Friday, June 26, 2009

Citigroup: Emerging Markets Barely In The Foothills Of A Potential Bubble

Citigroup Global Markets published "Global Equity Strategist" on Wednesday, 24 June. The first page summary is rather short:
  • Safe Haven Selling — The rise in risk appetite has been matched by large selling of traditional safe havens. Assets in US Money Market funds are down 6% from peak levels.
  • Welcome Back — After 10 months of outflows, Global Developed Market funds are seeing inflows again. Emerging Markets inflows have been even stronger this year, returning more than half of last year’s outflows.
  • Bubble Talk — Emerging Markets fund inflows have come back earlier and stronger than previous recoveries. Talk of a bubble is beginning to gain momentum. But performance, valuation and equitisation suggest an Emerging Market bubble is premature.
  • The Next Mania — Elements are potentially in place for a bubble in Emerging Markets. The most important is easy money. Real policy rates are negative. Money supply growth has rarely been stronger. We would buy Emerging Markets on dips and prefer CEEMEA and Em Asia.
However, the emerging markets equities are "barely in the foothills of a potential bubble":
Does performance signal a bubble in Emerging Market Equities? Emerging Markets are up 50% from their lows but this is just a fraction of the gains we have seen in a previous bubbles. In the 1980s Japanese equities rose nearly 10 times before the bubble burst in the early 1990s. Global Telecom, Media and Technology stock prices rose 7 times in their bubble. Chinese equities were up nearly 7 times from 2003-07, while Indian equities increased 9 times in their bubble.
Click on chart to enlarge, courtesy of Citigroup.

The rally in Emerging Markets has so far been in-line with previous bubbles at the same stage. However, it is still far too early to call the current move in Emerging Markets a bubble, either in duration or magnitude (Figure 12), in our view. For Emerging Markets to enter bubble territory we would have to see them double then double again.
So, just buy on dips?

I read sources, e.g., Societe Generale, Citigroup, today that June new lending will reach up to 1.2 trillion RMB (CNY, Chinese Yuans) in China. BNP Paribas mentions 1 trillion RMB in June, and concludes:
... total new lending in H1 2009 would amount to RMB 6.84 trn ...
Just to give some perspective, the USDCNY exchange rate is at circa 6.8335, meaning that 6.84 trillion RMB/CNY are 1 trillion USD. Chinese nominal GDP in current USD is ca. 5 trillion USD. So, they are blowing new credit only ca. 15-20% of nominal GDP in 6 months?

The 1 trillion USD lending growth on China would correspond to more than 2.5 (actually closer to 2.8 trillion) trillion USD lending growth in US. All the noise about irresponsible money printing in the US?

No comments:

Post a Comment