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Analysis: Global liquidity swell to spill into 2014

Wed Oct 30, 2013 2:52am EDT

LONDON (Reuters) – After a bone-dry summer, world markets seem awash with cash again and it looks like spilling into 2014.

Even though the U.S. Federal Reserve has kept its $85 billion-a-month of bond buying constant throughout, fevered speculation surrounding its easy money spigot has by itself dictated the massive ebb and flow of liquidity seen this year.

The rethink of Fed intentions after September 18 – when the central bank declined to cut back its asset purchases as expected – has raised all financial boats in one big wave.

Since the Fed demurred six weeks ago, the SP500 index of top Wall St stocks has jumped 3.5 percent. So too have 10-year U.S. Treasury bonds. High-yield corporate “junk” bonds are also up more than 3 percent, as are gold and the euro. Even indices of the most esoteric and speculative ‘frontier markets’ have added more than 3 percent.

The global surge has been remarkable as an evaporation of this year’s U.S. dollar’s gains has removed huge pressure from emerging market currencies and, in turn, eased the strain on some $7.2 trillion of emerging central bank reserves. And given these reserves are largely banked in western bonds, a virtuous circle of liquidity appears to have formed.

And by pumping up the euro and Japanese yen, the retreating dollar has upped chances of further easing – quantitative or otherwise – by the Bank of Japan and European Central Bank.

The global liquidity pool – one seeded by central banks and supercharged by the markets themselves – seems to expand anew.

Major stock markets from Tokyo, London, Frankfurt and New York have now clocked up year-to-date gains of between 20 and 30 percent and the latter two are in uncharted territory. Property hotspots in many of the same locales are similarly motoring.

Is this the mirror of the financial bubble that blew up pre-2007, as long-term bears such as Societe Generale’s Albert Edwards insist it is?

With huge amounts of spare capacity still across developed labor markets and economies and little or no sign of rising inflation, policymakers seemed unperturbed.

But scale of money building up appears very real.


JPMorgan analysts reckon investor flows behind the latest market surge are akin to the indiscriminate, liquidity-fueled equity and bond buying seen at the start of the year before talk of Fed tapering saw an equity bias emerge as many funds fled bonds and the economy sped up.

More “Asset Reflation” than “Great Rotation” this time around, they surmise.

To be sure, U.S. Mutual fund data from Thomson Reuters’ Lipper showed that last week alone there were hefty net inflows to equity, bond and money funds alike – more than $11 billion net to domestic equity, almost $5 billion to overseas equity and more than 3 billion to all taxable bond funds.

So what’s the scale of this global sea of liquidity?

JPM splits the notion of liquidity into two buckets – one looks at how the banking system absorbs and distributes new QE money from central banks and another is the broad view of money supply in the wider economy of households, firms and investors.

The former can be febrile, as we saw during the summer.

When the central banks pump in new zero-yielding money, or excess reserves to the banking system, the banks just buy bills and bonds from other banks as the money gets passed around like a ‘hot potato’, bidding up asset prices and depressing yields.

That is until policy uncertainty lifts interest rate volatility and threatens bond prices, as it did after May, and forces those ‘excess reserves’ to go to ground and hunker down in cash again until the coast is clear.

With the Fed speaking softly again, one-month U.S. Treasury bond volatility indices .MERMOVE have fallen to their lowest since May – half of June’s peaks.

On one level, it shows the power that policyspeak alone still has in controlling this money and many argue the stretch for yield during the first four months of the year prompted the Fed to deliberately fire its verbal shots across the bow.

The other measure of global liquidity, however, appears positively explosive.

JPMorgan estimates its measure of “excess liquidity” in the global system is still surging into record territory, with global M2 aggregates up by $3 trillion, or 4.6 percent, so far this year – far outstripping a 2 percent global inflation rate.

Two thirds of that M2 expansion came from emerging markets, where domestic loan growth shows few signs of being fazed by the mid-year financial market turbulence.

Using these “excess liquidity” gauges as a guide to asset prices and assessing their power over time, the report concludes that remains a powerful upsurge.

“The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of magnitude,” it concluded.

(Editing by Ron Askew)

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Asian shares creep ahead, count on Fed being benign

Wed Oct 30, 2013 2:46am EDT

SYDNEY (Reuters) – Asian share markets took heart from record highs in U.S. stocks on Wednesday as investors wagered the Federal Reserve would rock no boats at its policy meeting and leave stimulus in place for the next few months at least.

