed up with its programme of Outright Monetary Transactions (OMT). Draghi later labelled this, rather immodestly, as one of the greatest monetary policy tools ever crafted. He was right. In one fell swoop, the ECB managed to switch trillions of debt from being perceived as ‘external’ debt to ‘domestic’ debt. And with that change, default premiums in the eurozone debt rightfully plummeted. Rapid improvement in the balance of payments, less draconian austerity measures, and lower debt costs have since contributed to a now self-reinforcing cycle of improvement.

Eurozone economic sentiment is now on the mend. GDP will likely creep higher this year on the heels of broad-based but modest improvement in the weaker countries. The irony is that this modest recovery is perceived by markets as the ‘all-clear’ sign that eurozone debt problems are rapidly receding. A brighter growth outlook is certainly encouraging, but growth is not the key driver of investment returns in debt deleveraging events. Rather, it is typically the last piece of the jigsaw to fall into place. Modestly positive growth will make little or no difference to the debt sustainability of the indebted eurozone countries. Most of these look considerably worse than a majority of emerging market economies on most debt metrics, and this is not going to change.

It is difficult to identify tipping points in debt accumulation, but two critical factors portending crisis are the level of external debt and the actions of policymakers. European sovereign debt has performed phenomenally well precisely because it addressed both issues simultaneously. The ECB replaced policy ineptitude with policy magic by reassuring markets that eurozone debt was local debt. As long as there is no reason to doubt the sanctity of the eurozone going forward, the dreadful debt metrics of its weaker constituents will remain dormant concerns. The rally in peripheral debt has been justified. Sadly, that rally is almost over. Misplaced confidence fuelled by a better growth outlook may allow for an overshoot, but there is no hope for an immediate sustainable debt solution and spreads now offer little excess compensation.

Whereas euro countries snatched victory from the jaws of defeat, emerging economies have accomplished the opposite feat. Growth and strengthening finances have given way to excessive credit growth and a desperate need for structural reform. Aggregate debt levels, however, remain largely under control. Manageable debt levels should preclude a widespread crisis, allowing weaker currencies to bear the brunt of adjustment. Buying opportunities will abound in the coming year, but it may be necessary to dodge the occasional policy-induced catastrophe along the way.

Commentary from Jim Cielinski, Head of Fixed Income, Threadneedle Investments

]]>

Bond markets are full of surprises. Core government bonds have been one of the strongest performing asset classes in 2014, propelled in part by worrying signs of emerging market stress.

Emerging market (EM) debt has suffered relentlessly for nearly a year, scant reward for those emerging economies that spent most of the last decade bolstering their finances. Meanwhile, in the eurozone, Greece, Portugal, Spain, Italy and Ireland are among the world’s most indebted countries, and yet their bond markets have witnessed one of the most explosive rallies in history. Is this fair, and what explains this dichotomy?

 Figure 1: Peripheral bond spreads vs. EMD bond spreads

Thread-Figure1Source: Bloomberg, February 2014. EM denotes the spread on the JPM EMBI Global Index. All the periphery plots show the spread between the periphery country’s 10-year yield and the 10-year Bund.

In reality, the stock of debt is a poor indicator of the level of interest rates, sovereign default risk, or the near-term likelihood of a debt crisis. More important is the type of debt (external vs. internal) and factors affecting the ability of a country to refinance. If we are to assess whether EM debt is a crisis-in-the-making, or whether the eurozone periphery is overvalued, we must first ask: how much debt is too much debt?

Figure 2: Debt-to-GDP ratios versus bond yields

Thread-Figure2

Source: Bloomberg. For some countries, debt-to-GDP calculated using 2012 GDP as 2013 data not available at time of writing. For Brazil, the 2023 government bond yield has been used.

An elevated level of external or foreign currency debt is the poison that undermines sovereign debt stability. The lesson of emerging markets historically is that excessive foreign-denominated debts grow more ominous in the face of domestic deterioration. As strains grow, the accompanying currency devaluation makes these debts increasingly expensive to service. The combination of domestic weakness and higher debt burdens created a toxic and self-reinforcing downward spiral, ultimately imploding when foreign creditors turned off the lending taps.

