Tuesday, 30 November 2004

Structural unemployment in developed economies

The Singapore government recognises that structural unemployment is inevitable in a developed economy.

On 16 November, Manpower Minister Ng Eng Hen told Parliament: "No developed economy in the world has managed to solve fully its structurally unemployed and that is a fact. We will do our very best to mitigate the problem, to reduce it to manageable numbers."

Which makes it somewhat surprising to me that, according to The Straits Times today, he is saying in the ministry's latest annual report that Singapore will not be handing out unemployment benefits to the out-of-work. "We don't want a system where people expect some sort of benefit as long as they are unemployed. I think that creates a wrong mindset," he was reported to be saying.

If structural unemployment is inevitable, placing such a heavy burden on the unemployed to find jobs appears rather harsh to me. While the ministry promises to help with training and job matching, there is a limit to what these can accomplish.

Developed economies are so because the jobs in such economies tend to be specialised. Specialisation allows higher levels of skill and economies of scale. However, it also increases the problem of matching such specialised skills with available jobs. And unlike developing economies with agriculture dominating, an unemployed worker in a developed economy is unlikely to be able to go back to his family's farm to find work -- his family is unlikely to own a farm.

Like many high-return situations, the job market in a developed economy is also a high-risk one. People are more likely to venture into risky but potentially lucrative activities like esoteric specialisations and entrepreneurship when the government mitigates the consequences of failure. Unemployment benefits serve exactly that purpose.

Monday, 29 November 2004

Central banks reduce US debt holding

According to a Reuters story, the Federal Reserve reported on Friday that foreign central banks have been selling US Treasuries but buying agency debt. Overall holdings of Treasury and agency debt kept for overseas central banks declined by US$1.947 billion to US$1.319 trillion in the week ended 24 November. This breaks down to a net sale of $6.336 billion in Treasuries -- bringing their holdings down to $1.061 trillion -- and a net purchase of $4.389 billion in agency securities.

The overall decline in foreign central bank holding of US debt confirms the fears of many analysts that the former are retreating from US financial assets, which will put downward pressure on the US dollar.

While the weakening US dollar largely takes place in the foreign exchange market, there are implications for stocks. I discuss the outlook for stocks in the context of a slowing world economy and a falling US currency in "Slowing world economy poses risk to stocks".

Saturday, 27 November 2004

Singapore and Hong Kong slow, Indonesia accelerates

Singapore's manufacturing output continued to moderate last month, according to a press release from the Economic Development Board yesterday.

Monthly Manufacturing Performance - October 2004
Total manufacturing output increased by 2.4% in October compared to October 2003. The growth achieved by the transport engineering, electronics and chemicals clusters was moderated by the contraction in the biomedical manufacturing cluster. Excluding the biomedical manufacturing cluster, the October growth rate was 9.1%. The three-month moving average growth for total manufacturing was 6.4% while the seasonally adjusted month-on-month growth was 5.1%. Cumulatively, total manufacturing output grew by 13.0% in the first ten months this year compared to output in the same period last year.

Hong Kong is also seeing a slowdown, with GDP rising a seasonally-adjusted 1.9 percent in the third quarter from the previous quarter, after rising 2.6 percent in the second quarter. From a year earlier, third quarter GDP was up 7.2 percent, down from 12.1 percent growth in the second quarter.

In Indonesia, the economy accelerated in the third quarter to achieve 5.03 percent growth from a year earlier, faster than the second quarter growth of 4.54 percent.

Overall, there is nothing in the figures to suggest a looming disaster for these economies, although the continued weakness in the US dollar and the resilience of oil prices bear watching.

Friday, 26 November 2004

SembCorp loses Solitaire appeal

I had written in August (see "Solitaire still haunts SembCorp") that Singapore-listed SembCorp was haunted by an old, disputed contract from Allseas Marine Contractors SA to convert the Swiss company's bulk carrier Solitaire into a pipe-laying vessel. When SembCorp allegedly failed to finish the job on time, Allseas sued. A UK court ruled subsequently ruled against SembCorp, which duly appealed.

SembCorp has now announced that it has lost its appeal over the case.

SembCorp loses appeal over disputed ship conversion contract
SembCorp Industries Ltd says the High Court of England has dismissed its appeal against a ruling on a disputed ship conversion contract... "Accordingly, the Board of Directors of (SembCorp) has decided to make an additional provision of S$200 million," it said... SembCorp said its final exposure "will depend on the outcome of further hearings on other claims made by both parties in the arbitration, and the final quantum may differ from the current estimate."

