5/11/15: Euromoney on Irish Sovereign Risk Ratings

Euromoney Country Risk scores for Ireland have been improving significantly in recent months, while some ratings agencies' view of sovereign risks here remain lagging. Euromoney takes a look at the matter here: http://www.euromoney.com/Article/3503504/Category/14091/ChannelPage/8959/Country-risk-Why-Moodys-is-wrong-on-Ireland.html?LS=Twitter

4/11/15: About Those Corporate Earnings Surprises...

With earnings reporting season on, here is a very interesting and bold insight into what is happening in the markets: http://www.bloomberg.com/news/articles/2015-11-02/socgen-slams-the-corporate-cheating-season.

The gist of it is that "...investors can credit the robust equity market returns in October to "the charade that is quarterly company reporting."" In other words, Soc Gen analysts show that "corporate executives are able to lower the bar for what constitutes success since August 2008" so that "analyst upgrades relative to downgrades rise during periods in which many companies report earnings."

In simple terms, markets optimism is overhyped by artificial under-hyping at the estimates point in order to trigger positive surprise. And this comes on foot of massive equity buy-outs (often using debt) and other shenanigans. EMH, anyone?..

Which brings us to a perfect summary of the 'glass 1/10th full' the markets run on:

You can't make it up...

4/11/15: Irish Services & Manufacturing PMIs: October

Irish manufacturing and services PMIs have been released by Markit, covering October.

On Manufacturing PMI side, there has been some improvement in growth conditions in the manufacturing sector, with faster growth in new business, offset by softer production growth. IrishManufacturing PMI posted a reading of 53.6 in October, down marginally on 53.8 in September. Per Markit: “Business conditions have now strengthened in each of the past 29 months. The rate of expansion in manufacturing production continued to ease in October, the third successive month in which a slowdown has been recorded. The latest rise was the weakest since February 2014, but higher sales, in a number of cases from export markets, supported continued output growth.” In other words, MNCs activity is once again the suspect key driver for continued growth in the sector, not that Markit would say so outright.

On a 3mo average basis, 3mo average for the period through October stood at 56.1 - a hefty rise on the 3mo average through July 2015 that registered 53.7 and almost in line with 56.5 3mo average through October 2014. Over the last 6 months through October, the index average was down 1.5 points on the 6mo average through April 2015.

Meanwhile, on Services PMI side, October marked another month of rapid growth, although the rate of growth eased somewhat from dizzying highs of September. October Services PMI stood at a hefty 60.1, down on jaw-breaking 62.4 reading in September 2015. On a 3mo average basis, 3mo average through October 2015 was 62.7, up on 3mo average through July 2015 (61.5) and above the 3mo average through October 2014 (61.2).

Per Markit: “Although [October reading] signalled the weakest expansion in activity since February 2014, the rate of growth remained elevated as higher new business continued to lead to rising output.
Business sentiment remained strongly positive, with panellists predicting that new orders would continue to increase over the coming year, leading to further growth of activity. Improvements in wider economic conditions were also mentioned by those panellists forecasting higher output. That said, sentiment dipped to the weakest since August 2014. The rate of growth in new business eased further in October and was the weakest since March.”

As chart above shows, both services and manufacturing sectors continue to perform well ahead of historical comparatives, but on-trend in terms of growth balancing between two sectors. “Excess’ growth in Manufacturing, evident in October 2013 and 2014 data has eased, while accompanying moderation in growth in Services was somewhat weaker. Again, all indications are - exporting sectors are driving growth, dominated by MNCs, though domestic internal demand is also supporting expansion.