Debt denominated in domestic currency is a different matter. The solution here is easier, as it requires policymakers to simply create more money, buying their own debt if necessary. Default can be averted but often at the expense of currency debasement and other economic side-effects such as inflation.

The toxic external debt dynamic is mostly absent today. We do not see an EM debt crisis unfolding. Economic rebalancing has reduced EM reliance on external debt, domestic conditions are more stable, and in many cases reserves have ballooned.

 Figure 3: Aggregate amount of internal vs. external debt for EMs 

Thread-Figure3Source: Threadneedle, January 2014. Based on countries which are present in both the JPM GBI EM (local currency debt) and JPM EMBI Global (external credit) indices and then comparing the dollar equivalent outstanding/face value debt amount.

This is not to say the recent EM sell-off is unfounded. Idiosyncratic risks are extreme in some regions such as Argentina, Venezuela and Ukraine. In others, such as the BRICs, rapid credit growth and misallocation of capital have fostered broken economic models that are now in desperate need of structural reform. There is more work to do, but the likely release valve in this cycle should be weaker currencies rather than crisis and default. Much of this adjustment is already behind us.

The eurozone is an entirely different matter. The region in aggregate does not have a serious debt problem, but individual countries most definitely do. In a robust monetary union, this would have been easily overcome via reflationary policies. Central banks can address liquidity problems through reflationary policies, which allow countries such as Italy and Spain to go on refinancing their enormous debt loads. The ECB was always going to struggle with Greece and Cyprus; even central banks cannot rectify true insolvency. But the ECB’s mistake was that it nearly allowed liquidity problems to morph into a solvency crisis. Nearly all eurozone debt is denominated in domestic currency – euros. By exposing deep fissures within the EMU, policymakers allowed the market to price peripheral debt as external debt. Speculation of a eurozone break-up and debt restructuring were evidence of the lack of faith in the monetary union.

In July 2012, Mario Draghi made his famous proclamation that the ECB would do ‘whatever it takes’ to preserve the euro. The ECB followed up with its programme of Outright Monetary Transactions (OMT). Draghi later labelled this, rather immodestly, as one of the greatest monetary policy tools ever crafted. He was right. In one fell swoop, the ECB managed to switch trillions of debt from being perceived as ‘external’ debt to ‘domestic’ debt. And with that change, default premiums in the eurozone debt rightfully plummeted. Rapid improvement in the balance of payments, less draconian austerity measures, and lower debt costs have since contributed to a now self-reinforcing cycle of improvement.

Eurozone economic sentiment is now on the mend. GDP will likely creep higher this year on the heels of broad-based but modest improvement in the weaker countries. The irony is that this modest recovery is perceived by markets as the ‘all-clear’ sign that eurozone debt problems are rapidly receding. A brighter growth outlook is certainly encouraging, but growth is not the key driver of investment returns in debt deleveraging events. Rather, it is typically the last piece of the jigsaw to fall into place. Modestly positive growth will make little or no difference to the debt sustainability of the indebted eurozone countries. Most of these look considerably worse than a majority of emerging market economies on most debt metrics, and this is not going to change.

It is difficult to identify tipping points in debt accumulation, but two critical factors portending crisis are the level of external debt and the actions of policymakers. European sovereign debt has performed phenomenally well precisely because it addressed both issues simultaneously. The ECB replaced policy ineptitude with policy magic by reassuring markets that eurozone debt was local debt. As long as there is no reason to doubt the sanctity of the eurozone going forward, the dreadful debt metrics of its weaker constituents will remain dormant concerns. The rally in peripheral debt has been justified. Sadly, that rally is almost over. Misplaced confidence fuelled by a better growth outlook may allow for an overshoot, but there is no hope for an immediate sustainable debt solution and spreads now offer little excess compensation.