$200 million translates to about 10 cents a share. This threatens to erase most of this year's earnings.

The stock closed yesterday at $1.48. This translates to a price to 2004 earnings ratio of about 12, assuming that the earnings are not adjusted for the provision. This ratio appears quite reasonable, being slightly below the market's P/E ratio of about 14, which suggests that probably the problem associated with this contract is already at least partially discounted in the price.

Thursday, 25 November 2004

US economy not likely to see significant acceleration

Durable goods orders in the US were down in October.

Durable Goods Orders Slip Unexpectedly
Orders for long-lasting U.S.-made goods unexpectedly slipped 0.4 percent last month as demand for computers, cars and civilian aircraft slumped, a government report showed on Wednesday. The Commerce Department said orders for durable goods -- big-ticket items like cars and refrigerators meant to last at least three years -- would have been much weaker in October were it not for strong military demand. Non-defense durable goods orders dropped 1.5 percent, the sixth decline in the last seven months, and orders excluding transportation fell 0.7 percent, the department said.

Economists polled by Reuters had expected durable goods orders to rise by 0.5 percent, with non-transportation orders up 0.2 percent and orders excluding defense up 0.3 percent. While the report was weaker than expected, upward revisions to September's figure helped temper the picture. Durable goods orders in September were up 0.9 percent, compared to the 0.2 percent gain reported previously.

The federal depreciation bonus that expires at the end of the year and that had been expected to boost business spending does not seem to be having the expected kick. Hopefully, US consumers will pick up the slack.

UMich Finds Consumer Sentiment Up a Bit
U.S. consumer sentiment brightened slightly in November, helped by cheaper gasoline and a better jobs outlook, a survey released on Wednesday showed. The University of Michigan's final reading of its consumer confidence index for November was 92.8, up from a final October reading of 91.7...

Whether they actually have enough cash to spend, however, is another question.

ACNielsen Finds U.S. Consumers Short on Cash As Important Holiday Selling Period Begins
Many U.S. consumers say they are strapped for cash this holiday season, a development that could point to a moderate holiday selling period, according to a new study from ACNielsen, a leading provider of consumer and marketplace information. In fact, of the 28 markets around the world surveyed by ACNielsen, the U.S. had the highest percentage of consumers (28%) who say they have no extra money to spend. Among U.S. consumers who do have spare cash, their first priority for that money is debt repayment...

The upshot of all these pieces of news is that I am leaning further toward the idea that the US economy is more likely to decelerate than see a significant acceleration going forward.

Wednesday, 24 November 2004

Asian central bank accumulation of US dollars

Barry Ritholtz at The Big Picture has an interesting excerpt from The Wall Street Journal on the sell-off in the US dollar.

What was especially fascinating to me was the graph showing the accumulation of US dollars by Asian central banks over the past four quarters. From the graph, it seems that the Singapore central bank -- namely the Monetary Authority of Singapore (MAS) -- is the only one that has been making a substantial effort at getting rid of the US currency. Considering the current forex climate, that makes it the smartest central bank among the four shown (the other countries were China, Taiwan and South Korea).

The MAS had started its tightening in April. In the Singapore context, that means allowing the Singapore dollar to appreciate. It now looks like a prescient move.

Tuesday, 23 November 2004

Singapore and Hong Kong report minimal inflation

Inflation does not appear to be a problem in Singapore and Hong Kong.

Singapore inflation levels out in Oct
Singapore's consumer prices levelled out in October after two months or rises, broadly in line with market expectations, as an easing in a ban on Malaysian poultry knocked down food prices, data showed on Tuesday.

The flat consumer price index for October from September compared with expectations for a 0.1 percent fall, after seasonal adjustment, and marked a break from a trend of higher prices flowing from food costs and record high crude oil prices...

The annual inflation rate through October was 1.9 percent -- at the higher end of the 1.5-2 percent forecast range of the Monetary Authority of Singapore (MAS) for 2004, and exactly in line with a median forecast of a Reuters poll.

