Month: July 2012

Room for optimism on Europe: Mark Mobius

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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There is room for optimism that Europe’s economy will recover, Mark Mobius, Executive Chairman at Templeton Asset Management’s Emerging Markets Group told CNBC on Thursday, as companies in fast-growing emerging markets look to make acquisitions in the region.

“One of the reasons why I’m optimistic about Europe is that all this money in emerging markets is waiting for the opportunity to buy assets in Europe,” he said.

“So there’s going to be plenty of opportunities for Europe to sell state assets or other assets… So the picture looks very good,” Mobius told CNBC’s “Squawk Box Europe”.

Despite the global impact of the euro zone debt crisis, Mobius said emerging markets would continue to outpace their Western counterparts.

“The emerging markets are doing very well. Economically this year average growth for all these markets would be around five percent and the debt to GDP levels are low compared to developed countries,” he added.

He admitted that fears of a slowdown in China’s economy were a threat but this was to be expected given its size. India could yet surprise its critics, he said.

“There is deceleration, it’s still growing and we can expect that because the base is so huge and the size of that percentage is going to come down.

“Despite India’s corruption problems and organizational problems they still have rapid growth and if they can reform you are going to see the kind of growth rates China experienced in 5 or 10 years ago,” he said.

Mobius added that China currently offered interesting investment opportunities, as did Eastern Europe.

“Generally speaking we’re back in China. We’re doing more in China now because of this negative sentiment there’s some opportunities in China we can look at through the Hong Kong Market of course,” he said.

“The other area that is interesting for us still is in South-East Asia. Indonesia in particular, Thailand still looks quite good so we’re buying more there.”

In Europe there were a number of opportunities, he said, but the problem there was one of growth.

“Growth rates are not as high as they should be but there are some individual stocks that are breaking out and are moving internationally and regionally and growing that way. I would say that some of the eastern European opportunities are very interesting,” he said.

© 2012 CNBC.com

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No bottom in sight for China coal prices: Analyst

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Coal prices in China have fallen almost 20% since the beginning of the year, with analysts expecting further declines as inventories remain high and coal mines in China continue to ramp up production.

Spot coal in China, which is currently trading around 650 yuan (USD 102.40) a tonne could fall a further 8% this quarter, according to Nomura Research.

“It is too early to call a bottom in coal prices given that domestic supply cutbacks are inadequate and power plants` coal stockpiles remain high at 28 days versus 15 days in normal times,” Nomura Analyst Ivan Lee said in a report published Tuesday. “Waning coal-fired (electricity) generation, a high influx of cheap coal and excessive stockpiles across China will continue to weigh on the coal market outlook in the second half of 2012.”

According to the report, domestic coal producers are expected to increase production by about 5% a year from now until 2015, but the Chinese are continuing to import as well because international coal prices are about 10% cheaper than those at home. Imports of the commodity will reach 250 million tonnes this year, up from 182 million tonnes in 2011, according to data from the China Coal Market Network, an industry association.

Andrew Su, CEO of Compass Global Markets, a Sydney-based commodity trading broker, says the oversupply situation in China is getting worse.

“Six to seven months ago, we were getting inquiries from China about buying coal mines in Australia,” Su told CNBC. “Now, people are asking, how can we offload some of our coal capacity because some of our customers are defaulting on their uptake agreements. Shipments are just sitting there.”

According to Lee, coal producers need to cut output. But at 600-630 yuan a tonne, it is still profitable for companies to sell so they are not cutting back.

“The most likely catalyst for price stability and recovery at these levels is a larger cut in output among the highest-cost miners,” Nomura`s Lee said. “Sxcoal (research firm based in China) believes a 3% cut in monthly coal production, approximately 10 million tonnes, is needed to restore market balance.”

He adds that the current oversupply situation will lead to a further drop in prices hurting the earnings of China`s three largest listed coal companies, China Shenhua Energy, China Coal Energy and Yanzhou Coal. Nomura is revising its earnings estimates of these three companies as it expects margins to shrink and sales growth to slow over the next two years.

– By CNBC`s Jean Chua.

Copyright 2011 cnbc.com

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Pro who made June’s best call: What he likes now

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Michael Gurka may have sounded crazy a month ago when he recommended corn as one of the market’s best plays, especially after the commodity had just hit an 18-month low.

But a month later Gurka’s call stands as the best of June, with corn flying up 27% since then and, with a weak crop and scorching weather ahead, likely a solid play for some time yet.

So where does he see the next big move in the markets?