Whereas euro countries snatched victory from the jaws of defeat, emerging economies have accomplished the opposite feat. Growth and strengthening finances have given way to excessive credit growth and a desperate need for structural reform. Aggregate debt levels, however, remain largely under control. Manageable debt levels should preclude a widespread crisis, allowing weaker currencies to bear the brunt of adjustment. Buying opportunities will abound in the coming year, but it may be necessary to dodge the occasional policy-induced catastrophe along the way.

Commentary from Jim Cielinski, Head of Fixed Income, Threadneedle Investments

The post Does debt matter? The diverging tales of the eurozone and the emerging markets appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/03/debt-matter-diverging-tales-eurozone-emerging-markets/feed/ 0 Weekly market & economic update – week ending 31 January, 2014 https://www.adviservoice.com.au/2014/02/weekly-market-economic-update-week-ending-31-january-2014/ https://www.adviservoice.com.au/2014/02/weekly-market-economic-update-week-ending-31-january-2014/#respond Sun, 02 Feb 2014 20:50:45 +0000 https://adviservoice.com.au/?p=27858 Key events of the past week and implications
  • Emerging market worries and no signs that the Fed is too concerned as it announced a further tapering of its monetary stimulus program saw share markets remain under pressure over the last week with bonds benefitting from safe haven demand.
  • Our assessment remains that last year’s strong gains and high levels of investor confidence had left share markets vulnerable to a correction and that emerging world worries helped provide the trigger. There are several points to note. First, the emerging market (EM) problems are consistent with a longer term deterioration in their relative outlook that reflects a combination of slowing productivity growth and political problems. The Fed’s taper has merely helped expose these problems rather than cause them.
  • Second, while emerging country growth is likely to be slower than we have become used to – with rising interest rates in several countries not helping – a plunge into a 1997-98 style emerging market recession seems unlikely: much of the emerging world is in better shape than back then with less reliance on debt, current account surpluses, lower inflation and floating exchange rates. What’s more while its still a time to be cautious on emerging markets generally, some do offer good value – particularly the surplus countries like Korea and China.
  • Thirdly, a downturn in the emerging world is unlikely to have a major impact on advanced countries. Historically EM crisis have not had a big impact on advanced countries, eg the Mexican crisis of 1994-95 had little impact on the US and nor did the 1997-98 Asian-emerging market crisis.
  • For Australia, the key remains China and its growth outlook hasn’t changed that much, but the broader problems in the emerging world provide a reminder that growth in commodity demand in the years won’t be what we have become used to. Which all points to the need for continued low interest rates and a lower $A.
  • Once the share market correction has run its course and investor sentiment readings have fallen back to less exuberant levels the bull market in shares is likely to resume.
  • With January seeing share market falls of around 3%, its worth having a look at the so called January barometer again. This basically says that “as goes January for shares, so goes the year”, but its track record is messy. For the US S&P 500 there have been 22 positive Januarys since 1980 of which 19 saw positive years, indicating an 86% hit rate. But the hit rate for negative Januarys (of which there were 12 going on to negative years was only 42%. It’s the same for Australia – since 1980 there have been 20 positive Januarys for the All Ords index of which 15 saw positive years, giving a hit rate of 75%. But of the 14 negative Januarys since 1980 only 5 saw negative years resulting in a hit rate of 36%. The bottom line is that while a positive January augurs well for the rest of the year, the fact that January has been negative doesn’t tell us much at all. In both Australia and the US, January’s in 2003 and 2009 saw shares fall but both years had solid returns.
  • Finally, the news wasn’t all bad over the last week with confirmation that US growth has picked up, strong US earnings results, a further rise in European confidence measures, more solid Japanese data including a further rise in inflation and a good pick up in Australian business conditions in December. So despite the emerging market woes and a rough patch in shares, the world is in reasonable shape.