Hong Kong Oct composite CPI up 0.2 pct yr-on-yr vs 0.7 pct rise in Sept
The composite consumer price index (CPI) in October rose 0.2 pct year-on-year, but slowed from a 0.7 pct year-on-year increase in September, the government said. A government spokesman said the year-on-year increase in the composite CPI for October was slower than the September rise due to the diminishing effect of the low base of comparison brought about by the property rental rates concession in the third quarter of 2003

With the world economy already showing signs of slowing and Asian currencies under pressure to appreciate, it is conceivable that we have seen the worst of inflation in Singapore and Hong Kong in the current economic cycle.

Update on November 24: According to the Department of Statistics, the Singapore CPI in Oct 2004 fell marginally by 0.1 percent over Sep 2004.

Monday, 22 November 2004

Efficient Market Theory at The Big Picture

Barry Ritholtz at The Big Picture looks at the Efficient Market Theory. In particular, I think the following excerpt has particular relevance for the revamp of the investment philosophy for retirement programmes like the Social Security and Singapore’s Central Provident Fund.

EMH proponents suggest most participants would be better off owning index funds -- something I agree with for many time constrained or uninterested investors. By definition, if someone is outperforming, then someone else is under-performing. The odds favor that its more likely to be a small private investor (not that institutional players don't stink up the joint). Over time, money flees professionals who consistently under-perform. The same ruthless Darwinian competition that drives pros out of business merely makes lousy individual investors poorer.

He also provided an excerpt from a WSJ article:

In a study of Sweden's efforts to privatize its retirement system, Mr. Thaler found that Swedish investors tended to pile into risky technology stocks and invested too heavily in domestic stocks. Investors had too many options, which limited their ability to make good decisions, Mr. Thaler concluded. He thinks U.S. reform, if it happens, should be less flexible. "If you give people 456 mutual funds to choose from, they're not going to make great choices," he says.

For all its limitations, the Efficient Market Theory is largely valid. Few people consistently beat the market. Unfortunately, in trying to do so, incompetent amateur investors will become the fodder from which more competent professionals make their money. Others who tend to trade on "noise" will rack up large brokerage costs that more than negate their trading profits.

The odds of beating the market are not high to begin with. For amateurs, it is even more of an uphill battle.

Saturday, 20 November 2004

End in sight for fall in US dollar?

Today, The Straits Times asks: How low can the US$ go? Most analysts think that a combination of higher US budget deficit and a worsening current account deficit will lead the currency lower. However, Simon Flint, senior currency strategist at Bank of America, sees "an end in sight".

"I think the US dollar will probably stop at US$1.35 per euro and at 100 yen, and not much further." The Straits Times describes his views as follows:

...Mr Flint believes the US dollar will bottom out by the end of the first quarter next year, or at most by the second quarter, once the strong macroeconomic fundamentals of the US economy lock in. He also expects that export-oriented Asian countries will be fighting hard to stop their own currencies from appreciating too much and thus hindering growth...

"Cyclically, the US economy is stronger than Japan's and Europe's," he said. Expect the tide to turn, then, once the low US dollar starts translating into lower exports for Asia and Europe, inflicting pain throughout these economies.

The idea that a stronger US economy leads to a stronger US currency really belongs to the 1990s. In "Analysts risk overestimating the value of the US dollar", I had pointed out that this idea is not always valid. Especially in an economy driven by consumption and deficit instead of investment and surplus, a stronger economy actually tends to put downward pressure on the currency.

Mindsets among some currency strategists appear slow to change, though.

If the US dollar does hit a bottom next year, I think it is more likely to be the result of a weaker US economy, not a stronger one. The latest press release from the Conference Board shows that the US leading indicator decreased 0.3 percent in October, the fifth consecutive decline. A weaker US economy is likely to lower exports to the US for Asia and Europe and that, as Flint also recognises, may be what is needed for the US dollar to turn the tide against it.

Friday, 19 November 2004

Falling US dollar causes concern among Asian exporters

Asian stocks were rocked by the weakening US dollar yesterday on concerns that exporters will see their revenues hit.

In The Straits Times today, Panasonic Refrigeration Devices, the world's second-largest maker of fridge compressors, was reported to be concerned by the fall in the value of the US currency as almost 80 percent of its sales are denominated in it. Its executive director, Raymond Ng, was reported to have said: "We certainly hope that the US dollar gets stronger."