Japan’s Nikkei .N225 led the way with a gain of 1.2 percent, while Australian shares .AXJO added 0.3 percent and Shanghai stocks .SSEC 1 percent. MSCI’s index of Asia-Pacific shares outside Japan .MIAPJ0000PUS crept up 0.5 percent.

European shares were expected to edge higher, too. Capital Spreads predicted Britain’s FTSE 100 .FTSE to open 13 points or 0.2 percent higher, Germany’s DAX .GDAXI to gain 0.04 percent and France’s CAC 40 .FCHI to open flat.

A mixed bag of economic data caused few frowns since it merely reinforced expectations the Fed will maintain the status quo when its two-day policy meeting ends on Wednesday.

Even the U.S. dollar got a lift as dealers judged the prospect of easy money for longer had now been pretty much discounted following two months of losses.

Markets seem to be operating on the assumption that the Fed’s policy statement will not challenge the growing consensus that any tapering of its $85 billion of monthly asset purchases will not start until March at the earliest.

Such an outcome would be taken as justifying the rallies in stocks and bonds seen in recent weeks and might have only a limited impact on prices in the near term.

But it also means markets are vulnerable to a surprise.

“With expectations of taper firmly kicked into 2014 the risk that the FOMC could decide to move earlier looks asymmetrical,” said Patrick Perret-Green, an analyst at ANZ Bank.

“If the Fed does nothing tomorrow then nothing really happens but if they do something or even hint at moves in the not too distant future the effects could be dramatic.”

The Fed’s decision is due at 1800 GMT, though divining its true message may be tricky as no new economic forecasts are released and nor will Chairman Ben Bernanke be giving a news conference.


For now, markets are counting on the Fed being boring.

The Dow Jones industrial average .DJI ended Tuesday 0.72 percent higher at an all-time closing peak of 15,680.35.

The SP 500 .SPX gained 0.56 percent, aided further by a jump in heavyweight IBM (IBM.N) after the company’s board of directors approved another $15 billion for stock buybacks.

The flow of economic data proved too mixed to offer direction. Industrial output bounced in Japan, but disappointed in South Korea due to strikes at automakers. TOP/CEN

In the United States, a measure of core retail sales showed surprising resilience in September, yet a grim survey of consumers highlighted the heavy toll the recent government shutdown had taken on the public mood.

In currencies, dollar bears looked exhausted after two months of selling and the currency bounced broadly. The dollar index reached a one-week peak of 79.667.DXY, having climbed 0.5 percent on Tuesday. Just last Friday, it had plumbed a nine-month low at 78.998.

“Fed meetings have not been friendly to the USD this year, with the dollar weakening following every meeting in 2013 with the exception of June,” analysts at BNP Paribas wrote in a client note.

“However, with markets already having adjusted to a much more dovish view on the Fed outlook, we think the USD is likely to hold up better this time.”

The euro slipped to $1.3740, pulling away from a 23-month peak of $1.3833 set just a few days ago. The dollar firmed to 98.21 yen, from its recent trough of 96.94.

Yields on the benchmark 10-year Treasury note were steady at 2.506 percent after dipping from a high of 2.5360 on Tuesday. The market has enjoyed a substantial rally in the past two months with yields falling all the way from 3 percent.

Spot gold edged back to $1,344.51 an ounce as the dollar gained, but is still up more than 7 percent from a three-month low hit in mid-October. GOL/

Brent oil futures lost 36 cents to $108.65 a barrel while U.S. crude oil dipped 58 cents to $97.62. O/R

Traders termed this a consolidation after a big gain on Monday when reports of a sharp drop in Libyan oil exports rekindled worries over global supply.

(Additional reporting by Vidya Ranganathan; Editing by Eric Meijer, Shri Navaratnam and Chris Gallagher) To read Reuters Global Investing Blog click here; for the Macro Scope Blog click on; for Hedge Fund Blog Hub click on

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LinkedIn’s conservative forecast gives pause to sizzling stock surge

Tue Oct 29, 2013 11:08pm EDT

SAN FRANCISCO (Reuters) – LinkedIn Corp issued a conservative revenue forecast through the end of the year that damped a sizzling run in its stock price, taking the shine off an upbeat performance at the professional social network in the third quarter.