Major global economic events and implications

  • The Fed provided no surprises with another $US10bn reduction in its QE program and ongoing assurances that further tapering is data dependent and that rates will remain near zero for a long time. The Fed’s failure to mention the issues in the emerging world probably suggests it does not see it as a big problem.
  • US economic data remained good. Home sales and durable goods orders fell but the first was affected by bad weather and the latter was distorted by aircraft orders. Meanwhile consumer confidence and house prices rose solidly and December quarter GDP growth was a solid 3.2% annualised with the highlight being strong growth in consumer spending and business investment. The overall impression is that US growth has picked up pace.
  • US December quarter earnings continue to improve with now 80% of results beating earnings expectations and 66% exceeding sales expectations. It now looks like quite a good reporting season.
  • Eurozone money supply and lending growth remained weak highlighting the case for more ECB stimulus, but against this bank lending standards eased a bit and consumer and business confidence continue to improve.
  • Japanese data for December saw more evidence that Abenomics is working with strong household spending, lower unemployment, the jobs to applicant ratio at a new 6 year high, industrial production growing at 7.3% and a further rise in headline inflation to 1.6% year on year and 0.7% in terms of the core.
  • A possible crisis of confidence in China’s wealth management funds was averted when investors in a fund that invested in a failed coal venture were bailed out. While concern may linger regarding such funds, this one was complicated by fraud so may be a special case. The fund’s name “Credit Equals Gold #1”!
  • Finally, strong and better than expected growth data from Korea, Taiwan and the Philippines highlighted that many Asian countries are in good shape and a long way from any sort of Asian-emerging market crisis.

Australian economic events and implications

  • Australian data was reasonable. Skilled job vacancies slipped in December and the Westpac leading indicator showed only weak growth. But against this business conditions improved solidly in December, new home sales held on to held on to the bulk of a big November gain and remain in a strong uptrend and credit growth picked up a notch. Finally producer price inflation remained benign at 0.2% month on month or 1.9% year on year.

Major market moves

  • Share markets had another difficult weak as emerging market concerns lingered.
  • Bond yields were flat to down helped by safe haven demand. Yields particularly fell in Spain and Italy, highlighting that they are well and truly off the radar screen as investor concerns.
  • Commodity prices were mostly softer, but the $A had a bit of a bounce after the previous week’s fall.

What to watch over the next week?

  • In the US, the big focus will be on the January payrolls report due Friday which is expected to show a recovery from December’s weather affected gain of just 74,000 jobs. Expect payrolls to gain 190,000 with unemployment remaining at 6.7%. In other data expect a slight fall back in the ISM manufacturing conditions index (Monday) to a still strong reading of 56 and a slight bounce in the services conditions ISM (Wednesday).
  • In Europe, both the Bank of England and the ECB are likely to leave monetary policy unchanged on Thursday, but the ECB is likely to signal it retains an easing bias.
  • In Australia, the Reserve Bank is expected to leave interest rates on hold for the fifth meeting in a row on Tuesday. Interest rates have already been cut to record lows, evidence continues to build that rate cuts are getting traction – with housing construction indicators up strongly, retail sales improving and consumer and business confidence up from their lows, the $A has continued to fall and inflation is running slightly higher than expected. While problems in the emerging world pose a threat it’s way too early to respond to this. Our assessment remains that the RBA would prefer to wait for the full impact of past rate cuts to flow through and is now more focussed on achieving and maintaining a lower level for the $A.  On the data front expect the trend in building approvals, house prices (both Monday) and retail sales (Thursday) to remain up in December.
  • Australian December half 2013 earnings results will also start to flow. Consensus expectations are for 14% earnings growth in 2013-14 led by 35% growth in resources profits on the back of the lower $A and reduced capex and 8% growth for industrials, so earnings results should show signs of this turnaround starting to come through. Key themes are likely to be the benefits of the lower $A for miners and offshore earnings, early and tentative signs of top line revenue improvement, ongoing focus on cost control and solid dividend growth.

