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APRIL 2012
RBC Wealth Management Global Insight
This Month’s Issue: China in Focus In this issue
Pay Attention to Policy 2 Global Overview
China is too big to ignore, yet not too opaque to figure 3 Financial Markets Commentary
out. Government rhetoric should provide a road map 5 Market Scorecard
for investors to evaluate the impact of the country’s
6 China Policy — Focus Article
economic slowdown. — see page 6
8 China & Commodities — Focus Article
Commodities: Waiting on the Dragon 11 Downshifting Economy — Focus Article
Commodity producers and distributors may have
15 Equities
underestimated Chinese government policies.
>> Global
Commodity prices could remain vulnerable until this >> Regional
period of “gearing down” is over. — see page 8
22 Fixed Income
>> Global
>> Regional
26 Commodities
27 Currencies
29 Key Forecasts
Priced as of March 30, 2012, unless otherwise stated.
Global Insight is a monthly publication by
the Global Portfolio Advisory Committee
1 GLOBAL INSIGHT - JULY 2011
Global Overview
RBC’s Investment Stance Global Asset Class View
We maintain our “Neutral” stance on global equities—that is, we recommend portfolios hold up to but no more than their Asset Class View Comment
benchmark, long-term allocation to stocks. The fragile nature of the global economic recovery and lingering Eurozone risks keep us
from shifting to an “Overweight” stance. Also, stock prices have yet to fully reflect the very substantial U.S. fiscal/political risks we
Equities = Invested, but vigilant
see coming to a head later this year. Fixed Income – Unchanged
In fixed income, we remain “Underweight,” but recognize there are attractive opportunities in investment-grade corporate bonds Cash + Maintain, but ready to allocate
and select regional subsectors. Despite our aversion toward safe-haven government bonds—they fail to adequately compensate
the holder for inflation—we doubt the recent rise in yields reflects a sea change in the interest rate environment.
S&P/TSX: 12,392 (-2.0%)
Equities: Neutral
Fixed Income: Underweight STOXX Europe 600: 263 (-0.4%)
10-yr Cdn: 2.11% (+12.4 bps) Equities: Underweight
Economy: Balanced, but unin- Fixed Income: Underweight Nikkei: 10,083 (+3.7%)
spiring growth 10-yr Bund: 1.79% (-2.4 bps) Equities: Overweight
Shanghai Comp: 2,262 (-6.8%) 10-yr JGB: 0.98% (+2.6 bps)
Economy: In recession, austerity
Equities: Neutral Economy: Poised for above trend
headwind blowing hard
10-yr Govt: 3.54% (-3.0 bps) growth in first half 2012
Economy: Soft landing likely, but
FTSE 100: 5,768 (-1.8%)
S&P 500: 1,408 (+3.1%) hasn’t stabilized yet
Equities: Neutral
Equities: Neutral Fixed Income: Underweight
Fixed Income: Underweight 10-yr Gilt: 2.20% (+5.5 bps)
10-yr Tsy: 2.21% (+23.8 bps) Economy: Weak and under pres- Hang Seng: 20,555 (-5.2%)
Sensex: 17,404 (-2.0%) 10-yr Govt: 1.28% (-4.7 bps)
Economy: 2% sub-par growth sure from the Eurozone 10-yr Govt: 8.54% (+34.3 bps) Straits Times: 3,010 (+0.5%) Economy: Slow growth, could
trend and still vulnerable
Economy: Economy slowing; 10-yr Govt: 1.65% (+17.9 bps) contract if exports weaken
liquidity squeeze harming Economy: Growth slowing
growth toward 3%, inflation coming
down
Bovespa: 64,510 (-2.0%)
9-yr Govt: 11.14% (-18.4 bps)
Economy: 3%+ growth positive,
but below potential S&P/ASX 200: 4,335 (+0.85%)
10-yr Govt: 3.98% (+1.0 bp)
Equity index returns and fixed income change
Economy: Headed for 3%+ growth,
in basis points (bps) are for March 2012 capex leading the way
2 GLOBAL INSIGHT | APRIL 2012
Financial Markets Commentary
>> Successful U.S. bank stress tests and Eurozone the continued correction in natural gas weighed
on its resource-heavy stock market.
stabilization helped boost equity markets.
Safe-haven government bonds sold off, At the same time, safe-haven government bonds
acknowledging conditions have changed. succumbed to a steep sell-off, and yields jumped
to their highest levels in more than four months.
>> Markets have yet to peer over the “massive Markets appeared to be acknowledging that
fiscal cliff” in front of the United States. After conditions have stabilized compared to the crisis-
the November elections, Congress may have ridden episodes of last fall when European banks
its hands full dealing with tax and spending appeared in danger of failing, the currency union
policies. If key provisions expire as planned, the unraveling, and the global economy slumping
U.S. and global economies could suffer. back into recession.
Back to Basics
Three years ago markets were staring into the
abyss due to the near collapse of the global This relative calm in Europe enabled markets to
financial system. Two large U.S. banks were on the take a break from the sovereign debt crisis and
verge of collapse and had to be rescued via forced refocus on the economic recovery.
merger and a massive injection of public money. U.S. growth is proceeding along at a sub-par rate,
Many others were in peril. Fast forward to today: a trend that could persist for some time (see page
equity markets are up significantly, and U.S. banks 11). China’s economy is transitioning to a slower,
have improved their balance sheets to such a more sustainable pace. It seems headed for a
degree they are now overcapitalized. soft landing but could be more drawn out and
Recently the Federal Reserve put major U.S. turbulent than commodity markets had hoped for
banks through extremely demanding stress tests (see pages 6 and 8).
to evaluate how they would fare during a severe Japan’s economy, by contrast, is growing at
domestic downturn assumed to feature an 8% an above-trend pace. This, combined with its
plunge in GDP growth, a surge in unemployment relatively cheap valuation and loose monetary
to 13%, a roughly 50% decline in the stock market, policies, are why we rate Japan’s equity market
and a further 21% decline in home prices. Among “Overweight” (see page 21).
the 19 large banks examined, most passed with Europe is contending with a mild (so far)
room to spare and received the Fed’s blessing to recession but could be vulnerable to a deeper
raise dividends substantially and initiate stock downturn because the sovereign debt crisis, while
buy-backs. off the front burner, is still simmering. Portugal
This all fueled a 7.3% rally in U.S. bank stocks in is largely shut out of the private debt market and
March and led many developed and emerging Spain’s fiscal pressures are mounting. If Portugal
equity markets higher for the month. Canada was and Spain were to deteriorate, the European
an exception as a pullback in precious metals and interbank lending market could be right back in
3 GLOBAL INSIGHT | APRIL 2012
Financial Markets Commentary
Potential U.S. GDP Impact of Expiring Fiscal Provisions the soup. Globally oriented U.S. banks may have or if the outgoing Congress’ solution lacks
($ bln) passed their stress tests but aren’t necessarily credibility, financial markets would likely express
immune to derivatives risks related to Spain. dissatisfaction at the very least.
