Land of Hope and Gloria

By Derek On February 6, 2012 Under Broker Notes, Post

“I believe we are on an irreversible trend toward more freedom and democracy – but that could change.”  – Dan Quayle

The weathervane of macro data releases is beginning to point firmly in one direction. The US non-farm payroll number we saw on Friday was huge and tells us the risk of a double dip scenario in the world’s largest economy is no longer worth worrying about. The 243,000 net jobs added is over 70% higher than consensus estimates of 140,000. Hiring was strong across the board from services to manufacturing. What’s more, is once you look inside the numbers you see this isn’t just people giving up looking for work and going back to the couch or jumping off high bridges: the labor force actually expanded. Average hourly earnings are also up and have risen 1.9% over the past 12 months which helps consumers either, a) deleverage faster, or b) go out and buy stuff, hopefully some crap made in China.

Commodity prices have also fallen on average 15% since April. Lower input costs and some recovering demand points to greater corporate profitability. This is particularly true for commodity hogs like Asian economies. Here in the Far East we are also seeing falling inflation allowing for greater policy response to slower economic growth. Further interest rate cuts are on the cards for China, in particular, and most of Asia as well.

Other good news for Asian asset prices are fund flows. Numbers from EPFR show that January saw the largest ever inflows to EM equity funds at $11.3 bn. If that sounds like a large number it is when you consider $11.3 bn is fully one-third of ALL EM fund outflows for 2011… Developing market funds were witness to an outflow and all the decouplers are excited and jumping up and down again. I’m a “coupler” and like “coupling” so I think this will not last long enough to become a trend. But you can’t ignore the real trend forming which is a stronger than expected US economy will help demand recovery globally and appetite for risk should continue to improve.

This does not mean we are off to the races and everything is hunky dory, of course. Clients are confused. I am confused. As we climb the wall of worry there are a lot of falling rocks that can derail this train, including:

1) Europe – blah, blah, blah
2) China’s debt problem – blah, blah, blah
3) Israel hits Iran (in a US presidential election year….? Unlikely.)

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While tempering our formerly bearish macro outlook, Mirae is still not positive for the outlook on the China steel sector. Our commodity team initiates coverage today on Angang Steel (347 HK) and Magang (323 HK), with both Reduce recommendations despite the view that falling iron ore and coking coal prices are a nice tailwind. The issue for analyst Shirley Zhao is overcapacity and the fact that these two companies are inefficient SOEs. Any profits to be found this year in the steel sector in China will accrue to the private sector where mills are more cost efficient and more flexible acquiring iron ore. See notes attached for this super bearish call.

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Today is the 60th anniversary of Elizabeth ll’s ascendency to the British throne, making her one of the longest ruling monarchs in the world. She has seen off 13 Prime Ministers and 11 US Presidents during her time at the Palace and roaming the world. While impressive, her reign still falls short of Queen Vic (63 years), or even Louis XlV (72 years). The key to her longevity seems to be a combination of never really voicing an opinion and keen survival instincts.

Cheers.

Derek Hillen, CAIA

 

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