New York Times: Globally, Stocks Are Poised to Advance Further

Globally, Stocks Are Poised to Advance Further
By ERIC PFANNER
International Herald Tribune

LONDON

DESPITE the strongest global economic growth since the 1970's and outsized gains in corporate profits, 2004 was a decidedly ho-hum year for international stock markets, which took their cues from Wall Street. So, what will happen this year if, as expected, growth and profits ease back toward more normal rates?

Stock prices could actually forge ahead solidly, if not spectacularly, market strategists say. Average gains of 10 percent or so are expected globally, and some regions, including Continental Europe, could do a bit better. And if the dollar declines further, as many analysts expect, American investors who put some of their money into overseas securities might do even better, once currencies are converted. It is not that investors are returning to the irrational exuberance of the late 1990's - or even the milder wave of post-bubble optimism that washed over many global markets in 2003. But stocks in some regions remain attractively priced, at least relative to bonds, analysts say.

"We're not gung-ho, we're realistic," said Richard Batty, global investment strategist at Standard Life Investments in Edinburgh. "But markets generally have been pricing in a more pessimistic outlook than we think is warranted."

Many global stock markets finished 2004 above where they started, but not spectacularly so. In Japan, the Nikkei index was up only 7.61 percent, despite an improved economic outlook. Morgan Stanley Capital International's index showed a better gain in Japan - 10.9 percent, and for Americans who converted their yen-based gains into dollars, the rise was 16 percent. In Europe, stocks generally posted slightly larger gains, even as growth continued to be disappointing. In China and in Russia, stocks showed little change at the end of the year, despite strong economic growth. Morgan Stanley Capital International calculated a 2 percent rise for China.

The best performances were in emerging markets that benefited from a surge in commodity prices, particularly in Latin American markets like Mexico and Peru, and in some secondary European markets, including Iceland, Belgium, Norway, Austria, Hungary and Romania. Because of the fall in the dollar that accelerated toward the end of last year, American investors who ventured into foreign stock markets did considerably better than investors who used the local currencies. A local investor in the euro zone, for instance, would have seen gains of only 13.3 percent, based on a Morgan Stanley Capital International index of the region; in dollar terms, the return was 22.4 percent.

Morgan Stanley strategists predict gains of 8 percent in European stocks next year, based on share prices in mid-December. They see solid double-digit gains in Japan, with the Topix index, which finished 2004 at 1,149.63, rising to near 1,300 by the end of this year.

At Lehman Brothers, analysts are less enthusiastic about Japan, but see comparable gains in Europe. With dividends reinvested and including the effects of an additional 5 percent drop in the dollar against the euro, which they predict for this year, gains for American investors in euro-denominated shares could reach double digits. Other analysts, too, point to the euro zone as one of the most promising areas for share price growth.

To be sure, the dollar is one of several variables that make predicting share prices as dicey as ever. If it continues to fall, as many analysts expect, given the size of the United States' current account deficit, that could put upward pressure on inflation, prompting the Federal Reserve to raise interest rates more aggressively than it did in 2004. A weaker dollar could also lead to a renewed increase in oil prices, because oil is traded globally in dollars.

Though oil prices eased in December, ending the year at $43.35 a barrel, after passing $55 in October, a combination of continuing high prices and tighter monetary policy in the United States might slow global economic growth by curbing American demand for imports. Economists generally expect global growth to ease from rates near 5 percent last year to 3.5 percent to 4 percent this year, with a slight uptick in inflation. The combination makes some analysts wary about prospects for global stock markets.

"We've moved from above-trend growth and below-trend inflation to above trend in both," said Tim Bond, a strategist at Barclays Capital here. "That's negative for almost every asset class, except perhaps commodities."

Nonetheless, investors seem to be prepared to give stocks a chance. A Merrill Lynch survey of global fund managers in December showed that 77 percent expected equities to do better than bonds or cash this year. The managers were particularly bearish on bonds, which fall in price when interest rates are on the rise.

Continued strength in corporate earnings should provide some support for share prices, analysts say. Last year, companies in the United States, Europe and even Japan reaped the benefits of several years of cutting costs. As strong economic growth drove demand higher, profits of companies in the MSCI All-Country World index, a broad gauge of global stock prices, were on track for an annual increase of 25 percent, analysts at Morgan Stanley said. This year, they expect less impressive gains of 8 percent, just above the long-term trend of 7 percent.

Given that Europe has borne the brunt of the dollar's slide, with a rising euro making the region's exports less competitive, analysts' relative optimism about European stocks may seem surprising. But euro zone stocks are priced attractively, with price-to-earnings ratios around 14 percent, compared with about 16 percent for stocks globally.

European corporate profits are also expected to hold up fairly well, despite the strong euro. Companies seem to be suffering less than might seem likely, given policy makers' noisy laments about the weak dollar.

There are several reasons for this. European companies, like their American counterparts, have grown extremely frugal about capital expenditures, after the spree of the bubble years. And, particularly in Germany, long known for high labor costs, several big manufacturers have cited the threat of low-wage competition from new European Union members in the east and won concessions from workers.

Overall, hourly labor costs in the euro zone grew by only 2 percent in the third quarter of 2004, compared with a year earlier, the lowest increase since 1998.

"The unions seem to be getting more pragmatic," Mr. Batty said. "They realize things are changing. From a stock market point of view, this is great news."

