20 April 2012
By Ben Wattam, Investment Manager
Italy and Spain remain problematicItalian and Spanish debt yields have risen again this week following Italian debt auctions on Wednesday of €8 billion of one-year bonds and €5 billion of various maturities on Thursday. The one-year rate rose to 2.84%, up from 1.4% in last month’s auction and the three-year rate rose to 3.89% compared with 2.76% last month. The ten-year yield on Spanish debt is 5.8%, nearly 1% higher than at the start of March. The good news for Spain is that it has now issued half of its €86 billion of issuances for 2012. The bad news is that Deutsche Bank estimates that Spanish banks have already used the €54 billion of loans provided by the European Central Bank in December and February on buying Spanish government bonds. Italian banks have roughly €61 billion of headroom to support new Italian bond issuances. Markets (outside of Spain) remain fairly sanguine for now regarding the Spanish situation but it might not take too much negative news for more downward pressure.
China’s growth is still goodFirst quarter growth for 2012 came in at 1.8%, moving the year-on-year figure down to 8.1% from 8.9% at the end of 2011. Should we be worried? No. Quite simply, China’s economy grew by $1,714 billion in the first quarter which is the same as saying that they built another Spain ($1,407 billion) in three months. Although the press have pointed out that this is the lowest growth in three years, this is exactly what Premier Wen and his government are looking for: lower, sustainable growth. Chinese officials have targeted 7.5% growth in order to avoid the threat of high inflation and an overheated economy. The focus is now on internal consumption as a key driver of growth, moving away from government investment. However, the Chinese consumer is now changing. Thriftiness is a habit for China's older generation, many of whom grew up in poverty and turbulence. The younger generation will be different. Compared with their parents, China's children have grown up in an atmosphere of stability and affluence. The other statistic released overnight, which was largely ignored, was the 15.1% rise in retail sales over the past year. This highlights the continuing growth of Chinese consumerism. As the US consumer was so important in the 20th Century, the Chinese consumer will be in the 21st. China’s export industry is now contributing a much smaller proportion of GDP than before. A micro example of this is the Apple iPad which has a factory value $250 when shipped from China; the input costs from China are only 2%, as shown in the below pie-chart. The difference is largely down to the value added. China does not add much value. The Chinese manufacturer for Apple is Foxconn (the 3rd largest non-State employer in the world), which has a 1.5% profit margin compared with Apple’s 30% margin. The creation of a high-tech processor made in Taiwan or South Korea that can be sold at a mark-up does allow for higher margins, as does the design and marketing of a must-have gadget, which is still mainly dominated by the US.
US – unemployment solved?Even though the weekly unemployment claims jumped last week to the highest point since January, the US is dealing well with the massive unemployment it was facing since 2009. Back then, 6.63 million people claimed unemployment insurance and there were 667,000 new unemployed people every week at the peak. Although new claims rose last week, continuing claims are on a downward trend. The chart shows weekly claims on unemployment insurance in the US. Unemployment insurance claims are now nearing pre-crisis levels. The red line, measured against the left hand axis, shows new claims, and is therefore a measure of how many people have been made unemployed that week. The blue line, measured against the right hand axis, shows continuing claims, or the total number of unemployed people.
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