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With food prices up 8.3% on last year, the Chinese need little reminding what year it is. Whether looking at their calendars or at the hefty prices they're paying for their favourite meat, there's no doubt that this is well and truly the year of the pig.
Pork prices climbed 29.3% in April from March, according to the most recent statistics from the agriculture ministry, as a disease related cull and higher feed prices forces producers to pay 71% more for the live pigs they turn into the spare ribs and pork tenderloin favoured by the masses over the past year. The racy price rise has brought inflation to a 27 month high. And yet again its convinced more Chinese that their money's better off on the Shenzen wheel of fortune' stock market than in the average savings account...
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With inflation running at 3.4% and the benchmark 12-month bank deposit rate at 3.06%, the Chinese can see little point in putting any of their money in a bank deposit account. And who can blame them, especially, it should be said, when the government will nip another 20% of that in a tax take at the end of each year. The result is a negative savings rate of about 1 percentage point, says Yi Xianrong, an economist with the Chinese Academy of Social Sciences (CASS), the government's principle think tank, on Reuters. That doesn't makes economic sense, so a rate rise is surely on the way.
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Most analysts expect as much, with Goldman Sachs saying that there should be two more by the end of the year (the Chinese raise rates by 0.27% each time). It's a point echoed in a recent note to clients from Citigroup economist Yiping Huang. He said that the latest inflation figure 'likely will induce further tighteningWe expect the central bank to hike interest rates.'
Lets hope they do it soon, because otherwise, here in the West we'll have to start forking out a lot more for the Chinese exports that have been so cheap and have kept inflation abnormally low here for so long. The combination of low rates and high asset prices like real estate and equities could very well begin to push up the price of Chinese exports quite soon. And with wage increases of almost 20% a year across many Chinese cities, the end of our benign deflationary period in the West looks nigh.
Still, until the rate rise comes the Chinese will keep putting their money into the stock market, and particularly the companies that will benefit from high food prices. Fortune Ng Fung Food (Hebei) Co. is a favourite. In common with other mainland Chinese equities, it's trading on a sky high P/E, in this case 147 times earnings.
That's clearly an insanely high valuation, and we wouldn't recommend investors touch it with a large barge pole. Instead, rational investors looking to get in on the Chinese food story should look outside China. Take Hong Kong-listed China Yurun Food Group Ltd., which now trades at 26.7 times profit.
And if Chinese investors have paid little attention to the Hong Kong market recently, they've paid even less to the Singapore market. China's largest meat processor, Singapore listed People's Food Holdings Ltd does much the same as its more expensive rivals, but is currently trading on a P/E of 11.7. That's 56% cheaper than shares in the Hong Kong listed Yurun Food. "Investors pay less attention to Chinese shares in Singapore, which could explain why People's Food has a lower valuation'' than China Yurun, says Tiffany Feng, an analyst at Guotai Junan Securities in Hong Kong on Bloomberg.
Turning to the stock markets...
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In London, the FTSE 100 closed 47 points lower at 6,520 - just above an intra-day low of 6,513. The poor start on Wall Street - prompted by concerns that rising bond yields could prompt an interest rate rise - hit investor sentiment. Mortgage lender HBOS was the day's biggest faller on news that its market share is to fall. Other lenders including Northern Rock and Bradford and Bingley fell in sympathy. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 ended the day 41 points lower, at 5,898, as interest rate concerns and downbeat corporate news weighed. In Frankfurt, the DAX-30 was 27 points lower, at 7,678.
Across the Atlantic, rising bond yields (the 10yr Treasury climbed to 5.246%) continued to rattle investors yesterday. The Dow Jones fell 129 points to end the day at 13,295. The S&P 500 was 16 points lower, at 1,493. And the Nasdaq was 22 points lower, at 2,549.
In Asia, falls on Wall Street and weakness in the property market weighed on the Japanese Nikkei 225, which fell 28 points to close at 17,732. In Hong Kong, the Hang Seng fell 54 points to 20,582.
Crude oil was under pressure again this morning, last trading 3c lower at $65.32. In London, Brent spot was at $68.74.
Spot gold had fallen to $646.10 from $648.30 in New York late last night. And silver had fallen to $12.95.
In the foreign exchange markets, the pound rose to its highest level in three months against the euro today before falling back slightly to 1.4838. Sterling was steady at 1.9721 against the dollar. And the dollar was at 0.7522 against the euro and 122.25 against the Japanese yen.
And in London this morning,Britain's seventh-largest bank Alliance and Leicester announced that annual profits could rise by as much as 3.9% - coming in at the top end of analysts' forecasts - as mortgage lending rises and bad debts fall. The bank also announced today that Finance Director David Bennett would replace outgoing CEO Richard Pym. Shares in Alliance and Leicester had risen by as much as 1% in early trading.
And our two recommended articles for today...
Is America relying on overseas savers to save its skin? - There has been a dramatic shift in the global saving mix in recent years, says Stephen Roach. Whilst the US has become more spendthrift, many developing countries have been running a surplus on which the former has been relying for its borrowing. To find out why this situation can't last, read: Is America relying on overseas savers to save its skin?
Why banks' eagerness to lend could end in disaster - Total debt on commercial buildings is soaring, yet yields on most properties are below borrowing costs. Meanwhile, Man Group is openly announcing its intention to 'use and abuse' cov-lite loans. To find out why banks have allowed this situation to develop, click here: Why banks' eagerness to lend could end in disaster
