- "Since the end of 2009, the financial markets have been characterised by great volatility and a rise in risk premia, sure signs of highly significant uncertainty among investors."
- "This uncertainty is definitely set to last, since it has causes that are themselves longlasting:
• difficulty in ascertaining what the outcome of the sovereign debt crisis in the euro zone will be: stabilisation of public debt ratios and possibility for countries to finance themselves again normally, or a divergent dynamics and eventually a default? We will have to wait until 2012 or 2013 to have a clear view;
• uncertainty about the banks’ real situation, due to additional real estate losses (Spain, United States) and the massive holding of sovereign debts in Europe. We will have to wait for the outcome of the sovereign debt crisis, i.e. 2012 to (possibly) be reassured;
• continued recovery or dip in the United States? The latest figures are downbeat, but we will have to until the end of 2010 and 2011 to gain a better understanding;
• uncertainty about the effects of the restrictive fiscal policies in European growth, and hence the results and the financial situation of companies; will a decline in the savings rate offset this? Fiscal deficits must be drastically reduced from 2011 to 2013."
- "We can therefore expect continued high volatility in the financial markets for several years."
Natixis Flash Economics 355 20100709
First Half Not Exactly As Expected – So What to Expect in 2H?
- India and Indonesia look expensive — "In terms of straight valuations, both India and Indonesia now rank amongst Asia’s most expensive equity markets. Even adjusting for ROE, the premium now looks excessive. At the other end of the spectrum, one has Korea on single-digit P/E, but cranking out an above-average ROE; all hallmarks of an end-of-cycle for a cyclical market. China now also features amongst the cheaper markets based on P/E, P/CE and ROE; a market to look at for the second half."
- Defensive stocks are expensive — "Sector wise, the consumer defensives are amongst the most expensive whichever valuations you care to look at. They are also well held by the consensus. What comes out looking cheap is a combination of cyclical, tech hardware and the semiconductors. Amongst the interest sensitives, banks score well, as increasingly does real estate. The cheapest defensive is telecoms. Across the board, earnings revisions continue to decline, with the cyclicals underperforming. Appetite towards cyclicals or real estate remains low at present."
- Market is likely to weaken in summer — "We continue to believe that markets will weaken into August-to-September, driven by downward revisions to earnings, global growth fears, and continued tightness in Asian excess liquidity. The shift in our portfolio will be away from telecoms and towards greater cyclicality. Country wise, the biggest call will be whether to overweight China."
Citigroup Asia Macro Investigator 20100712
- Defensive stocks are expensive — "Sector wise, the consumer defensives are amongst the most expensive whichever valuations you care to look at. They are also well held by the consensus. What comes out looking cheap is a combination of cyclical, tech hardware and the semiconductors. Amongst the interest sensitives, banks score well, as increasingly does real estate. The cheapest defensive is telecoms. Across the board, earnings revisions continue to decline, with the cyclicals underperforming. Appetite towards cyclicals or real estate remains low at present."
- Market is likely to weaken in summer — "We continue to believe that markets will weaken into August-to-September, driven by downward revisions to earnings, global growth fears, and continued tightness in Asian excess liquidity. The shift in our portfolio will be away from telecoms and towards greater cyclicality. Country wise, the biggest call will be whether to overweight China."
Citigroup Asia Macro Investigator 20100712
China Property: Current sector rebound could be shortlived; sales performance is the key
- June sales stabilized: "Primary home sales in the eight major cities in June slipped only 1% M/M after a 46% decline in May. That said, sales in fact increased at end-June as some developers started offering more sizable discounts in the sales price. In 1H10, sales in the eight
major cities dropped 36% Y/Y, in contrast to the 20% Y/Y growth for sales volume nationwide in 5M10."
- Price correction underway: "In June, the Centaline Leading Index (secondary transaction price) for the top five cities fell 1.0% to 3.6% M/M, thus bringing the overall cumulative decline to 3.2% since April’s peak. More price cuts are underway with a 20-30% price drop seen in Tongzhou (beyond 5th-ring-road) in Beijing. According to government statistics, in 5M10 the national average ASP reached Rmb4,959psm, and affordability is now close to 47% based on our estimates. We therefore see room for a further correction, especially in overheated cities, where we expect a 20-30% price decline."
- Sector may stay range-bound: "We also do not anticipate any nearterm easing of policy measures. The effect of any policy easing in late 2010 could be offset by a potential sharp increase in inventories. Hence we expect the sector to remain range-bound and prefer companies with better sales performance due to their more flexible pricing strategies (e.g. Vanke) and companies with improvement in net gearing (e.g. R&F). We are concerned about the slow run rate of some mid-cap names such as Shimao, Agile and CR Land relative to their own targets. While we have a long-term bullish view and OW rating on these stocks, in the next quarter their share price performance could be constrained by slower contract sales until sales catch up, say in 4Q10."