4/11/15: BRIC Manufacturing PMI: October Blues

BRIC Manufacturing PMIs by Markit for October were out earlier this week, so here is the summary of latest changes:

Russia:
Russian manufacturing PMI posted a reasonably significant improvement, rising from 49.1 in September to 50.2 in October, and marking the first month since November 2014 of above 50 readings. That said, the indicator is statistically indistinguishable from 50.0 and the level of activity uplift is weak. Per Markit release, “new orders placed with manufacturing companies in Russia grew for the second successive month in October. The rate of expansion was the sharpest since November 2014, despite being modest overall. The increase in new business was driven by stronger demand from the domestic market, however, as new export orders declined. …Workforce numbers at Russian manufacturers contracted in October. However, the latest reduction in headcounts was the weakest for seven months. The sharpest drop in employee numbers was registered by consumer goods producers, according to sector data.” On a 3mo average basis, 3mo average through October stood at 49.1, somewhat better than 48.2 3mo average through July 2015, but still below 50.6 reading in 3mo through October 2014. Overall, Manufacturing reading for Russia confirms weak stabilisation in growth trend with PMIs rising for the second consecutive month. At this stage, it is too early to call recovery based on these readings, but a positive sign is that Manufacturing sector is no longer a negative factor in determining growth in the economy. 

India:
Indian Manufacturing PMI posted weaker reading in October, falling to 50.7 from 51.2 in September. This is the weakest reading in the index since December 2013 (when it stood at 50.7 as well). On a 3mo average basis, 3mo average through October stood at 51.4, weaker than 52.2 3mo average through July 2015, and marginally below 51.7 reading in 3mo through October 2014. Per Markit release: “the latest PMI dataset highlighted weaker growth of both output and new orders. Encouragingly, companies added to their worforces for the first time since January and continued to increase buying levels. …the PMI has recorded above the crucial 50.0 threshold in each month since November 2013. Output growth eased in October on the back of a slower increase in new orders.” In summary, Indian manufacturing sector has avoided contraction in activity, but growth conditions have again deteriorated - with index declining for the third month in a row.

China:
Chinese manufacturing PMI came in at 48.3 in October, up from 47.2 in September, but still below 50.0. This means that Chinese manufacturing has now been in a contraction territory for the 8th consecutive month. 3mo average through October stood at 47.6, weaker than 48.8 3mo average through July 2015, and below 50.3 reading in 3mo through October 2014. Per Markit: “Total new business declined only modestly, helped in part by a renewed increases in new export orders. This in turn contributed to softer contractions of output and employment in October. Operating conditions have now worsened in each of the past eight months, though the latest deterioration was the weakest since June.”

Brazil:
Brazil manufacturing sector shrunk at a record breaking pace, posting October PMI at 44.1 down from an already abysmal 47.0 in September. This marks the lowest reading in PMI for 79 months running and ninth consecutive month of sub-50 readings. 3mo average through October is now standing at 45.6, which is down from the extremely poor 46.5 3mo average through July 2015. Over 3mo through October 2014 the index was reading 49.5. Per Markit: “PMI data for October indicated that Brazil’s manufacturing recession worsened. Rates of contraction in both output and new orders accelerated to the fastest since the financial crisis, leading companies to cut jobs at the quickest pace in six-and-a-half years. Output fell for the ninth consecutive month, the longest sequence of continuous reduction since the global financial crisis. ...October saw the rate of contraction accelerate to the sharpest since March 2009.”

Overall:
BRIC Manufacturing sector performance posted very poor figures in October, following on already poor performance in 3Q 2015. This suggests that the global economic growth slowdown remains in place despite some firming up if data coming from Europe. Amongst BRIC economies, India remains the strongest performer, with Russia now close second. China is continuing to post weak data, while Brazil is in an outright deep sectoral recession.

1/11/15: Digital City Index: What's Up With Dublin?..

Digital City Index ranks European cities in terms of their ecosystem ability to sustain digital entrepreneurship.

Full data and rankings are accessible here: https://digitalcityindex.eu/downloads.

While one can be sceptical in looking at the data, there are several things jumping out when it comes to Dublin ranking.

