James Kirby
October 10, 2010
IS THE value of your house about to plunge? Macquarie Bank has tipped a 20 per cent drop in housing construction next year while commentators say the smallest lift in interest rates will pop the ''home price bubble''.
House prices have been sliding for months. Industry estimates suggest that over the past quarter Melbourne prices are down 2 per cent and Sydney is off by 0.5 per cent. But these figures are nothing compared with those for Britain and the US, or Ireland, where home prices are down 40 per cent and falling.
So it is no surprise that every time anything remotely negative happens in the wider economy - this week it was the mere threat the Reserve Bank might lift interest rates - there are suggestions home prices are about to go over a cliff.
The doomsayers' arguments have been well aired. They pivot mainly on the sheer price of our real estate in relation to average income. There is also a lot of credence given to household debt levels and the presence of incentives that prop up the market, such as negative gearing.
Invariably the doomsayers are economists, especially offshore, while the bulls are linked to the success of the property industry (mortgage financiers, builders, developers and real estate agents).
Associate Professor Steve Keen, of the University of Western Sydney, for example, who has gained national prominence for his dire warnings on house prices, is still talking about a sharp home-price downturn. On Friday he told the ABC that property investors on average incomes would not be able to endure even flat prices in the coming years. Keen estimated property investors earning less than $80,000 a year make up 20 per cent of the market and the slightest pinch in the market would prompt this sector to sell out, causing ''the bubble to burst''.
Alternatively, we get experts such as ANZ economist Paul Braddick, who made his name with a presentation he took round the country called ''the mother of all housing booms''. Braddick believes the outlook for house price appreciation is now ''soft'', but he is convinced the momentum is strongly upwards over the long term.
Fresh voices are rare in the debate. But in recent days a new perspective emerged from John Wilson, the Australian chief executive at Pimco, the world's biggest bond fund. Wilson, in a paper on Australia's housing market, argues forcefully that our market is no bubble.
He begins with some obvious points - worrying that Australia may follow the US or Britain is pointless because we have an utterly different economy with relatively strong growth and high employment. Likewise, where the US and other nations built too many houses in recent years, we have not built enough.
He follows with a range of points:
■ We have relatively high mortgage repayments but the ratio of housing costs to household disposable income (a key indicator of people's ability to finance mortgages) has remained unchanged at 30 per cent for more than a decade.
■ Australians pay a relatively high amount in cash for their homes, but a closer look shows that one-third of repayments go on principal, not interest - that's saving and investment, and because housing has risen steadily (6 per cent a year) the situation is better than you think.
■ Our household debt figures are high, but the debt relates to bricks and mortar - we are not spending any more on cars or credit cards. What's more, the average equity we have in our homes is 60 per cent and that has remained steady.
Wilson also suggests the worst of the interest rate rises may be over: a view that is gaining momentum.
Add it all up, and though it is clear home prices may be experiencing a weak patch, the merchants of doom have got it wrong so far and there's little reason to believe the local fundamentals have changed.
http://www.smh.com.au/business/why-home-prices-are-not-about-to-crash-and-burn-20101009-16d3p.html
Saturday, 9 October 2010
It perhaps seems strange that SOME investors don't invest in American shares.
Are British investors missing a trick by shunning Wall St?
Nine of the world's biggest brands are American. Should we be backing Gekko's greed?
By Paul Farrow, Personal Finance Editor
Published: 11:30AM BST 08 Oct 2010
As Gordon Gekko returns to the big screen, should British investors be rethinking their lack of American exposure? Talk of investing in the US evokes images of Gordon Gekko, the king of Wall Street, all braces and pinstripes, making multi-million-dollar deals and living the high life. Yet the Eighties blockbuster film did little to encourage British investors to grab a slice of the American investment pie.
More than two decades on and Michael Douglas has reprised his role as Gekko in the sequel Wall Street: Money Never Sleeps. Yet, Wall Street might as well take 40 winks where British investors are concerned, as they continue to shun the world's biggest stock market – it was the least popular sector according to the latest monthly statistics from the Investment Management Association.
It perhaps seems strange that British investors don't invest in American shares. After all, nine of the world's biggest brands are American – they are names we know and we contribute to their prominence. Take an IBM laptop into McDonald's, sip a Coca-Cola, check your email on Microsoft Outlook and surf on Google, and you will have embraced five of the top six in one swoop.
Yet despite its familiarity, financial advisers have never been too keen on selling the US story to investors.
Brian Dennehy at advisers Dennehy Weller & Co has been avoiding the US since 1996 and said that few have found good reason to buy the US market since: "The US is all too often at the epicentre of investment stupidity, from the Long Term Capital Management (LTCM) saga in 1998, the technology bubble of 2000, the property bubble that is still painfully deflating – and the greedy and feckless are now being set up for a roller-coaster in gold from which few will exit with profits [if a classic bubble inflates].
"There is dynamism and resilience built into the US economy. But what's the point for a UK investor when we can opt for more reliable growth areas in Asia?" he said. Hargreaves Lansdown simply thinks British fund managers aren't that good at delivering the goods. But it also agrees with Mr Dennehy and said that when it comes to investing on the other side of the Atlantic, other overseas sectors such as global emerging markets are more exciting.
Mark Dampier at Hargreaves Lansdown said: "In my 27 years in the industry I have never bought an American fund, perhaps that tells you everything."
Not that all financial advisers are downbeat.
Alan Steel at Alan Steel Asset Management is baffled as to why British investors shun the US. But he suggests that it is difficult to ignore a nation whose GDP is equal in size to the GDP of France, the UK, Italy, Brazil, Canada, Spain, Russia and India added together.
"The US market has always gone up strongly following the first two years of a new president's first term, going back to the Thirties, and we are about to enter the sweet spot," Mr Steel said.
"On top of that, demand has come in the past from times when a new generation is significantly bigger than the previous one. Generation Y, as it is known, is reckoned to be 20pc bigger than the baby boomers. No other country has this phenomenon as far as I can see."
The US economy is still in recovery and continues to run in fear of a double dip. Its latest job data showed an unexpectedly poor reading on private-sector hiring as employers cut 39,000 jobs in September, according to the ADP Employer Services report – the largest monthly loss since January.
Tom Walker, a fund manager at Martin Currie, the Edinburgh investment house, said the economic news continues to be "very mixed". "We do not expect a 'normal' economic recovery, but do expect growth to continue, albeit at a modest rate."
Mr Walker admitted that valuations look promising, but that there will be as many hits as misses. "This is not an environment where all boats are going to float and stock selection is more crucial than ever. The market valuation, looking exceptionally cheap, remains key," he added.
Felix Wintle, who manages Neptune US Opportunities, thinks many investors have seen the S & P500 remain flat for a decade and therefore not thought they had missed out. "The US market is 5,000 strong and companies are at the heart of innovation – these companies, such as Apple, create new world themes, plus we have hundreds of different business models from which to choose the best," he said.
Mr Wintle points to technology where in the UK, he says, British investors are limited to the likes of Logica and Sage, or in the retailers there are just a handful of shares such as Tesco and Next. "In the US we have so much choice because it is such a big market," he said. "The latest earnings figures are smashing the ball out of the park. Companies have restructured and become leaner organisations over the past couple of years."
Advocates of the US also argue that its companies are a conduit to emerging markets, which makes them an intriguing play for the contrarian investor who thinks that the likes of China are overcooked. "The US is a bit like the UK in that it is not a domestic play," said Tom Stevenson, investment director at Fidelity. "But its companies have been far more aggressive in making cuts than most and they are relatively cheap. It is one for the contrarian to consider."
http://www.telegraph.co.uk/finance/personalfinance/investing/8050267/Are-British-investors-missing-a-trick-by-shunning-Wall-St.html
Nine of the world's biggest brands are American. Should we be backing Gekko's greed?
By Paul Farrow, Personal Finance Editor
Published: 11:30AM BST 08 Oct 2010
As Gordon Gekko returns to the big screen, should British investors be rethinking their lack of American exposure? Talk of investing in the US evokes images of Gordon Gekko, the king of Wall Street, all braces and pinstripes, making multi-million-dollar deals and living the high life. Yet the Eighties blockbuster film did little to encourage British investors to grab a slice of the American investment pie.
More than two decades on and Michael Douglas has reprised his role as Gekko in the sequel Wall Street: Money Never Sleeps. Yet, Wall Street might as well take 40 winks where British investors are concerned, as they continue to shun the world's biggest stock market – it was the least popular sector according to the latest monthly statistics from the Investment Management Association.
It perhaps seems strange that British investors don't invest in American shares. After all, nine of the world's biggest brands are American – they are names we know and we contribute to their prominence. Take an IBM laptop into McDonald's, sip a Coca-Cola, check your email on Microsoft Outlook and surf on Google, and you will have embraced five of the top six in one swoop.
Yet despite its familiarity, financial advisers have never been too keen on selling the US story to investors.
Brian Dennehy at advisers Dennehy Weller & Co has been avoiding the US since 1996 and said that few have found good reason to buy the US market since: "The US is all too often at the epicentre of investment stupidity, from the Long Term Capital Management (LTCM) saga in 1998, the technology bubble of 2000, the property bubble that is still painfully deflating – and the greedy and feckless are now being set up for a roller-coaster in gold from which few will exit with profits [if a classic bubble inflates].
"There is dynamism and resilience built into the US economy. But what's the point for a UK investor when we can opt for more reliable growth areas in Asia?" he said. Hargreaves Lansdown simply thinks British fund managers aren't that good at delivering the goods. But it also agrees with Mr Dennehy and said that when it comes to investing on the other side of the Atlantic, other overseas sectors such as global emerging markets are more exciting.
Mark Dampier at Hargreaves Lansdown said: "In my 27 years in the industry I have never bought an American fund, perhaps that tells you everything."
Not that all financial advisers are downbeat.
Alan Steel at Alan Steel Asset Management is baffled as to why British investors shun the US. But he suggests that it is difficult to ignore a nation whose GDP is equal in size to the GDP of France, the UK, Italy, Brazil, Canada, Spain, Russia and India added together.
