Central banks in eastern Europe, the region hardest hit by the global financial crisis, will raise interest rates less than other emerging markets as policy makers signal greater concern about growth, economists said.
Emerging Europe’s economies will expand 3.6 percent this year, compared with 8.4 percent predicted for Asia’s developing economies and 4.3 percent for Latin America, according to International Monetary Fund’s January forecasts. Russia yesterday unexpectedly kept its deposit rate unchanged, while money market rates for Poland and Hungary show that investors have scaled back bets on how far borrowing costs will rise.
Global rate setters are growing more concerned that inflation is accelerating as the world economy gathers strength and food and oil prices rise. While Hungary, Serbia and Poland have raised borrowing costs, emerging Europe’s rates will rise more slowly than in Asia and Latin America, which are growing twice as fast, according to Commerzbank AG, Capital Economics Ltd. and Bank of America Merrill Lynch.
“With the still sluggish growth rate, east European central banks can’t afford to be very aggressive,” said Michael Ganske, head of emerging-markets research in London at Commerzbank, Germany’s second-biggest lender. “You can’t purely look at inflation when you’re just coming out of a major economic crisis.”
Russian Rates
In Russia, where President Dmitry Medvedev set an annual growth target of 8 percent to 10 percent in five years, the central bank opted to raise reserve requirements for banks to contain inflation without throttling the recovery. It surprised 12 of 16 economists in a Bloomberg survey by keeping the deposit rate unchanged.
Bank Rossii kept all interest rates on hold, including the key refinancing rate at a record-low 7.75 percent. The IMF expects Russia to grow 4.5 percent this year, compared with 9.6 percent for China and 8.6 percent for India.
Forward-rate agreements used to lock in interest costs in a year’s time now indicate Polish rates will increase by 1.08 percentage points by year-end; two weeks ago they predicted 1.25 percent.
Hungarian contracts now show the bank may be done raising rates, compared with rate bets of 52 basis points two weeks ago. Contracts for the Czech Republic, where the bank has kept rates at a record low 0.75 percent since May, signal an increase of 85 basis points, compared with 82 two weeks ago.
India, Brazil
In India, where the central bank last week resumed rate increases, bets on the extent of tightening are rising. The cost of one-year interest-rate swaps used to guard against fluctuations in borrowing costs rose 29 basis points this month to 7.43 percent. Brazil’s central bank last month lifted rates 50 basis points and signaled it will move again in March. Yields on interest-rate futures contracts due January 2013 have risen 52 basis points in the past month.
Interest-rate derivatives markets may still be overestimating increases to east Europe’s policy rates because central bankers may be unable to influence food and energy- related price gains with monetary tightening, said Neil Shearing, senior emerging markets economist at London-based Capital Economics.
Central banks may tolerate some inflation “because they know where it’s coming from, food and energy prices, and they know that they don’t have much control over that,” he said. “In much of the region there are still major growth challenges.”
Inflation Threat
The share of food prices in consumer-price baskets across the region is between 20 percent and 40 percent, BNP Paribas SA economist Michal Dybula said. Inflation is a threat to eastern Europe’s recovery as it may damp consumer spending and prompt interest rate increases, the European Bank for Reconstruction and Development said last week.
Because of sluggish economic growth, the dilemma for emerging European central bankers is more similar to that of U.S. and western European policy makers than the challenges faced by their Chinese, Brazilian or Indian counterparts, Commerzbank’s Ganske said.
The Federal Reserve last week maintained plans to buy $600 billion of Treasuries through June to help reduce unemployment. European Central Bank President Jean-Claude Trichet said on Jan. 26 in Davos, Switzerland that euro-region interest rates were “appropriate.”
‘Most Hawkish’
Serbia’s central bank, which Timothy Ash, head of emerging- market strategy at Royal Bank of Scotland called Europe’s “most hawkish,” led rate increases, lifting borrowing costs times since August by 4 percentage points to 12 percent as losses in the currency fueled inflation.
Hungarian policy makers last month raised the country’s benchmark rate a quarter-point to 6 percent, the third consecutive increase. The central bank sought to tighten policy before Prime Minister Viktor Orban appoints board members more likely to favor lower rates, RBC Capital, Citigroup Inc. and Capital Economics said.