Well, he can hope that the US dollar gets stronger, but he, and many other exporters, had better do something to prepare for the possibility that it gets weaker. The problem is that many businesses have been built around the assumption that the US dollar remains at around current levels or stronger, based on its recent historical value. Unfortunately, such assumptions may not hold.

And that is the problem with prolonged distortions in the value of assets, whether it be a currency or stocks. It causes businesses and investors to plan based on misleading information and unsustainable conditions, and can result in losses subsequently when those conditions change.

In other words, distortions in asset values induce wasteful activity. And that is why bubbles -- as well as undue pessimism -- are bad for the economy in the long run.

Thursday, 18 November 2004

Decelerating Singapore economy provides little upside potential for stocks

Singapore's Ministry of Trade and Industry has updated its estimate for the economy's third quarter growth to 7.5 percent year-on-year. On an annualised quarter-on-quarter basis, the economy declined 3 percent in the third quarter.

Manufacturing was hard hit, slowing down from 20.7 percent year-on-year growth in the second quarter to 11.5 percent in the third. The other badly-hit sector was construction, which contracted a further 10.9 percent year-on-year in the third quarter after a 5.9 percent contraction the previous quarter.

More recent data show no sign of an acceleration in the economy.

International Enterprise Singapore reported that non-oil domestic exports (NODX) increased by a mild 1.0 percent in October 2004 on a month-on-month seasonally adjusted basis, after a 1.4 percent decline in September 2004. On a year-on-year basis, NODX grew 11.9 percent in October.

Non-oil retained imports of intermediate goods (NORI), a short term leading indicator of overall manufacturing activities in the months ahead, posted a 4.2 per cent rise on a month-on-month seasonally-adjusted basis in October, partially reversing its 7.2 percent decline in September.

With the economy now clearly decelerating, most analysts do not see much upside potential for the Singapore stock market. For example, in a recent report, Macquarie Securities gave a target of 2,100 for the Straits Times Index for the next 12 months. That is not much higher than today's close of 2,032.62.

Inflation, China and the falling US dollar

James Picerno at the Capital Spectator asks: Is inflation still contained?.

[I]n light of yesterday's report on the producer price index, inflation looks notoriously uncontained. The PPI soared 1.7% in October... Adding insult to injury, this morning's consumer price index...advanced by a robust 0.6% last month, up from 0.2% in September. On an annual basis, CPI is rising at 3.2% through October, the second-highest year-over-year rate in about three years.

Inflation, it seems, is not only something less than contained, it's escaped and running.

The yield on the 10-year Treasury is significant in the last 24 hours for its lethargy... Gold, by comparison...is now priced at its highest since 1988.

The dollar too has reacted by dropping like a rock, thereby supporting gold's climb... The currency's weakness is all the more poignant in light of news yesterday from the U.S. Treasury that foreign central bank purchases of Treasuries dipped sharply in September to $10.1 billion from $19.1 billion the month previous... [G]iven the PPI data, not to mention the fact that Fed funds is still negative in real (inflation-adjusted) terms and thus inflationary raises anew the question of how long foreigners will continue financing the federal budget deficit by snapping up Treasuries like there's no tomorrow?

...The answer is necessarily unclear, in large part because central banks are...pursuing a trade that is almost surely a losing proposition. Indeed, the central banks of Japan, China, and elsewhere in Asia are inclined to buy Treasuries for reasons of a) keeping their domestic export machines humming and b) ensuring that their already heft Treasury holdings don't lose large amounts of value in the wake of letting the dollar find a truly free-market price...

A post at Brad DeLong's blog titled "The Chinese Credit Market" points to a related reason for China's persistent US dollar-buying: It is trying to inflate away its debt problems.

Wednesday, 17 November 2004

Brad DeLong on the US dollar

Brad DeLong weighs in on the US dollar's decline.

[W]hen I repeated [Treasury deputy secretary John] Taylor's claim that the recent growth of the trade deficit was due to foreigners' eagerness to invest in the United States (rather than a decline in national savings) at the Berkeley Economics Department Tea, the reaction was general laughter--for Taylor's claim is false... [T]he Greenspan-Mann scenarios [of gradual decline in the US dollar] require (i) continued foreign central bank purchases of dollars on a huge scale as the dollar (gradually) declines, and (ii) that private foreign exchange traders continue to fail to make large bets that the dollar will decline. We need both of those to happen to repeat what took place between the Plaza and the Louvre Accords in the mid-1980s. If we don't have both of those over the next several years, the times will be very interesting indeed on the foreign exchange market...