JPMorgan China Property Monthly Wrap 20100715
major cities dropped 36% Y/Y, in contrast to the 20% Y/Y growth for sales volume nationwide in 5M10."
- Price correction underway: "In June, the Centaline Leading Index (secondary transaction price) for the top five cities fell 1.0% to 3.6% M/M, thus bringing the overall cumulative decline to 3.2% since April’s peak. More price cuts are underway with a 20-30% price drop seen in Tongzhou (beyond 5th-ring-road) in Beijing. According to government statistics, in 5M10 the national average ASP reached Rmb4,959psm, and affordability is now close to 47% based on our estimates. We therefore see room for a further correction, especially in overheated cities, where we expect a 20-30% price decline."
- Sector may stay range-bound: "We also do not anticipate any nearterm easing of policy measures. The effect of any policy easing in late 2010 could be offset by a potential sharp increase in inventories. Hence we expect the sector to remain range-bound and prefer companies with better sales performance due to their more flexible pricing strategies (e.g. Vanke) and companies with improvement in net gearing (e.g. R&F). We are concerned about the slow run rate of some mid-cap names such as Shimao, Agile and CR Land relative to their own targets. While we have a long-term bullish view and OW rating on these stocks, in the next quarter their share price performance could be constrained by slower contract sales until sales catch up, say in 4Q10."
JPMorgan China Property Monthly Wrap 20100715
China Property: Hope in 2H, Selectively Focus on Beta
- Strong June sales rebound— "Key developers we tracked announced an average 45% MoM rebound in June contracted sales vs. the 43% MoM slippage in May. Market giants Vanke, China Poly, COLI, etc. demonstrated strong sales capabilities with monthly sales up 42.6%-98.9% MoM, even hitting monthly record high sales. Apart from several developers such as CR Land, Glorious & Country Garden, the remainder reported a gentle recovery of 20-30% MoM on transaction value."
- June 2010: National residential prices -0.1% MoM; 1st drop in past 16 months —
"The strong sales rebound in leading developers was due to price cutting, especially for Vanke and Poly. NBS released the Jun-2010 operating statistics of China property sector that growth momentum on investment and building activities has been decelerating under the tightening while the pricing is resilient, on the grounds that developers are still reining in launching new supply with significant price cuts. Transaction volume recovered on a MoM basis given the low-base sales in previous month as well as price cuts from selective developers."
- Recent share price rally triggered by rumor of mortgage lending loosening — "In the past two trading days, China property stocks rebounded by about 7% on average due to the rumor that a few banks in Shanghai have resumed third home mortgages and loosened standards for second home mortgages."
- Hope in 2H — "In 1H, we suggested investors only stick to quality names such as COLI and Shimao, and they have been the top two best share price performers among all leading developers YTD. Entering 3Q, policy risk has been partially settling along with developers’ price cuts. Potential strong property demand has been well proven. Though we do not think the central government should loosen the tightening in the remainder of 2010, which could be too risky – the central government could lose credibility and could trigger a crazy rebound in volume and property prices – it is still possible for the central government to give more
feasibility to commercial banks in 1Q of next year after considering its critical contribution to economic growth."
- Selectively focus on beta – Shimao and Poly HK. — "If we expect the physical market turning point to emerge in 1Q2011, a good entry timing to the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. After the expected price cuts of 10-15% in June and July, the policy risk should be partially settled already. Entering 3Q, investors could gradually add weights to higher-beta names such as Shimao and Poly HK. We believe these names not only have higher beta but also have specific selling points that could result in share price outperformance."
Citigroup China Property 20100713
- June 2010: National residential prices -0.1% MoM; 1st drop in past 16 months —
"The strong sales rebound in leading developers was due to price cutting, especially for Vanke and Poly. NBS released the Jun-2010 operating statistics of China property sector that growth momentum on investment and building activities has been decelerating under the tightening while the pricing is resilient, on the grounds that developers are still reining in launching new supply with significant price cuts. Transaction volume recovered on a MoM basis given the low-base sales in previous month as well as price cuts from selective developers."
- Recent share price rally triggered by rumor of mortgage lending loosening — "In the past two trading days, China property stocks rebounded by about 7% on average due to the rumor that a few banks in Shanghai have resumed third home mortgages and loosened standards for second home mortgages."