As always, optimism about Europe needs to be tempered, analysts say. Some worry about the effects of a shift to new international accounting standards, which is required for all publicly traded companies in the European Union by the end of this year. One result could be increased volatility in reported earnings.

And the euro zone economy, which analysts at ABN Amro say will grow by only 1.5 percent this year, after 1.8 percent growth in 2004, could slow even further, particularly if consumer spending continues to stagnate.

Possible weakness in consumer spending could also hurt Britain, which remains outside the euro zone and has enjoyed several years of strength compared with its neighbors. Analysts worry that a boom in housing prices, which has fueled consumer spending, may be over, with prices already easing slightly in recent months. Nevertheless, most analysts are optimistic about the outlook for British stocks, which were rising at the end of last year, bolstered by banking issues.

Many analysts expect the Japanese economy to slow, too, after a solid 2004; Morgan Stanley predicts 0.5 percent growth, after 4 percent last year. That makes many strategists wary about prospects both for Japanese stocks, which have not drawn much strength from improved corporate finances, and the overall economy after more than a decade of recessionlike conditions.

Some analysts, however, see an opportunity in Japan for patient investors. A slowdown in the growth of corporate profits - analysts expect that once the numbers are in for 2004, they will show profit growth of 60 percent - seems inevitable, but it will not prevent a longer-term recovery from taking hold. "We think the market will begin recognizing that Japan has taken the first step toward returning to normal," said Naoki Kamiyama, a strategist at Morgan Stanley, in a note to investors.

Elsewhere in Asia, all eyes remain on China. A mild slowdown in that country's runaway growth rate, and a possible easing of the currency's tie to the dollar, could put pressure on shares, which performed poorly last year. Analysts say other Asian markets, particularly those with heavy exposure to technology stocks, like South Korea and Taiwan, might do better, though.

And other emerging markets, especially those that have benefited from a global surge in commodity prices, could continue to power ahead, strategists say. Many South American markets, for instance, have enjoyed a period of relative political and financial stability, and resource-rich countries like Brazil have fared particularly well.

Over all, said Mr. Bond at Barclays Capital, "equities globally are well placed against bonds, but it will be a year of modest returns."

***
Prudent Investor says: Not so fast there...most of these analysts are talking from the rear view mirror perspectives, in other words using the immediate past as a measure to predict future performances. Caveat, dear readers.

According to several leading multilateral institutions such as the OECD and World Bank, the prospects of slower economic growth for the world are more likely in 2005, as to how much of that could be equated with gains in the global equities and more so in the commodities (some, not all) front is something to be reckoned with, unless of course we could see some foreign currency reserve rich Asian nations picking up the consumer demand and domestic investment slack caused by the anticipated global softening. But of course, economics is not the sole determinant, liquidity is likely a more influential factor. With global Central Banks likely to follow on the footsteps of the US Federal Reserve in its 'measured pace' of monetary tightening, the odds are stacked in favor of a 'lesser' optismistic outlook for the major equities and bond markets compared to these 'mostly' pollyannaish mainstream forecasts.

It will be a challenging 2005 indeed. Care to place your bets?

BBC News: Blog reading explodes in America

Prudent Investor Says: Ahead not only in investments but also in technology apps...

Blog reading explodes in America
BBC News

Americans are becoming avid blog readers, with 32 million getting hooked in 2004, according to new research.

The survey, conducted by the Pew Internet and American Life Project, showed that blog readership has shot up by 58% in the last year.

Some of this growth is attributable to political blogs written and read during the US presidential campaign.

Despite the explosive growth, more than 60% of online Americans have still never heard of blogs, the survey found.

Blogs, or web logs, are online spaces in which people can publish their thoughts, opinions or spread news events in their own words.

Companies such as Google and Microsoft provide users with the tools to publish their own blogs.

Getting involved

The rise of blogs has spawned a new desire for immediate news and information, with six million Americans now using RSS aggregators.

BLOGGING IN AMERICA Blog readership has shot up by 58% in 2004 Eight million have created a blog 27% of online Americans have read a blog 5% use RSS aggregators to get news and other information 12% of online Americans have posted comments on blogs Only 38% of online Americans have heard about blogs

RSS aggregators are downloaded to PCs and are programmed to subscribe to feeds from blogs, news sites and other websites.

The aggregators automatically compile the latest information published online from the blogs or news sites.

Reading blogs remains far more popular than writing them, the survey found.

Only 7% of the 120 million US adults who use the internet had created a blog or web-based diary.

Getting involved is becoming more popular though, with 12% saying they had posted material or comments on other people's blogs. Just under one in 10 of the US's internet users read political blogs such as the Daily Kos or Instapundit during the US presidential campaign.

Kerry voters were slightly more likely to read them than Bush voters.

Blog creators were likely to be young, well-educated, net-savvy males with good incomes and college educations, the survey found.

This was also true of the average blog reader, although the survey found there was a greater than average growth in blog readership among women and those in minorities.

The survey was conducted during November and involved telephone surveys of 1,324 internet users.

Yale Global: China's African Safari

China's African Safari

Besides buying energy and commodities, China is also trying to win hearts and minds in a continent embittered by colonial experience

Paul Mooney

YaleGlobal, 3 January 2005

BEIJING: In the 1960s and 1970s, Chinese engineers were hard at work throughout Africa, constructing stadiums, laying down roads, and building hospitals in the Cold War battle for the hearts and minds of Third World citizens. The politics and revolutionary idealism behind many of these good-will projects faded in the eighties after Beijing became preoccupied with building socialism with Chinese characteristics back home. However, a fast-growing China with a voracious appetite for resources and markets is now back with a vengeance, and it's shaking up Africa's European and American partners.