Between 1995 and 2000 the trade deficit grew because investment rose as a share of GDP. Between 2000 and 2003 investment shrank, but the trade deficit did not fall. Instead, the trade deficit grew in spite of falling investment, in spite of rising private savings, because of the Bush budget deficit.

And true to what I discussed in my article yesterday, the fall in the US dollar is mirroring a parallel increase in the inflation rate. Yesterday, the Labor Department reported that producer prices rose 1.7 percent in October, the biggest gain in nearly 15 years. While energy prices was obviously a major factor, rising 6.8 percent, even core prices -- excluding food and energy -- was up 0.3 percent.

Tuesday, 16 November 2004

Euro near all-time high as US reiterates "strong dollar"

The US dollar continues to support the "strong dollar", Treasury Secretary John Snow told reporters in Dublin yesterday. So what is he doing about it, other than talking about it?

Nothing. Not just because there is not much he can do about it, but because he probably doesn't really support a strong dollar. With the US suffering large and growing trade deficits and having difficulty creating jobs, a strong dollar is not necessarily in the best interests of the US economy.

Last week, the euro rose to an all-time high of US$1.30. It is still hovering around that level. If the US dollar is strong, the euro must be Herculean.

I look at some of the factors surrounding the US dollar's recent decline -- in particular, the trade deficit -- in "US dollar affected by both trade deficit and inflation".

Sunday, 14 November 2004

Why a bargain is not always a good deal

In the Invest section of The Sunday Times today, four investors were featured on their investing habits. The fourth investor caught my eye because the habit of his that was highlighted had more to do with saving than investing but is nevertheless an important element in wealth-building.

Described as a one-time impulsive buyer, he has since learnt to rein in this habit. As he describes it:

[W]e bought things because we thought they were cheap and not because we needed them. Take a $100 item selling at 70 per cent discount. I now think: Does this save me $70, or am I just spending an additional $30?

One of the traps that many people fall into is in thinking that the market price of an item reflects its value. In actual fact, the market price only reflects the value of that item to the marginal buyer. It does not reflect the value of that item to all potential buyers unless the latter can resell it at negligible cost.

Unfortunately, many people get fixated on the so-called discount and get tempted to buy an item when an advertised discount is apparently large. The discount, as a result, has become a tool used by sellers to give buyers a misleading reference point to value the item. It is a tool that can be further misused when the so-called "normal price" from which the discount is calculated is actually not normally transacted at to begin with.

Still, some people are incorrigible bargain-hunters. The thrill of getting a good bargain provides them with psychological benefits. But as the investor featured in The Sunday Times points out, it is a benefit that comes with risks to one's wealth.

Buy enough bargains and you may go broke.

Friday, 12 November 2004

Japanese economy disappoints

Japan's economy did not fare as well as expected in the July-September quarter.

Japan Economy Up 0.1 Pct. in New Quarter
Japan's economy expanded a weaker-than-expected 0.1 percent in the July-September quarter, as exports that had driven growth in the past quarters barely rose, the government said Friday.

The Cabinet Office said Japan's gross domestic product - or the value of goods and services produced in a nation - grew at an annualized rate of 0.3 percent in the three months ended Sept. 30, from the previous quarter. That marked six straight quarters of growth...

[E]xports grew 0.4 percent, as a demand for autos and machinery failed to grow... Consumer spending went up 0.9 percent... The unemployment rate fell to 4.6 percent in September...

Yesterday, the Cabinet Office had reported that core private-sector machinery orders fell 8.4 percent in the latest quarter from the previous quarter, reflecting a lack of capital spending. The good news from today's report, I guess, is that consumer spending, up 0.9 percent, was relatively robust.

Thursday, 11 November 2004

US and S Korean interest rates move in opposite directions

What a contrast in interest rate direction.

Fed raises key rate quarter point to 2.0 percent
US Federal Reserve policymakers, heartened by a burst in new jobs in October, raised key short-term interest rates Wednesday for the fourth time in a row. The key federal funds target rate, which commercial banks charge each other overnight, rose to 2.0 percent from 1.75 percent, by unanimous vote of the Federal Open Market Committee (FOMC).

