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Markets News Tuesday: Chinese overseas investment jumps; BP reports profit drop; Irish National Pension Reserve Fund worst performer in OECD
By Finfacts Team
Oct 27, 2009 - 10:23:27 AM
Chinese Vice Premier Li Keqiang said on Monday that the country's quarterly economic growth was quickening and the contribution of domestic demand to economic growth was growing.
Li made the remarks at the Third International Tax Dialogue (ITD) Global Conference, which opened in Beijing on Monday.
China on Tuesday forecast an acceleration in industrial production and reported a 190% rise in overseas investment for the third quarter, confirming it key role in the global economic recovery.
Investment by Chinese firms abroad rose to $20.5 billion in July through September, almost triple a year earlier, the Ministry of Commerce said in a statement. Industrial output may increase 16% in the fourth quarter, Ministry of Industry and Information Technology official Zhu Hongren said in a briefing in Beijing, compared with a 13.9% increase in September.
China plans to use its more than $2 trillion in foreign exchange reserves, to accelerate Chinese business expansion overseas, the country's premier said last July.
"We should hasten the implementation of our 'going out' strategy and combine the utilization of foreign exchange reserves with the 'going out' of our enterprises," Wen Jiabao told Chinese diplomats.
Wen said Beijing also wanted Chinese companies to increase China's share of global exports.
Last week China reported that its economy grew 8.9% in the third quarter, the fastest pace in a year.
Pension funds recovering in 2009, says OECD
Pension funds staged a partial recovery in the first half of 2009, generating investment returns of 3.5% in nominal terms. But, as of 30 June 2009, total pension funds assets still remained 14% below their December 2007 levels, according to the latest edition of OECD Pensions Markets in Focus.
For the OECD as a whole, in the first half of 2009 funded pension arrangements have recovered $1.5 trillion of the $ 5.4 trillion in market value that they lost in 2008.
Thanks to the stock market rally in emerging markets, some non-OECD countries have already largely made up their 2008 investment losses. By the middle of the year, Chilean pension funds had largely made up their 2008 losses, while assets of Israeli pension funds were above their December 2007 level.
Another performance indicator that shows a market improvement are funding ratios of defined benefit pension plans. The average funding level for OECD defined benefit pension plans went up from a 24% deficit at the end of 2008 to an estimated 18% deficit by June this year. Funding levels improved thanks to both investment gains and higher discount rates.
The OECD said the Irish National Pension Reserve Fund (NPRF) experienced the worst performance of any sovereign or national fund within the OECD group, losing 30.4% of its value last year.
New Zealand was a follower-up, losing 26.2%, followed by Norway and France, whose national pension funds shed around 25% of their value.
The Irish National Pension Reserve Fund was the most exposed to equities in December 2008, at 59.8% of total assets, followed by New Zealand (53.8%), Norway (50.8%) and France (49.3%), the OECD said.
After a final weekend of negotiations, Germany's coalition government is expected to sign a deal late Monday before formally taking office on Wednesday. Holger Schmieding from BofA Merrill Lynch Global Research spoke to CNBC about the outlook:
McDonald's exits Iceland
McDonald's, for long the symbol of the US globalisation drive, on Monday announced that it was exiting Iceland.
Iceland's three McDonald's restaurants, located in the capital Reykjavik, will close next weekend following a struggle by the franchise owner with the impact of a falling Icelandic krona.
Lyst Hr was required by McDonald's to import all the goods for its restaurants -- from packaging to meat and cheeses -- from Germany.
Costs had doubled in 12 months over the past year and a Big Mac in Reykjavik selling for 650 krona ($5.29), made it unrealistic to raise the price further to achieve profits.
The Economist magazine's 2009 Big Mac index has the Big Mac price in Switzerland and Norway at $5.75.
Lyst plans to reopen its stores under a new brand name, Metro, using locally sourced materials and produce and retaining the franchise's current 90 staff.
US third-quarter GDP is likely to "look reasonably buoyant in the region of around 3% on an annualized basis," Philip Shaw from Investec told CNBC ahead of the official data due Thursday:
US earnings season exceeds expectations
Davy economist Rossa White comments:"US earnings season continued to beat expectations last week. There has been significant upward revision to the final earnings outturn. And revenues are ahead of expectations. One measure of the overall result is that 81% of companies have beaten estimates so far, fully 20 percentage points above the average of 61% since 1994. This week is dominated by industrials, utilities, pharma and energy compared with last week when IT and (retail) financials were at the forefront.
This week sees 14 more S&P 500 companies report than the 135 that released earnings last week. By the end of the week, more than two-thirds of the S&P 500 will have revealed their results. The average annual decline expected for the quarter overall is now 18.2%, compared with -22.6% a week ago. IT, financials, materials and consumer discretionary have accounted for the bulk of the upgrades so far. Note, though, that the 25% increase in earnings for consumer discretionary has been skewed by the 'cash-for-clunkers' scheme and the low base for housebuilder earnings. Excluding these, growth of 25% becomes decline of 15%.
Revenues have beaten expectations, albeit not dramatically. In aggregate, revenues are 0.9% ahead of forecasts. The split of those ahead of expectations on the revenue line versus those behind is 62%/38%. Keep in mind though that Q4 is already shaping up well, from tentative evidence available. The negative-to-positive ratio is 1.8, well ahead of the ugly-looking 3.8 at the same point ahead of Q3. The long-term average is 2.1. Because of the low base (the worst quarter of the recession was Q4 2008), the latest estimate is that earnings will jump 201% year-on-year in Q4."
