The reaction was swift and severe. Petrobras Chief Executive Officer Pedro Parente woke up this morning to a wave of downgrades from the same Wall Street analysts who had been praising him since he took the helm of the state-controlled oil producer two years ago.

Bank of America Merrill Lynch, Morgan Stanley and Credit Suisse Group AG all cut their recommendations after Parente announced a 10 percent cut in wholesale diesel prices late Wednesday to help the government negotiate an end to a nationwide truckers strike that has wrought havoc on Latin America’s largest economy.

“The just announced diesel price reduction in response to truckers’ protest is likely to materially damage Petrobras’ perceived independence in a way that may be difficult to recover,” Frank McGann, an analyst at Merrill Lynch, wrote in a report where he cut his recommendation on the company’s American depositary receipts to neutral and his price objective to $17.

“We think that the investment case for Petrobras has been seriously damaged, and the risk profile has risen.”

While Parente said Petrobras isn’t bowing to pressure and that the temporary measure doesn’t mean a change in its pricing policy, shares extended losses in after hours trading to as low as $13.40 in late New York trading.

Petrobras is a major constituent in global high yield benchmarks so its decision to cut price against a rising oil price environment is not especially good news. Along with Turkey and Argentina, the risk in the high yield sector has increased this year.

Turkey’s central bank raised interest rates to halt a slide in the lira that’s seen the currency post a series of record lows.

The central bank raised its late liquidity window rate by 300 basis points to 16.5 percent, after an extraordinary meeting of its monetary policy committee on Wednesday to “discuss recent developments.” It kept other rates unchanged, describing the move as a “powerful monetary tightening” and saying it’s ready to continue using all instruments.

The lira reversed Wednesday’s losses after the bank’s move. It was trading 0.7 percent stronger at 4.6367 per dollar as of 7:32 p.m. in Istanbul. The currency earlier fell as much as 5.5 percent.

The central bank acted after three weeks of turmoil on Turkey’s currency markets. Turkish President Recep Tayyip Erdogan, who’s seeking re-election next month, has publicly opposed any moves to raise interest rates, while investors and economists argued that was the only way to halt the rout.

Erdogan told Bloomberg in an interview this month that he’ll seek more control over monetary policy if he wins the vote.

The central bank’s rate-setting committee hadn’t been scheduled to meet until June 7. After news broke of its emergency session on Wednesday, Finance Minister Mehmet Simsek said on Twitter that it’s time to restore the credibility of Turkey’s monetary policy.

The Lira has been accelerating lower and dropped to test TRY5 to the US Dollar this morning, before the central bank finally intervened by raising the interest rate. 16.5% represents a substantial premium over anything available in Europe and is aimed squarely at stemming foreign capital flight.

The shares jumped as much as 17 percent to $119.60 in New York trading, an all-time intraday high and the biggest one-day leap in almost a decade.

The overhaul started by Chief Executive Officer Alessandro Bogliolo consolidated a rebound under way when he took over last year, with revenue growth last quarter at the highest since 2012. The former Diesel executive aims to woo a younger clientele with refreshed jewelry lines and generate hype for the 181-year-old brand. The revitalization attempt includes redesigned stores and back-end improvements in procurement and technology operations.

“We are particularly encouraged by the breadth of sales growth across most regions and all product categories,” Bogliolo said in a statement.

Global same-store sales climbed 7 percent, in the quarter ended April 30 when holding currency constant, compared with the 2.6 percent growth projected by analysts, according to Consensus Metrix.

On that basis, sales rose 9 percent in North America, Asia- Pacific and Japan, all beating analysts’ predictions. Asia was particularly strong in China and Korea. The weak spot was Europe, which saw a 9 percent decline due to reduced spending by overseas tourists, the New York-based company said.

There has been a high degree of commonality in the luxury goods sector this year as the Trump tax cuts unleashed some pent-up consumer demand. Front loading purchases of goods likely to rise in value in anticipation of inflation has also been a factor in the outperformance of the sector. Additionally, luxury goods manufacturers have been at pains to try and appeal to a younger demographic.

Moody’s Investors Service said it may cut Campbell Soup Co.’s credit rating after the company posted a steep drop in profitability and its chief executive officer suddenly stepped down.

All of the company’s ratings are under review, including its Baa2 senior unsecured rating, Moody’s said in a report Monday. That’s only two steps above speculative-grade. Moody’s did not say how many levels the downgrade could amount to.

Campbell Soup has short- and long-term debt of $9.84 billion and its leverage as measured by debt-to-Ebitda -- earnings before interest, tax, depreciation and amortization -- was about five times at the March closing of the Snyder’s-Lance Inc. acquisition. Moody’s says it’s now doubting that the company can meet its expectations to reduce that metric to below four times within two years via cash flow and cost savings.

“The sharp and unexpected decline in profitability in the third quarter casts serious doubt that Campbell will be able to meet its deleveraging plans following the Snyder’s-Lance acquisition,” Moody’s analyst Brian Weddington said in the report. “Additionally, the departure of the CEO adds further uncertainty about whether the company will respond successfully to its operating challenges in the near term.”

Campbell Foods is not a dividend aristocrat because there have been occasions in the last 30 years when it cut the dividend. On each of those occasions it stopped raising the payout before the decision to cut. That is at least part of the reason that the share has been falling over the last year but does not explain the fall from the peak in 2016.

Italian President Sergio Mattarella takes center-stage as he weighs whether to give law professor Giuseppe Conte a chance to lead a populist government following a last- minute wobble over the candidate’s suitability for the post.

Mattarella is due to announce his decision as early as Wednesday after Conte, 53, was put forward by Luigi Di Maio of the anti-establishment Five Star Movement and Matteo Salvini of the anti-immigrant League. A flurry of reports in Italian media cast doubt on Conte’s premiership before it even began, prompting Five Star and the League to reaffirm Conte’s candidacy on Tuesday evening.

The marriage of two populist parties which are essentially from the two opposing extremes of the populist field i.e. cut taxes versus boost benefits, is proving more fraught with difficulty than might initially have been apparent. They are still likely to try and install a compromise candidate but there is no doubting that strong personalities are to the fore.

Thanks for your comments which are very interesting, especially your focus on technology and its potential to alter radically the investment landscape.

I have 2 points of my own to make. Using gold as the standard of value for stocks is interesting but I would think valuation metrics are more useful. As you know the Shiller PE, derived by comparing the S&P to the 10-year moving average of real corporate earnings- GAAP (not adjusted)- is at the highest level since the TMT bubble popped in 2000. The ratio of market value (the Wilshire 5000+) to GDP was at all-time highs in January. We have lived through a decade of extraordinary monetary policy (almost zero interest rates and QE), which is now being reversed. I think S&P market value to S&P sales may also be at all-time highs, but I may be wrong about that.

So the starting point is pretty rich. The PE is at 25 times 4 quarter GAAP earnings, implying a 4% earnings yield. The Moody's Baa 20-year bond yield is around 4.6% so the equity premium has been negative the last 5-6 years for the first time since 1961 when the Bloomberg series started. On average equity holders over this period have earned a premium of 1.62% to reward them for investing in the riskier part of the capital structure, but now they must pay for the privilege.

However, this does not address your major point about the enormous earning potential of companies involved in future technology. Now a standard criticism of your point is that competition between businesses will reduce the excess profits to "normal profits". What economists call "consumer surplus" consists of the extra value that is transferred from businesses to consumers for free due to the operation of the competitive market which eliminates excess profits.

This flows from the ideal world of independent competitive enterprises. Anti-trust laws in the USA have been around since 1890 (Sherman Anti-Trust Act) and were designed to cause real world behaviour to better approximate the theoretical. 

What I have found interesting is that Anti-Trust is no longer as big a deal as it was when I was a student. In fact, when Mark Zuckerberg testified he named 5 or 6 tech companies that are competitors of Facebook's. In this list he mentioned WhatsApp and another company (Telegram?) that he has already bought and perhaps one or two others. He also mentioned Skype, which Microsoft has bought. The big tech companies have the where with all to buy smaller rapidly growing companies and maintain tight oligopolies and thus earn outsize profits. I doubt whether many of these purchases would have passed muster from the Department of Justice's Anti-Trust division one or two generations ago.

So the key may be to watch politics and see whether the populists at some point turn their attention to Anti-Trust.

Thank you for this detailed email which has given me much food for thought. As you point out there is a tendency among the producers of widgets to encounter competition which reduces the price to often unprofitable levels. At that point some of the weaker producers go out of business and a process of consolidation unfolds. The competitive Amazon marketplaces is a good example of this where producers of widgets compete on price to gain market share only for many to disappear after a relatively short time to be replaced by lower cost producers.

The combination of higher debt levels and share of debt denominated in foreign currency means many emerging markets are now more exposed to dollar appreciation than in 2009, amid signs the robust growth in developing economies may be slowing, the Institute of International Finance said in a May 17 note.

While the U.S. Treasury will sell some of its largest offerings since 2010 this week, a slew of Fed speakers may reiterate plans for gradual rate increases.

The selloff in developing nation currencies is hurting other assets.

Emerging-market local-currency government bonds declined for a sixth week, the worst run since 2016. Developing-nation stocks retreated 2.3 percent last week.

The last time there was angst expressed at the impact a resurgent Dollar would have on emerging markets was in 2015. The same arguments are being made today and it appears that the figures for US Dollar denominated debt are even higher.

The rude crude rally has not gone unnoticed by the gasoline market where there is the potential for gasoline prices to spike this summer with prices at a four-year high amid record demand (prices).  So far such price increases have not bled into the inflation figures, but the truckers are seeing the pinch.  To wit (as reprised by David Lutz): Trucking companies increased leverage is applying added pressure to cargo costs as accelerating economic growth bolsters transportation demand and exacerbates driver scarcity.  With first-quarter trucking spot rates up 27 percent from a year earlier, according to Bloomberg Intelligence, freight expenses are crimping profits at companies.

To us, the creeping inflation, and marginally higher interest rates, suggests the economy is going to strengthen in the back half of 2018.  Certainly that is what the stock market is telegraphing as earnings continue to ramp-up.  As we write, the D-J Industrial Average has made it eight consecutive winning sessions, leaving the equity market very overbought in the short term.  Also worth consideration is that the Industrials rarely make it more than nine straight sessions in any one direction.  Consequently, there could be a pause in the upward onslaught or even an attempt to pull stocks back.  However, we think the S&P 500 (SPX/2730.13) should be well supported at the 2670-2685 level and that should contain any decline barring unexpected news.  Also waxing bullishly is the TD Ameritrade Investors Movement Index, which is back down to its 2015-2016 levels.  That means investors are not very optimistic currently and, therefore, not buying stocks.  Further, there was over $8 billion of money flows into prime money market funds last week.  These are not the kind of metrics one sees at stock market tops.  However, it’s May option expiration week, which has been bearish for the last nine years, and with stocks stretched for the aforementioned reason, look for some kind of pause/pullback that does not get very far.

A link to the full note is posted in the Subscriber's Area.

As I spoke about in last night’s video/audio there is a risk of some consolidation following the impressive rally over the last couple of weeks.

A link to the full report is posted in the Subscriber's Area.

If the USA’s increasingly powerful position as a swing producer of oil and gas is reducing the need for it to play the part of the global police force then what can we conclude from China launching its first domestically produced aircraft carrier this week?

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:

The U.S. Supreme Court struck down the federal law that bars gambling on individual sporting events in most of the country, in a ruling likely to unleash a race among the states to attract billions of dollars in legal wagers.

Ruling in a New Jersey case, the court said the 1992 law unconstitutionally forced states to maintain laws that outlaw gambling. Nevada is the only state where single-game wagering is now legal.

Sports gambling could begin in a matter of weeks in casinos and racetracks in New Jersey, which instigated the legal fight by repealing its gambling prohibition. Mississippi, Pennsylvania, New York, Delaware and West Virginia could follow soon, and the number of states might reach double digits by the end of the year.

The vote was 6-3 to strike down the entirety of the federal prohibition. Americans place $150 billion a year in illegal sports bets, according to the casino-backed American Gaming Association. The research firm Eilers & Krejcik Gaming puts the number at $50 billion to $60 billion, not counting bets among friends.

The ruling starts a new era for the largest sports leagues, which fought New Jersey in court even while moving toward embracing legalized sports wagering. In January, a National Basketball Association executive told New York lawmakers the leagues should get 1 percent of all bets. The NBA says it would prefer a new federal law to set nationwide standards.

However one feels about investing in vice, there is no doubt that people like to gamble and the removal of the Federal prohibition will be a major benefit to casino. Since there was never a prohibition on online gambling this news is unlikely to be of particular interest to that segment while the biggest losers are likely to be Indian casinos which have been able to skirt the law for the last few decades.

The big question surrounding automation has long been whether robots would compete with workers or help them. Initially, workers feared robots would destroy jobs across the economy. Scholarly research and real-life experience has eased that concern, although some types of workers and industries are ending up on the losing side.

Today, the question is more precise: In which industries does automation help both employer and employee?

The companies that may have cracked the code are those that can assign repetitive, precise tasks to robots, freeing human workers to undertake creative, problem-solving duties that machines aren’t very good at. That’s particularly relevant for manufacturing, the food sector and service sectors such as billing, where timetable spreadsheets can be automated, freeing up workers to do higher-value tasks.

With demand for Bosch-built steering controls high, the company has used automation to increase its output, leading it to hire more people to perform the type of checks Mr. Rösch conducts.

“We looked for 20,000 new hires last year,” a mix of new positions and replacement staff, said Stefan Assmann, one of the company’s chief engineers, to join Bosch’s total 400,000 employees. Bosch factories world-wide now make use of 140 robotic arms, up from zero in 2011. “We can’t see robots having a negative impact on our workforce,” Mr. Assmann said.

If robotics and automation are helping to improve productivity and leading to expanded employment then there must be another reason why factories have been closing and people losing their jobs. The answer is pretty simple when we hear of workers having to train their replacements from overseas before they are fired.

What comes next is unclear. Mahathir helms an unwieldy four-party coalition that includes Malaysia’s largest ethnic Chinese party, and he plans to step aside once de facto opposition leader Anwar Ibrahim gets out of jail on a sodomy charge. Mahathir said he would seek a pardon for Anwar.

“I have to manage four presidents of four different parties,” Mahathir said. “It’s going to be a headache.”

Mahathir has pledged to set term limits for prime minister and reduce its power, while promising to scrap the GST within 100 days in power.

It’s uncertain whether the outcome will fundamentally reshape race relations in Malaysia. Najib’s party had long staked its legitimacy on providing preferential treatment for the bumiputera, or “sons of the soil,” which include ethnic Malays and indigenous groups.