Provisions 2013
What’s more, Europe will soon be facing elections Even if Congress manages to address the bulk of
Bush income tax rates expire; marginal rates rise -$102
in France and Greece, the Irish referendum, and these issues and only one-third of the provisions
Social Security tax rate jumps back to 6.2% -$120
parliamentary votes on the fiscal compact. Only 12 are implemented, the private sector would need to
Alternative Minimum Tax provisions -$125 of the 17 euro area countries need to approve the grow well above trend in 2013 to maintain overall
2011 spending cut legislation (debt ceiling deal) -$70 fiscal compact; however, in Northern Europe it is GDP growth of 2.0%—a formidable task.
Business tax provisions expire -$55 already facing fiercer opposition than anticipated.
Extended unemployment benefits expire -$45
Fuel tax credit expires -$6 The U.S. Fiscal Cliff
Estate and gift tax rates jump back up -$5 In our assessment, the most underappreciated risk RBC’s Investment Stance
Total -$528
for the global economy and stock market is the We maintain our “Neutral” stance on global
“massive fiscal cliff” in front of the United States. equities—that is, we recommend portfolios
Impact as a share of real GDP -3.80% Federal Reserve Chairman Ben Bernanke—not hold up to but no more than their benchmark,
one to engage in hyperbole—coined the “massive long-term allocation to stocks. The fragile
Source: RBC Capital Markets, Haver Analytics
fiscal cliff” phrase during his recent congressional nature of the global economic recovery and
testimony to describe the collection of automatic lingering Eurozone risks keep us from shifting
tax increases and spending cuts previously to an “Overweight” stance. Also, stock prices
Real U.S. Federal Spending by Quarter
enacted by lawmakers that are scheduled to come have yet to fully reflect the very substantial
(year-over-year % change)
into force January 1, 2013. U.S. fiscal/political risks we see coming to a
10%
RBC Capital Markets’ economists estimate these head later this year.
8% provisions would chop 3.8 percentage points In fixed income, we remain “Underweight,”
6% out of GDP growth in 2013 (see upper table). If but recognize there are attractive
implemented, they could conceivably take the opportunities in investment-grade corporate
4%
fragile economy right over the edge and into a bonds and select regional subsectors. Despite
2%
recession and have serious knock-on effects for our aversion toward safe-haven government
0% America’s key trading partners, including Canada, bonds—they fail to adequately compensate
-2% China, Japan, Korea, and Latin America. the holder for inflation—we doubt the recent
This stark recession risk may well prompt rise in yields reflects a sea change in the
-4%
2004 2005 2006 2007 2008 2009 2010 2011 2012 Congress to change at least some of these interest rate environment.
Source: Federal Reserve Economic Data, St. Louis Fed; data through Q4 2011 provisions before year end. But it could be a
contentious, last-minute exercise. Campaign
season dynamics could push some of these issues
into a “lame duck” session after the November
elections. If policy negotiations produce intense
gridlock similar to the 2011 debt ceiling debate
4 GLOBAL INSIGHT | APRIL 2012
Market Scorecard Index (local currency) Level 1 Month YTD 12 Month Commodities (USD) Price 1 Month YTD 12 Month S&P 500 1,408.47 3.1% 12.0% 6.2% Gold (spot $/oz) 1,668.35 -1.7% 6.7% 16.5% S&P/TSX Comp 12,392.18 -2.0% 3.7% -12.2% Silver (spot $/oz) 32.27 -6.9% 15.9% -14.3% FTSE 100 5,768.45 -1.8% 3.5% -2.4% Copper ($/ton) 8,474.50 -0.2% 11.7% -10.0% Hang Seng 20,555.58 -5.2% 11.5% -12.6% Uranium ($/lb) 51.00 -1.9% -1.4% -18.4% Dow (DJIA) 13,212.04 2.0% 8.1% 7.2% Oil (WTI spot/bbl) 103.02 -3.8% 4.2% -3.5% NASDAQ 3,091.57 4.2% 18.7% 11.2% Oil (Brent spot/bbl) 124.86 -0.3% 14.9% 5.5% Russell 2000 830.30 2.4% 12.1% -1.6% Natural Gas ($/mlnBtu) 1.98 -18.9% -33.6% -54.1% STOXX Europe 600 263.32 -0.4% 7.7% -4.6% Agriculture Index 444.17 -0.4% 2.3% -16.6% German DAX 6,946.83 1.3% 17.8% -1.3% Currencies Rate 1 Month YTD 12 Month Nikkei 225 10,083.56 3.7% 19.3% 3.4% US Dollar Index 79.00 0.3% -1.5% 4.1% Straits Times 3,010.46 0.5% 13.8% -3.1% CAD/USD 1.00 -0.9% 2.3% -2.8% Shanghai Comp 2,262.79 -6.8% 2.9% -22.7% USD/CAD 1.00 0.9% -2.2% 2.9% Sensex 17,404.20 -2.0% 12.6% -10.5% EUR/USD 1.33 0.1% 3.0% -5.7% Brazil Bovespa 64,510.97 -2.0% 13.7% -5.9% GBP/USD 1.60 0.6% 3.0% -0.1% Bond Yields 3/30/12 2/29/12 3/31/11 12 Mo Chg AUD/USD 1.03 -3.6% 1.3% 0.2% US 2-Yr Tsy 0.329% 0.293% 0.821% -0.49% USD/CHF 0.90 -0.2% -3.8% -1.8% US 10-Yr Tsy 2.209% 1.971% 3.470% -1.26% USD/JPY 82.87 2.1% 7.7% -0.3% Canada 2-Yr 1.197% 1.097% 1.831% -0.63% EUR/JPY 110.56 2.2% 10.9% -6.1% Canada 10-Yr 2.111% 1.987% 3.350% -1.24% EUR/GBP 0.83 -0.5% -0.1% -5.7% UK 2-Yr 0.419% 0.413% 1.356% -0.94% EUR/CHF 1.20 -0.1% -1.0% -7.5% UK 10-Yr 2.204% 2.149% 3.689% -1.49% USD/SGD 1.26 0.5% -3.0% -0.2% Germany 2-Yr 0.206% 0.191% 1.790% -1.58% USD/CNY 6.30 0.1% 0.1% -3.8% Germany 10-Yr 1.794% 1.818% 3.354% -1.56% USD/BRL 1.83 6.4% -2.1% 12.0% Source: Bloomberg, RBC Wealth Management; data through 3/30/12. Equity performance and bond yields in local currencies. U.S. Dollar Index measures USD vs. six major currencies. Currency rates reflect market convention (CAD/USD is the exception). Currency returns quoted in terms of the first currency in each pairing. Examples of how to interpret currency data: CAD/USD 1.00 means 1 Canadian dollar will buy 1 U.S. dollar. CAD/USD -2.8% return means the Canadian dollar has fallen 2.8% vs. the U.S. dollar during the past 12 months. USD/JPY 82.87 means 1 U.S. dollar will buy 82.87 yen. USD/JPY -0.3% return means the U.S. dollar has fallen 0.3% vs. the yen during the past 12 months. 5 GLOBAL INSIGHT | APRIL 2012
China in 2012: Pay Attention to Policy
>> Those hoping for a rapid reacceleration of 9.2% in 2011, and RBC Capital Markets forecasts
Chinese growth are likely to be disappointed. a decline to 8.4% in 2012. Consumer price
inflation peaked in July 2011 at 6.5%, primarily
>> Statements made at the National People’s due to high food prices, and has since fallen
Congress suggest policy easing will be deliberate to 3.2% in February. Housing prices appear to
and “prudent.” have peaked in August 2011 and have since been
>> Shifting priorities place an emphasis on “higher gradually moderating (although generalizations
are hard to make due to the hundreds of cities
quality,” more sustainable growth.
