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Message: Focus on two macro trends ..
Dear member,
This week we'll be focusing on two macro trends which we believe will have positive impacts on equities and the overall markets in 2012.
The first point of focus is China - the long-time, fastest growing major economy of the world. We believe China is primed to have a less volatile year with better than expected growth. We'll provide compelling data to back this point up later in the Volume.
The emerging markets will also re-emerge back into the limelight as they shake off a terrible 2011, which saw volatility and risk aversion, by global investors, destroy its many markets.
As an investor, you can waste an incredible amount of time worrying about a Greek default, the Eurozone collapse or attempting to interpret the barrage of daily market noise. We are all inundated with information of this nature, much of it politically motivated (let's not forget).
As we stated last week, in the short-term there will be some consolidation in the US markets, due to investors' pessimism towards the EU. We saw it this past week with all major markets giving up gains. That stated, we remain bullish for the medium-term (6-9 months) as central banks have taken their stand. The bond market is dead (providing pitiful returns) and you better believe cash is dead. If you are an investor looking to beat inflation, which the Fed has kindly explained to us in great detail through its policy implementations, you have to move into equities and commodities. Money supply is up and the manipulation we've discussed for years is in full swing. What else should we expect? It is an election year after all (and not just for the US).
Speaking of elections, China will hold a congressional election in 2012. This is the leading reason we believe the majority of data emanating from China this year will be positive. Just to be clear, this is not a democratic election. Nevertheless, strong economic news leading up to China's 'election' is vital.
China's current leaders will simply appoint new ones and to avoid a revolt or protests, the economy needs to be strong. The appointments take place in March, with the actual handover of power occurring March of the following year.
Although predetermined, the change in leadership is still significant for markets. To ensure a smooth transition, the incoming party looks to gain popularity and avoid protests. Sound familiar? It doesn't matter if you are a democratic nation or a communist one, the people must support their leadership, which usually means markets and news are going to be manipulated to please the people. Our research team found an interesting 30 year average of China's markets before and after elections. We found that China's policy makers typically boost economic growth during the election focused year and purposely hamper growth leading up to the election year.
Exhibit 1: The below Election Cycle shows China's Real GDP Growth Relative to Average Compound Growth Rates
China's annual growth over the past ten years has been in the neighbourhood of 10%. It's ability to sustain double digit growth, or close to it, has been amazing and has never been seen before in modern history.
Exhibit 2: China's Election Cycle and Average Yearly Change in GDP Growth Rates
The above charts are a tribute to the true manipulation that politicians and policy makers indulge in during election years - fascinating to say the least. Our team at Pinnacle has never been one to fight the trend and will be capitalizing on this trend by staying heavily weighted in commodities this year. China has been leading the commodity trade for years and we expect elevated GDP growth to continue as infrastructure projects continue to roll out.
Whether or not China's landing will be soft or hard is irrelevant for the next 6 to 9 months. You can trust that its leaders will be doing everything to create jobs, growth and a renewed sense of optimism as a newly 'elected' President and Premier prepare to take the helm.
Emerging Markets
The emerging markets had the wind taken out of their sails last year as investors shunned the volatile and risky countries of Brazil, Russia, India and China (BRIC countries).
Hong Kong Hang Seng Index 1 Year Chart:
You can see from the above chart that the Hang Seng got hammered July through December, losing more than 5000 points!
China and many of these countries have their respective currencies pegged to the US dollar whether they admit it or not. If the US prints, China and others have to print as well. Inflation will lift up many of their assets, including their stock market valuations. The lower volatility favors these countries as it makes investors forget about the risk associated with developing nations and focus more on their growth - where it should be in a year like this one.
Last week, the National Bureau of Statistics of China, reported that consumer prices rose 4.5% from a year earlier. This rise was 'unexpected' and was blamed primarily on Chinese New Year which is a weeklong holiday where many spend extra on food. Nevertheless, it is dramatically higher than last year and our team is identifying a key trend. As these currency wars progress, inflation (intentional devaluation of currencies) will continue.
Chang Jian, a Hong Kong-based economist at Barclays Capital, made a few comments prior to the release of China's updated inflation report. He commented that in respect to the Chinese government, "they remain cautious about upside risks to imported inflation from commodity prices".
Imported inflation is something we will be hearing more of and an issue we have discussed at length in past reports.
Let's now turn back to the emerging markets where positive indicators and predictions have abounded in recent weeks.
The Conference Board, a New York-based business and economics research group funded by major corporations, said that it expected growth in developed economies to slow down from 1.6% in 2011 to 1.3% in 2012, while emerging market growth will decelerate from 6.4% in 2011 to 5.1% this year.
Those statistics represent a serious drag, if not a contraction across Europe. The growth is still squarely in the developing world (emerging markets) and this should further boost its markets in the medium-term, despite being vulnerable to shocks from Europe.
As of February 10th the MSCI Emerging Markets Index Fund was up an incredible 15.59% on the year. Not too shabby for 6 weeks. If volatility stays relatively low, this index will continue to drift upwards as a contained slowdown in Europe or the US will not impact it dramatically. Take a look at the chart below.
MSCI Emerging Markets Index Fund 1 year Chart:
Mark Martiak, vice-president at Premiere Financial Advisors in New York commented that, "Emerging markets will remain the fuel for world growth, and secular themes such as population growth and an emerging middle class are truly powerful drivers. But I always warn my clients that the short-term headline risk with these securities is very real."
Our team will continue to monitor the emerging markets which we remain bullish towards over the medium-term. As the debt-ridden United States continues to print its way to sustainability, we stay heavily weighted in resource rich commodity explorers, developers and producers. These equities will appreciate as the dollar continues to depreciate.
