Sunday, April 12, 2015

2015-03 Relative Equity Trends

In March, the consumer goods sector and the materials sector continued their trends over the last few months.  The consumer goods sector continued to decline from a year ago, but the rate of decline over the last twelve months has slowed from -13.36% in February to -5.99% in March.  The materials sector continued to expand, and the rate of increase over the last twelve months has accelerated from 12.25% in February to 15.62% in March.  This indicator would indicate that the Chinese economy continues to be in a state of expansion that started in June 2014.

The end user prices for these goods contradict the movements in equities.  Raw materials and commodities prices have been declining over this period, whereas consumer goods prices have remained above negative territory.  However, equity returns for the companies that produce commodities have out performed equity returns of consumer goods sector companies.  This is most likely driven by the fact that new credit is flowing faster into the materials sector, which is further exacerbating the oversupply in raw materials.  The equity value of these companies is being driven higher as their investment in new assets further deteriorates their future cash flows, thus facilitating an even larger correction than would originally be required.

In the news:
  • [SCMP] “Aluminum Corp of China Ltd (Chalco), the leading producer of primary aluminium and raw material alumina in the country, posted its largest-ever loss in 2014 due to huge writedowns and weak metal prices as the Chinese economy slowed.”
  • [Platts] “With concentrate prices at current low levels, most of China’s molybdenum miners still in operations are incurring losses, an official from a major miner in China said on the sidelines of the 11th China Molybdenum Annual Conference that was held over March 27-29.”
  • [Reuters] “China’s largest listed gold producer Zijin Mining Group reported net profit growth for the first time in three years in 2014 but expects gold prices to hover at low levels due to the global economy slowdown.”
  • [Bangkok Post] “In Malaysia, Great Wall Motor Co Ltd (GWM), China’s biggest maker of sport utility vehicles (SUVs) and pickup trucks, has partnered with Go Automobile Manufacturing Sdn Bhd to invest 2 billion ringgit to assemble energy-efficient vehicles in Kedah state.”
  • [Bloomberg] “China Mengniu Dairy Co. surged to a seven-month high in Hong Kong trading after China’s second-largest dairy producer posted full-year profit that beat analyst estimates.”
  • [HKS] “China’s largest diaper maker Hengan International Group (1044) saw net profit rise 5.2 percent last year to HK$3.92 billion, thanks to a quick turnaround in the second half after a slip of 4.5 percent in the first.”