Clouds darken over euro-zone economy

July German Ifo, euro-zone PMI data boost recession fears

By William L. Watts, MarketWatch

Last update: 9:31 a.m. EDT July 24, 2008

LONDON (MarketWatch) -- Fears the once-resilient euro-zone economy could fall into recession were amplified Thursday after two closely-watched gauges of economic sentiment and activity posted larger-than-expected declines.

The Munich-based Ifo Institute's German business climate index plunged to its lowest level since September 2005. Separately, the preliminary July RBS/Markit composite purchasing managers index -- a gauge of activity across the manufacturing and services sector -- fell to its lowest level since November 2001. Read related commentary.

"The data significantly added to the impression that economic growth, in Germany too, is slowing at a fast clip," said Peter Possing Andersen, senior analyst at Danske Bank in Copenhagen.

"Not only did the new data indicate that euroland economic activity is now stagnating, they also suggest that the European economy could be about to slide into a recession, should the business surveys deteriorate further in the coming months," he said in a research note.

Ifo's business climate index posted a sharper-than-expected drop to 97.5 in July, down from 101.3 in June. Consensus expectations were for a decline to 100.2, according to a Dow Jones Newswires survey of economists.

The composite purchasing managers index for the euro zone fell to 47.8 from 49.3 in June, below expectations for a decline to 48.7 and the lowest reading since November 2001.

The figures show that purchasing managers across the euro-zone believe activity contracted further in July. A reading of less than 50 signals a contraction in activity, while a reading of more than 50 signals expansion.

Ifo indexes measuring current conditions and expectations also fell sharply. The July current conditions index declined to 105.7 from 108.3 in June, below the consensus forecast for a drop to 106.2. The expectations index, which measures sentiment about prospects in the next six months, fell to its lowest level since November 2002, dropping to 90.0 from 94.6 in June, compared to expectations for a drop to 93.3.

Meanwhile, the PMI survey also found that firms across the region were cut staffing levels for the first time in three years, with employment down in both manufacturing and services.

The data indicate "that the downturn is gathering pace faster than expected," said Chris Williamson, chief economist at Markit.

The figures come as Spain, Ireland and Italy are seen to be flirting with the possibility of recession, and while France -- the euro zone's second largest economy -- also displays signs of slowing growth.

France's national statistics office, Insee, said Thursday that its July business sentiment index fell to a three-year low of 98 in July due to business leaders' pessimism on production and price pressures. Expectations were for a reading of 100 after a downwardly revised 101 in June.

Also Thursday, Markit's composite purchasing managers index for France's service sector fell to 47.1, its lowest level on record.

A measure of Italian business confidence produced by research center ISAE fell to 83.5 in June from a downwardly revised 86.7 in June, the lowest reading for the euro area's No. 3 economy in nearly seven years, news reports said.

Moreover, the Ifo data underlines the notion that long-resilient Germany, the single-currency area's biggest economy, is beginning to slow significantly as rising inflation bites into consumer pocketbooks and a strong euro and slowing world growth weigh on exports, economists said.

The purchasing managers index for the 15-nation zone's manufacturing sector dropped to 47.5 from 49.2 in June, the lowest since June 2003. The services PMI fell to 48.3 from 49.1, also the lowest in three years.

Economists said the PMI readings point to quarterly euro-zone gross domestic product growth trend of just 0.1%.

Alongside the Ifo data, the European Central Bank will likely find itself forced to revise down its own growth estimates, wrote economists James Ashley and Nick Mathews of Barclays Capital.

A decline in oil prices suggests euro-zone inflation may have peaked at an annual rate of 4%, where it's likely to stay through September, they wrote, potentially limiting room for further rate hikes by the European Central Bank.

The figures suggest that recession "has finally set in" for the euro-zone's export-sensitive manufacturing sector, accompanied by a simultaneous weakening of the service sector, said economists at BNP Paribas.

On top of that, the German Ifo data suggest the euro zone's "biggest and most competitive economy is on edge of a severe growth slowdown," they wrote.

The PMI survey also found that input prices climbed slightly higher again in July after a surge in June, with the overall rate of inflation rising at the fastest pace since October 2000.