1. Overall ranking for the city is 8th. Not too bad, but not too great either, especially given the hoopla usually accompanies our self promotion as the world's leading tech hub.
2. In Access to Capital terms, we rank 11th. Not great either.
3. In Business Environment - 17th - oh dear...
4. In Digital Infrastructure - 27th... no comment necessary
5. In Skills - 10th. Again, respectable, but surely not exactly world's most educated workforce thingy...
6. In Entrepreneurial Culture - third.  Which is great and suggests that it is not our enterprising that is poor, but the supports systems and institutions. Guess which bit is the remit of our policymakers?
7. In Knowledge Spillovers we ranked 14th. Recall all the talk about the alleged great benefit from the MNCs in terms of knowledge spillovers? Spot it anywhere in these figures?
8. Lifestyle - a proxy for quality of life, that is cost-adjusted... well 26th we are. Great place to attract top notch human capital to.
9. Dublin Market system is 9th ranked - respectable.
10. We rank excellent 3rd in terms of Mentoring & Managerial Assistance. 
11. We rank 21st in terms of Non-Digital Infrastructure. No comment here.

So, overall, let's cut the hype and start facing the music, shall we? We are - by some distance - not ranked as the best place to start digital business in Europe. No matter how many posters saying otherwise we plaster on the walls of Dublin Airport.

30/10/15: Why Economists Failed & What's Up With Irish Banking Reforms?..

Earlier this week I gave a small presentation to a group of academics and researchers from Holland on two topics:

1. Why majority of economists did not foresee the Global Financial Crisis? and
2. What is the state of play with Irish banking sector reforms?

Here are my slides from the talk:

30/10/15: 'Internet Natives': Power of Value Creation + Power of Value Destruction

A very interesting Credit Suisse survey of some 1,000 people of the tail end of the millennial generation (age 16-25) across the U.S., Brazil, Singapore and Switzerland. Some surprising insights.

Take a look at the following summary:

The results are seriously strange. Around 48% of all respondents use internet for payments transactions, but only 19% on average use it for obtaining financial advice. In other words, convenience drives transactions use, but not analytics demand.

Meanwhile, on average just 20% use internet for earning money or working. Which makes you wonder, what jobs (if any) do the respondents hold if only 1 in 5 use internet to execute it? And, furthermore, look at the percentages of respondents who use internet for job searches compared to earning money or working. Once again, something fishy.

Internet use for political and social engagement heavily exceeds personal relations. And this is true for all countries surveyed. Which simply does not bear any relationship to young generation voting participation in the real world, but does match their responses to whether or not they use internet for voting.


While responses across previous set of questions suggest that internet-based social (political / civic) engagements are more prevalent amongst the young respondents than personal engagements, there is the opposite view of internet as bearing personal benefits as opposed to social benefits.

This is especially true in the U.S. and Switzerland, where the gap between those who think internet is a positive personal platform as opposed to social platform is 12-13 percentage points.

Confusing? May be not. The ‘web naturals’ that we all are, we are simultaneously experiencing two aspect of internet-enabled life:

• Too much information and clutter; and
• Significant value to the power of engagement.

What this means to me is that social and interactive platforms have to stop inventing new channels to push through to us - information users - commercialised crap and start letting us take charge of content once again. To do this, the successful platforms of the future will need the following:
1) Own brand capital that is clean from being pure advertisement pushers;
2) More creative and empowering deployment of user-generated content; and
3) Ability to re-focus their business strategies on margin delivery.

Otherwise, they will end up cannibalising themselves and destroying our - users’ - value.

30/10/15: Eurocoin: Not so Sunny on the Growth Horizon...

Eurocoin - a leading growth indicator for Euro area economy published by CEPR and Banca d'Italia - posted second consecutive monthly decline in October, falling to 0.36 from 0.39 in September and down from the recent peak of 0.43 registered in August. This is the weakest reading for the indicator in 6 months.

For what it is worth, the ECB remains stuck in a proverbial monetary corner:

While in historical terms, growth signal of 0.36% (and annualised average over the last 12 months of 1.58%) is above long term average (annualised average growth over the last 15 years of 1.03% or over the last 5 years of 0.57%), growth remains anaemic by all possible comparatives beyond the Euro area.

You can see the less than pleasant specifics on eurocoin drivers for October here: http://eurocoin.cepr.org/index.php?q=node/243. In the nutshell, things are static across all major sectors, with households' optimism is largely flattening; and if we ignore the European Commission survey signals, things are poor for the industrial sector.

30/10/15: Repaired Irish Banking: Betting Your House on Corporate Deleveraging

I have not been tracking more recent changes in Irish banking sector aggregate balance sheets for quite some time now. However, preparing for a brief presentation on Irish banking crisis earlier this week, I had to update some of my charts on the topic. Here is some catching up on these.

Take a look at Central Bank’s data on credit and deposits in Irish banking system. These figures incorporate declines in both due to sales of loan books by Irish banks, so step-changes down on credit lines reflect primarily these considerations. As superficial as the numbers become (in this case, the aggregate numbers no longer fully reflect the true quantum of debt held against Irish households and companies), there are some positive trends in the figures.

1. Over the 3 months through August 2015 Irish households have reduced the level of outstanding debt by some 7.1% compared to the same 3mo period in 2014. Total level of household debt now stands at the average of December 2004-January 2005. This is a massive reduction in debt burden, achieved by a combination of repayments, defaults and sales of loans to non-banking entities (e.g. vulture funds). However, loans for house purchases have declined by a more moderate 4.5% over 3mo through August 2015 compared to the same period in 2014. This brings current pile of house mortgages outstanding to the average level of February-March 2005. Which is impressive, but, once again factoring in the fact that quite a bit of these reductions was down to defaults and sales of loans, the overall organic deleveraging has been much slower than the chart above indicates. Over the last 3 months (though August 2015), total volume of household debt declined, driven down by deleveraging in mortgages debt and ‘other debt’ against a modest increase in consumer credit. It is interesting to note that over the last 12 months (based on 3mo average), volume of ‘other loans’ has dropped by a massive 38%, suggesting that this category of credit is now also subject to superficial debt reductions, for example originating from insolvencies and bankruptcies. For the record, there are at least three highly questionable reductions in recorded household debt on record: November-December 2010 drop of EUR7.5 billion, September-October 2011 drop of EUR17.2 billion, and May-June 2014 decline of EUR4.1 billion. This suggests that the official accounts of household deleveraging may be overstating actual degree of deleveraging by upwards of EUR28 billion which could bring our debt levels back to September-October 2011 and signify little material reduction in total debt over recent years.
2. Over the 3 months through August 2015, loans outstanding to the Non-financial corporations in Ireland fell 19.4% compared to the same period average in 2014. Most of this decline was driven by the 19.5% drop in loans, with debt securities outstanding declining by only 5.7%. This marks 12th consecutive month of m/m declines in credit outstanding to the corporate sector. Current level of corporate credit brings us back to the levels last seen in 3Q 2003. Just as with households there are at least 3 episodes of significant declines in credit volumes since the start of the Global Financial Crisis, although the path for corporate loans has been more smooth overall than for household debt. This suggests that banks have prioritised resolving corporate arrears over household arrears, as consistent with 2011 PCAR strategy that also prioritised corporate loans problems. 

Total credit outstanding to the real economy (excluding Government and financial intermediaries) has fallen 12% y/y in the three months through August 2015. The official register now stands at EUR145.3 billion, a level comparable to the average for June-July 2004.The truly miraculous thing is that, given these levels of deleveraging, there is no indication of severe demand pressures or significant willingness to supply new credit.

As shown in the chart below, Irish banking sector overall has been enjoying steadily improving loans to deposits ratios.

Over the July-August, household loans to deposit ratios dropped to 99% - dipping below 100% for the first time since the Central Bank records began in January 2003. Loans to deposit ratio for non-financial corporates declined to 120% also the lowest on record. However, this indicator is of doubtful value to assessing the overall health of the financial sector in Ireland. To see this, consider the following two facts: household loans/deposit ratios have been below pre-crisis lows since October 2011, while corporate loans/deposits ratios have been below pre-crisis lows since July 2014. Reaching these objectives took some creative accounting (as noted above in relation to loan book sales), but reaching them also delivered practically no impetus for new credit creation. In other words, deleveraging to-date has had no apparent significant effect on banks willingness to lend or companies and households willingness to borrow.

By standards set in PCAR 2011, Irish banks have been largely ‘repaired’ some months ago. By standards set in PCAR 2011, Irish banks are yet to start their ‘participation in the economy’.

Meanwhile, take a look at the last chart:

As the above clearly shows, Irish banking system is nothing, but a glorified Credit Union, with credit outstanding ratio for household relative to corporates at a whooping 177%. This, again, highlights the simple fact that during this crisis, banks prioritised deleveraging of corporate debt and lagged in deleveraging household debt. Irish economic debt burden, thus, has shifted decisively against households.

Someone (you and me - aka, households) will have to pay for the loans write downs granted to companies over the years. And the banks are betting the house (our houses) on us being able to shoulder that burden. 

30/10/15: None of Them 'Harmful' Tax Inversions, Dupes...

Remember how in recent months, on foot of an uproar in the U.S. and across the EU, Irish Government has told us that there will be no ‘harmful’ corporate inversions? In other words, there will be no redomiciling of the U.S. companies into Ireland purely for tax purposes?

Well, the mother of all inversions is currently underway, and it is brand new. Behold, Allergan (Irish-based previously inverted U.S. company making Botox) is in talks with Pfizer (U.S.-based global pharma giant) on a merger that will lead to, well, in the words of BusinessInsider: “In this case it would have Pfizer moving its tax domicile - not necessarily its management headquarters - to Ireland, where Allergan is based.”

Read more on this here: http://uk.businessinsider.com/pfizer-allergan-tax-inversion-2015-10?r=US&IR=T

So about none of that business with ‘harmful’ inversions thus?..  staying all OECD-compliant...

28/10/15: Russian Economy Update: Consumption and Debt

Updating Russian stats: September consumption and deleveraging: bigger clouds, brighter silver lining. 

In basic terms, as reported by BOFIT, per Rosstat, Russian seasonally-adjusted retail sales (by volume) fell more than 10% y/y in September, with non-food sales driving the figure deeper into the red. On the ‘upside’, services sales to households fell less than overall retail sales. This accelerates the rate of decline in household consumption expenditure - over 1H 2015, expenditure fell just under 9% y/y. Small silver lining to this cloud is that household debt continued to decline as Russian households withdrew from the credit markets and focused on increased savings (most likely precautionary savings).

Russian households are not the only ones that are saving. Overall external debt of the Russian Federation fell, again, in 3Q 2015, with preliminary data from the Central Bank of Russia figures putting total foreign debt at USD522bn as of end-September, down just over USD30bn compared to 2Q 2015. Per official estimates, ca 50 percent of the overall reduction q/q in external debt came from repayment of credit due, while the other 50 percent was down to devaluation of the ruble (ca 20 percent of Russian external debt was issued in Rubles).

Overall, 3Q 2015 saw some USD40 billion of external debt maturing, which means that over 1/4 of that debt was rolled over by the non-bank corporations. Per CBR estimates, ca 40% of the external debt owed by the Russian non-bank corporations relates to intragroup loans - basically debt owed across subsidiaries of the same percent entity. And over recent quarters, this type of debt has been increasing as the proportion of total debt, most likely reflecting two sub-trends:
1) increasing refinancing of inter-group loans using intra-group funds; and
2) increasing conversion of intra-group investments/equity into intragroup debt (and/or some conversion of FDI equity into intra-group debt).

Over the next 12 months (from the start of 4Q 2015), Russian foreign debt maturity profile covers USD87 billion in maturing obligations against country currency reserves of USD370 billion-odd. As noted by BOFIT, “A common rule-of-thumb suggests that a country’s reserves need to be sufficient to cover at least 100% of its short-term foreign debt to avoid liquidity problems.” Russia’s current cover is closer to 430%. And that is absent further ruble devaluations.

A chart via BOFIT:

28/10/15: Flatter Growth Trend = Opportunities in Fundamentals

My outlook for investment markets - interview at IG Summit https://www.ig.com/uk/live-video?bctid=4581832859001&bclid=3671160850001.