Epsilon capital management’s first quarter european (emerging) economic round up


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Epsilon capital management’s first quarter european (emerging) economic round up

  1. 1. Epsilon Capital Management’s First Quarter Asia Pacific (Emerging) Economic Round Up
  2. 2. This is Epsilon Capital Management’s 2 Part Series on the Emerging Asia PacificEconomies for the first quarter of 2012.In the first part of our report we will look across the region as a whole and morespecifically at China and India.Emerging Asia Pacific: Economic Review 1st Quarter 2012Emerging Asia Pacific witnesses a modest rebound despite oil spike Emerging AsiaPacific economies, which reported dismal economic numbers during the fourthquarter of 2011, recovered some lost ground during the first quarter of 2012. Export-led growth in many Asian countries such as Taiwan, Malaysia, South Korea, andChina, which had come under pressure during the last months of 2011, witnessedslight improvements in 2012 thanks to receding fears about a sovereign debt crisis inthe European Union and a stronger-than-expected recovery in the U.S. China, theregion’s largest economy, however, signaled that it will accept a slightly lower growthrate of around 7.5% over the coming years. The Chinese economy grew at a pace ofnearly 10% for over two decades.
  3. 3. Inflationary pressures in the region also remained subdued in many of theseeconomies in the face of slowing growth. However, there were significant signs thatinflation could haunt emerging Asia Pacific economies sooner than later. A spike inoil prices during the first quarter of 2012 stirred inflation in many economiesalthough the pace of inflation was not as high as witnessed during mid-2011.Consequently, although many countries experienced relatively low inflation, somecentral banks in the region stubbornly refused to cut interest rates. Central banks inMalaysia, India, and South Korea held on to their current levels of interest rates overfears of igniting inflationary pressures. On the other hand, central banks inIndonesia, Thailand, and Philippines were more comfortable cutting interest rates tostimulate growth.
  4. 4. China: Monetary tightening takes a toll on outputChina started calendar year 2012 on a sober note. Economic growth in the world’ssecond largest economy came under pressure from a stringent monetary policy,weakened exports, and subdued housing markets. Consequently, China had aforgettable January and February in 2012, recording the weakest production gainfigures since 2009. During this period, the slowdown in the European Union, one ofChina’s largest export markets, hit many of the coastal factories that predominantlycater to overseas demand. As a result, Chinese exports slowed, forcing the country torecord a $31.5 billion trade deficit in February. The February trade deficit was the firstdeficit in the past 12 months and the largest monthly deficit since 1989.The slowing export industry also pulled down industrial production growth to 11.4%for the first two months. Other economic indicators such as retail sales growthslowed to 14.7% in February against an expected 17.6% growth estimated byeconomists surveyed by Bloomberg.
  5. 5. Nonetheless, Chinese rulers seemed to take the slowing growth instride. In early March, Chinese Premier Wen Jiabao pared thenation’s targeted annual growth rate to 7.5% from the 8% annualgrowth target set in 2005. In 2011, China’s annual GDP growth ratetouched 9.2% compared to 10.4% in 2010. China’s GDP growthrate slowed primarily due to a tight monetary policy that wasintroduced to combat stubbornly high inflation. China’s consumerprice inflation, which had climbed as high as 6.5% in July 2011slowed to an average of 5.4% for the whole year primarily due tomonetary tightening.But the monetary tightening had other effects as well. China’sconsumption-led growth became a victim to high interest rates.Sales of passenger cars, including both small cars and SUVs,declined 4.4% during the first two months of 2012. The industrialand manufacturing segment also witnessed a slowdown. Forinstance, the purchasing manager’s index (PMI) compiled byHSBC Holdings Plc, fell to 53.3 in March from 53.9 in February.
  6. 6. On the other hand inflation, which was subdued, also gained pacein March. Consumer price inflation in China jumped 3.6% duringthe month. Although inflation during March was quite belowChina’s targeted inflation of 4%, food price inflation at 7.5% hascaused concerns. Further, a sharp spike in oil prices earlier thisyear also forced Chinese authorities to keep a close watch oninflation numbers. Home prices in China, meanwhile, slipped downfrom their peak in 2010. Prices of new apartments fell in 45 of the70 cities surveyed by the government in February. The fall in homeprices come after a protracted battle from Chinese authorities toprevent a housing bubble in the country. Zhang Xiaoqiang, the vicechairman of National Development and Reform Commission, saidthat China’s first quarter GDP grew 8.4% citing preliminaryresearch figures.
  7. 7. India: Slowing investment and persistent inflation cloud outlookIndia’s GDP for the three months ended December 2011 grew at 6.1%, theslowest pace in nearly eight quarters. The slowdown in GDP comes amidst thebackdrop of high inflation, slowing investments, and faltering demand fromdeveloped markets. During this period, almost all legs of the economyencountered substantial challenges. While manufacturing output inched up just0.4%, mining and farm output declined substantially. A large fiscal deficit arisingfrom high social sector spending and a spike in oil prices has been troublingIndia over the past year. Private economists surveyed by Bloomberg estimatethat India’s fiscal deficit will touch 6.1% of GDP for the year ending March 2012.On the other hand, the pace of investment is slowing in Asia’s third largesteconomy. The investment-to-GDP ratio in the December quarter fell to 30% fromnearly 34% in the year-ago period. Gross fixed capital formation, which measuresinvestments in roads and factories, declined 1.2% in the December 2011 quarterfollowing a 4% fall in the previous quarter.
  8. 8. India’s central bank, meanwhile, is watching the inflation numbers in order totrim borrowing costs to boost growth. The central bank had raised interest ratesby nearly 375 basis points since March 2010 to combat inflation. During its policymeetings in 2012, the central bank refrained from cutting rates but chose toreduce the cash reserve ratio. India’s inflation, which trended down a bit in late2011 again showed signs of rising in February, during which month it jumped6.95%.In another note of weakness for India, the Purchasing Manager’s Index measuredby HSBC, has consistently fallen over the past three months. After falling to 56.6in February from 57.5 in January, the reading fell to a low of 54.7 in March. HSBCreported that the dip in the figures was largely due to domestic factors like highinput costs and supply side constraints like overcrowded ports and roads. Indiais currently facing a shortfall of nearly 114 million metric tons of coal required toproduce electricity and keep its factories running.
  9. 9. In our second part we will continue to look at the key remaining AsianEmerging Economies of South Korea, Indonesia, Thailand, The Philippines andTaiwan.Epsilon Capital Management is an independent investment advisory firmwhich focuses on global equities and options markets. Our analytical tools,screening techniques, rigorous research methods and committed staff providesolid information to help our clients make the best possible investmentdecisions. All views, comments, statements and opinions are of the authors.For more information go to www.epsiloncapitalmanagement .com