The company said it expected between $415 million and $420 million in revenue for the final three months of the year, lower than the $438 million expected by analysts polled by Thomson Reuters I/B/E/S. LinkedIn said fourth-quarter growth will not be as impressive as a year ago when it rolled out new features.

Reflecting better-than-expected numbers for July-September, it did nudge its full-year estimates upward to $1.5 billion. But that also fell slightly short of Wall Street’s sky-high expectations.

Shares in the company that’s become an online reference point for job searches and career development slid 4.5 percent to $236 in choppy after-hours trading. Even at that price, the stock has more than doubled in the past year and quintupled since 2011, when it went public at $45 a share.

LinkedIn’s dizzying valuation – with a market value of $27.7 billion it is trading at roughly 158 times forward earnings, compared with Facebook Inc’s 70 times and Google Inc’s 23 – has heightened scrutiny on whether the company can maintain its growth streak.

So far, Chief Executive Jeff Weiner has beaten top-line targets every quarter since his company went public. But LinkedIn, a company born in the quickly fading era of desktop Internet sites, has had to move swiftly to pursue a variety of other revenue streams.

On a conference call Tuesday, Weiner said finding ways to make money out of the company’s mobile applications is a matter of “strategic importance,” describing the company as being in a “transition period” as it introduced new mobile advertising units.

On Tuesday the company’s executives downplayed expectations for the fourth quarter, warning desktop page views could decline.

But Kerry Rice, an analyst at Needham Co, noted that LinkedIn has guided conservatively for several consecutive quarters only to exceed targets. “People get a little too exuberant,” Rice said. “This was resetting those expectations.”

LinkedIn’s fundamental business roared along in the third quarter.

Monthly users rose to 259 million during the quarter, a 38 percent rise from a year ago, LinkedIn said. In the quarter, the company earned 39 cents a share, excluding certain items, exceeding the 32 cents expected by analysts.


By making itself a popular tool for professional recruiters and job seekers who are willing to pay for its services, the company has enjoyed a steady stream of income and avoided the turbulence encountered by free, consumer-facing social networks like Facebook.

Like many other Internet companies, LinkedIn emphasized its shift to mobile. Mobile users now account for 38 percent of total users versus 8 percent in early 2011, CEO Weiner said.

LinkedIn in July introduced ads called “Sponsored Updates” to its mobile applications.

The in-stream ad unit, which resembles ones used by Facebook and Twitter Inc has generated the majority of clicks from users on mobile devices rather than LinkedIn’s desktop website, Weiner told analysts.

But he warned that the ads will not generate enough revenue to make a material impact until next year.

The company’s aggressive push into mobile has not been without bumps. Security experts this week criticized a new LinkedIn feature called “Intro,” which re-routes a user’s emails through LinkedIn’s servers, as a potential security risk.

The company was pressed to issue a blog post last week to clarify some of its security practices while also characterizing some of the criticisms leveled against Intro as “speculative.” (here)

Asked about the issue by an analyst on Tuesday, Weiner did not address the matter in depth except to say, “We recognize the current climate and the sensitivity around this, and work hard to make sure it’s as secure as possible.”

(Reporting by Gerry Shih; Editing by Phil Berlowitz and Kenneth Maxwell)

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U.S. consumer confidence at six-year high, Europeans also more upbeat

Tue Oct 29, 2013 10:07pm EDT

LONDON (Reuters) – Consumer confidence in the United States reached a six-year high in the third quarter, as prospects for jobs and personal finances improved, and also rose sharply in Europe, a global survey showed.

Americans were among the most bullish consumers in a quarterly survey by global information and insights company Nielsen, reflecting growing confidence that the world’s biggest economy is a on a sustainable growth path. U.S. stockmarkets have risen to record highs, creating a wealth effect that has also made consumers more willing to spend.

The survey, released on Wednesday, was taken before a 16-day partial government shutdown early this month which economists expect will hurt U.S. economic growth in the fourth quarter.

“In the United States, the labor market is slowly healing, and low interest rates are helping the housing market come back and bringing up the stock market, which is perhaps especially beneficial to higher-income consumers with more assets,” said Venkatesh Bala, chief economist at The Cambridge Group, a part of Nielsen.

“It’s still going to be a slow climb – we’re not going to see huge growth rates – but this improvement is recurring and it is sustainable.”

