The Economist wonders why food prices are rising during a recession. “Between December and mid-June, the food index rebounded by a third, even though this year’s total cereals crop is expected to be another bumper (2.2 billion tonnes, says the Food and Agriculture Organisation, second only to 2008/09). Meanwhile, soyabean and sugar prices have risen by nearly half from trough to peak—see chart below—and the index of “non-food agriculturals” (plants such as cotton or rubber) also rose by a quarter between December and mid-June. Prices have been increasing at a time of plenty.”
The Economist says there are two clusters of explanation: cyclical factors—features of the farm cycle and world economy that fluctuate from season to season—and secular, long-term factors.
“On the face of things, markets last year were adjusting exactly as economic theory predicts they should: prices rose, drawing investment into farms; supplies then rose sharply, pushing prices down. But that was not the whole story.”
“The price fluctuations of 2007-09 suggested that uncertainty in the world of agriculture was deepening under the influence both of oil prices and capital flows.”
The fact that prices are still well above their 2006 average, even in a recession, suggests that the spike of 2008 did not signal a mere bubble—but rather, a genuine mismatch of supply and demand.
“And this year’s price increase suggests that there is a long way to go before that underlying mismatch is eventually addressed.”
Technorati Tags: food-prices
The credit crisis appears to have done little to dampen expectations of pending international consolidation across the private banking and wealth management industry,according to a new survey from KPMG. However, this appetite for acquisition belies some serious structural concerns that should be dealt with prior to many banks returning to the acquisition trail, the survey finds.
Perhaps most notably, the sector is facing a tremendous squeeze on its margins, driven by falling asset values and yields, and a high cost base.
“Many banks will find it hard to substantially improve their profit margins in the short-term. This, combined with some prospective acquirers adopting a ‘wait and see’ policy and potential sellers being reluctant to accept current low valuations, may delay any surge in M&A activity.”
The survey results are based on interviews with 100 senior executives in the private banking and wealth management industry, from 17 countries around the world.
Survey highlights:
- majority confident about growth prospects (though less so than in previous years)
- expectation of international consolidation
- small banks more focused on organic growth; seem unconcerned about consolidation
- lack of available acquisition targets, especially in Asia-Pacific
- domestic deals prevail at 54 percent of deals undertaken by survey respondents in the past two years
- China and India overwhelmingly cited the countries with greatest growth potential
- onshore/offshore banking mix may provide a catalyst for M&A.
Technorati Tags: Add new tag, M&A, mergers and acquisitions, private banking, wealth management
The United States yesterday introduced a federal ‘Cash for Clunkers’ scheme, providing incentives for motorists to trade-in old vehicles for new, more fuel-efficient models. The scheme is an example of a program, which has become popular as a response by many governments to the current crisis facing the automotive sector. Oxford Analytica looks at how these schemes have fared in Europe.
United Kingdom. The UK scheme has government and manufacturers offering 1,000 pounds each towards the cost of a new car or van if owners trade in a vehicle more than ten years old they have owned for at least a year:
- Increasing prices. In January, due to the recession and oversupply, some analysts were claiming cars were at their lowest ever prices in real terms. Following introduction of the scrappage scheme (and depreciation of the pound) car prices have increased steeply from manufacturers. Prices were also likely to be driven up by the need to recoup some of the costs of the manufacturer’s 1,000-pound share of the 2,000-pound grant.
- Environment. The environmental benefits of the UK scheme have been diluted by the omission of the government to put in place a minimum vehicle efficiency standard under the scheme. Indeed, the benefits of the scheme are highest for targeting the worst polluting cars. For example, using the metric of gallons per hundred mile (gphm) a Toyota Prius gets 2.17 gphm, a RAV4 4.17 and a Range Rover 7.14. This highlights how targeting these worst polluting cars is likely to lead to the largest environmental gain.
- Oversupply. The environmental and economic logic of providing incentives for people to scrap cars still with several years of useful life may also be questioned as it takes energy to produce new cars and may exacerbate problems of oversupply in the sector.
Germany. Germany’s scheme provides a scrappage premium of 2,500 euros (3522 dollars) for new car purchases and has been widely held responsible for a 40% surge in car sales in March and 18% increase in April compared with similar times last year:
- Boosting imports. German vehicle production in April fell 34% compared with a year earlier with exports also falling 48%. Increased sales have been driven by Japanese, South Korean, Italian and French small, low priced cars — for example Hyundai’s sales in Germany have increased by 140% since the beginning of the scheme.
- Diluting stimulus. There is also concern in the wake of a collapse in the used car market that scrappage has shifted activity from used-car sector to new cars. New car buyers may also be bringing forward their plans to buy, to take advantage of the temporary scheme. This suggests future sales will be lower when the scheme ends causing a ‘hang-over’ in sales. There is also the chance that people are trading-in second cars which they do not value highly and did not drive much.
