Month: September 2014

There’s more to Modi-Abe ties than China

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

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There`s more to blossoming ties between the Indian and Japanese prime ministers than counterbalancing the rise of China, analysts say.

“India right now is shopping for money. That to me trumps any longer geo-political considerations, especially with respect to China. I`m sure India also wants very strong relations with China as it is India`s largest trading partner,” said Taimur Baig, chief Asia economist at Deutsche Bank.

“There are broader issues down the road about supplanting China as a manufacturing hub, but that`s not today`s story. That`s years from now. First off is getting the macro house in order as far as India`s concerned,” he said.

Read More India and Japan send signal with bear hug

Narendra Modi made a five-day visit to Tokyo last week, his first major trip to a foreign country since becoming India`s prime minister in May. Stronger ties between India and Japan are rooted in an over two-year old friendship between Modi and Japanese Prime Minister Shinzo Abe that began in 2012 when Modi visited Japan during his role as Gujarat`s Chief Minister. The leaders hold similar conservative-nationalistic, pro-business views.

A united front

Defense deals overshadowed investment news, fueling speculation that Japan and India aim to form a united front amid China`s increasingly aggressive maritime offense in the South and East China Seas.

Read More Is India `holding a gun to its own head?`

Modi lashed out at what he called the “18th century” expansionary ways of some countries which “encroach and enter the seas of others,” during his visit, a likely reference to Beijing.

On Monday, the leaders agreed to hold regular maritime exercises and to accelerate talks about the potential sale of Japanese aircraft to India`s navy; this would mark Japan`s first overseas military sale in nearly 50 years.

Seeking investment

While defense deals were front and center, Modi also sought increased investment from Japan – its fourth-largest foreign-direct investor, according to data from India`s Ministry of Commerce and Industry.

“Modi went to Tokyo with a very clear message for Japanese businesses that he was going to address the country`s labyrinth of regulatory and tax complications that get in the way of foreign direct investment, which the Japanese business community has scratched their heads over for a long time,” said Sheila Smith, senior fellow for Japan studies at the Council for Foreign Relations.

Read More The missing link in Asia`s economic recovery

If the Japan Credit Ratings Agency is more favorably pre-disposed to looking at India`s macro outlook there`s a greater chance that a higher rating will be assigned, reducing the cost of financing for Japanese corporates into India, Deutsche Bank`s Baig said.

Read More Japan and Korea seize opportunity in India

On Monday, Japan pledged to double private and public investment in India over the next five years to $35 billion.

Jealous much?

State-run newspaper China Daily accused Abe of “dividing” India and China on Monday, stating that Indo-Japan ties face “huge uncertainty” in view of rising cooperation between China and India and the BRICS (Brazil, Russia, India, China and South Africa) generally.

“Beijing`s improving maritime strategies and the development of China-India strategic relations will inevitably exert far-reaching influence upon Japan`s strategic resources, channels and markets,” the paper said.

The article also questioned why India would sign deals with Japan that could potentially affect China ahead of Modi`s state visit to Beijing later this month.

Still, Baig expects Modi to cosy up to Chinese leader Xi Jinping.

“Our view is that Modi wants to pursue and East Asian model of development: Pushing up the savings rate which then becomes a source of large investment pool but also importing capital from the rest of the world to set up large manufacturing facilities to provide employment for Indians. If that is a model India wants to follow, then Japan is example number 1 and China is example number 2.”

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

The missing link in Asia’s economic recovery

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

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Economists expecting a pickup in Western demand to drive Asia`s growth recovery have been disappointed thus far.

“There has been a striking breakdown in the relationship between Asia`s exports and demand indicators in the US/European Union,” said Taimur Baig, economist at Deustche Bank.

Historically, a recovery in advanced economies has boosted Asian exports, which has in turn boosted income and investment in the region.

However, Baig points out that data through July show only small pockets of strength, with the region as a whole exporting much less than expected.

Read More Did China just announce a new mini-stimulus package?

Data released Monday show exports by trade powerhouseSouth Korea`s dipped 0.1 percent on-year in August, below expectations for a 0.2 percent rise and marking the first annual fall since May.

Trade data from South Korea, the world`s seventh-largest exporter, provides an early gauge on the strength of global demand as it`s the first major exporting economy to publish trade data each month.

Indonesia`s exports, meanwhile, plunged 6 percent on year in July, far worse than forecasts for a 2 percent decline.