- Hope in 2H — "In 1H, we suggested investors only stick to quality names such as COLI and Shimao, and they have been the top two best share price performers among all leading developers YTD. Entering 3Q, policy risk has been partially settling along with developers’ price cuts. Potential strong property demand has been well proven. Though we do not think the central government should loosen the tightening in the remainder of 2010, which could be too risky – the central government could lose credibility and could trigger a crazy rebound in volume and property prices – it is still possible for the central government to give more
feasibility to commercial banks in 1Q of next year after considering its critical contribution to economic growth."
- Selectively focus on beta – Shimao and Poly HK. — "If we expect the physical market turning point to emerge in 1Q2011, a good entry timing to the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. After the expected price cuts of 10-15% in June and July, the policy risk should be partially settled already. Entering 3Q, investors could gradually add weights to higher-beta names such as Shimao and Poly HK. We believe these names not only have higher beta but also have specific selling points that could result in share price outperformance."
Citigroup China Property 20100713
Do not fear a weaker euro, but do not expect too much either - US growth: good news and bad…
- United States "Business surveys are signalling a slowdown in the US economic recovery as the second half of the year gets underway. We believe this is less a sign that a "double-dip” recession is imminent than it is of the inventory cycle's diminishing contribution to growth. The combination of slower growth, lower inflation and turmoil in financial markets in the wake of the sovereign debt crisis, will no doubt encourage the Federal Reserve to maintain its extremely accommodative monetary policy well into next year."
- Japan "Growth slowed significantly in Q2 to 0.5%, as exports and consumption lost some of their dynamism. Monetary policy is expected to remain extremely loose, while fiscal policy could be progressively tightened. The economy is expected to grow by around 3.5% in 2010 and 2% in 2011. Deflation is expected to end in the second half of 2011."
- Eurozone "Driven by the ongoing rebound in the industrial sector, GDP growth probably increased in Q2 after rising only 0.2% q/q in Q1. However the pace of economic activity could slow thereafter as persistently tough labour market conditions and fiscal consolidation measures adopted by several countries put a significant strain on domestic demand. Exports will remain the main growth engine. With low inflationary pressures and a fragile recovery, the ECB will be in no hurry to raise the refi rate before 2012."
- Germany "Exports will continue to support growth over the next few quarters, as Germany benefits from the recovery of investment spending in China and the United States. The euro's depreciation againstthe dollar is also increasing the country's price-competitiveness. The strength of exports shouldtherefore partially compensate for weak domestic demand."
- France "Activity very probably rebounded in the spring despite the ongoing contraction in household spending, particularly car purchases. The spike in inflation is nearly at and end and the stabilisation in the unemployment rate since the beginning of the year suggests that the labour market continues to improve. However, domestic demand remains weak against a backdrop of growing concern as to the scale of the fiscal consolidation scheduled for next year. The Finance Act for 2011, currently being drafted, aims to reduce the fiscal deficit to 6% of GDP next year."
- Italy "The recovery from recession continues to be quite moderate and export-led for Italy. From Q3 2009 to Q1 2010 the GDP has regained just one tenth of the previous fall. The implementation of austerity measures – decided in the wake of the Greek debt crisis- will further stress the priority of sound stability versus quicker economic expansion."
- Spain "After growing slightly in the first half of 2010, GDP is expected to contract again in the second half under the impact of the Spanish government’s new austerity measures. These will probably further depress domestic demand, already dampened by the slow elimination of the main imbalances - high indebtedness among private economic agents, exorbitant size of the
construction sector and bursting of the property market bubble. Spain could therefore slip back
into recession. Against this backdrop, investors will be focusing their attention on public finances
and the situation in the banking sector."
- United Kingdom "The acceleration of GDP growth in the second quarter is likely to be short lived. The new Cameron government's programme to consolidate public finances, the likes of which haven’t been seen since the second world war, is likely to weigh on economic activity as of next year. Sterling’s past depreciation and the likelihood of continued accommodative monetary policy from the Bank of England will not compensate for fiscal austerity’s negative impact on growth. We expect GDP growth to slow from 1.5% this year to around 1% in 2011."
- China "China’s economic growth is showing signs of deceleration driven by domestic investment. It is projected to slow gradually in 2Q-4Q10, down from +12% year-on-year in 1Q10, and reach 10% for the whole of this year. In recent months, the authorities have implemented quantitative and administrative measures aimed at curbing mortgage and total lending growth and limiting investment projects of state enterprises and local governments. This has succeeded in bringing credit growth apparently under control and reducing state investment growth. Moreover, a correction seems to begin in the property market and inflation expectations are moderating. Moreover, on June 19th, China ended its currency peg to the USD and returned to a managed float exchange rate regime. Due to renewed uncertainties over global prospects and slowing domestic demand growth, the authorities are unlikely to let the yuan appreciate much or tighten further their economic policy stance in the very short term."