Mak Hon Hoe, a 46-year-old ethnic Chinese voter, on Wednesday deplored the fact that Malaysians were separated in different racial categories.

“I want to see a fairer system,” he said while casting his ballot. “Race is still an issue. We want a Malaysian identity.”

The 1MDB scandal has finally brought down Nijab Razak’s government but it is unlikely that the figurehead of 92-year old Mahathir is going to be enough to hold together a disparate coalition of four smaller parties. The new administration is going to have to move swiftly and definitively to stamp its intent to improve governance if it is to have any hope of seeing out its term.

Coffee and your long-term video. my start on Saturday morning...really enjoying and appreciating it. I am confused. There is a chart which is making me feel slightly nervous. It is the Citigroup Eurozone Economic Surprise Index. When comparing the Economic Surprise Index with the Dax on the 20-year overlay chart I see lower lows and a 20 year low on the Surprise Index and a nicely higher trending Dax. The European PMI indices show economic growth. It looks like Europe is slowly recovering. What causes the Economic Surprise Index to be so low? should we sound the alarm? Kind regards.

Thank you for this interesting question and I am delighted the Long-Term video is a valuable part of your weekend routine. To the best of my knowledge economic surprise indices are calculated on a cumulative basis so if economic figures surprise on the downside on a persistent basis then you get a downtrend. Eurozone GDP has been increasing but not at the pace expected by economists and that is probably why the index is so weak.

5. Who would likely win?
Opinion polls show the League -- the rebranded, formerly secession Northern League, once known for deriding residents of the country’s south as beggars, thieves and good-for-nothing rednecks -- has gained the most from two months of bargaining. Its support rose to 24.4 percent from 17.4 percent in the March vote, according to an SWG opinion poll carried out May 3-6. Five Star is still the biggest single party, slipping half a percentage point to 32.2 percent. (A center-right alliance including the League and the Forza Italia party of Silvio Berlusconi, the four-time former prime minister, rose to 38.5 percent from 37.1 percent.) If Salvini’s League strengthens in the next election, he could decide to break with Berlusconi and finally form a coalition with Di Maio. This time around, Di Maio’s insistence on excluding Berlusconi was a primary obstacle to a populist coalition government.

6. Why does this matter?
Italy is facing political decisions and economic problems that affect other nations too. At more than 130 percent of gross domestic product, Italy’s debt is second-highest in the euro area, after Greece. The European Commission called the debt “a major source of vulnerability” for Italy and has been overseeing the country’s efforts to reduce spending. Underlying problems remain in Italy’s banks, including cronyism with many lenders too entwined with politicians, unions and foundations of all shapes. Mattarella has warned that the timing of the next elections could jeopardize the 2019 budget, which has to be approved by the end of the year, and unsettle financial markets. And nobody’s fully forgotten Five Star’s past talk of a referendum on leaving the euro.

Small political parties seem to have learned that the only way they will ever succeed in ousting the status quo is to refuse to be co-opted. If we look at the history of coalitions, the insurgent party does well until they give up on their ideals for a chance to hold power. They then get lumped in with the status quo for any egregious activity that occurs during government and subsequently get annihilated at the next election because their support base feels betrayed. The Five Star Movement’s refusal to enter government with Silvio Berlusconi is an example that they have learned this lesson.
 

The Arab world’s biggest stock market will probably face difficulty in retaining foreign money unless companies become more transparent, according to some investors. Executives aren’t used to the level of scrutiny demanded by global funds as retail buyers, who typically focus on charts rather than financial analysis, account for about 75 percent of daily trading, according to Gary Dugan, chief investment officer at Dubai-based family office Namara Wealth Advisors Ltd.

Gary Greenberg, an investing veteran, isn’t joining the Saudi party. The London-based head of global emerging markets at Hermes Investment Management Ltd. wants more evidence of economic and political change as well as confidence in the rule of law as Crown Prince Mohammed bin Salman seeks to modernize the kingdom and wean it off its reliance on oil. Other investors including J O Hambro Capital Management are wary of adding to their emerging-market holdings as concern over the pace of U.S. policy tightening sent equities retreating from a multi-year high.

Admittance to the MSCI Emerging Markets basket is a big event for any market because it opens up one of the world’s largest cohorts of index tracking funds as potential investors.

Kim and Moon embraced after signing the deal during a historic meeting on their militarized border, the first time a North Korean leader set foot on the southern side. They announced plans to replace the 1953 armistice that ended hostilities with a peace treaty by year’s end.

Their statement on a “common goal of realizing, through complete denuclearization, a nuclear-free Korean Peninsula,” stopped short of the “complete, verifiable and irreversible denuclearnization” long sought by the U.S. and its allies. The statement didn’t elaborate on what the term meant and Kim didn’t personally utter the word during remarks Friday.

The International community is understandably skeptical regarding North Korea’s overtures with skepticism considering how duplicitous the country has been over it’s post war history. Some appear willing to think sanctions have played a role, others that China is more active in pressuring the regime but there is another reason why North Korea is suddenly willing to sit down to talk.

The central bank’s quest to restore sustainable inflation of just under 2 percent has been complicated by data suggesting that the euro area’s strongest growth in a decade may be faltering. As well as waning industrial output and deteriorating business confidence, the threat of a global trade war is hanging over Europe’s export-oriented economy.

“Incoming information since our meeting in early March points towards some moderation, while remaining consistent with a solid and broad-based expansion of the euro-area economy,” Draghi said. “The underlying strength of the euro area economy continues to support our confidence that inflation will converge towards our inflation aim of below, but close to, 2 percent over the medium term.”

Mario Draghi’s statement “An ample degree of stimulus remains necessary.” Is what the market was expecting. The ECB and Bank of Japan remain the primary providers of liquidity to the global economy so when they eventually begin a process of quantitative tightening is likely to be an important catalyst for liquidity fueled uptrends.

Following the dissolution of parliament last week, 9 May has been set as the date for the 14th General Election (GE14). Malaysians will vote for the 222-member Dewan Rakyat (lower house) on the federal level along with 12 assemblies on the state level. The main challenge to incumbent Prime Minister Najib Razak and his Barisan Nasional (BN) coalition will come from the Pakatan Harapan (PH) coalition led by Malaysia's former and longest-serving Prime Minister Mahathir Mohamad, who has defected to the opposition.

Pakatan Harapan is similar to the Pakatan Rakyat (PR) coalition that won the popular vote in GE13, but without the Islamic party PAS, which split from PR in 2015. Thanks to a split opposition contesting many of the same seats, surveys, admittedly somewhat dated given Malaysia's fluid politics, suggest BN should retain control (The Malaysian Insight, 7 January). However, given the unreliable nature of surveys and the unprecedented nature of this election (Mahathir may have an impact on states such as Kedah, his home, plus UMNO may face competition in Malay constituencies where it faces candidates from both PH and PAS), we consider what an unlikely opposition victory might mean for the economy.

We analyse the coalition manifestos, in particular proposals relating to economic and fiscal policy. As always, the focus will be on whether or not the status quo is maintained. We note that key opposition proposals such as the abolition of GST and the reintroduction of some fuel subsidies suggest higher budget deficits in the absence of off-setting revenues. PH also pledges to review key mega-projects (mostly Chinese-financed).

A link to the full report is posted in the Subscriber's Area.

It’s a big question whether the Malaysian electorate will demand their pound of flesh from the ruling party in retribution for the embarrassing spectacle of Najib Razak and the 1MDB scandal which has been dragged through the international press for years already. That represents a challenge for the Ringgit considering the populist tone of the emerging opposition. 

My daughters love visiting Japan. They adore anime and manga, and no they are nor the same thing, I’ve been reminded more than once. They love the cutsie culture coupled with the storytelling and fact that a lot of the topics covered are more mature in nature than they would be conventionally exposed to at home.

In my 10-year old’s class there are two things that every child, regardless of background, intelligence or wit loves; slime and squishes. Slime has turned every girl in the nation into a chemist and our house is full of the products my daughter has concocted from mixing varying quantities of Elmer’s glue and borax and lotion. I’m really hoping that one is a phase, the stuff is gross to my eyes. The other thing they love are Squishies. These are what many of us might think of as stress balls. The most popular are Japanese because they are of higher quality and return to their shape slowly. If you can bare it simply plug Squishies into YouTube.

Squishies, anime and manga, robotics and a range of other genres highlight the fact that Japan is still capable of capturing the imagination of popular culture. Against that insight more than a few people told me that the country is managed for old people. It is a common sight to see nonagenarians being wheeled around by their sexagenarian offspring. Massage and pain treatment for backs, necks and knees are some of the most common store fronts. Something politicians and the general public are only beginning to get grips with in Europe and North America is that older people are reliable voters and are jealous of their pensions and senior perks.

Africa is increasingly becoming a generator of knowledge, innovation, creativity and technology, rather than being solely an adapter of trends produced elsewhere in the world - like it was mostly the case in the past. There is no doubt that this trend must not only be encouraged by African Governments, but it must also be accelerated with the implementation of specific proposed public policies. Why? Because the knowledge and creativity-based development model renders obsolete all other models of development as it has a unique feature that none of the other models does: its entire bedrock rests on bringing self-sufficiency, independence and self-generating mechanisms of well-being gains enshrined in each domestic economy, and that is for the entire African continent. The knowledge-based development model can charter new territory for Africa – a territory where it has never succeeded in going before - a territory where an extremely knowledgeable, creative, skilled and educated young and dynamic African population combined with the implementation of science/evidence-based public policies by African leaders, finally brings societal well-being, that is well-being to every single citizen, on the continent. The knowledge-based development model can do so in two specific ways: 1) it can ensure the continent’s self-sufficiency, independence and self-generating mechanisms of well-being gains for all segments of its population rather than depending on outside help, and 2) it can, once and for all, lift all African countries out of the natural resources curse2 or the Dutch disease or the paradox of the plenty by ushering them into an era where endowment in two new kinds of natural resources – namely knowledge and creativity -- is more closely correlated with societal well-being compared to endowment in oil and other natural resources.

A link to the full report is posted in the Subscriber's Area.

Africa is often considered as a whole but is a continent replete with different languages, cultures and traditions that are as valuable and varied as anywhere else. There are obviously countries that are more successful than others and the record of improving standards of governance is patchy at best. I look forward to a time when any mention of the Africa does not require a preamble.

Barbosa, a 63 year-old black man raised in poverty, became a household name in Brazil during the Supreme Court’s handling of the so-called "mensalao" corruption scandal in the government of President Luiz Inacio Lula da Silva. Of all the potential candidates for October’s presidential elections, Barbosa has one of the lowest rejection ratings, at just 14 percent, according to Datafolha polling company. That compares with 60 percent for President Michel Temer and 40 percent for Lula.

The former judge is a presidential candidate "with potentially the best profile in the field," according to a note published by Eurasia Group on March 29, adding that he has a good mix of experience, anti-corruption credentials, and credibility on social issues.

"It’s a huge movement on the electoral chess board," said Richard Back, a political analyst at XP Investimentos.

The Brazilian iBovespa Index has been the best performing major market globally over the first quarter. It has been assisted by improving perceptions that the crusade against institutional and political corruption is gaining traction and the relative stability of the Real over the same period.

But at the same time, there’s been a spike in sales to China of precision metal working machines and equipment for making chips from firms like Japan’s Yaskawa Electric Corp. With a Chinese state-backed fund gearing up to pour as much as $31.5 billion into homegrown semiconductor manufacturing, there’s potential for trade flows to start to shift.

China’s ambitions, set out in its sweeping Made in China 2025 plan, go much further than semiconductors and would see its technical prowess advance in a host of areas, ranging from bio- medicine and artificial intelligence to new-energy vehicles and aircraft. The challenge to Japan, Korea and Taiwan also applies to European exporters like Germany, and comes on top of the risks to global trade from the Trump administration’s embrace of tariffs.

"The bits of the global supply chain that are currently the preserve of Korea, Japan, Taiwan, the U.S., and Germany, are the bits of the supply chain that China has a decade-long industrial strategy to move into," said Tom Orlik, Bloomberg’s chief Asia economist. He said it’s only a matter of time before many components for electronic products are made domestically and the country is on track to become a car exporter. Eventually, it will be selling airplanes, said Orlik.

China is moving up the value chain in just about all industries. It’s policies in achieving that goal are openly mercantilist. It has unabashedly supported domestic industry by whatever means necessary, closed off the mainland market to global competitors, engaged in industrial espionage on a grand scale and none of these actions are without precedent.

A link to the full report and section from it are posted in the Subscriber's Area.

This is a very measured report which I think is underplaying the short-term volatility tariffs are likely to provoke. Bilateral trade between the USA and China is substantial and US companies have invested considerable resources in developing customer bases in China. They are far from immune from Chinese retaliatory measures which over the course of the medium-term will likely be ironed out but probably not before there is some pain felt on both sides.

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a brief summary of my view at present.

Risk assets are vulnerable to a correction as valuations approach fair value, Thakur and John Dwyer, vice president and credit research analyst, wrote in a report.

“This risk becomes more important as we transition to a period of gradual tightening of monetary policy by global central banks,” according to the report. Asset prices offer little buffer to the risk of possible shocks resulting from negative growth surprises or higher-than-expected inflation, they said.

Australian government yields share a high degree of commonality with those of other developed market nations. The 10-year has been ranging below 3% since 2015 and over the course of the last month has pulled back to test the region of the trend mean. With inflationary pressures being more of a fear than a reality at present there is scope for some further steadying in the market.

In an evidence session held by the housing committee on Monday, the Labour MP Helen Hayes asked Raab if he was comfortable with the “positive effect” that help to buy had had on housebuilders’ profits and executive bonuses. “It’s almost unfathomable,” said Raab. “No I’m not comfortable with it.

“That’s why the government has introduced measures on corporate governance and is encouraging shareholders to take a greater grip on it. We want to see shareholders take a stronger grip on it and we’re starting to see more shareholder activism.”

Hayes asked if the government was monitoring the effect that help to buy was having on corporate profits. “I’m not sure how we would measure a hydraulic relationship between those three points,” Raab said. He added that “other parts of government” were looking at corporate pay.

Help to buy is designed to spur the construction of new homes by giving aspiring homeowners an interest-free government loan worth up to 20% of a property’s value – if the buyer opts for new build. According to several reports, housebuilders have simply increased the price of homes in response, driving up prices and boosting their own profits.