The European Central Bank hiked its key lending rate earlier this month by a quarter of a percentage point to 4.25% in an effort to ensure that surging, commodity-led inflation pressures don't feed through to wage negotiations and broader prices.

William L. Watts is a reporter for MarketWatch in London.

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CS Global Equity Strategy - Halfway through a bear market rally


Global equity strategyGY
Asset allocation: Half way through a bear market rally

Two weeks ago, we highlighted that we were becoming less bearish but were waiting for clearer capitulation.

We did not quite get capitulation on the scale that we had envisaged (the aggregate indicator did not quite reach Jan 21st and March 17th lows) but three of the sub indicators did get there over the past week:

(1) Markets were exceptionally oversold (less than 20% of stocks were above their 10-week MA for 10 consecutive days - the only time this happened before was July 02 and May 04, which then saw an average gain of 12% over the next month).

(2) Equity sentiment was as depressed last week as it was at the lows in Q1.

(3) Insider (i.e. management) buying rose to levels consistent with a temporary low, with corporate net buying (data just out) now back up to normal levels. On top of this, we have the catalyst of a falling oil price (with each 10% off the oil price adding 0.2% to GDP and reducing inflation by 0.3% at a time when central banks are focused on inflation!).

The average bear market rally has been 15% over 51 days and on that basis we are about half way through the rally (though the risk is that with less capitulation than March 17 lows - the rally is less).

Why a bear market rally not a bull market?

(1) Valuations are cheap but should be cheaper

: the equity risk premium oour earnings numbers is 3.8%. This is 'cheap' in as much as it is 40bp above its long-run average but the warranted equity risk premium (based on credit spreads and lead indicators) is now at 4 ¾%. The problem is that bond yields did not fall that much into the last down-leg in equities (when the S&P 500 was last at this level in mid-March the US bond yield was 80bp lower!). We do not hit an equity risk premium of 4 ½% or more until the S&P falls to a 1,150 to 1,200 range. Additionally, at 1,170 S&P 500, the multiple on trend earnings would be the same as Oct 2002 market low (of 15.6x). (2) Our models suggest 2009 EPS will fall by 20% to 30%. (3) To get more positive on the economic backdrop we have to see the ECB target growth not inflation (and we think that will not be until Q1 2009) OR oil falls sustainably below $110pb (again unlikely until we have seen more demand destruction in Europe/US). (4) The average bear market during a recession has been 28% over 13 months – as of now, the US is down 17% over 9 months.
Our biggest fundamental concern is that the central banks continue to overly focus on commodity led inflation (where resource constraints continue to negatively surprise) and as a result exacerbate a credit led deflation (that has on our data hardly started with both US bank leverage and on some measures US consumer leverage higher than a year ago). Hence, we believe that global GDP growth will slow to around 2.8% over the next year (compared to 4.9% in 2007)

. We continue to prefer credit to equity with, outside the financial sector, the earnings risk being higher than the balance sheet risk. We stick to our yearend target of 1,300 on the S&P 500 and 320 on Eurostoxx.
The fundamental view: only a bear market rally!

(1) Equities are cheap but should be cheaper on our models.

(2) 2009 EPS estimates need to fall at least 20% on our models (in Europe probably closer to 30%).

(3) We need to see oil falling sustainably below $110.

(4) We need the ECB to target growth, not inflation.

(5) In a recession, the average bear market is 28%

(that would imply a low of 1,140 S&P 500).

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LONG WAY TO FALL

As the MSCI Asia ex-Japan benchmark index looks likely to post its best week since March, some investors might be asking whether markets have bottomed. At the very least, have valuations fallen enough to make stocks look relatively attractive?

Not quite, said Garry Evans, strategist at HSBC in Hong Kong.

Valuations in Asia are running at 2.1 times trailing book value, far above the 1.2 times reached in the last three major periods of market volatility in 1998, 2001 and 2003.

Using the usual price-to-expected earnings ratios to measure relative value, shows that Asian stocks are quite cheap. They have slid to 11.7 times 12-month forward earnings from 17 times in the last year.

But Evans said consensus earnings forecasts for 2009 could come down sharply in a matter of months.

"We think it unlikely, though, the bear market is over. Investors have not yet capitulated," he said in a note. "In the worst case, there could still be a long way to fall."

Institutional investors, who usually move large amounts of money with longer time frames, apparently agreed.