BNPParibas Economic Market Monitor July2010
- Japan "Growth slowed significantly in Q2 to 0.5%, as exports and consumption lost some of their dynamism. Monetary policy is expected to remain extremely loose, while fiscal policy could be progressively tightened. The economy is expected to grow by around 3.5% in 2010 and 2% in 2011. Deflation is expected to end in the second half of 2011."
- Eurozone "Driven by the ongoing rebound in the industrial sector, GDP growth probably increased in Q2 after rising only 0.2% q/q in Q1. However the pace of economic activity could slow thereafter as persistently tough labour market conditions and fiscal consolidation measures adopted by several countries put a significant strain on domestic demand. Exports will remain the main growth engine. With low inflationary pressures and a fragile recovery, the ECB will be in no hurry to raise the refi rate before 2012."
- Germany "Exports will continue to support growth over the next few quarters, as Germany benefits from the recovery of investment spending in China and the United States. The euro's depreciation againstthe dollar is also increasing the country's price-competitiveness. The strength of exports shouldtherefore partially compensate for weak domestic demand."
- France "Activity very probably rebounded in the spring despite the ongoing contraction in household spending, particularly car purchases. The spike in inflation is nearly at and end and the stabilisation in the unemployment rate since the beginning of the year suggests that the labour market continues to improve. However, domestic demand remains weak against a backdrop of growing concern as to the scale of the fiscal consolidation scheduled for next year. The Finance Act for 2011, currently being drafted, aims to reduce the fiscal deficit to 6% of GDP next year."
- Italy "The recovery from recession continues to be quite moderate and export-led for Italy. From Q3 2009 to Q1 2010 the GDP has regained just one tenth of the previous fall. The implementation of austerity measures – decided in the wake of the Greek debt crisis- will further stress the priority of sound stability versus quicker economic expansion."
- Spain "After growing slightly in the first half of 2010, GDP is expected to contract again in the second half under the impact of the Spanish government’s new austerity measures. These will probably further depress domestic demand, already dampened by the slow elimination of the main imbalances - high indebtedness among private economic agents, exorbitant size of the
construction sector and bursting of the property market bubble. Spain could therefore slip back
into recession. Against this backdrop, investors will be focusing their attention on public finances
and the situation in the banking sector."
- United Kingdom "The acceleration of GDP growth in the second quarter is likely to be short lived. The new Cameron government's programme to consolidate public finances, the likes of which haven’t been seen since the second world war, is likely to weigh on economic activity as of next year. Sterling’s past depreciation and the likelihood of continued accommodative monetary policy from the Bank of England will not compensate for fiscal austerity’s negative impact on growth. We expect GDP growth to slow from 1.5% this year to around 1% in 2011."
- China "China’s economic growth is showing signs of deceleration driven by domestic investment. It is projected to slow gradually in 2Q-4Q10, down from +12% year-on-year in 1Q10, and reach 10% for the whole of this year. In recent months, the authorities have implemented quantitative and administrative measures aimed at curbing mortgage and total lending growth and limiting investment projects of state enterprises and local governments. This has succeeded in bringing credit growth apparently under control and reducing state investment growth. Moreover, a correction seems to begin in the property market and inflation expectations are moderating. Moreover, on June 19th, China ended its currency peg to the USD and returned to a managed float exchange rate regime. Due to renewed uncertainties over global prospects and slowing domestic demand growth, the authorities are unlikely to let the yuan appreciate much or tighten further their economic policy stance in the very short term."
BNPParibas Economic Market Monitor July2010
The correlation between risks since 2009
- "Since 2009, there has been a correlation between four types of risks:
• sovereign risk;
• banking risk;
• corporate credit risk (default risk);
• currency risk."
- "The sovereign risk and the banking risk are correlated (in Europe and Japan) because of the massive holding of government securities by banks and the appearance of sovereign risk due to the fiscal deficits linked to the crisis."
- "The credit risk and the banking risk are normally correlated, because of the banks’ portfolios of corporate loans; the corporate credit risk and sovereign risk are correlated since, if there is a public debt crisis in a country, there is either a very rapid reduction in the fiscal deficit, or a default, and in both cases a fall in gross domestic product."
- "Lastly, the currency risk is correlated to other risks because of the dollar’s safe haven role: concern about European countries, banks and companies leads to an appreciation of the dollar. The "stress-test" has become global, since all risks unfold simultaneously."
Natixis Flash Economics 353 20100708
• sovereign risk;
• banking risk;
• corporate credit risk (default risk);
• currency risk."