Right in the same commodities space, but in gold and oil, both of which he sees reaching pressure points and about to turn lower.

“There’s potentially going to be a short squeeze here in metals and energy – gold and crude,” said Gurka, managing director of Spectrum Asset Management in Chicago. “If you start seeing crude getting above USD 93 to USD 95, that’s when you`re going to start seeing some pretty good short positions coming in. For gold, USD 1,625 and north of there, it’s mostly the same scenario.”

Fundamentals will drive down the prices, Gurka said, basing the belief on the notion that the global economy is in a slowdown mode that will prevent growth-related goods like oil from continuing to rise.

“I’m still really bearish on the economy,” he said. “Things eventually are going to start falling apart here.”

Data this week backs up the perception that the economy is teetering on the brink of at least a slowdown and perhaps a recession.

The Institute for Supply Management manufacturing reading fell below 50 in June, a reading that signals contraction. The Philadelphia Federal Reserve’s activity gauge last week also showed conditions consistent with a recession.

Those factors would back up a bearish call on oil as well as gold, which is traditionally seen as an inflation hedge though it has been the beneficiary of a flight-to-safety move as well. Gurka thinks declining economic signs will manifest themselves in trading.

It’s worth noting that he’s making a short oil call as crude has surged USD 7 a barrel over the past week.

In a CNBC.com interview, Gurka predicted on June 1 that “the grains are really going to start to shine.”

The call turned to be spot-on, as wheat, corn and soybeans easily outperformed an otherwise lackluster commodity group, which gained as whole just 1.2% in June, as compared to the Standard and Poor`s 500, which was up 5% during the volatile month.

He said corn still could have room run judging by heavy activity in the December contract. On Tuesday`s pre-holiday quiet trading day, 50,000 December corn contracts changed hands, Gurka said.

He’s not alone in his bullish corn call, though newcomers to the trade may have missed the most dramatic gains.

“We see little in the near-term (apart from a dramatic shift in weather patterns in the coming weeks) that will cull the market’s current bull run,” Morgan Stanley analyst Hussein Allidina said in an outlook for clients.

Copyright 2011 cnbc.com

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Farmers quit, saying high grain prices are a ‘myth’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Corn and wheat prices may be trading close to ten-month highs but contrary to public opinion many farmers are not reaping fat profits.

The stark reality is that growers’ margins are razor thin and many are even losing money because food crops are priced well-below the cost of production, former Australian farmer Paul Hickey explains.

Hickey speaks from personal experience. Unable to contain spiraling losses, he stopped production last year at his 1,000-hectare farm in Howlong in New South Wales, ending more than one-and-a-half centuries of “continuous food production in Australia by our family.”

The story is the same globally, he says. “From growers I know in the US, UK and particularly Australia and Canada, there is no one making anything out of grain. Beef, dairy, fruit and vegetables are much the same.”

Drought in the US grain belt has sent benchmark prices in the agricultural commodities complex surging and those markets have remained resilient to the global economic slowdown.

Relentless heat in the key US corn- and soybean-growing areas drove benchmark Chicago corn futures higher on Tuesday, marking the grain’s biggest eight-day advance in three-and-a-half years.

Soybean prices jumped to their highest levels since 2008, less than a dollar per bushel off that year’s top, while US wheat hit its highest price in over a year, tracking corn’s rally. That’s raising fears of soaring costs for consumer food items such as bread, breakfast cereal and cooking oil, which in turn could fuel inflationary pressures.

But from a farmers’ point of view high food prices are an “urban myth”, Hickey says. And he argues that food should be priced much higher to take into account producers rising production costs. “This food production crisis is coming to a head. Low-priced food cannot continue. “

Prices Way Below Breakeven

On average, an Australian farmer’s “breakeven” wheat price last year was $180 (Australian dollars) a ton but they were paid between $130 and 140 a ton with rising input and fixed costs a major drag on farm incomes, Hickey explained.

“In Australia, many midsize farmers cannot afford to buy a $500,000 harvester or a new $350,000 tractor when you’re struggling to cover the fixed costs of growing grain or of producing meat. This is why much larger operators than us had machinery 30 years old that they could not afford to replace.”

Abah Ofon, senior agriculture commodities analyst at Standard Chartered in Singapore, said anecdotal evidence from farmers he’d spoken to “definitely tally” with the theme of tight or negative margins.

