South African finance minister Pravin Gordhan has called on the US Federal Reserve to remain mindful of the impact of its decisions on emerging markets as it continues with a programme of raising interest rates.
Speakng at the World Economic Forum in Davos, Mr Gordhan said the so-called ‘taper tantrum’ of 2013 reminded investors and policymakers of the strong links between global financial markets
“The Fed has shown a new kind of sensitivity to their decisions and the impact on emerging markets and we hope that will continue,” he said.
Now, he says pootential impacts on South Africa will ikely be limited, thanks in part to limits on foreign-currency debt levels. But he noted that other African countries have suffered greatly from the cost of servicing dollar debt along with depressed commodity prices.
He also noted that the Fed will be operating in an unusual environment under President Trump.
“The new administration has a particular political outlook, to put it politely, and the Fed has another. That will have implications.”
Over the past few years, whenever I have been asked which Chinese company is on my radar, I keep mentioning Huawei Technologies.
Huawei is rarely a topic of conversation in Japan, possibly because it is unlisted. Recently, however, the name recognition of this telecommunications equipment manufacturer is increasing in my country because its smartphones have become available here.
In the global smartphone market, Huawei has already captured the third-largest share after Samsung Electronics and Apple. The question is whether it can overtake the South Korean giant without going public.
In its Jan. 6 online edition, The Nikkei reported from Las Vegas that Huawei wants to expand in the U.S. and plans to do so via a smartphone that adopts Amazon’s artificial intelligence technology. At a press event during the 2017 International Consumer Electronics Show, Huawei announced the U.S. release of its Mate 9 smartphone equipped with an app that uses Amazon’s AI called Alexa.
The announcement was made while Amazon Vice President Steve Rabuchin was on the stage. Upon seeing this, I thought to myself, Huawei will use Amazon’s prowess to pry open the door.
Great American wall
In the global smartphone market in the third quarter of 2016, Samsung had a 19.2% share followed by Apple at 11.5% and Huawei at 8.7%, according to American market research company Gartner.
Richard Yu Chengdong, CEO of Huawei’s consumer group, said the company will seek to become the world’s second-largest smartphone maker by 2018 and capture the top spot in four to five years. He said this in an interview carried in The Wall Street Journal’s online Japanese-language edition on Sept. 2, 2016.
Investors will confront excessive debt, high P/E levels and political uncertainty as they enter the Trump presidential era. In response, according to Jeffrey Gundlach, U.S.-centric portfolios should diversify globally.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 10. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2017.
Before we look at his 2017 predictions, let’s review his forecasts from a year ago. His two highest conviction forecasts were that the Fed would not raise rates more than once, despite the Fed’s own predictions, and that Trump would win the presidency. Both predictions were accurate.
But he was also downbeat on emerging markets, and singled out Brazil and Shanghai as likely underperformers. Brazil turned out to be the best-performing emerging market last year, gaining 69.1%, but he was correct about Shanghai, which was the worst performing market, losing 16.5%.
Gundlach said he had a “low conviction” prediction that the yield on the 10-year Treasury would break to the upside. It began 2016 at 2.11% and ended at 2.45%. He said the probability was that U.S. equities would decline in 2016, yet the markets gained approximately 13%. Gold, he said, would hit $1,400 at some point in 2016. It began the year at approximately $1,100, hit a high of $1,365 during the summer and closed at approximately $1,150.
Benefits of demonetisation are “highly uncertain” and the potential positives are unlikely to be strong or last long enough to make a significant difference to government finances or medium-term growth prospects, global ratings agency Fitch said today. Taking into account the short-term disruptions, it also revised down the GDP growth estimate for the current fiscal to 6.9 per cent from the earlier 7.4 per cent.
“The note ban move has some potential benefits, but the positive effects are unlikely to be strong or last long enough to make a significant difference to government finances or medium-term growth prospects…benefits of demonetisation are highly uncertain,” the ratings agency said in a note.
“The intentions behind demonetisation are positive and in keeping with the broader reform efforts, but the short-term pains may outweigh the uncertain long-term gains,” it said.
Terming the note ban as a “one-off event” as people will still be able to use the new high denomination bills and other options like gold to store their wealth, it warned that “there are no new incentives for people to avoid cash transactions. The informal sector could soon go back to business as usual.”
