89 i chronicle


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Cover Story Higher stakes for Abenomics
Outlook Pound
Stats Interim Budget 2014-15
Emerging Country Morocco
In Focus What’s app at Facebook?

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89 i chronicle

  1. 1. Investeurs Chronicle February 2014, Volume: 89
  2. 2. Cover Story The Japanese economy grew at the tepid rate of 1 percent in the final quarter of 2013, falling short of analysts’ expectations and heightening concerns that the country’s recovery might not be strong enough to weather an impending sales tax increase, a worsening trade balance and other problems expected this year. Japan’s economy grew at a much slower pace than expected at the end of last year, posing a challenge to policymakers as massive government stimulus efforts showed few signs of sparking momentum in consumption and exports. The economy grew 0.3% in the fourth quarter, well below the median estimate for a 0.7% increase and followed 0.3% growth in July-September. Capital expenditure, a weak link in Japan's rebound so far, rose 1.3% in October-December. This marked the quickest growth in two years but was still less than the median forecast for a 1.9% gain. In the fourth quarter private consumption, which makes up about 60% of the economy, grew 0.5% from the third quarter. That was less that the median estimate for 0.7% in October-December, suggesting that a spurt in demand ahead of the sales tax hike is not as strong as anticipated. The data showing disappointing private consumption, business investment and shipments came as the Bank of Japan met to review its ultra-easy policy, with markets widely expecting the central bank to hold firm to the current pace of bond-buying stimulus. However, pressure is likely to mount on the BOJ and the government to do more in coming months, especially if a planned sales tax hike in April proves more damaging to growth than expected. The government will increase the sales tax in April to 8% from 5%, and consumers have been buying cars, homes and durable goods before the tax increase. Economists still expect that growth will accelerate in the current quarter as shoppers buy more goods before the tax hike, but any further disappointments could increase the need for further fiscal and monetary stimulus. Achilles’s Heel What's actually worrying is sluggish exports despite long-expected impact of a weak yen on boosting external demand. Export growth has remained sluggish over recent quarters, partly reflecting softer demand in Asian markets though some of it also underlined the shift by Japanese companies of their manufacturing plants to offshore centres. The weak external sector is a worry for Japan especially as the initial burst of momentum created by Prime Minister Shinzo Abe's unprecedented monetary and fiscal expansionary policies start to fade. External demand subtracted 0.5%age point from growth, versus the median estimate for a 0.4%age point subtraction. The negative contribution is due partly to Japan's expanding domestic demand, which is boosting imports. This in turn called into question one of the main planks of Mr Abe's economic plan, the devaluation of the yen. A shutdown of the country’s nuclear power plants and the higher cost of extra imported energy due to a weak yen partly explain the worsening trade deficit. It rose to ¥2.79 trillion in January ($22.4 billion), the highest level since records began, and our third bit of gloomy news. The Japanese are buying more foreign gadgets in preference to domestic electronics, which is part of the story. According to the Nikkei newspaper, the economy ministry calculates that the success of foreign smartphones has worsened Japan’s trade balance by as much as ¥2.3 trillion or a fifth of the overall trade deficit in 2013. Apple’s iPhones made up nearly 70% of all smartphone sales in the fourth quarter of 2013. Higher stakes for Abenomics
  3. 3. Cover Story Then there is the phenomenon of “hollowing out”, whereby local firms set up facilities overseas. Japanese firms have moved to “offshore” production to cheaper locations; to be closer to overseas customers; and to escape the pressure of a yen that used to be costly. They had stood by loyally for years before following the example set by American and European companies, but now the trend is in full swing. With production costs measured in other currencies, the yen’s devaluation has not been able to boost export volumes direct from Japan in the way it used to. After decades of lacklustre growth, during which time China overtook Japan as the world's second-biggest economy, Abe swept to power in December 2012 with a bold plan to end deflation and strengthen economic reforms. Stock markets rose by over 50 percent last year in response to Mr. Abe’s first so-called arrow — aggressive monetary stimulus that has