Almost every African country today bears examples of China's emerging presence, from oil fields in the east, to farms in the south, and mines in the center of the continent. According to a recent Reuters report, Chinese-run farms in Zambia supply the vegetables sold in Lusaka's street markets, and Chinese companies - in addition to launching Nigerian satellites - have a virtual monopoly on the construction business in Botswana.

Between 2002 and 2003, two-way trade climbed 50 percent to US$18.5 billion - the fastest growth China has seen with any geographical area. And trade is tipped to further soar to US$30 billion by 2006.

The last year has seen revolving door visits by officials of the two sides, and China and the United Nations Development Programme (UNDP) jointly established the China-Africa Business Council in November. The organization will support China's private sector in promoting business in Cameroon, Ghana, Mozambique, Nigeria, South Africa and Tanzania.

China's rampant economic expansion - and resulting appetite for raw materials - is the major factor driving the country's long march across the African continent. The second biggest consumer of oil after the United States, China is searching the world for new sources of energy, and Africa is fast becoming an important supplier. To date, China has oil partnerships in Sudan, Chad, Nigeria, Angola and Gabon, and is exploring a potential collaboration in Kenya.

Beijing has pressed history to promote its economic agenda, attempting to win African sympathy by emphasizing the common history of exploitation China and African nations have suffered at the hands of Western colonialists. This is a common theme in the pages of African newspapers, where commentators argue that Western investors exploit Africa, while Chinese companies tend to invest in businesses that are beneficial.

China is also making an effort to win the hearts and minds of the African people, and to extend its political influence.

Still, there is some debate among Africans over whether China is exploiting or benefiting their continent. Chinese are busy developing much-needed African infrastructure: roads and rail lines in Ethiopia, Sudan, and Rwanda; a new hospital in Sudan; a farm and a bridge across the Nile; reclaiming thousands of hectares of farmland in Tanzania. But at what cost?

Moeletsi Mbeki, deputy chairman of the South African Institute of International Affairs, wrote in recently AllAfrica.com that China "is both a tantalizing opportunity and a terrifying threat to South Africa." On the one hand, he said that China was "just the tonic" that mineral-rich but economically-ailing South Africa needs. But he added that exports from China and Hong Kong to his country are double those from Africa and almost double what South Africa exports to China. He called the trade relations between South Africa and China "a replay of the old story of South Africa's trade with Europe."

Said Mbeki: "We sell them raw materials and they sell us manufactured goods with a predictable result - an unfavorable trade balance against South Africa."

He went on to say that most of what Europe and America sells to South Africa are high tech goods that the latter does not produce itself, while imports from emerging Asian countries like China are goods his country is able to produce itself. In September, one of South Africa's largest trade unions threatened to boycott retailers it said were importing cheap Chinese products, which it said had lead to worsening unemployment at home.

In the meantime, however, many African nations are pleased that no political strings are attached to China's friendship - with the obvious exception that they must not recognize Taiwan and must affirm the one China policy. At present, only 7 African nations have relations with Taiwan - one-quarter of the total - and a key part of China's Africa policy is denying Taiwan any greater diplomatic space on the continent.

He Wenping, director of the African Studies Section at the Chinese Academy of Social Sciences in Beijing, says that China and Africa share the view that countries should not meddle in each other's affairs. "We don't believe that human rights should stand above sovereignty," says He. "We have a different view on this, and African countries share our view."

Zimbabwe is a case in point. After Americans and Europeans withdrew from the country due to the government's destructive land reform program and poor human rights record, China stepped in, ready to work with the embattled, and resource-rich, African nation.

During his recent trip to Africa, Wu Bangguo, chairman of China's legislature, spent four days in Zimbabwe, leading a delegation of 100 Chinese businessmen who inked joint venture deals in mining, transportation, communications and power generation. It's no wonder that Emmerson Mnangagwa, speaker of Parliament, is so bullish on China. The official gushed in a state-run Zimbabwean newspaper: "With all-weather friends like the People's Republic of China... Zimbabwe will never walk alone."

Sudan is another example. China National Petroleum Corporation won an oil exploitation bid there in 1995, and when Washington cut ties two years later, the Chinese were ready to fill the void left by retreating Western oil companies. They helped to develop oil fields, built refineries, and laid two oil pipelines. Sudan, which was an oil importer before the Chinese arrived, now earns some US$2 billion in oil exports each year, half of which goes to China, accounting for 5 percent of the country's total imports. China owns a 40 percent stake in the Greater Nile Petroleum Operating Company, the major consortium drilling in Sudan.

But more important for Sudan is Beijing's political support. China has vowed to veto any sanctions imposed against Sudan. When the UN Security Council tabled a resolution in September to punish Sudan for failing to stop atrocities in the troubled western region of Darfur, it was forced to water down the proposal to avoid a Chinese veto. China, Russia, Pakistan and Algeria all abstained in the vote for the weaker resolution that passed by 11-0.

The political scientist He Wenping concedes that China would suffer if sanctions were applied against Sudan, but she says that this is not China's main consideration. "Suppose this happened in another country," she argues. "China would still take the same stand. You can see this from other examples."

Still, international pressure is growing for China to use its political influence to pressure Sudan, which critics say is using its oil dollars to fund the military actions against its black African population in Darfur. Some observers say that China, which relishes its relatively new position as an international mover, will not want to be seen as an obstacle to the solution of the problem in Sudan.