South Korea lowers key interest rate to 3.25 percent.
South Korea's central bank, in a surprise move, cuts its key interest rate for November by 0.25 percentage points to 3.25 percent in a bid to boost a sluggish economy.

Of course, it's a reflection of how US demand is still perceived as strong while South Korean demand is not. The question is whether US demand will remain as strong as we head into 2005.

Straits Times Index hits 4-year high

The Straits Times Index (STI) closed at 2,022.99 yesterday, a four-year high.

At this level, I think that the Singapore stock market is near the top of its fair-value range. One and a half years into the current bull market, I think that is a reasonable level for it to be in. I expect the rally to continue for a little while longer, bringing the market into slight overvaluation territory, before the bull run ends.

In my opinion, the Singapore market is in a sideways trend for the longer-term. It has to adjust to the fact that Singapore is transforming from a high-growth economy to a mature, lower-growth one. This means that even as corporate earnings rise, P/E multiple contraction will keep prices from rising substantially. Fresh all-time record highs for the STI are unlikely in this sort of environment.

Wednesday, 10 November 2004

China's industrial output slows in October

China's economy continues to show signs of a slight slowdown, with industrial output growth in October slowing to 15.7 percent year-on-year compared to a 16.1 percent gain in September. That still leaves output for the 10 months to October up 16.9 percent compared to the prior year.

"Output of major energy, raw materials, some machinery, home appliances and electronic products is growing fast but car output is falling," the NBS said in a statement.

Citigroup analyst Huang Yiping was quoted as saying that the overall decrease compared to September was not "very significant" but a further "moderation" was expected in coming months as the government likely ratchets up macro-economic controls.

Economists and investors will obviously want to see continued but gradual slowing. Any other outcome would not be welcomed by most.

Tuesday, 9 November 2004

Investment outlook after the US elections

The stock market rallied last week after President George W Bush gained re-election. However, Citigroup Asset Management's Anthony Muh prefers to look at long-term economic fundamentals. Excerpt from The Edge Singapore:

Stock markets in Asia as well as across the world reacted positively last week to news that US President George W Bush had been re-elected for a second term in office. But for managing director and regional head of investments at Citigroup Asset Management Anthony Muh, who the US president happens to be matters less than what he's going to do. "It's the long-term economic and corporate fundamentals that are important," Muh told The Edge Singapore... [W]hile Bush has often been portrayed as being more pro-market than kerry on trade issues, policy realities under either candidate would probably have been much the same...

The big deal for professional money managers with an eye on regional stock market indices right now is the slowing pace of growth in the US, and the dangers posed by its heavily leveraged public and private sectors. "Corporate earnings look good now, but they are forecast to dip across the world," says Muh. "Global earnings in aggregate have grown between 21% and 24%. Next year, it is forecast to fall to about 12%. But I suspect that number might be revised down further. So, there is a possibility that we will be down to single-digit earnings growth."

That's not to say that we are headed for a global recession, Muh adds... However, there isn't much to buffer the impact of further economic shocks going forward... [T]he US also has a private sector that is pretty much tapped out. "The US is no longer facing a twin deficit, it actually has a triple deficit," says Muh. "Household debt in the US has been increasing over the past decade. And, when you are highly geared and interest rates are going up...you also run the risk of rising servicing costs curtailing your spending..."

"It's very clear that given the triple deficit in the US, something has got to give," says Muh. "The US dollar has quite rightly been weakening... I think it's fair to say that Asian currencies have an upward bias across the board against the US dollar... Stronger currencies, and the belief that it is going to happen, will lead to a lot of capital flow into these countries..."

Against this backdrop, Muh says that Citigroup Asset Management's funds are overweight in Australia, New Zealand and Singapore, which offer a balance of attractive valuations and moderately positive earnings momentum. And, while South Korea has very poor earnings momentum, its valuations are too attractive to ignore...

I agree with Muh that President Bush's re-election is less significant than many analysts and investors think, and that the world economy is headed for a slowdown. I am not so sure, though, about his country picks.

The Australian and New Zealand markets have benefited from the commodity boom of the past few years; many analysts think that commodities are headed for a correction, and that may not be good for these markets. The Singapore economy has recently given indications of a slowdown in its important manufacturing sector, suggesting that its recovery may have peaked.

Having said that, longer-term investors may be willing to ride out the potential slowdown if valuations are attractive enough, as implied by Muh.