“This is largely a result of higher production costs for fertilizer, energy, labor, insurance and machinery juxtaposed with stiff price competition,” Ofon said. “This rings true for sugarcane farmers in India, onion farmers in Tasmania, cotton farmers in Benin or wheat farmers in Kansas.”

He added: “One of the best ways to think about costs is to relate it to yields. Poor yields mean that you are spreading your cost over a smaller volume of produce and that really eats into margins – which is why the weather and yields are so important” in the agriculture sector.

Ultimately, Hickey says, the end result is that farming isn’t considered a viable career option for many young Australians. “You won’t find many farmers in Australia under 40. Many have got up and got out. Here in Australia they have gone to the mines, or like myself back to their old professional jobs,” said Hickey, who holds an MBA and BA degree in Agricultural Sciences, and now works as an agronomist.

Christopher Narayanan, Societe Generale’s head of agricultural commodity research, says aging farmers is a theme that’s resonating in the US too.

“There is waning interest in farming,” he said. “In the end, I believe areas such as South America, Eastern Europe and Sub-Saharan Africa offer the best chances for agriculture expansion. To that end, there is some truth to crop prices versus inputs. With rising global population and shrinking arable land, the long-term trend certainly suggests eventual constraints unless these production practices can be improved. For that, I remain a long-term bull on agri-prices to encourage farmers to adopt – and afford – these technologies and practices.”

Copyright 2011 cnbc.com

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Are the boom days for Hong Kong property over?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Hong Kong’s residential property market, which has seen dramatic price gains over the past decade because supply has not kept up with demand, is set for a slowdown as the new administration comes good on its pledge to increase land supply for housing, says an industry expert.

“With a pro-supply government and hence likely rising supply, and more proactive policies against price rises, we expect residential price growth to halve at best,” Nicole Wong, Regional Head of Property Research at CLSA told CNBC.

In his inaugural speech on July 1, Chief Executive CY Leung reiterated his pledge to increase land supply to ensure affordability for middle-income buyers. The government’s target is to help private developers release for sale 20,000 units every year – almost double of the 9,500 units made available in 2011.

Residential property prices, which have surged 66% between 2000 and 2012 at an annual rate of 5.2%, will slow to a 2.6% growth rate per annum between 2010 and 2020, according to Wong.

“I think the pressure on property prices is going to hit the property market much earlier than people would have expected,” Wong said, adding that she is underweight Hong Kong property developers as she believes earnings have peaked.

Policy risks surrounding the sector, along with a general rise in investor risk aversion, sent Hong Kong property stocks down 2% in the second quarter – after rising 19% in the first quarter.

Some developers in the city have already started pricing their housing projects at a discount. Cheung Kong Holdings, for example, priced units at a new project located in the city’s suburbs 5% below apartment prices in the same district.

“Future land is not going to be pricier, it is going to be a little cheaper – so (Cheung Kong is) offloading the flats and recouping the cash (to) buy lower,” Wong said, a trend that is likely to continue among other developers.

Paul Louie, property analyst at Nomura, however, disagrees that government’s policies to increase supply will have a large impact on prices in the coming years.

“Even though there will be an increase in land supply, the transmission mechanism takes four years. It takes at least four years in order to complete the constructions before they can be moved into,” he said.

Louie adds that there is adequate demand to meet an increase in supply, which will ensure that prices remain supported.

“The physical market has been fine year-to-date – most of the projects that have been launched have been clearing units at a decent pace,” he said.

Copyright 2011 cnbc.com

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Weak rupee makes foreign trips unaffordable for Indians

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Delhi-based communications consultant Sanjiv Kataria is not going to the US this August to accompany his daughter as she starts a master’s degree program at the University of Pennsylvania in Philadelphia.

The decision to break the normal practice among Indian parents – who tend to escort their children in overseas enrolment – was not an easy one for the 56-year-old, who says it was a choice driven purely by economics: a falling rupee, that has depreciated about 25% over the past one year, coupled with red hot inflation at home and skyrocketing airfares.

Kataria, who has been holidaying abroad every year since the past six years, says the plummeting rupee has messed up his budget. “All my calculations with regard to her education costs and the cost of a return trip to the US were based on rupee at 50 against the dollar, now it’s almost at 57. We have to send her to college, but can save on our trip,” he told CNBC.

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Growing risks for Philippine stocks as market surges

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Philippine stocks, the best performers in Asia this year, have gained more than 22% in 2012, but the market is now looking expensive compared to Southeast Asian peers, and analysts say it may be particularly vulnerable to capital outflows should the global economy deteriorate further.

