International earnings and multi-national corporations

Despite an improving picture for the global economy, earnings reports of MNCs with operations in Asia and other emerging markets have seen lower growth in the 4th quarter. However, managements of these companies are quick to reassure investors that things would improve in the second half of 2012

The present stock market optimism is based on a very benign view of the world. The US economy continues to add jobs, although not as many as it should. Greece’s negotiations with its private creditors are going well and they will work out a deal to avoid default. Or at least that is what we are told to say nothing about increasing problems in Portugal and Spain. The emerging markets have been growing rapidly with Egypt up 25%, Hungary up 21% and Turkey up 21%. Perhaps surprising considering Egypt’s political upheaval, Hungary’s debt levels and Turkey’s double digit inflation.

But the best news is from China, where the official Purchasing Managers’ Index (PMI) was 50.5 in January, beating analysts’ expectations of 49.5. Of course, the government figures were contradicted by a private-sector version of the survey put out by HSBC. Its number was 48.8, which indicates a slight contraction and was unchanged from December. What is more interesting than the Chinese government’s PMI fudge is that the statistics bureau decided not to publish figures on investment and other activity in January due to “distortions related to the national week-long holiday.” Were they that bad?

Despite all of these encouraging numbers demonstrating an improving picture for the global economy; it might be a good idea to look a little deeper into the earnings reports for the 4th quarter. Since the crash of 2008 the developing world has experienced slow or no growth. The recovery was helped by the massive stimulus in China and insanely accommodative central banks in developed countries. This wall of money helped China and most emerging markets achieve robust growth while the developed world stagnated.

It was not only the emerging market economies, especially those in Asia, which grew. Many of the US’ largest companies grew with them. Although their revenue growth in Europe and the US remained anaemic, many of them racked up double-digit growth in Asia and other developing markets. This has gone on quarter after quarter until now. Apparently in this reporting season there are definite signs that things are changing.

Take the case of Siemens, the giant German industrial company that makes everything from wind turbines to medical diagnostic equipment. Considering the problems in Europe, it would be considered natural if Siemens’ sales slowed, but the problem was not in Europe. New orders from China slowed by 16%. While Siemens’ chief financial officer, Joe Kaeser, acknowledged that “there had been a ‘clear slowdown’ in China”, he was quick to reassure investors that things “in China could actually brighten in the second half.”

Siemens was not the only large company to experience problems in Asia. Eaton, the US manufacturer of industrial equipment and components for trucks and aircraft had problems too. Their sales have been hit by the slowdown in Chinese construction. Eaton’s CEO, Sandy Cutler, was not fazed. He told analysts that he still expected economic growth would be faster in emerging economies such as China and India.

The American manufacturer 3M had similar problems. Its chief executive said: “Our China team anticipates continued below-trend growth in the first half of 2012.” United Technologies, the manufacturer of Otis elevators had the same experience for its sales in China, which slowed by 7% in the fourth quarter. Also, the Swedish-Swiss power and automation company ABB’s orders dropped 5% due to weaker demand for its power systems in China.

The problems are not limited to manufacturing companies. The largest US chemical company DuPont also had issues. Their sales in the Asia-Pacific region fell by 23% in the fourth quarter of 2011. The management of UPS ascribed the slower global growth to Europe, but also acknowledged that the Asia-to-US package volume slipped 3% and that it had reduced its Asia-to-US capacity by about 10% because of the lower demand.

Certain segments of the automotive sector have also been hit by a slowdown in Asia. The commercial vehicles group, Volvo, warned last summer that Chinese demand for construction equipment fell, but of course they assured investors that it was just ‘temporary’. Ford experienced declining sales in both Europe and Asia as did Johnson Controls Inc, a US auto parts manufacturer.

Not all car companies had problems. Luxury brands like BMW and Volkswagen’s Audi had record-breaking sales. Like the 35% rise in gambling revenues in Macau, these sales might represent instability and corruption. But even these might have problems. Wynn Macau just reported slower growth.

One US company, Caterpillar, also saw a drop in sales in China, but the stock still has risen 20% in January. Part of the expectation is Caterpillar can profit from sales in the US although those are still only 50% of their peak in 2006. The other bright spot for the company is sales to mining companies which look forward to booming demand for their commodities in, you guessed it, China.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected])



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Upmove with pauses: Weekly closing report

A reaction is imminent

For the fifth week in a row the market has ended in positive, making the Sensex and the Nifty to close at its highest since 31 October 2011. Both the indices rose 2% over the week. Except for Monday when there was huge loss on the bourses, all other four trading session recorded gains and each day the both the indices making a higher high and higher low. From here we may see the Nifty moving in the range of 5,220 and 5,395. The market is liable to reverse anyday though the trend is firmly up.

Snapping its three-day winning streak in the last week of January, the domestic market opened lower on Monday tracking the Asian bourses which were mostly lower on unending Eurozone debt concerns. Fitch Ratings on 27th January downgraded the sovereign credit ratings of Italy, Spain Belgium, Cyprus and Slovenia, indicating there is a chance of further downgrades in the next two years. However, on Tuesday, the domestic market opened higher, tracking gains in the Asian region in morning trade following reports that European leaders on Monday supported plans for greater fiscal integration in Europe.
On Wednesday, concerns about the government’s excessive borrowing, as pointed out by the RBI, kept the market lower in the fist session. The market moved sideways till noon trade after which concerns raised by the RBI over the government’s excessive borrowing pushed the benchmarks to the day’s lows. The Asian markets, which opened mixed on economic growth concerns, closed mostly higher on support from the European bourses. While Chinese government data showed a rise in manufacturing output last month, the HSBC Manufacturing PMI data disappointed investors. The Thursday’s upmove was dented with the Supreme Court’s verdict in 2G telecom scam, when the Court ordered the Department of Telecommunications to cancel all the 122 mobile telecom services licenses it allotted after January 2008.
On Friday, the Asian indices opened cautiously and the domestic indices too were range bound for the major part of the trading session but surged towards the end. At the end of the session the Asian market were a mixed bag ahead of key US jobs data which will be out later today, which will offer more clues over the global growth and appetite for risk, while Greek debt restructuring talks dragged on.

The US market ended in positive on Friday on the back of stronger than expected job growth in the month of January drove the unemployment rate down to its lowest level in almost three years

The Sensex gained 371 points to close at 17605 while the Nifty gained 121 points to close at 5326

Except for BSE capital goods (fell 1%), BSE Consumer durable (fell 3%), all other 11 sectoral indices ended in positive, with major gain seen in BSE Realty index (rose 5%) followed by BSE Auto (rose 4%)

The toppers in the Sensex stocks were D L F Ltd (up 9%), Hero Motocorp and Tata Power both rose 7%, Hindalco Industries ( rose 6%), Tata Consultancy Services (rose 5%) while the on the losing side were Coal India and BHEL  both fell 4%, Larsen & Toubro fell 2%, I T C Ltd and HDFC both fell 1%

The toppers in the Nifty were D L F Ltd (up 9%), Jaiprakash Associates (up 8%), Sesa Goa, Hero Motocorp, Tata Power  (up 7% each) while the bottom five were Larsen & Toubro and Cairn India fell 2% each, Reliance Communications and BHEL (fell 3% each), Coal India (fell 4%)


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