Outlook for markets

  • Despite a poor start to the year, global shares are likely to push higher this year helped by reasonable valuations, improving earnings on the back of the global economic recovery and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. However, with shares no longer dirt cheap returns are likely to be a bit more constrained and volatile, and the current correction could go a bit further until investor confidence readings fall back a bit more.
  • Despite a likely more volatile ride, Australian shares are expected to perform well as profits pick up and interest rates remain low. The ASX 200 is expected to rise to around 5800 by year end.
  • Government bond yields are likely to continue their gradual upward trend as global growth improves and investors switch to risky assets. Cash and bank deposits offer pretty poor returns given low interest rates.
  • The $A looks messy with Fed tapering, China/emerging market uncertainties and RBA jawboning all working against it right now. The break below December’s low of $US0.8820 also points lower – down to around $US0.85. The $A is likely ultimately on its way to around $US0.80 over the next few years.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

——————-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
]]> Key events of the past week and implications
  • Emerging market worries and no signs that the Fed is too concerned as it announced a further tapering of its monetary stimulus program saw share markets remain under pressure over the last week with bonds benefitting from safe haven demand.
  • Our assessment remains that last year’s strong gains and high levels of investor confidence had left share markets vulnerable to a correction and that emerging world worries helped provide the trigger. There are several points to note. First, the emerging market (EM) problems are consistent with a longer term deterioration in their relative outlook that reflects a combination of slowing productivity growth and political problems. The Fed’s taper has merely helped expose these problems rather than cause them.
  • Second, while emerging country growth is likely to be slower than we have become used to – with rising interest rates in several countries not helping – a plunge into a 1997-98 style emerging market recession seems unlikely: much of the emerging world is in better shape than back then with less reliance on debt, current account surpluses, lower inflation and floating exchange rates. What’s more while its still a time to be cautious on emerging markets generally, some do offer good value – particularly the surplus countries like Korea and China.
  • Thirdly, a downturn in the emerging world is unlikely to have a major impact on advanced countries. Historically EM crisis have not had a big impact on advanced countries, eg the Mexican crisis of 1994-95 had little impact on the US and nor did the 1997-98 Asian-emerging market crisis.
  • For Australia, the key remains China and its growth outlook hasn’t changed that much, but the broader problems in the emerging world provide a reminder that growth in commodity demand in the years won’t be what we have become used to. Which all points to the need for continued low interest rates and a lower $A.
  • Once the share market correction has run its course and investor sentiment readings have fallen back to less exuberant levels the bull market in shares is likely to resume.
  • With January seeing share market falls of around 3%, its worth having a look at the so called January barometer again. This basically says that “as goes January for shares, so goes the year”, but its track record is messy. For the US S&P 500 there have been 22 positive Januarys since 1980 of which 19 saw positive years, indicating an 86% hit rate. But the hit rate for negative Januarys (of which there were 12 going on to negative years was only 42%. It’s the same for Australia – since 1980 there have been 20 positive Januarys for the All Ords index of which 15 saw positive years, giving a hit rate of 75%. But of the 14 negative Januarys since 1980 only 5 saw negative years resulting in a hit rate of 36%. The bottom line is that while a positive January augurs well for the rest of the year, the fact that January has been negative doesn’t tell us much at all. In both Australia and the US, January’s in 2003 and 2009 saw shares fall but both years had solid returns.
  • Finally, the news wasn’t all bad over the last week with confirmation that US growth has picked up, strong US earnings results, a further rise in European confidence measures, more solid Japanese data including a further rise in inflation and a good pick up in Australian business conditions in December. So despite the emerging market woes and a rough patch in shares, the world is in reasonable shape.