- Short-run political gain? The temporary German scheme has now been extended to the end of 2009. With an election due in September 2009, this highlights the danger that these schemes can become entrenched in the political economy. This would not only be costly for the taxpayer but would fuel an over production of cars, distort competition between sectors and delay the restructuring of the automotive sector penalising firms that could better read industry trends. However, these negative arguments can be tempered by the observation that the scrappage scheme in Germany seems to have rewarded the producers of small, efficient cars that were better positioned for the downturn anyway — potentially accentuating the structural shift desired by policy makers.
If designed well, vehicle scrappage schemes can provide an effective temporary boost to ease the effects of the economic crisis on the auto sector and consumers.
European experience suggests sales of small, cheap cars especially benefit. However, scrappage schemes are likely to disappoint as a tool to assist struggling car manufacturers that produce larger, more expensive and often polluting vehicles.
Technorati Tags: automotive, cash for clunkers, environment, greenhouse-gases, stimulus
Standard & Poor’s has published a summary of a recent roundtable of its top analysts that provides some insight into the ratings agency’s thinking on the economic outlook and credit markets. The group gave their views on the impact of government stimulus in the U.S. and globally, the implications of the resulting shift in spending from individuals and companies to governments, the continuing ramifications of the recession and other shocks to the financial system, prospects for the various sectors that Standard & Poor’s rates, and lessons learned from the housing bubble and its aftermath.
The participants were Standard & Poor’s Chief Economist David Wyss, Standard & Poor’s Ratings Services Executive Managing Director David Jacob of Global Structured Finance Ratings, and Managing Directors John Bilardello of Corporate Ratings, John Chambers of Sovereign Ratings, Jayan Dhru of Financial Institutions Ratings, and William Montrone of U.S. Public Finance Ratings.
Some key points:
- Peak to trough in taking our estimate of the second quarter, we’re looking at a 21% drop in household net worth since the end of 2007. That’s the result of the 57% drop in the stock markets combined with a 32% decline in home prices.
- … as we look forward into 2010, there’s a large amount of debt coming to maturity that will start to spike in 2010 through 2014. That’s going to weigh very heavily on corporate credit quality and the ability to refinance that debt, starting now and carrying through the next four or five years.(Bilardello)
For CMBS, the credit deterioration is just beginning and we believe the outlook is negative.
- Commercial real estate lags the overall economy, so problems with CMBS have really just begun. Refinancing needs are huge and will exacerbate the credit issues if banks don’t start lending again. Downgrades will far exceed upgrades for the foreseeable future. (Jacob)
- The outlook for RMBS is slightly less negative. Most of the subprime issues are behind us from a ratings perspective. However, we still have a lot of work to do on Alt-A and prime because the credit picture in those segments has continued to deteriorate. (Jacob)
- We’re seeing some companies take a relook at their capital structure with an eye toward deleveraging, if that’s possible. Some companies who are on the fence of speculative grade and investment grade, they’re looking to either stay investment grade or get back to investment grade, so we’re seeing a bit of that. But with that said, corporate executives have short memories. (Bilardello)
For details see 2009 Midyear Outlook: A Tough Road To Recovery For Global Markets.
Technorati Tags: CMBS, corporate-debt, credit-markets, credit-ratings, deleveraging, economic-forecast, RMBS
PIMCO’s Bill Gross advises investors to stick to low-risk bonds and stable dividend-paying equities in his latest Investment Outlook:
” If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? ”
The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.
“Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets – stocks, high yield bonds, and commercial and residential real estate will involve just that – risk. Investors should stress secure income offered by bonds and stable dividend-paying equities. Consumer Cuisinart consumption is a relic of the past.”
Technorati Tags: Bill-Gross, investment-strategy
This is hardly new, but data from the OECD illustrates how far out of line spending on healthcare is in the United States.
Total health spending accounted for 16.0% of GDP in the United States in 2007, by far the highest share in the OECD, according to OECD Health Data 2009. Following the United States were France, Switzerland and Germany, which allocated respectively 11.0%, 10.8% and 10.4% of their GDP to health. The OECD average was 8.9% in 2007.
The United States also ranks far ahead of other OECD countries in terms of total health spending per capita, with spending of $7,290, almost two-and-a-half times greater than the OECD average of $2,964 in 2007.
The high US spending is not accompanied by comparatively better health:
- Life expectancy at birth in the US increased by 8.2 years between 1960 and 2006, which is less than the increase of almost 15 years in Japan, or 9.4 years in Canada. In 2006, life expectancy in the US stood at 78.1 years, almost one year below the OECD average of 79.0 years.
- Infant mortality rates have fallen greatly over the past few decades, but not as much as in most other OECD countries. It stood at 6.7 deaths per 1 000 live births in 2006, above the OECD average of 4.9.