UK homebuilders initially collapsed following the Brexit vote but were among the first to rally as the full ramifications of the collapse of the Pound filtered through into nominal asset prices. Help-to-buy programs also represented significant tailwinds for the sector, however increases to stamp duty have had negative effects and not least in London where prices are now falling against a background where the Pound has strengthened considerably from its 2016 lows.

President Donald Trump’s decision to accept a meeting with North Korean leader Kim Jong Un caught the world off guard.

In agreeing to sit down with North Korea’s third-generation leader, Mr. Trump has boosted the stature of Mr. Kim—a man he has ridiculed as “Little Rocket Man” and threatened with “fire and fury”—with a surprise diplomatic opening that left some allies wrong-footed.

For Mr. Kim, who is half the age of Mr. Trump, just getting a summit meeting with the U.S. president is a big win. Neither his father nor his grandfather succeeded in getting a face-to-face meeting with a sitting U.S. president.

Mr. Trump’s move represents a victory for South Korea’s president, Moon Jae-in, who has pleaded with the U.S. to tone down its rhetoric and worked assiduously to get negotiations off the ground, and others who have pushed for engagement and diplomacy.

Other U.S. allies and some veteran negotiators, however, expressed concern that while a summit meeting could lead to a breakthrough in what has been a protracted standoff, it is a risky move that could lead to ill-considered concessions to Pyongyang.

Agreeing to a meeting with Kim is a big risk because of the polarity of the potential outcomes. These kinds of win/lose scenarios are not attractive from the perspective of any diplomatic corp but are not at all unusual in business where the first lesson is you have to be willing to walk away with nothing if you do not get the price you want.

You mention lead indicators, could you explain those you prefer?

At FullerTreacyMoney we look at two different types of lead indicator. The first is what one might think of as individual to the animating theme behind a trend, the others are broad market indicators.

Brazil is now seen as more corrupt than Argentina for the first time in over two decades after suffering last year one of the biggest plunges among the nations tracked by a global transparency ranking.

Latin America’s largest economy fell 17 positions in the2017 index released by graft watchdog Transparency International on Thursday. It now ranks 96th among 180 nations, tied in the region with Colombia and Peru. Only two other countries in the whole index -- Bahrain and Liberia -- slid more than Brazil last year. Argentina meantime rose 10 spots, to 85th place and now ranks better than Brazil for the first time since 1996.

A series of corruption scandals have rocked Brazil over the past few years as the so-called Carwash probe uncovered a massive kickback scheme involving the country’s political and business elite. Former President Luiz Inacio Lula da Silva was convicted for graft last year while allegations against President Michel Temer are still being investigated. In Argentina, meanwhile, President Mauricio Macri has worked to make public tenders more transparent and successfully pushed for a law allowing plea bargain testimonies to resolve corruption cases.

Among key Latin American countries, the least transparent are still Venezuela (169th position) and Mexico (135th spot).

Transparency International’s ranking is based on surveys and assessments from 12 institutions and has become a benchmark gauge of corruption perception used by analysts and investors.

There is no Brazilian politician that has not been embroiled in the carwash probe. That’s bad news. However, the fact the scandal has broken, is being addressed by the judiciary and is making headlines both domestically and internationally speaks to the fact that Brazil does have institutions that can tackle corruption if the will to do is present. 

Your recent assessments of the markets appear to be that a period of ranging is likely to be followed by markets going up again. Of course, whilst no one knows what the future will be, I wonder why you don't see the greater likelihood of markets turning down after some consolidation. With the amount of US debt increasing, interest rates increasing, and stock market levels already high by historical standards, are you not more concerned that markets, being forwards looking, might be more likely to head down than up? Esp. since markets struggle when interest rates go above 3%? I appreciate your talk of share rotation, but a rising tide lifts all boats and surely the opposite is true when markets tank?

Thank you for these questions which I think everyone asks from time to time. For someone in our position of attempting to forecast the outlook for markets the most important thing we have to remember is that markets rise for longer than they fall but when they fall they often do so quite quickly. However, they do not fall without first exhibiting topping characteristics. 

And that is the likely fate of conventional retail. Like the railroad, there’s an extraordinarily surfeit of retail space built with little consideration of what the market will actually sustain; recent declines in the retail revenue per square foot in brick-and-mortar stores suggests that things are getting worse, fast. And like the railroad, there’s a new way of doing business on the block, except that instead of changing how we move people and goods, online retailing promises a new way of delivering them to the end consumer. 

If the per capita retail footprint declined as much as the railroads did, it would fall all the way down to 2.82 square feet per capita. That’s a lot of empty malls and defunct big box stores, but retail won’t disappear any more than the railroads have gone extinct.

In fact, in 2014, the inflation-adjusted revenue that railroads earn per mile of track is 2.7 times what it was a century ago. More startling still, the so-called “ton miles” of freight carried on the nation’s railroads (a ton mile is one ton of freight carried one mile) has tripled since 1960, even as the total size of the operational railroad system has declined dramatically.

That points to the likely future of conventional retail: a drastic reduction in the per capita footprint, with the remaining stores capable of earning far more money per square foot. It’s not the brightest of futures. But it’s also not the end of the world.

Near where I live in Los Angeles, a large mall is close to shutting since it’s primary tenants, Macys and Nordstrom, have decamped to the newly refurbished Westfield mall in Century City near Beverly Hills. The two malls are about a mile apart but until a couple of years ago Macys seems to have been comfortable with the idea of having two large stores within close proximity of one another. In between the two malls the only businesses that have survived are universally service oriented. So, what is going to be done with all the empty commercial space sitting on valuable pieces of real estate?

In an effort to sharpen Reckitt Benckiser’s focus on brands such as Strepsils and Mucinex cold remedies, Kapoor has moved to separate the company’s home-care and health businesses. Reckitt also became a leader in infant nutrition with the acquisition of Mead Johnson Nutrition Co. last year.

On Monday, it increased its forecast for synergies from the deal to about $300 million from $250 million. This year’s savings will only “slightly exceed” additional infrastructure expenses associated with the new health and home-and-hygiene business units, the company said.

Morgan Stanley analysts led by Richard Taylor described the company’s outlook as conservative.

A question someone asked of Charlie Munger at last week’s Daily Journal AGM stuck with me over the weekend. It was how he thought the established brands would fare with increased competition from the likes of Costco and Amazon who are pioneering their own products often in direct competition. His answer was that white- labelling and own-brand selling would have an effect, but if one were to take a long-term view the established brands would still have value. 

Investigations by the nation’s graft ombudsman and Auditor- General found that graft is endemic in the state, with tens of billions of rand stolen or squandered each year. Zuma appointees head almost all the law-enforcement agencies, which have been slow or loathe to act against some of his closest allies who’ve been implicated in the free-for-all. The new president will need to replace several key officials, reassert confidence in the independence and integrity of the criminal prosecution system and show that the government is intent on ensuring all those found guilty of corruption are held accountable.

2. State-owned companies in chaos
The looting spree largely targeted state companies, especially power utility Eskom Holdings SOC Ltd., which is at risk of running out of cash. While Ramaphosa has already overseen the appointment of a new board at Eskom, it still needs to appoint a permanent chief executive officer, fill several other top management posts and urgently raise new funding. South African Airways and oil and gas company PetroSA Ltd. are among the other entities that have been hobbled by a lack of leadership and oversight.

 

Governance is Everything has been a mantra at this service for decades. Zuma did everything he could while in power to line the pockets of everyone loyal to him and that system of rent seeking and bribery is going to take a long time to unwind. It could well be that the water crisis in Capetown and the near bankruptcy of Eskom were the final catalysts for Zuma’s ouster. Right now, the market is willing to give the benefit of the doubt to Ramaphosa that some of these issues can be addressed. Capetown’s situation is urgent so Ramaphosa is unlikely to have much of a honeymoon period.

South Korea’s surprisingly weak economic performance in the last three months of 2017 isn’t cause for concern but does support the case for a cautious stance on central bank policy, according to economists and bank officials.

The economy ended its streak of outperforming expectations in the last quarter by recording its first quarter-on-quarter contraction since the global financial crisis.

That resulted in growth for the year—at 3.1%—coming in just below the government’s 3.2% target, but above 2016’s expansion of 2.8%. Markets on Thursday brushed aside the result, with the Kospi jumping 1% to reach record highs.

Still, the result will temper recent optimism about the economic outlook, while likely dispelling any idea at the Bank of Korea about raising rates until much later in the year. In November, the central bank raised rates for the first time in more than six years.

South Korea is the world’s 11th largest economy and it did not grow in the last quarter of 2017. This was explained by the surge in investment in the early part of year that eased back in the latter part of year but the failure to growth was an anomaly amid strong numbers for the rest of the global economy. Domestic consumption is expected to pick up this year and the Olympics may add some tourist revenue so a recession may be avoided but it bears monitoring nonetheless 

S&P500 Consumer Staples has lost momentum over the last couple of years with larger pull backs that dip into the underlying range and somewhat less impressive rallies subsequently. Last week’s downside weekly key reversal with follow through this week represents another in a series of failed upside breaks. It is back testing the region of the 200-day MA and will need to continue to hold the 550 area if top formation completion is to be avoided. 

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Veteran subscribers will be familiar with my refrain from the Big Picture Long-Term videos, since at least September, that we are in the 3rd Psychological Perception Stage of this impressive almost decade-long cyclical bull market. 

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The USA led the world into recession in 2008 and out of it onto an historically lengthy expansion in 2009. The Federal Reserve started out on the road to normalizing policy last year and fiscal stimulus will be picking up some of the slack in monetary accommodation this year. The above statistics suggests at least some Asian countries are now following a similar trajectory. 

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Vietnam benefits from its close proximity to China, low labour costs, large young population, trade friendly administration and a desire to progress from being a frontier market to a more conventional investment destination. 

Russia’s Finance Ministry will buy about $4.5 billion in foreign currency over the next three weeks, increasing purchases after changes aimed at further limiting the economy’s dependence on oil.

The amount of additional budget revenue earned in January from oil and gas is expected at 257.1 billion rubles ($4.5 billion) as a result of higher crude prices, the Finance Ministry said on Wednesday. Under a so-called budget rule, the entire windfall will be spent on buying foreign currency in the domestic market, with daily purchases at 15.1 billion rubles from Jan. 15 to Feb. 1, it said in a statement.

The operations will help insulate the economy from the ups and downs in crude and shield the ruble’s exchange rate from volatility. The government is absorbing all revenue earned when Russia’s Urals export blend is above $40 a barrel, channeling the excess income into its sovereign wealth fund.

The Ruble accelerated to an important low in early 2015 which prompted the central bank to intervene and to push interest rates up to 17%. The collapse in oil prices into the 2016 low saw the currency hit a nadir but the interest rate and oil’s recovery resulted in a major short covering rally. 

Billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. agreed to acquire spectrum, mobile-phone towers and fiber assets of his brother Anil Ambani’s Reliance Communications Ltd. helping the younger sibling cut debt at the embattled wireless carrier, the two companies said in separate exchange filings.

Reliance Jio emerged the highest bidder for assets and the sale is expected to be closed in a phased manner between January and March 2018, according to a statement from RCom on Thursday.

The companies didn’t disclose a value for the transaction. The deal will include a cash payment and transfer of deferred spectrum installment payable to India’s Department of Telecommunication.

Mumbai-based RCom is seeking to cut total borrowings by $6 billion by March. RCom posted its first annual loss last March after Jio stormed into the market by offering free calls and data. That escalated a price war that has forced consolidation in the sector. RCom this week said it expects to get about 250 billion rupees ($3.9 billion) from the sale of its spectrum across four frequencies, its optical fiber network, and its more than 40,000 telecom towers. Entire proceeds will be used for repayment of RCom’s debt.

Reliance Jio is only paying for good quality assets that will enhance its depth of network, especially in rural areas, and raise data usage capacity, Shobhit Khare, a co-founder at Inertia Wealth Creators LLP, said via phone.

Reliance Industries spent a great deal of time developing a 4G network (Jio) and is now reaping the benefits. Reliance Communications, by selling its mobile assets, is essentially exiting the mobile telecommunications business. This article from livemint.com details where management see the company focusing next:

RCom will essentially be transformed from a business-to-consumer (B2C) into a business-to-business (B2B) entity, which will provide submarine cable systems that will deliver the latest sub-sea cable technology to meet growing cloud infrastructure and data capacity demand from global enterprises and over-the-top, or OTT, service providers.

Ambani said the new RCom will be valued at Rs15,000 crore. The business, he said in a presentation, will be based on a capex-light model and will generate sustainable cash flows, with 50% of revenue and 60% of operating profit coming from outside of India.

President Michel Temer’s efforts to overhaul Brazil’s unsustainable pension system has dominated political debate in Latin America’s largest economy throughout the year. With pressure mounting to pass the unpopular measure before lawmakers start concentrating on 2018 elections, negotiations between the presidential palace and congress reached fever pitch in recent days. The government’s plans started falling apart this week as several policy makers contradicted themselves on the potential vote date while Temer was hospitalized for a surgery.

"We don’t have all the votes now and we’ll have to keep on working," Maia told reporters after a meeting with government allies in Brasilia. "I’m sure we’ll have the votes in February."

Maia added that he’s confident the government will obtain 320-330 votes in favor of the bill, which is more than the 308 needed to secure its approval in the lower house. The legislation would also require Senate backing.

Many observers are skeptical it will pass in 2018. "It’s very hard, if they weren’t able to do it this year, the chances fall significantly," said Juliano Griebeler, a political analyst at Barral M. Jorge consultancy. "Leaving it until next year creates a bad situation for the government as it will have to push back other important issues, like tax reform."

Governance is Everything. Brazil has been laboring under the constant flood of corruption allegations against just about all politicians and that represents a headwind to getting meaningful legislation passed. It is almost too much to hope that a new reform minded administration which also takes a tough stance on graft is going to be elected so Brazil has challenges. 

I think veteran subscribers will recognise a number of the themes I have been discussing in recent big picture long-term audios in this podcast. 

The CSI 300 Index of large-cap stocks closed down 1.3 percent, with ZTE Corp. and BYD Co. both falling the 10 percent limit in Shenzhen, while BOE Technology Group Co. slid 9.7 percent. Shanghai-listed liquor giant Kweichow Moutai Co. couldn’t maintain its brief foray into positive territory and closed down 1.4 percent, its seventh straight loss since state media warned it was climbing too fast. The stock has slumped 14 percent since Nov. 16.

“Institutional investors are choosing to cash in toward year-end as valuations are near historic highs and market sentiment deteriorated after official media targeted Moutai,” said Shen Zhengyang, Shanghai-based analyst at Northeast Securities Co. He said the market “lacks steam” for further gains.