The problem is that while China predicts that the growth of oil consumption will slow sharply next year from the 20 percent rise in 2004, the country still faces continued power shortages. Crude oil imports could hit 150 million tons in 2005, up from 130 million tons this year. Already more than 40 percent of the country's total crude demand is met by imports, and analysts say imports will account for between 50 to 75 percent of its consumption by 2020.

If sanctions were to block oil from Iran and Sudan, China would be forced to scramble to find other sources, which could be problematic. The question is whether or not Beijing is willing to sacrifice oil and its African partnerships to salvage its international image as a responsible global force.

Paul Mooney, a freelance journalist, has been reporting on China for 15 years.

Rights:
© 2004 Yale Center for the Study of Globalization

Myrtle Beach online: China's steel peril may be oversupply

China's steel peril may be oversupply
Rising exports, lower prices could have global effect
By Patrick Barta and Paul Glader
The Wall Street Journal
January 3, 2005

For much of the past two years, China has threatened to foster a world steel shortage with its prodigious appetite for imports of the metal. Now the country has become a net exporter, its domestic demand is slowing and steelmaking capacity is up around the world, sparking concern over global oversupply and tougher times for the industry in the years ahead.

Behind China's shift is a sharp slowdown in the growth of steel consumption at home combined with continued increases in production. As Beijing has worked to cool an overheated economy, the growth in domestic demand for steel recently has been rising only about 5 percent a month compared with year-earlier periods, after average monthly increases of 26 percent in 2002, 2003 and early 2004, according to UBS AG.

Meanwhile, UBS estimates that Chinese steel production will climb 22 percent this year to 268 million tons and grow a further 14 percent next year to 305 million tons. In November, China reported net exports of more than one million metric tons of steel, more than double October's level and a reversal from November 2003, when it was a net importer of nearly three million tons.

China's emergence as a net steel exporter and rising capacity elsewhere highlights how quickly global commodity flows can shift directions. It also raises the question of whether China could as quickly reverse the trend and again squeeze global steel supplies. China in recent years has added so much new production of some raw materials, such as coal and aluminum, that even minor shifts in its economy could force it to dump unneeded supply on to the global marketplace, potentially sending prices down as quickly as they have gone up.

Lower steel prices could be a boon to manufacturers, builders and consumers worldwide, helping to reduce costs in the plant and prices at the cash register. The effect on steelmakers is less rosy, especially in the United States. Although the American steel industry is in better shape, after a wave of bankruptcies and consolidation, to cope with oversupply, the United States would be at a big disadvantage against steelmakers in lower-cost countries. In addition to China, production in lower-cost regions such as India and Eastern Europe has been surging in recent years. And when the dollar's weakness reverses, imports will look more attractive to U.S. customers.

For now, analysts and executives see a clear movement toward rising capacity in China and worldwide, though they disagree on how soon large amounts of new steel will reach the market and how much of a price squeeze global producers face.

Just a few years ago, the steel industry was slogging through a decades-long downturn, caused in part by overcapacity. That changed in 2003 and 2004, as manufacturing picked up worldwide, but especially in China, where construction projects far exceeded expectations. A global squeeze on steel supplies this year led to panic buying that caused steel prices to double and triggered shortages of steel-making raw materials such as iron ore, coking coal and scrap steel.

Now, many governments are using subsidies, loan guarantees and other tools to promote more steel production to capitalize on the increased demand in China and elsewhere. The North American Steel Trade Committee is worried that some 250 million metric tons of new steel capacity are on track to be added in the next five years in a global market that produces about one billion tons annually.

China now exports large amounts of lower-quality steel, of the type used in construction. Supplies of higher-quality steel, of the kind used to make cars and trucks, remain tight - Nissan Motor Co. and Suzuki Motor Corp. both had to temporarily halt production when they couldn't find enough steel in recent weeks. But China has been ramping up its capacity to make more high-quality steel as well.

Excess Chinese steel might not dent world prices right away. But rising Chinese exports would almost certainly affect other markets eventually, stoking competition as steel producers that had sold to China vie for sales elsewhere.

Some steel users say they are already seeing the impact of greater production and slowing demand in Asia. Among them is Pan Australian Resources Ltd., a mining concern based in Brisbane, Australia, that is building a $15 million gold-processing facility in northern Laos. Steel products account for as much as 10 percent of the facility's cost.

When Pan Australian priced the project this summer, suppliers appeared to be padding their estimates in the expectation that steel costs would continue to rise. But now that it is taking delivery of the steel, the company is finding prices are more than 10 percent below estimates.

"It looks like their order books have thinned out, so they need to be more competitive," says Joe Walsh, a Pan Australian spokesman.

And more capacity is on the way. Despite its announced intention to rein in excess steel investment earlier this year, the Chinese government recently approved a $2.5 billion plant expansion for Maanshan Iron & Steel Co., the country's fifth-largest steel producer, to make more steel for cars and home appliances. It also approved a $2 billion expansion for stainless-steel maker Taiyuan Iron & Steel.

State-run media have reported that China's largest steelmaker, Baosteel Group, is considering a $10 billion expansion to build a 10-million-ton-a-year plant in Guangdong province, pending government approval. Baosteel officials declined to comment on the plan. Baosteel has started construction on a stainless-steel plant in Guangdong that would be the biggest stainless-steel processing and distribution center in China when finished.