in China and the different levels of development
across regions). Growth in the Chinese export
Unsurprisingly, the phrase “to have one’s cake and
machine has also moderated as external demand,
eat it” does not translate literally into Chinese.
particularly from Europe, has weakened.
Instead, a common Chinese phrase is “鱼与熊掌
不可兼得,” which means “you cannot have a fish Recently, the Chinese government provided a
and a bear paw at the same time.” When it comes number of targets for 2012, via the Government
to the Chinese economy in recent years, it appears Work Report, which reviews progress in the
some investors have wanted both bear paws previous year and the outlook for the next year
and fish, first fretting the Chinese economy was and was issued to the National People’s Congress
overheating and then worrying it is slowing down in March, and via comments from Premier
too much. Wen Jiabao. Given the outsized influence of
the government in China, investors looking for
China garners so much attention
from investors globally because it
has become a major contributor Share of Nominal Global GDP Growth
to global GDP growth (see chart).
Investors now ask how long the 45% China
slowdown will last, to what level 40% European Union
GDP growth will fall, and what a 35% United States
China slowdown means for global Japan
30%
commodity demand. 25%
While there are a range of 20%
20.6%
possible outcomes to these 15%
15.3%
questions, the data thus far 10%
1.6%
continue to point to a gradual
8.1%
5%
Jay Roberts – Hong Kong, China slowdown in the economy. 0%
jay.roberts@rbc.com
Indeed, this has been the clearly 1980s 1990s 2000s 2010-2016
Yang Yufei – Hong Kong, China stated aim of government policy (forecast)
yufei.yang@rbc.com
for some time now. GDP growth Source: International Monetary Fund
moderated from 10.4% in 2010 to
6 GLOBAL INSIGHT | APRIL 2012
China in 2012: Pay Attention to Policy
answers as to what might unfold in the Chinese about 1.5% of GDP. However, investors have finished. In 2012, the target is to begin more
economy in 2012 should pay close attention. been much more concerned with local than seven million and finish a further five
government debt burdens, given they represent million. The overall target is to build 36 million
GDP: The target for growth in 2012 is 7.5%.
the majority of government expenditures. In units by the end of the current five-year plan
This is in line with the target average of 7%
2010, China audited local government debt period.
over the next five years that was laid down in
across the country for the first time—a total
China’s 12th five-year plan in 2011. However, RMB Exchange Rate: Since exchange rate
of RMB 10.7 trillion. In 2011, as the central
the Chinese economy has typically exceeded reform began in 2005, the renminbi has
government tightened policy, net new debt
target growth rates. Arguably, these targets may appreciated by around 30%. Since last
rose by only RMB 300 million. (This consisted
be seen as minimum acceptable growth targets September, the RMB non-deliverable forward
of RMB 2.1536 trillion of new debt and
for the country to achieve. At the same time, rate against the U.S. dollar has moved to either
RMB 2.1533 trillion of repaid debt.) Premier
government rhetoric is increasingly focused side of the spot rate. This implies the market
Wen Jiabao recently stated that much local
on the “quality” of growth. This may refer to has switched back and forth between expecting
government debt was backed by projects with
sustainable growth in real investment rather appreciation and depreciation of the currency.
cash flows, while “public projects” would be
than putting capital into projects of questionable The spot rate has been relatively stable. RBC
repaid by both central and local governments.
value just to boost growth numbers and often Capital Markets forecasts more renminbi
He summarized that, “in short, we will take
leading to industry overcapacity. appreciation, but not until the second half of
local government debt seriously and will not let
2012. Government rhetoric on this politically
Inflation: The target for 2012 is 4%. This is it interfere with China’s construction.”
sensitive subject remains nebulous, with
higher than the long-term target of 3%. Chinese
Property Market: Investors should expect promises to “keep improving the reform of the
inflation, however, will likely be a recurring issue
China’s restrictive housing market policies exchange rate.”
in the future. Inflation is imported via rising
to remain in place for some time. The While the rate of the slowdown is currently under
commodity prices, such as oil or imported food.
government has consistently used strongly control, a harder question to answer is how long it
Domestically, factor costs are rising, driven
worded statements to reiterate its restrictive will go on. Vice Premier Li Keqiang, who is widely
in particular by rapid income growth. The
stance on the property market. There are many expected to take over as China’s Premier when the
government has been raising minimum wages
policies currently in place aimed at reducing leadership changes hands later this year, notes the
across the country.
investment demand and speculation. There focus of the government’s economic policy should
Monetary Policy: The watchword is “prudent.” have been instances of a few local governments be on balancing three factors:
Money supply growth (M2) is targeted at 14%. attempting to ease policy restrictions, only to
The target for 2011 was 16%, but the actual have the central government immediately order 1. the speed of growth;
number came in at 13.6%. While robust, 14% is any such measures to be reversed. Premier Wen 2. the structure of the economy (referring to
the lowest target since 2002. Investors should Jiabao recently said property prices are still “far becoming less export dependent and more
also look for “directional loosening” of monetary from reasonable.” While the downturn in the focused on growing domestic consumption,
policy, which refers to targeted measures to private property market is clearly a negative primarily by means of more urbanization and
support key projects, the build-out of affordable for base metals and bulk commodities such encouraging the services industry); and
housing, and small-to medium-sized enterprises. as iron ore, these commodities should receive 3. inflation.
support from China’s ambitious plans to build Investors looking for clues as to the end of
Fiscal Policy: The central government has
more affordable public housing. Ten million China’s slowdown should pay close attention to
targeted a deficit of 800 billion renminbi (RMB),
units were started in 2011, and 4.3 million were government rhetoric on these subjects.
