Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: China storms back, Singapore avoids recession, US politicians don’t do unthinkable, but will they do it in March, and dare you think it? House prices: confidence rises. Hollande sees court rejection. Press tips for 2013
China storms back
China is back. At least it is back if you believe the PMI indices covering the country’s manufacturing carry any weight.
The official PMI for Chinese manufacturing in December was 50.6, equalling November’s reading which itself was a seven month high. Any score over 50 is meant to signify growth. Although in the case of China, the 50 score seems to relate to changes in growth. So less than 50, means growth slows.
That was good news. Just to reiterate: a seven month high in November, and staying there in December.
And the unofficial PMI, produced by Markit and HSBC, and which puts more emphasis on smaller businesses did much better. It rose to 51.5 in December. That was the highest reading since May 2011.
The HSBC/Markit measure is usually a pretty reliable guide, so this is good news indeed. China, it appears, is back. Talk of a soft landing can be forgotten. And thanks to recovering China, no doubt Japan, South Korea and the economies of South East Asia can look forward to renewed export growth. Maybe even western exporters might pick up some sales on the back of the recovery.
It is just that China has been creating credit and boosting borrowing like a bull charging at a red flag dotted with one big star and four little ones.
China’s government knows that it will only be able to enjoy sustainable growth, and pass the so called middle income trap, by persuading its consumers to spend more and save less, and by ensuring more profits trickle down into wages. The solution to China’s challenge probably lies in that idea which Austrian economists so hate: an improved social safety net, meaning better state backed benefits for the retired and unemployed. Incorporate that idea, and China’s consumer may be less scared about the future, and less likely to save. Then again, the very factor that has underpinned China’s growth over the last few decades is its competitive labour market. Somehow, China has to find the right balance between social safety net and competitive market labour, and that won’t be easy.
Singapore avoids recession
In Q3 Singapore sunk. Quarter on quarter growth was minus 6.3 per cent – ouch.
Many feared the worst. The possibility of a mild recession was not so much a danger, but actually a quite positive outcome, considering how severe the Q3 slump was.
Relax! Data out this morning revealed that Singapore expanded by 1.8 per cent in Q4 compared to the previous quarter and by 1.1 per cent year on year.
Singapore’s problem is its manufacturing sector, which contracted by 10.8 per cent in Q4 and indeed contracted in the two previous quarters.
That’s the problem with an export dependent sector when the global economy is limping along.
Still, it’s quite impressive that despite the woes of Singapore’s manufacturing, its services sector was able to more than make-up for the loss. That’s the key for any country wanting to move past the middle income territory. It needs a strong services sector.
US politicians don’t do unthinkable, but will they do it in March, and dare you think it?
Quelle surprise! US politicians worked until late at night, and indeed had been working throughout much of the holiday season; even Barak Obama had to put his holiday on hold. And just as the deadline that could not be breached seemed about to be breached, they agreed.
In the House of Representatives 257 senators said aye, 167 nay. 172 Democrats and 85 Republicans voted yes, while 151 Republicans and 16 Democrats voted no.
If you want to squint your eyes, or alternatively squeeze your fingers together around some salt, you could say Obama won the day. Taxes for those earning more than $400,000 a year are going up. (The Democrats had originally hoped to raise taxes for those earning more than $250,000. Before Christmas the Republicans had agreed to upping taxes on those earning more than $1 million. So the eventual compromise was closer to the Democrat position). Inheritance tax is rising too, as are capital taxes, while unemployment benefits and tax credits are extended.
In short, taxes have gone up, but spending stayed put.
But, in reality, the decision on spending cuts has been postponed for two months. And of course, we are going to see the talks over spending dominate the headlines. When EU leaders meet and finally agree to save the world, the headlines say they have kicked the can down the road. The leaders say otherwise, of course, but we all know the truth. But in the US there was no hiding the fact; politicians have not only kicked the can down the road, they had pretty much said so in a booming voice.
And now it turns out that the US is set to pass its debt ceiling again. Now the two houses of Congress, with their checks and balances, have two months to agree to approve the necessary borrowing and spending to meet the US government’s commitments.
In fairness to Obama, he is talking the talk, and trying to avoid the damage of late night negotiations, politicians talking tough and refusing to compromise until they have no choice. But we all know it will happen anyway. Just at that point when any later would be too late, Congress will agree a compromise deal that actually postpones the day of reckoning by a few more months.
One has to feel sorry for the can; never in the field of human affairs has one object been kicked by so many.
In Europe, politicians may look on in astonishment. How can they be so irresponsible, they might ask? As a body, how can they be so indecisive?
Meanwhile, in China they may look on, and say: “Democracy, no thank you.”
House prices: confidence rises
According to a survey from Lloyds, nearly four in ten (38% per cent) of respondents predict the average UK house price will rise over the next year, whilst less than a fifth of respondents (18 per cent) forecast a decline in prices.
The Halifax Housing Market Confidence tracker rose to plus 20 in December, the highest reading ever. Although it might be worth pointing out that in this case forever means since April 2011 when the index was begun.
This begs the question: why?
Even Martin Ellis, housing economist at Halifax, seemed a little puzzled. The survey was good, but he said: “Conditions in the housing market have been largely unchanged over the past 12 months with little overall movement in either house prices or sales for the second consecutive year. This remarkable stability, given the poor domestic and overseas economic climate, has probably been a key driver of the improvement in sentiment regarding the outlook for house prices over the coming year. Ongoing concerns over job security and the challenges in raising a deposit are likely to constrain housing demand and activity next year. Accordingly, we expect continuing broad stability in house prices nationally in 2013.”
The strength, or rather lack of weakness in the UK housing market, is a puzzle. If it can avoid a crash when the economy is so dire, what will it do when the economy returns to normal? At least that is the kind of thinking that may be underpinning the rise in optimism. What the optimists may be overlooking is that the economy may not return to normal until certain asset prices come back to earth.
QE may not be boosting inflation by much, but it has surely stopped a crash in property prices. Whether the economy can fully recover until property prices crash, however is a moot point.
Hollande sees court rejection
Whist you were enjoying the holiday season, Francoise Hollande suffered a blow. France’s richest may have been touch happier, however.
A French court rejected Hollande’s plan for a 75 per cent tax on those earning more than one million euros a year.
The French Constitutional court was not against the idea of high earners paying more, but it was against the way in which the tax did not take into account household income. French income taxes are normally based on household income.
Apparently, the decision was not enough to placate Gerard Depardieu, who is soon to become the country’s most high profile tax exile. He is still moving to Belgium. France’s Prime Minister Jean-Marc Ayrault described Depardieu’s imminent move as pathetic. Depardieu has previously sent an open letter to France’s Prime Minister, published in the ‘Journal du Dimanche’ saying he was leaving “because you consider that success, creativity, talent, anything different, are grounds for sanction.”
Companies in the news
It being the first working day of the year, the tipsters have been busy.
Over at the ‘Guardian’, companies tipped for 2013 include: Home Retail Group, Diageo, Betfair, Man Group, Chemring, Ruffer Investment Company, Asos, SSE, TalkTalk and Herbalife. See: Top 10 stock market tips for the uncertain year ahead
At the ‘Telegraph’, Questor tipped MP Evans, London Mining, Heritage Oil, Melrose Industries, Capita, and San Leon Energy. See Questor: Six share tips for 2013
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employeeshese views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees