- deflationary fears. The NYSE Arca Gold Miners Index rose 2.76 percent this week. Franco-Nevada closed up 3.92 percent this week.
- The International Energy Agency’s November report maintained previous demand estimates for 2014 and 2015. While the energy space has taken a substantial beating of late, the presence of strong demand may imply that the bottom is close.
Weaknesses
- Oil and gas drilling stocks declined this week as the global energy sell-off continued. Declining oil prices continue to weigh on the industry, causing the S&P Supercomposite Oil & Gas Drilling Index to fall 7.48 percent
- Typically a brighter area of the energy space, oil and gas refining stocks fell this week as declining oil prices narrowed the spread between West Texas Intermediate (WTI) and Brent crude. The S&P Supercomposite Oil & Gas Refining & Marketing Index was down 2.67 percent this week.
- Utilities stocks saw their first weekly decline since the end of September this week, giving back some of their exceptional gains. The S&P 500 Utilities Sector fell 3.05 percent this week.
Opportunities
- While many are predicting an interest rate increase in the United States as early as mid-2015, some analysts are forecasting the next installment of quantitative easing, QE4. CLSA’s Greed and Fear argues that the two times the five-year breakeven inflation rate declined to 2 percent, the Federal Reserve began expanding its balance sheet. Currently, the five-year breakeven inflation rate is around 2.2 percent and trending lower. Fear of deflation could prompt further expansionary measures in the U.S., which would be positive for equities overall, particularly gold stocks.
- France’s GDP grew for the first time this year during the third quarter, while Germany’s growth remained positive. Given the headwinds facing the eurozone, the results are a relief to many investors and allow the European Central Bank (ECB) more breathing room for enacting its easing policies.
- The OPEC meeting at the end of this month could not be more pressing. With oil prices severely depressed and weighing on the exporters’ budgets, a production cut could yield a significant boost to the energy space.
Threats
- Oil continued its downward trend this week, inciting new fears of further declines to come. If oil dips lower, many energy companies could find themselves in a dire situation. On a positive note, because demand remains strong globally, a decrease in supply will reveal the bottom for oil prices, which should bounce given the present severity of oversold conditions.
- The dollar seems to be unstoppable. After consolidating for a short period of time, the dollar has risen to new highs. The rise remains a warning sign of a weaker global economy and the threats that still exist to destabilize it.
- The Platts China Steel Sentiment Index revealed that expectations for new orders dropped from 71 in October to 33 in November. The results are the product of speculation that China is removing certain tax rebates on exports of steel products.
Strengths
- Turkish stocks rallied this week, getting a boost from falling Brent prices. The country is a net importer of oil, which has allowed it to benefit in the current cheap oil environment. Turkey’s current account deficit shrank roughly 33 percent year-over-year in September, while the yield on two-year government notes fell to the lowest level since July. The Borsa Instanbul 100 Index closed up 4.17 percent for the week.
- Hungarian banks breathed a sigh of relief this week as the government decided to allow the conversion of $14 billion of retail foreign-currency mortgages at the market exchange rate. The government has been at odds with the banks after accusing the latter of unfair lending practices. The recent news comes as a sign of cooperation and solidarity. The Budapest Stock Exchange rose 1.51 percent this week.
- Both China and Hong Kong were among the best performing Asian countries this week, as the government set November 17 as the official start date for the Shanghai-Hong Kong market integration program. This will allow investors from both sides to trade stocks listed in each other’s exchanges after seven months of preparation.
Weaknesses
- A great deal of attention was placed on Russia this week, and for good reason. The ruble saw its eighth-straight weekly decline as foreign sanctions, declining oil prices, and intolerably high borrowing costs continue to choke the country’s economy. Russia’s central bank has been using every tool at its disposal to prop up the ruble, even going as far as to limit domestic lending to the financial sector. Still, the ruble remains the worst performer out of more than 170 currencies, declining roughly 22 percent over the last three months. Furthermore, Russia escalated the conflict in Ukraine this week as NATO reported Russian troops and artillery amassing in eastern Ukraine. The reignited geopolitical risk alongside the continued pressures facing the Russian economy led the ruble to decline 0.8 percent against the dollar this week.
- Another currency that saw significant sell-offs this week was the Brazilian real, declining 1.11 percent against the dollar. The volatility surrounding Brazil stems from speculation over who the re-elected Dilma Rousseff will choose as the next finance minister. Furthermore, Petroleo Brasileiro fell 7.5 percent this week as the company considers the results of an internal investigation about money laundering and bribery. The Ibovespa Brasil Sao Paulo Stock Exchange Index fell 2.73 percent this week.
- Malaysia was the worst performing Asian country this week, as its third-quarter GDP slowed to 5.6 percent year-over-year from 6.5 percent in the second quarter largely due to deceleration in exports. The current account surplus declined significantly to 2.8 percent of GDP from 6.1 percent of GDP in the previous quarter.
Opportunities
- The substantial underperformance of Brazilian stocks has been cited as one of the main reasons for Morgan Stanley’s upgrade of Brazil from underweight to equal-weight this week. Technical indicators are revealing a much oversold condition in Brazil, perhaps providing a cheap buying opportunity according the report.
- Greece’s Deputy Finance Minister, Giorgos Mavraganis, announced plans this week to improve the country’s tax system and foster growth. The plan includes cutting the income tax rate for businesses, reducing the minimum tax rate on income-wage earners and pensioners, lowering the property tax rate, and developing harsher punishments for tax offenses.
- Chinese government policy efforts to stabilize the property market and rein in excessive local government borrowing should help reduce systemic risk and enhance the asset quality of Chinese banks over time. The imminent official start of the Shanghai-Hong Kong market integration program could be a near-term catalyst for re-rating as Chinese banks are still trading at near trough valuations despite consistent dividend growth in the last eight years.
Threats
- Russia faces the threat of tougher sanctions due to recent allegations of providing weapons and artillery to rebel forces in Ukraine. Current sanctions have already placed significant pressure on the economy, which saw growth of only 0.7 percent in the third quarter. Furthermore, many speculate the central bank will enact another rate increase to defend the ruble, which would be the fifth rate hike this year. Higher borrowing costs for domestic banks, which had its access to credit cut by the central bank this week, could serve to hurl the Russian economy into a recession, a possibility Putin and the central bank are very much aware of.
- The dollar’s continued climb remains a warning sign to the global economy. While the eurozone has by and large avoided another recession, deflationary pressures and global growth scares continue to dominate market sentiment. While a reversal of the dollar is certainly overdue, the catalyst that would cause it has yet to be found.
- A number of things may continue to weigh on investor sentiment towards South Korean equities including: (1) increasingly challenging exports, pressured by a stronger Korean won versus the Japanese yen; (2) negative earnings revisions; and (3) a price-to-earnings valuation above the decade average.
© US Global Investors