Major global economic events and implications

  • The Fed provided no surprises with another $US10bn reduction in its QE program and ongoing assurances that further tapering is data dependent and that rates will remain near zero for a long time. The Fed’s failure to mention the issues in the emerging world probably suggests it does not see it as a big problem.
  • US economic data remained good. Home sales and durable goods orders fell but the first was affected by bad weather and the latter was distorted by aircraft orders. Meanwhile consumer confidence and house prices rose solidly and December quarter GDP growth was a solid 3.2% annualised with the highlight being strong growth in consumer spending and business investment. The overall impression is that US growth has picked up pace.
  • US December quarter earnings continue to improve with now 80% of results beating earnings expectations and 66% exceeding sales expectations. It now looks like quite a good reporting season.
  • Eurozone money supply and lending growth remained weak highlighting the case for more ECB stimulus, but against this bank lending standards eased a bit and consumer and business confidence continue to improve.
  • Japanese data for December saw more evidence that Abenomics is working with strong household spending, lower unemployment, the jobs to applicant ratio at a new 6 year high, industrial production growing at 7.3% and a further rise in headline inflation to 1.6% year on year and 0.7% in terms of the core.
  • A possible crisis of confidence in China’s wealth management funds was averted when investors in a fund that invested in a failed coal venture were bailed out. While concern may linger regarding such funds, this one was complicated by fraud so may be a special case. The fund’s name “Credit Equals Gold #1”!
  • Finally, strong and better than expected growth data from Korea, Taiwan and the Philippines highlighted that many Asian countries are in good shape and a long way from any sort of Asian-emerging market crisis.

Australian economic events and implications

  • Australian data was reasonable. Skilled job vacancies slipped in December and the Westpac leading indicator showed only weak growth. But against this business conditions improved solidly in December, new home sales held on to held on to the bulk of a big November gain and remain in a strong uptrend and credit growth picked up a notch. Finally producer price inflation remained benign at 0.2% month on month or 1.9% year on year.

Major market moves

  • Share markets had another difficult weak as emerging market concerns lingered.
  • Bond yields were flat to down helped by safe haven demand. Yields particularly fell in Spain and Italy, highlighting that they are well and truly off the radar screen as investor concerns.
  • Commodity prices were mostly softer, but the $A had a bit of a bounce after the previous week’s fall.

What to watch over the next week?

  • In the US, the big focus will be on the January payrolls report due Friday which is expected to show a recovery from December’s weather affected gain of just 74,000 jobs. Expect payrolls to gain 190,000 with unemployment remaining at 6.7%. In other data expect a slight fall back in the ISM manufacturing conditions index (Monday) to a still strong reading of 56 and a slight bounce in the services conditions ISM (Wednesday).
  • In Europe, both the Bank of England and the ECB are likely to leave monetary policy unchanged on Thursday, but the ECB is likely to signal it retains an easing bias.
  • In Australia, the Reserve Bank is expected to leave interest rates on hold for the fifth meeting in a row on Tuesday. Interest rates have already been cut to record lows, evidence continues to build that rate cuts are getting traction – with housing construction indicators up strongly, retail sales improving and consumer and business confidence up from their lows, the $A has continued to fall and inflation is running slightly higher than expected. While problems in the emerging world pose a threat it’s way too early to respond to this. Our assessment remains that the RBA would prefer to wait for the full impact of past rate cuts to flow through and is now more focussed on achieving and maintaining a lower level for the $A.  On the data front expect the trend in building approvals, house prices (both Monday) and retail sales (Thursday) to remain up in December.
  • Australian December half 2013 earnings results will also start to flow. Consensus expectations are for 14% earnings growth in 2013-14 led by 35% growth in resources profits on the back of the lower $A and reduced capex and 8% growth for industrials, so earnings results should show signs of this turnaround starting to come through. Key themes are likely to be the benefits of the lower $A for miners and offshore earnings, early and tentative signs of top line revenue improvement, ongoing focus on cost control and solid dividend growth.

Outlook for markets

  • Despite a poor start to the year, global shares are likely to push higher this year helped by reasonable valuations, improving earnings on the back of the global economic recovery and easy monetary conditions helping to entice investors to switch out of cash and bonds and into shares. However, with shares no longer dirt cheap returns are likely to be a bit more constrained and volatile, and the current correction could go a bit further until investor confidence readings fall back a bit more.
  • Despite a likely more volatile ride, Australian shares are expected to perform well as profits pick up and interest rates remain low. The ASX 200 is expected to rise to around 5800 by year end.
  • Government bond yields are likely to continue their gradual upward trend as global growth improves and investors switch to risky assets. Cash and bank deposits offer pretty poor returns given low interest rates.
  • The $A looks messy with Fed tapering, China/emerging market uncertainties and RBA jawboning all working against it right now. The break below December’s low of $US0.8820 also points lower – down to around $US0.85. The $A is likely ultimately on its way to around $US0.80 over the next few years.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