Poland followed on Jan. 19 by raising rates a quarter-point to 3.75 percent from a record low to tame inflation expectations and strengthen the zloty. The Czech central bank has signaled it may raise its main rate in the second half.
Following the rate moves, policy makers toned down their inflation-fighting rhetoric.
‘On a Hair’
Hungarian central bank President Andras Simor said after the Jan. 24 meeting that the vote to raise rates hinged “on a hair” and that council members were “very open” about next month’s decision. Polish central bank policy maker Andrzej Bratkowski, who had in the past favored higher rates, said on Jan. 25 that the next rate increase may only come in May or June rather than March.
Polish, Hungarian and Czech inflation rates will breach the upper limits of monetary policy makers’ targets this year, according to the central banks. Bank Rossii’s 6 percent to 7 percent goal this year will be “very difficult” to meet, the bank’s First Deputy Chairman Alexei Ulyukayev said on Jan. 20.
“Inflation risk is real, forcing most central banks to react,” said Raffaella Tenconi, a London-based economist at Bank of America Merrill Lynch. “The recovery in domestic spending is nascent, implying the required monetary tightening in the near term remains contained.”
The spread between the yield on Poland’s inflation-linked bonds due in August 2023 and similar maturity government debt was at 3.35 percentage points today. The difference, known as the breakeven rate that reflects investors’ expectations for consumer-price increases, has risen 28 basis points this year.
Emerging-market consumer companies are valued at the most expensive levels on record just as surging food and energy costs curb household spending from Sao Paulo to Shanghai.
Shares in the MSCI Emerging Markets Consumer Discretionary Index traded at a 15-year high of 2.6 times net assets last week, data compiled by Bloomberg show. Wynn Macau Ltd., owned by billionaire Stephen Wynn’s casino company, fetched a record 28 times forecast profit. Mahindra & Mahindra Ltd., India’s biggest sport-utility vehicle maker, has a price-to-book ratio 53 percent higher than global peers, while Brazil’s Cia. Hering, producer of Hering brand apparel, commands a 15 percent premium.
Economic growth and supply shortages sent a United Nations gauge of food prices to a record last month, cutting the buying power of 2.8 billion people in Brazil, Russia, India and China who spend 19 percent of their income on groceries, compared with 6 percent in the U.S., Euromonitor International data show. Consumer shares were the second-worst performers among 10 industries in periods of rising inflation since 2001, according to Morgan Stanley.
“Inflation has really thrown a curve ball,” Jacob De Tusch-Lec, who helps oversee about $17 billion as a London-based money manager at Artemis Investment Management, said in a Jan. 14 telephone interview. “With food prices and energy prices being so high — and it’s a big portion of consumer spending in Asia — that could put a bit of a stop to that story.”
Rising Borrowing Costs
The MSCI emerging-market consumer index surged 36 percent during the past year, the best performance among 20 industry gauges worldwide, as investors lifted holdings to their biggest “overweight” position, data compiled by MSCI Inc. and Bank of America Corp. show. Profit at hotels, carmakers and retailers may get squeezed as input costs including oil rise faster than retail prices, according to Morgan Stanley.
Consumer shares are “over-owned” and will probably trail the broader market, Jonathan Garner, the New York-based bank’s chief Asia and emerging-markets strategist, wrote in a Jan. 14 research report.
Rising benchmark interest rates will also increase company borrowing costs, Emil Wolter, a Royal Bank of Scotland Group Plc equity strategist who has an “underweight” rating on Asian consumer shares, said in a Jan. 18 e-mail.
Inflation Accelerates
The extra yield investors demand to own the debt of developing-nation retailers over U.S. Treasuries has climbed 148 basis points, or 1.48 percentage points, during the past year to 434 basis points, the highest level among seven industries, according to JPMorgan Chase & Co.’s CEMBI+ Indexes.
The jump in China’s inflation to the fastest pace since 2008 has prompted the central bank to raise its benchmark lending rate twice since October and lift banks’ reserve requirements four times in about two months. India’s central bank Governor Duvvuri Subbarao said on Jan. 17 in Mumbai that the country is facing a “surge” in inflation, fueling concern he may increase borrowing costs at a policy meeting today.