"It doesn't take too much imagination to look at what's happening in China and say that this is a really serious issue," says Peter Hickson, a steel analyst at UBS in London, who thinks steel prices could fall nearly $200 a ton in 2005. The U.S. industry expects prices for cold-rolled steel, a type commonly used in everything from dishwashers to automobiles, to be about $800 a ton in early 2005. Hickson's bank recently downgraded the global steel sector to "neutral" from "buy," in large part because of worries over China.

Still, some analysts contend that concerns about a steel overhang are premature. Many of the new expansions won't be completed for a long time, and some might not happen at all if steel prices drop and supplies of raw materials remain tight.

"I think there is a little too much concern about announced new capacity," says Dan DiMicco, chief executive officer of Charlotte, N.C.-based Nucor Corp. "You can build steel mills, but you can only run them if you have raw materials."

Kim Soo Jung, a spokeswoman for Posco, the large South Korean steelmaker, says: "We can't say we're not concerned about the increased production volume in China. If they don't stop producing [so much], that will cause overcapacity."

Even so, Posco is considering its own expansions, including a possible $8.4 billion joint venture with Australia's BHP Billiton to build a steel-slab plant in India with capacity for 10 million tons a year. As recently as 2001, Kim says, Posco was the world's biggest producer of steel in terms of volume, but it has lost that status after other steelmakers expanded through a series of mergers. "If we want to continue to be a leader in the industry, we need to expand our capacity," she says.

Chinese officials emphasize that their latest expansions will be aimed at serving the high-grade steel market rather than users of lower-grade construction steel. Wang Xiaoguang, head of the economic operation and development research department at China's State Development and Reform Commission, predicts China's steel output will only increase 10 percent to 15 percent next year, compared with more than 20 percent in recent years.

The United States, for its part, remains a net importer of steel, taking in about 30 million of the 130 million tons of steel it consumes each year. A few companies, such as Nucor and Fort Wayne, Ind.-based Steel Dynamics Inc., have expanded existing capacity this year for certain types of steel. But that additional production roughly offsets steel-making capacity that disappeared from the United States between 2000 and 2003, when almost 40 companies declared bankruptcy.

Bloomberg: Eastern European Currency Gains Spur Shopping Trips

Eastern European Currency Gains Spur Shopping Trips (Update1)

Dec. 31 (Bloomberg) -- Record gains by currencies in the four biggest nations that joined the European Union in May have boosted consumers' spending power and spurred trips to Austria, Germany and beyond for clothes, ski trips and even groceries.

The Polish zloty is the world's best-performing currency this year, gaining 15 percent against the euro and 25 percent against the dollar. The Hungarian forint has risen 7 percent versus the euro and 16 percent against the dollar, while the Czech and Slovak koruna are up 6 percent against the euro and 15 percent against the dollar.

``The purchasing power of the people from those new EU countries increased quite markedly and their presence will be felt more on the markets'' of Western Europe, said Radek Maly, who follows Eastern European currencies as head of research and treasury at Citibank in Prague. ``They will be able to afford to spend more, either through tourism or by individual spending.''

The former communist countries' EU membership has reduced the risk for foreign investors, boosting benchmark stock indexes and generating demand for the currencies. Budapest's BUX index is the world's third-best performer this year, adding 78 percent in dollar terms, while Prague's PX50 is up 72 percent, ranking fourth. Warsaw's WIG20 index gained 49 percent and ranks eighth.

Shares of Budapest-based OTP Bank Rt., the biggest bank by market value in the 10 new EU members, rose 109 percent, and PKN Orlen SA, Poland's largest oil company, has advanced 56 percent.

EU Dynamics

Polish bonds with a maturity of at least 10 years are the world's best performers this year, returning 28 percent in euro terms. Hungarian five-year debt has returned 23 percent, according to Bloomberg data.

``It's a reflection of the dynamics flowing from EU entry, foreign direct investment and convergence towards the euro,'' said Elizabeth Gruie, an emerging markets economist at BNP Paribas in London. ``It's also because of investors' appetite for yield. Central banks have been aggressive in keeping monetary policy tight'' as currency strength fights inflation.

A strong forint encourages shoppers such as Otto Szabo, a 30- year-old swimming-pool builder from Gyor in northwest Hungary, to make a weekly, hour-long drive to neighboring Austria for clothes, food and drink.

Austria Cheaper

``Everything is cheaper here, even food,'' said Szabo, heading into Vienna's Shopping City Sued mall, one of Europe's largest malls. ``When I want to buy a good suit, I go to Vienna, not to Budapest.''

Companies including Ford Motor Co. are building or expanding plants in the new EU states, where economic growth is twice the pace of the older members. The European Commission on Oct. 26 said it expects Poland and the Czech Republic, the two largest economies among the new entrants, to grow 4.9 percent and 3.8 percent next year, compared with 2 percent in the 12 euro-sharing nations.

Dearborn, Michigan-based Ford, the second-largest U.S. carmaker, said on Dec. 2 it plans to invest 300 million euros ($409 million) to build a transmission plant in Slovakia.

Central banks in Eastern Europe are keeping interest rates high to support their currencies and hold down inflation to meet terms for adopting the euro later this decade. Poland's benchmark borrowing cost is 6.5 percent and Hungary's is 9.5 percent, compared with the European Central Bank's main refinancing rate of 2 percent.