The pace of the CSI300’s advance has picked up over the last six months and has outperformed the bank-heavy Shanghai A-Share Index. The institutional memory of the bubbly activity which contributed to the surge and collapse of the market in 2015 is still relatively fresh and the government does not want to see a repeat. That suggests some pressure may be coming to bear on the highest-flying shares, to instil some discipline among investors. 

For Sun Jianbo, president of China Vision Capital Management Co. in Beijing, valuations among large-cap shares are too expensive for state-backed funds to intervene.

The CSI 300 traded at its highest level relative to the broader Shanghai Composite Index in at least 12 years at the start of this week as investors flocked to large caps such as Moutai and Ping An Insurance (Group) Co.

"There’s no need to prop up the market yet," Sun said. "A lot of big caps are still expensive and it would do more harm than good to state-backed funds if they buy now."

The divergence between large-cap shares and the rest of the market may be one reason why the government took aim at Moutai. Before Xinhua warned last week that gains in the liquor maker were excessive, the stock had more than doubled this year.

Following the botched introduction of options trading in 2015 the Chinese administration introduced new rules on disclosures and selling by company principles. It also banned short selling for a time. Through steady purchases by various state-owned vehicles, they manufactured the slow and steady pace of the stock market’s advance since the low in early 2016. 

The UK on-trade looks not dissimilar to the UK grocery sector, which too has a few dominant operators that take share from a weak underbelly of independents and supplier-tied franchises. The big grocers resemble the big pub chains inasmuch as they are all about buying power, efficient logistics, wage capping, centralised cost savings and economies of scale. It might also be noted that Wetherspoon’s 4m square feet of productive floor space is about equal to the whole Tesco Express estate. And while Wetherspoon’s revenue of £450 per square foot or thereabouts is half the level expected from a big-four grocer, its 7.7 per cent operating margin compares pretty well to Tesco’s 1.8 per cent at group level last year.

It’s a comparison endorsed by Tim Martin, Wetherspoon’s founder and chairman, who is often found astride his hobby horse that supermarkets and pubs should be taxed equally. Mr Martin has been less vocal on whether pubs and supermarkets should be regulated equally.

Because here’s the thing with supermarkets: they can’t engage in local price wars. Every single UK branch of Tesco Express has to charge the same. That’s because since 2002, the supermarkets have been bound by a code of practice drawn up in response to a Competition Commission review a couple of years before. 

If the performance of Wetherspoons compared to Tesco is any guide the difference in competitive pricing laws has a considerable effect on performance. Meanwhile there is also a clear difference between what are the higher overall margins on discretionary spending and staple spending at supermarkets where competition is increasingly aggressive.  

One in three Chinese children faces an education apocalypse. An ambitious experiment hopes to save them – This article by Dennis Normile for Sciencemag.com may be of interest to subscribers. Here is a section:

The result is a widening gap between urban and rural educational achievement in China, Rozelle says. Many urbanites fit the stereotype of "tiger" parents, pushing kids to excel in school. After hours, their schedules are packed with music and English lessons and sessions at cram schools, which prepare them for notoriously competitive university entrance exams. More than 90% of urban students finish high school.

But only one-quarter of China's children grow up in the relatively prosperous cities. Rural moms have high hopes for their children; Rozelle's surveys have found that 75% say they want their newborns to go to college, and 17% hope their child gets a Ph.D. The statistics belie those hopes: Just 24% of China's working population completes high school.

Rozelle believes such numbers bode ill for China's hopes of joining the ranks of high-income countries. Over the past 70 years, he explains, only 15 countries have managed to climb from middle- to high-income status, among them South Korea and Taiwan. In all those success stories, three-quarters or more of the working population had completed high school while the country was still in the middle-income bracket. These workforces "had the skills to support a high-income economy," Rozelle says. In contrast, in the 79 current middle-income countries, only a third or less of the workforce has finished high school. And China is at the bottom of the pack. School dropouts don't have the skills needed to thrive in a high-income economy, Rozelle says. And, worryingly, the factory jobs that now provide a decent living for those with minimal training are moving from China to lower-wage countries.

Rozelle thinks a lack of opportunity isn't the only factor holding back China's rural children. Physically and mentally, they are also at an increasing disadvantage, hampering their performance in school and their prospects in life.

You might remember last year the OECD’s Pisa rankings of schools was released and China featured particularly highly. That is because the data only looked at Beijing, Shanghai, Guangdong and Jiangsu where the best of the country’s education resources are concentrated. As the above article highlights the real story is of a country that still has a long way to go in equipping its population with the tools necessary to succeed in the 21st century. 

Infrastructure plays a crucial role in the region’s economic, social and environmental development, including boosting regional connectivity. Greater connectivity of the transport infrastructure enhances logistical efficiency and supports the growth of investment, trade and commerce while reducing business costs. While countries have invested in infrastructure to varying extents over the years, development has been gaining momentum, with more than US$275bn key pipeline projects across ASEAN, as we detail in this report.

Singapore: To fulfil Singapore’s 6.9mn population target (+25% from the current size) by 2030, the government is steering infrastructure development towards greater public network connectivity, usage of personal mobility devices, as well as usage of digitalisation to transform the city state into a Smart Nation. These infra developments, amounting to US$44bn will help Singapore cope with population increase and prevent traffic congestion.

Malaysia: In the 10th Malaysia Plan (2011-2015), the government highlighted its commitment to infrastructure development. One focus is on building railways (MRT 2, MRT 3, LRT 3) to alleviate traffic congestion. Another focus is on connecting rural areas to urban clusters to ensure equitable development through the Pan Borneo Highway. Infrastructure growth is driven by China, having committed US$34bn (RM144bn) to infrastructure projects such as the East Coast Rail Link, Kuantan Industrial Park and Melaka Gateway. 

Indonesia: In the post-Suharto era, infrastructure development stalled and has not been able to keep up with economic growth amid the commodities boom. The inefficient transport network has resulted in acute distribution bottlenecks, driving up logistics cost. When President Jokowi took office, he diverted a portion of the energy subsidies to infrastructure development. Through priority infrastructure projects totalling US$41bn, the government seeks to boost connectivity in the archipelago to increase business competitiveness.   

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In a period of synchronised economic expansion it is natural for emerging markets to engage in infrastructure development since credit is generally still accommodative and the need remains compelling. That will also help to lay the foundation for future growth as the region evolves economically amid a trend of generally improving standards of governance. 

German Chancellor Angela Merkel said she would prefer to go ahead with new federal elections rather than try to form a minority government, as Europe’s most powerful leader weighs her options after the collapse of four-party coalition talks late Sunday.

Seeking her fourth term, Merkel is “skeptical” about a minority government as it may not bring about necessary stability and is open to another so-called grand coalition with the Social Democratic party, she said in an interview with ARD television. In the absence of an agreement to secure a majority in Germany’s Bundestag, “I’m certain that new elections are the better way,” she said.

Disputes among parties over migration and other issues led the Free Democrats to walk out of the talks. German President Frank-Walter Steinmeier urged the country’s political parties to return to the negotiating table, saying “those who seek political responsibility in elections must not be allowed to shy away from it when they hold it in their hands.”

Small parties face difficult choices when they enter government. If they are to ever have a chance of achieving the change they seek, they have no choice but to enter a coalition. However, they seldom get everything they wanted and are often seen by their voters as sellouts when they fail to achieve lofty goals. Therefore, the fate of small parties is often to taste power but to have their support evaporate at the following election. That is as true of the Liberal Democrats in the UK as it is of many small parities in the Eurozone. 

Two Reasons Adoption Is Slowing... First, the benefits of growing awareness among online consumers in the US/Europe are slowing/topping out, as Airbnb awareness among our survey respondents increased by only 800bps to 80% in '17 (vs. a 2,000bps increase in '16). We see awareness as a smaller driver going forward. Second privacy/safety are material and growing barriers to adoption, as the percent of non Airbnb users citing these factors to not use it increased by ~700bps/400bps, and the absolute number of people concerned about these issues increased by 10%/25% Y/Y. This, in our view, could speak to two potential truths: 1) How Airbnb/sharing lodging could be more niche than previously expected, and 2) How the lobbyists/opponents of Airbnb may be gaining traction.

...Causing Us to Lower Our Airbnb Forecast...This slowing adoption causes us to reduce our forward user/room night forecast for the US/Europe, now expecting ~12% '16-'20 room night growth, vs 29% previously. We now model Airbnb to grow to 6% of lodging demand across US/Europe by '20, vs. 9% previously.

...Making Us Incrementally More Bullish on the Lodging Space... While surveyed hotel cannibalization inched up slightly to 51% from 49% (and expected to be 54% in '18), a slowing user adoption curve suggests Airbnb is less of a threat to hotels. We estimate that Airbnb had a 50bps impact to '17 RevPAR growth across US/Europe, down from our prior estimate of 90bps. We now forecast it will have another 50bps impact on '18 RevPAR growth, down from our prior 80bps impact. As such, we expect US RevPAR to be relatively stable at +2.3% and +1.6% growth in '18 and '19, respectively.

 

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The travel sector is likely to get a boost from the expansion in the number of airlines, signalled by impressive sales at the Dubai Air Show. That should be positive for hotels and particularly so if AirBnb’s penetration is peaking. Personally my experience with AirBnb has been mixed and I suspect many people have had similar experiences. 

Microtransactions have been hotly debated since they began debuting in mobile games almost ten years ago. While they’d been used sporadically in various games for years, the rise of mobile games and their extremely low-to-free pricing made them a functional necessity for developers working in Android or iOS. The AAA PC gaming industry quickly took notice of this, and began offering games with microtransaction options. There’s been a great deal of pushback from the community at various points (Dead Space 3 got hosed for it, as did Bethesda and its horse armor), but microtransactions are clearly here to say. Ubisoft just reported that it took in more money in microtransaction sales than it did in game sales for the first time ever.

Over the past few years, Ubisoft has seen a notable shift in its earnings for various titles, SeekingAlpha reports. Game sales were buoyed this year by South Park: The Fractured But Whole and Assassin’s Creed: Origins, but microtransactions shot up even further, growing 1.83x in 12 months compared to 1.57x for game sales. Ubisoft also got a boost from the Switch, but even with Nintendo’s new platform, microtransactions brought home the bacon.

 

Once upon a time you bought a computer game and it included everything you would ever need to play that game. I started playing Diablo 2 as a teenager and the game is still available online with access to the Battlenet server, so players can join and play with or against others. It’s still free after more than 20 years. The updated version of the game, Diablo 3, has downloadable content (DLC as my daughters refer to it), and additional characters you can pay for. Overwatch, Activision Blizzard’s newest hit game releases animated shorts to build interest in characters, has built in loot boxes for extra gear and additional outfits for your favourite characters all of which represent additional revenue streams. 

Until this year, struggling retailers have largely been able to avoid bankruptcy by refinancing to buy more time. But the market has shifted, with the negative view on retail pushing investors to reconsider lending to them. Toys “R” Us Inc. served as an early sign of what might lie ahead. It surprised investors in September by filing for bankruptcy—the third-largest retail bankruptcy in U.S. history—after struggling to refinance just $400 million of its $5 billion in debt. And its results were mostly stable, with profitability increasing amid a small drop in sales.

Making matters more difficult is the explosive amount of risky debt owed by retail coming due over the next five years. Several companies are like teen-jewelry chain Claire’s Stores Inc., a 2007 leveraged buyout owned by private-equity firm Apollo Global Management LLC, which has $2 billion in borrowings starting to mature in 2019 and still has 1,600 stores in North America.

Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20 percent, to $35 billion, and the industry’s leveraged loans are up 15 percent, to $152 billion, according to Bloomberg data.

Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.

 

One of Warren Buffett’s most colourful adages is “you don’t know who has been swimming naked till the tide goes out” A great many companies have survived with high debt loads because liquidity was abundant, interest rates were at rock bottom levels and access to credit was easy. Until recently, refinancing has been easy which allowed companies to pile on additional debt. An obvious point is that highly leveraged companies are heavily exposed to refinancing issues as interest rates rise. 

I was thinking back to our dinner at the club in LA, and remembering that you stated that the Princes of the Sauds owed allegiance to their King, comparing them to the Barons of Europe in the middle ages. You said that sooner or later, the finances of the Kingdom would have to be enhanced, and that the Princes would be called upon to do so, just as the Barons of long ago were required to collect taxes and give treasure to the Crown. The parallels between today in the Kingdom of Saudi Arabia and those days so long ago are amazing!

We have now seen the first round of the tax collection begin, and those who were arrested were quite likely opposing the new "taxes", if not plotting actual rebellion (in which case they will almost certainly be executed). There is a clear message here for the rest of the Princes...

Now this is the stuff that historians truly love. 

 

Saudi Arabia has been held together by a series of transfers and concessions to families and tribes that agreed to set aside their enmity in return for a share in the nation’s oil wealth. That worked well as long as the population was small and oil revenues trended higher amid a century of oil’s dominance of the global economy. 

I’m going to use 3M to illustrate the following points. 

1. Equities as an asset class is often perceived as riskier than others but there is one sector within equities that I will argue is safer than everything else including fixed income and real estate. 

2. If you invest in a world class, global scale company that is from this sector, you are already fully diversified, hedged and all the macro economic issues and challenges taken care of. 

3. This sector is resilient in the face of even a global financial crisis because frequently, these companies do not have high financial leverage. (Caveat: In recent years, it has become less true in the US and Europe) 

What is 3M really? It is a deep physics, chemistry and material science company. Everything they do is about manipulating the atoms and molecules of nature to create functional materials that we can use in our daily lives.  

With each passing year, 3M piles on more patents, a bigger library of chemicals and processes, more knowhow. All this knowledge is cumulative. The company is now 115 years old. All that accumulated intellectual property is practically unassailable. There will never be another company like 3M anywhere else in the world. Certain segments of their business can be separately attacked but there will never be another company that can challenge 3M on most fronts simultaneously.  

This is the nature of science and intellectual property. The strength is cumulative over time. In contrast, for real estate companies and banks, big or small has no bearing on vulnerability to debt crisis storms, as we all learnt in 2008. The underlying strength is not cumulative over time, not the way it is for a science and intellectual property company.

 

A link to the full note is posted in the Subcsriber's Area.

When I click through the constituents of the Autonomies section of the Chart Library 3M always comes out first because they are listed in alphabetical order. However, the reason the company is included in the list of Autonomies is because it fulfils every qualification for membership. It is a truly global company with operations everywhere and generates 60% of revenue from outside its home market. 