Futures traders in Brazil have boosted bets on higher interest rates after the heaviest rainfall in 44 years threatened to curb food production. Russian consumer prices rose 8.8 percent in the 12 months to December, the most in a year, prompting Bank Rossii Chairman Sergey Ignatiev to say last month he may lift borrowing costs in the first quarter.
Low Rates
The U.S. Federal Reserve will probably keep its benchmark lending rate at a record low, near zero through at least the fourth quarter, according to the median forecast of 77 economists compiled by Bloomberg.
Emerging markets are “where the risks lie at this point, because those economies are farther along in the overheating stage, and you’re starting to see tightening,” Michael Aronstein, president of Marketfield Asset Management in New York whose Marketfield Fund beat 94 percent of peers the past year, said in a Jan. 14 interview with Bloomberg Radio fast cash advance.
Surging Chinese demand and Russia’s worst drought in a half-century sent an index of 55 food commodities tracked by the UN to a 25 percent gain last year. Rising milk and flour costs triggered protests in Algeria this month that left three people dead and 420 injured. Tunisian President Zine El Abidine Ben Ali was forced to hand over power to his prime minister on Jan. 14 and leave the country after failing to end a month of protests by promising lower prices for bread and sugar.
Still Bullish
McDonald’s Corp., the world’s biggest restaurant chain, will probably raise prices this year to offset rising ingredients costs, Chief Financial Officer Peter Bensen said on a conference call with analysts. Meat prices may climb as much as 3.5 percent this year, according to the U.S. Department of Agriculture.
Inflation in seven of the 10 biggest developing nations accelerated during the most recent month that government data were available, fueled by a rally in oil prices to above $85 a barrel.
Many professional money managers are still bullish on emerging-market consumer discretionary stocks, with a net 50 percent saying they hold more shares in the group than are represented in benchmark indexes. The ratio is the biggest proportion of any industry in developing countries, the U.S., Japan or Europe, according to a Bank of America survey of managers with $562 billion of assets that was published Jan. 18.
Premium Valuations
Consumer purchases in the so-called BRIC countries may climb by more than $500 billion a year, according to Goldman Sachs Asset Management Chairman Jim O’Neill. Spending in the four countries was about $4 trillion in 2009, Goldman’s data show. Companies that sell to emerging-market shoppers are some of the best investments “of our lifetime,” O’Neill, who created the BRIC acronym in 2001, said on Bloomberg Television last month.
“We’ve found a lot of profitable investments in consumer- oriented stocks — in consumer goods and retailing,” Mattias Westman, who helps oversee about $4.7 billion as a founding partner of Prosperity Capital Management in London, said in a Jan. 6 interview on Bloomberg Television. “There you have really good growth.”
The MSCI emerging-market consumer discretionary index is valued at a 22 percent premium to the same industry gauge for developed markets, compared with an average discount of 29 percent since the start of 1996, according to price-to-book ratios compiled by Bloomberg.
‘Losing Luster’
Mahindra & Mahindra of Mumbai trades at a 98 percent premium to Dearborn, Michigan-based Ford Motor Co., the second- largest U.S. carmaker, price-earnings ratios show. Hering, based in Blumenau, Brazil, is 81 percent more expensive than New York- based Phillips-Van Heusen Corp., the apparel company that owns the Calvin Klein brand.
Wynn Macau shares trade at HK$19.98, or within 1 percent of the average 12-month share-price estimate of 18 analysts compiled by Bloomberg. The company, which listed in Hong Kong in October 2009, was named a “top sell” on Jan. 13 by RBS’s Wolter.
Revenue at companies in the MSCI emerging-market consumer index will probably decline 6.4 percent this year, analysts’ projections compiled by Bloomberg on Jan. 19 show. Profit margins are poised to fall from the widest levels since at least 2000 as inflation pushes up costs faster than companies are able to pass them along to consumers, according to Morgan Stanley’s Garner.
Russia’s index of producer prices rose 16.7 percent in December, almost double the rate for consumer prices, government data show.
“The consumer discretionary space is clearly losing its luster,” said Wolter, the head of regional strategy for Asian equities at RBS in Singapore. “Given its valuation premium, we expect sectoral weakness to persist.”
Employers watch out: Your workers can’t wait to quit.
According to a recent survey by job-placement firm Manpower, 84% of employees plan to look for a new position in 2011. That’s up from just 60% last year.
Most employees have sat tight through the recession, not even considering other jobs because so few firms were hiring. For the past few years, the Labor Department’s quits rate, which serves as a barometer of workers’ ability to change jobs, has hovered near an all-time low.
But after years of increased work and frozen compensation, "a lot of people will be looking because they’re disappointed with their current jobs," said Paul Bernard, a veteran executive coach and career management advisor who runs his own firm.
Douglas Matthews, president and chief operating officer for Right Management, a division of Manpower, called the results "a wake-up call to management. … This finding is more about employee dissatisfaction and discontent than projected turnover," he said.
Despite a disappointing jobs report last month, experts agree that the employment picture will likely improve going forward, although hiring will be slow.
"A lot of people who have jobs are considering looking for new work this year," said Charles Purdy, a career expert at Monster+HotJobs. "I don’t know if we’re going to see a huge uptick in the number of jobs, but I do think we’ll see a huge surge in the number of people looking for work, even among people who are already employed."
Austin and Lauren will be two of them. (Both asked that their last names not be used.)
Austin has worked as the general manager for a small manufacturing company for six years, but he has his sights set on a job with the federal government faxless payday loans.
"I am definitely ready to make a move now," he said. "I want to change because I feel that I would be more successful and have more challenges working in a Federal agency representing the interests of multiple private small businesses."
Austin has applied to positions at the Department of Commerce, Homeland Security and the State Department. But until hiring picks up, he is maintaining his current employment while campaigning for his next career in the New Year, or what he calls "maintaining and campaigning."
Lauren wants to leave the marketing position she landed soon after graduating in May. She said she feels lucky to have any job at all, "but it’s definitely not what I expected."
"I’m currently in an environment where I’m not learning anything and am not challenged by any of my work," she said. "It just makes me feel like I’m wasting my time."
Even with less than a year of experience under her belt, Lauren plans to look for another opportunity in 2011. "What I’m hoping with the new year is that since most companies do their budgets around this time, they’ll have room for new employees," she said.
But Bernard warns that they shouldn’t leave their day jobs too soon. "People need to have realistic expectations," he cautioned. "It could still take 10 months to find a job."
OTTAWA
THE QUARTER: The operator of Wendy’s and Arby’s lost money in its third quarter, pressured by higher commodity costs and weak performances at both restaurant chains.
THE NUMBERS: Wendy’s/Arby’s Group Inc. lost $909,000, or break-even on a per-share basis, for the period ended Oct. 3. Analysts expected earnings of 4 cents per share.
THE RESTAURANTS: Systemwide sales at Wendy’s open at least a year in North America dropped 1 payday loans.7 percent, while Arby’s reported a 5.9 percent decline. This is important because it measures results at existing restaurants rather than newly opened ones.
HELSINKIâNokia and other established handset makers are quickly losing global market share to a push by Chinese no-brand vendors into emerging markets, research firm Gartner said.
Surging growth of no-brand manufacturers coupled with growing smartphone sales boosted third-quarter cellphone sales 35 percent, Gartner said on Wednesday. It raised its outlook for growth in 2010, which it forecast would top 30 percent.
No-brand manufacturersâmostly small Chinese firms using chipsets from Mediatek or Spreadtrum Communications Incâhave this year quickly expanded their reach outside China into Africa, India, Latin America and Russia.
Next these manufacturersâwho sell in total roughly as many phones as Nokiaâwill focus on smartphones, using Mediatekâs new Android chipset, Gartner said.
Googleâs Android software platform rose to No. 2 spot globally in the quarter, behind Nokiaâs Symbian and ahead of Apple and Research In Motion.
Handset vendors including Motorola Inc, HTC Corp and Samsung Electronics are using Android for their flagship smartphones, but the models using Googleâs software are also carrying lower prices to hit mass market.