Growing Appetite

Currency appreciation lowers inflation by cutting import costs and euro aspirants must bring their inflation rates to within 1.5 percentage points above the average of the three EU members with the lowest rates.

Poland's annual inflation rate was 4.5 percent in November while in Hungary it was 5.8 percent.

While gross average wages in the new EU states are around $800 a month, compared with more than $4,000 in Germany, a growing and better-paid middle class is getting an appetite for travel and higher-quality goods from abroad.

Marek Svoboda, a 54-year-old ski buff from the Czech Republic, sat on a ski lift in Bad Hofgastein, Austria, last week, enjoying the mountain view.

A year ago, a double room at the Norica Hotel in the Austrian resort, at 679 euros for the week, cost him 22,510 koruna. This year, the same room cost 2,000 koruna less. The ski pass, at 171 euros per person for the week, is now almost 1,000 koruna cheaper for a couple.

``It's really worth the five-hour drive,'' Svoboda said. ``I might have come anyway, but this makes it better.''

Paying Off

Milena Valdova, the owner of Matylda s.r.o., a Prague-based travel agency, said interest in one-day Christmas shopping trips to Vienna, Nuremberg, Passau and Dresden has increased.

``These trips are selling much better this year than last,'' Valdova, 41, said in a phone interview. ``It pays off to buy a whole range of goods in Germany and Austria.''

Still, the strength of Eastern European currencies is hurting exporters, including Polish copper producer KGHM Polska Miedz SA, who get less revenue after exchanging dollars and euros earned abroad.

``We've got a strong zloty and its effects are not good for us,'' said Tomasz Szelag, director of currency risk at Lubin- based KGHM, Poland's biggest exporter. ``We do hedging and high copper prices also provide a natural hedge so we're OK, but we're not happy with the current exchange rate.''

Raba Rt., a Gyor, Hungary-based axle and truckmaker, reported on Nov. 9 that its nine-month operating loss widened to 8.2 billion forint because of the currency's appreciation.

Hungarian Law

Hungary's government has repeatedly called on the central bank to cut interest rates faster to stem the forint's gains, on concern it will lead to job cuts.

A new law to increase Prime Minister Ferenc Gyurcsany's influence over who will sit on an expanded rate-setting council was signed by the president on Dec. 20 and will take effect as of the central bank's January meeting.

``Exporters are being killed by the strong forint,'' said Bela Balog, Raba's chief financial officer. ``Our company is very badly affected by the persistently strong exchange rate. If this is sustained in the long term, it will damage the whole economy. We're pleased to see any initiative aimed at weakening the forint.''

San Jose Mercury News: With `Socks City,' China puts toe in textile market

With `Socks City,' China puts toe in textile market

SPECIALIZED MANUFACTURING AIMS FOR GLOBAL DOMINANCE

By David Barboza
New York Times
San Jose Mercury News

DATANG, China - You probably have never heard of this factory town in coastal China, and there's no reason you should have. But it fills your sock drawer.

Datang produces an astounding 9 billion pairs of socks each year -- more than one set for every person on the planet. People here fondly call it ``Socks City,'' and its annual Sock Festival attracts 100,000 buyers from around the world.

Southeast of Datang is Shenzhou, which is the world's ``Necktie Capital.'' To the west is ``Sweater City'' and ``Kid's Clothing City.'' To the south, in the low-rent district, is ``Underwear City.''

This remarkable specialization, one city for each drawer in your bureau, reflects the economies of scale and intense concentration that have helped turn China into a garment behemoth. On Jan. 1, a new trade regime will end the decades-old system of country-by-country quotas that split up the world's exports among roughly 150 countries. Now, China is banking on its immense size and efficient operators to grab an even larger share of the world's clothing orders.

Neither Adam Smith nor Karl Marx could possibly have imagined that this kind of capitalism would evolve from a communist system in quite this way, with an obscure town in the middle of nowhere becoming the world's sock capital. But these days, buyers from New York to Tokyo want to be able to buy 500,000 pairs of socks all at once, or 300,000 neckties, 100,000 children's jackets, or 50,000 size 36B bras. And increasingly, the places that best accommodate those kinds of orders are China's giant new specialty cities.

The abolition of quotas is expected to accelerate this trend over the next decade or so, particularly under the guidance of China's visible hand. The niche cities reflect China's ability to form ``lump'' economies, where clusters or networks of businesses feed off each other, building technologies and enjoying the benefits of concentrated support centers -- like the ``Button Capital'' nearby, which furnishes most of the buttons on the world's shirts, pants and jackets.

Glimpse at the future

The new era, thus, offers a glimpse into how China's incredibly fast-paced economy is developing into more than just a beehive of individual private enterprises scattered hither and yon. Beyond the entrepreneurial vigor so palpable, the textile business is a prime example of how the Chinese government's attempt to guide development more indirectly through local planning instead of outright state-ownership is starting to pay off in a big way.

China is not just becoming the leader of the pack. In many ways, it hopes to run away with as much of the market as possible.

New import limits by the United States, along with other external and internal forces, are expected to hamper China's progress in apparel and textiles for several years, if not longer. That should allow several other countries to maintain vigorous garment industries as well. But there is little question that China will be the dominant force in the business, and the growth of its industrial conclaves highlights just how powerful a force China's industries are becoming in almost every sector they have entered.

In the late 1970s, Datang was little more than a rice farming village with 1,000 people, who gathered in small groups and stitched socks together at home and then sold them in baskets along the highway.