They did not take part in this week's global equity rally and actually pulled back their accumulation of European stocks over the last month to the slowest since January, according to State Street Global Markets, which tracks about $15.3 trillion in assets held in custody by the bank.

In addition, large investors have been selling the U.S. and European energy sectors as well as emerging market equities and moving into sovereign bonds, State Street data showed.

"This mini-rally looks as though it is built on unsafe foundations. State Street Global Markets flow measures suggest that institutional investors are staying on the sidelines," the firm said in a weekly note.

Japanese government bond prices rose on a drop in the Nikkei and an overnight surge in U.S. Treasury debt prices.

Japan's benchmark 10-year yield <JP10YTN=JBTC>, which moves in the opposite direction to the price, fell 8.5 basis points to 1.570 percent, down more than 10 basis points from Thursday's high and near a three-month low of 1.530 percent hit last week.

The dollar slipped against the yen to 107.20 yen <JPY=> after hitting a one-month high a day earlier. The euro was at $1.5666 <EUR=>, down about 4 cents from a record high above $1.60 SET last week.

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KNN - Strategy: 2H2008 Strategy - Near Term uncertainties, Long Term Opportunities

· The recent selldown in Bursa Malaysia with market retracing 27% has created investment opportunities in liquid large caps last seen early 2006. We are excited about the market and advise investors to accumulate despite the near term uncertainties which are largely sentiment driven by political uncertainties.


· We like companies that have invested in capital expenditure prior to the raw material price increases as they would be well position to acquire market share with lower cost of production. Companies with a proven track record and high management competence will be able to steer through these uncertain times and emerge even stronger especially those with strong balance sheet and recurring income.


· Construction companies with locked in contracts and regulated assets/concessionaires will deliver locked in earnings and strong recurring cashflow over the medium to long term. However, one must be careful to avoid those with older contracts priced before raw material cost increases while concessionaires face increasing regulated risks. Property investment companies with prime office/retail space and MNC tenants with low default risk also generate consistent recurring earnings.


· Lastly, the "sin" sectors, gaming, NFO, tobacco and breweries continue to do well and sell down by foreign institutional investors have resulted in attractive yields of 5% to 8%.


· Our top picks are

BAT (HOLD; RM40.75; TP: RM46.25),
Resorts World (BUY; RM2.54; TP: RM4.84),
SP Setia (BUY; RM3.02; TP: RM5.68),
KLCC Property Holdings (BUY; RM2.74; TP: RM4.37),
Telekom Malaysia (BUY; RM3.36; TP: RM4.20),
UMW Holdings (BUY; RM5.70; TP: RM8.00),
IOI Corporation (BUY; RM5.50; TP: RM8.15),
QL Resources (BUY; RM2.58; TP: RM3.60),
LCL Corporation (BUY; RM4.90; TP: RM8.65), and
Coastal Contracts (BUY; RM2.15; TP: RM3.48).

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INTERNATIONAL TRADER - ASIA

Bargain Hunting in Vietnam

By ELLIOT WILSON

A shopping list now that the formerly sizzling market has cooled.

Emerging Markets

VIETNAM'S ECONOMY AND capital markets have become a falling star. After nearly doubling in value in the year ended March 21, 2007, the Ho Chi Minh Stock Exchange -- HOSE, for short -- plummeted 68% in the following 15 months, wiping out all its previous gains. Daily trading on the HOSE is down to $5 million from $100 million a year ago.

More disturbing, Vietnam's economy grew by just 6.5% in the first half of 2008 -- nominally impressive, yet its slowest growth rate in seven years. The inflation rate was 26.8% year-over-year in June, the sharpest increase since 1992, driven by -- what else? -- rising food and oil prices. Perhaps most worrying, the country's balance of payments in the first five months ballooned to $14.4 billion, or $2 billion more than the figure for all of 2007, mirroring Malaysia and Thailand more than a decade ago, prior to the Asian financial crisis.

A further concern is corporate earnings, expected to slump this year after several years of strong growth. Thomas Lanyi, director of the $100 million Azalea Fund, run by Ho Chi Minh City-based Mekong Capital, reckons most Vietnamese companies will suffer "huge losses" this year.

