Month: October 2015

Byron Wien: Stocks Are Prey to Uncertainties

This is a Barron’s piece I was able to get through Barron’s Free Pass. I hope you also can because Wien does a good job layout out what may be in investors’ minds..

Fitch: Strong Focus on Reform, Rebalancing in China Fifth Plenum

The broad emphasis on reform and productivity growth that emerged from China’s Fifth Plenum underscores that macroeconomic restructuring remains a core policy objective for the authorities, says Fitch Ratings. This is in line with Fitch’s view for a protracted rebalancing, with growth slowing below 7% from 2015.

The Fifth Plenum meeting of the Communist Party of China’s Central Committee concluded yesterday. The communique outlining the conclusions of the plenum was light on detail. But, it is notable that the broad thrust of the document focused on areas pertaining to macroeconomic reform and increasing productivity in the context of tightening constraints on human and natural resources.

Notably, the communique reaffirmed the goal to double the 2010 level of GDP by 2020. If interpreted in real terms, this would imply a growth rate of about 6.5% per year on average for the coming five-year plan period (2016-2020). From a growth perspective, it is also significant that the plan targets a substantial increase in the share of consumption. Fitch has long maintained that progress on rebalancing the economy away from capital investment toward a more sustainable consumption-led growth model would be positive for the sovereign credit profile.

Few details on specific policy changes were released, but some of the broader objectives listed could point to reforms. A target to accelerate urbanisation by increasing the share of registered residents is a case in point, which may imply further reform of the household registration system.

The communique also discusses “improving” the management of the state’s capital as an objective. This could point to further reform of state-owned assets, but Fitch maintains that administrative reforms within the existing ownership model are more likely than widespread privatisation.

Demographic challenges and the constraints posed by an aging population are key issues raised by the communique, and the authorities have announced their intention to strengthen the social insurance system with an injection of state resources. This underscores how ageing is likely to exert an increasing drag on the fiscal position over the long term.

Replacing the country’s decades-old ‘one-child’ population control policy with a two-child policy was also announced as part of the communique to address human resource constraints. But, the move to a two-child policy cannot avert the pressure on China’s demographic position over the next 20 years – during which the UN projects the working-age population to drop to 65% in 2035 from 73% in 2015 (versus 60% in 2035 for high-income countries). It remains to be seen to what extent the new two-child policy will have on birth rates, considering the weak take-up for a second child under the previous system.

Further details on the next five-year plan should be available around the Central Economic Work Conference later this year leading up to its formal adoption by the National People’s Congress in March.

If Merkel falls, Europe will unravel She has been the rock of certainty. Without her the fractures would multiply

It is more accurate to call it panic than plotting. This week I spent time in the company of members of Angela Merkel’s Christian Democrat party. Startlingly for an outsider, the conversations turned on whether the German chancellor would survive the refugee crisis. Some thought she had just weeks to turn things around. Never mind that only yesterday she had towered above any other European leader. Overnight, the unthinkable has become the plausible — for some in her party, the probable.

Other voices say the fever will subside, but Ms Merkel’s vulnerability speaks to the convulsions across Europe caused by the tide of refugees from Syria, Iraq, Afghanistan and the Maghreb and Sahel countries of Africa. In the eastern, post-communist part of the continent, the influx has strengthened the hands of the ethnic nationalists who never quite signed up to the idea of liberal democracy. To the west it has bolstered the fortunes of nativists such as Marine Le Pen’s National Front in France. Rallies of the far-right Pegida party in Germany now feature speakers who lament the loss of concentration camps. If Britain’s David Cameron loses his referendum to keep Britain in the EU it will be because emotions over migration trump economic self-interest.

(…)  And, yes, her welcome for the refugees initially caught the national mood. But the sheer numbers — Germany expects 1m-plus arrivals this year — have changed the calculus. Towns and villages have been overwhelmed by the influx. And, this the potentially fatal wound for the chancellor, a sense has grown that she has lost that all-important control.

Politicians never stop looking at their poll ratings and the CDU’s have fallen sharply. There is no obvious candidate to replace her, but step up Wolfgang Schäuble, the finance minister, as a likely stopgap until a candidate is chosen to fight the 2017 election. Mr Schäuble has been curiously quiet of late.

Behind selfish calculation lies a deeper fear. Centre parties across Europe have surrendered ground to populists of left and right because their electorates have feared they no longer offer security. Germany, the nastiness of the small Pegida notwithstanding, had seen the centre hold. But now, on an issue widely seen as one of cultural identity, has Ms Merkel lost control?

The answer I think is no, but when politicians fall to panic anything is possible. I watched at close quarters the defenestration by her own party of Margaret Thatcher, another powerful leader who seemed invincible until the moment of her fall. She, too, had won three election victories. Though deeply unpopular by 1990, until it happened it seemed unthinkable that her colleagues could turn on her with such ferocity.

The stakes, though, are much higher with Ms Merkel. The financial crash, the euro crisis and the collapse of the Schengen open borders arrangement has seen Europe unravelling as centrist parties across the continent have struggled to meet the challenge of the populists. Ms Merkel has been the rock of certainty — the leader with the authority to keep the show on the road. Without her the fractures would multiply.

Mr Schäuble, too, is a pro-European, in some respects a more committed integrationist. But Ms Merkel has been the guardian of a post-1989 settlement that has rooted Germany in its Europeanness. Her removal would see it shift into the camp of those consumed by narrower, more immediate calculations of interest, giving up on the ideal of a European Germany. And that would be the beginning of the end.