"The US market has always gone up strongly following the first two years of a new president's first term, going back to the Thirties, and we are about to enter the sweet spot," Mr Steel said.
"On top of that, demand has come in the past from times when a new generation is significantly bigger than the previous one. Generation Y, as it is known, is reckoned to be 20pc bigger than the baby boomers. No other country has this phenomenon as far as I can see."
The US economy is still in recovery and continues to run in fear of a double dip. Its latest job data showed an unexpectedly poor reading on private-sector hiring as employers cut 39,000 jobs in September, according to the ADP Employer Services report – the largest monthly loss since January.
Tom Walker, a fund manager at Martin Currie, the Edinburgh investment house, said the economic news continues to be "very mixed". "We do not expect a 'normal' economic recovery, but do expect growth to continue, albeit at a modest rate."
Mr Walker admitted that valuations look promising, but that there will be as many hits as misses. "This is not an environment where all boats are going to float and stock selection is more crucial than ever. The market valuation, looking exceptionally cheap, remains key," he added.
Felix Wintle, who manages Neptune US Opportunities, thinks many investors have seen the S & P500 remain flat for a decade and therefore not thought they had missed out. "The US market is 5,000 strong and companies are at the heart of innovation – these companies, such as Apple, create new world themes, plus we have hundreds of different business models from which to choose the best," he said.
Mr Wintle points to technology where in the UK, he says, British investors are limited to the likes of Logica and Sage, or in the retailers there are just a handful of shares such as Tesco and Next. "In the US we have so much choice because it is such a big market," he said. "The latest earnings figures are smashing the ball out of the park. Companies have restructured and become leaner organisations over the past couple of years."
Advocates of the US also argue that its companies are a conduit to emerging markets, which makes them an intriguing play for the contrarian investor who thinks that the likes of China are overcooked. "The US is a bit like the UK in that it is not a domestic play," said Tom Stevenson, investment director at Fidelity. "But its companies have been far more aggressive in making cuts than most and they are relatively cheap. It is one for the contrarian to consider."
http://www.telegraph.co.uk/finance/personalfinance/investing/8050267/Are-British-investors-missing-a-trick-by-shunning-Wall-St.html
India is tipped to emerge from China's shadow
India has been overlooked by investors, but it should not be ignored.
By Emma Wall
Published: 5:21PM BST 08 Oct 2010
2 Comments
If there were a popularity contest for emerging markets, India would struggle to win a medal. As the Commonwealth Games host has had difficulty enticing crowds to the sporting event, so too have investors shunned its economy in favour of India's bigger neighbour, China.
British fund investors have put £4bn more into China than into India, according to Morningstar, the analyst – China has attracted £15bn from UK-registered unit trusts, compared with £11bn for India.
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But the smart money may do well not to just follow the crowd China may be the current star of the BRIC show, but India could eclipse its neighbour in the not-too-distant future.
"In the last year, the MSCI India index is up by 22pc, whereas China is up by only 5.8pc," said Allan Conway of Schroders. "China may have better short-term prospects, but India is less developed and so has further to grow. Add to this China's prematurely ageing population due to the one-child policy, and I would say on a five-year-plus view that India is the more attractive investment opportunity."
India's economy is expected to grow by about 9pc next year, and although the budget deficit is 4.5pc, very little of this is in foreign currency, making it manageable.
India's past performance has been impressive too. If you had invested £1,000 in J P Morgan's Indian investment trust a decade ago, it would now be worth more than £6,000; had you invested a similar sum in the HSBC GIF Indian Equity unit trust, it would have grown to £7,433.
Short-term performance has also been positive. In the past year First State's Indian Subcontinent fund has returned 39pc and the India Capital Growth investment trust has risen by 58pc.
The past year has been prosperous for India. A new single-party government – India had been governed by coalitions since 1991 – was elected in May 2009 and has focused on corporate governance and tax regulation. It is introducing identity cards, which will be used to tax workers more efficiently and provide income for the state.
"It used to take a year to build the same number of roads that are being constructed in a day," said Pinakin Patel of J P Morgan.
India is a domestic market, supporting its own industry rather than relying heavily on exports like Russia and Brazil. This means that it was less affected by the global economic downturn than some of its emerging market peers, and can offer investors a hedge against a European or American double-dip.
India has a lower dependence on commodities than other emerging markets, contributing just 25pc of the equity market, compared with 36pc in South Africa, 46pc in Brazil and 70pc in Russia. The more diverse market offers more stability instead, mainly being a composite of financials at 30pc and energy, which is 25pc of the market.
Future investment opportunities lie not in big cities such as Mumbai and Delhi, but in smaller centres. Investors will be able to get the growth prospects of a frontier market, but with the stability of a more developed country.
The consumer story is big in these regions. Not only are the growing middle classes buying more goods and eating more meat, but their rise in social status is encouraging more infrastructure to be built and bringing big business to the financials.
"I come from a rural part of India," said Mr Patel. "I know how much people keep under the mattress. But more people are getting bank accounts, mortgages and credit cards – which is why we chose to play the consumer trend more indirectly through the financials." Four of the top five holdings in the J P Morgan investment trust are banks.
The newly launched Insynergy Absolute India fund favours financials too. It is run by India's largest business, Reliance Group, which invests in HDFC Bank. The high savings and investment rate, 37pc of GDP, coupled with the large as yet untapped market make it a good long-term growth holding.
Other sectors touted as opportunities for growth are pharmaceuticals, technology and infrastructure.
As the Commonwealth Games have proved, however, regulation in emerging economies is simply not on a par with the Western world. Fund managers may have puffed infrastructure as an area to invest in, but who wants to invest in the kind of bridges that collapse?
"India remains a very rough diamond," said Darius McDermott of Chelsea Financial Services. "In terms of infrastructure it remains a decade behind China – in many parts of the country roads are truly catastrophic. Energy supply is a perennial problem, as is the supply of skilled workers."
Mr Patel stressed that investors should not confuse publicly funded infrastructure, which is poorly regulated, with privately funded infrastructure. "Privately funded construction has many success stories, such as the Delhi metro," he said. "India is not perfect, but it has an English legal system and a proper accounting system. We chose to work with leading companies with a good track record." The JPM fund holds Larsen & Toubro, which builds power plants, and BHEL, a builder of roads and airports – both with 40-year histories.
While the Empire may have left India with an impressive rail system, the leftover democracy has stifled growth. "The legacy of the British Raj is a heavy-handed civil service," said Schroders' Mr Conway. "The administration system is onerous and means any development applications are beset with delays."
Financial advisers are not convinced that India is for everyone, as it remains at the higher end of the risk spectrum. Mr McDermott said: "In terms of an investment case India shows lots of promise, but there are endemic problems. Given the inherent problems associated with its nascent economic boom I consider this a high-risk investment. I recommend that exposure to the region should be less than 5pc and part of a balanced portfolio."
He suggested the more cautious strategy of getting exposure to India through an emerging market fund such as Allianz BRIC. For investors set on a specialist fund he recommended Fidelity India Focus Fund.
Charlie Nicholls of Investment-advice-online.com backed First State Indian fund or Invesco Perpetual Asia.
"India only has a 20-year economic history, compared to China's 35-year one," said Mr Conway. "In five to 10 years China will slow down and India will consistently grow each year faster than China."
http://www.telegraph.co.uk/finance/personalfinance/investing/8051265/India-is-tipped-to-emerge-from-Chinas-shadow.html
By Emma Wall
Published: 5:21PM BST 08 Oct 2010
2 Comments
If there were a popularity contest for emerging markets, India would struggle to win a medal. As the Commonwealth Games host has had difficulty enticing crowds to the sporting event, so too have investors shunned its economy in favour of India's bigger neighbour, China.
British fund investors have put £4bn more into China than into India, according to Morningstar, the analyst – China has attracted £15bn from UK-registered unit trusts, compared with £11bn for India.
Related Articles
Are British investors missing a trick by shunning Wall St?
Scottish social housing needs investment as safe as 'gilts'
Silver price boosts Hochschild to near all-time high
Super-rich buy gold by the ton
'We are going to have higher prices for commodities'
Emerging markets second wind blows in the face of short-term thinking
But the smart money may do well not to just follow the crowd China may be the current star of the BRIC show, but India could eclipse its neighbour in the not-too-distant future.
"In the last year, the MSCI India index is up by 22pc, whereas China is up by only 5.8pc," said Allan Conway of Schroders. "China may have better short-term prospects, but India is less developed and so has further to grow. Add to this China's prematurely ageing population due to the one-child policy, and I would say on a five-year-plus view that India is the more attractive investment opportunity."
India's economy is expected to grow by about 9pc next year, and although the budget deficit is 4.5pc, very little of this is in foreign currency, making it manageable.
India's past performance has been impressive too. If you had invested £1,000 in J P Morgan's Indian investment trust a decade ago, it would now be worth more than £6,000; had you invested a similar sum in the HSBC GIF Indian Equity unit trust, it would have grown to £7,433.
Short-term performance has also been positive. In the past year First State's Indian Subcontinent fund has returned 39pc and the India Capital Growth investment trust has risen by 58pc.
The past year has been prosperous for India. A new single-party government – India had been governed by coalitions since 1991 – was elected in May 2009 and has focused on corporate governance and tax regulation. It is introducing identity cards, which will be used to tax workers more efficiently and provide income for the state.
"It used to take a year to build the same number of roads that are being constructed in a day," said Pinakin Patel of J P Morgan.
India is a domestic market, supporting its own industry rather than relying heavily on exports like Russia and Brazil. This means that it was less affected by the global economic downturn than some of its emerging market peers, and can offer investors a hedge against a European or American double-dip.
India has a lower dependence on commodities than other emerging markets, contributing just 25pc of the equity market, compared with 36pc in South Africa, 46pc in Brazil and 70pc in Russia. The more diverse market offers more stability instead, mainly being a composite of financials at 30pc and energy, which is 25pc of the market.
Future investment opportunities lie not in big cities such as Mumbai and Delhi, but in smaller centres. Investors will be able to get the growth prospects of a frontier market, but with the stability of a more developed country.