No. 9 handset maker ZTE launched an Android phone with Orange in the British market for less than 100 pounds.
Gartner said third-quarter sales of smartphones nearly doubled, in line with other researchers estimates.
Milanesi said full-year smartphone market growth would be âway over 50 percentâ.
HITTING NOKIA
Top-selling Nokiaâs third-quarter market share shrank to 28.2 percent from 36.7 percent a year ago, to its lowest level since 1999.
Gartner said sales of cellphones made by vendors outside the top 10 rose to 138 million handsets from 50 million a year ago.
âIt is an issue more for Nokia than for others. Nokia is the one that owns the low-end of the market,â said analyst Carolina Milanesi.
Nokia reported last month sales of its non-smartphones dropped 9 percent year-on-year in the past quarter, saying component shortages were the main reason.
In its key Indian market, Nokiaâs share dropped to 31 percent from 51 percent a year ago, Gartner said.
No. 2 and No. 3, Samsung Electronics and LG Electronics, also saw their market share slip to 17.2 percent and 6.6 percent respectively.
Gartner estimates are different from other research firms as it tracks actual sales to consumers at retailers and operators, while others follow handset manufacturers output.
Time Warner Inc. reported earnings that topped Wall Street’s expectations Wednesday and raised its outlook for 2010, thanks in part to a boost in advertising revenue.
The New York-based parent company of CNNMoney.com and Fortune said net income from continuing operations was $522 million, or 46 cents per share, down 10% from a year ago.
The decline in profit came as the media giant redeemed some of its debt in an attempt to strengthen its balance sheet, resulting in a charge of $295 million.
But adjusted operating income, a commonly used profit metric for media companies, rose 5% to $1.4 billion, or 62 cents per share. Analysts polled by Thomson Reuters were looking for earnings of 53 cents per share on that basis.
Time Warner’s sales rose 2% to $6.38 billion, slightly lower than analysts’ forecasts of $6.41 billion.
Time Warner chairman and chief executive officer Jeff Bewkes said in a prepared statement that the company "remains on track for a very strong year" and added that the "strategy of focusing on high-quality branded content continues to pay off."
For the full year, Time Warner said it now expects earnings to be up in the high 20% range from the $1.83 per share the company earned a year ago. In the second quarter, the company had forecast earnings for 2010 to be up at least 20%.
Revenue at the company’s network division, which includes CNN and HBO, climbed 9% to $3 billion, helped by a 10% rise in advertising revenue and a 9% increase in subscription revenue.
"We’re looking at this as a very solid quarter," said Thomas Eagan, an analyst at Collins Stewart. "The best part was the increase in subscription revenue and ad revenue at the cable networks Business Card Holders."
Sales at Time Warner’s film business, Warner Bros., remained flat as the company’s films failed to beat out last year’s hit releases including "Harry Potter and the Half-Blood Prince" and "The Hangover".
But Bewkes said he has high hopes for the films on deck in the fourth quarter, including "Harry Potter and the Deathly Hallows: Part 1".
The company’s publishing branch, Time Inc., continued to struggle in the quarter, despite a jump in advertising revenue. Overall revenue fell 1% to $901 million, as a 5% rise in advertising revenue was offset by a 5% drop in subscription revenue and a 12% decline in other revenue.
"[Time Inc.] is still struggling a little, said Eagan. "We expect to see continued low single-digit growth increases in ad revenue, but subscription revenue will be challenged for a while."
Shares of Time Warner (TWX, Fortune 500) were down nearly 1% but have climbed about 11% so far this year. Other media stocks have also had a decent run in 2010 amid hopes of a rebounding economy and recovering advertising market.
Time Warner is the first of the major media companies to report third quarter earnings. News Corp. (NWSA) is slated to release results after the market close Wednesday, CBS (CBS, Fortune 500) earnings are due Thursday and Walt Disney (DIS, Fortune 500) is on tap to post results next week.
AOL Inc. (AOL), which Time Warner spun off last December, also reported earnings Wednesday that beat expectations, but advertising sales were significantly lower from a year ago.