For more on my take on President Bush's re-election and the prospects for the world and, in particular, the Singapore economy, see "Bush's election victory cannot blow dark clouds away".

Monday, 8 November 2004

India's manufacturing challenge

Bloomberg columnist William Pesek Jr. thinks that India's push into manufacturing is risky. Excerpt from his article:

India's Push to Manufacturing a Risk
As India struggles to raise the 35 percent of its 1 billion people living on less than $1 a day out of poverty, manufacturing seems a perfect place to create jobs. Such jobs require less education than information- technology ones, and the government is mobilizing resources to create them -- many clustered in the western city of Pune...

Yet the concern is that India is overestimating the job- creating potential of manufacturing. Its bad infrastructure, slow pace of foreign direct investment, low national savings and China's daunting head start are major impediments. Manufacturing industries that complement information-technology are one thing. A national manufacturing push that dilutes efforts to build on India's success in software would be a mistake...

In today's intensely competitive world, manufacturing success is all about high productivity. It's an intrinsically laborsaving endeavor; services, meanwhile, remain labor-intensive, especially in the case of the knowledge-based activities driving growth in India's most vibrant service companies.

Squeezing high productivity out of a laborsaving operation requires huge scale, something that's working for China. Given India's deficiencies in infrastructure and foreign direct investment, achieving that kind of scale is a huge challenge. Labor-intensive services, by contrast, need less scale to create large numbers of jobs.

While Pesek's concerns are valid, India probably has little choice but to put more emphasis into manufacturing. To raise the standard of living, India must export more to wealthy nations with purchasing power. But there is a limit to how much exportable services India can produce and the rest of the world can absorb. Manufacturing provides an alternative export outlet.

Friday, 5 November 2004

More bad news for Singapore manufacturing

Singapore's manufacturing sector is definitely decelerating.

The Singapore Institute of Purchasing and Materials Management's index of manufacturing activity dropped 1.7 points to 51.5 in October. This is the lowest reading in 14 months. The new export orders index fell 4.4 points to 50.6, while the production index fell 4.8 points to 49.1.

And to add to the manufacturing gloom, there was further confirmation of the semiconductor slowdown over the past two days when the Semiconductor Industry Association (SEMI) and IDC both lowered forecasts for semiconductor sales next year. SEMI forecasted global chip sales to be US$214 billion next year, unchanged from this year, compared with an earlier projection of 4 percent growth. IDC expects sales to fall 2 percent to US$205 billion next year, compared with an earlier forecast of 7.5 percent growth.

Thursday, 4 November 2004

US factory orders down, but services and jobs improve

New orders at factories in the United States fell 0.4 percent in September, mainly due to a large fall in orders for transportation equipment, according to the Commerce Department. Excluding transportation, factory orders rose 0.3 percent.

The number of new orders in August was revised down to a 0.3 percent decline from the originally-reported 0.1 percent dip.

In services, things are looking better, with the Institute for Supply Management's index rising to 59.8 in October from September's 56.7.

Over on the employment front, job-cut announcements by US companies fell 5.6 percent in October, according to outplacement firm Challenger, Gray and Christmas. At 101,840, however, the number of jobs cut has exceeded 100,000 for the second consecutive month.

The overall picture appears to be one of continued but uneven growth in the US.

Wednesday, 3 November 2004

WSTS cuts 2005 chip sales growth forecast

The World Semiconductor Trade Statistics (WSTS) has cut its growth forecast for the semiconductor market to 1.2 percent in 2005, a sharp slowdown from this year's expected rate of 28.5 percent.

After all the reports of weaker-than-expected demand and inventory accumulation by semiconductor companies, this isn't too surprising. Even Taiwan Semiconductor Manufacturing and United Microelectronics Corp, the world's largest contract chip makers -- which had reported good quarterly profits and record sales in the past few months -- have recently projected weak outlooks, while third-ranked Chartered Semiconductor now looks likely to make a loss in the fourth quarter.

The semiconductor cycle appears very much to have turned.

Tuesday, 2 November 2004

Singapore's unemployment rate falls to 3.4 percent

Yesterday, the Singapore Ministry of Manpower released its report on the employment situation in the third quarter of 2004. Excerpt follows:

Recovery in the job market strengthened in the third quarter 2004, supported by the robust economic growth in the first half of this year. Preliminary estimates show that employment increased by 16,600, the strongest quarterly gain in three and half years. This brings the total number of persons employed to 2,176,400 as at September 2004, up 41,200 from the start of the year.