Is there any good news out there? Well, yes. Falling stock prices will benefit those looking to buy now, then profit from the next market upswing. A year ago, listed Vietnamese companies were changing hands at a generous 35-40 times earnings. By the end of last month, they were trading at just five to 10 times.

Mixed Bag: Japan fell 1.5% over the week, Hong Kong rose 3.6%, and Australia fell 2%.

That has led some investors to start cherry-picking stocks. One investment banker highlights Tan Tao Industrial Park (ticker: ITA. Vietnam), the nation's largest owner-manager of industrial parks. "They are a direct beneficiary of foreign direct investment into the country," he says. Other investors point to Vinamilk (VNM. Vietnam); the country's largest dairy producer is preparing to list 5% of the company's equity in Singapore in the fourth quarter. Another favorite: the nation's third-largest listed company, Pha Lai Thermal Power (PPC.Vietnam), with its own power distribution network and captive coal mine.

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This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com.  • See a sample reprint in PDF format  • Order a reprint of this article now.

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A SIMPLER WAY TO invest in Vietnam is through the numerous funds springing up domestically and run by firms such as Mekong Capital, Dragon Capital and VinaCapital, all based in Ho Chi Minh City. Mekong Capital is launching its new MEF III fund late this year, expecting to attract up to $500 million from the U.S., Europe, Asia and, increasingly, the Persian Gulf. It's focusing on classic private-equity investments, notably growth capital and buyouts. With Vietnam's central bank turning off the liquidity taps in order to further dampen red-hot economic growth, investors would benefit from one of the few institutions capable of making major capital investments.

And amid all the gloom, foreigners are clearly still attracted to a fast-growing $70 billion economy blessed with a relatively large population (86 million), a low median age (27) and rock-bottom unit labor costs. Foreign direct investment hit $31.6 billion in the first half of 2008, against $20 billion for all of 2007, suggesting that the prospects for one of Asia's fast-rising economies have not yet crashed and burned.

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INTERNATIONAL TRADER - ASIA

Bargain Hunting in Vietnam

By ELLIOT WILSON

A shopping list now that the formerly sizzling market has cooled.

Emerging Markets

VIETNAM'S ECONOMY AND capital markets have become a falling star. After nearly doubling in value in the year ended March 21, 2007, the Ho Chi Minh Stock Exchange -- HOSE, for short -- plummeted 68% in the following 15 months, wiping out all its previous gains. Daily trading on the HOSE is down to $5 million from $100 million a year ago.

More disturbing, Vietnam's economy grew by just 6.5% in the first half of 2008 -- nominally impressive, yet its slowest growth rate in seven years. The inflation rate was 26.8% year-over-year in June, the sharpest increase since 1992, driven by -- what else? -- rising food and oil prices. Perhaps most worrying, the country's balance of payments in the first five months ballooned to $14.4 billion, or $2 billion more than the figure for all of 2007, mirroring Malaysia and Thailand more than a decade ago, prior to the Asian financial crisis.

A further concern is corporate earnings, expected to slump this year after several years of strong growth. Thomas Lanyi, director of the $100 million Azalea Fund, run by Ho Chi Minh City-based Mekong Capital, reckons most Vietnamese companies will suffer "huge losses" this year.

Is there any good news out there? Well, yes. Falling stock prices will benefit those looking to buy now, then profit from the next market upswing. A year ago, listed Vietnamese companies were changing hands at a generous 35-40 times earnings. By the end of last month, they were trading at just five to 10 times.

Mixed Bag: Japan fell 1.5% over the week, Hong Kong rose 3.6%, and Australia fell 2%.

That has led some investors to start cherry-picking stocks. One investment banker highlights Tan Tao Industrial Park (ticker: ITA. Vietnam), the nation's largest owner-manager of industrial parks. "They are a direct beneficiary of foreign direct investment into the country," he says. Other investors point to Vinamilk (VNM. Vietnam); the country's largest dairy producer is preparing to list 5% of the company's equity in Singapore in the fourth quarter. Another favorite: the nation's third-largest listed company, Pha Lai Thermal Power (PPC.Vietnam), with its own power distribution network and captive coal mine.

---

DOW JONES REPRINTS

---

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com.  • See a sample reprint in PDF format  • Order a reprint of this article now.