Asia`s sputtering export engine

One reason an export-led recovery is lacking is that the recovery in the U.S.has been accompanied by unusually weak labor market conditions, said Baig.

Read More Chinese twin PMIs confirm manufacturing downturn

“The unemployment rate has declined, but some of that is has been due to a large rise in discouraged workers. A large pool of contract workers has emerged, with far less sense of job security than permanent hires. This, in combination with tightened bank lending conditions, in turn can lead to lower incentive to consume,” he said.

The situation is even worse in Europe and as long as labor market weakness persists Asian exporters will struggle, he said.

Another headwind is the revival in the US manufacturing sector which has led to some degree of import substitution.

“Surging shale gas and oil production has reduced imports, lowered energy costs, and revitalized long dormant segments of manufacturing. This phenomenon is not going to threaten large chunks of Asian exports given the sustained comparative advantage and economies scale enjoyed by the region`s manufacturers, but nevertheless this marks a notable reversal of a multi-decade trend of production off-shoring,” Baig said.

Read More US factory activity expands at fastest pace in over 4 years in Aug: Markit

Finally, a marked rise in trade restrictions constrained global trade growth in recent years.

1,185 trade-restrictive measures have been recorded since late 2008, only a fifth of which were removed by May 2014, according to the World Trade Organization (WTO),

Trade outlook bleak

Louis Kuijs, chief China economist at RB (London Stock Exchange: RBS-GB)S (London Stock Exchange: RBS-GB) observed a similar trend, noting that economic growth in Asia could disappoint in the coming months due to weaker-than-expected global trade developments.

“While we still expect global trade to continue to grow at a reasonable pace in the coming six months, we expect no significant pick-up in growth of global demand anymore for the rest of the year,” he said.

Read More India`s growth speeds up in after-glow of Modi`s triumph

In its July World Economic Outlook Update, the International Monetary Fund scaled back its projection for global trade growth for 2014 to 4.0 percent from 4.3 percent. While still 0.9 percentage points faster than in 2013, it`s a significantly smaller acceleration than expected at the start of this year, Kuijs said.

Baig too noted his forecasts for Asia`s economic growth could be at risk.

“Will any of these headwinds disappear soon? We doubt it. As the [Federal Reserve] Chairperson Yellen pointed out at her address in Jackson Hole last week, ongoing shifts in the structure of the labor market and the possibility that the global financial crisis has caused persistent changes in the labor market`s functioning will continue to act as brakes to employment and income,” he said. “Import substitution may rise in the near term, and there is little sign of trade restrictions abating.”

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

Why Japan’s economy is stuck in ‘no man’s land’

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

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As poor economic data rattles faith in Abenomics following the April consumption tax hike, one analyst told CNBC that uncertainty over the outlook for Japan`s economy will linger for some time.

“With the consumption tax, we`re not done with this… as the government is poised to take it from 8 to 10 percent next October,” Paul Sheard, chief global economist at Standard and Poor`s Ratings Services told CNBC Asia`s ” Squawk Box .”

“So if they go ahead with that we`re still going to be – for the next year to year and a half – in this no man`s land of not knowing whether what [Bank of Japan Governor Haruhiko] Kuroda is doing is successful,” he added.

Japanese household spending fell 5.9 percent on year in July, worse than expectations for a 3 percent decline, data released Friday showed. Industrial output rose 0.2 percent on month, below expectations for a 1.0 percent rise.

The data add to a series of sub-par economic readings as the effects of the government`s sales tax to 8 percent from 5 percent in April drag the economy, fueling uncertainty over the effectiveness of Abenomics – Prime Minister Shinzo Abe`s plan to boost Japan`s long-moribund economy.

Second quarter growth data released in August showed the Japanese economy shrank an annualized 6.8 percent, the largest contraction since the first quarter of 2011 when the economy was hit by the impact of the March 2011 earthquake and tsunami.

Have faith

Some economists are optimistic that the fog surrounding Abenomics will soon clear.

“Despite [Friday`s] weaker-than-expected data I`m still optimistic about growth prospect for the second half of the year,” said Junko Nishioka, chief economist for Japan markets at the Royal Bank of Scotland.

The continued recovery in the labor market and the government`s proactive stance of spending on public works are encouraging signs, Nishioka said.

Japan`s jobs-to-applicants ratio held steady at 1.10 in July after rising to that level in June for the first time June 1992, data released Friday showed.

