Money Talk: Murky International Waters

02002

Confidence is up and some countries are on the road to recovery – but some are still in deep trouble. Roger Williams presents the definitive guide to trading overseas

It is remarkable. When people are confident, they simply shrug off bad news. The US is confident, though this is not surprising given the numbers. Look at the graph below: the Federal Reserve of Philadelphia’s ‘Leading Index’ combines a mix of data (including housing and unemployment surveys) to predict where the economy is headed. When the data falls below zero, the economy is slowing. When the index is above zero, the economy is expected to grow. These numbers are buttressed by growing construction.

Private sector, non-farm employment continues its upward path established in 2010. As a result, the US stock markets bound ahead.

In China, too, there is optimism. After the economy slowed throughout the first three-quarters, it turned, and has continued this growth in the first two months of 2013. Exports, the main driver of the Chinese economy, were stronger in February than expected as China saw strong demand from the US and south-east Asia.

The strengthening of the Chinese economy comes partly from the loosening of the fiscal reins. This has seen increased inflationary concerns and has already resulted in tightening measures such as requirements for increased down payments and higher mortgage rates on second homes in selected cities where prices have risen too fast. A 20 per cent tax on gains on property sales has been introduced as well.

Other global data does not deny the optimist view. Continued sideways movements in commodities like copper are offset by rising oil prices. The increasing oil prices have often been the factor that has choked off growth during past recovery attempts.

Elsewhere in the world, despite the despicable raid on depositors’ funds in Cyprus, countries are still clamouring to join the euro. Poland is the latest lemming; this despite unemployment in the eurozone reaching 12 per cent in February, a 1.77 million rise on the same month last year. The 17-country eurozone is managing to outperform the 27-country EU by 20 per cent – unfortunately in its rate of unemployment. This grim data is reflected in the eurozone’s manufacturing Purchasing Managers Index (‘PMI’), which stands at 46.8 – still well below the crucial 50 per cent that might indicate sufficient confidence to believe that a recovery may be on its way. Worse is to come.

03003Capital is a timorous beastie. It flies from potential loss and gravitates to safety. Huge returns and high interest are bait. Eventually, when the bait looks too good to be true, it acts as a barrier to attracting capital. You will now see this. Cyprus will cause a shift of deposits out of the southern eurozone countries and a rise in the commercial rates sought by those banks. This will be buttressed by new European bank capital requirements. The UK has added to this call for stronger banks with more capital, as evidenced by Mervyn King’s recent strident pronouncement in the UK press. This rush for stronger banks is not for them to deal with what they are going to do. It’s a call for more capital to deal with the loans they’ve already made and know full well aren’t performing, and haven’t been written down. For many banks, these loans take the form of the government bonds they’ve bought – bonds of Italy and Spain in particular.

Based on the above, I have some advice to offer you:

The US market is strong and will remain so while Obama remains in office. Demand there stays high and input costs are stable. It is a good place to buy or sell.

If you are transacting any business with counterparties in Italy, Spain, Portugal, Greece or Ireland, be sure you use a UK bank even if it is headquartered elsewhere. Try to ensure you keep the transaction as small as can be economic, and spread your risk across a number of transactions.

If you are looking to borrow, borrow now – commercial rates for borrowing in the EU will increase. You might not see this in the UK bank rate, but the banks will all increase their fees and rates.

01001We are operating in turbulent times. Markets have splintered and you must be careful that you know which country you are dealing with when you have an international partner. Here is a brief and not exhaustive list to help you navigate:

Northern Eurozone countries such as Germany, Holland, Belgium, Finland, Austria: The banks here are likely to be net beneficiaries of flight capital, and deposit rates have the potential to fall (although many have little room to do so).

Intermediate Eurozone countries, like France: Why use a French bank if you can use one from a Northern Eurozone country?

Southern Eurozone countries, such as Spain, Italy, Portugal, Greece (and Ireland): Avoid their banks for all transactions if possible.

Countries wishing to join the euro: If Poland joins the euro, be careful as the appreciated zloty may mean an unrealistic positioning in the euro. Latvia, Bulgaria, Kosovo and Montenegro are all using the euro but have not joined yet. When they do, avoid their banks; until then, be very careful and minimise the amount per transaction to the lowest economic level.

United States: This country’s banks have been racking up huge profits and have replenished their capital the old-fashioned way – they have earned it by lending money and trading. Be confident in your dealings. Be aware of transactions through brokers; customer funds have been seized in bankruptcy.

Canada: Be careful. Despite the strength of some of the banks, in the official 2013 Canadian budget there is an explicit provision that Canada will pursue the bail-in model (‘taxing’ depositors) for systemically important banks for future bank failures.

The two biggest economies in the world are recovering. However, Europe is a disaster and recovery is being held back by the political will to maintain the euro. After Cyprus, every business has a new financial risk to assess. Where is your money and can it be taken? If foreign governments can take the money of depositors, and in such a capricious way, who is to say that funds in transit might not be ‘taxed’, especially if substantial

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