---

A SIMPLER WAY TO invest in Vietnam is through the numerous funds springing up domestically and run by firms such as Mekong Capital, Dragon Capital and VinaCapital, all based in Ho Chi Minh City. Mekong Capital is launching its new MEF III fund late this year, expecting to attract up to $500 million from the U.S., Europe, Asia and, increasingly, the Persian Gulf. It's focusing on classic private-equity investments, notably growth capital and buyouts. With Vietnam's central bank turning off the liquidity taps in order to further dampen red-hot economic growth, investors would benefit from one of the few institutions capable of making major capital investments.

And amid all the gloom, foreigners are clearly still attracted to a fast-growing $70 billion economy blessed with a relatively large population (86 million), a low median age (27) and rock-bottom unit labor costs. Foreign direct investment hit $31.6 billion in the first half of 2008, against $20 billion for all of 2007, suggesting that the prospects for one of Asia's fast-rising economies have not yet crashed and burned.

Blogged with the Flock Browser

INTERNATIONAL TRADER - ASIA

Bargain Hunting in Vietnam

By ELLIOT WILSON

A shopping list now that the formerly sizzling market has cooled.

Emerging Markets

VIETNAM'S ECONOMY AND capital markets have become a falling star. After nearly doubling in value in the year ended March 21, 2007, the Ho Chi Minh Stock Exchange -- HOSE, for short -- plummeted 68% in the following 15 months, wiping out all its previous gains. Daily trading on the HOSE is down to $5 million from $100 million a year ago.

More disturbing, Vietnam's economy grew by just 6.5% in the first half of 2008 -- nominally impressive, yet its slowest growth rate in seven years. The inflation rate was 26.8% year-over-year in June, the sharpest increase since 1992, driven by -- what else? -- rising food and oil prices. Perhaps most worrying, the country's balance of payments in the first five months ballooned to $14.4 billion, or $2 billion more than the figure for all of 2007, mirroring Malaysia and Thailand more than a decade ago, prior to the Asian financial crisis.

A further concern is corporate earnings, expected to slump this year after several years of strong growth. Thomas Lanyi, director of the $100 million Azalea Fund, run by Ho Chi Minh City-based Mekong Capital, reckons most Vietnamese companies will suffer "huge losses" this year.

Is there any good news out there? Well, yes. Falling stock prices will benefit those looking to buy now, then profit from the next market upswing. A year ago, listed Vietnamese companies were changing hands at a generous 35-40 times earnings. By the end of last month, they were trading at just five to 10 times.

Mixed Bag: Japan fell 1.5% over the week, Hong Kong rose 3.6%, and Australia fell 2%.

That has led some investors to start cherry-picking stocks. One investment banker highlights Tan Tao Industrial Park (ticker: ITA. Vietnam), the nation's largest owner-manager of industrial parks. "They are a direct beneficiary of foreign direct investment into the country," he says. Other investors point to Vinamilk (VNM. Vietnam); the country's largest dairy producer is preparing to list 5% of the company's equity in Singapore in the fourth quarter. Another favorite: the nation's third-largest listed company, Pha Lai Thermal Power (PPC.Vietnam), with its own power distribution network and captive coal mine.

---

DOW JONES REPRINTS

---

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com.  • See a sample reprint in PDF format  • Order a reprint of this article now.

---

A SIMPLER WAY TO invest in Vietnam is through the numerous funds springing up domestically and run by firms such as Mekong Capital, Dragon Capital and VinaCapital, all based in Ho Chi Minh City. Mekong Capital is launching its new MEF III fund late this year, expecting to attract up to $500 million from the U.S., Europe, Asia and, increasingly, the Persian Gulf. It's focusing on classic private-equity investments, notably growth capital and buyouts. With Vietnam's central bank turning off the liquidity taps in order to further dampen red-hot economic growth, investors would benefit from one of the few institutions capable of making major capital investments.

And amid all the gloom, foreigners are clearly still attracted to a fast-growing $70 billion economy blessed with a relatively large population (86 million), a low median age (27) and rock-bottom unit labor costs. Foreign direct investment hit $31.6 billion in the first half of 2008, against $20 billion for all of 2007, suggesting that the prospects for one of Asia's fast-rising economies have not yet crashed and burned.

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