More stimulus?

Whether or not the central bank can achieve its key inflation target without additional stimulus is questionable, however.

Nationwide core consumer prices rose 3.3 percent in July, in line with forecasts, Friday`s data showed. However, when excluding the effect of the April tax hike core inflation stood at 1.3 percent, below the 2 percent inflation target that the Bank of Japan (BOJ) pledged to meet sometime next year.

“Spare capacity widened again last quarter, and may settle at levels consistent with 1 percent [inflation] rather than 2 percent over the next year or so,” said Marcel Thieliant, Japan economist at Capital Economics. “What`s more, the exchange rate has been broadly stable lately over the past year, so the boost from import prices is now fading.”

“We doubt that the 2 percent inflation target will be reached without additional stimulus,” he said.

“Assuming that Bank of Japan has expanded its policy duration to the next fiscal year, I think 2 percent inflation during the period is achievable,” Royal Bank of Scotland`s Nishioka added.

The Bank of Japan is will meet this week but most analysts do not expect further monetary stimulus until October.

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

China real-estate: A bubble bursting

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

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For 31-year old Beijing resident Wang Yuanzhi, talk about a bubble in Chinese property is not something to be too concerned about.

“If you look at the real estate market in China, it has already seen a golden decade of extreme fast growth. There will still be room for growth in this market, even in the next ten to twenty years,” said Wang, who bought a home under construction last December. “The whole housing bubble is a fear; it is a concentration on the risks that the real estate market faces.”

Underlying confidence expressed by residents such as Wang may be what China`s authorities hope will aid a recovery in a market that has seen prices fall for three straight months.

For other observers a downturn in China`s once red-hot property market poses one of the greatest threats to the economy, the world`s second biggest.

“The risks and exposure to property don`t look the same as in the US sub-prime [mortgage crisis], but new bubbles never look exactly like the last bubble (otherwise they`d be easy to recognize),” said Patrick Chovanec, chief strategist at Silvercrest Asset Management.

“The exposure of China`s banks (and now shadow banks) to real estate may look different than it did in the US, but it`s very real. The main exposure is the reliance on property as collateral to support virtually all forms of lending throughout the economy, a situation that is very similar to Japan in the 1980s,” he added, referring to a collapse in Japan`s property market after a boom.

The importance of China`s property market cannot be underestimated – it accounts for roughly 15 percent of gross domestic product (GDP) and directly affects other sectors such as banking and construction.

Systemic risk?

To contain a boom in China`s housing market and keep prices affordable, Beijing imposed restrictions over the past five years. Those measures together with a slowing economy now appear to be having an impact.

Average new home prices in 70 major Chinese cities fell 0.9 percent in July on month, following a 0.5 percent decline in June, and the question now is just how protracted the slowdown will be.

“The real-estate market has been the downfall of many major economies in the past – the U.S., Japan,” said Dariusz Kowalczyk, a senior economist at Credit Agricole. “So the worst case scenario for China`s housing market is an economic crisis.”

In China`s case, credit expansion drives the housing market and when that slows it has a direct impact on real estate, say economists.

They point out that since 2008, China`s money supply expanded by more than threefold and a lot of that money had gone into real estate. Latest data shows that the amount of money flowing into China`s economy slowed to its lowest level in six years in July.

Here`s how it could play out, according to Silvercrest`s Chovanec.

“When property developers can`t get more credit, they have to slash prices to unload their unsold inventories (and pay back their debts), which gives investors second thoughts about whether to continue plowing their money into property,” he said.

“Sales dry up, prices fall, new [housing] starts dry up, construction dries up, sales of construction equipment, concrete, and steel dry up, land sales dry up, local government revenues disappear and they can`t pay their debts … in other words, falling asset prices undercut the basis for both past and future lending, and you`ve got a real system-wide problem,” Chovanec added.

Dong Tao, chief regional economist for non-Japan Asia at Credit Suisse in Hong Kong, describes developers as the “weakest link.”

“If one property developer gets into trouble that could have a domino effect on the rest of the market,” he said. “Without the central government taking action there will be a serious slowdown. Something has to be done and liquidity may have to be eased to help property developers.”

In recent weeks, mid-sized developers such as Hong-Kong listed Greentown China Holdings and Shui On Land  issued profit warnings amid a downturn in the housing market.

