FinancialExpat's Blog

The US Government may end up holding stakes in General Motors, Ford and Chrysler if Congress and the White House reach agreement on a financial bailout for the carmakers. Under the proposal, which is still under discussion, the Treasury would get warrants for stock equivalent to 20 percent of any government loans. With GM seeking as much as USD 10 billion and valued at USD 3 billion, the state may become the biggest shareholder.

The yen has risen against the euro as European stocks and US index futures have fallen, lifting the yen's appeal as a haven. The yen appreciated to 118.87 per euro in London. Against the dollar, the yen strengthened to 92.46 from 92.82. The Japanese currency may trade at 94 against the dollar in three months' time, Bank of New York Mellon Group commented. The euro slid to USD 1.2858 from USD1.2963.

The price of crude oil is little changed on the New York Exchange with demand falling from all the major oil importers. Crude oil for January delivery is USD 43.66 a barrel. OPEC meets next week and is expected to decide to make significant cuts in production. However, not all OPEC members are complying with quotas. Saudi Arabia, the world's largest crude exporter, is currently producing 107% of its OPEC quota but it is expected to trim its exports soon.

Gold fell in London as the dollar gained and oil declined, reducing the metal's appeal as an alternative investment and hedge against inflation. Gold for immediate delivery lost USD 3.70, or 0.5%, to USD 769 an ounce in London. February futures were little changed at USD 769.10 on the New York Exchange.

The Bank of Canada has lowered its benchmark interest rate by more than anticipated to a half-century low. Its rate setting panel reduced the rate from 2.25% to 1.5%. Canada's central bank commented in a statement, "The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required." Canada's decision comes a week before the US Federal Reserve's next meeting, followed by the Bank of Japan two days later.

Standard & Poor's has downgraded their credit rating for Russia, the world's largest energy producer. The agency cited the rapid depletion of foreign currency reserves as capital continues to flee the country. Its chief economist Roger Bootle says, "Russia will be hit hard by the collapse in oil prices. Both the fiscal and current accounts balance at around USD 65 a barrel." However, leading fund managers, such as Neptune's Robin Geffen, manager of the Neptune Russia & Greater Russia fund, have quite a different view from the economists. Geffen states, "This is definitely a buying opportunity. When one reads the State of the Nation delivered by Putin last week it becomes clear this is a centralised economy where the decision making is working. It is a system where individuals and companies are not leveraged." Geffen equates Standard & Poor's decision to lower Russia's credit rating with its failures to spot risks inherent in vehicles hit by the credit crunch. He also waves off fears over the depleting foreign exchange reserves saying, "Look at the big number. It is still well in excess of the external debt, people have become obsessed with the oil price unfairly."

Spotlight on Europe

One European country has bucked the trend of writedowns and government bailouts. It's Italy, whose banks have outperformed larger continental rivals over the last 18 months. Italian banks such as Intesa Sanpaolo and Unicredito Italiano have outpaced European heavy weight rivals such as Barclays and BNP Paribas primarily due to their extremely conservative business models. The Italian banks have stayed clear of securitised assets and subprime loans, forgoing profits that boosted rivals' balance sheets in the past, but also avoiding the huge losses that ensued later. Instead, they have remained focused on traditional retail operations and corporate lending, relying on customer deposits to fund day-to-day operations. While this conservatism and lack of global ambition were previously seen as major weaknesses, analysts now applaud Italian banks on their focus on traditional ways. Indeed, banks around the world are following suit and going back to basics.

German investor confidence unexpectedly rose in December even after its economy entered recession. The ZEW Centre for European Economic Research said its index of investor and analyst expectations increased to minus 45.2 from minus 53.5 in November. "We're probably already past the worst in investor sentiment even if that doesn't necessarily apply to the economy," said Rainer Guntermann, an economist at Dresdner Kleinwort.

Beneteau, the world's biggest sailboat maker, predicts a pause in profit growth this year as a result of economic uncertainty and sees signs of recovery in demand. "People were anxious about their bank accounts and about whether their bank would go bankrupt," said Chief Executive Officer Bruno Cathelinais. "Now, that period is over. Clients are once again signing up for boats. Demand is sustained."

