Sunday, March 8, 2015

2015-02 Relative Equity Trends

Relative equity returns are indicating the Chinese economy is continuing a period of expansion that began in June, 2014.  The materials sector continued its climb higher and the decline in consumer goods accelerated slightly since January.  Not only has the materials segment outperformed the consumer goods segment, both segments are moving in opposite directions.

Interest rates are rising, making capital expenditures more expensive.  A decrease in foreign capital into projects in China are more likely than a decrease in state-sector resource allocation into raw materials production.  Consumer goods margins are also being squeezed, which will put more downward pressure on raw materials prices.  We should begin to see the materials segment decrease at a more rapid rate, returning China into a period of contraction.

In the news:
  • [WSJ] “Even as China’s car sales grow at a 10% annual clip, many of its domestic auto makers are expected to report 2014 results that will be their worst in years. Great Wall Motor Co. , considered a rising star, projects a 2% decline in net profit for 2014, its first year-over-year drop since 2008. Geely Automobile Holdings Ltd. , whose parent company owns the Swedish Volvo brand, warned of a roughly 50% slump in last year’s net profit, its first year-over-year decline since 2002.”
  • [SCMP] “Snack food producer Want Want China said its revenue and profit for 2014 may not “follow the increasing trend as demonstrated in the past year” due to the slowdown of the Chinese economy.”
  • [Bloomberg] “Chinese insurers and banks rallied in New York on Feb. 13 after government data showed the broadest measure of new credit rose for a third straight month in January. Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal, posted the steepest weekly gain since the five days ended Jan. 9.”
  • [Bloomberg] “Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, surged to the 10 percent daily limit in Shanghai after announcing it would set up a 2 billion yuan ($320 million) e-commerce unit to trade steel.”
  • [Bloomberg] “China Petroleum & Chemical Corp., PetroChina Co. and [CNOOC] Ltd. are cutting spending and controlling costs to cope with crude’s plunge in the past seven months that’s already crimped 2014 earnings. [Chengyu Fu], chairman of Sinopec, as China Petroleum is known, said on Jan. 15 that profit from exploration and refining “fell off the cliff” in the three months ended Dec. 31.”