Employment in the goods-producing industries expanded by 7,200. This came on the back of accelerated gains of 8,800 in manufacturing employment... The services-producing industries added 9,400 workers...

Retrenchment has eased further. Preliminary findings... show that 1,700 workers were retrenched in the third quarter of 2004, a reduction of 17% from the previous period.

Preliminary estimates show that the seasonally adjusted overall unemployment rate fell to 3.4% in September 2004 from 4.5% three months back.

The large fall in the unemployment rate was unexpected. A poll by The Straits Times had seen economists forecasting the unemployment rate to fall to 4.3 percent.

In fact, though, employment had expanded at a healthy rate over the past few quarters, and the unemployment rate had been kept high because of the rising number of job-seekers. However, whether the improvement in unemployment can be sustained is another question.

The results of a survey by the Economic Development Board on business expectations of the manufacturing sector for the fourth quarter of 2004 was also released yesterday. Excerpt follows:

A net weighted balance of 12 per cent of the firms foresee a favorable business situation ahead. This is, however, weaker than the net weighted balance of 24 per cent recorded a quarter ago...

A net weighted balance of 15 per cent of the electronics manufacturers expect business to improve in the six months ahead... In terms of employment outlook, a net weighted 2 per cent of the electronics manufacturers plan to hire more workers in the fourth quarter compared to the third quarter of 2004.

A majority of the firms in the chemicals cluster continue to expect a good business environment.. Most of the chemicals firms also anticipate little change in employment in the fourth quarter of 2004.

The biomedical manufacturing cluster anticipates a favorable business environment in the six months ahead... [E]mployment outlook for the biomedical cluster is expected to remain largely similar to a quarter ago.

The precision engineering cluster expects demand to soften in the next six months ending March 2005... A net weighted balance of 11 per cent of the precision engineering firms expect employment to fall in the fourth quarter of 2004.

A majority of the transport engineering firms foresee robust business conditions to continue in the next 6 months ending March 2005... [T]ransport engineering firms plan to hire more workers in the fourth quarter of 2004.

A weighted 76 per cent of the manufacturers plan to invest in plant and machinery in the next twelve months (October 2004 - September 2005) compared to the past twelve months...

In other words, the survey projects continued but slowing expansion. This is similar to the findings from the survey by the US-based Institute for Supply Management (ISM). Excerpt follows:

ISM's PMI registered 56.8 percent in October, a decrease of 1.7 percentage points when compared to 58.5 percent in September. ISM's New Orders Index rose 0.2 percentage point from 58.1 percent in September to 58.3 percent in October. ISM's Production Index decreased 2.7 percentage points from 61.6 percent in September to 58.9 percent in October. The ISM Employment Index is at 54.8 percent for October, a decrease of 3.3 percentage points when compared to the 58.1 percent reported in September.

Next up is Singapore's PMI figures to be released later today.

Monday, 1 November 2004

China raises interest rates

China raised interest rates on 28 October, somewhat to the surprise of many economists. Morgan Stanley’s chief economist Stephen Roach was one person who had previously recommended precisely such a course of action to cool the Chinese economy. In a commentary on 29 October, he wrote:

The interest rate hike announced by China’s central bank on 28 October is an important development for China and the rest of the world. It gives me confidence that Chinese policy strategy is now more balanced and, therefore, on the right course to cool off an overheated economy. That’s good news for the China soft-landing case. The global economy will not be without pressure, though. While somewhat lower commodity prices could provide a temporary windfall of purchasing power, any such impetus is likely to be swamped by the far more powerful impact of China’s trade linkages. In my view, a China slowdown does not appear to be a growth-friendly event for China, the rest of Asia, and the broader global economy.

A slowdown in the Chinese economy has been expected for a long time. Indeed, most -- like Roach -- would have hoped for a significant but mild slowdown to come sooner to avoid a more calamitous one later. However, the administrative measures that had been put in place by the Chinese authorities to slow the economy had obviously not been enough, as seen in the third quarter's growth (see my earlier post).

So while in the near term, the interest rate hike in China will be a damper on the world economy, it is a necessary evil and should be welcomed by investors who are more focused on the longer term. It's just unfortunate that it is likely to occur at about the same time that demand from the US also flags.