flooded the Japanese economy with money and helped weaken the yen. But while the weaker currency has brought record overseas earnings for Japanese exporters, it has yet to translate into significantly higher export volumes or a rebound in wages and investment at home. His policies, dubbed Abenomics, helped Japan's economy speed past many of its Group of seven counterparts in the first half of last year, but the latest data will raise doubts about Abe's strategy. Some companies have indicated they are willing to raise salaries during annual wage negotiations with labour unions held in the spring, which is an important barometer of whether Abe's economic policies are working. Still, some economists worry wage gains will not be strong enough to support consumer spending after the tax hike takes effect. For the time being, investors are shrugging off the bad news. That is mainly because a second round of monetary easing by the Bank of Japan (BOJ) is expected soon, and the disappointing news about the fourth quarter’s GDP should, if anything, bring it forward. This week the BOJ said it would double and extend its loan-support programme for banks, which the governor, Haruhiko Kuroda, said would increase the “ripple” effects of its monetary easing. The effect is likely to be limited, but markets took the announcement as a sign that the BOJ is ready and waiting to do far more.BOJ Governor Haruhiko Kuroda has dismissed the need for additional monetary easing as consumer prices are headed toward its 2% inflation target and as overseas economies recover. Yet with exports weak, the economy will rely heavily on the engine of domestic consumer demand, which is vulnerable to the coming consumption-tax hike. The structural-reform part of Mr Abe’s agenda, which should help spur growth in the longer term, is unlikely to take large steps forward before the summer. The government has now turned its attention to Mr Abe’s national-security agenda, while the economy sits back on the burners.
  4. 4. GBP has been a noteworthy exception to USD strength during H2 13, rallying close to 10% against the USD. The GBP has had a strong start to the year, trading to a new multi-year high in mid-January. Technically, the upward trend is strong but sentiment is mixed. The GBP/USD eased after a disappointed CBI Industrial Trends Orders print. The pound is trading at 1.6650 (as on Feb 20, 2014). It has been buoyant since the BoE raised its forecast last week for economic growth this year to 3.4 per cent from 2.8 per cent. The bank also said in its inflation report that market pricing that assumed a rate hike in the second quarter of next year was consistent with keeping inflation on target. On the other hand, U.S. economic growth forecast is down to 1.0% from 1.5-2.0% due to negative impacts from the bad weather, which may still dampen the U.S. economic data. The rebound may not be visible until Q2 and investors may consider buying currencies with strong fundamentals such as GBP. GBP/ USD may test higher to 1.6878-1.7042. Stats Outlook-Pound Gloss Protectionism Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition. Typical methods of protectionism are import tariffs, quotas, subsidies or tax cuts to local businesses and direct state intervention.
  5. 5. Emerging Country- Morocco Morocco, officially the Kingdom of Morocco, is a country in the Maghreb region of North Africa. It is one of only three nations (along with Spain and France) to have both Atlantic and Mediterranean coastlines. Geographically, Morocco is characterized by rugged mountainous interior and large portions of desert. Morocco's economy is considered a relatively liberal economy governed by the law of supply and demand. Economic growth is far more diversified, with new service and industrial poles, like Casablanca and Tangier, developing. The services sector made up of mining, construction and manufacturing is an additional quarter. The sectors who recorded the highest growth are the tourism, telecoms and textile sectors. Morocco, however, still depends to an inordinate degree on agriculture. The Moroccan economy grew at 4.4 percent in 2013, a rebound from 2.7 percent in 2012, which was also caused by a poor harvest. Despite the development in other sectors, agriculture remains a key employer in this nation of 34 million and the economy remains at the mercy of the rains. Morocco expects its gross domestic product growth to slow to 2.5 percent in 2014 the High Planning Commission said. Morocco's trade deficit narrowed by 2.8 percent last year compared with 2012 as the economic slowdown reduced demand for imports. The 2013 deficit came to 196.38 billion Moroccan dirhams ($23.80 billion). Imports fell 2 percent from a year earlier, with energy imports down 4 percent and wheat imports dropping by 31.7 percent as the national harvest hit record levels. Morocco has