World Bank’s latest Global Economic Prospects report … headlines:
Forecasts global real GDP growth at 2.7% in 2017 vs 2.3% in 2016
Forecasts advanced economies’ growth at 1.8% in 2017 (vs 1.6% in 2016)
Emerging/developing economies’ growth at 4.2% in 2017 (3.4% in 2016)
Forecasts US growth at 2.2% in 2017 (vs 1.6% in 2016) … they say their forecast excludes effects of any policy proposals from trump administration
Challenges for emerging market commodity exporters are receding, while domestic demand solid in emerging market commodity importers
Fiscal stimulus in US could generate faster domestic and global growth, but extended uncertainty over policy could keep global investment growth slow
Forecasts China’s growth slowing to 6.5% in 2017 (from 6.7% in 2016)
(Headlines via Reuters)
The World Bank looking at the recovering oil and commodity prices, noting this eases the pressures on emerging-market commodity exporters. Expects the recessions in Brazil and Russia to end.
As always the Bank notes uncertainties in its forecasts (all forecasters should), with upside uncertainty (in the short term at least) on US potential increased fiscal stimulus, tax cuts, infrastructure spending. Looking further out, though, a surge in debt load, higher interest rates & tighter financial conditions would have adverse effects.
Also downside potential on a more protectionist trade stance.
Careful what you wish for central bankers and fiscal policy makers. Though we don’t see signs of “rollover risk” in any of the G5 or G20, it’s all about confidence and you know what Joe said about confidence:
Confidence is a very fragile thing. – Joe Montana
.The World Economic Forum reports this about Zimbabwe’s ghost of hyperinflation past,
Zimbabwe was once so gripped by hyperinflation that the central bank could no longer afford paper on which to print practically worthless trillion-dollar notes.
The government reported in July 2008 that Zimbabwe was experiencing inflation of 231 million percent (231,000,000%). However, the Libertarian think tank, the Cato Institute, believes that the real inflation rate was 89.7 sextillion percent or 89,700,000,000,000,000,000,000%.
It is interesting to note that the country is now grappling with the opposite problem.
Like Britain, Japan, the US and other nations dealing with the consequences of weak demand and cheap oil, Zimbabwe is threatened more by the prospect of falling prices. But that doesn’t mean its people are ready to trust that hyperinflation won’t happen again.
While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.
In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.
Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.
Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.
“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”
For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000.
Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.
With Trump’s border tax adjustment looking increasingly likely, the stock market – as JPM has warned in recent days – is starting to fade the relentless Trumponomic, hope-driven rally since election day instead focusing on the details inside the president-elect’s proposed plans. And, as explained earlier in the week, if the border tax proposal is implemented, economists at Deutsche Bank estimate the tax could send inflation far above the Federal Reserve’s 2% target and drive a 15% surge in the dollar.
While this would be bad for stocks, as a 5% increase in the dollar translates into about a 3% negative earnings revision for the S&P 500 all else equal, a surge in inflation would also wreak havoc on bond prices, and send interest rates surging, at least initially, before they subsquently plunge as a result of a rapidly tightening, deep “behind the curve” Fed unleashes a curve inversion and recessionary stagflation becomes the bogeyman du jour.
With the government’s move for a less-cash economy, telecom service providers will have to invest around Rs 1 lakh crore annually for the next five years to build a robust infrastructure for providing seamless data services, experts say.
Airtel is best placed, as it has got a payments bank licence. And, Vodafone has the experience of its mobile wallet, M-Pesa, which enables transactions between merchants and customers, an analyst told this newspaper.
Aditya Birla Idea Payments Bank, a subsidiary of Idea Cellular, and Aditya Birla Nuvo would also offer these services, with the latter having got a banking licence for digital payments. The new entrant, Reliance Jio, has also started its JioMoney e-wallet, to enable its users to pay from their bank accounts through the platform.
“The industry needs to invest Rs 5 lakh crore in the next five years to improve the overall infrastructure, including the data infrastructure,” said Rajan S Mathews, director-general, Cellular Operators Association of India.
Since 2010, he said, telecom companies had invested Rs 3.27 lakh crore in spectrum auctions to support growth.
According to Prashant Singhal, global telecom leader at consultancy E&Y India, an investment in the range of $10 billion (Rs 68,000 crore) is needed over the next two-three years by telecom operators to make data services more seamless. “There is need for more investment for better coverage and capacity.”
Assessments from a couple of the rating’s agencies on the Federal Reserve today
Rate hike reflects economic strength; US interest burden to rise in long term
Expects Federal Reserve to tighten at very gradual pace, with 2-3 more rate increases pushing the Fed Funds rate to around 1.25% to 1.5% by 2017 end
Expects US government’s net interest expense to rise to 12.7% of total spending in fiscal 2025
Says Fed rate increase heralds a step up in normalization
Changing macroeconomic and policy backdrop means that fed is less likely to delay further increases
There is more detail from both agencies, but that’s the gist.
Headlines via Reuters
Oh and as a ps. …. to all those bloggers/tweeters saying such and such a currency is falling b/c of (insert pre-conceived view) ….. NO …. it’s the Fed hike, dot plot & therefore USD strength. Try to keep up 😀