Global Macroeconomic situation as of 1 May 2008

Last week I made a post about whether China is decoupling from the USA.

Among my wishlist were the following :

So my wish list is as follows :

1) China companies continue to report good 1Q 2008 earnings. Proving the might of China's domestic market.

Here's a report from REUTERS

April 30, 2008, 5.54 pm (Singapore time)
China earnings outlook regains some lustre after Q1

SHANGHAI - Earnings prospects for China's 1,500-plus listed companies have brightened after they posted better-than-forecast profits in the first quarter, bolstered by unexpectedly brisk economic growth.

Six fund managers and securities analysts surveyed by Reuters on Wednesday predicted median profit growth for listed Chinese firms of 25 per cent in 2008, up from a forecast of 20 per cent about a month ago.

A pick-up in the stock market and a likely slowing in yuan appreciation were among other supportive factors they cited for the earnings outlook.

The forecast suggests China will maintain the first-quarter pace of year-on-year earnings growth, calculated at more than 23 per cent by the official Shanghai Securities News, for the rest of the year.

While impressive on a global scale - US first quarter earnings, for example, are down by about a fifth - the growth is still less than half the gains made during 2007.

A major boost came from China's economy growing at an annual rate of 10.6 per cent in the first quarter, achieved despite the worst snow storms of the decade in many areas of the country and slower export growth as the US credit crisis hit the global economy.

'We raise our forecast for 2008 corporate earnings (to 25 per cent) from 15-20 per cent a month ago, partly due to a stronger-than-expected economy in the first quarter,' said senior stock analyst Cao Xuefeng at West China Securities in Chengdu.

But first-quarter earnings growth slowed sharply after growing by about half in 2007, according to the Shanghai Securities News.

That in turn was below analysts' forecasts late last year of a 50 to 60 per cent rise for 2007. Earnings rose by about two-thirds in the first three quarters of 2007 alone.

Shares slide
First quarter earnings were hit particularly hard by the plunge of more than a third in the benchmark Shanghai Composite Index's . That eroded the investment income of index heavyweights such as top insurer China Life Insurance, which posted a 61 per cent drop in first-quarter profit.

The bottom line of export-oriented companies was also hurt by faster appreciation of the yuan, which gained 4.2 per cent in value against the US dollar in the first quarter - its quickest quarterly appreciation since 1993.

'The first-quarter earnings indicated a strong polarisation of listed companies' performance, with banks outperforming the overall market while refineries were hit by surging oil prices,' said Yan Zhenghua, chief strategist at China Asset Management.

'The trend is likely to continue for all of 2008,' he added.

Among 15 listed Chinese banks, most reported a more than doubling of first-quarter profit, partly due to an income tax cut for Chinese companies to 25 per cent from 33 per cent this year.

The reduction will boost overall corporate earnings by an estimated 10 per cent this year and will benefit banks the most, partly because of their huge turnover.

Banks, which account for about 30 per cent of all listed firms' earnings, are under pressure from official economic cooling steps such as a new loan quota system, but analysts now believe their total profits will grow at least 40 to 50 per cent for in 2008, an upgrade from a forecast about a month ago for a 30 per cent rise.

Oil giant PetroChina, however, posted a disappointing 32 per cent fall in net profit for the first quarter and Sinopec Corp, Asia's largest oil refiner, suffered a 69 per cent dive, as soaring crude oil prices pushed their refining business into a deep loss.

The two account for about 20 per cent of domestically listed firms' total earnings.

Resilient economy
But a resilient economy is likely to keep earnings buoyant.

For 2008, analysts forecast economic growth around 10 per cent. An easing in consumer price inflation, which reached an 11 year high of 8.7 per cent in February before falling back to 8.3 per cent in March, would also help companies facing higher input costs.

China has also slowed the appreciation of the yuan, which is nearly unchanged against the US dollar in April, as the government, which guides the market through the central bank's daily mid-points, appears to be responding to exporters' complaints.

That could combine with a possible stabilizing in the US economy to boost business for small exporters such as toy maker Haixin Group, which posted a loss of 5.88 million yuan (US$840,000) in the first quarter.

Earnings will also get a boost from a steadier stock market. The main index has rebounded 23 per cent from a 13 month low last week after the government stepped in with supportive measures, including a cut in the stock trading duty.

Stock investments accounted for about 15 per cent of listed firms' net profit in 2007.

The average price-to-earnings (PE) ratio of China's listed firms has dropped to about 27 times 2007 profit, from a peak of 46 times late last year. Many analysts said that was unsustainably high but profit growth around 25 per cent this year should bring PE ratios down further, to about 22 times. -- REUTERS

The question is whether to trust these analysts in their forecasts? What we do know is that everyone was thinking that the US slowdown will impact China badly in 1Q 2008 as well. But clearly that did not happen.

2) 2Q 2008 US GDP numbers come in showing no recession or a mild recession

So far the 1Q 2008 US GDP numbers came in showing expansion of 0.6%. This was slightly above forecasts. The big question going forward would be the 2Q 2008 figures. But certainly the numbers for 1Q 2008 has not caused any panic, which I still view as positive.

3) US Federal reserve indicates confidence in US economy and signals the cycle of rate cuts is coming to an end, and the Fed will be focusing on tackling inflation next. (The WORLD will be focusing on tackling inflation)

The Fed cut rates by 25 basis points overnight. This was expected. However the key was what the Fed would say giving a clue going forward. Well the Fed just about said the same things except that the central bank removed the following language form the current statement: "downside risks to growth remain."

While the Fed did not say that they had confidence in the US economy (guess I was getting ahead of myself there), the omission of that statement is a step forward.

Which is why the market sold off subsequently because they realized the Fed might be coming to an end of its rate cuts cycle.

The Fed will be starting to watch inflation now more so than the economy if my guess is right.

4) Commodity prices fall, cost of raw materials drops for China and they continue with powerful growth figures.

This will take time. The USD will have to strengthen for this to happen. The Fed cutting rates overnight will cause the USD to fall again in the short term. Oil and commodities might have one last rally. But I would expect things to change going into 4Q 2008.

Hence overall I still expect China to be stable and strong going into 2H 2008. How strong that's the big question. As for the USA, I'd be optimistic to say that they manage to avoid recession. Most likely they will have a mild recession. Long or short? It may not matter as much for us in Asia as much as it matter to them in USA!

I expect the markets to be indecisive in 3Q 2008. It should be a bumpy ride. But hopefully things will improve from 4Q 2008 and a sustained rally towards the end of the year.

Next I'll be looking at COSCO Corp's earnings......