7 GLOBAL INSIGHT | APRIL 2012
China & Commodities:
Waiting on the Dragon
>> The Chinese economy has been gearing down to a pronounced slowdown in the growth of exports
a lower, more sustainable growth trajectory for stemming mostly from very weak demand from
more than a year. Europe, China’s biggest customer.
While the government has begun to ease
>> Prices of many commodities have been correcting
monetary policy, the moves so far have been
and consolidating as producers and investors far more deliberate and less forceful than
await signs China’s slowdown phase is over ... market observers had been expecting. Tough
>> … They may have longer to wait. housing regulations have not been eased, and
bearish commentators continue to point to
Investors have been watching China slow down excesses in capital investment. Fear of a more
since last summer. The main cause has been extended slowdown in China has become more
deliberate moves by policy-makers—high interest pronounced in recent weeks with China’s premier
rates, restrictive bank reserve requirements, and forecasting 7.5% economic growth for 2012,
tough second-home purchase regulations— the slowest pace since 2004. The government
designed to curb a difficult inflation problem and clearly regards a slower rate of GDP growth
rein in excessive increases in house prices. The as appropriate, a fact that may not yet have
slower GDP growth these policies have produced been fully absorbed by commodity producers,
over the past five quarters has been exacerbated by distributors, and investors.
Ghina GDP Growth Rate (quarter-over-quarter % change)
14.0
12.4 12.6
11.5 11.511.2 11.3 11.9
10.6 10.4 10.7 10.3
10.1
9.6 9.8 9.7 9.5
9.0 9.1 9.1 8.9
7.9
6.8
6.2
2006 2007 2008 2009 2010 2011
Source: National Bureau of Statistics, RBC Capital Markets
Mark Allen – Toronto, Canada
mark.allen@rbc.com
8 GLOBAL INSIGHT | APRIL 2012
China & Commodities: Waiting on the Dragon
For commodities, the impact of a slowdown in super-cycle we have witnessed over the past Base Metals
China should not be underestimated. China has decade. For most industrial materials, including China’s urbanization and industrialization process
been the driving force behind the commodities base metals, China now represents the single has meant construction on a massive scale.
largest consumer globally. Wiring all those buildings and stringing all those
Chinese Copper Demand vs. Rest of the World For energy and fertilizers, the power lines require a great deal of copper, and
global distribution of demand in 2011 China represented approximately 46%
1,200,000
China is more diverse; however,
Rest of World
of global copper consumption. In fact, Chinese
1,000,000 China’s influence on demand
copper consumption was even greater than
growth has been substantial.
that of the United States and Western Europe
800,000 A further slowdown of the
Metric Tonnes
combined, which accounted for only 27%. A
Chinese economy would
600,000 similar picture exists for other base metals. Nickel
likely usher in a more difficult
and zinc, for example, have been swept up by
period of correction for
400,000 China for the making of corrosion-resistant
many commodities. A more
steel. In 2011, China represented approximately
200,000 measured, but enduring
44% of global nickel consumption and 43% of
slowdown could also have
- global zinc consumption. Peering deeper into
serious implications for the
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 copper specifically, between 2001 and 2011 China
longer-term commodity bull
accounted for a whopping 97% of the global
Source: Bloomberg run.
increase in demand, offsetting declines in the
United States and flat growth in Europe.
China’s Share of Global Demand in 2011 Fixed-asset investment has driven about half
of China’s GDP growth over the last 10 years.
Oil Potash Copper
In China’s 12th five-year plan, infrastructure
investment has been given less of a focus.
China China China
11% 21%
However, the commitment to continued
46%
construction remains large, with the government’s
target of building 36 million housing units
between 2011 and 2015. Taking a step back to
look at fundamental demand, another 80 million
people in China are expected to move to cities by
Rest of Rest of Rest of 2015 and 200 million by 2022, thus supporting
World World World longer-term construction trends.
89% 79% 54%
All that said, at the recent National Peoples
Source: RBC Capital Markets (Oil & Potash); Bloomberg (Copper)
Congress, policy statements by the Premier
made it clear the government places a high
9 GLOBAL INSIGHT | APRIL 2012
China & Commodities: Waiting on the Dragon
priority on improving the debt issues faced by to 9.5 million barrels per day in 2011. To put this the protein of choice, was up by almost 60%. In
local governments. Observers have concluded in context, total worldwide demand growth over addition to this short-term squeeze, China’s per
this means capital projects already underway will this same period was 10.8 million barrels per day; capita food consumption has been rising steadily
receive support, but new ones will be subject to a thus, China drove approximately 37% of the total for some time in step with household incomes
more onerous permitting process. This suggests to consumption increase. and is forecast to go on doing so. These factors
us the outlook for fixed-asset investment is likely Meanwhile, domestic oil supply has seen are stimulating Chinese agriculture to take every
to be somewhat clouded, at least for this year. comparatively modest growth, expanding from available step to increase crop yields and overall
3.3 million barrels per day in 2001 to 4.1 million production.
Oil
barrels per day in 2010. As a result, Chinese
The tripling of China’s economy over the last Summary
imports surged, putting pressure on the global
decade and the proliferation of auto sales have China’s growth is being purposely moderated by
market and driving much higher clearing prices.
made China thirsty for oil. In 2004, China eclipsed the government, and the emphasis is shifting from
Japan as the world’s second-largest oil consumer Potash infrastructure spending to domestic consumption.
and by 2011 had reached 10.7% of global demand, China has played a crucial role in the growth While the last decade saw trend GDP growth
second only to the United States at 21%. Over of demand for potash. In 2011, the country of 10%-11%, the next decade could look closer
the last decade, China’s consumption has nearly accounted for approximately 21% of global to 7%-8% growth accompanied by diminishing
doubled from 4.9 million barrels per day in 2001 potash requirements. However, much as for oil, capital intensity. Commodity markets and prices
this number does not tell have been enduring an adjustment phase as the
the whole story: China is the country’s growth trajectory transitions to this
China’s Consumer Price Index largest driving force behind new, somewhat more subdued profile. We expect
global consumption growth. In commodities will be vulnerable to additional
25
Overall CPI
the decade leading up to 2011, consolidation/correction until this period of
Food CPI China contributed 34% to total “gearing down” is over.
20
global growth in potash use.
15 One of the principal goals of
YoY % Change
China’s economic policies
10 is “social stability.” Sharply
higher inflation in the first
5
half of 2011 was viewed as
a threat to that goal. When
0
overall inflation peaked at
6.5% last summer, food price
-5
inflation was running at a
2000 2002 2004 2006 2008 2010 2012
very unsettling 15%. Pork,
Source: China National Bureau of Statistics
10 GLOBAL INSIGHT | APRIL 2012Sizing Up a Downshifting Economy
>> The United States and other developed Post Crisis
economies are stuck in “slow gear” as they In theory, economic growth should be slower
struggle to repair the damage done in the after a financial crisis. Debt excesses need to
financial crisis and the Great Recession. be worked down until they are manageable
given the underlying level of income and assets.
>> Emerging new headwinds suggest slow growth Households should spend less and save more, and
may be the new normal. businesses should do the same. Banks deleverage.
Governments are usually preoccupied with bailing
Our material well-being is remarkably dependent out the rest of the economy first, but are ultimately
on a perpetually growing economy. The economic cowed by markets into austerity of their own.
machinery groans in protest against even the
This process has already begun. The U.S.
slightest bouts of stagnation or decline. Gears
household debt-to-income ratio has started to fall.
strip, chains break, fuses blow. Take the 2009
Banks continue to deleverage in the U.S., and now
recession. Never mind economic output per
in Europe. The International Monetary Fund (IMF)
American enjoyed its sixth-best year in history
estimates that adhering to tighter international
up until that point—the year was a disaster, plain
bank capital requirements alone could chop
and simple. Unemployment rates soared, financial
something like half a percentage point off the level
markets plummeted, and gloom prevailed and still
of developed world economic output.
haven’t fully recovered.
Right or wrong, economic
growth has become of central U.S. Commercial Banks are Deleveraging, Reducing Loan Availability
importance and the more
95
of it the better. It follows
Deposit to Net Loans and Leases Ratio
then that our belief future
90
economic growth could remain
somewhat slower than usual 85
is disconcerting. Unpleasant
consequences arise in an 80
extended period of slower
growth including a diminished 75
buffer against recession,
stagnant living standards, 70
inadequate government
Eric Lascelles – Toronto, Canada finances, and possibly lower 65
Chief Economist investment returns. 2002 2004 2006 2008 2010
RBC Global Asset Management
Source: Federal Deposit Insurance Corporation
11 GLOBAL INSIGHT | APRIL 2012Sizing Up a Downshifting Economy
Another consequence is a retrenchment in risk households from escaping the most economically evidence. But this statistical phenomenon is not
appetite. Few households, businesses, banks, or waterlogged regions. as informative as it first appears.
governments are willing to take large risks or to Even as net job creation picks up, workers are In fact, growth tends to be horrific in the
invest boldly in the future. The popularity of ultra- not opportunistically hopping from job to job, as immediate aftermath of a crisis but then
low-yielding government bonds demonstrates they would normally. Instead of securing better frequently reverts to an ordinary-looking profile
this phenomenon. Without risk there is no reward, matches between their skills and roles, they are within a few years. This renders the ten-year
and economies tend to move more slowly when choosing to stick with the devil they know in a average unrepresentative of both early and later
everyone plays it safe. time of uncertainty. periods. As we enter year four of this recovery,
In the heat of this financial crisis, economic might we then be on the cusp of accelerating
output dropped precipitously. Most of this has Slower for Longer activity?
since been restored. However, a few percentage Regrettably, there is a good chance the sluggish This is a tempting notion, but we regard it as
points of activity appear to have vanished into the economic growth of the past few years will unlikely. Financial crises that come paired
ether, and the economy finds itself on a parallel, endure for several more to come. The fact that with housing busts—such as this one—tend to
lower trajectory. growth in the decade after a financial crisis tends experience a rougher ride. The especially deep
to be slower than beforehand is often cited as and global nature of this financial crisis
The Cost of Labour
also tilts the odds toward a less attractive
Market Dislocation outcome. Deleveraging and risk aversion
Supply is Greater Than Demand in the U.S. Job Market
In the U.S., this loss has been due have clearly not evaporated, which
mainly to a troubled labour market. 14 continues to suppress growth.
As the average spell of American 2000-2006 2007-Present
Fiscal Drags
Persons for Each Job Opening
unemployment yawns three times
Number of Unemployed
wider than normal, skills corrode. Crumbling government finances also limit
Multi-year bouts of joblessness economic growth. Structural deficits equal
reduce a worker’s salary and to 6% of GDP in the U.S. and 5% across the
productivity by an average of 14%. 6 developed world will need to be tackled
5
Today’s unemployed workers are 4 over the coming years. Unfortunately,
3
disproportionately trained in 2
the optimistic notion that fiscal austerity
construction and manufacturing, might be economically neutral or even
whereas job creation now tends beneficial has been thoroughly debunked.
to be elsewhere. They can Fiscal austerity mathematically slows the
Construction Manufacturing All Other Industries
switch sectors but will not be as economy. Realistically, this will amount
Type of Industry to a fiscal drag averaging 0.5%-0.75% on
employable, productive, or highly
paid. Simultaneously, underwater Source: Haver Analytics, RBC Global Asset Management annualized GDP growth over the next
mortgages prevent American several years.
12 GLOBAL INSIGHT | APRIL 2012Sizing Up a Downshifting Economy
Unfortunately, there were robotics, artificial intelligence, nanotechnology,
Government Debt is Reaching Problematic Levels
several under-acknowledged and pharmaceuticals. However, attempts to
140 tailwinds during that period. predict the form they will take or the speed of their
These included false financial arrival is clearly folly.
General Government Debt (% of GDP)
120 Threshold for Slower innovation, excess leverage, We believe the loss of prior tailwinds may subtract
Economic Growth entry of the Soviet Bloc
100 around 0.5 percentage point from economic
and China into the global growth, while new headwinds could subtract
80 economy, low and steady another 0.75 percentage point. Together leaving
commodity prices, as well as economic growth around 1.25 percentage points
60 falling inflation, interest rates, slower than the 3.25% 1980-1999 norm for the U.S.
2012 IMF and tax rates. and Canada—about 2% growth per annum. It
40 Forecast
In short, the 1980-1999 period implies even slower growth in most other developed
20 U.S. Germany had an element of fairy tale to economies.
France U.K. it. Future growth over the long Although we do not anticipate a second recession
0 run should be a little slower
2002 2004 2006 2008 2010 2012 2014 2016 for the U.S. or Canada, a second contraction is
simply because the sleek unusually common in the decade following a
Note: U.K. is net general government debt, other are gross general government debt. carriage has reverted back to
Source: International Monetary Fund (IMF) and RBC Global Asset Management financial crisis, even if it is usually attributed to
pumpkin form. some other cause.
Added to this is the burden associated with high Headwinds Won’t Help Of course, there is nothing exact about these
debt levels. Rising debt levels ordinarily don’t Just as old tailwinds are ceasing to blow, new estimates, and it is worth acknowledging that
cause much pain to the economy, until they reach headwinds are mounting. Most importantly, forecasting precision declines over time. It is
the level when they abruptly do—usually at about demographics are becoming much less amenable also true there are examples of countries that
90% of GDP. Developed economies are at this very to economic growth. The rate of educational bucked these trends—notably Sweden, Finland,
moment whistling past that graveyard. attainment may also be starting to flatten out. and Canada in the 1990s. There is also some
unorthodox historical evidence that periods of
Perhaps the most contentious subject of
What’s Normal? slower population growth are associated with
all is technological change, which is a big faster productivity growth, perhaps providing a
Of course the reality is there is no such thing as
part of productivity growth that in turn is partial offset. Too, a growing cohort of seniors
truly “normal” growth. Conditions are always
a prerequisite for an expanding economy. won’t just stop spending money because it has
changing. But we need a frame of reference, and
Simply put, technological gains are obvious exited the workforce.
for many the 1980s and 1990s are still the epitome
only in retrospect. There remain plenty of
of “normal,” when the U.S. economy grew at an We should avoid the temptation of disaster
fields ripe for major breakthroughs, including
annualized rate of 3.2% per year. myopia—imagining we will forever be stuck in
communications, information, computing,
13 GLOBAL INSIGHT | APRIL 2012Sizing Up a Downshifting Economy
calamitous times—simply because that has
Working Age Population Growth Slows
been the recent experience. The world has
endured many bouts of economic disaster as
Working Age Population Growth Rate (%)
bad as or worse than this one—global wars,
1.15 2011
pandemics, and the Great Depression—and
30-Year Annualized Change
1.02 2042
yet ultimately has always bounced back.
0.42
0.36
0.14
Bottom Line
0.17 0.14 0.06
All that said, our assessment leads us to
expect a prolonged period of slower growth
than the world was accustomed to prior to
the financial crisis as deleveraging continues
-0.81
-0.94 and fiscal austerity bites. Over the long run,
growth may also downshift into a lower
U.S. Canada U.K. Germany Japan gear, due to the loss of prior economic
tailwinds and the addition of new headwinds
Source: Haver Analytics and RBC Global Asset Managment such as slower population growth. This is
clearly not ideal, because it eats away at the
natural buffer against recession, slows the
advancement of living standards, represents
Dependency Ratio in Developed Nations Will Rise
an enormous burden for governments, and
90 may diminish investment returns.
75
Dependency Ratio (per 100)
60
45
30
United Nations Forecast
15
0
1950 1966 1982 1998 2014 2030 2046 2062 2078 2094
Note: Dependency ratio represents ratio of population age 0-14 and 65+ per hundred population age 15-64.
Source: United Nations, Haver Analytics, RBC Global Asset Management
14 GLOBAL INSIGHT | APRIL 2012Global Equities
“Vigilance” Remains the Watchword $105.70 per share versus roughly $113 last spring.
Our below-consensus estimate stands at $101. That
Major markets were mostly higher in March, would represent a 3.2% advance on 2011—not a
buoyed by an encouraging U.S. employment growth rate that would typically drive extraordinary
report, further indications the Eurozone and its returns from here, but together with dividends,
banks had moved back from the precipice, and enough to make it a satisfactory year for investors.
positive results of the demanding U.S. bank stress
tests. U.S. bank stocks rose strongly all month, What would make it better would be a combination
helping to boost developed markets. of faster-than-expected growth in the U.S. and
China (even just a bit faster) and additional,
Canada’s S&P/TSX was the exception. The index’s convincing actions to resolve Europe’s debt crisis.
almost 50% weighting in energy and materials What would make it worse would be the opposite.
stocks left it lagging most other global averages. We don’t put a high probability on either coming
Official statements out of China (see articles to pass, but enough of a probability that we believe
on pages 6 and 8) made it clear that easing of “vigilance” will continue to be the watchword for at
restrictive monetary and regulatory policies was least the next several months.
going to be more deliberate and drawn out than
commodity markets had been hoping for. Our stance has not changed: we recommend a
“Neutral” exposure to stocks—that is, portfolios
Looking forward, some elements of the economic/ should contain up to but not more than their long-
financial market picture have shifted, although the term target allocation to equities.
scene it portrays is much the same as it has been
for some time. The U.S. is still working through an
extended period of below-trend growth (see article
Global Asset Class View
on page 11). China, too, is transitioning to a slower, Asset Class View Comment
more sustainable growth trajectory, with all the
discomfort and market challenges that entails. And
Equities = Invested, but vigilant
Europe, now in recession, is gradually addressing Fixed Income – Unchanged
its sovereign debt/banking crisis and remains a
considerable way from fully resolving it.
Cash + Maintain, but ready to allocate
Meanwhile, the steady stream of economic data, Region Weighting
which on balance was ahead of expectations
from September to January, has since tended to
U.S. Neutral =
marginally disappoint. Canada Neutral =
Earnings appear to offer a constructive backdrop Continental Europe Underweight –
for equities—but not overwhelmingly so. Analysts
expect earnings to grow in 2012, nevertheless
U.K. Neutral =
Jim Allworth – Vancouver, Canada
jim.allworth@rbc.com
they continue to revise estimates lower and have Asia (ex Japan) Neutral =
for many months running. For example, the 2012
forecast for S&P 500 earnings is now down to
Japan Overweight +
15 GLOBAL INSIGHT | APRIL 2012Equities: United States
>> Sub-par economic growth, year-end fiscal risks,
Neutral (=) and lingering European uncertainties keep
Portfolio Recommendations
We would continue to tilt portfolios toward
us in the “Neutral” camp for U.S. equities, three economically sensitive sectors:
Sector View although attractive valuations should keep a bid Technology, Industrials, and Financials.
Financials + underneath large-capitalization stocks. However, bank stocks probably need time to
consolidate their recent gains.
Industrials + >> The historic multi-year leadership run for small-
cap stocks may be coming to an end. Large-caps For investors with outsized positions in small-
Information Technology + seem poised to pick up the baton. cap stocks, we would begin to pare back
Consumer Staples = exposure and shift into large caps. Small caps
Market Developments have outperformed persistently since 1999
Energy = Financials significantly outperformed the broader but may be passing the leadership baton.