Buying by foreign investors has helped drive the Philippine Stock Exchange (PSE) index to a valuation of 15.9 times forward earnings, compared to 12.1 times for Indonesia and just 10.5 times for Thailand.

“Our general view on Manila is that the market is overvalued and has limited investment options,” David O’Neil, Chief Investment Officer of Asean Investment Management told CNBC. “Yes, the market has performed well but we put it in the camp of ‘fairly valued and at risk of capital outflows if global issues turn more negative’.”

Last year, the Philippine stock market drew the most foreign buying in Asia as a percentage of its market capitalization . New foreign money accounted for USD 1.3 billion, or 5.6%, of the Philippine Composite Index last year, according to data from Nomura.

There has been no let-up in foreign buying in 2012, with net inflows into the market every month of this year.

According to Nomura, the inflows are likely to continue, especially if Moody’s Investors Service and Standard and Poor’s follow Fitch’s move and raise their credit ratings for the Philippines to one notch below investment grade.

“The Philippines is seeing the strongest buying in the region so far this year and we expect this to go on,” Equity Strategist Mixo Das said. “Every month this year, we have seen net inflows into the market while Taiwan, Korea and Thailand have had at least two months of outflows.”

While this means that the stock market will continue to chalk up gains, it makes the market more vulnerable to outflows. James Thom, Investment Manager at Aberdeen Asset Management, which owns Philippine consumer, financial and conglomerate shares, likes the market because of its positive macroeconomic story but is concerned about its exposure to foreign flows.

“It’s a relatively small market with a certain risk profile,” Thom said. “Its economy is a little bit more exposed to exports than Indonesia’s but on par with Thailand’s, for example. If we see a sudden deterioration in the global economy, led by events in Europe, this could trigger a reversal of flows.”

Despite the growing short-term risks, analysts say the long-term fundamentals remain strong. They say the market should still be able to perform well, provided that that economy stays its course and the corporate sector continues to report steady earnings growth.

In fact, O’Neil of Asean Investment Management expects Phillipine stocks to gain as much as 40 percent over the next two years.

– By CNBC’s Jean Chua.

Copyright 2011 cnbc.com

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

JPMorgan downgrade ‘long time coming’: Whitney

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Meredith Whitney, CEO of the Meredith Whitney Advisory Group, downgraded JPMorgan to “hold” on Tuesday and told CNBC that it had been a “long time coming.”

“It wasn`t the right time to do it when the stock announced a USD 2 billion writedown,” Whitney told “Closing Bell,” referring to the bank`s admission last month that it would post a trading loss of at least USD 2 billion.

But with JPMorgan rallying back 17% and now trading at a little above tangible book value, Whitney said, “we decided to do it before the holiday weekend in light of this Libor event, which I think is going to get a lot bigger.”

Whitney was referring to Britain`s rate-fixing scandal, which this week forced Barclays to pay a USD 450 million fine and led to the resignations of its top three executives.

Before the downgrade, JPMorgan was the only large-cap bank Whitney had recommended. She said the downgrade brings it in line with her negative stance on the group overall.

“These banks are not even earning their cost of capital,” Whitney said.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Why Europe needs to do more than cut interest rates

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The European Central Bank needs to go beyond lowering interest rates – which has already been priced in by markets – to boost growth and authorities may be better off ramping up their asset-purchasing programs instead, economists tell CNBC.

According to Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital Investors, another rate reduction may not make a “huge difference” to Europe’s economy because low rates are not being passed through the system.

“They need to do something about the fact that the monetary transmission mechanism in Europe has broken down,” Oliver told CNBC Asia’s “Squawk Box” . “They’ve got record low interest rates but credit conditions in places like Spain, Greece, Italy and so on are incredibly tight. They should be playing a role in making sure that the bond yields in those countries come down.”

Bond yields in Spanish and Italian 10-year paper are at about 6.2% and 5.7% on Tuesday, compared to 1.6% on German government bonds, considered the region’s safest. To bring down the borrowing costs of Spain and Italy, for example, the ECB should follow the BOE’s move and buy those sovereign bonds, Oliver said.

Oliver’s comments came on the back of remarks by the head of the International Monetary Fund Christine Lagarde to CNBC that easier monetary conditions may not be the best policy for Europe.

“The ECB has room available in terms of traditional monetary policy. We are not sure this is the best channel at the moment,” Lagarde told CNBC’s Maria Bartiromo on Tuesday, when asked about the possibility of a rate cut. “Germany does not need a lowering of interest rates set by the ECB but Italy and Spain do, so you can’t dissociate when you use that kind of monetary policy instrument.”