While the long term structural macro outlook remains unambiguously positive, we think India is also poised for a cyclical upturn in growth, and that the worst of the growth-slowdown, caused by temporary disruption and technical factors related to external trade, is behind us. The economy has already started to stabilize post GST and high frequency indicators are showing a rebound, which should eventually reflect a recovery in July-Sep’17 GDP growth (DB estimate 6.4%). While we expect growth to average around 6.6% during FY18, we are more optimistic about the outlook for FY19 and beyond.

We also note that growth momentum generally improves in the year prior to the elections (India’s next general elections are to be held in May 2019 or earlier), which is likely to play out in this cycle as well. We think given the various reforms that are operational at this stage and that have been implemented by this government so far, it is reasonable to expect growth to return close to 8.0% by FY20, absent any external shock that could jeopardize this baseline outlook.

A link to the full report is posted in the Subscriber's Area.

At a talk I gave for the CFA in San Francisco in 2013 I made the point that rather than comparing India to China it was probably more appropriate to compare India’s development to the UK’s and China’s to the USA. The reason for this was because the USA built its infrastructure and cities on a grid system with clear delineation between public and private responsibilities which to one extent or another China has followed. 

Alibaba Caps $250 Billion Rally With Accelerating Sales Growth – Alibaba’s “new retail” plan carries a simple premise -- to combine its online merchants with a vast swathe of physical stores now divorced from the internet, stripping out layers of profit-sipping middlemen and boosting Alibaba’s e-commerce in the process. Those outlets double as storage and delivery centers.

But the execution involves a battery of expensive and time-consuming investments: buying into department stores such as Intime, setting up “smart” grocery stores like Hema, investing $15 billion into expanding its delivery network into remote regions, and enlisting some half-a-million mom-and-pop stores that now serve the countryside.

Alibaba is trying to transform the way retailers large and small manage their inventory based on real-time demand. And drawing more physical customers into its network boosts its own online orders and provides abundant data to target future consumers.

Guangzhou’s old town is a picture of the commercial reality represented by the marriage of social media and physical stores. There are coupons available for almost every purchase on WeChat, JD.com or Alibaba that can only be redeemed in store. This has delivered almost overnight a realization that customer service is what drives customer flow. Coupled with on demand manufacturing China is rapidly advancing a modern shopping experience that retailers in the rest of world need to pay attention to. 

Gaming data points available today point to an industry facing challenges: The number of physical games sold in the US has declined every year for the better part of the last decade, the install base of consoles is well below the prior cycle peak, and the physical attach rate of software is below where it was in the last two console cycles. However, this is the old way of analyzing this business and in the new “Digital Era” of video games, the business has shifted from one that is hit-driven and reliant on physical retail to an industry that is largely online (over 60% digital and could arguably shift completely online longer term), more recurring and predictable, more monetize-able, and significantly more profitable. 

When we consider that the number of games sold as digital copies continues to grow at 20- 30% each year, notably the market for console software is actually growing – albeit at a single-digit rate. Add to that, the install base of hardware continues to progress towards 100mn+ HD units and, while the physical attach rate of software is below where it was in the last two console cycles, the focus on deeper engagement and higher player monetization through digital content appears to be largely offsetting the impact of fewer game sales. We remain optimistic that newer hardware including Nintendo’s Switch and Microsoft’s Xbox One X can re-invigorate the market for games and are encouraged by some early trends. US retail sales are tracking up mid-single digits year over year in 2017 and, adjusting for sales of digital games, it appears that the number of games sold each year in the US is stable y/y. 

In the Digital Era, gaming content will always be available and players will have access to games in more ways than ever. The industry will become far more global and fragmented across devices than before, which will increase the potential audience for gaming content substantially. We are cautiously optimistic on the potential for traditional video game publishers to further penetrate the rapidly-growing markets in China and on Mobile, however, and we remain on the sidelines regarding the emerging interest in eSports and VR. Nonetheless, we still believe the value proposition of games remains very high relative to other forms of media and we are encouraged that the new revenue TAM in the Digital Era is dictated only by the amount of time players have to engage with games, rather than by the number of consoles in their hands.

 

A link to the full report is posted in the Subscriber's Area.

Gaming is evolving into a much larger industry than movies. Audiences at theatres continue to decline, not least because of the lackluster “cookie-cutter” nature of many movies but also because audiences have more to do and have both online games and content available 24/7. That represents a significant migration within the media sector which is easily observable in the performance of respective shares. 

Thank you for a very informative big picture on Friday. Do you know of any fund managers that are investing in Africa with good track records for us to consider investing with?

Thank you for this question which I’m sure will be of interest to subscribers. Investing in Africa is not a simple matter. The entire continent has 1649 listed companies with major markets like South Africa, Nigeria and Egypt representing significant weightings.  

In 2016 Chinese electrical vehicle makers represented 43% of the global EV market, or 873,000 units, overtaking the United States for the first time, according to a July report by McKinsey & Company. The report notes that not only did China up its share of the EV market by 3% compared to 2015, it also made gains on the supply side of EVs including components such as lithium-ion batteries and electric motors. "One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions," McKinsey explained.

The Chinese government has announced that "new energy vehicles" (NEVs, which includes hybrids) should account for 8% of the passenger vehicle market by 2018, 10% by 2019 and 12% by 2020, according to EV Volumes.com.

Anyone who has spent any time in Beijing over the winter knows how badly the entire north east of the country needs to combat air pollution. On my first strip in 2005 I developed a cough as if I have been smoking my entire life that only let up once I got back on the plane home. If anything, the air is worse today than it was then. 

The threat from expanding missile technology by potentially adversarial nations is on the rise and has been since the early 2000s (see Figure 3). The most visible signal of that being the acceleration in missile technology breakthroughs and launches by North Korea. On the back of this accelerating tension is a rising tide of political support. A bipartisan call for higher missile defense spending seems to be gaining traction, with the "Advancing America's Missile Defense Act of 2017" gaining 27 cosponsors in the Senate (21 Republicans, 5 Democrats and 1 Independent) introduced in May 2017. The bill laid out a few points for its rallying cry, but in particular drove home that a 23% decline in Missile Defense Agency budget since 2006 (while Iran and North Korea activity was going in the opposite direction) needed to be corrected. In the Bill, there is explicit language to: 1) increase the number of ground-based interceptors (by 28 with expansion to 100 interceptors vs. the 44 scheduled to be in place at the end of 2017, 2) reintroduce the development and deployment of space-based missile defense sensors (e.g. Space Tracking and Surveillance System--STSS), and 3) evaluation and testing of radar and sensors for the ground-based midcourse systems (e.g. LRDR) as well as the system as a whole (for which testing funding has declined over 83% since 2006). More additions are possible following recommendations from the Department of Defense's upcoming Ballistic Missile Defense Review ("BMDR") and Missile Defeat Review ("MDR"). Even more near-term, the DoD this week released details of a budget reprogramming request for 2017 for over $400M ~5% of the Missile Defense budget) toward previously unfunded missile defense efforts consistent with the desires laid out in the "Advancing America's Missile Defense Act of 2017". 

A link to the full report is posted in the Subscriber's Area.

Subscribers are probably aware that I was intrigued by the many topics covered in Elon Musk’s presentation to the 68th International Astronautical Congress. There were some big claims made which highlighted the rapid pace of innovation in the space sector, the introduction of private capital has achieved. However, there are some pressing geopolitical considerations that should also be considered from this evolution. 

Catalonia, which includes Barcelona and accounts for a fifth of Spain’s economy, is attempting to become the first of 17 autonomous regions that already enjoy a measure of self-government to hold a binding plebiscite on independence. It staged a nonbinding ballot three years ago that was backed by about 80 percent of voters, though barely 30 percent of those eligible turned out.

The rebel administration is pressing ahead with the referendum even after Rajoy’s government seized 10 million ballots, deployed thousands of police and arrested more than a dozen Catalan officials.

“This is the most serious constitutional crisis Spain has faced,” said Alejandro Quiroga, professor of Spanish history at the University of Newcastle in the U.K. “The Catalan question could trigger a competition among the other regions to test how far they can go. It’s a very complex matter.”

 

How much did the discovery of America, and the riches that flowed into Spain as a result, cement the binding together of Castille and Aragon when Isabella and Ferdinand were wed? There is no doubt economic abundance reduces nationalistic tendencies but the opposite is also true. 

A link to the full report is posted in the Subscriber's Area.

There were a number of interesting points raised but I believe the most relevant for subscribers’ centre on what he said about shrinking the Fed’s balance sheet, the outlook for the Dollar, commodity markets, the relative attractiveness of emerging markets and his best guess for when to expect the next recession.

Philippine central bank Governor Nestor Espenilla downplayed risks of surging credit growth, saying the trend is consistent with the fast pace of economic expansion.

“From a micro level, loans are being very carefully managed from a risk perspective,” Espenilla said in an interview with Bloomberg TV’s David Ingles and Haidi Lun on Friday. “At the macro level, the 20 percent growth is relatively consistent with the rapid growth of the economy.”

An economic boom accompanied by surging credit growth has fueled speculation that Bangko Sentral ng Pilipinas may raise interest rates as early as the fourth quarter. That would be a divergence from other central banks in Southeast Asia, like Indonesia and Vietnam, that have eased policy this year. The Philippines kept its benchmark interest rate unchanged at a record low of 3 percent on Thursday.

Commercial bank loans have risen quickly this year, with mortgages surging more than 20 percent in June. Bangko Sentral has adopted measures in the past to cool the property sector, including capping the value of real estate that can be used as loan collateral.

Domestic credit to the private sector in the Philippines stood at 45 percent of gross domestic product in 2016, according to data from the World Bank. The ratio exceeded 100 percent in Malaysia, Thailand, and China.

“The Philippines is basically in catch up mode right now,” Espenilla said, referring to the credit expansion.

The Philippine economy is headed for a sixth year of growth exceeding 6 percent, among the world’s fastest. That hasn’t yet translated into an inflation problem, with the central bank maintaining its forecast for this year and next year at 3.2 percent. The bank’s goal is to keep inflation within a range of 2 percent to 4 percent until 2020.

“We are on track with meeting our inflation target which is the main driver for our policy decision,” Espenilla said. “Our assessment is inflation remains firmly under control.”

 

The Philippines has mostly made headlines for the aggressive pace of Rodrigo Duterte’s campaign against drug traffickers and others deemed to be malcontents. However, what has often gone unnoticed is this activity has not arrested the pace of economic growth. 

Over the past three years, the 10 largest packaged-food companies have seen about $16 billion in revenue evaporate as consumers change how they eat and shop. Shoppers are seeking out more natural and organic food, shifting away from the staples that have dominated supermarket shelves for decades.

Whole Foods Deal
Amazon.com Inc.’s deal to buy Whole Foods also has fueled pessimism about packaged-food giants, with analysts predicting that the e-commerce titan will favor private-label products and squeeze the profit margins of its suppliers. In June, when that deal was announced, the 10 largest U.S. food companies lost almost $8 billion in market value combined.

In a bid to add more natural products, Campbell agreed to buy Pacific Foods of Oregon, a maker of organic soup and broth, for $700 million in June. Campbell also acquired Bolthouse -- a producer of carrots, juices and salad dressings -- for $1.55 billion in 2012. That business, now part of the Campbell Fresh unit, has struggled with poor harvests and a drink recall.

 

Leaner and fitter isn’t just a maxim for personal health but is increasingly being foisted upon consumer goods companies as the supermarket sector comes under pressures from low cost new entrants willing to compete on razor thin margins. Amazon’s focus on Whole Foods’ own brands coupled with Aldi and Lidl’s low cost own- brand focus represent challenges for other supermarket chains which are inevitably going to be passed on to their suppliers. 

Justice Maraga said the election commission had failed "to conduct the presidential election in a manner consistent with the dictates of the constitution".

He said the commission had committed irregularities "in the transmission of results", adding that the court would provide details in a full judgment within 21 days.

Dissenting judges said that the Nasa opposition alliance - which had petitioned the Supreme Court - failed to prove claims that the polls had been rigged.

The election sparked days of sporadic protests, in which at least 28 people were killed. The vote had raised fears of major political violence - as was the case after a disputed poll in 2007.

 

Governance is Everything. The annulment of Kenya’s election is a landmark event but the true measure of a democratic society is whether the opposing parties can agree to another election and accept the result without resorting to what could be cause for a civil war. 

The National Prosecuting Authority has been probing the unit in an investigation that Gordhan, opposion parties and civil-society groups say is politically motivated. The former finance minister described the latest moves as an attempt to discredit politicians who oppose Zuma and are fighting against the plunder of state resources in Africa’s most-industrialized economy.

Scandals have shadowed Zuma, 75, during his eight-year presidency, including a finding by the nation’s top court that he broke his oath of office by refusing to repay taxpayer funds spent on his private home.

‘State Capture’

The nation’s graft ombudsman accused him of allowing members of the Gupta family, who are in business with his son, to influence cabinet appointments and the award of state contracts, referred to as “state capture.” Zuma and the Guptas deny wrongdoing.

On Aug. 8 more than two dozen of the ruling African National Congress’s lawmakers backed an opposition motion of no confidence in Zuma in a secret ballot in parliament. While he survived, the party fired Makhosi Khoza as chairwoman of a portfolio committee and wrote to Derek Hanekom, the head of its disciplinary committee, rebuking him for his Twitter postings calling for the president’s removal.

Zuma is due to step down as the ANC’s leader in December, with his ex-wife, Nkosazana Dlamini-Zuma, and Deputy President Cyril Ramaphosa seen as the leading contenders to replace him.

“It’s a massive tussle -- it’s about the future of the ANC as we’ve known it,” Gordhan said. “Either you follow the capture of the ANC,” or change the party’s character and “recapture the state, which has now gotten into the wrong hands. People like ourselves are backing Mr. Ramaphosa, because we believe he has the integrity, to put it bluntly. And secondly, he has the modernity to innovate, to allow new ideas to emerge, understands the economy. ”

In much the same way Winnie Mandela took a dominant position in the ANC, Zuma’ ex-wife is likely to be a formidable opponent not least because of the support she will receive from Jakob Zuma’s tenure.  However, despite the continued deterioration of standards of governance under Zuma the existence of opposition both within and outside the ANC is positive as is the freedom of south Africa’s judiciary. 

The company said it will begin slashing prices on a broad cross section of Whole Foods groceries Monday -- the same day the $13.7 billion deal is set to close. That will start with items such as chicken, eggs, some vegetables, and some types of organic fish. Amazon reeled off a long list of other plans to combine its leading e-commerce and delivery assets with the physical locations of Whole Foods stores.