A sharp slide in house prices that hurts consumer confidence could see economic growth in China drop below 5 percent, said Credit Agricole`s Kowalczyk. To put that number into context, Beijing targets full-year GDP growth at 7.5 percent.

Support at hand?

In a bid to shore up the property market, a number of local governments have eased restrictions on home purchases in recent weeks and state-backed banks have upped lending to the sector.

“I decided to own a place because in Chinese culture and our tradition, it is important. I wanted to get my own place as I am going to start a family and why pay rent when you can have your own space?” said Wang, who expects construction on his new home to be completed next year.

Analysts add that the fact that Chinese households have relatively low levels of household debt is another reason why not to be too pessimistic about the housing market. An International Monetary Fund (IMF) report published in April ranked China the fourth lowest in terms of household debt levels among 11 Asian countries at around 12 percent of GDP.

“We believe the downturn [in China`s property market] is unlike the situation in the U.S. that led to the Great Financial Crisis, and is unlikely to cause a crash in Chinese or international financial markets,” said Clem Miller, investment strategist at Wilmington Trust Investment Advisors.

“For one thing, given requirements for large down payments, Chinese mortgage debt is low as a percentage of house value. Additionally, Chinese state banks typically hold these mortgages on their balance sheets rather than sell them into the market as collateralized mortgage obligations,” he said.

Analysts say there is no easy fix to China`s property market woes – the sector needs to go through a period of adjustment that helps put the economy on a more secure long-term footing.

“The good news for China is that it has produced more than it consumed for years. As a result, if its own output falls, it can afford to consume more than it produces,” said Silvercrest`s Chovanec.

“If the economy falters, consumption and living standards do not have to falter too. China can run a trade deficit (assuming its forex reserves aren`t depleted by mass capital flight). This can provide a cushion while it undertakes what would otherwise be a wrenching adjustment to its economy.”

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

Does Samsung need crisis management?

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

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Samsung Electronics is in dire need of crisis management, analysts say, as ineffective product differentiation sparks margin erosion and a decline in market share.

Until recently the world`s largest smartphone marker was considered an unstoppable force. However, with key rival Apple getting its groove back and intensifying competition from low-end handset manufactures in emerging markets, things don`t look so rosy anymore.

Shares of Samsung are down 10 percent year to date, far under-performing Apple shares, which are up 28 percent.

“Samsung is currently in crisis mode,” CW Chung and Taeyoung Kim, analysts at Nomura  wrote in a note titled `Crisis management ability much needed` in which they downgraded their price target on the stock to 1.55 million won from 1.8 million won. Samsung shares last traded at to 1.23 million won ($1,210).

Profitability is deteriorating more steeply than expected, Chung and Kimg said, warning Samsung is unlikely to meet third quarter guidance for a 10 percent on-quarter rise in smartphone shipments and 10 percent decline in average selling price (ASP).

Mobile carriers appear reluctant to bear the inventory burden that resulted from Samsung`s unsuccessful product differentiation,especially ahead of Apple`s iPhone 6 launch expected in September, according to Chung and Kim.

“Hence, there could be some potential downside in terms of ASP and shipments for high-end,” they said.

Furthermore, intensifying competition from Chinese players will present a major headwind to the company`s mid-to-low end smartphone business.

“Though we previously anticipated recovery in the mid- to low-end smartphone market sometime in the third quarter following the inventory correction of existing 3G products in the second quarter (given that Chinese carriers provide subsidy mainly for 4G products), a price war or marketing cost war appears to be starting amidst the intensifying competition against Chinese players,” they said.

Reality check

Samsung needs to take swift action to ensure that it remains competitive in the mid-to-low end segment,said Tom Kang, research director Counterpoint Research.

“Samsung has put too much focus on beating Apple in the high end. They should admit that they have lost the battle in the premium segment and do what`s necessary to prevent losing the battle in mid-to-low tier,” he said.

Samsung`s market share in the premium segment – phones in the $400 plus range – declined to 38 percent as of June 2014, down from 51 percent in the same period a year earlier. By contrast, Apple`s market share rose to 45 percent from 28 percent over the same period.

One factor Samsung can address immediately is pricing on its mid-to-low end phones.

“I don`t think they were expecting price erosion to happen so rapidly in the past six months,” he said.

The swift rise of budget smartphone makers such as Xiaomi in China and Micromax in India has set the stage of a price war in the smartphone space. In the second quarter, Xiaomi knocked Samsung off its spot as the top selling smartphone brand in China.

