Delivering On Our Promise
1st Febuary 2014
As we move into the second month of 2014, dear readers, there are things to cheer and things to worry about.
The good news is that the world’s largest single-country economy, the US, seems to be well on the path of recovery and there are expectations that the growth rate will pick up this year compared to the slight dip last year, unemployment will fall below the Fed’s immediate target of 6.5 percent, inflation will remain in the comfort zone of around 2 percent and the fiscal drag will continue to decline.
The Fed’s decision to continue with its programme of reducing asset purchases (see our article) and several other positive indicators (read our article) reflect this upbeat mood.
Similarly, the world’s largest multi-country economy, the Eurozone, which contributes nearly 30 percent of the world’s Gross Domestic Product (GDP), is steadily giving out the right signals. There is slow, steady, albeit brittle healing of the scars of the Global Financial Crisis (GFC) of 2008. The UK has posted its fastest pace of growth in the fourth quarter of 2013 since the meltdown of 2007-08 (check our article) while the rest of continental Europe led by Germany and France are not doing too badly.
The bad news, however, is that the emerging markets are on a boil. Growth rates have slowed down, currencies are being hammered, and investors seem to be hitting the panic button. Argentina has sharply devalued its currency (read the case study by our new columnist Jagannadham Thunuguntla, Chief Strategist of SMC Global Securities) while Turkey has at last given up its inexplicable policy of not raising interest rates with a sudden massive hike in one fell swoop which boosted its currency lira, but only for a short time, and it was once again sliding till last reports came in (see our article).
Among the other countries in the BRICS grouping, the Russian rouble has begun to recover somewhat after hitting record lows earlier this week following the central bank’s announcement that it would go for unlimited market interventions. The currencies of all the other BRICS countries – the South African rand, the Indian rupee and the Brazilian real – are all under pressure and government’s are increasingly running out of options as to how to defend their currencies and also tackle persistent inflationary stress.
Both Brazil and India are facing similar problems – a growth versus inflation conundrum – even as their governments remain fettered by the threat of losing popularity in the face of upcoming elections (check our article).
With the Fed announcing its decision to continue with its planned reduction of asset purchases, all the emerging markets are feeling the heat on their currencies and equity markets on top of a growth slowdown over the last couple of years. But as The Economist has recently pointed out there is no need for investors to panic and bring about self-fulfilling crash landings. These economies “have flexible exchange rates; their reserves are higher (a whopping $7.7 trillion in total); their current-account deficits are smaller (only two of the 25 emerging markets tracked by The Economist have a deficit above 5% of GDP); their debts are lower and more likely to be denominated in domestic currency,” the magazine has said in a leader.
This leaves us with the question of China, the world’s second largest single-country economy that contributes about 10 percent to global GDP. And it is a big question. “The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam,” wrote George Soros, the doyen of investors, on the second day of 2014 in an opinion piece in Project Syndicate.
Fears of a sharp slowdown in growth, a debt problem especially in the country’s shadow banking sector and an unabated real estate boom that many think is a bubble ready to burst are the three key elements that have given rise to so much uncertainty.
The latest HSBC Purchase Managers’ Index (PMI) released this Thursday fell below 50 to 49.5 in January for the first time since July, 2013 and down from 50.5 in December, 2013, indicating a continuing contraction in economic activity. According to official data released by China’s National Bureau of Statistics, the country’s GDP growth in 2013 was 7.7 percent, the lowest since 1992.
Even as growth is slowing, the bigger problem seems to be debt. In a report released in December, 2013, China’s National Audit Office had reported that the total debt of local governments in China had grown 67 percent from $1.76 trillion at the end of 2010 to $2.95 trillion by the end of June, 2013. There are no official estimates of how much of these loans are from outside the formal regulated banking sector, that is, from the shadow banking sector. Unofficial estimates claim the sector is equivalent to 40 percent of China’s GDP, which by any measure, is quite massive. No doubt investors are edgy about fears of default although recently there were reports that a default in the country’s $1.67 trillion trust industry, the fastest growing part of China’s shadow banking system, was averted probably with help from the government.
The debt problem as well as the real estate boom with home prices soaring despite thousands of unsold homes stem from the Chinese growth model based on investment in fixed assets such as infrastructure and construction. With the Chinese government now trying to shift from an investment-led growth model to a consumption-led one together with efforts to better manage debt and rein in home prices, what is happening in China will require careful watching.
And your favourite magazine for mapping the markets, dear readers and investors, will be there to do the watching and reporting. As you must have noticed, we are delivering on our promise. We have begun to introduce columnists who will help you to better understand market developments while the editorial team will, as usual, keep you up to speed with all the market tracking that you need to fine tune your investment plans.
Do read us and stay ahead of the game. Happy reading!
Arjun Sen
(Editor)
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