- "The sovereign risk and the banking risk are correlated (in Europe and Japan) because of the massive holding of government securities by banks and the appearance of sovereign risk due to the fiscal deficits linked to the crisis."
- "The credit risk and the banking risk are normally correlated, because of the banks’ portfolios of corporate loans; the corporate credit risk and sovereign risk are correlated since, if there is a public debt crisis in a country, there is either a very rapid reduction in the fiscal deficit, or a default, and in both cases a fall in gross domestic product."
- "Lastly, the currency risk is correlated to other risks because of the dollar’s safe haven role: concern about European countries, banks and companies leads to an appreciation of the dollar. The "stress-test" has become global, since all risks unfold simultaneously."
Natixis Flash Economics 353 20100708
Comparisons with Japan, US, Hong Kong and Singapore housing markets for China
• China housing sector development compared with Japan, US, Hong Kong and Singapore: "This report reviews the development of the housing sectors in Japan, US, Hong Kong and Singapore, focusing on the high-growth periods in those markets, in order to make comparisons with China's rapidly growing housing market. We also review housing finance systems and the nature of housing sector leverage during periods of rapid growth, and analyze the impact of specific policy measures on the development of the housing sectors in each country."
• China’s housing sector faces short-term cyclical challenges but longterm outlook is robust: "China’s housing sector exhibits the pronounced cyclicality of a high-growth emerging market. Since 1998, housing values have risen almost 400x and the housing loan market has expanded 125x to become the second-largest home loan market in Asia- Pacific (after Japan)."
• Policy risks appear adequately priced in China developer share prices, but timing of re-entry depends on sales momentum: "The lessons drawn from a review of the other comparative markets show that policy failures/mistakes can accentuate the cyclicality of this sector. We believe the China homebuilders already price in a substantial policy risk premium, but will consider a concerted re-entry into the China homebuilders when contract sales momentum begins to re-accelerate (toward the end of 2010 based on our expectations)."
JPMorgan Asian Property Yardstick 20100714
• China’s housing sector faces short-term cyclical challenges but longterm outlook is robust: "China’s housing sector exhibits the pronounced cyclicality of a high-growth emerging market. Since 1998, housing values have risen almost 400x and the housing loan market has expanded 125x to become the second-largest home loan market in Asia- Pacific (after Japan)."
• Policy risks appear adequately priced in China developer share prices, but timing of re-entry depends on sales momentum: "The lessons drawn from a review of the other comparative markets show that policy failures/mistakes can accentuate the cyclicality of this sector. We believe the China homebuilders already price in a substantial policy risk premium, but will consider a concerted re-entry into the China homebuilders when contract sales momentum begins to re-accelerate (toward the end of 2010 based on our expectations)."
JPMorgan Asian Property Yardstick 20100714
Recovery Is In The Details
- "A light data week provided a much needed respite from the overspinning of disappointing numbers in recent weeks. Recovery appears poised to slow but not falter. The latest business surveys, jobless claims and anecdotal consumer reports suggest moderate growth will continue, while the headlong retreat in risk appetite has paused."
- "Despite an uninspired jobs recovery, a decomposition of employment data shows some encouraging signs. In particular, some structurally damaged sectors may be stabilizing. Nonetheless, the wide disparity between rising profits and capex on one side and lackluster hiring on the other reinforces concern that policy-related uncertainty is delaying a healthier upturn in employment."
- "Headline weakness in retail sales belies relative strength in more comprehensive data on consumer spending. Discretionary consumer outlays continued to ramp up through May. Again in June, the dampening effects of lower gasoline prices and a continuing correction in building materials sales may mask expected gains in areas more directly linked to consumer spending. We expect a rise in core sales of 0.3% for June consistent with roughly 3% growth in real consumer outlays for the second quarter."
Citigroup Comments on Credit 20100709
- "Despite an uninspired jobs recovery, a decomposition of employment data shows some encouraging signs. In particular, some structurally damaged sectors may be stabilizing. Nonetheless, the wide disparity between rising profits and capex on one side and lackluster hiring on the other reinforces concern that policy-related uncertainty is delaying a healthier upturn in employment."
- "Headline weakness in retail sales belies relative strength in more comprehensive data on consumer spending. Discretionary consumer outlays continued to ramp up through May. Again in June, the dampening effects of lower gasoline prices and a continuing correction in building materials sales may mask expected gains in areas more directly linked to consumer spending. We expect a rise in core sales of 0.3% for June consistent with roughly 3% growth in real consumer outlays for the second quarter."
Citigroup Comments on Credit 20100709
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