Health Care = market in March, rising 7.3% due to successful bank During the past year, the Russell 2000 Index
stress tests and higher-than-expected dividend underperformed its large-cap S&P 500 cousin
Consumer Discretionary – increases. Seven of 19 large banks examined by by almost 8%. Analysts’ small-cap earnings
Materials – the Fed raised dividends 44%, on average. Most estimates seem far too aggressive—up 27%
banks’ balance sheets are strong enough to allow in 2012 on a year-over-year basis versus only
Telecommunication Services – dividends to rise further in the years ahead. 8% for the S&P 500. That gap seems too wide.
Utilities – Further, small caps currently trade at a 24%
The S&P Retail Index climbed 7.2% in March and valuation premium compared to large caps.
has rallied 21% so far this year on strong earnings The premium could shrink if earnings fall short
results and despite elevated gasoline prices. of what we think are unrealistic expectations.
Nevertheless, retail stocks are richly priced and
could be approaching peak profitability. We rate
the Consumer Discretionary sector “Underweight.” 2012 Small-Cap Earnings Estimates Seem Too High
First-quarter earnings season is around the corner. Large Caps (S&P 500) 27.0%
The consensus S&P 500 forecast calls for $24.02 Small Caps (S&P 600)
per share, representing 2.2% year-over-year
growth, the weakest pace since 2008. Analysts 16.5x
may end up cutting their 2012 estimates further. 13.3x
On a year-over-year basis, forecasts for Q2 and Q3
growth seem somewhat reasonable at 8.1% and 8.0%
5.4%, respectively. However, the consensus growth
estimate for Q4 seems far off base at 16.3%. Many
Kelly Bogdanov – San Francisco, California management teams have yet to provide second-
kelly.bogdanov@rbc.com Price-to-Forward Earnings Earnings Growth Estimates
half guidance and could temper expectations in the
Janet Engels – New York, New York
janet.engels@rbc.com
weeks ahead. Our full-year estimate stands at $101
Source: RBC Capital Markets, Bloomberg
per share versus the $105.70 consensus forecast.
16 GLOBAL INSIGHT | APRIL 2012Equities: Canada
Neutral (=) >> We maintain a “Neutral” recommendation Portfolio Recommendations
(benchmark allocation) for Canadian equities. We expect the Canadian market to deliver
Attractive valuations and accommodative central worthwhile gains; however, we recommend
Sector View
bank policies could be catalysts for worthwhile domestic Canadian investors consider taking
Financials + returns in 2012. advantage of a richly valued Canadian dollar to
diversify exposures to other markets that may
Industrials + >> The uneasy slowdown in China continues currently offer more compelling valuations and
Telecommunication Services + to weigh on the relative performance of the prospects.
Canadian market because nearly half of the S&P/
Consumer Discretionary = TSX is exposed to commodities.
Commodity stocks offer attractive long-term
value, although, we would be cautious about
Consumer Staples = >> While our base case remains a “soft landing,” adding exposure until the technical backdrop
Health Care = commodity stocks are unlikely to outperform and Chinese prospects improve.
Information Technology = until more conviction emerges that China’s We continue to advocate a focus on dividend
slowdown phase is ending. payers and growers, but we note yield-hungry
Materials = investors have bid up many high-quality issues
Energy – Market Developments to levels that are no longer attractive.
The S&P/TSX is up 3.7% year to date, one of the
Utilities – worst performances among major global indices.
The S&P/TSX has now underperformed the S&P TSX Gold & Energy Stocks Relative to Gold & Oil Prices
500 by 17% since the early October lows.
110
Both energy and commodity stocks continue Gold Stocks
Relative to the
to underperform relative to their underlying 100 Gold Price
commodities. While WTI crude is up ~4% year to
date, the S&P/TSX Energy sub-index is actually 90
Energy Stocks
down 1.2% for this period.
Relative to the
80 Oil Price
Solid Q1 results confirm Canadian banks are
recovering from a poor 2011. While the domestic
70
Canadian economy has slowed, the Canadian Commodity stocks have underperformed
banks continue to generate ROEs far in excess of their underlying commodities.
60
their global peers, helping to justify the premium Sep-11 Nov-11 Jan-12 Mar-12
Matt Barasch – Toronto , Canada valuations most of the Canadian banks enjoy.
matt.barasch@rbc.com Source: RBC Capital Markets
Jean-François Dion – Toronto , Canada
jean-francois.dion@rbc.com
Maha Arshad – Toronto , Canada
maha.arshad@rbc.com
17 GLOBAL INSIGHT | APRIL 2012Equities: Continental Europe
Underweight (-) >> European markets struggled in March. This was
not due to a particularly poor Eurozone news flow
and the slowdown of the Chinese economy could
erode both domestic and external demand.
but rather to deteriorating economic momentum On the political front, news was mixed as well.
Ifo Germany Business Climate Index in China and few economic upgrades in the U.S. Italian Prime Minister Monti still enjoys a 62%
approval rating in recent polls and is pressing
120 >> The road should remain bumpy, but there is ahead with labour reforms and austerity.
reason to be hopeful with Germany functioning Meanwhile, the Spanish Prime Minister Rajoy’s
as a beacon of stability and Italian Prime Minister support is eroding, as shown in the opposition’s
110
Monti pushing through austerity and reforms. victory in a recent provincial election. Mr. Rajoy
has to focus on bringing the fiscal deficit down
>> European equity markets are trading at 11.3x from 8.5% of GDP last year to 5.3% this year—a
100 2012 and 10.0x 2013 earnings and offer an tall order after years of economic contraction. It
attractive yield of 4.1%. is no wonder Spanish ten-year bond yields have
90 >> We continue to be discriminating when selecting surpassed Italy’s in recent weeks.
investments and hence remain “Underweight.” However, a lot has changed in Europe. Two LTROs
have added much-needed liquidity, lessening
80 Market Developments the risk of a financial system collapse. The Greek
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
European equity markets struggled in March bail-out package has been agreed on, and Greece
Source: Bloomberg, quaterly series; data through March 2012 largely due to a more cautious macroeconomic is no longer perceived as an imminent threat. And
environment in the U.S. and in China. Defensive importantly, Germany has become less dogmatic,
sectors (Food and Beverages, Health Care) and realising that austerity is only part of the solution.
insurance led the market. To illustrate, German Chancellor Merkel used to
be starkly opposed to having a European bail-
Macroeconomic news during the month was
out fund bigger than €500bn. The tone has been
mixed. The Eurozone Purchasing Manager Indices
markedly softened recently, with a plan to run the
were weaker than expected, reinforcing the belief
EFSF (€192bn committed) and the permanent
the euro area economy is likely to have fallen into
€500bn ESM concurrently. We see this softening
technical recession in Q1 2012. German consumer
stance as a step closer to the long-term plan of
confidence was disappointing as well, dented by
fiscal union.
higher energy prices.