The consumer story is big in these regions. Not only are the growing middle classes buying more goods and eating more meat, but their rise in social status is encouraging more infrastructure to be built and bringing big business to the financials.
"I come from a rural part of India," said Mr Patel. "I know how much people keep under the mattress. But more people are getting bank accounts, mortgages and credit cards – which is why we chose to play the consumer trend more indirectly through the financials." Four of the top five holdings in the J P Morgan investment trust are banks.
The newly launched Insynergy Absolute India fund favours financials too. It is run by India's largest business, Reliance Group, which invests in HDFC Bank. The high savings and investment rate, 37pc of GDP, coupled with the large as yet untapped market make it a good long-term growth holding.
Other sectors touted as opportunities for growth are pharmaceuticals, technology and infrastructure.
As the Commonwealth Games have proved, however, regulation in emerging economies is simply not on a par with the Western world. Fund managers may have puffed infrastructure as an area to invest in, but who wants to invest in the kind of bridges that collapse?
"India remains a very rough diamond," said Darius McDermott of Chelsea Financial Services. "In terms of infrastructure it remains a decade behind China – in many parts of the country roads are truly catastrophic. Energy supply is a perennial problem, as is the supply of skilled workers."
Mr Patel stressed that investors should not confuse publicly funded infrastructure, which is poorly regulated, with privately funded infrastructure. "Privately funded construction has many success stories, such as the Delhi metro," he said. "India is not perfect, but it has an English legal system and a proper accounting system. We chose to work with leading companies with a good track record." The JPM fund holds Larsen & Toubro, which builds power plants, and BHEL, a builder of roads and airports – both with 40-year histories.
While the Empire may have left India with an impressive rail system, the leftover democracy has stifled growth. "The legacy of the British Raj is a heavy-handed civil service," said Schroders' Mr Conway. "The administration system is onerous and means any development applications are beset with delays."
Financial advisers are not convinced that India is for everyone, as it remains at the higher end of the risk spectrum. Mr McDermott said: "In terms of an investment case India shows lots of promise, but there are endemic problems. Given the inherent problems associated with its nascent economic boom I consider this a high-risk investment. I recommend that exposure to the region should be less than 5pc and part of a balanced portfolio."
He suggested the more cautious strategy of getting exposure to India through an emerging market fund such as Allianz BRIC. For investors set on a specialist fund he recommended Fidelity India Focus Fund.
Charlie Nicholls of Investment-advice-online.com backed First State Indian fund or Invesco Perpetual Asia.
"India only has a 20-year economic history, compared to China's 35-year one," said Mr Conway. "In five to 10 years China will slow down and India will consistently grow each year faster than China."
http://www.telegraph.co.uk/finance/personalfinance/investing/8051265/India-is-tipped-to-emerge-from-Chinas-shadow.html
Sorry to burst your bubble, your investment is overpriced
Annette Sampson
October 9, 2010
They're frothy and insubstantial. Mere lightweights in the world of solid matter. But bubbles can prove mighty dangerous phenomena, especially in the world of investments.
Investment bubbles have been brought back into focus by the mere uttering of the word by the Reserve Bank head of financial stability, Luci Ellis, in relation to the residential property market at a conference in Brisbane this week.
Let's be quite clear. Despite continuing speculation that Australian house prices are in bubble territory this was not what Ellis was claiming. Rather, Ellis said the market was showing ''welcome signs'' of cooling. But low yields on residential property, she said, limited the potential for price appreciation.
Advertisement: Story continues below ''Buying an asset because you expect the price to rise in the future, well, that is actually the academic definition of a bubble,'' were the attention-grabbing words. ''So that would be undesirable and seen as a problem.''
Never mind that future capital gains have long been the prime motivation for Australian residential property investors. Ellis said recent rises in rental yields and a levelling off in prices were a good thing, but this has not dampened the speculation over whether Australia, like the US and so many other countries, is in danger of a housing bubble burst.
The International Monetary Fund also bought into the housing bubble debate this week cautioning that our house prices may be overvalued and a correction could hit household wealth and consumer confidence.
The arguments on the Australian housing market have been well-documented. Those holding the bubble view point to historically high levels of debt by households, high house prices in relation to incomes, and low rental yields as being unsustainable. The property bulls point to continuing undersupply of housing and strong immigration as putting a floor under house values.
Both have a point. But in the post global financial crisis environment where debt still has the potential to derail the economic recovery, it would certainly be prudent to err on the side of caution.
However the argument raises the broader issue of how investors can shield themselves from the inevitable crashes that follow investment bubbles, while enjoying some of the profits while markets are rising.
As the chief economist of AMP Capital Investors, Shane Oliver, points out, investment asset bubbles are an inevitable outcome of human nature. Investors have a natural inclination to jump onto popular fads by buying into investments that have been star performers - a trend that pushes prices up further and further until they become overpriced and unsustainable.
While you would think investors would be once bitten, twice shy, history also shows that bubbles emerge regularly, often arising from the ashes of the most recent crash. While it's easy to get caught up in bubbles, the fact that we've had so many of them also provides investors with the tools to identify when and where bubbles are emerging. There are always those who will claim each bubble is different, but the reality is that they all follow similar patterns. The signs are there for those prepared to look for them.
Dr Oliver identifies a combination of conditions that tend to lead to bubbles.
Oliver says the liquidity that has been generated by governments in response to the global financial crisis and the bursting of the bubble in US house prices has created fertile conditions for the next bubble. Easy money is providing the fuel for investors to jump into something seen as safe, offering a good return, and removed from the assets that caused the last set of problems.
His pick of prime bubble candidates are shares in emerging markets, gold and commodity prices, and resource shares.
However for a bubble to exist, speculation and overvaluation must also be present - and while there is definitely speculation in these markets, and prices have risen strongly, Oliver argues they have not yet reached bubble levels.
His verdict is that we are in the ''foothills'' of the next bubble, which more than likely has several years to run.
It is also important to note that while the most memorable bubbles are those that come to a spectacular end, not all investment bubbles lead to a sudden collapse in prices. Bubbles can end with a bang, or they can simply run out of steam, providing investors with a long period of underperformance rather than overnight losses. Historically this has been the more common trend for less volatile (and less liquid) assets such as direct property investments.
In that respect, a cooling in Australian house prices should indeed be welcomed.
http://www.smh.com.au/business/sorry-to-burst-your-bubble-your-investment-is-overpriced-20101008-16bz5.html
October 9, 2010
They're frothy and insubstantial. Mere lightweights in the world of solid matter. But bubbles can prove mighty dangerous phenomena, especially in the world of investments.
Investment bubbles have been brought back into focus by the mere uttering of the word by the Reserve Bank head of financial stability, Luci Ellis, in relation to the residential property market at a conference in Brisbane this week.
Let's be quite clear. Despite continuing speculation that Australian house prices are in bubble territory this was not what Ellis was claiming. Rather, Ellis said the market was showing ''welcome signs'' of cooling. But low yields on residential property, she said, limited the potential for price appreciation.
Advertisement: Story continues below ''Buying an asset because you expect the price to rise in the future, well, that is actually the academic definition of a bubble,'' were the attention-grabbing words. ''So that would be undesirable and seen as a problem.''
Never mind that future capital gains have long been the prime motivation for Australian residential property investors. Ellis said recent rises in rental yields and a levelling off in prices were a good thing, but this has not dampened the speculation over whether Australia, like the US and so many other countries, is in danger of a housing bubble burst.
The International Monetary Fund also bought into the housing bubble debate this week cautioning that our house prices may be overvalued and a correction could hit household wealth and consumer confidence.
The arguments on the Australian housing market have been well-documented. Those holding the bubble view point to historically high levels of debt by households, high house prices in relation to incomes, and low rental yields as being unsustainable. The property bulls point to continuing undersupply of housing and strong immigration as putting a floor under house values.
Both have a point. But in the post global financial crisis environment where debt still has the potential to derail the economic recovery, it would certainly be prudent to err on the side of caution.
However the argument raises the broader issue of how investors can shield themselves from the inevitable crashes that follow investment bubbles, while enjoying some of the profits while markets are rising.
As the chief economist of AMP Capital Investors, Shane Oliver, points out, investment asset bubbles are an inevitable outcome of human nature. Investors have a natural inclination to jump onto popular fads by buying into investments that have been star performers - a trend that pushes prices up further and further until they become overpriced and unsustainable.
While you would think investors would be once bitten, twice shy, history also shows that bubbles emerge regularly, often arising from the ashes of the most recent crash. While it's easy to get caught up in bubbles, the fact that we've had so many of them also provides investors with the tools to identify when and where bubbles are emerging. There are always those who will claim each bubble is different, but the reality is that they all follow similar patterns. The signs are there for those prepared to look for them.
Dr Oliver identifies a combination of conditions that tend to lead to bubbles.
- Chief among these is a supply of easy money, though the bubble generally does not start to form until something happens that generates popular interest in the investment, it becomes overvalued, and speculators jump in fearing that if they don't buy now they'll miss out on the next chance to make some fast profits.
- Other commentators have pointed out that bubbles are also characterised by overconfidence. Even when it is obvious that prices are overvalued, pundits come up with arguments to justify why ''this is different'' or why the old rules don't apply to this investment. A classic example was the tech boom of the late 1990s when any company claiming a vague connection to information technology could command a heady price on the sharemarket regardless of its earnings. Indeed, even if it had no earnings.
- Another common feature of bubbles is that they are generally fostered by government policy that encourages speculation to grow.
Oliver says the liquidity that has been generated by governments in response to the global financial crisis and the bursting of the bubble in US house prices has created fertile conditions for the next bubble. Easy money is providing the fuel for investors to jump into something seen as safe, offering a good return, and removed from the assets that caused the last set of problems.
His pick of prime bubble candidates are shares in emerging markets, gold and commodity prices, and resource shares.
However for a bubble to exist, speculation and overvaluation must also be present - and while there is definitely speculation in these markets, and prices have risen strongly, Oliver argues they have not yet reached bubble levels.
