Author Archive for Also Sprach Analyst

The Greek Stock Market Collapse in Historical Perspective

By Also Sprach Analyst

The realisation that Greek equities have somehow outperformed Chinese equities this year so far is quite comical. In fact, we are still laughing at it, as even Greeks cannot quite believe this has actually happened.

Even if you are not entirely convinced that China is growing at the rate as stated by the National Bureau of Statistics, it is still fair to say that the Chinese economy is growing, while Greece remains in a multi-year depression, thanks to the inflexibility of the Euro, which is not unlike the Gold standard. It is clear that the rate of growth of an economy is one thing, return on its stock market is a different thing.

To put things in perspective, the Greek stock market has fallen more than 90% from the pre-subprime crisis peak and reached a low in June this year (whether it is THE low is another matter which we are not going to discuss here). Even with an impressive 72% rebound in the recent months from the low, the level of the index remains nothing compared with the pre-crisis high, although it somehow managed to outperform Chinese equities for this year.

The chart below should be familiar to regular readers, which shows the boom and bust of major stock market bubbles. This time, we also add the Athens stock exchange index for the purpose of comparison, with the peaks all rebased to 100 and lined up to the same time. Interestingly, the fall of Athens stock exchange index from peak to trough matches that of US equities during the Great Depression, while that of Chinese stocks look more like a long road of decline like the Nikkei.

The Dow Jones Industrial Average bottomed in 1932 while the Great Depression did not really end until the second world war (allegedly). Since it bottomed at 41.22 on 8 July 1932, the Dow Jones Industrial Average has never revisited that point again.

New Home Prices Rise in 35 Chinese Cities in October

By Also Sprach Analyst

New home prices in China rose in 35 out of 70 cities according to data compiled by the National Bureau of Statistics, up from 31 out of 70 cities rising in September.

Of 70 cities, 18 of them saw new home prices staying flat, up from 17 in September, while 17 cities saw new home prices falling, down from 22 in September.

Although the official home price numbers are not reliable, as the methodology is flawed, it points to the reality that the real estate market continues to be resilient with the exception of a few cities, such as Wenzhou, which saw new home prices falling in 13 out of the last 14 months, which resulted in a 17% drop of new home prices since August last year (anecdotes from Wenzhou suggest that the actual fall is likely to be much higher than this).

Source: National Bureau of Statistics

Nomura: Some Very Bullish Thoughts on China

By Also Sprach Analyst

The recent deterioration of sentiment on China has been surprising even to us, as economists rushed to cut their GDP forecasts one after another.  That is before the QE Infinity announcement,Germany Constitutional Court ruling, and the ECB’s OMT, so the sentiment is certainly as bad now as it was 2 weeks ago.

Although we now see some reasons to expect pick-up, or at the very least a stabilisation of economic activities in the few months to come (see also the OECD indicator which is pointing to a slowdown in the pace of slowdown), and although some suddenly believe that the government’s stimulus has suddenly got real (we are sceptical as to how “real” the stimulus is), we are not aware of anyone more excited than Nomura, as they believe that growth will rebound strongly from 7-ish per cent now to 8.8% yoy in Q4.  The reason is that they believe the stimulus in forms has suddenly got real.  In other words, investment (in other words, the usual suspect) will pick up sharply in the months ahead:

“We believe economic growth in China will rebound earlier, and stronger, than the market currently expects. The consensus forecast for 2012 GDP has fallen to 7.7% from 8.1% three months ago, and on a quarterly basis the consensus expects growth to slow from 7.6% y-o-y in Q2 to 7.5% in Q3, before recovering slightly to 7.7% in Q4. We on the other hand expect growth to rebound visibly in Q4 2012 to 8.8%, driven by stronger infrastructure investment and a rebound in housing investment, which combined account for half of total investment.

We believe CPI inflation bottomed in July and will rise to 3.1% in Q4 2012. We expect CPI to climb further to 4.2% in 2013, exceeding the consensus forecast of 3.4%. We believe the economic recovery will open up a positive output gap. The surge in global food prices is also likely to push up pork and edible oil prices in China.”

China: A Crisis in the Making?

By Also Sprach Analyst

Li Zoujun, an economist at the Development Research Centre of the State Council, recently released a report, presumably at an internal meeting, which predicted that China could face an economic crisis in 2013.  The full report in Chinese can be read here.

We are not going attempt to summarise the whole report as it is quite lengthy, except for his somewhat apocalyptic predictions. The majority of what he said does not seem very surprising. The only surprising thing about such a report is that it is made by someone from the State Council as opposed to a Westerners or Western media who were allegedly talking down China.

Li Zoujun says the causes of this economic crisis are, first of all, a burst of real estate bubble and local government debts crisis.

The second is external, namely that hot money and capital inflow over the past few years fuelled the bubble within China (then he blames “foreigners who short China”). As capital might flow the other way when the economy slows, it will cause troubles for Chinese government in dealing with it.

The third is political: as this year is pretty much the final year for the current government’s term, its job in the remaining months would be to hope that everything is stable. But let’s say the economy get pass the leadership transition without any troubles, the next leadership will face two choices: either to sustain the bubble for now and create a bigger problem in 2015 /16, or let the bubble got bust. Of which, he endorses the second choice.

Finally, business cycle short-wave and long-wave troughs could meet very soon (whatever that means). He believes that a crisis should have occurred in 2008/09, yet the massive stimulus delayed that, and it is about time that it can no longer be delayed.

In the coming crisis, he believes some local governments, small and medium sized business and some banks will go bankrupt.

For those who are familiar with our view, this is not new. We have spent quite a lot of time focusing on local government debts, shadow banking mess and real estate bubbles. We have also said many times now that capital outflow will prove to be very problematic for China. Many of the problems he is predicting here has been mentioned, and indeed some are already happening, such as defaults and the credit crunch among SME caused by mutual guarantees scheme, while some local government debts are being rolled over to delay the day of reckoning. While we do not think at the present moment that any banks will go bankrupt despite a potential financial crisis, we see Chinese banks shares to suffer an RBS-type outcome.

The only surprise, as we said, is that this is someone within the State Council who said it. This adds evidence to our judgment that the massive stimulus in 2009 is widely viewed as a mistake within China, and some within the government’s policymaking bodies share that view, and we believe this is one of the reasons why the government is so far reluctant to provide any massive stimulus despite arguably very grim economic outlook.

Air Cargo Data Points to Weakening Industrial Production

By Also Sprach Analyst

Nomura has an Air cargo volume index (as we first mentioned here), which correlates with global industrial activities pretty with (correlation = 0.84).

The latest read of the air cargo indicator came in at –6.1% yoy for July according to Nomura, after improving somewhat from –7.6% yoy in May to –2.5% yoy in June.  In other words, the indicator is pointing to weakening again after the blip in June.

The chart below shows Nomura’s air cargo indicator and global industrial production growth:

The Best and Worst Asset Classes of the Last 5 Years

By Also Sprach Analyst

It is hard to believe that the great financial crisis started 5 years ago today when the subprime crisis surfaced, as many would feel like it was only yesterday.

Jim Reid of Deutsche Bank reflects on the crisis today, and the chart below from his latest note shows the performance of various asset classes over the last 5 years.  The best performing asset turns out to be corn, followed by gold and silver.  The worst asset classes were mainly European peripheral stocks.  Funny enough, the Shanghai Composite was the 6th worst performing asset class.

Source: Deutsche Bank (click to enlarge):