All the best with your investments,
This week we'll be focusing on two macro trends which we believe will have positive impacts on equities and the overall markets in 2012.
The first point of focus is China - the long-time, fastest growing major economy of the world. We believe China is primed to have a less volatile year with better than expected growth. We'll provide compelling data to back this point up later in the Volume.
The emerging markets will also re-emerge back into the limelight as they shake off a terrible 2011, which saw volatility and risk aversion, by global investors, destroy its many markets.
As an investor, you can waste an incredible amount of time worrying about a Greek default, the Eurozone collapse or attempting to interpret the barrage of daily market noise. We are all inundated with information of this nature, much of it politically motivated (let's not forget).
As we stated last week, in the short-term there will be some consolidation in the US markets, due to investors' pessimism towards the EU. We saw it this past week with all major markets giving up gains. That stated, we remain bullish for the medium-term (6-9 months) as central banks have taken their stand. The bond market is dead (providing pitiful returns) and you better believe cash is dead. If you are an investor looking to beat inflation, which the Fed has kindly explained to us in great detail through its policy implementations, you have to move into equities and commodities. Money supply is up and the manipulation we've discussed for years is in full swing. What else should we expect? It is an election year after all (and not just for the US).
Speaking of elections, China will hold a congressional election in 2012. This is the leading reason we believe the majority of data emanating from China this year will be positive. Just to be clear, this is not a democratic election. Nevertheless, strong economic news leading up to China's 'election' is vital.
China's current leaders will simply appoint new ones and to avoid a revolt or protests, the economy needs to be strong. The appointments take place in March, with the actual handover of power occurring March of the following year.
Although predetermined, the change in leadership is still significant for markets. To ensure a smooth transition, the incoming party looks to gain popularity and avoid protests. Sound familiar? It doesn't matter if you are a democratic nation or a communist one, the people must support their leadership, which usually means markets and news are going to be manipulated to please the people. Our research team found an interesting 30 year average of China's markets before and after elections. We found that China's policy makers typically boost economic growth during the election focused year and purposely hamper growth leading up to the election year.
Exhibit 1: The below Election Cycle shows China's Real GDP Growth Relative to Average Compound Growth Rates
China's annual growth over the past ten years has been in the neighbourhood of 10%. It's ability to sustain double digit growth, or close to it, has been amazing and has never been seen before in modern history.
Exhibit 2: China's Election Cycle and Average Yearly Change in GDP Growth Rates
The above charts are a tribute to the true manipulation that politicians and policy makers indulge in during election years - fascinating to say the least. Our team at Pinnacle has never been one to fight the trend and will be capitalizing on this trend by staying heavily weighted in commodities this year. China has been leading the commodity trade for years and we expect elevated GDP growth to continue as infrastructure projects continue to roll out.
Whether or not China's landing will be soft or hard is irrelevant for the next 6 to 9 months. You can trust that its leaders will be doing everything to create jobs, growth and a renewed sense of optimism as a newly 'elected' President and Premier prepare to take the helm.
Emerging Markets
The emerging markets had the wind taken out of their sails last year as investors shunned the volatile and risky countries of Brazil, Russia, India and China (BRIC countries).
Hong Kong Hang Seng Index 1 Year Chart:
You can see from the above chart that the Hang Seng got hammered July through December, losing more than 5000 points!
China and many of these countries have their respective currencies pegged to the US dollar whether they admit it or not. If the US prints, China and others have to print as well. Inflation will lift up many of their assets, including their stock market valuations. The lower volatility favors these countries as it makes investors forget about the risk associated with developing nations and focus more on their growth - where it should be in a year like this one.
Last week, the National Bureau of Statistics of China, reported that consumer prices rose 4.5% from a year earlier. This rise was 'unexpected' and was blamed primarily on Chinese New Year which is a weeklong holiday where many spend extra on food. Nevertheless, it is dramatically higher than last year and our team is identifying a key trend. As these currency wars progress, inflation (intentional devaluation of currencies) will continue.
Chang Jian, a Hong Kong-based economist at Barclays Capital, made a few comments prior to the release of China's updated inflation report. He commented that in respect to the Chinese government, "they remain cautious about upside risks to imported inflation from commodity prices".
Imported inflation is something we will be hearing more of and an issue we have discussed at length in past reports.
Let's now turn back to the emerging markets where positive indicators and predictions have abounded in recent weeks.
The Conference Board, a New York-based business and economics research group funded by major corporations, said that it expected growth in developed economies to slow down from 1.6% in 2011 to 1.3% in 2012, while emerging market growth will decelerate from 6.4% in 2011 to 5.1% this year.
Those statistics represent a serious drag, if not a contraction across Europe. The growth is still squarely in the developing world (emerging markets) and this should further boost its markets in the medium-term, despite being vulnerable to shocks from Europe.
As of February 10th the MSCI Emerging Markets Index Fund was up an incredible 15.59% on the year. Not too shabby for 6 weeks. If volatility stays relatively low, this index will continue to drift upwards as a contained slowdown in Europe or the US will not impact it dramatically. Take a look at the chart below.
MSCI Emerging Markets Index Fund 1 year Chart:
Mark Martiak, vice-president at Premiere Financial Advisors in New York commented that, "Emerging markets will remain the fuel for world growth, and secular themes such as population growth and an emerging middle class are truly powerful drivers. But I always warn my clients that the short-term headline risk with these securities is very real."
Our team will continue to monitor the emerging markets which we remain bullish towards over the medium-term. As the debt-ridden United States continues to print its way to sustainability, we stay heavily weighted in resource rich commodity explorers, developers and producers. These equities will appreciate as the dollar continues to depreciate.
All the best with your investments,
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