His verdict is that we are in the ''foothills'' of the next bubble, which more than likely has several years to run.
It is also important to note that while the most memorable bubbles are those that come to a spectacular end, not all investment bubbles lead to a sudden collapse in prices. Bubbles can end with a bang, or they can simply run out of steam, providing investors with a long period of underperformance rather than overnight losses. Historically this has been the more common trend for less volatile (and less liquid) assets such as direct property investments.
In that respect, a cooling in Australian house prices should indeed be welcomed.
http://www.smh.com.au/business/sorry-to-burst-your-bubble-your-investment-is-overpriced-20101008-16bz5.html
Soaring Australian dollar could fall 25%
Chris Zappone
October 9, 2010
THE Australian dollar's dramatic rise towards parity with the US dollar has left the currency exposed to the possibility of a correction, analysts say.
The Australian dollar leapt to US99.18¢ on Thursday night - the highest level since the currency was floated in 1983 - driven by strong data on the local economy and a weakening trend for the greenback. The dollar retreated to the US98.3¢ mark in local trade Friday afternoon.
''While many in the market believe parity will be reached, it will be difficult to see sustained trading at those levels in the longer term,'' said Travelex's Head of Risk Solutions, Anthony Gray. ''Get ready for the excitement as we reach parity, but do not be disappointed if the party wraps up pretty quickly.''
Advertisement: Story continues below New York-based GFT director Kathy Lien said that when the Aussie's purchasing power was viewed against the purchasing power of other currencies, it appeared extremely overvalued. ''At an exchange of US98¢, the Aussie is approximately 30 per cent overvalued against the US dollar,'' Ms Lien said.
''In fact, the Aussie is overvalued against every major currency including the British pound, Japanese yen, euro and New Zealand dollar,'' she said.
In addition to gains against the greenback, since August 25, the Aussie has risen 5 pence against the British pound to trade recently at 61.8 pence. It has also risen 6 yen on the Japanese currency to be at 80.8 yen, and New Zealand 5¢ against the kiwi to trade at NZ$1.31. The Australian dollar in its 27 years as a freely floating currency has had a long term value of US73.48¢.
''When valuations become this out of line, the general belief is that it needs to return to more sensible levels but it could be a long time before they do,'' Ms Lien said.
The Australian dollar's latest rally was sparked on Thursday when jobs data showed the economy added almost 50,000 new jobs last month - twice the level expected.
The surprisingly large increase led investors to bet the Reserve Bank would raise its key interest rate next month, adding to the relative allure of holding the Aussie dollar.
Also, in recent weeks the US Federal Reserve has hinted it could embark on another round of quantitative easing, a process aimed at bolstering economic growth that also weakens the US dollar against other currencies.
Nonetheless, the Aussie's run has drawn warnings from currency experts about a potential correction once market sentiment shifts. ''In financial markets as in other walks of life, the bigger they are the harder they fall,'' said 4Cast Ltd economist Ray Attrill. ''So if and when we do see a major shake-out … the Australian dollar will likely fall faster and further than just about any other G10 currency,'' he said, referring to the Group of 10 large economies.
Credit Suisse analyst Damien Boey said that on conventional currency assumptions the Aussie dollar could be overvalued by as much as 25 per cent.
''But we don't live in a normal world, because of quantitative easing globally,'' Mr Boey said. ''One day, we will revert to a more normal macro environment, and the currency will correct. But there is no visible catalyst for correction.''
http://www.smh.com.au/business/soaring-dollar-could-fall-25-20101008-16c5j.html
October 9, 2010
THE Australian dollar's dramatic rise towards parity with the US dollar has left the currency exposed to the possibility of a correction, analysts say.
The Australian dollar leapt to US99.18¢ on Thursday night - the highest level since the currency was floated in 1983 - driven by strong data on the local economy and a weakening trend for the greenback. The dollar retreated to the US98.3¢ mark in local trade Friday afternoon.
''While many in the market believe parity will be reached, it will be difficult to see sustained trading at those levels in the longer term,'' said Travelex's Head of Risk Solutions, Anthony Gray. ''Get ready for the excitement as we reach parity, but do not be disappointed if the party wraps up pretty quickly.''
Advertisement: Story continues below New York-based GFT director Kathy Lien said that when the Aussie's purchasing power was viewed against the purchasing power of other currencies, it appeared extremely overvalued. ''At an exchange of US98¢, the Aussie is approximately 30 per cent overvalued against the US dollar,'' Ms Lien said.
''In fact, the Aussie is overvalued against every major currency including the British pound, Japanese yen, euro and New Zealand dollar,'' she said.
In addition to gains against the greenback, since August 25, the Aussie has risen 5 pence against the British pound to trade recently at 61.8 pence. It has also risen 6 yen on the Japanese currency to be at 80.8 yen, and New Zealand 5¢ against the kiwi to trade at NZ$1.31. The Australian dollar in its 27 years as a freely floating currency has had a long term value of US73.48¢.
''When valuations become this out of line, the general belief is that it needs to return to more sensible levels but it could be a long time before they do,'' Ms Lien said.
The Australian dollar's latest rally was sparked on Thursday when jobs data showed the economy added almost 50,000 new jobs last month - twice the level expected.
The surprisingly large increase led investors to bet the Reserve Bank would raise its key interest rate next month, adding to the relative allure of holding the Aussie dollar.
Also, in recent weeks the US Federal Reserve has hinted it could embark on another round of quantitative easing, a process aimed at bolstering economic growth that also weakens the US dollar against other currencies.
Nonetheless, the Aussie's run has drawn warnings from currency experts about a potential correction once market sentiment shifts. ''In financial markets as in other walks of life, the bigger they are the harder they fall,'' said 4Cast Ltd economist Ray Attrill. ''So if and when we do see a major shake-out … the Australian dollar will likely fall faster and further than just about any other G10 currency,'' he said, referring to the Group of 10 large economies.
Credit Suisse analyst Damien Boey said that on conventional currency assumptions the Aussie dollar could be overvalued by as much as 25 per cent.
''But we don't live in a normal world, because of quantitative easing globally,'' Mr Boey said. ''One day, we will revert to a more normal macro environment, and the currency will correct. But there is no visible catalyst for correction.''
http://www.smh.com.au/business/soaring-dollar-could-fall-25-20101008-16c5j.html
China rejects quick yuan revaluation
October 9, 2010 - 4:19AM
.AFP
China's top central banker has rejected demands for a quick revaluation of the yuan, saying the emerging giant will reform gradually rather then engaging in "shock therapy".
Under fierce pressure from the United States, Europe and Japan, central bank governor Zhou Xiaochuan said on Friday the yuan will move gradually toward an "equilibrium" level.
With the recovery still painfully slow in the developed world, China and other emerging markets are being asked to allow a more level playing field for trade.
Advertisement: Story continues below Attempting to defuse simmering tensions, IMF chief Dominique Strauss-Kahn said China will not be expected to revalue its currency overnight.
But earlier on Friday, US Treasury Secretary Timothy Geithner gave a glimpse of Washington's impatience with the pace of reform so far.
"The United States believes that global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery," he told the IMF's 186 other member states.
Geithner added the solidarity shown in the wake of the global financial crisis is at risk of disappearing as countries like China fail to switch the foundation of their economies from foreign to domestic demand.
© 2010 AFP
.AFP
China's top central banker has rejected demands for a quick revaluation of the yuan, saying the emerging giant will reform gradually rather then engaging in "shock therapy".
Under fierce pressure from the United States, Europe and Japan, central bank governor Zhou Xiaochuan said on Friday the yuan will move gradually toward an "equilibrium" level.
With the recovery still painfully slow in the developed world, China and other emerging markets are being asked to allow a more level playing field for trade.
Advertisement: Story continues below Attempting to defuse simmering tensions, IMF chief Dominique Strauss-Kahn said China will not be expected to revalue its currency overnight.
But earlier on Friday, US Treasury Secretary Timothy Geithner gave a glimpse of Washington's impatience with the pace of reform so far.
"The United States believes that global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery," he told the IMF's 186 other member states.
Geithner added the solidarity shown in the wake of the global financial crisis is at risk of disappearing as countries like China fail to switch the foundation of their economies from foreign to domestic demand.
© 2010 AFP
UK investors to study finance meeting
October 9, 2010
The London stock market may extend recent gains next week as investors digest the outcome of this weekend's international finance meeting in Washington amid fresh economic data and company results.
By Friday on the London Stock Exchange, the benchmark FTSE 100 index finished the week at 5657.61 points, up 1.16 per cent from a week earlier.
This weekend, major world powers are gathering in Washington to try and avert a damaging global "currency war" and address the weak level of the dollar.
Advertisement: Story continues below With recovery slowing, recent weeks have seen some nations intervene to stop their currencies from rising to levels that would make their exports prohibitively expensive.
That has sparked talk of a currency war and cast a shadow over global financial markets.
Finance ministers and central bankers from 187 countries are convening for the annual meeting of the International Monetary Fund amid concern that currency policies could wreck the fragile global economic recovery.
"From a currencies perspective, many will look to developments at the ... meeting to see if there is anything done to stop the dollar from weakening," said City Index analyst Joshua Raymond.
He added: "There could, however, be much volatility triggered by the third-quarter earnings season in the United States and a range of important economic data due out throughout the week.
"We are now in third-quarter season and so, naturally, we will see a shift in attention towards US companies that report.
"Next week we have Intel, JPMorgan, Google, General Electric all reporting and so, naturally, we will see European traders react to this," he added.
In Britain next week, there is data on inflation, unemployment and trade.
Key trading updates are due from mining giant Rio Tinto and drinks group Diageo.
© 2010 AFP
The London stock market may extend recent gains next week as investors digest the outcome of this weekend's international finance meeting in Washington amid fresh economic data and company results.
By Friday on the London Stock Exchange, the benchmark FTSE 100 index finished the week at 5657.61 points, up 1.16 per cent from a week earlier.
This weekend, major world powers are gathering in Washington to try and avert a damaging global "currency war" and address the weak level of the dollar.