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Investors with the UK's biggest bank are buying back into emerging market equities in the wake of the recent sell-off. HSBC said the sector now offered compelling opportunities to investors with a medium to long-term horizon, the stocks having come off their highs recently as the global economy comes under pressure. HSBC's Alex Tarver, global emerging market product specialist, said while short-term risk remained, the fundamentals were still solid for earnings in the BRIC regions. He argued that the recent sell-off across markets in Brazil, Russia, India and China had been overdone, and although he conceded earning estimates needed to come back a little, the price had already come back too far. He said, "Earnings are now strong and sustainable. They will have to fall back a bit but probably not as far as the price has come back. The regions have better prospects than developed markets." HSBC is focusing on the longer-term picture for the regions, noting that fundamentals, such as having large, young, populations, expanding labour forces, and high savings rates, would drive long-term growth. Tarver suggested either buying in now or drip-feeding money into the region, in order to gain or maintain exposure to the economies concerned.

Global financial stocks are likely to outperform industrials during 2009, Fidelity asset-allocator Trevor Greetham has predicted, but investors will face hard choices. Greetham, manager of Fidelity Multi-Asset Strategic fund, said that investors will have to contend with a "tug of war" between falling earnings and attractive valuations. He added that investors hoping for flat markets and the predictability of a downturn after the historical volatility of 2008 are likely to be disappointed, however. "Markets are likely to remain extremely volatile as investors weigh up bad news on the economy against an unprecedented array of central bank and government stimulus packages," said Greetham. He added, "Rather than trying to time moves into and out of stocks, investors looking for a lower risk profile would do best to diversify their exposure across a range of asset classes or invest in a balanced fund. Interest rate-sensitive sectors such as consumer cyclicals and defensive areas such as staples and healthcare will be the most attractive areas for equity investors. Financials are likely to outperform industrials."

The Swiss National Bank is becoming the first central bank in Europe to learn what it's like to live in a zero interest-rate world leaving it with little room for further cuts. On 20 November the bank reduced the short-term rate it uses to steer borrowing costs to 0.1%. SNB President Jean-Pierre Roth may instead have to find new tools, such as "quantitative easing", to restore the flow of credit through the economy and head off the risk of deflation. The unorthodox tool was last deployed by the Bank of Japan a number of years ago when policy makers kept their key rate at zero and flooded the banking system with cash to encourage lending.

The SNB's challenge may soon be shared by other central banks. The Bank of England's Governor openly discussed the possibility of zero interest rates for the first time on 25 November. The European Central Bank will cut is benchmark rate to 1.5% next year, according to a Bloomberg News survey, with Citigroup saying a move to zero is possible. The US government is already starting to use unorthodox methods. The US central bank on 25 November said it will purchase as much as USD 600 billion in debt issued or backed by government-chartered housing finance companies.

Thirty-year US Treasury bonds are returning the most since 1995 as investors bet the Federal Reserve will buy the securities to help bring down long-term borrowing costs. The so called long bond has returned 27.8% this year, including a 15.6% gain in November, Merril Lynch & Co index data show. Market commentators wonder how long the "bubble" will last as, despite the expense, investors are enticed to buy the debt for fear of missing out on even more gains.

Crude oil has fallen to its lowest level in more than three years as demand in the US has weakened more than expected. Oil for January delivery is down to USD 47.36 In New York, 68% down from its height last July. OPEC will reduce crude production when it meets in Algeria this month and they expect oil demand to drop further next year.

Spotlight on Latin America

Brazil may access USD 6.35 billion of its yet to be approved sovereign wealth fund to enable the state development bank (BNDES) to boost lending to local companies as external credit has become increasingly scarce. Brazil's government wishes to secure economic growth of 4% next year. President da Silva asked Congress in July to establish a wealth fund that would hold the equivalent of 0.5% of the gross domestic product in 2008. However, the bill, approved by Congress on 4 November still needs Senate approval.

Peru's economy grew 9.5% in the third quarter, the fastest pace in Latin America. Peru's National Statistics Institute says growth slowed only slightly after expanding by 9.9% in the first two quarters compared to the same period in 2007. The Institute said Peru's construction, mining and fishing industries largely withstood the downturn being experienced elsewhere. Peru's government expects growth to slow to 6% next year as deflated prices affect its mineral exports.

A report by Mexico's central bank shows that its economy will expand 0.38% in 2009. Economists raised their forecast inflation this year to 6.27% from 5.84% earlier. Speculators increased bets last week that the peso will decline against the US dollar as figures from the Commodity Futures Trading Commission show. The peso's slump over the past three months has encouraged Mexican workers abroad to send more money home in October, the dollar inflow rising 13% over October 2007.

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