US markets
In New York Monday, stocks fell on worries some big banks may have issues repaying federal bailout funds and as a drop in oil prices hit both energy and materials firms.
The Dow Jones Industrial Average closed down 104.22 points, or 1.1%, at 9867.96.
The Standard & Poor's 500 dipped 1.2% and the Nasdaq closed off 0.6%.
Asia
The MSCI Asia Pacific Index dropped 1.5% Tuesday.
India’s Sensex index fell 1.3%; the Nikkei 225 dipped 1.5% and the Shanghai Composite fell 2.83%.
In Europe, the Dow Jones Stoxx 600 is up 0.2% Monday.
BP's third-quarter replacement cost profit was reported today as $4.98bn compared with $10.0bn a year ago, a decrease of 50%. For the nine months, replacement cost profit was $10.5bn compared with $23.0bn a year ago, down 54%.
The results for the July to September quarter a year earlier were boosted by crude oil prices reaching an all-time high of $147 a barrel in July 2008, but prices averaged around half in the 2009 quarter.
BP increased its annual cost savings target for the second time this year, to $4bn from the $b forecast in July.
Goodbody analyst Ian Hunter comments on Elan: Tysabri revenue may fall by 14%, following revelation of additional PML cases - - "Following the EMEA’s (European Medicines Agency) review of Tysabri, which revealed that there have now been 23 cases of PML (up from 13 cases on 17th September), we have attempted to assessed the potential impact of this negative news. When the initial scare over PML in Tysabri patients broke in July 2008, the quarterly additional patients taking Tysabri fell by 61% over the next three quarters. If we build a similar reaction into our current model, this would pull back our Tysabri revenue projects by 14%. Running that into our valuation model would see our share price target (now taking the lower end of our range, on Tysabri uncertainty) fall from $6.42 to $5.30. It would appear that the market is currently factoring in a similar patient/physician reaction on the news that the number of PML cases has risen sharply to 23.
One of the big unknowns, however, given that we have no data on 12 of the 23 cases, is how the regulatory authorities are going to react. On a back of the envelope basis, where we have little solid information to go on, adding a similar impact to our numbers as the above patient reaction assumptions would bring our Elan valuation down to $4.87. However, until we have greater visibility on the profile of the patients with PML, projections on whether or not this ramp up in numbers is set to continue and the reaction of and subsequent action by the relevant authorities, it is difficult to call. Any further cases of PML can only, however, (i) increase the likelihood of regulatory action that will reduce Tysabri’s potential; and (ii) add further doubt in physician/patient minds as to whether or not to switch to Tysabri, thus further slowing patient adds."
Gold is trading at $1,038.90 up 90 cents from Monday's spot price close in New York.
Goodbody chief economist Dermot O'Leary comments: Economic View; Budget leaks have started in earnest - - "With six weeks to go, the clock is now ticking towards Budget 2010. We commented last week on leaks from the Government that the public sector pay bill would be cut by €1.3bn. It is still unknown how these savings will be made but further leaks over the weekend suggest that the Government is exploring how these reductions can be made without cutting actual pay rates.
Further reductions in the capital budget also look to be in the pipeline. There is obvious pressure from unions but it is difficult to avoid reducing pay rates for three reasons: (1) the scale of budget consolidation requires all areas to be looked at; (2) public sector pay and pensions account for a third of public spending and; (3) engineering a real devaluation in the economy needs to include cost-cutting across the board. Let’s look at the numbers again. The Government has planned a budget consolidation package of €4bn in 2010 and another €4bn in 2011.
That’s not all. A further €4bn is needed in 2012 and another €3bn in 2013, to reduce the budget deficit to 3% of GDP by 2013. The key point here is that Budget 2010 is only the beginning of the process. Delaying the process will lead to higher borrowing and thus higher interest costs. It may also mean that precautionary savings by households would increase as they would know that further tax increases or spending cuts were to come. Progress has been made over the last twelve months in tackling the fiscal crisis in Ireland. This momentum needs to continue on December 9th."
Goodbody analyst Anna Lalor comments: Irish Financials; Read-through from ING break-up and Regulator increases mortgage scrutiny - - "Given our bank holiday yesterday it is worth covering items of interest in the weekend press as well as yesterdays’ newsflow. The break-up of ING announced yesterday, which according to the press was largely driven by the EU as a result of state aid received by the bank, will separate its banking and insurance businesses and calls into question the bancassurance model.
Moves to separate out the life company from the bank at IL&P are already expected. The bank is likely to be separated from the life company in new holding company as part of the expected creation of a third banking force from the merger permanent tsb, EBS and possibly Irish Nationwide. The ING break-up also shows the power that the European Commission has in dealing with those institutions in receipt of state aid. ING also plans to raise €7.5bn to repay half of the €10bn capital injection it received from the State and to fund the cost of state guarantees.
With the NAMA legislation still in the legislative process there continued speculation over the likelihood of a capital raising by BOI before the end of the year in order to repay some of the Government’s preference share investment, thereby reducing the percentage of the company that can be owned via the related warrants from 25% to 15%.
The Tribune also reports that the Financial Regulator has increased its scrutiny of the mortgage loan books of the banks, with visits to branches to look at their approach in dealing with defaults and arrears, while also reviewing how the banks write off mortgage losses and provide for future losses. We have been relatively cautious on the outlook for mortgage losses, given the large increase in the number of people unemployed in Ireland, while there is a possibility of a further deterioration in mortgage quality when Eurozone interest rates start to rise."
