This is an abbreviated post from our subscription series at Credit Writedowns Pro.
There a decent number of different threads running this morning. So I’ve decided to go with a multi-themed post this Monday instead of the usual mono-themed one.
- Russia is signalling de-escalation in Ukraine, at least on economics
- The mobile battle is moving to India
- The limited window on Abenomics is closing
The $50 billion Yukos settlement is a development that only sharpens the political nature of the Ukraine crisis as it will be seen inside Russia as another measure by the west to punish Russia. I think of the Yukos expropriation as similar to the YPF expropriation in Argentina. I am not sure how that’s relevant yet. But, with Argentina facing debt default and a pariah status in the U.S., perhaps it goes to topics like financial warfare and the rule of law. Just something to consider moving forward.
At this point, the economic battle is all one-sided then i.e. the west trying to isolate Russia via sanctions. This only makes Putin more popular in Russia, makes the west look like the aggressor to ordinary Russians and, therefore, gives Putin more leeway to act. The question now then is the military side. Ukraine seems to be pressing an advantage over the insurgents. Russia has to decide how openly it wishes to aid the insurgents militarily. If they do so too openly, it will draw another round of more onerous sanctions and potentially a direct military proxy war with the U.S. as we saw in Afghanistan during the Cold War.
Mobile. In the mobile world, I reported on Apple’s stellar execution in China. That is seeing the country through a saturation point in developed economies. In fact, because China Mobile is moving to 4G technology, Samsung has been caught out by lower-cost 3G competitors at the mid-range, while Apple has been able to focus on the high-end where the growth is for the 4G rollout. Other Chinese telecom operators will be rolling out 4G soon as well.
Meanwhile, we should also be thinking of India as the next big mobile market given the saturation elsewhere. The FT has a must-read article on this market, which claims that India is preparing for a ‘big bang’ in smartphone use. Here though the focus seems to be on upgraders because consumers are price-sensitive and 650 million Indians already have mobile handsets. In terms of profitability, we could end up seeing the same thing here that we saw in China in terms of Apple dominating the high-end space. This dominance may come at the cost of Android’s dominance of the lower-end, leading to Apple’s iOS platform becoming an increasingly smaller percentage of the market. Both India and China bear watching on that front.
Japan. The last thread I want to touch on here is Abenomics. The latest news out of Japan has been negative. Forecasts for growth in 2014 have been downgraded. And the trade deficit is becoming a big issue hanging over Japan’s macro outlook. Export volume is not increasing despite the drop in the Yen. As a result, the value of Japanese exports is now 23% lower than at its March 2008 peak.
Part of this is structural. Japanese companies assemble enough of their products abroad that, even in good times, they see little sense in making hard-to-reverse investments in staff and factories at home. After all, they can still profit handsomely from the increased yen value of their global sales simply by converting foreign exchange earnings – regardless of where the goods are produced.
On the other side of the trade ledger, the yen’s fall has exacerbated a massive post-Fukushima increase in the cost of oil and gas imports. Japan’s trade deficit in the first half of 2014 was Y7.6tn, the largest since comparable data collection began in 1979.
I think we are at a crossroads here with Abenomics. Politically, Abe has a limited window before the dissatisfaction with his program means permanent failure. He has done what he promised to do on the inflation and growth fronts. But the structural issues remain. And that is the sticky wicket here. Without structural adjustments, Abenomics will fail.