Back then, government officials branded Datang's sock makers as ``capitalists'' and ordered them to stop selling socks. Now, they produce more than a third of the world's output, and the government has nothing but praise for such entrepreneurs and their domination of the sock business.

Signs of Datang's rise as a sock capital are everywhere. The center of town is filled with a massive government-financed marketplace for socks. The rice paddies have given way to rows of neatly paved streets lined with cookie-cutter factories. Banners promoting socks appear along streets and draped across buildings. And each year, Datang is decorated with balloons and flags for the annual sock fair.

And rags-to-riches tales abound in Datang. Just ask Dong Ying Hong, who in the 1970s gave up a $9-a-month job as an elementary school teacher to make socks at home. Now, Hong is the owner of Zhejiang Socks -- and a sock millionaire.

U.S. left behind

These kinds of gains have sharply eroded America's old sock-making might. American textile companies filed a petition earlier this year asking Washington to place limits on Chinese sock imports.

Hoping to ease trade tensions, the Chinese government said earlier this month that it would voluntarily add tariffs on some of its own textile and apparel exports to lessen their competitive thrust. That is one reason, among others, why many experts believe China's wallop will not come all at once.

Still, China already accounts for about 16 percent of all apparel imports into the United States. And several studies project that in the next few years, once all the limits are lifted, that figure could soar to between 50 and 70 percent.

``There's no question, at the end of the day, China ends up a much bigger player in the global apparel business,'' said David Weil, an associate professor of economics at Boston University.

Businessweeek: Alternative Energy Gets Real

Alternative Energy Gets Real
Businessweek
December 27, 2004

Pricey oil and gas are heating up industrial interest in renewable sources

Renewable energy is booming. The use of solar power has been growing by more than 30% a year and, except for a hiccup in 2004 -- when Congress delayed renewing a tax credit -- so has wind power. Ethanol is heading for record production levels. And there's no end in sight, given high oil and gas prices, an increasing number of government mandates and incentives, and the first real steps toward tackling global warming. Clean Edge Inc., a research and strategy consultant, predicts that the total clean-energy market will grow to $92 billion by 2013, about seven times its current size of $13 billion. "The investment community is starting to see real opportunities," says Ron Pernick, co-founder of Clean Edge.

But buyer beware: Many of the leading companies supplying the technology to produce renewable energy still aren't profitable. Often the pros are divided on just which are the leading companies. In fact, today's renewable business is reminiscent of the computer industry in the early 1980s, "when no one knew who the winners would be," says Carsten Henningsen, chairman of Portfolio 21, a mutual fund that invests in environmentally conscious companies. That's why many analysts and fund managers recommend investing in a basket of companies. "People should try to pick companies positioned to be winners and get enough of them," says Henningsen.

Wind might produce the biggest winners. A U.S. tax credit of 1.8 cents per kilowatt-hour is in place until 2006, and 19 states now require electricity producers to generate part of their power from green sources. Energy information and services company Platts, like BusinessWeek part of The McGraw-Hill Companies (MHP ), expects that most of the new sources will be wind. One beneficiary could be Denmark's Vestas Wind Systems, the world's biggest turbine manufacturer, which is listed in Copenhagen and trades over the counter in the U.S. "It is profitable, and there is more certainty and a more favorable political climate surrounding wind than solar or hydrogen," says Henningsen.

Fuel-cell companies are also catching the eye of investors. Their stocks are way down from the speculative peaks of a few years ago, but their products are finally becoming a compelling alternative to diesel-powered backup generators, says Walter Nasdeo, managing director of New York-based Ardour Capital Investments LLC. And they hold the promise of clean, efficient, hydrogen-powered cars, provided costs come down. Nasdeo is bullish on FuelCell Energy Inc., which he expects to reach $17.50 in a year, from $8.45 now.

A buy-and-hold strategy combined with some selective trading may be the best strategy for cashing in on the alternative-energy boom. "If [FuelCell Energy] goes to $14 or $15, you should take a little profit, then wait until [it] pulls back and buy some more," says Nasdeo. Eventually, he expects one of the renewable energy stocks to hit it big. In addition to FuelCell Energy, Nasdeo sees potential in Evergreen Solar (ESLR ), which makes solar cells; American Superconductor (AMSC ), which makes highly efficient superconducting wire and power-regulation devices; and two other fuel-cell makers, Hydrogenics (HYGS ) and Plug Power (PLUG ).

Portfolio 21's Henningsen also sees opportunities now to buy companies with beaten-down stocks. His own holdings: Vestas; fuel-cell makers Ballard Power Systems and Plug Power; and IMPCO Technologies (IMCO ), which focuses on devices for car engines that use alternative fuels. After a fall for these stocks in 2004, "now may be the time to buy," he says.

If investors don't have the time or stomach to juggle a portfolio of individual stocks, they could buy into a fund that specializes in renewable-energy stocks. An interesting choice is the WilderHill Clean Energy Index, set to debut in early 2005. It's the brainchild of Robert J. Wilder, who put together an index of clean energy stocks five years ago as a hobby. It now includes everything from fuel-cell companies to suppliers of carbon fiber for turbine blades and makers of hydrogen. The index soared during the tech boom, plunged, and is now up 26% since August. "There are about 40 representative stocks -- and any one of them might do well," says Wilder. In other words, with a big enough basket, renewable energy could charge up any portfolio.