Advertisement: Story continues below With recovery slowing, recent weeks have seen some nations intervene to stop their currencies from rising to levels that would make their exports prohibitively expensive.
That has sparked talk of a currency war and cast a shadow over global financial markets.
Finance ministers and central bankers from 187 countries are convening for the annual meeting of the International Monetary Fund amid concern that currency policies could wreck the fragile global economic recovery.
"From a currencies perspective, many will look to developments at the ... meeting to see if there is anything done to stop the dollar from weakening," said City Index analyst Joshua Raymond.
He added: "There could, however, be much volatility triggered by the third-quarter earnings season in the United States and a range of important economic data due out throughout the week.
"We are now in third-quarter season and so, naturally, we will see a shift in attention towards US companies that report.
"Next week we have Intel, JPMorgan, Google, General Electric all reporting and so, naturally, we will see European traders react to this," he added.
In Britain next week, there is data on inflation, unemployment and trade.
Key trading updates are due from mining giant Rio Tinto and drinks group Diageo.
© 2010 AFP
Facebook, Twitter used in US stock fraud
October 06, 2010
Facebook and Twitter feeds were used to allegedly defraud the investing public. — Reuters picNEW YORK, Oct 6 — Facebook and Twitter social networking sites were used to tout stocks in a classic “pump and dump” fraud of about US$7 million (RM21.7 million) that was uncovered during a cocaine-trafficking probe, US prosecutors said yesterday.
Investigators discovered the fraud in a two-year probe of suspected trafficking by longshoremen and others of 1.3 tonnes of cocaine worth US$34 million through the Port of New York and New Jersey officials said.
A statement by the Manhattan US Attorney’s office said 11 out of 22 people charged used more than 15 web sites, Facebook pages, and Twitter “feeds” to “defraud the investing public into purchasing stocks that were being manipulated by participants in the conspiracy.”
A spokeswoman for Twitter declined to comment on the announcement. A spokesman for also Facebook declined to comment.
Eight longshoremen and three others face narcotics trafficking charges. Eleven people, including one longshoreman, face charges of conspiracy to commit wire fraud in the purported stocks scheme.
Documents filed in Manhattan federal court said the 11 were from New York, Florida and Pennsylvania. They are accused of orchestrating web site links that touted picks in four penny stocks said to be based on the authors’ expertise and independent research.
They face up to 20 years in prison if convicted.
None of the stocks were identified in court documents, which said more than US$3 million was accrued in illegal gains by the accused and that shareholder losses amounted to more than US$7 million.
The case is USA v. Susser et al, US District Court for the Southern District of New York, No. 10-mag-2190. — Reuters
Facebook and Twitter feeds were used to allegedly defraud the investing public. — Reuters picNEW YORK, Oct 6 — Facebook and Twitter social networking sites were used to tout stocks in a classic “pump and dump” fraud of about US$7 million (RM21.7 million) that was uncovered during a cocaine-trafficking probe, US prosecutors said yesterday.
Investigators discovered the fraud in a two-year probe of suspected trafficking by longshoremen and others of 1.3 tonnes of cocaine worth US$34 million through the Port of New York and New Jersey officials said.
A statement by the Manhattan US Attorney’s office said 11 out of 22 people charged used more than 15 web sites, Facebook pages, and Twitter “feeds” to “defraud the investing public into purchasing stocks that were being manipulated by participants in the conspiracy.”
A spokeswoman for Twitter declined to comment on the announcement. A spokesman for also Facebook declined to comment.
Eight longshoremen and three others face narcotics trafficking charges. Eleven people, including one longshoreman, face charges of conspiracy to commit wire fraud in the purported stocks scheme.
Documents filed in Manhattan federal court said the 11 were from New York, Florida and Pennsylvania. They are accused of orchestrating web site links that touted picks in four penny stocks said to be based on the authors’ expertise and independent research.
They face up to 20 years in prison if convicted.
None of the stocks were identified in court documents, which said more than US$3 million was accrued in illegal gains by the accused and that shareholder losses amounted to more than US$7 million.
The case is USA v. Susser et al, US District Court for the Southern District of New York, No. 10-mag-2190. — Reuters
Just say no to gold, advise private bankers
October 06, 2010
Gold’s high price made it hard to extract further gains, said several US bankers. — Reuters picNEW YORK, Oct 6 —Gold is all the rage as investors flee uncertain markets and worry about inflation, but some bankers to the very rich do not take a shine to the precious metal.
Gold prices have spiked 22 per cent this year, with investors sending gold futures to record highs of more than US$1,337 (RM4,144) yesterday. The weak dollar, volatility in currency markets and deficit worries boosted demand for the metal as a safe store of value.
Private banking executives, say gold’s glittering price tag is or should give their wealthy clients pause.
“We’re not really recommending gold right now, just because it’s at a level where there are things driving it beyond the types of things (where) that we can add a lot of value,” US Trust President Keith Banks said at the Reuters Global Private Banking Summit in New York.
Instead, Banks said gold prices may reflect the surge in demand for gold exchange-traded funds, listed shares that purchase physical gold, and broader worries about government spending leading to rapid price inflation.
“So what exactly is leading to gold at the levels it’s at? Your guess is as good as mine,” said Banks, who runs the Bank of America private bank unit.
The SPDR Gold Trust ETF, which lets retail investors more easily bet on gold, has surged 21 per cent this year to a record high of 130.71. The fund shares are up more than 50 per cent since the end of 2008.
Wealthy families are more interested than ever in owning commodities such as metals and energy, assets that do not move up and down in step with stock and bond prices. They also offer a hedge against inflation, since their values rise with prevailing prices.
There are many critics who warn gold is the latest frenzy and is doomed to collapse.
“With gold being over US$1,300 an ounce now, you have people who are asking whether, first, ‘Is it another bubble?’ and then, ‘How far can I ride that bubble?,’” Credit Suisse Americas private banking chief Anthony DeChellis said.
Bessemer Trust Chief Executive John Hilton said his New York wealth management firm allocated a single-digit percentage of its real return fund into gold.
For some clients, he acknowledged, that was not enough.
“We have clients who have made very large individual purchases of gold. Sometimes they’ll just say they’re doing it, and they’ll ask us if we can hold it for them, but we haven’t made any large purchases of gold directly for our clients,” said Hilton, whose firm manages about US$56 billion.
US private bankers, to be sure, also told the Summit they do recommend investments in a range of commodities.
“We have been a proponent of having an exposure to commodities. The bank is optimistic about the economic recovery, and commodities is a way to play global growth,” said US Trust’s Banks.
US Trust formed its Specialty Asset Management group, which buys hard assets on behalf of its wealthy clients — anything from real estate, timberland and farmland to oil and gas properties. US Trust will buy and sometimes hire people to operate these assets.
The business, which manages about US$16 billion of assets, is seeing strong interest from clients, he said.
“These are assets that I think people can feel good about, that are probably not going to track the more typical areas, and it’s just a unique opportunity,” Banks said. — Reuters
Gold’s high price made it hard to extract further gains, said several US bankers. — Reuters picNEW YORK, Oct 6 —Gold is all the rage as investors flee uncertain markets and worry about inflation, but some bankers to the very rich do not take a shine to the precious metal.
Gold prices have spiked 22 per cent this year, with investors sending gold futures to record highs of more than US$1,337 (RM4,144) yesterday. The weak dollar, volatility in currency markets and deficit worries boosted demand for the metal as a safe store of value.
Private banking executives, say gold’s glittering price tag is or should give their wealthy clients pause.
“We’re not really recommending gold right now, just because it’s at a level where there are things driving it beyond the types of things (where) that we can add a lot of value,” US Trust President Keith Banks said at the Reuters Global Private Banking Summit in New York.
Instead, Banks said gold prices may reflect the surge in demand for gold exchange-traded funds, listed shares that purchase physical gold, and broader worries about government spending leading to rapid price inflation.
“So what exactly is leading to gold at the levels it’s at? Your guess is as good as mine,” said Banks, who runs the Bank of America private bank unit.
The SPDR Gold Trust ETF, which lets retail investors more easily bet on gold, has surged 21 per cent this year to a record high of 130.71. The fund shares are up more than 50 per cent since the end of 2008.
Wealthy families are more interested than ever in owning commodities such as metals and energy, assets that do not move up and down in step with stock and bond prices. They also offer a hedge against inflation, since their values rise with prevailing prices.
There are many critics who warn gold is the latest frenzy and is doomed to collapse.
“With gold being over US$1,300 an ounce now, you have people who are asking whether, first, ‘Is it another bubble?’ and then, ‘How far can I ride that bubble?,’” Credit Suisse Americas private banking chief Anthony DeChellis said.
Bessemer Trust Chief Executive John Hilton said his New York wealth management firm allocated a single-digit percentage of its real return fund into gold.
For some clients, he acknowledged, that was not enough.
“We have clients who have made very large individual purchases of gold. Sometimes they’ll just say they’re doing it, and they’ll ask us if we can hold it for them, but we haven’t made any large purchases of gold directly for our clients,” said Hilton, whose firm manages about US$56 billion.
US private bankers, to be sure, also told the Summit they do recommend investments in a range of commodities.
“We have been a proponent of having an exposure to commodities. The bank is optimistic about the economic recovery, and commodities is a way to play global growth,” said US Trust’s Banks.
US Trust formed its Specialty Asset Management group, which buys hard assets on behalf of its wealthy clients — anything from real estate, timberland and farmland to oil and gas properties. US Trust will buy and sometimes hire people to operate these assets.
The business, which manages about US$16 billion of assets, is seeing strong interest from clients, he said.
“These are assets that I think people can feel good about, that are probably not going to track the more typical areas, and it’s just a unique opportunity,” Banks said. — Reuters
Friday, 8 October 2010
Next up: Tax hike for brewers?
Written by Insider Asia
Friday, 08 October 2010 12:16
This article appeared in The Edge Financial Daily, October 8, 2010.
Friday, 08 October 2010 12:16
Now that two of the three so-called “sin sectors”, cigarettes and gaming, have seen taxes raised this year, expectations are high that the brewers are next in line.