"This is a pretty impressive array of bold moves on the first day of an acquisition -- unprecedented, we would say," said Carol Levenson, an analyst at Gimme Credit.

The moves by Amazon inflame an already raging price war in U.S. groceries -- a sector known for razor-thin profit margins.

German discount grocers like Lidl and Aldi are expanding in the U.S. and Wal-Mart Stores Inc. has been investing in more discounts too. Low prices are familiar terrain for Amazon, which has operated with little profitability for more than a decade. Shares of grocery-store chains fell on the announcements.

Kroger Co. declined as much as 2.4 percent while Sprouts Farmers Market Inc. sank 2.5 percent. Wal-Mart Stores Inc., which sells the most groceries in the U.S., also dropped 0.8 percent.

Amazon will also begin selling Whole Foods branded products, including those that are part of the 365 brand, via its website, and through fast delivery services like AmazonFresh, PrimeNow, and Prime Pantry, the company said.

Beyond price cuts and increased distribution, Amazon Prime will become Whole Foods’ customer rewards program, allowing shoppers to rack up Amazon rewards when they purchase pasture-raised eggs, organic milk and kombucha.

 

Amazon Prime is no longer the cheapest venue for goods but is among the most convenient. That turn to mild profitability has allowed the share to perform admirably over the last 18 months. The decision to embark on a price war following its acquisition of Whole Foods, which has historically been among the most expensive vendors, is a threat to established stores that have never had to compete on price with a company possessing Whole Foods’ cache. 

“By turbocharging supply and depressing demand, automation risks exacerbating China’s reliance on export-driven growth – threatening hopes for a more balanced domestic and global economy,” BI economists Tom Orlik and Fielding Chen wrote.
Pay gains are intact. Domestic manufacturing workers with a high-school education saw wages rise 53 percent from 2010 to 2014, according to China Household Finance Survey data cited by BI. 

“Increasing use of robots should be bad news for medium-skilled workers, especially those in sectors where routine work means scope for automation,” Orlik and Chen said. “Yet wage growth in China remains rapid, and if anything, medium-skilled workers conducting routine work are doing better than average.”

 

Technological innovation has led to the pace of development speeding up. It will not have escaped the attention of investors that the original Tiger economies were able to evolve economically much faster than the Europe or North America during the Industrial Revolution. More recently China has come from relative obscurity to be the world’s second largest economy. What used to take generations now takes decades and the pace of development is speeding up so that we may witness multiple iterations in our lifetimes. As much youngest daughter delights in telling me, she was born the same year as the iPhone. 

With a shrinking working population, Japan has record low levels of unemployment and the economy is poised to receive a boost once this lack of supply filters down to wage growth. But there are equities which can profit from the tight labour market according to Weindling; he invests in recruitment firms that provide permanent and temporary workers.

Suppliers Immune from Domestic Threats
While the population is ageing, Weindling points out that a Japanese company does not need a Japanese customer base to thrive.

“There is no reason why Japan should not continue to make things. Factory automation and robotics are not a threat to Japanese industrials in the way that they are to US companies – they are the solution to a dwindling workforce,” he says. “More automation is a good thing, and the larger industrials will continue to take market share. It is a multi-year, structural shift.”

That does not mean he backs the exporters of old, however. The international names which have long been synonymous with Japan are electronics firms and auto-makers; Toyota, Canon, Mitsubishi and even Sony are no-go areas for Weindling.

“No one buys cameras anymore, so why would I buy Canon,” he says. “We don’t own any of those household names. Their prospects are considerably lessened. Japan’s export market is no longer about cars and electronics, it is about condoms, baby milk, skin cream, medicine. Japan is known across Asia for high-quality products, reliability and high safety standards. These are the companies you want to be invested in.”

 

Japan is an increasingly popular tourist destination for Asian, particularly Chinese, tourists who come with well-defined shopping lists from WeChat personalities that tell them exactly what and what not to purchase. On my family’s visit to Japan in April there were a number of consumer items Mrs. Treacy was very eager to try based on reviews she had seen in Chinese social media. 

Why, after two years on the block, is FCA apparently drawing interest from at least one potential Chinese buyer now?
The answer: FCA's global network and product — specifically Jeep and Ram — fit the requirements the Chinese government has set for attractive acquisitions.

Quality gap
Chinese automakers have openly dreamed of cracking lucrative North America for a decade, spending millions to display their vehicles at high-profile U.S. auto shows. Early efforts showed that Chinese automakers had a long way to go before they were ready to compete here.

But in more recent years — through knowledge and expertise gained via joint ventures with the world's largest and most successful automakers — Chinese companies have closed the quality gap.

And the automakers feel like they finally have closed that gap enough to start selling their products in the U.S., said Michael Dunne, president of Dunne Automotive, a Hong Kong investment advisory company and an expert on the Chinese auto industry.

They also are under pressure from the government to expand beyond China, Dunne said. A government directive dubbed China Outbound pushes Chinese businesses to acquire international assets from their industries and operate them "to make their mark," much as Geely has done since acquiring Volvo in 2010. Bloomberg reported last week that Chinese companies plan to spend $1.5 trillion acquiring overseas companies over the next decade — a 70 percent increase from current levels.

 

Germanys auto sector has been garnering all the wrong sorts of attention lately with increasingly evidence that the major manufacturers may have colluded in hoodwinking the globe into believing diesel engines are clean. On the other hand, China’s auto manufacturers have been among the best performers this year as they have increasingly focused on partnerships with international brands. 

Ten years ago on Wednesday marked the start for many observers of the global financial crisis - a series of rolling credit shocks and bank crashes that led to the deepest world recession for a generation and a decade of slow growth and painful repair.

On Aug. 9, 2007, the European Central Bank flooded its money markets with billions of euros of emergency cash to prevent a seizure in the European banking system after France's BNP Paribas became the latest to shut down investment funds hobbled by a collapse of U.S. mortgage and asset-backed bond markets.

Serial bank collapses in Britain, the United States, Germany and elsewhere were to follow over the following 18 months. These culminated in U.S. investment bank Lehman Brothers being allowed to go bankrupt in September 2008, triggering a world financial panic, deep recession and eventual rescue package by the U.S. government, Federal Reserve and the rest of the G20 economic powers.

The number of articles pointing out this historical milestone has proliferated over the last week. It’s not particularly positive for sentiment because it reminds investors that everything comes to an end and often in a manner deleterious to one’s financial health. 

A point I have made repeatedly in big picture long-term audios is that the rollout of 4G to India’s hundreds of millions illiterate unbanked masses is a gamechanger for the economy.

On diet. I have followed the recent discussions on diet with great interest. Having been in the veterinary profession for the last 50 years my own experience may be of interest. Two dictums I have always followed. You are what you eat and moderation in everything. For the last few million years or so humans have been omnivores and have a gut designed with that in mind, so a diet of vegetables, nuts, berries, meat and fish is ideal. 

When I joined a small animal practice on the North Yorkshire border so long ago I was given a tip by my then boss who incidentally was a great friend of James Herriott and was featured in his books. He had observed the huge beneficial effects that certain formulations of the antioxidant Vitamin E had on elderly canines prone to mini strokes and heart problems. Some forty years ago I decided to take a daily dose myself. At any rate, I have reached the age of 76 (David's vintage) Mild blood pressure, normal cholesterol and in possession of all my original joints in good working order. I now have a pretty stress-free life spent for the most part in South Africa and the only thing now that tends to affect my blood pressure is the politics of the place!

Thank you for the valuable feedback from a lifetime of healthy living which I’m sure will be appreciated by the Collective. I notice that your list of what is healthy in moderation conspicuously avoids carbohydrates and other processed sugars. In the meantime, the politics of your adopted home were on full show today. 

Asia is enjoying better growth so far this year versus 2016. Of the 11 countries we track in Figure 1, seven registered faster growth in 2017 (based either on Q1 or H1 GDP data). China leads the pack, growing 6.9% in H1 – we now think China may register faster growth in 2017 than 2016; this would be the first time that annual growth has not slowed since 2010. Of the three economies that underperformed versus 2016, India was due to demonetisation, the Philippines was slower versus a high base and Korea’s Q2-2016 growth was boosted by budget front-loading.   

The region is benefiting from a pick-up in external demand. All the economies we track above are enjoying faster export growth. As a whole (excluding China, Indonesia and Vietnam), exports rose 13% y/y in 5M-2017. A caveat is that 32% of the increase went to China. This is reflected in the export broadness index above, which shows a relatively narrow export destination profile for the region so far this year. We expect Asia’s export performance to ease in H2 on the back of growth moderation in China and less favourable price base effects.  
Comparatively, domestic economic activity appears more divergent across the region. Credit growth remains soft in several economies, reflecting still-cautious domestic sentiment. Government-led infrastructure in places such as Indonesia and Thailand will be needed to mitigate soft private investment. 

 

A link to the full report is posted in the Subscriber's Area.

There are two ways of looking at the impressive performance of Asia’s stock markets. The first is that it reflects the region’s continued economic outperformance driven by favourable demographics and leverage to global economic expansion. The second is that they do not exist in a bubble and both US interest rates and the Wall Street Leash Effect cannot be ignored. 

The diplomatic route that is being pursued by Donald Trump, as it was by his presidential predecessors, is not going to work. China is never going to take actions tough enough to force Pyongyang to give a “victory” to the US-led coalition.

Secondly, because the consequences of another war in Korea, even if brief and limited, would not be catastrophic for Americans... only for Koreans, and perhaps Japanese.

Thirdly, US willingness to act so decisively would convey the strongest possible message to a potentially much more dangerous would-be nuclear power, Iran, to forget the whole idea and behave.

Fourthly, foreign adventures are a classical method for national leaders to divert attention from political difficulties at home. “Trump, facing ever-expanding scandals, continually-low polling numbers, and even potential impeachment proceedings, may decide that a pre-emptive strike on North Korea is worth the costs and consequences,” Micah Zenko writes in Foreign Policy.

Much-respected analyst George Friedman of Geopolitical Futures concludes that the US continues to be “on the path to war.”

The US is not likely to unleash an attack until it has a casus belli, or a challenge from North Korea that it can point to as a defensible cause for going to war.

That hasn’t happened yet. But the situation could change very quickly if the US becomes convinced that the North has developed intercontinental ballistic missiles. Sudden falls in the South Korean and Japanese stock-markets would be an early warning of pending military conflict.

 

A link to the full report is posted in the Subscriber's Area.

North Korea currently has three US hostages which it is undoubtedly hoping will be a deterrent to a US military strike. That may prove to be a vain hope if it persists in pursuing development of an intercontinental ballistic missile. Simple maths would suggest the lives of millions of possible US casualties outweigh the near certain death of three. 

The billionaire however focused primarily on Hon Hai’s plans for the longer term. Apple’s main manufacturing partner, which does most production in China, makes everything from smartphones to PCs with a growing clout that has seen it courted by governments around the world.

Gou promised to ramp up investment in the U.S., possibly helping with a rust-belt economic revival. Dubbed “Flying Eagle,” Foxconn’s plan to build a U.S. facility could create tens of thousands of American jobs during Trump’s first year in office. The company is considering a joint investment with Sharp, but details have yet to be hammered out.

In the nearer term, Hon Hai’s shares are riding high as Apple prepares to unveil its latest iPhone -- one of the most- anticipated devices of 2017. The shares closed little changed in Taipei after reaching a record earlier this week.

Hon Hai reported first-quarter earnings short of estimates after a stronger Taiwan dollar squeezed profit in the lull before the new iPhone. That came after a year in which smartphone shipments grew at their slowest pace on record and PC demand continued to flounder. In 2016, Hon Hai’s sales fell 2.8 percent while net income rose just 1.2 percent. Gou said Thursday that revenue and profit this year would be better.
Over the longer term, Gou is re-tooling Foxconn for the future, installing robots to offset rising labor costs in China.

It’s also investing in emergent fields from virtual reality to artificial intelligence.
Hon Hai makes a wide range of electronic devices from HP laptops and Xiaomi handsets to Sony PlayStation game consoles.

But Apple is by far its most important client, yielding roughly half the company’s revenues.

 

Foxconn employs 1 million people in China but is also one of the largest investors in robotic technology to try and mitigate its reliance on human labour. Any factory built in the USA will likely employ a lot of people in the construction phase but will be highly automated to control headcount. 

Amazon.com Inc. will acquire Whole Foods Market Inc. for $13.7 billion, a bombshell of a deal that catapults the e-commerce giant into the supermarket business with hundreds of stores across the U.S.

Amazon agreed to pay $42 a share in cash for the organic- food chain, including debt, a roughly 27 percent premium to the stock price at Thursday’s close. John Mackey, Whole Foods’ outspoken co-founder, will continue to run the business -- providing a lifeline to the embattled executive after a fight with activist investor Jana Partners.

The deal sends a shockwave across both the online and brick-and-mortar industries, uniting two brands that weren’t seen as obvious partners. But Whole Foods came under pressure to find a buyer this year after Jana acquired a more than 8 percent stake and began pushing for a buyout. Jana’s move irked Mackey, who has referred to Whole Foods as his “baby.” By enlisting Amazon, he gets to keep his job as chief executive officer of the grocery chain.

Whole Foods shares jumped 27 percent to $41.99 as of 10 a.m. in New York, bringing them close to the transaction price. Amazon shares gained 3.2 percent to $995.

 

If you thought the grocery business was competitive before, the polarisation of the market is only growing more intense with Amazon taking a role in the luxury end of the market while Aldi and Lidl are investing heavily in the lower end of the market. Companies in the middle are being squeezed and may represent an additional headwind for the already ailing mall sector. 

South African regulators unveiled a new mining charter to force companies to give more ownership to black shareholders, sparking a selloff across the industry.

Anglo American Plc and Sibanye Gold Ltd. shares tumbled after the Department of Mineral Resources introduced requirements that local companies must ensure 30 percent of their shareholders are black, up from a previous level of 26 percent. Several of South Africa’s biggest mining companies may have to sell new stakes, raising the risk of dilution for existing owners.

The new rules “could pull the rug right from under the industry’s feet,” said Andy Pfaff, chief investment officer of Vanguard Derivatives, a South Africa-based broker. “It’s certainly not going to help with attracting foreign investment into South Africa.”

 

Jacob Zuma’s government has been under pressure with a slew of corruption allegations and the firing of his finance minister. Introducing another mining charter which gives greater ownership rights to the people who vote is a populist move no doubt aimed at shoring up support. 

Ten years ago India was not a topic of a lot of interest. This month we find ourselves again talking about India twice, on pulses and beef. And when we look at corn we have some optimism to offer up.