become one of Africa’s top business destinations, FDI accounted for 9.2% of Morocco’s gross fixed capital formation in 2012, up from 8.2% in the previous year. Separate figures published by Morocco's Ministry of Industry, Trade and New Technologies indicate that of the Dh32bn (US$3.8bn) of FDI that the kingdom attracted in 2012, 26% went to the industrial sector. Manufacturing has continued to increase sharply this year; in June the industrial sector alone attracted 59% of incoming FDI, compared with 14% for the construction sector and 2% for tourism. The balance of trade has been in favour of Morocco because of imports of phosphoric acid and rock phosphate by India. The quantum of bilateral trade, which was US$ 1.63 billion in 2010, reached US$ 2.04 billion in 2011 (including India’s exports to Morocco at US$ 587.2 million and India’s imports from Morocco at US$1.45 billion). The trade turnover between the two countries stood at US$1.61 billion in 2012 (including India’s exports to Morocco at US$ 517.7 million and imports at US$1,101.6 million); the slight decline in trade vis-a-vis 2011 could be attributed to the global economic meltdown. Main items of export to India are metallic ores and metal scrap, semi-finished products and inorganic chemicals. The main items of India’s exports to Morocco are cotton yarn, synthetic fiber, transport equipment, pharmaceuticals, agricultural implements, chemicals, spices and manufactured metals. The balance of trade has been in favour of Morocco because of imports of phosphoric acid and rock phosphate by India. Vital Economic Statistics of Morocco Economy Particulars Details GDP (nominal) $107.1 billion (2013 estimate) GDP growth rate 4.4% (2013) Currency Moroccan Dirham (MAD) Credit Rating BBB+ (S&P) BBB-(Fitch) Ba1 (Moody’s) Fiscal Surplus 7.6 % of GDP (2012) Current account deficit 6.5% of GDP (2014)
  6. 6. In FocusForex Whats app at Facebook? On the face of it, Facebook’s $19 billion acquisition of WhatsApp has all the ingredients that have market mavens crying “bubble”. With no hard assets and no visible revenue model, the instant messaging service defies valuation by any conventional metrics. Nor does WhatsApp boast of a business model that is difficult to replicate. It owes its phenomenal popularity mainly to two things — the service comes practically free and works seamlessly across borders and smartphones, whether i-Phones, Blackberrys and Android-based devices. Facebook’s interest in WhatsApp’s numbers lies almost wholly in its user base, which stands at 450 million and is growing rapidly. At $19 billion, Facebook is paying a modest $42 per user to add WhatsApp to its fold. Facebook itself sports a market value of about $180 billion for 1.2 billion users; a price tag of about $150 per user. No doubt purists will argue that paying hard cash (or stock) for footfalls or eyeballs is the kind of foolishness that led to the dotcom bust of 2000. But this is the only metric on which the success of any social media company rests today. Facebook, Twitter, Instagram all operate on just one premise; if you manage to capture a good portion of the world population as your audience, it will be only a matter of time before revenues pour in either by subscription or by bagging a large slice of the $550 billion global advertising market. One, the social media is a fickle space and yesterday’s fad could be passé today. Although it has a user base of over a billion, Facebook — which went in for an IPO in 2012 — is aware of the slowing pace at which it is gathering new subscribers, thanks to interest in other platforms such as Twitter. WhatsApp, in contrast, has been wildly popular with a rapidly expanding user base among the under-30s. This large audience in Europe and emerging markets such as India also gives Facebook a readymade footprint in these under-penetrated markets. Two, while Facebook is unlikely to pepper messages with ads to ‘monetise’ WhatsApp, it probably recognises the commercial potential in mining data about WhatsApp users. Overall, it is not Facebook, but technology firms in other businesses which need to worry about this deal and the social site’s growing clout. Twitter and Google, apart from a host of other internet ventures, compete with Facebook for a share of the global advertising market that’s not growing very fast. And telecom and technology firms, which are dependent on charging fairly steep rates to connect people, may have a lot to worry about too. Data from 10th February 2014 to 22nd February 2014 Sensex Nifty 20,334 .27 20,700 .75 6053.4 5 6155.4 5 Gold (10 gm) Silver (1 Kg) 28960 29844 44670 47467 Crude Oil ($/barrel) Dollar/INR 107.96 109.85 62.19 62.16
  7. 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance Team Chronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor, Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com