ELB Research & Market Commentary

Australian Business Sentiment: 07-14-09

eb2568 — Mon, 20 Jul 2009 00:52:41 +0000

The Australian June Business Sentiment survey was released on Tuesday, July 14. The sentiment index increased 6 points to end at 4. Bloomberg indicates that this was the first positive reading since December 2007.

The improvement in sentiment can be seen as a belief that Australia may have sidestepped the current recession to a much larger degree than some of its developed market peers, including Europe and the United States. It should be noted that Australia is by no means ready to sustain impressive growth (if it grows at all). Instead, conditions are simply at a comparable level to the pre-Lehman days of Fall 2008. Other indicators of an improving Australian economy include an increase in consumer confidence, and another increase in home-loan approvals. However, the jobless rate is still increasing (albeit, at a slower pace than analyst expectations) and there is talk of Australia’s housing market as unstable and current prices as unsustainable.

Overall: The growing consensus of Australia moving ahead of the global recession is one which has been supported by recent economic statistics. However, it is the author’s opinion that the risk present in the Australian economy lies in its strong connections to natural resources (particularly metals & mining) and their future performance. Australia is certainly more diversified than Latin America (another resources powerhouse) and this is evidenced by an economic comparison of the two regions over the previous 12 months. Australia is a key player in the resources industry and will stand to benefit when global growth begins to resume, similar to Latin America. However, Australia can be considered as a less levered play on the direction of key resources whereas Latin America can be considered more levered to resource pricing.

Next week will be the release of Q2 CPI on Wednesday, July 22 and Q2 PPI on Monday, July 20.

6-24-09 Notes

eb2568 — Wed, 24 Jun 2009 23:59:25 +0000

What countries will exhibit strong growth going forward in an environment characterized by slow growing developed markets such as US, Canada, Japan, and particularly the major EU nations? Dubai is currently one of the cheapest EEMEA countries and has lagged its peers year-to-date. India is a strong, internally growing country. In such an environment it is ideal to invest in a country that exhibits strong domestic demand. However, to date the Indian market has been a stellar performer. It would be most prudent to wait for the inevitable correction in the markets to purchase quality Indian companies at a lower price. Areas to watch are agriculture and other companies in the Basic Materials sector. Indonesia appears attractive from a macroeconomic standpoint, however, it looks as if the market got ahead of itself during the first half of the year and a correction is expected.

Currently Eastern European countries are looking attractive on a long-term basis, yet the short-term outlook is uncertain enough to warrant current valuations. It is the author’s opinion that the general trend of Eastern Europe hinges on the outcome of the Latvian situation and the possibility of its default. If Latvia were to default this should have a ripple effect (psychological and most likely real) on other Eastern European nations. Not only this, but it will effect other larger European countries who import goods to these nations, and the banks (particularly Austrian) who have signficant European exposure.

Quick Notes

-unsustainable global rally

-GCC and Latin America good long-term investments

-looking to find emerging market investments for purchase at more reasonable valuations

-India agriculture

-Long term themes: Agriculture, energy, domestic demand economies

-Avoid Eastern Europe until Latvia situation is known

-Sovereign debt? Do strong economies offer attractive sovereign yields? What about corporate debt?

-Will commodities rally continue?

-Probably not in the short term because global growth will not increase fast enough to justify recent price increases, but in the long-term commodities should be an excellent investment opportunity

Quick Market Thoughts

eb2568 — Tue, 23 Jun 2009 03:20:56 +0000

The current market rally is unsustainable. Markets have moved too far too fast and are pricing in a quick recovery which will not happen. Indeed, the road to recovery will be a long and winding road with multiple bear market rallies like we have seen during the month of May. There are too many sell-side analysts reporting that the turnaround has begun and we will begin to see stronger growth accelerate in 2H 2009. To arrive at this conclusion they extrapolate past figures and trends and apply them to a situation which is not similar to the periods from which the figures and trends were taken. Unfortunately there are still too many “negatives” present in the economic landscape to say that there is a bright light at the end of the tunnel.

As a Basic Materials analyst I became convinced during the month of May that what we were (and still are) experiencing is another bear market rally when I observed PotashCorp rise from the mid $80’s to around $115. Investors were clearly pricing in the rosiest and quickest economic recovery scenario. Not only PotashCorp increased but essentially all Basic Materials stocks, all emerging markets, and most developed markets posting gains as well.

It was only a matter of time before an event or news item put a hole in the 2H 2009 theory. It is the author’s opinion that the event in question is today’s announcement from the World Bank regarding the global growth outlook. While the author places little emphasis on their estimates, the figures provided are vitally important to know and follow because they are widely used by the average market investor as a proxy for due diligence and creative thinking. Thus, the results of the outlook are likely to be exacerbated in the financial markets (at least in the short term) due to the sheer amount of weight they carry within industry professionals.

Global growth is expected to contract 2.9% in 2009 and turn to positive growth of 2.0% in 2010 and 3.2% in 2011.

Developing Countries: 2009 estimated growth of 1.2%. This follows 8.1% growth in 2007 and 5.9% in 2008. The two main drivers of this estimate are India and China. It is estimated that if these two countries are dropped from the estimates that the projected growth would turn into a project loss of 1.6%.

Latin America and Caribbean: GDP expected to decline 2.3% in 2009.

Middle East and North Africa: GDP expected to grow 3.1% in 2009.

South Asia: GDP projected to grow 4.6% in 2009.

Sub-Saharan Africa: GDP expected to grow 1% in 2009.

East Asia and Pacific: GDP expected to grow 5% in 2009.

Europe and Central Asia: GDP expected to fall 4.7% in 2009

It is the author’s opinion that the highlighted statistics from the World Bank are far from certain and will in all likelihood be revised again as time moves forward. Again, little emphasis is being placed on the figures themselves, but are used to understand the average mindset of the average market investor. While some geographic regions are expected to post modest GDP growth this year, this growth must be compared to the growth over the past few years and it will be seen that even then the growth figures are quite low. It is also the author’s belief that this will announcement will only strengthen the budding correction in the markets that we have seen over the past several trading days. Following this news the DJIA was off 2.35% to 8,339.01. The S&P 500 was off 3.06% to 893.04 and the Nasdaq off 3.35% to 1,766.19. Russia’s RTS Index was down 4.98% to 961.04 and Brazil’s Bovespa was down 3.66% to 49,494.80.

Introduction

eb2568 — Thu, 18 Jun 2009 20:40:09 +0000

The content to be published by ELB Research can be categorized into four broad categories:

Weekly Reviews: Consisting of analysis regarding economic statistics released during the previous week, along with equity and currency market summaries. Weekly reviews will also highlight any important news or political events during the previous week (on select countries only).
Individual Company Reports: Highlighting individual companies and including an investment strategy and recommendation. The purpose is to provide the reader with an in-depth analysis of an attractive investment opportunity. The highlighted company may or may not be based in the country highlighted in the most recent country report.
Country Reports: Intended to be produced on a monthly basis and will provide the reader with an increasing awareness of other countries from an economic, investment, and cultural perspective.
General Notes and Thoughts: Serves as an outlet for the general thoughts and ideas of the author. Topics will usually be broad in nature, typically dealing with various countries, economic highlights, various asset strategies, and rhetorical questions and scenarios. Any short-term or miscellaneous investment/trade ideas are considered to be a part of this category.