Will Samsung pull through?

While Samsung is struggling due to its “over-confidence”, Chung and Kim of Nomura are optimistic it will overcome headwinds and regain its momentum.

“We anticipate that the company will successfully employ its crisis management skills to overcome the crisis (as evidenced in the past) through its own crisis management techniques. Hence, we expect further downside to Samsung`s share price to be limited,” they said.

Samsung is beginning to respond to some of the market`s warnings over the past two years about sticking to the same design concept and the slow progress of its software and content ecosystem.

“Though it seems a bit late at this point, the company appears to be striving to improve on its product line-up through design upgrades (metal casing, bended display, foldable display, etc),” they said.

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

Stocks to stay sweet in September

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

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Global stock markets are closing out August on a high as investors grow increasingly confident about the world economy and analysts expect the buying momentum to continue into September.

Major equity markets around the world are trading at, or near, the highs for the year. US stocks have been a standout, with the SandP closing above 2,000 this week for the first time ever. In Europe, the Stoxx Europe 600 has rebounded from a sell-off earlier this month to trade 4 percent higher year-to-date.

Stocks in Asia also had a decent showing, with the MSCI Asia Index rising 5 percent so far this year and up 14 percent since the year-low hit in February. India is the notable out-performer, with both Sensex and Nifty broke fresh life-time records this month. Shares in China and Hong Kong are hovering at 2014 peaks, while Australia`s ASX 200 is at its highest since the global financial crisis six years ago.

Against this backdrop, is the rally set to continue?

“Yes, I think so,” said Mikio Kumada, global strategist at LGT Capital Partners. “The correction that needs to happen has already happened, so global markets are likely to trek higher from here.”

Geopolitical tensions surrounding Iraq and Ukraine briefly roiled markets in July but shares made a turnaround in August. Kumada said European stocks have the most to gain in September.

“What goes down hardest, often comes back up the most,” he said. “The European markets` performance still lag that of the U.S., which more than doubled since 2009. I believe that Europe also has to be potential to do the same, if governments and the ECB get their policy right. Of course, timings will depend a lot on political news flow.”

Kumada is also upbeat about the prospects for U.S. equities, despite calls that the market is due for a significant correction. “I don`t buy the bubble argument. True, some sectors of the market such as high tech are a bit overvalued, but overall, U.S stocks still look reasonably priced,” he said.

Sean Darby, global head of equity strategy at Jefferies, says equity markets are looking toppish, but he does not expect any meaningful correction in September as low interest rates will keep investors chasing for more lucrative returns in stock markets.

“That`s because most markets are still experiencing negative real interest rates, and under these circumstances asset prices will remain attractive and well-bid,” he said.

China and Japan in vogue

Share markets in China and Japan may have headed in separate directions this year, but both could move upwards in tandem in September, analysts told CNBC.

Jefferies` Darby remains bullish on China`s A-share market, which has outperformed its Asian peers. He expects the Shanghai Composite Index, which has gained 4 percent so far this year, to continue gains ahead of the link-up between Shanghai-Hong Kong stock exchanges in September, which allows investors in both exchanges to trade in each other`s markets.

Japanese shares, on the other hand, were clear laggards so far this year, with the Nikkei 225 falling over 5 percent, after breathtaking gains of 57 percent in 2013. Poor data and doubts over Prime Minister Shinzo Abe`s policies to reboot the economy weighed on sentiment.

But LGT`s Kumada is staying overweight on the market, expecting equities to outperform in next three to six months. “We don`t see major risks for the Japanese economy in the medium term. If reflation appears to stall, the Bank of Japan will intervene,” he said.

Market risks persist

To be sure, with traders coming back from their summer holidays in September, any rally could have its fair share of volatility.

“There is a ton of downside this fall, but that is a function of the coming end to Fed`s QE which ushers in a new era of rising interest rates and less grip on markets by the Fed,” Clem Chambers, CEO of financial market website AVDFN, wrote in a note.

“This slow return to normality will likely be accompanied by shocks. The market is also very high. So put together, it`s time to buckle up!” he added.

When asked about events that could upset global markets, both Darby and Kumada flagged escalation of tensions between Ukraine and Russia as a wild card.

“If that happens, it is wishful thinking to believe that only Europe will suffer. There`s no way that a major BRICS economy`s pain won`t hurt the rest of the world as well,” said Kumada.

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