Earlier in June 2010, gaming companies saw pool-betting duty raised from 6% to 8%. The latest round of tax increase for cigarette manufacturers, of three sen per stick, was announced earlier this week ahead of Budget 2011, which is to be presented on Oct 15.
Of the three sectors, cigarette manufacturers have been the worst affected, having been slapped with tax hikes every year for the past eight years. By comparison, brewers are “luckier” — they have been spared of any tax increase since 2005.
Back then, the government raised excise duty by 23% to RM7.40 per litre and introduced a new 15% Ad Valorem duty payment on the ex-brewery price for beer products. But at the same time, it also reduced sales tax to 5% of the ex-factory invoice price on all products sold. The net tax increase was thought to be around 8%-9%.
As such, many expect the time is ripe for fresh tax hikes — by as much as 10% — in Budget 2011. The government has hinted as much.
On the other hand, brewers contend that beer taxes in the country are already one of the highest in the world, second only to Norway. Government tax payments amounted to over 48% of Carlsberg Brewery’s revenue last year.
Like the cigarette industry, it is feared that further tax hikes — and the resulting higher selling prices — will fuel smuggling. Smuggled or illicit beer is estimated to make up roughly 20% of the local beer market. Volume sales of the duty-paid malt liquor market dipped in 2005-2006 after the last round of tax hike before recovering in 2007-2008. Industry volume sales are estimated to have declined by roughly 2% in 2009, impacted by the global downturn, but are expected to grow in the single digit this year.
Higher taxes and prices could send volume sales growth back into negative territory — affecting the earnings of the two local breweries, Guinness Anchor and Carlsberg.
Guinness fared better over past few years
Of the two, Guinness appears to have weathered the intensely competitive operating environment better. The company charted steady growth in sales and profits over the past decade, thanks, in part, to its success in gaining a steadily larger slice of the domestic market. At present, its market share is estimated at roughly 57%, up from about 45% back in 2001.
Sales grew at a compounded rate of more than 8% annually, from RM670 million in FYJune01 to RM1.36 billion in FY10. Over the same period, net profit increased at an even faster pace of 11.2% per annum, from RM58.7 million to RM152.7 million in the latest financial year.
By comparison, Carlsberg’s earnings growth has been patchier. Whilst sales increased at a compounded annual rate of about 2.3% between 2000 and 2009, net profit dipped to RM75.9 million last year from RM110 million in 2000. Indeed, Guinness’ shares had outperformed Carlsberg over the past five years. Shares of Guinness are currently trading at RM8.46, compared to RM5.75 at the start of 2006 whilst Carlsberg’s shares are hovering around the same levels as they were five years ago.
Expansion boost for Carlsberg
Nonetheless, Carlsberg’s prospects appear to be looking up. The company has been on an expansion trail, investing in Luen Heng F&B in November 2008 and Carlsberg Singapore in October 2009. The acquisitions have widened both its product range and market base — and appear to be paying dividends.
Carlsberg reported strong earnings in 1H10, boosted by contributions from Carlsberg Singapore. The latter accounted for RM28.7 million of its pre-tax earnings of RM69 million in the first six months of the year, and is well on track to meet the company’s estimated net profit contribution of RM37 million for the full year. At this pace, we estimate Carlsberg’s 2010 net profits to be sharply higher from last year’s RM75.9 million. In addition to operational synergies, the expansion in Carlsberg’s customer base is likely to temper the negative impact of a tax hike in the domestic market.
Carlsberg’s new ventures — Carlsberg Singapore was acquired for RM370 million — have come at the expense of dividends. The company lowered its dividend payout in 2008-2009 to 35% and 51% of profits, respectively, compared with the average payout of 108% in the preceding six years. The company has net debt of RM37.7 million at end-June 2010.
Assuming the same 51% profit payout this year, dividends will total 30 sen per share. That translates into a net yield of 4.3% at the current share price of RM5.20.
Guinness pays higher dividends
Guinness, on the other hand, remains focused primarily on the domestic market. With lower capital expenditure — estimated at roughly RM50 million in the current financial year — dividend payout has stayed high, averaging at some 85% of net profits in the past five years.
The stock will trade ex-entitlement for a final tax-exempt dividend of 35 sen per share on Nov 11.
Assuming dividends totalling 45 sen per share — the same as that for FY10 — in the current year, shareholders will earn a net yield of 5.3% at the prevailing share price of RM8.46.
Guinness is sitting on net cash totalling almost RM150 million at end-June 2010. — InsiderAsia
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
Earlier in June 2010, gaming companies saw pool-betting duty raised from 6% to 8%. The latest round of tax increase for cigarette manufacturers, of three sen per stick, was announced earlier this week ahead of Budget 2011, which is to be presented on Oct 15.
Of the three sectors, cigarette manufacturers have been the worst affected, having been slapped with tax hikes every year for the past eight years. By comparison, brewers are “luckier” — they have been spared of any tax increase since 2005.
Back then, the government raised excise duty by 23% to RM7.40 per litre and introduced a new 15% Ad Valorem duty payment on the ex-brewery price for beer products. But at the same time, it also reduced sales tax to 5% of the ex-factory invoice price on all products sold. The net tax increase was thought to be around 8%-9%.
As such, many expect the time is ripe for fresh tax hikes — by as much as 10% — in Budget 2011. The government has hinted as much.
On the other hand, brewers contend that beer taxes in the country are already one of the highest in the world, second only to Norway. Government tax payments amounted to over 48% of Carlsberg Brewery’s revenue last year.
Like the cigarette industry, it is feared that further tax hikes — and the resulting higher selling prices — will fuel smuggling. Smuggled or illicit beer is estimated to make up roughly 20% of the local beer market. Volume sales of the duty-paid malt liquor market dipped in 2005-2006 after the last round of tax hike before recovering in 2007-2008. Industry volume sales are estimated to have declined by roughly 2% in 2009, impacted by the global downturn, but are expected to grow in the single digit this year.
Higher taxes and prices could send volume sales growth back into negative territory — affecting the earnings of the two local breweries, Guinness Anchor and Carlsberg.
Guinness fared better over past few years
Of the two, Guinness appears to have weathered the intensely competitive operating environment better. The company charted steady growth in sales and profits over the past decade, thanks, in part, to its success in gaining a steadily larger slice of the domestic market. At present, its market share is estimated at roughly 57%, up from about 45% back in 2001.
Sales grew at a compounded rate of more than 8% annually, from RM670 million in FYJune01 to RM1.36 billion in FY10. Over the same period, net profit increased at an even faster pace of 11.2% per annum, from RM58.7 million to RM152.7 million in the latest financial year.
By comparison, Carlsberg’s earnings growth has been patchier. Whilst sales increased at a compounded annual rate of about 2.3% between 2000 and 2009, net profit dipped to RM75.9 million last year from RM110 million in 2000. Indeed, Guinness’ shares had outperformed Carlsberg over the past five years. Shares of Guinness are currently trading at RM8.46, compared to RM5.75 at the start of 2006 whilst Carlsberg’s shares are hovering around the same levels as they were five years ago.
Expansion boost for Carlsberg
Nonetheless, Carlsberg’s prospects appear to be looking up. The company has been on an expansion trail, investing in Luen Heng F&B in November 2008 and Carlsberg Singapore in October 2009. The acquisitions have widened both its product range and market base — and appear to be paying dividends.
Carlsberg reported strong earnings in 1H10, boosted by contributions from Carlsberg Singapore. The latter accounted for RM28.7 million of its pre-tax earnings of RM69 million in the first six months of the year, and is well on track to meet the company’s estimated net profit contribution of RM37 million for the full year. At this pace, we estimate Carlsberg’s 2010 net profits to be sharply higher from last year’s RM75.9 million. In addition to operational synergies, the expansion in Carlsberg’s customer base is likely to temper the negative impact of a tax hike in the domestic market.
Carlsberg’s new ventures — Carlsberg Singapore was acquired for RM370 million — have come at the expense of dividends. The company lowered its dividend payout in 2008-2009 to 35% and 51% of profits, respectively, compared with the average payout of 108% in the preceding six years. The company has net debt of RM37.7 million at end-June 2010.
Assuming the same 51% profit payout this year, dividends will total 30 sen per share. That translates into a net yield of 4.3% at the current share price of RM5.20.
Guinness pays higher dividends
Guinness, on the other hand, remains focused primarily on the domestic market. With lower capital expenditure — estimated at roughly RM50 million in the current financial year — dividend payout has stayed high, averaging at some 85% of net profits in the past five years.
The stock will trade ex-entitlement for a final tax-exempt dividend of 35 sen per share on Nov 11.
Assuming dividends totalling 45 sen per share — the same as that for FY10 — in the current year, shareholders will earn a net yield of 5.3% at the prevailing share price of RM8.46.
Guinness is sitting on net cash totalling almost RM150 million at end-June 2010. — InsiderAsia
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, October 8, 2010.
LPI earnings up on unit’s higher underwriting profit
Friday October 8, 2010
LPI earnings up on unit’s higher underwriting profit
PETALING JAYA: LPI Capital Bhd’s net profit for the third quarter ended Sept 30 rose to RM36.21mil from RM32.90mil in the same period last year.
This was achieved on higher underwriting profit generated by its wholly-owned subsidiary Lonpac Insurance Bhd.
Revenue for the period increased to RM216.95mil from RM206.63mil recorded in the same period last year mainly due to higher gross premium underwritten, the company told Bursa Malaysia yesterday.
Earnings per share rose to RM16.85 from RM15.33.
For the nine months ended Sept 30, LPI’s net profit was up to RM100.97mil from RM91.12mil previously while revenue rose to RM640.46mil from RM583.88mil.
Earnings per share increased to RM47.03 from RM42.46.
Barring any unforeseen circumstances, LPI said prospects for the group should be satisfactory for the year 2010.
In a separate statement, LPI chairman Tan Sri Teh Hong Piow said Lonpac was able to achieve a significant improvement in its underwriting surplus despite operating in a competitive market.