Pulses are basically dry beans, lentils, and peas. Few of us ever thought about them being grown in North America. U.S. and Canada have become major growers, exporting to India and other nations from the Middle East to India. Bottom graph is of U.S. acreage planted in pulses. While expansion has been irregular, roughly 1.5 million acres have been added in last fifteen years. Canada is a major source of pulses. Roughly 65% of world’s lentils are grown in that nation. Acreage dedicated to these crops is probably approaching 10 million acres. Apparently Canada is an ideal place to grow them, and then send them to India, et al

India is becoming a major customer for world’s food system. Second, world will grow what customers want. Farmers are looking to produce alternative crops in search for profits. The “corn vs. soybean” farmer, while essential, may increasingly become “outdated”.

A link to the full report is posted in the Subscriber's Area.

India is one of the fastest growing economies in the world which is lifting millions of people out of abject poverty. The first thing people do when they go from $1 to $2 a day is eat more food and buy soap. That helps them to continue earning more money and puts many people and their children on the road to a more secure standard of living. It is reasonable to expect India’s demand for food will continue to increase as it progresses economically. 

May is set for a healthy majority of at least 50 seats which could become a landslide of as many as 200. “In this type of election, which has switched back to two-party politics, once you start polling in the 40s you can win big.” Tony Blair won his landslide in 1997 with 43 percent of the vote. The "numbers behind the polls” -- such as the relative ratings of the leaders and who’s best to manage the economy -- all still favor May.

Joe Twyman, head of political polling at YouGov
May should get a majority of 40 to 60 seats. “A lot could still happen. The Tories have not had a good campaign. Labour have had a better one, but started from a low base. Turnout will be crucial given how age is now such an important social cleavage in Britain.”

Adam Drummond, senior research manager at Opinium
May is on course to win a majority of 72, based on the latest data. Even if the Tory lead narrows further, she should still have a majority of 50 to 70, partly because the party’s so far ahead of Labour among older voters "who always go out to vote."

Flip flopping on policy initiatives in the middle of an election campaign does not make for good optics. Unfortunately when a party goes into an election as the presumed leader it is hard to campaign with the same ferocity and leaves open the potential for opposing parties to improve on their position. That still won’t result in Jeremy Corbyn becoming Prime Minister but is has created uncertainty. 

Brazil's political crisis deepened sharply on Thursday with corruption allegations that threatened to topple the president, undermine reforms aimed at pulling the economy from recession and leave Latin America's largest nation rudderless.

Stocks plunged, both chambers of Congress cancelled sessions and President Michel Temer's office canceled his planned activities Thursday in the wake of a Globo newspaper report that he had been taped endorsing bribery of a former lawmaker.

Protests were planned in several cities and opposition politicians took to Twitter and local news channels to call for Temer to resign or be impeached, arguing his government no longer had legitimacy

"I can't see how Temer survives this," said David Fleischer, a political science professor at the University of Brasilia. "There are just too many people against him now."

 

Brazil has been plagued by corruption on both sides of the political divide and the fact that Lula Da Silva has said he intends to re-enter the public arena will only add to uncertainty and lack of faith in public institutions. The unfortunate fact is that it is hard to believe anyone can survive long in Brazilian politics without being corrupt in one way or another. That was ignored during the boom years but with a recession biting that kind of behaviour is less acceptable. 

The online retail giant is making a major push into furniture and appliances, including building at least four massive warehouses focused on fulfilling and delivering bulky items, according to people familiar with Amazon’s plans.

With that move, the Seattle-based retailer is taking on the two companies that dominate online furniture sales— Wayfair Inc. W -5.95% and Pottery Barn owner Williams-Sonoma Inc. Furniture is one of the fastest-growing segments of U.S. online retail, growing 18% in 2015, second only to groceries, according to Barclays. About 15% of the $70 billion U.S. furniture market has moved online, researcher IBISWorld says.

But even the biggest players in online furniture are struggling to get the market right. Unlike established categories such as books and music or even apparel, retailers are still hammering out basic concepts like how much variety to offer on their sites and the most efficient ways to deliver couches and dining sets to customers’ homes.

While Amazon has been selling furniture for years, it has lately decided to tackle the sector more forcefully.

“Furniture is one of the fastest-growing retail categories here at Amazon,” said Veenu Taneja, furniture general manager at Amazon, in a statement. He said the company is expanding its selection of products, with offerings including Ashley Furniture sofas and Jonathan Adler home décor, and it is adding custom-furniture design services. Amazon is also speeding up delivery to one or two days in some cities, he adde

Free returns and secure transactions make online shopping risk free and painless from the perspective of consumers. Amazon is employing that strategy in an increasing number of sectors but most particularly in furniture and fashion. The number of brands Amazon now carries as well as sporting its own designs represent not only a direct threat to Williams Sonoma but to departments stores generally. 

The Kospi index dropped the most since March as North Korea reiterating its pledge to push forward with another nuclear test showed Moon Jae-in, the victor in Tuesday’s presidential vote, is unlikely to get a honeymoon. While Citigroup Inc. to Morgan Stanley are betting on further upside for South Korea’s record- setting stocks, analysts and investors are seeking more from Moon, who ran on a platform of corporate reform and rapprochement with North Korea.

“Markets will take this on the chin,” said James Soutter, who helps manage the equivalent of about $500 million at K2 Asset Management in Melbourne, referring to the election.
“Rumblings out of North Korea on further nuclear tests should have a bigger influence on markets than the election.”

While Korean technology shares rallied on bets Moon will bolster the sector as a way of delivering more jobs, the Kospi spiked lower, declining 1 percent Wednesday -- the most since March 3 -- as utilities and banks paced losses. Markets in Seoul were closed for the election Tuesday, so the drop came after a 2.3 percent surge in the Kospi on Monday, its best day since September 2015

The South Korean Kospi Index has been ranging for six years but broke out ahead of the election to new all-time highs. Increased tensions with North Korea coinciding with a short-term overbought condition suggest there is scope for some consolidation of the recent run-up. However a sustained move below the trend mean would be required to question medium-term scope for additional upside. 

Morrison is changing the terms of the economic debate, from dire warnings on debt and deficit to a more politically astute one of prosperity and opportunity. His infrastructure plan aims to create a virtuous circle: such investment may trigger private-sector spending and increased household consumption that would boost the economy.

“We continue to forecast a slower deficit consolidation than projected in the budget,” Marie Diron, associate managing director at Moody’s Investors Service, said in a statement after the release. “We assume that GDP growth will be somewhat slower than projected by the government, at 2.5-2.7 percent in the next few years. Productivity growth has slowed in Australia, like in other high-income economies. We estimate that this slowdown is partly related to long-lasting factors that will continue to weigh on growth.”

Infrastructure projects include a new airport in Western Sydney; acquiring greater or outright ownership of the Snowy Mountains hydroelectric scheme and then expanding it; upgrading highways across the nation; and funding for a Melbourne-to-Brisbane inland railway.

The Australian economy has gone 25 years without a recession which is an incredibly impressive achievement. In that time the currency has been highly volatile; acting as a pressure release valve. The decision to spend A$75 billion in infrastructure projects will help to absorb some of the available labour that the drop off in commodity supply growth investment has left but the outright effort to stoke inflation through wage growth is likely to take a toll on both the currency and bond yields. 

The video worked exceedingly well. In August, Wal-Mart Stores Inc. announced it would acquire Jet.com for $3.3 billion in cash and stock. It was an extraordinary sum for a 15-month-old, purple-hued website that was struggling to retain customers and is still far from making a profit. Even more astonishing, Lore and his management team in Hoboken, N.J., were put in charge of Wal-Mart’s entire domestic e-commerce operation, overseeing more than 15,000 employees in Silicon Valley, Boston, Omaha, and its home office in Arkansas. They were assigned perhaps the most urgent rescue mission in business today: Repurpose Wal-Mart’s historically underachieving internet operation to compete in the age of Amazon. “Amazon has run away with it, and Wal-Mart has not executed well,” says Scot Wingo, chief executive officer of Channel Advisor Corp., which advises brands and merchants on how to sell online. “That’s what Marc Lore has inherited.”

Lore’s ascendancy at Wal-Mart adds bitter personal drama that wouldn’t seem out of place on Real Housewives of New Jersey to a battle between two of the most disruptive forces in the history of retail. In 2010, Wal-Mart tried to buy Lore’s first online retail company, Quidsi Inc., which operated websites such as Diapers.com for parents and Wag.com for pet owners. But it moved too slowly and lost out to a higher bid from Amazon.com Inc. Lore then toiled at Amazon for over two years before quitting, in part out of disappointment with its refusal to invest more in Quidsi and to integrate his team into the company, according to two people close to him.

 

You get a lot with your Amazon Prime membership from free 2-day shipping to photo storage and Amazon TV but you do not get the cheapest price on the majority of goods and Prime is not free. It costs $99 a year so you really need to shop, archive and watch Amazon to get your money’s worth and for many people that works out since it has built its subscriber base to 80 million people from 40. 

If driverless deliveries prove faster, cheaper, safer, and more accurate, they would likely be adopted quickly and affect all parts of the country. Truck driving is much less concentrated in particular areas than, say, coal mining or steel making.

In 2016, there were 1.7 million heavy and tractor-trailer truck drivers, with a median annual wage of $43,590; 859 hundred thousand light-truck and delivery workers, who earned $34,700; and 426 hundred thousand driver/sales workers, who earned $28,449. So a rough estimate would be that driverless deliveries would put at least 2.5 million drivers out of work, not counting drivers’ helpers and a substantial number of workers in truck stops and roadside services patronized by truckers. Truck drivers drink a lot of coffee.

Like many lost manufacturing jobs, truck driving requires skill, some special training, hard work, and fortitude, but not much formal education. If you did not go beyond high school, but are a reliable, safe driver—especially if you are willing to work the demanding schedules of long-haul truckers—you can support a family and have decent benefits by driving a truck.

The transition to driverless deliveries would also create some new jobs, many of them technical jobs involving software development and programming that would command relatively high wages. Vehicle maintenance jobs would still be necessary, and would likely require enhanced electronic skills with higher pay than current truck maintenance jobs. Expanded demand for the cheaper delivered products would likely create additional jobs in the transportation sector. It is impossible to predict the ultimate effects of any major technological change, but in the short run it is a good bet that a lot of former drivers would be looking for work and finding their skills and experience ill-suited to available jobs at comparable wages.

The one question I get wherever I go to talk is what am I going to do when the robots take my job? It’s a big question but over the last year it has really moved into the public consciousness. The prospect of machines driving down our roads with no human behind the wheel has lent a sense of reality to the debate that was not present in years past. 

More positively though, in terms of capital investments, the flow of FDI into Africa recovered in 2016 after a dip in 2015. During 2016, capital investment into Africa rose 31.9%. Investment per project averaged US$139m, against US$92.5m in 2015. This surge was driven by several large, capital intensive projects in the real estate, hospitality and construction (RHC), and transport and logistics sectors. The continent’s share of global FDI capital flows increased to 11.4%, up from 9.4% in 2015. That made Africa the second fastest growing destination when measured by FDI capital.

This somewhat mixed picture is not surprising to us. We believe that investor sentiment toward Africa is likely to remain somewhat softer over the next few years. From our point of view, this has far less to do with Africa’s fundamentals than it does with a world characterized by heightened geopolitical uncertainty and greater risk aversion. Companies already doing business in Africa will continue to invest, but will probably exercise a greater degree of caution and be more discerning. We are still of the opinion that any shorter-term shifts in FDI levels will be cyclical rather than structural. We also anticipate that the evolution of FDI — increasing diversification in terms of sources, destinations and sectors — will continue. Over the longer term, as economic recovery slowly gathers pace and as many African economies continue to mature, we also anticipate that levels of FDI will remain robust and will continue to grow.  

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Africa is a massive continent which for all practical purposes is undeveloped. It is also going to represent the bulk of population growth and the most attractive demographics over the next 30 years so there is a logical explanation for why FDI is flowing towards countries with improving governance and/or abundant mineral wealth. 

There’s plenty of talk about the retail industry dying, with malls closing and the slump stressing iconic chains like Sears Holdings Corp. and J. Crew, but healthier big-box giants such as Wal-Mart Stores Inc. and Costco Wholesale Corp. are still chronically in need of employees, at least for now. The number of U.S. retail jobs was about the same last year compared with 2015, according to the Bureau of Labor Statistics. What’s really bedeviling retailers is annual turnover -- at 65 percent, it’s the highest since before the Great Recession -- making it necessary to keep hiring. The chains are so hungry for good help they’re poaching workers from fast-food restaurants.

“Those jobs tend to be more transitional, they tend to be more fluid, and as a result there tends to be higher turnover,” said Michael Harms of Dallas-based researcher TDn2K. “Even though you hear headlines like retail is dying and the robots are coming, there’s still a lot of things that need human touch points. It’s a dogfight over good employees.”

What interested me most about this story was not so much the fact big box stores need more workers as their share of the retail market increases, but the effect this is having on restaurant wages. 

For the first time since 2010, the global economy is enjoying a synchronous recovery (see chart). The developed markets’ (DM) private sector is exiting deleveraging after several years of slow growth due to a focus on balance sheet repair and, after four years of adjustment, the emerging markets are in a recovery mode. These trends create a positive feedback loop. Indeed, the DM economies account for 60% of emerging market (EM) exports, so as their real import growth accelerates, EM exports are rebounding. What’s more, an improving EM outlook reduces DM disinflationary pressures. 

How sustainable is this recovery? Typically business cycles end with macrostability risks (price, external and financial) spiking, forcing policymakers to tighten monetary and/or fiscal policy. In this cycle, considering that emerging markets inflation and current account balances are moving toward their central banks’ comfort zones, it is unlikely that macrostability risks will surface soon. Moreover, the emerging markets now have high levels of real rate differentials vis-àvis the US, providing adequate buffers against normalization of the Federal 

DEVELOPED MARKET RISK. In our view, the key risk to the global cycle is apt to come from the developed markets— most likely the US, considering that it is most advanced in the business cycle. Moreover, the US tends to have an outsized influence on the global cycle, particularly the emerging markets. While price stability features prominently in debating the monetary policy stance of any central bank, financial stability is clearly emerging as an equally important factor.

How will it play it out? For insight, we can look at history. The late ’60s saw fiscal expansion at a time of strong growth and low unemployment. In the mid ’80s, the US pursued expansionary fiscal and protectionist policies in an improving economy. We look at similarities and differences versus today, analyzing asset class performance by fiscal deficit and unemployment quartiles.