“On the other hand, the (ECB) asset purchase program is much more selective and can be used in a more judicious way,” she added.

The European Central Bank (ECB) and the Bank of England (BOE) are both meeting on Thursday, and the former will likely cut by 25 basis points its record-low interest rates, currently at 1%, economists say. The BOE may introduce more stimulus after keeping the benchmark rate at an all-time low of 0.5% in June, they say.

David Woo, Head of Global Rates and Currencies Research at BOA Merrill Lynch in New York, agrees that central banks will probably have to be a lot more aggressive because interest-rate cuts have already been priced in by investors and may not have the desired effect of boosting asset prices.

He said that while consensus is for a rate reduction of 25 basis points by the ECB this week, they can probably cut rates by as much as 50 basis points, and do more by announcing a quantitative easing program by buying sovereign bonds. 

“I think the market is definitely pricing in another round of QE .The markets have already to a great extent front-run policy makers so from that point of view, once these policies were to come through, I am not sure to what extent this is going to give risk assets much of an upside from here,” Woo told CNBC. “The point here is the market is expecting them to act aggressively so I’m not sure to what extent they will be able to exceed market expectations.”

– By CNBC’s Jean Chua.

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Risks lurk in Asia’s most upbeat economy

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Travels over the past week through India and Indonesia yielded very different perspectives. There was a sense of grave concern and urgency among market participants and policymakers in India, where high inflation, low growth, an under pressure currency, and regulatory uncertainty have combined to create difficulties unseen in many years.

Indonesia, in contrast, seemed relaxed, marked by minimal concern about growth, overall comfort with the inflation situation, and a broad-based perception that the economy was capable of withstanding the stress in global markets better than it had been in decades.

Some were concerned about the state of politics, slow pace of reforms and infrastructure investment, rising nationalism in the area of mining, and heavy handed intervention in the bond and currency markets, but no one saw high risk of market or economic dislocation. The general sentiment seemed to be that the country was primed for strong growth for years to come.

The Indonesian economy continues to be characterized by exceptionally strong consumption and investment demand. Benign inflation during the past year, helped by a broad range of subsidies on energy products, and substantial intervention by Bank Indonesia, has pushed down the structure of interest rates considerably, leading to a boom in consumption and imports. There is little sign of that boom abating in the near term.

The policy strategy appears to boost investment by pushing interest rates to exceptionally low levels, while keeping consumption under some modicum of control through sectoral lending limits – banks now face some restrictions in the areas of real estate, auto, and credit card lending.

The biggest focus is on foreign exchange market stability, with the central bank imposing repatriation requirement on exporters and opening a dollar deposit facility for banks this year. The former has yet to gain traction, while the latter has received positive response from banks, although the amounts are small.

At times the market has been overwhelmed by heavy handed intervention by the central bank, causing the spread between domestic and off-shore forex rates to spike. The authorities seem to think that the market has broadly stabilized in recent weeks, which appears misaligned from the market’s perception.

Indonesian policymakers are keen to prevent disorderly adjustment in bond yields or financing crunch if external risk aversion spikes. A bond stabilization fund is in place to use state owned enterprises’ “excess” cash to purchase bonds, although the fund has not been needed thanks to Bank Indonesia’s aggressive bond buying program in the past year. A USD 5.5 billion standby credit line has been arranged to handle emergency budget financing risks.

The central bank has a multi-billion dollar swap line with the central banks of China and Japan, in case balance of payments are stretched.

The Downside

While these contingencies help deal with external risks, they are not comprehensive. Corporates have considerable external leverage, much of it in short term liabilities, which could still face stress. Exceptionally low fuel prices continue to cause excess consumption and distortion, which would likely result in particularly poor current account figures if exports remain weak and imports stay sticky.

Rising judicial activism on investment related regulation is a source of discomfort among foreign investors. New laws on mining suggest rising protectionism and economic nationalism.

Still, confidence among Indonesians, whether they are consumers or government officials, remain high. Indonesia has been long dormant, a product of the aftermath of the 1998 financial crisis. There are many reasons why its growth rate may not soar in the coming years, and why a boom-bust cycle could ensue in a couple of years, but for the time being, it may well be the most buoyant economy in Asia.

Taimur Baig is the Chief Economist for India, Indonesia and Singapore, Global Markets Research at Deutsche Bank AG. He is a regular guest on CNBC TV.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow