Inflation trends positive for Asian markets

Lehman and JP combining to set up quite a bullish set up for Asian markets.

First off, Lehman notes that inflation is coming off, and that will lead, as it always has, to P/E expansion which, they believe, will offset the cr@ppy earnings prospects into a slowing global economy.

"... the recent drop in oil prices and, in developed economies at least, absence of significant second-round effects should mean that global inflation falls from 4.4% in 2008 to 2.4% in 2009... if the historical relationship is maintained, this decline in headline inflation ought to be consistent with... an expansion in the P/E multiple from 13.9x to 20.0x."

Meanwhile, back in Asia, JP notes a clear decline in food prices, which should lead, in my view, to an outsize improvement in inflation prospects and hence, if you follow Lehman, an outsize Asian market re-rating.

"While recent declines in oil prices have grabbed more attention, food price trends are actually more important for inflation in Emerging Asia because they have much bigger weights than energy prices in most countries’ consumer price indices."

And since I'm so good at Excel stuff and not messing it up...




Stumble It!
::

::

The Rise (and Rise and Rise) of Rice

Comment from Merrill Lynch (link to a note this morning):

• "There are many tsunamis in the agri world, but this is a big one The floods in Southern China will cause huge damage to China's rice production. There will be extensive damage to a host of other crops but let's focus on Asia's staple : rice.
• "David Cui reckons that up to 13m tonnes may be lost, or over 10% of China's harvest. To put it into context, 13m is equivalent to the total exports out of Thailand and Vietnam combined : the world's top 2 exporters. It's two years' worth of US production. The equivalent in the oil world would be Russia not producing any oil for four months... Where would oil prices be then?
• "And another snippet : if China wants to replace this lost crop by importing, that would soak up 50% of global trade... so where do we think rice prices are going to head in that monopsonistic scenario ?
  
• The point is that China subsidizes rice prices by about 40% vs global prices and these floods have to put pressure on global prices exacerbating the situation. Unless China raises domestic prices, smuggling, already an issue, will escalate."

(What would I buy to play this? Noodles.)

=====================


A word from my distant past that I've not heard in ages:

In economics, a monopsony (from Ancient Greek μόνος (monos) "single" + ὀψωνία (opsōnia) "purchase") is a market form with only one buyer, called "monopsonist," facing many sellers.

(Thank you, Wikipedia!) And yes, the writer's a Brit.

The PBOC says: "GrrrrRRR..."

Okay, this is a couple of days late, sorta, but I think it's relevant as we digest this morning's PPI figures from China and await the probably more important CPI numbers due out tomorrow. So, in reverse order:

Whisper (Chinese Whisper?) numbers suggest that May CPI will come in at 7.7% YoY (vs 8.0% currently expected, and 8.5% in April.) Whispers in China of this sort generally turn out to be quite accurate.


Meanwhile, this morning we saw the PPI numbers come in better (lighter) than expected. From CLSA:

"China reported 8.2% YoY Producer Price Index (ie the output PPI) for May, which outpacing April's 8.1% although slightly lower than market consensus of 8.3%. Meanwhile, May's Purchasing Price Index (ie the input PPI) reached 11.9%, 10bps higher than April's 11.8%, which may imply input costs are rising and only incompletely being passed on resulting in margin squeeze that we are seeing in company data."

And last Saturday, ahead of a long weekend ("take THAT, markets - hahaha...") we had the PBOC come up with not one, but two consecutive 50bp Reserve Requirement Ratio hikes. From Sherry Lin at Credit Suisse, in a note on the China banks this morning:

"We maintain that the RRR hike per se has limited negative impact on earnings of Hong Kong-listed China banks, which operate with relatively liquid balance sheets. We estimate that every 50 bps increase in RRR will reduce Hong Kong listed China banks’ earnings by less than 1%."

In other words, as I read it, the Chinese banks are not likely to be hit by this 100bp increase in the RRR (partly as the PBOC actually pays interest on it, I believe) as they are liquid - and given that they are liquid, it's unlikely to lead to a serious easing in their absolute capacity to lend. ("In the near term, China banks’ earnings will be more vulnerable to a sustained correction in local stock markets" as Sherry also notes.) The PBOC knows this and seems to be sending a message to the markets that its position continues to be that runaway inflation will not be tolerated...

BUT given softening industrial data (CS economist Dong Tao's comments here) and a massive natural disaster to cope with (and the fast approaching Beijing Olympics too) stamping hard on the brakes and driving economic growth through the floor is also clearly not the aim.

Still cautious on China consumer names, but surprise could be to the upside, especially given the sell-off post RRR/ long weekend/ Friday US tanking.


----------------------------------

The FT's Lex column suggests that the latest RRR move is to stem capital flows, of which a large part may be speculative, and that the next move may be to control capital inflows directly... and implicitly agreeing with my view that the PBOC is NOT trying to drive down China's growth.

Playing with your Food plays

Credit "don't call me CSFB" Suisse is out with a glossy mega tome, the like (and weight) of which we rarely see these days, on the theme of food and rural income in Asia. (Never mind about the trees.)

The central thesis is that Asia's need for food self-sufficiency will rival the Western world's need for energy, with demand growing at a faster clip than supply... with inventories in Asia now already at a 30 year low, this problem will take years to fix. Total acreage supply in Asia is growing at only 0.3% per annum since 1990 - the only way Asia can meet its growing demand is through yield enhancement.

In the meantime (during the meanwhilst), rural incomes will likely grow at a rate so far only seen in urban centres. That's 1.7bn people connected to agriculture in Asia, and rising farm investment and rural income is likely very different to how most investment portfolios are focused. Most of the research I see these days focuses on urban wealth creation (BMW-aspiring yuppies and supermarket/ department store shoppers.)

The CS STOCK PICKS with which I currently agree
(one or more of which may be current portfolio positions, either long or short):

- CHINA: China Mobile, Chaoda Modern Agriculture, China Agri-Industries
- INDONESIA: United Tractors, Bisi, Indofood,
- KOREA: CJ Cheiljedang, Namhae Chemical
- MALAYSIA: KL Kepong
- SINGAPORE: Noble, Olam, Indofood Agri,
- TAIWAN: Taiwan Fertilizers, Sesoda
- THAILAND: Big C Supercenter, Thai Union Frozen

(And for those of you who squint at big reports, here are the slides.)

Rice shortages, riots and starvation: Not funny

Call me old fashioned, but I don't find food shortages, riots and starvation as amusing as TheStreet.com appears to.






------------------------
THIS on the other hand is a very worthwhile diversion from highly whippy markets in this part of the world!

All this via the mysterious Prince of Wall Street, Paul Kedrosky's Infectious Greed and some dude called Nick.

Bush and his legacy: World Hunger

It's all in the NT Times today!

The wonderful Gail "!" Collins of the NY Times writes this morning in "The Fat Bush Theory":

"(W)e sure do have a lot to look forward to in the future, people. There's new federal spending on biofuels. Much of this is for ethanol, which has the unfortunate side effect of creating more greenhouse gases than it eliminates, and, of course, helping to create a planetary crisis over rising food costs."

Meanwhile, "Across Globe, Empty Bellies Bring Rising Anger":

"Saint Louis Meriska’s children ate two spoonfuls of rice apiece as their only meal recently and then went without any food the following day. His eyes downcast, his own stomach empty, the unemployed father said forlornly, “They look at me and say, ‘Papa, I’m hungry,’ and I have to look away. It’s humiliating and it makes you angry.”"

What else can one say?

-----------------------

Meanwhile... does money buy happiness?

More Rice Pain (but somebody gains)

From this morning's FT in an article gloomily entitled "Farmers Doomed to Pay Price for Export Restrictions":

"Countries such as Argentina, Kazakhstan, India and Vietnam have stopped their farmers selling crops abroad or taxed exports heavily in an effort to keep local markets well-supplied and local prices for those crops low. This means the farmers in these countries are not benefiting from record international prices. At the same time, these farmers are facing higher costs in the shape of higher prices for diesel, seed and fertilizers. The result? Some farmers are cutting their acreage."

So who could benefit from this miserable situation?


Trust the good guys over at Jamie Dimon's shop to point out in a flash note today that China is increasing tariffs on fertilizer exports by a huge amount to try and keep more of the stuff at home (and affordable.)

Beggar-thy-non-Middle-Kingdom-neighbours and (further) enrich fertilizer companies everywhere (except in China)...

"The Chinese State Council announced today (April 17) that a decision has been made to impose a special tariff of 100% on exports of fertilizer and fertilizer raw materials from China... effective from April 20 through September 30, 2008... Substantially Lower Chinese Exports Likely... (this) will further tighten the global supply/demand balance."

China inflation: Bang a Gong

(Get it On.)

JP Morgan's Frank FX Gong (Wharton PhD, ex-NY Fed... and his real initials) wrote in a very good piece last night on what to worry about in China and why we should not panic about food price inflation.

• China's food inflation (the key contributor to China's headline inflation) is very different from the global food inflation;
• The global food inflation has been led mainly by cereal (wheat, corn & rice) while China's food inflation has been mainly led by pork/meat;
• China is a net exporter of cereal (rice, wheat, & corn), while the global meat/pork prices are much cheaper than China's domestic price and China has not been a big importer of meat/pork despite higher domestic meat/pork inflation;
• No need to panic on China's food and headline inflation: if China really wants to kill the food inflation and bring down the headline CPI inflation, they can simply start to import meat/pork from the global market - especially so with a faster appreciating RMB. China absolutely has no need, and would NOT need to kill food inflation by hiking interest rates.