To that end, private-sector leverage has picked up modestly in the US. In fact, the household-sector balance sheet, which was the epicenter of the credit crisis, had been deleveraging until 2016’s third quarter. Moreover, the regulatory environment has been relatively credit-restrictive. Hence, we see moderate risk to financial stability. However, risks could rise, considering that monetary policy is still accommodative, and particularly so if the administration eases financial regulations. Price stability is a critical risk, too—especially since the core Personal Consumption Expenditures Index inflation rate is close to the Fed’s target and US unemployment is around the rate below which inflation could accelerate. Reflecting this, we expect the Fed to hike rates six times by year-end 2018 (see page 3). We expect other major DM central banks to take a less dovish/more hawkish stance

A link to the full report is posted in the Subscriber's Area.

The MSCI World Index broke out to new all-time highs in March and continues to extend that breakout. There is no denying that the Index is heavily weighted by the USA but it has been a generally firm period for global stock markets as economic growth figures pick up against a background where interest rates are still relatively accommodative. 

Tergnier may be Macron’s toughest sell.

The town, with a population of 13,000, used to vote Communist and then Socialist. It turned to the National Front as its sprawling rail freight station — once one of France’s biggest — shed hundreds of jobs. Steelworks, a sugar-manufacturing plant and other firms closed down or moved elsewhere leaving the jobless rate at 15 percent. The national average is 10 percent. Thirty-six percent of voters backed Le Pen last month, among her highest votes in the country.

“Globalization is bad for Tergnier,” said mayor Christian Crohem, 67, who heads a mainly leftist coalition. “We’ve brought more countries into the EU and we’ve allowed businesses to move around, so we’re up against workers from abroad who don’t play by the same rules, it’s unfair competition.”

He tells the story of a 70-year-old woman who came to see him recently because she didn’t have enough money to feed herself. Sitting in his office, she cried with shame as she asked him for a handout to buy food.

“That kind of thing really gets to you,” he says. “People here feel abandoned, and so do we, the officials they elect.”

 

In a country like France, which prides itself on its social infrastructure, this kind of story is all the more troubling. Fiscal austerity over much of the last decade has laid bare the hollowing out of rural and legacy manufacturing centres right across the developed world. We are talking about France right now because the election is on Sunday but this is a broad issue which has contributed to populism in a number of countries and there is little evidence of sincere efforts to curb it. 

Acceleration in market share gains: Our AlphaWise survey indicated that the low price course strategy is highly effective for leading players to gain market share, thanks to their strong brand name, well established systems, standardized teaching procedures, and strong teaching curriculum development capabilities. We expect the promotional environment in China's K-12 after-school tutoring market will become a new norm, and the low user stickiness in the market will benefit the leading players like TAL and New Oriental, as they're considered top providers for potential switchers. We believe New Oriental's roll out of its low price strategy to over 30 cities and TAL's acceleration in capacity expansion will accelerate their market shares in the coming quarters. Although this may bring some short-term uncertainty to revenue growth and margins when the summer course revenues are booked, we believe this strategy is value accretive to the leading players given they can manage to achieve high retention rate.

Market demand remains robust amid macro slowdown: According to our AlphaWise survey results, K-12 after school tutoring expenses are the last item to cut among major household expenses during weak financial conditions. Moreover, 24% of respondents intend to increase their spending on tutoring classes in the next 12 months. This shows that education is not only resilient during macro downturns, but also remains a structurally growing sector in China. 

Good potential for online education: The survey results also show that the acceptance level of online education is very high and 43% of respondents thought online education was as good as offline, but more convenient. We believe this bodes well for future demand for the leading players' online and O2O initiatives, which could bring in incremental revenue opportunities with better operating leverage.

 

A link to the full report is posted in the Subscriber's Area.

For most families education is the surest and in many cases only way to climb out of poverty. Despite the fact there is a great deal of debate about the best way to impart knowledge and indeed what should be prioritised in the West, Chinese parents are under no illusion, their child has to perform well in the state exam. Competition is such that the only way to ensure your child is getting the grades they need when you do not have knowledge/time yourself is to employ a tutor. 

Indonesia: buy for the 2H17/2018 recovery? Our earlier worries for equities – politics, tax scrutiny, rising rates, earnings risk – have not disappeared, but we now think an expected period of support for EM currencies will help to keep bond yields and risk-free rates down – a bigger tailwind. This is coupled with improving earnings momentum with an acceleration to 17% growth in 2018, supported by less bank provisioning and increased infrastructure momentum ahead of the 2019 elections and a consumption recovery. Our Focus List includes BBCA, ASII, TLKM, UNTR, LPPF and LINK; our new index target implies 8% upside.

Malaysia: window still open. We initiate on Malaysia (Malaysia strategy initiation) and position it as our No.2 OW in ASEAN. Interest is back, as evidenced by US$1bn of foreign equity inflows in March. We see room for more outperformance from: 1) upcoming elections, 2) infrastructure pick-up, 3) better commodity prices, 4) return of earnings growth, and 5) currency support. We add IHH Health Care to our Focus List. 

A link to the full report is posted in the Subscriber's Area.

The AEAN region was among the first to recover following the credit crisis and has been a centre of investor interest for more than a decade. It remains a hotbed of economic growth not least because of favourable demographics and proximity to the world’s major population centres. Governance is everything and ASEAN offers some wildly different examples of how countries have gotten it right and indeed wrong. 

Turkish President Recep Tayyip Erdogan has lambasted friend and foe alike in a campaign for vast new powers, but his political fate may hang on the one thing he’s stopped carping about: the price of money.

With the April 16 vote on strengthening the presidency too close for pollsters to call, Erdogan is no longer berating the central bank and commercial lenders over borrowing costs they’ve pushed to a five-year high. He’s betting any measures taken to arrest the lira’s plunge will pay off at the ballot box.

The lira’s value versus the dollar is more than just a pocketbook issue in Turkey, where millions of voters still remember the abrupt devaluations that ravaged their livelihoods in past decades and view the exchange rate as the most important indicator of the nation’s economic health.

Turkey’s trade deficit is the biggest of all top 50 economies relative to output and most of its imports and foreign debt are priced in dollars, so sharp declines in the lira can be ruinous for legions of entrepreneurs like Ramazan Saglam, who owns a print shop in a working-class neighborhood of Ankara.

“I bitterly recall when the dollar jumped in 1994 and 2001 -- my business collapsed both times,” Saglam said. “I’m supporting the new presidential system wholeheartedly because I don’t want to go bankrupt again.”

Turkey is a NATO member, it controls the Bosphorus so it’s in a strategic position geopolitically and it is flirting with becoming an outright dictatorship. That represents an uncomfortable problem for its NATO allies who will be all too aware that allowing Turkey to migrate towards Russia’s sphere of influence would be a serious loss. In addition, refugees represent an election catalyst for half a dozen European countries to which Turkey holds the key. That means there is little the EU can do but protest at the trend toward despotism. 

The overthrow of Mubarak, one of a series of military men to rule Egypt since the 1952 abolition of the monarchy, embodied the hopes of the Arab Spring uprisings that shook autocrats from Tunisia to the Gulf and briefly raised hopes of a new era of democracy and social justice.

His release takes that journey full circle, marking what his critics say is the return of the old order to Egypt, where authorities have crushed Mubarak's enemies in the Muslim Brotherhood, killing hundreds and jailing thousands, while his allies regain influence.

Another military man, Abdel Fattah al-Sisi, stepped into Mubarak's shoes in 2013 when he overthrew Mohamed Mursi, the Brotherhood official who won Egypt's first free election after the uprising.

A year later, Sisi won a presidential election in which the Brotherhood, now banned, could not participate. The liberal and leftist opposition, at the forefront of the 2011 protests in Cairo's Tahrir Square, is under pressure and in disarray.

Years of political tumult and worsening security have hit the economy, just as Mubarak always warned. Egyptians complain of empty pockets and rumbling bellies as inflation exceeds 30 percent and the government tightens its belt in return for loans from the International Monetary Fund.

 

Egypt might not have oil but it is strategically important and has a large young population. The release of Mubarak and return to a business as usual stance by the Al-Sisi administration is unlikely to do anything to quell the disaffection of protestors and it would appear to be only a matter of time before they regroup. 

Nike Inc. tumbled the most in 19 months after third-quarter sales missed estimates, renewing concern that the long-dominant athletic brand is losing market share to Adidas AG and Under Armour Inc.

Revenue rose 5 percent to $8.43 billion, the Beaverton, Oregon-based company said after the market closed on Tuesday. Analysts estimated $8.47 billion, on average.

Under Armour and a resurgent Adidas have been grabbing market share from Nike, especially in the U.S. That’s led investors to sour on the stock, which had its first annual decline in eight years last year. And last quarter’s results only reinforced Nike’s woes as North American sales rose just 3 percent. Executives on a conference call didn’t provide much reason for optimism, either. Worldwide futures orders, excluding the effects of currency fluctuations, fell 1 percent, the first drop since 2009. Analysts had predicted a 3.4 percent gain.

 

Nike produces great products and has a dominant position in the apparel sector which makes it a target. With Adidas moving to a fast fashion model, Nike is under pressure to innovate and most particularly by moving to an online presence. Under Armor might be grabbing market share but it has also struggled to boost its online offering and as a customer of all three, I personally find the online shopping experience far from compelling with all their sites. 

Taiwan dollar advances 0.3% after closing at the strongest level in more than two years Monday

TWSE climbs 0.6%; inflows into stocks exceed $3.8 billion for 2017, the third-biggest in Asia, according to data as of Monday

Stocks including Wistron gain on Apple-related optimism, with Fubon Securities raising rating on the stock

Ten-year bond yield rises 2bps to 1.14%

 

The Taiwan Dollar has appreciated by more than 10% against the US dollar over the last 12 months and extended that advance today. It is overbought in the short-term but its recent strength has broken the Dollar’s five-year progression of higher reaction lows suggesting a medium-term change to the relationship between supply and demand. 

In short, every time Porsche sells a 911 sports car or one of its Cayenne SUVs, it could take the profit alone and go buy a brand new Chevy Cruze.

Its Teutonic peers don’t have nearly as much profit punch. Daimler AG pocketed about $5,000 a vehicle last year, roughly the same margin Bayerische Motoren Werke AG (BMW) has been managing. Part of the money magic is simply price. Porsche doesn’t make cheap cars. Even luxury players like Mercedes occasionally offer more pedestrian versions at narrower margins to get aspiring buyers into the family. And make no mistake, Porsche customers are paying a premium for the brand’s reputation.

Ferrari knows this game well. Its operating profit equates to almost $90,000 a vehicle. But about 30 percent of Ferrari’s business comes from engines, key chains, amusement parks, and other things that don’t have wheels. What’s more, the company makes only about 8,000 cars a year, scrimping on supply to keep prices high.

 

Porsche might be making significant profits on every car it sells but the company is also among the largest shareholders in Volkswagen. It was far from immune to the fallout from the diesel scandal which saw the stock plummet from €95 to €35 and it has been heavily influenced by its parent’s performance since. 

The state settlements already had prompted the credit-reporting firms to remove several negative data sets from reports. These included non-loan related items that were sent to collections firms, such as gym memberships, library fines and traffic tickets. The firms also will have to remove medical-debt collections that have been paid by a patient’s insurance company from credit reports by 2018.

Such changes might help borrowers and could spur additional lending, possibly boosting economic activity. But it could potentially increase risks for lenders who might not be able to accurately assess borrowers’ default risk.

Consumers with liens or judgments are twice as likely to default on loan payments, according to LexisNexis Risk Solutions, a unit of RELX Group that supplies public-record information to the big three credit bureaus and lenders.

“It’s going to make someone who has poor credit look better than they should,” said John Ulzheimer, a credit specialist and former manager at Experian and credit-score creator FICO. “Just because the lien or judgment information has been removed and someone’s score has improved doesn’t mean they’ll magically become a better credit risk.”

 

Credit affects just about every large purchase. This is especially true for the USA, where possession of a credit card is practically a necessity for daily life and not least because of the substantial points programs they offer. 

Inditex put greater emphasis on online expansion last year, cutting its target for new brick-and-mortar stores. The retailer is also making changes to some of its brands to gain market share, with the most recent example being February’s foray into men’s clothing by the Stradivarius brand, which has focused on women.

After starting online sales in Singapore and Malaysia this month, the company plans to add such services in Thailand and Vietnam in the next few weeks and also in India this year.

“India is a very attractive market for us,” Isla said on a conference call with analysts. This year Zara will open a 5,000 square-meter flagship store in Mumbai, which will be its largest store in the country. Inditex has 21 stores in that market.

 

Fast fashion is a major business but is also highly competitive and gaining access to consumers is the key to unlocking growth potential. Moving into high population countries with expanding middle classes is one solution to that challenge and expanding online is another. Creating multiple product lines in a short period of time and getting them to market instantaneously is what has allowed companies like Inditex, H&M and more recently Primark to expand globally but it’s a ruthless sector with clear winners and losers.  

The impeachment of Park Geun-hye opens the door for a reset in ties with North Korea and China.

The leading candidates to replace Park, who was ousted as president by South Korea’s constitutional court on Friday, favor a softer touch with North Korean dictator Kim Jong Un. They’re also open to rethinking the deployment of the Thaad missile shield, which has spurred Chinese retaliation against South Korean companies.

“The liberals believe that if you engage with North Korea, then they could get some kind of missile-test moratorium,” said John Delury, an associate professor of Chinese studies at Yonsei University in Seoul. “The Chinese strategy will be to push just hard enough so the South Korean public sees the cost of having Thaad, but not too hard that you unleash outrage.”

The election campaign -- a vote must be held within 60 days -- will spur fresh debate on how to stop Kim from acquiring more powerful nuclear weapons and missiles. Secretary of State Rex Tillerson plans to seek a new approach to dealing with North Korea in a trip to the region next week, though China’s calls for talks have been rebuffed by the U.S., Japan and South Korea.

Earlier this week, the U.S. military unloaded two mobile missile launchers in South Korea to start deployment of Thaad. It came as North Korea launched four ballistic missiles that landed in waters near Japan.    

 

The potential for a reset with North Korea is a double-edged sword. After all this is a regime whose main export has been nuclear technology to any country willing to pay for it, but most particularly those which are at odds with Western interests. In that regard it is reasonable to conclude North Korea’s actions are those of a Chinese puppet state. Too often the liberal attitude to negotiations has been to give the recalcitrant threatening aggressor whatever they want just to make them go away. Unfortunately, that only emboldens them to ask make even more ambitious demands.