IMF Outlook - 23rd April

All about the fall-out from the IMF’s quite dismal outlook for global growth, and the increasing concern over Pakistan’s “abdication’ to the Taleban and the US’s noticeably aggressive rhetoric as Clinton warns of a “mortal” danger to global security, while South Africa has been busy re-electing its favourite party, the ANC, this time around with an energetic new and controversial leader – Jacob Zuma. Morgan Stanley last night helped bring the financials back down to earth as it provided some disappointing results. In the midst of talk of nuclear annihilation you can’t help but wonder just how important those Q1 earnings really are – or aren’t.

Markets…
Markets have been jittery at best this week and today/tomorrow will not prove an exception. In Asia, Japan’s woes continue, not only did the IMF show the largest contraction would come through in their stricken economy (-6.2%) but one of the largest super-banks has just admitted it will be making a larger loss than anyone had anticipated – Mizuho posting $5.4bn loss, with the main culprit being a tumble in the value of its equity investments. With an apparent return to some-sort-of-form from the US lenders (BofA and Citi in particular), Japan’s mighty institutions are looking fragile and more questions concerning their future ability to withstand a deepening recession are arising. Good times are not ahead for the once seemingly immune (back in early 2008) Japan financial industry to the credit-crunch fall-out. A key immediate issue is the need for additional capital raising - something the Japanese banks have not done with great relish.
Despite the bad news in Japan and concerns over China’s slowing growth rate from the IMF, markets across Asia managed to put in some good performance today, with Hong Kong the star +2.3% and Australasia doing quite well – avg +2%. The most declining market today unsurprisingly Pakistan’s (-3.2%) as the political situation takes its toll.

Europe has been trading flat and light most of the morning until Credit Suisse provided a little extra vitamin injection and announced it has returned to profit – most European indices now trading modestly higher but possibly following the (for now) decent indication of a positive open on the US futures (DJIA +68pts, S&P +8.5pts)
US futures appear to have had a boost from Obama’s administration calling for banks to prepare for a report of the “stress-testing” they have undergone – the report is to be released on May 4th and Obama wants answers before the questions that will surely follow are asked. This may be improving confidence amongst some market watchers that the financials will be able to survive the worst-of-
the-worst of this crisis – Obama would not be asking for explanations of how a banks might survive unless he knew they able to already – some market confidence building tricks here most likely.
On a positive note for the US, and a great sign for the most recession proof of all businesses – entertainment - major Hollywood studios have generated enough ticket sales this year (+17% YoY) to be on course for the first ever $10bn revenue year. By bringing forward a large number of their traditional summer big-ticket (pun intended) releases, studios have (incredibly astutely) realised that lumping all your best movies into a one month period may not be the best way to ensure large audiences – nothing like a sobering crisis to get the best out of those highly-paid MBA grads slaving away amongst the stars in Hollywood.

Oil has edged closer to $50/brl again, despite some news yesterday that inventory levels at US’s Department of Energy were not as low as expected, but the weakening US$ vs Euro pushing crude higher. Gold has quietly edged higher all week and we are back within melting distance of $900/oz once more. Currencies have seen the aforementioned strength return to Euro, but cable remains relatively stable at around 1.45. $/Yen has not returned to tackle the 100 level since 13th April.

Water fights…
China has gone and put on display the best of its naval offering, with some exceptionally advanced warships as it goes ahead with a military parade to celebrate the 60th anniversary of the country’s navy. Just another example and sign of China’s growing international power. The US response to all this – “there is no way the Chinese navy is on par with the United States, or even Japan” – oh dear, is that really the right way to react to a country that is intent on always proving people wrong – especially one that will go to any length, and spend any size fortune, to achieve exactly that, and prove people wrong.

I buy a home, and you give me a voucher…
More bad news about Dubai’s real estate market today out from UBS, as it states a further 70% fall may be expected in 2009 (from peak levels in 2008) –this would be in keeping with much of the anecdotal evidence that has been doing the rounds as well as a number of official views recently released. Unlike some before it, the report from UBS though was quite damning of the entire real-estate sector, even noticing fundamental weakness amongst the Abu Dhabi developers where others have not. They downgraded and recommended investors sell every developer they cover. This is not in keeping with our view, where we have significant differences in opinion on the Abu Dhabi names and even a few in Dubai.
In the midst of this, Emaar continues to draw up plans to deal with its toxic assets, attempting to highlight those most damaging to future revenue targets. Emaar has already provided some purchasers that have found themselves invested in properties that are not being completed with “vouchers” – allowing buyers to swap their investment for other Emaar properties. These credit notes are transferable and word is that they are already exchanging hands for cash at 40% discount to face value. Not bad if you consider those not holding any properties at the moment can come in and “buy” a new property for a 40% discount on top of the discounted voucher.
What will be exciting is if these vouchers quickly take on a life of their own and become acceptable forms of currency for settling very expensive bar tabs at very expensive Dubai bars. “Double vodka on the rocks sir? No problem…that’ll be a nice two-bed, 3 bath, sea view please – may I keep the change too?”