Its underwriting surplus rose by 38% to record an underwriting profit of RM77.9mil for the nine-month period versus RM56.5mil previously on the back of gross premium income of RM586.3mil.
“Lonpac places utmost priority on strong risk management of its assets and liabilities as well as stringent internal controls in managing its operations,” he said.
LPI shares closed up six sen to RM11.76 yesterday with 17,900 shares traded.
http://biz.thestar.com.my/news/story.asp?file=/2010/10/8/business/7184502&sec=business
Comment: This remarkable company has seen at least 15% annual growth in its revenues, profit before tax and EPS for many years. This speaks for its durable competitive advantage in its insurance business.
Contradictory strategies
For almost any strategy that's been proposed as a good one with shares, there's also a contradictory one. And the interesting thing is that a strategy may work in certain circumstances whereas in different circumstances the contradictory strategy may work just as well. There are several important conclusions from this:
Tip
- There's no one strategy with shares that works in all circumstances.
- The most important factor is to decide on a strategy and stick to it. Chopping and changing at the spur of the moment and not sticking to your strategy is the cause of most problems in share investing.
Tip
When you've decided on a strategy, stick to it. Give it a fair trial, and change only if the fair trial convinces you that your strategy needs to be adjusted (or abandoned).
Blue Sky Potential
There are many listed companies whose shares trade for prices ranging from cents to dollars that fit into one or more of the following categories:
You'll find examples of these types of companies among:
And the list goes on ...
Shares in these types of companies are priced by the market according to what is known as 'blue sky potential'. The market factors expected future profitability into the share price, and so companies not currently making a profit may still have a high price if the market anticipates that future profitability may occur.
Tip
Also read:
- The company doesn't yet have a saleable product.
- The company is making a loss.
- The company has never made a profit.
You'll find examples of these types of companies among:
- mineral and oil exploration companies
- biotechnology or medical companies researching or developing a new vaccine or medical treatment
- industrial innovation companies developing a new product
- computer technology companies developing software or new computer hardware.
And the list goes on ...
Shares in these types of companies are priced by the market according to what is known as 'blue sky potential'. The market factors expected future profitability into the share price, and so companies not currently making a profit may still have a high price if the market anticipates that future profitability may occur.
Tip
It is risky to buy shares in a company whose shares are priced on blue sky potential.
Also read:
Green Packet Announces 10th Consecutive Quarter Of Losses!
Update on Green Packet
Six Principles of Share Investing
Here is a relatively hassle-free and low-risk investment strategy that should provide good profitability with shares over the long term. The strategy is outlined here as the six principles of investing and they are:
- Compound your share investment
- Diversify your investment
- Invest in shares with good fundamentals
- Trade at the right price
- Trade at the right time
- Monitor and review regularly.
Thursday, 7 October 2010
Is the KLSE overvalued?
5.10.2010
KLCI 1462.27
Market PE of KLSE = 17.48
Earnings yield = EY = 1/PE = 5.7%
Risk free FD interest rate = 3.0%
Equity risk premium = 5.7% - 3.0% = 2.7%
Equity risk premium is the compensation investors require for holding stocks.
Equity risk premium = earnings yield (1/market PE) - the risk free rate.
More than 3.5%, market is undervalued
0.6% to 3.5%, market is fairly valued.
Less than 0.6%, market is overvalued
So, presently, by the above criteria of equity risk premium, the market is neither undervalued nor overvalued, and is at fair value.
http://myinvestingnotes.blogspot.com/2009/07/when-is-market-over-valued.html
KLCI 1462.27
Market PE of KLSE = 17.48
Earnings yield = EY = 1/PE = 5.7%
Risk free FD interest rate = 3.0%
Equity risk premium = 5.7% - 3.0% = 2.7%
Equity risk premium is the compensation investors require for holding stocks.
Equity risk premium = earnings yield (1/market PE) - the risk free rate.
More than 3.5%, market is undervalued
0.6% to 3.5%, market is fairly valued.
Less than 0.6%, market is overvalued
So, presently, by the above criteria of equity risk premium, the market is neither undervalued nor overvalued, and is at fair value.
http://myinvestingnotes.blogspot.com/2009/07/when-is-market-over-valued.html
12 warning signs of unreliable forecasts from Tarbell and Trugman
Written by David on October 5, 2010
“It’s good to be talking about business forecasts with a lot of CICBV members in the room,” began Gary Trugman at his keynote session on working with financial projections in Miami at the ASA/CICBV Annual Business Valuation Conference. “You’re all already familiar with hockey sticks.”
Trugman and his co-presenter Jeff Tarbell note that USPAP doesn’t address forecasts directly in Sections 9 or 10. SSVS-1 refers to projections in sections on collecting data, and in DCF analyses. But, there’s nothing about the degree to which appraisers need to audit forecasts—which is part of the reason that a standard limiting condition in many valuation reports is something like the language below.
We do not provide assurance on the achievability of the results forecasted by [ABC Company] because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.
Correctly or incorrectly, some appraisers may try to account for forecasts they don’t trust via the company-specific risk factor. “The courts are catching up with anything that looks like this practice,” Tarbell said.
How good are forecasts? First, “30-40% of the companies we work with don’t have a meaningful forecast,” said Trugman. “But, even when you can obtain one, you often face unreliable assumptions, and they may be unwilling to make changes you suggest.” So, when do you just do your own forecast?
Particularly with public companies “you’re going to have a hard time justifying numbers you made up as opposed to numbers management made up,” says Tarbell. “You could be asking management to revise numbers that may have already been presented to analysts or others. You’re opening a lot of doors no one wants to open.” But, if you do your own, the best hope is “to get management to sign off on what you’ve done. Maybe they don’t have a balance sheet forecast so we fill in the blanks, send it to management, and ask them to agree to it with all the disclaimers that you can’t predict the future.”
Trugman and Tarbell feel that if you can’t obtain a forecast, or adjust a weak forecast, or create your own, your option is to reject the income approach. And, they warn all appraisers to recognize two rules about nearly all forecasts:
– The distribution of future cash flows is not likely symmetric.
– Downside often exceeds upside due to capacity constraints, market size, competition, etc.
– This is not the particular outcome with the highest probability of occurrence.
Pratt and Grabowski’s Cost of Capital 4th Edition is due out very soon. Tarbell reports that these two points are freshly emphasized in the update. And, Tarbell and Trugman recognize that there are a dozen Indications of possible unreliability:
1. Forecast results are notably different than past results.—“It’s OK to be wrong in a forecast; all the public companies are. But by looking at past forecasts you can see patterns of unreliability,” says Trugman.
2. Forecast was prepared by a party with an interest in the valuation outcome.
3. Resulting value is not consistent with the values from other methods used.
4. Forecast was prepared by CEO/CFO without input from business unit heads. “If the CEO hasn’t spoken to sales and marketing, you may see very different results,” says Tarbell.
5. Forecast is inconsistent with analyst expectations for public comps. “Are growth rates and margins consistent with what analysts are projecting for public companies in your industry,” asks Tarbell. “There better be a good explanation if a forecast is different that other companies who are all competing for the same market share.”
6. Forecast income statement without balance sheet and statement of cash flows. “It may not be very safe when you’re missing such critical inputs to the DCF method such as working capital, CAPEX/depreciation, or financing needs,” warns Trugman. He sees many clients who project faster than historical growth, but in fact when balance sheet forecasts are prepared, it turns out that you outstrip cash resources very quickly and there’s no way to support this growth. “The company may have exceeded its borrowing capacity early in the projection cycle,” Trugman explains in the most typical case.
7. Forecast assumes capital spending at levels that are not financeable. “We often see a forecast that assumes a doubling of some factor in the middle of the cycle,” says Tarbell. This is a clear warning sign. “A leveraged analysis may be more appropriate where the subject company has significant capital needs over the course of the forecast,” Trugman agrees.
8. Forecast ends on the peak or trough of a business cycle. “What do we do with forecasts now, for instance,” asks Trugman. “The answer is we’re looking at longer business cycles, even beyond the standard five year projections. How did the business do during the last downturn?”
9. Forecast not accompanied by a detailed schedule of assumptions. Tarbell says “even if there aren’t detailed notes, can management explain the significant assumptions and particularly any of those that are inconsistent with the past. I don’t like those.”
Determining Forecast Reliability
– Forecast should be based on normalized operations
http://www.bvwirenews.com/2010/10/05/12-warning-signs-of-unreliable-forecasts-from-tarbell-and-trugman/
“It’s good to be talking about business forecasts with a lot of CICBV members in the room,” began Gary Trugman at his keynote session on working with financial projections in Miami at the ASA/CICBV Annual Business Valuation Conference. “You’re all already familiar with hockey sticks.”
Trugman and his co-presenter Jeff Tarbell note that USPAP doesn’t address forecasts directly in Sections 9 or 10. SSVS-1 refers to projections in sections on collecting data, and in DCF analyses. But, there’s nothing about the degree to which appraisers need to audit forecasts—which is part of the reason that a standard limiting condition in many valuation reports is something like the language below.
We do not provide assurance on the achievability of the results forecasted by [ABC Company] because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.
Correctly or incorrectly, some appraisers may try to account for forecasts they don’t trust via the company-specific risk factor. “The courts are catching up with anything that looks like this practice,” Tarbell said.
How good are forecasts? First, “30-40% of the companies we work with don’t have a meaningful forecast,” said Trugman. “But, even when you can obtain one, you often face unreliable assumptions, and they may be unwilling to make changes you suggest.” So, when do you just do your own forecast?
Particularly with public companies “you’re going to have a hard time justifying numbers you made up as opposed to numbers management made up,” says Tarbell. “You could be asking management to revise numbers that may have already been presented to analysts or others. You’re opening a lot of doors no one wants to open.” But, if you do your own, the best hope is “to get management to sign off on what you’ve done. Maybe they don’t have a balance sheet forecast so we fill in the blanks, send it to management, and ask them to agree to it with all the disclaimers that you can’t predict the future.”