- The obesity rate among US adults (34.3% in 2006) is the highest in OECD countries.
- One positive trend: the proportion of daily smokers among US adults has been cut by more than half over the past 25 years, falling from 33.5% in 1980 to 15.4% in 2007. This is the lowest rate among OECD countries after Sweden.
Technorati Tags: Healthcare
CreditSights has issued a pair of reports summarizing the 6th Annual Renewable Energy Finance Forum in New York. The conference brought together skeptics, optimists, and pessimists, but all attendees were hopeful of an encouraging end result of the industry stimulus brought on by the American Recovery and Reinvestment Act (ARRA), according the reports. Topics discussed included financing at the debt and tax equity levels, the impact of renewable energy on the power markets and the prerequisites to bring more renewable energy to market.
A few general themes CreditSights took note of were:
- frustration with the Treasury’s slow response to act on rules for the 30% investment tax credit grant program,
- lack of risk appetite for projects without long-term PPAs in place, and
- scarcity of players involved with the tax equity markets.
Without investor certainty, capital will wait on the sidelines, for the most part.
In part one, CreditSights explores the government’s role and the role of financial players in this re-emerging sector. Part two covers renewable energy providers, new sector innovations and the participation from utilities.
Jeffrey Holzschuh of Morgan Stanley gave the institutional investor’s view of renewable energy investing. After a period of optimism and investment from 2005-2007 in the space, we are now in a period of rationalization and optimization, according to Holzschuh. After this period, he expects there to be a long monetization period, when he expects photovoltaic solar will reach grid parity and large scale solar thermal plants to start ramping up. He also foresees a shift in focus to transmission and distribution from generation.
Technorati Tags: cleantech, renewable-energy, solar-energy
US consumers have responded to the global economic crisis by curtailing their expenditures, paying down debt, and saving more—all logical responses to a recession. Yet most consumers have acted by choice, not necessity, according to McKinsey. Spending, saving, and debt averages are not at abnormal levels today but rather returning to long-term trends.
It was the behavior of US consumers during the past two decades, our research shows, that was the aberration. The return to traditional spending patterns will cause companies to adjust to a fundamentally altered playing field.
In a McKinsey survey conducted in March 2009, 90 percent of the US respondents said that their households had reduced spending as a result of the recession—33 percent of them “significantly” so. The survey, which included 600 households in three consumer segments comprising around 40 percent of all US homes, found that 45 percent of those who reduced spending did so by necessity, 55 percent by choice.
Technorati Tags: Consumer-spending
Could US housing prices finally be bottoming out? Standard & Poor’s Case-Shiller Index chart looks somewhat encouraging.
“The 10-City and 20-City Composites declined 18.0% and 18.1%, respectively, in April compared to the same month in 2008. These are improvements over their returns reported for March, down 18.7% for both indices. For the past three months, the 10-City and 20-City Composites have recorded an improvement in annual returns. Record annual declines were reported for both indices with their respective January data, -19.4% for the 10-City Composite and -19.0% for the 20-City Composite.”
The pace of decline in residential real estate slowed in April,” according to S&P’s David M. Blitzer. “In addition to the 10-City and 20-City Composites, 13 of the 20 metro areas also saw improvement in their annual return compared to that of March. Furthermore, every metro area, except for Charlotte, recorded an improvement in monthly returns over March.”
While one month’s data cannot determine if a turnaround has begun; it seems that some stabilization may be appearing in some of the regions.
“We are entering the seasonally strong period in the housing market, so it will take some time to determine if a recovery is really here.”
Technorati Tags: Add new tag, house prices, housing, S&P Case-Shiller Home Price Index
Venture capital firms in VC hubs such as Northern California tend to deliver superior performance, but that does not appear to derive from locally-based investments, according to a new working paper published by Harvard Business School.
More than half of the 1,000 venture capital offices listed in Pratt’s Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas – San Francisco, Boston, and New York, the paper notes. More than 49% of the U.S.-based companies financed by venture capital firms are located in these same three cities.
“Surprisingly, much of the VC outperformance in these venture capital centers arises from their non-local investments. This finding is counterintuitive, since venture capitalists might be expected to be the most involved and add the most value to the geographically closest companies. We observe this outperformance of non-local companies in both early- and latestage investments. ”
“One potential explanation for this higher return to non-local deals is that venture capitalists have a higher hurdle rate (i.e., require a higher expected rate of return) for investments that have a higher monitoring cost. This higher hurdle rate may reflect the imputed (personal) cost of traveling to remote locations.”
Outperformance of non-local investments suggests that policy makers in regions without local venture capitalists might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms.
Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion
Henry Chen, Paul Gompers, Anna Kovner, Josh Lerner
Technorati Tags: venture-capital