——————-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 31 January, 2014 appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/02/weekly-market-economic-update-week-ending-31-january-2014/feed/ 0 ASIC releases report on emerging market issuers https://www.adviservoice.com.au/2013/08/asic-releases-report-on-emerging-market-issuers/ https://www.adviservoice.com.au/2013/08/asic-releases-report-on-emerging-market-issuers/#respond Tue, 27 Aug 2013 21:40:11 +0000 https://adviservoice.com.au/?p=24418 developing-250

ASIC has undertaken a review of emerging market entities.

Following the high profile collapse of some emerging market issuers overseas ASIC has undertaken a review of these types of entities here in Australia.

Our review has not identified at this time any areas of systemic concern, however ASIC does consider that there are some specific challenges that retail investors should be aware of before making the decision to invest in an emerging market issuer.

Today ASIC has published Report 368 Emerging market issuers (REP 368) about our review of emerging market issuers.

REP 368’s key points:

  • ASIC identified challenges emerging market issuers may be more likely to encounter than entities operating wholly in Australia.
  • ASIC is urging emerging market issuers and their advisers to focus on their corporate governance and the disclosure they provide to Australian investors regarding these challenges.
  • Investors should consider the risks before investing in an emerging market issuer.
  • Investors need to know that they may not have the same protections when investing in an emerging market issuer that is listed in Australia but incorporated abroad.

As described in REP 368, ASIC found that there are a number of challenges faced by entities that are operating in, or have significant exposure to, emerging markets. Common challenges include implementing good corporate governance and management systems, operating through complex ownership or contractual arrangements, risks associated with relying on one or two key individuals located outside Australia, and the difficulty in accessing or verifying reliable information about an entity’s operation and performance.

The report recommends emerging market issuers respond to these challenges by implementing effective internal controls and risk management systems. It is important that entities focus on making appropriate disclosure to investors consistent with an exchange’s listing rules and ASIC’s regulatory guidance.

‘ASIC is shining a light on emerging market issuers and their governance and disclosure, because we want to lift the sector’s transparency. And that is because we want investors to be confident and informed when putting their money in these companies,’ ASIC Commissioner John Price said.

]]> developing-250

ASIC has undertaken a review of emerging market entities.

Following the high profile collapse of some emerging market issuers overseas ASIC has undertaken a review of these types of entities here in Australia.

Our review has not identified at this time any areas of systemic concern, however ASIC does consider that there are some specific challenges that retail investors should be aware of before making the decision to invest in an emerging market issuer.

Today ASIC has published Report 368 Emerging market issuers (REP 368) about our review of emerging market issuers.

REP 368’s key points:

  • ASIC identified challenges emerging market issuers may be more likely to encounter than entities operating wholly in Australia.
  • ASIC is urging emerging market issuers and their advisers to focus on their corporate governance and the disclosure they provide to Australian investors regarding these challenges.
  • Investors should consider the risks before investing in an emerging market issuer.
  • Investors need to know that they may not have the same protections when investing in an emerging market issuer that is listed in Australia but incorporated abroad.

As described in REP 368, ASIC found that there are a number of challenges faced by entities that are operating in, or have significant exposure to, emerging markets. Common challenges include implementing good corporate governance and management systems, operating through complex ownership or contractual arrangements, risks associated with relying on one or two key individuals located outside Australia, and the difficulty in accessing or verifying reliable information about an entity’s operation and performance.

The report recommends emerging market issuers respond to these challenges by implementing effective internal controls and risk management systems. It is important that entities focus on making appropriate disclosure to investors consistent with an exchange’s listing rules and ASIC’s regulatory guidance.

‘ASIC is shining a light on emerging market issuers and their governance and disclosure, because we want to lift the sector’s transparency. And that is because we want investors to be confident and informed when putting their money in these companies,’ ASIC Commissioner John Price said.

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