Burlington-based MidCarolina Financial Corp., parent company of MidCarolina Bank, on Friday reported net income of $721,000, or 13 cents per share, during the second quarter. That’s up a little more than 1 percent from earnings of $713,000, or 12 cents per share, during the same period a year ago.
Total assets rose to $561 million from $549 million last year. Nonperforming assets rose to 2.65 percent of total assets, up from 1.27 percent during the second quarter a year ago.
“The second quarter of 2010 showed quarterly earnings improvement over the past several quarters. We are pleased with that trend, as well as our strong capital position and efficiency trends,” said Charles T no fax payday loan. Canaday Jr., president and CEO of MidCarolina. “We have focused on these areas given the ongoing financial and economic uncertainties, both in our local markets and beyond.”
Canaday noted that some housing and commercial real estate borrowers continue to have difficulty servicing their debt. The company increased its allowance for loan losses to $8.5 million in the second quarter, up 32 percent from $6.5 million during the year prior.
The University of Texas said it won’t join the Pacific-10 Conference, dealing a blow to efforts to grow conference influence and revenue.
Texas said Monday it will say in the Big 12 Conference, USA Today reported.
The news appears to dampen expectations of a seismic shift in the college sports landscape. After Nebraska officially left the Big 12 last week, the Texas Longhorns, Oklahoma, Oklahoma State, Texas Tech and Texas A&M were expected to finalize plans to join the Pac-10 and create a 16-team conference.
The University of Colorado last week said it will join the Pac-10, leaving the Big 12 Conference.
The Pacific-10 seeks to grow revenues in an increasingly cutthroat world of big-time college sports bad credit payday advance.
Although a winner with its teams on the field, the conference is a laggard in revenues. The Pac-10 reported $96 million in revenue last year. That trails all but one of the major collegiate conferences, despite having prominent schools like the University of California, Los Angeles; University of Southern California; Cal and Stanford, which have traditions of football and basketball success.
Recently the Pac-10 hired Creative Artists Agency to advise on expansion and on upcoming broadcast negotiations. The conference’s agreements with ESPN and Fox expire after the 2011-12 school year.
Colorado legislators on Thursday changed a bill cracking down on payday lenders to allow the businesses to make more money from their loans, but opponents said that the amendment did not do enough to keep a large number of those shops from closing their doors.
House Bill 1351, sponsored by Rep. Mark Ferrandino, D-Denver, would limit the amount of interest that payday lenders can make off of loans. It was approved on a 7-4 vote by the House Judiciary Committee, with Democrats backing it and Republicans opposing it, and is headed next for debate on the House floor.
Under current law, payday lenders can charge a finance charge of $20 per $100 on the first $300 loaned and $7.50 per hundred dollars after that until the loan has reached its maximum $500 limit. The average payday loan in 2008 was $391, with an average annual interest rate of 317 percent, according to the nonpartisan Colorado Legislative Council.
HB 1351 originally proposed capping the annual percentage rate on each loan at 36 percent. However, Ferrandino amended the bill Thursday to increase that number to 45 percent APR and added a provision allowing a loan-origination fee of $10 per $100 lent for the first loan made to a person in any 12-month period.
The changes came after payday lenders, who made more than $566 million in loans in 2008, complained that the reduction in profits they would be able to make would shut down many of their businesses and put thousands of people out of work during an economic downturn. A number of Democrats have spoken against the potential effects of the bill as well.
Under current law, Ferrandino argued, lenders can make $75 off of a two-week loan, while his new bill would reduce that amount to $58.63, much higher than the $6.90 they could have made under the original HB 1351. The goal of his bill, he said, is to stop lenders from making large amounts off of future loans that keep borrowers in a perpetual cycle of debt.
"If people are using this responsibly for short-term loans, they‚re making close to what they're making before," Ferrandino said.
However, Rep. Steve King, R-Grand Junction, said that without that income on future loans, lenders will lose large amounts of money and be forced to shut their doors.
"We‚re talking about $1.75 on a $100 loan," King said of the change from 36 percent to 45 percent annual interest that lenders can charge. "It's still going to kill jobs. It's still going to cause businesses to go out of business."
The bill also would require the question to be referred to voters on the November ballot before the law were to take effect.
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