By John Carey

Busineweek: Four Countries You Must Own

Four Countries You Must Own
Busineweek
December 27, 2004

Every investor needs a stake in Brazil, Russia, India, and China

Once in a great while a trend takes hold that's so powerful, it transforms the entire global economy: the Industrial Revolution of the 18th century, the modern industrial nation in the 19th century, and the emergence of cheap computing and communications in the 20th century.

The newest megatrend? It's the rise of the BRICs. That's shorthand for four dynamic developing nations with large populations -- Brazil, Russia, India, and China. The four now account for less than 15% of the economies of the G6 nations. But collectively they could be larger than the G6 in just four decades, say economists at Goldman, Sachs & Co. (GS ). That depends, of course, on whether they get the fundamentals right: sound fiscal and monetary policies, free trade with the outside world, and massive investment in education. "It's a story for the future," says Robert Hall, portfolio manager for global emerging markets at Russell Investment Group.

That means you might want to start making investments now. You can choose individual equities or take a basket-of-stocks approach with exchange-traded indexed funds or actively managed mutual and closed-end funds. Don't invest a huge lump sum at once. Instead, put your money in over time. The markets are volatile, and there will be pullbacks offering cheaper entry points.

These economies have weaknesses, too. For instance, foreign capital is pouring into China so quickly that some economists fear the combination of a speculative frenzy and a backward banking system will eventually burst the bubble. Watchdog group Transparency International ranks India among the rampantly corrupt nations in its latest Corruption Perception Index. And investors are questioning Russian President Vladimir Putin's commitment to capitalism after the recent crackdown on oil giant Yukos. Any one of those could derail the markets or the economy for a bit.

Still, there is precedent for making a long-term bet on an emerging frontier. In the years after the Civil War, America's industrial output lagged far behind that of Germany, France, and Britain. Yet from 1870 to 1914, America's economy expanded fivefold, and the U.S. became the world's leading industrial power. Along the way there were about a dozen sharp downturns and a handful of financial panics, yet stocks returned an average of 6.5% a year after inflation. "If you can close your eyes for years, you'll probably do well," says Stuart Schweitzer, global markets strategist at JPMorgan Fleming Asset Management in New York.

In part driven by the economic performance of the BRICs, the entire emerging-market sector put on a stellar show this year. The Morgan Stanley Capital International Emerging Market Index is up some 14% through Dec. 10, vs. 6.8% for the Standard & Poor's 500-stock index.

And 2005 looks good, too. Emerging-market stocks are cheap, with valuations about 40% lower than in the U.S. The sinking dollar is prompting investors to send more money abroad, says Brad Durham, a managing director at Emerging Portfolio Fund Research in Boston. Currently, global mutual funds and pension funds are underweighted in the BRICs. As investors become more familiar with the BRICs, says Durham, more money will flow to them.

One strong global theme that benefits the BRICs in particular is demand for industrial commodities. Brazil's Bovespa stock index is up some 15% this year, powered by companies such as Companhia Vale do Rio Doce, a major exporter of iron ore, and CSN, a major steelmaker. Rio Doce, CSN, and other basic industry companies should continue to do well considering the world's voracious appetite for raw materials, especially in China. Russia's Gazprom, for instance, will account for a quarter of world gas production, and it will be one of the international oil giants after buying a chunk of rival Yukos. "It's Russia's Aramco," says James Fenkner, chief strategist for Troika Dialog, a Moscow investment bank, referring to the Saudi Arabian oil company. "You don't need to be born into the House of Saud to benefit from Gazprom."

While commodities are expected to remain strong, many global investors believe rising incomes and growing employment in the BRICs will make consumer companies golden. In a decade, say the Goldman economists, the BRICs' middle class will total more than 800 million, greater than the populations of the U.S., Western Europe, and Japan combined today. The BRICs' middle class now number more than 250 million, says Goldman, and those consumers are already spurring demand for cars, cell phones, and better food, furnishings, and clothes.

Investing in the consumer sectors of these countries has been hard because of a scarcity of good, publicly traded companies. But that's changing. New opportunities are opening in Brazil, for example, after a rash of initial public offerings there. Among the IPOs were Natura, a cosmetics company, and Grendene, a footwear maker. In Russia, mobile-phone companies such as Mobile Telesystems are benefiting from growing usage. When Putin came into office in 2000 there were some 1.5 million cell-phone subscribers in Russia. Now there are more than 50 million. India's Pantaloon Retail is building both food hypermarkets and clothing stores that appeal to young buyers. Same-store sales are expanding at a 12% to 15% annual pace.

FOOLHARDY -- OR FARSIGHTED?

In China, consumers are also inveterate savers, salting away some 40% of their incomes. That's good for financial-services firms such as China Life Insurance (LFC ), a favorite of Agnes Dang, an investment manager for Standard Life Investments in Hong Kong. China Life is the country's biggest insurer, and its premium income is growing at 15% a year. Phillip Ehrmann of Gartmore China Opportunities Fund, a U.S. mutual fund, expects a number of state-run Chinese banks to go public in 2005, and they may make attractive investments. You heard that right. China's banks have a reputation for bad loans and poor management, yet Ehrmann thinks some of them will clean up their acts because the government wants them to go public.

For sure, those who invest in those Chinese banks -- or in the BRICs -- will be called foolhardy by some doubters. But much the same was said in the 19th century about those who invested in a wild and raucous nation called America.

By Christopher Farrell with Frederik Balfour in Hong Kong, Jason Bush in Moscow, and Jonathan Wheatley in São Paulo