Nevertheless, German business confidence
Portfolio Recommendations
remains strong, as the March Ifo index increased
again, illustrating sound economic fundamentals. While recent policy action has greatly reduced
Italian and French consumer confidence also the possibility of a crisis escalation, risks
improved during the month, though are still at remain. Spain in particular is a worry. We would
low levels. Whether this optimism is sustainable focus on resilient and cash flow generating
Frédérique Carrier – London, United Kingdom companies in the stronger countries of Europe,
frederique.carrier@rbc.com
remains to be seen as high oil prices, austerity
measures in almost all other Eurozone countries, such as Germany, Switzerland, and Sweden.
18 GLOBAL INSIGHT | APRIL 2012Equities: United Kingdom
Neutral (=) >> March macro data point to the U.K. economy continue as the labour market inches towards
reaching a point of inflection.
struggling but not deteriorating markedly.
Chancellor of the Exchequer Osborne delivered
U.K. Consumer Price Index (year over year % change) >> The budget was the first in years not to reduce a budget that was largely fiscally neutral. For the
growth expectations. first time in years, there was no deterioration in
6
>> We maintain a “Neutral” (benchmark) position in the country’s expected outlook. The independent
5 U.K. equities. The market is inexpensive, and the Office for Budget Responsibility’s growth forecasts
4.1% yield is supportive. were little changed: growth should be 0.8% this year
4 and 2% next year. If these forecasts materialize and
3 Market Developments cost-cutting is implemented, the Treasury sees the
U.K. equity markets lost momentum in March, net national debt figure peaking at 76.3% in 2014/15
2
led by sharp falls in Basic Materials and Energy, rather than 78.0% as it did in the autumn budget
two sectors hit by the prospect of weaker Chinese statement.
1
growth. This may provide some comfort to credit rating
0
Economic news centered on inflation and agencies that have recently put the U.K.’s AAA rating
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12
unemployment releases. U.K. CPI inflation slowed on negative watch. Fiscal stabilisation, however, is
Source: Bloomberg; data through February 2012, the most recent report
from 3.6% year over year in January to 3.4% year clearly dependent on no further deterioration in
over year in February but was a little stronger than either the Eurozone crisis or in oil prices.
the consensus forecast (3.3%). CPI inflation has The U.K. equities market is inexpensive, trading
fallen for five months running, but RBC Capital on 10.4x 2012 and 9.4x 2013 consensus earnings
Markets expects this trend will shift from March estimates, though this reflects the high weightings
onwards as the impact of past increases in VAT and in the lowly valued Energy, Materials, and Financials
energy prices fall out of the index, and as rising sectors. Even so, a dividend yield of 4.1% and
energy prices put upward pressure on inflation. possible stock buybacks are further supportive of
Given the emergence of further inflation risks the market.
and barring any negative growth surprise, the
Monetary Policy Committee is unlikely to vote for Portfolio Recommendations
more Quantitative Easing in May. We continue to favour companies with relatively
Recently released data indicates the level of U.K. high exposure to international sales. We would
unemployment continued to creep higher in focus on companies with solid market positions,
January, with the number of people unemployed high barriers to entry, exposure to growing
increasing by 28k over the period to reach regions or industries, a strong balance sheet, and
2.67 million. The ILO unemployment rate was robust cash flow generation. These attributes
unchanged at 8.4% during the three months to tend to enable companies to implement an
January. The latest labour market data confirm attractive, sustainable, and often progressive
Frédérique Carrier – London, United Kingdom
frederique.carrier@rbc.com the pace of deterioration has slowed markedly dividend policy.
in recent months, a trend that is expected to
19 GLOBAL INSIGHT | APRIL 2012Equities: Asia
Asia (ex Japan): Neutral (=) >> Asian equities declined in March. Sentiment Market Developments
weakened at the end of the month on softer Weaker Chinese data towards the end of the month
Japan: Overweight (+) economic leading indicators from China. Surging changed the tone of the MSCI Asia ex-Japan Index
energy prices are now a headwind for Asian which declined by 3.2% in March. Additionally,
remarks from commodity giants BHP Billiton and
Indices Year-to-Date Performance
growth because the largest Asian economies all
Rio Tinto that commodity demand from China was
rely on oil imports. We maintain our “Neutral” slowing received wide-spread attention.
SHANGHAI SE COMPOSITE 2.9% stance on equities in Asia ex-Japan and our
“Overweight” stance on Japan. Japan’s Nikkei China
AUSTRALIA ASX 6.9%
has been the best-performing index in Asia thus The HSBC Flash PMI for China, a leading economic
JAKARTA COMPOSITE 7.8% far in 2012. indicator, weakened to 48.1 in March, lower
than February’s 49.6. The new orders index was
KOSPI 10.3% >> The annual National People’s Conference (NPC)
particularly weak, declining to 46.2. The PMI is
HANG SENG 11.5%
was held in Beijing. A range of economic targets
consistent with other Chinese data that indicate a
were issued, and Premier Wen Jiabao commented steady slowdown. For example, recent export data
TAIWAN TAIEX 12.2%
on hot issues including Chinese property and has been weaker, primarily due to a sizeable decline
SINGAPORE STRAITS TIMES 13.8% local government debt levels. Our base case still in demand from Europe.
STOCK EXCH OF THAI 16.7% calls for a soft landing as the Chinese leadership
Consumer price inflation rose 3.2% for the month
transitions later this year. RBC Capital Markets of February. This was less than expected and a big
NIKKEI 225 19.3%
forecasts 2012 Chinese GDP growth of 8.4%. drop from January’s 4.5% advance, although the
Source: Bloomberg >> Policy remains tight in China, although we are timing of Chinese New Year does affect economic
beginning to see some selective easing in certain data. Investors should welcome this decline
areas, such as limited support for small- to because it ultimately provides Chinese authorities
medium-sized enterprises. However, a multitude with more scope to ease policy.
of measures to control property prices remain During the National People’s Congress, Premier
firmly in place. It appears Chinese property Wen Jiabao noted property prices are “still far from
prices peaked in August 2011. We expect the returning to reasonable levels,” and consequently
moderation to continue for an extended period it is not possible to relax regulation. He also noted
since the government’s rhetoric on property the central government will take the matter of local
government debt “very seriously” and not allow it to
prices has remained steadfast.
affect China’s development negatively.
Economic targets for 2012 from the NPC include:
Jay Roberts – Hong Kong, China
jay.roberts@rbc.com real GDP growth of 7.5% (previous target for 2005 –
Yang Yufei – Hong Kong, China 2011 was 8%); inflation target of 4%; steady export
yufei.yang@rbc.com
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