(Chart: JP Morgan)

Risk appears to be to the upside for refiners and IPPs in terms of the possible lifting of price controls if China's CPI figures, due late next week, remain under control. But I can't really understand why China is not ALREADY trying to bring food inflation down - food remains a significant part of rural household expenditure doesn't it? Is it just banking on a base effect kicking in during 2H to lower headline figures? (Peasants can't eat base effects!) Or perhaps the government wants a bit of pain on the cost/ margin front to squeeze out waste and inefficiency??

Slightly different from the Credit Suisse conclusion (from the Purchasing Managers Index input price trends) of widespread inflation kicking in that I mentioned on Monday. Looks like a fine line the PBOC is walking, if you ask me. On balance, I'm sticking to more accommodative policy for the time being.

Annoyingly, I can't figure out how to find his actual note on the MorganMarkets website to give you a document pull link. Maybe it'll come up on his page later in the day. (Even more irritating than Credit Suisse's site, but at least, unlike Merrill's, still works - just about - on Firefox.) AND yes, of course I'll e-mail you a copy if you ask nicely!!

-----------
Earlier piece by Frank's colleague, Jing Ulrich, in which she points out China's shift in concern from inflation to growth. I also mentioned it in an earlier post, but hers is better!

An affordable sandwich in London by 2013

I'm not an avid (rabid?) Torygraph reader, but some interesting articles appearing there on UK housing and the economic beating the country's going to get as a result of its own stiff upper-lipped version of the sub-prime crisis.

1) The economy is going to get impacted, on a relative basis, more than any country in the world, according to the IMF:

"The IMF expects British banks to lose more than £20 billion - equivalent to three per cent of gross domestic product (GDP) - from the international meltdown in sub-prime mortgages. American banks, which had been thought to be bearing the brunt of the credit crisis, will lose £72 billion - equivalent to only 1.4 per cent of US GDP... European countries have lost £61.5 billion - 1.7 per cent of GDP. "

2) UK Housing prices... You Goin' Down, Sucka! (Now, there's a good Telegraph-style headline!)

"Many people... are mesmerised by the recent experience of constantly rising prices and they find it difficult to believe that prices could fall when there is such a "shortage" of houses and the demand is so great... What does it mean to say that there is a shortage of housing? A shortage of houses at what price? Without concern for price there is a shortage of Rolls-Royces."

If this goes on for another 5 years (it might) I'll finally be able to afford a sandwich for lunch in central London!

China inflation - chicken feet or Wal-Mart socks?

Contrasting interpretations of data coming out of China today.

Wang Qing at Morgan Stanley notes that "Food Prices in the 1st Week of April Continued to Decline" on a sequential basis. "Meat and vegetable prices experienced the largest drop. Meat prices declined by ...6.5% from the levels of ... the monthly average in March ... while vegetable prices declined by 12.3%." Not much commentary, but obviously positive news, on balance, even though "wholesale price indices ... show that the average prices for agriculture products and vegetables increased by 1.2% and 1.5% compared to the last week of March".

Meanwhile, Credit Suisse's big cheese economist, Dong Tao is reporting today that risk remains to the upside for inflation across the board, with the March Purchasing Manager's Index showing not only strength in the headline and new orders figures (second highest readings since inception 3 years ago) led by infrastructure investments, but also that INPUT PRICES are rising fast... to THE highest level ever. Good sign of a rebounding economy, but part of that is seasonal, part of that is catch-up from the snowstorm. Given inflation risks, he sees rate hikes in 2H08 and 10-12% RMB appreciation vs the USD in 2008.

He writes: "the pressure is all on the inflation front, as input costs continued to surge. While market consensus and the government are focused on food inflation, we see an across-the-board inflation on the horizon. Besides the rising material costs, anecdotally, the wage rate is also rising fast and accelerating, as people’s expectation on inflation has changed. The surge in global food prices does not help the situation. As wage pressure spills over from the manufacturing sector to the services sector, we anticipate a much quicker price hike given that the services sector does have the pricing power and has little room to improve productivity."

On balance, I think the figures are market positive near term. Comments from Wen last week on the importance of economic growth alongside inflation concerns indicates that the govt is aware of the continuing risks to growth, including softer net exports going forward... but food inflation remains the key, and with continued softer data on that front, policy developments may continue to surprise the market on the upside for the time being.

Agri/food plays, Consensus numbers

Due to overwhelming popular demand, here it is again, updated, expanded and better than ever in every way!

(In every way, that is, except for legibility... you need to CTRL-click on the little picture on the right and it'll be clearer... just.)


All data from Bloomberg.