Trugman and Tarbell feel that if you can’t obtain a forecast, or adjust a weak forecast, or create your own, your option is to reject the income approach. And, they warn all appraisers to recognize two rules about nearly all forecasts:
1. Management tends to over-estimate projected cash flows:
– The distribution of future cash flows is not likely symmetric.
– Downside often exceeds upside due to capacity constraints, market size, competition, etc.
2. The appropriate projected cash flow for discounting is the statistically expected value, meaning a probability-weighted expectation of future results.
– This is not the particular outcome with the highest probability of occurrence.
Pratt and Grabowski’s Cost of Capital 4th Edition is due out very soon. Tarbell reports that these two points are freshly emphasized in the update. And, Tarbell and Trugman recognize that there are a dozen Indications of possible unreliability:
1. Forecast results are notably different than past results.—“It’s OK to be wrong in a forecast; all the public companies are. But by looking at past forecasts you can see patterns of unreliability,” says Trugman.
2. Forecast was prepared by a party with an interest in the valuation outcome.
3. Resulting value is not consistent with the values from other methods used.
4. Forecast was prepared by CEO/CFO without input from business unit heads. “If the CEO hasn’t spoken to sales and marketing, you may see very different results,” says Tarbell.
5. Forecast is inconsistent with analyst expectations for public comps. “Are growth rates and margins consistent with what analysts are projecting for public companies in your industry,” asks Tarbell. “There better be a good explanation if a forecast is different that other companies who are all competing for the same market share.”
6. Forecast income statement without balance sheet and statement of cash flows. “It may not be very safe when you’re missing such critical inputs to the DCF method such as working capital, CAPEX/depreciation, or financing needs,” warns Trugman. He sees many clients who project faster than historical growth, but in fact when balance sheet forecasts are prepared, it turns out that you outstrip cash resources very quickly and there’s no way to support this growth. “The company may have exceeded its borrowing capacity early in the projection cycle,” Trugman explains in the most typical case.
7. Forecast assumes capital spending at levels that are not financeable. “We often see a forecast that assumes a doubling of some factor in the middle of the cycle,” says Tarbell. This is a clear warning sign. “A leveraged analysis may be more appropriate where the subject company has significant capital needs over the course of the forecast,” Trugman agrees.
8. Forecast ends on the peak or trough of a business cycle. “What do we do with forecasts now, for instance,” asks Trugman. “The answer is we’re looking at longer business cycles, even beyond the standard five year projections. How did the business do during the last downturn?”
9. Forecast not accompanied by a detailed schedule of assumptions. Tarbell says “even if there aren’t detailed notes, can management explain the significant assumptions and particularly any of those that are inconsistent with the past. I don’t like those.”
10. Forecast not achievable without additional financing or acquisition.
11. Forecast hinges on one or two extraordinary assumptions. “If good results are tied to the outcome of one key assumption, you’ll need to examine that assumption very carefully, and be very suspicious of the projections,” Trugman warned.12. Too much of the indicated value is coming from the terminal value.
Trugman and Tarbell’s indicators of forecast reliability appear in the table below
Determining Forecast Reliability
• Revenues
– Are growth rates consistent with history?
– What are new revenue streams based on?
– What is the timing of new revenue streams?
– Are changes in revenues consistent with industry information?
• Expenses
– Forecast should be based on normalized operations
– Fixed vs. variable cost analysis
– What do variable costs vary against? Revenues? Payroll? Square footage?
– Is this consistent with history?
– What is basis for research and development costs?
http://www.bvwirenews.com/2010/10/05/12-warning-signs-of-unreliable-forecasts-from-tarbell-and-trugman/
Wednesday, 6 October 2010
Market PE of KLCI 5.10.2010
Market PE of KLCI 5.10.2010
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHJMTjI0N1NhSG16dVhBMDZCYTQ3eVE&hl=en&output=html
5.10.2010
KLCI 1462.27
Market PE of KLSE = 17.48
Market DY = 2.52%
Compare this with:
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHJMTjI0N1NhSG16dVhBMDZCYTQ3eVE&hl=en&output=html
5.10.2010
KLCI 1462.27
Market PE of KLSE = 17.48
Market DY = 2.52%
Compare this with:
Market PE of KLSE 10.2.2010
Tesco sees no repeat of UK recession as profits rise to £1.6bn
Supermarket giant Tesco has been boosted by a recovery in global markets as it announced an 12pc increase in first-half pre-tax profit to £1.6bn.
The result came as growth in global markets, particularly Asia, offset "modest" UK sales growth in the 26 weeks to August 28, the company said on Tuesday
Terry Leahy, chief executive went on to suggest that developed markets like the UK could be stabilised in the wake of Asian growth, avoiding a fall back into recession.
"My starting point is the global economy, which is in a pretty robust recovery," he said. "If you look at the customer psychology and the pulling power of the developing markets, I think they will pull Europe and the United States into a stable and established recovery."
Robust global recovery was contrasted with slow, albeit steady, UK recovery. The company said UK like-for-like sales excluding petrol rose 1.3pc in the second quarter, compared with 1.1pc in the first quarter – but, adjusting for VAT sales, the figure was just 0.3pc higher over the half-year.
Finance director Lawrie McIlwee described the UK economy as "pretty stagnant", although there were "signs of a recovery".
"Modest" UK sales growth in the first half were a result of higher fuel costs as customers spent more at the pump instead of in store and due to low food inflation. However, Mr Leahy said the retailer – which plans to create 9,000 jobs in the UK this year – was experiencing "the tailwinds of recovery".
Tesco, the world's third-biggest retailer behind France's Carrefour and US leader Wal-Mart, said group sales rose 7pc, excluding VAT sales tax, to £29.8bn, just below analysts average forecast of £30bn.
The company expects its loss-making US supermarket business, Fresh & Easy, to break even by the end of 2012/13 financial year.
Mr McIIwee stated Tesco Bank, with revenues of £474m in the first half, and Tesco Insurance, were significant part of the group business. Mr McIlwee said Tesco hoped to offer mortgages next year, with a current account to follow, following regulatory approvals from the Financial Services Authority (FSA).
The results arrive in an important week for gauging the mood of the British consumer, with updates from rival Sainsbury's and high street retailer Marks & Spencer later this week.
http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/8043148/Tesco-sees-no-repeat-of-UK-recession-as-profits-rise-to-1.6bn.html
Robust global recovery was contrasted with slow, albeit steady, UK recovery. The company said UK like-for-like sales excluding petrol rose 1.3pc in the second quarter, compared with 1.1pc in the first quarter – but, adjusting for VAT sales, the figure was just 0.3pc higher over the half-year.
Finance director Lawrie McIlwee described the UK economy as "pretty stagnant", although there were "signs of a recovery".
"Modest" UK sales growth in the first half were a result of higher fuel costs as customers spent more at the pump instead of in store and due to low food inflation. However, Mr Leahy said the retailer – which plans to create 9,000 jobs in the UK this year – was experiencing "the tailwinds of recovery".
Tesco, the world's third-biggest retailer behind France's Carrefour and US leader Wal-Mart, said group sales rose 7pc, excluding VAT sales tax, to £29.8bn, just below analysts average forecast of £30bn.
The company expects its loss-making US supermarket business, Fresh & Easy, to break even by the end of 2012/13 financial year.
Mr McIIwee stated Tesco Bank, with revenues of £474m in the first half, and Tesco Insurance, were significant part of the group business. Mr McIlwee said Tesco hoped to offer mortgages next year, with a current account to follow, following regulatory approvals from the Financial Services Authority (FSA).
The results arrive in an important week for gauging the mood of the British consumer, with updates from rival Sainsbury's and high street retailer Marks & Spencer later this week.
http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/8043148/Tesco-sees-no-repeat-of-UK-recession-as-profits-rise-to-1.6bn.html
Rio kills off BHP deal
Michael West
October 6, 2010THE biggest merger in Australian history is dead, with the board of Rio Tinto preparing to walk away from a $120 billion iron ore deal to join forces with rival mining company BHP Billiton in the Pilbara desert in Western Australia.
The aborted merger deal - which follows an unsuccessful $180 billion takeover bid for Rio by BHP two years ago - was expected to meet opposition from European and Chinese regulators concerned about the impact of the miners' stranglehold on global iron ore prices.
But the major reasons for Rio's decision appear to be its improving financial fortunes, pressure from shareholders and the conclusion that the deal favoured BHP.
Sources close to the Rio board confirmed Rio was preparing to tell BHP of its decision yesterday. Rio chairman Jan du Plessis had informed fellow directors on Monday night that he did not think BHP would object to Rio calling an end to the deal.
''They can't object to that,'' Mr du Plessis said. ''That's kind of us stating our investment preference. They will no doubt have their own measurements and I think that's fine.''
Although the market had speculated about the failure of the Pilbara deal since BusinessDay first foreshadowed its collapse in August, there had been no acknowledgement from either party that the merger was in trouble.
Now Rio, having canvassed the opinion of its major investors, is looking to save face.
''I think with regard to the JV and why it didn't succeed … we should simply work on the basis that both parties worked well and in good faith to make this thing work and both parties agreed, simultaneously, it wasn't possible.
''In short, I think we have a positive message we should spread … I would caution against trying to be too critical as far as BHP is concerned, or kind of denigrating them in any way. I'm not sure that gets us anywhere,'' Mr du Plessis told his fellow directors.
BusinessDay understands other directors agreed with the positive public strategy. One, Sir Rod Eddington, responded to Mr du Plessis, saying, ''In fact the opposite Jan. I think it blows up in our face''.
Besides needing the approval of regulators, the deal required approval from both BHP and Rio shareholders. And it was this which finally prompted the Rio board to move. Rio - whose iron ore production is roughly twice the size of BHP - stood to gain a $5.8 billion ''equalisation payment'' from BHP. This was no longer viewed as adequate.
When the deal was cut in 2009, Rio was heavily in debt and had fallen afoul of its Chinese customers thanks to its infamous fall-out with Chinalco.
Since then, Rio has cut its debt by almost 40 per cent, its share price is strong and it has struck a $12 billion iron ore deal in West Africa with Chinalco.
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