Tuesday, December 21, 2010

CFO Survey Indicates Good Growth Ahead

The latest Duke University Fuqua School of Business CFO Survey came out recently and it made pretty positive reading. First of all top line data in the States suggests an uptick in confidence...

source: cfosurvey.org

However, we see a slightly different story in the Rest of the World

source: cfosurvey.org

Essentially, what we are seeing here is confirmation of good growth in the US and in particular in retails sales. Ultimately, this has a concomitant positive effect upon those Asian countries that peg their currency to the US Dollar and are structured to export to the US. A classic example being Taiwan and how they rely on the US semiconductor industry via their manufacturing foundries.

China is not as strong and I suspect this reflects some macro economic concerns relating to the housing market and/or the Government trying to rein in inflation by increasing the banks reserve requirement ratio. Even so, Chinese business still forecast 19.1% earnings growth in the next year, as well as 11.3% increase in capital spending. Both of these numbers were above last the last quarters forecast.

In Europe, the numbers are noticeably weaker. This reflects the fears of pressure on the financial system from the European Sovereign Debt crisis. Earnings growth forecasts were reduced to 10.4% annual growth  but capital spending plans increased to 6.8% Worryingly, hiring plans were reduced to an anaemic .2% growth.

Returning to the US, we see that earnings growth is now forecast at a stonking 19.8% with capital spending plans increased to 8.9% Technology spending is predicted to increase by 4.8% and employment by 2% The employment number seems low, but it is actually the highest since March 2006!

Bullet Points on the CFO Survey

A few bullet points here
  • Perhaps there is more to run in the capital goods sector?
  • US Employment growth looks better
  • Asia ex-China looks set for growth, but can they cope with any slowdown in China?
  • Europe is reacting to Sovereign Debt fears
Conclusions on Duke CFO Survey

In conclusion, I think this survey perfectly encapsulates the dichotomy in the Global Economy. Growth in the US is getting stronger, but perhaps the differential between the US and Europe is explained by the relative sentiment of Sovereign Debt? If so, than should US Municipal Bond fears flare up than the solidity of the recovery will be called in to question. I think 2011 is delicately poised.

It looks like Spain is in trouble and I expect more action will be necessary by the ECB. I would not rule out the creation of 'Euro bonds' before the end of 2011. Whether the US Municipal Bond Market falls victim to negative sentiment is anybody's guess. However, I note that, whenever I check it on CMA Datavision, the market is pricing in the probability of default in California as being similar to that in Italy.

Moreover, any slowdown in the US housing market will hurt revenues in California and Florida. There are also question marks over the probability of China engineering a soft landing for its housing market.

With regards asset allocation, I still consider market neutral to be the optimal strategy for 2011.

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