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United States monetary and fiscal policy outlook
Since Federal Reserve policy under Chairman Yellen will depend heavily on unemployment, given the fact that inflation is currently well below expectations, we can expect low short-term interest rates through 2015, despite the fact that tapering will probably continue next year. On the other hand, an upside surprise in employment would be a positive for household earnings in the U.S. and would also support equities. Therefore next year should be a modestly positive year for the S&P 500 index (SPY). Our analyst Brent Nyitray discusses tapering in his weekly real estate roundup series here.
On the fiscal front, according to the International Monetary Fund (IMF), U.S. GDP growth saw a negative 2.4% drag from austerity in 2013. As a result, if economists are right, a 1.7% nominal growth rate in the U.S. could have actually been 4.1% without this drag. Economic indicators, including manufacturing and export PMIs, consumer confidence, and even non-farm payrolls, would have been much higher after adjusting for this discovery. In 2014, since fiscal drag is expected to be much lower (closer to 0.7%), we may see a much better year in terms of economic data in the United States.
Are German real wages causing peripheral deflation?
In Germany, real wages continue to rise along with consumer confidence. This is positive for the euro but negative for the peripheral countries to an extent because it could cause deflation in weaker countries.
Has Japanese monetary and fiscal policy failed to bolster real wage growth?
In Japan, the government just announced large spending plans for 2014, and Abenomics continued to push down the value of the yen and raise asset prices. Although inflation expectations have risen, wages have not followed. This could be a risk, as consumer spending could be hindered in the face of commodity inflation.
On the fiscal front, government ministers adopted a 95.9 trillion yen ($1 trillion) budget proposal that will be administered starting April 1, 2014. As a result, the nation will issue 41.3 trillion in new revenue bonds, hoping to stop a multi-decade deflationary spiral. In addition to short-term stimulus, the government agreed to plan for a fiscal surplus by 2020, but like most governments, it will probably push this forward, as growth remains below expectations. Stimulus measures were probably in reaction to the fact that in the second quarter of 2013, Japanese growth continued to slow, as the initial impact of Abenomics started to fade.
Did the Chinese reform agenda create a floor for local equities?
The Chinese announced a very ambitious reform agenda this quarter that succeeded in rallying stocks despite U.S. taper risks. Compared to other emerging markets, China did not see the same impact on its indices due to fund outflows. More on Chinese reform will follow in later Market Realist Chronicles updates.
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Opportunity in Turkey
At current levels, Turkish stocks may be attractive, given the fact that much of the political risk in the region may already be priced into the nation’s equities. However, volatility for local stocks could continue until local elections in March 2014.
Prime Minister Recep Tayyip’s government faced turmoil this year on corruption probes and conflicts with the political party of a rival Islamic cleric. Hundreds of police chiefs have been dismissed and many political leaders have been charged. Many CEOs of state-owned companies, including Turkiye Halk Bankasi AS and Emlak Konit Gayrimenkul Uatorim Ortakligi AS, have also been arrested this month. These CEOs have been accused of bribery, gold smuggling, and money laundering. Halkbank’s CEO was rumored to have $4.5 million stashed in shoe boxes at his home. Halkbank has fallen almost 19% since the government raids last week. Emlak has fallen 20% over the same period, even though the company announced a $16 million stock repurchase plan.
In the long run, uncovering government corruption is probably positive for the Turkish capital markets. Usually, temporary political shakeups like these can create buying opportunities for patient investors. A good way for retail investors to participate in the index would be investing in the iShares Turkey ETF (TUR).
Turkish stocks, represented by the Borsa Istanbul 100 Index, are down 13% in a year where the MSCI world index is up more than 22%. On a dollar basis, the Turkish equity index is actually down 26% due to currency weakness. The index is currently at 68,086, which is its lowest print since September 2013. The Turkish market’s current price-to-earnings ratio is 9.2x, which is very low given the index valuation range in recent years. In early 2013, the index was valued at about 12.0x.
The Turkish lira is also down a whopping 15% this year.
For those interested in exploring the Turkish market for value stocks, a good way to start would be to dissect the top holdings of the iShares Turkey ETF.
Happy holidays and a happy new year from Market Realist!
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