Indonesia remained the most bullish consumer market worldwide, followed by the Philippines and India, as in the previous quarter, but confidence levels in all three emerging markets dipped. It also dipped in Brazil.

The Nielsen Global Consumer Confidence Index was unchanged in the third quarter from the previous three months at 94, up 2 points from the same period a year earlier. A reading below 100, however, signals still relatively low consumer morale.

Portugal saw the biggest jump in consumer confidence globally in the third quarter, by a hefty 22 points, while Ukraine saw the biggest drop, by 13 points.

Portugal’s rebound led a pick-up in consumer sentiment in peripheral euro zone countries that have been grappling with tough austerity measures as they sought to cut heavy debt levels.

While the rebound is encouraging and tied with other recent economic data suggesting the euro zone economy has turned the corner, Portugal, Italy, Greece, as well as France, were still among the most depressed consumer markets globally.

“In Europe, we’ve seen a change in mindset as policymakers have moved away from austerity measures and toward growth policies,” said Bala.

“While recovery is still uneven, many consumers – especially in countries such as Germany and the United Kingdom – are feeling that the worst is behind them, and their confidence is improving as they sense growth returning.”

Non-euro zone member Hungary was the most pessimistic market globally although it showed an improvement from the third quarter.

The Nielsen survey was conducted between August 14 and September 6 and covered more than 30,000 online consumers across 60 markets.

(, editing by Ron Askew)

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Brazil suspends trade in shares of university operator GAEC

Tue Oct 29, 2013 8:26pm EDT

SAO PAULO (Reuters) – Brazil’s securities regulator CVM on Tuesday suspended trading in shares of education company GAEC Educação SA (ANIM3.SA) in the second day of trading since its $213 million initial public offering.

The CVM said it handed down the suspension due to statements attributed to the company’s chairman, Ozires Silva, which were published in the local newspaper Valor Economico on Monday.

GAEC had not yet submitted a closing statement for its IPO, making statements to the media off limits by law.

CVM said it could reverse the suspension if the company corrects the perceived irregularities or it could cancel the IPO if GEAC does not take such steps.

GAEC shares closed down 1.5 percent at 18.93 reais on Tuesday, in their second day of trading.

The firm operates universities under the Anima Educação brand in Brazil, where an $11 billion-a-year education industry has grown at a double-digit rate in recent years.

(Reporting by Reese Ewing; Editing by Joseph Radford)

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Pentagon sees ‘sufficient’ progress to boost fiscal year 2015 F-35 output

Tue Oct 29, 2013 8:15pm EDT

WASHINGTON (Reuters) – The Pentagon this week said the Lockheed Martin Corp (LMT.N) F-35 program had made sufficient improvement to plan for higher production in fiscal year 2015, but contract awards would be tied to progress on the fighter jet’s software, reliability and other issues.

“Program progress is sufficient for the department to budget for an increase in the production rate in fiscal year 2015,” Frank Kendall, undersecretary of defense for acquisition, technology and logistics, wrote in a memorandum dated October 28 and obtained by Reuters on Tuesday.

“Award of higher production rates will be contingent on continued program progress,” he wrote in the memo. He cited the need for progress in software development, improvements in a computer-based logistics system that is behind schedule, and resolution of several previously identified design issues.

The jet’s reliability is also not growing at an acceptable rate, he said in the two-page memo.

The $392 billion F-35 Joint Strike Fighter, the Pentagon’s biggest arms program, has seen a 70 percent increase in costs over initial estimates and repeated schedule delays, but U.S. officials say the program has made progress in recent years.

Lockheed is developing three models of the new radar-evading warplane for the U.S. military and eight countries that helped fund its development: Britain, Canada, Turkey, Italy, Norway, Australia, Denmark and the Netherlands.

“Success on the F-35 requires progress in all aspects of the program, and I am concerned that three areas in particular need additional attention: software development … reliability growth and ALIS (Autonomic Logistics Information System),” Kendall wrote.

He said work on the final version of the software, known as 3F, was a particular concern since it was essential to achieving the desired combat capability of the F-35, and was running behind schedule.

He said the magnitude of the production increase in fiscal 2015, which begins October 1, 2014, would be determined by Defense Secretary Chuck Hagel as the Pentagon finalizes its budget plans.

Lockheed expects to deliver 36 of the plans in 2013. Current government plans call an increase in F-35 production to 45 jets in the eighth production batch, a deal the government expects to negotiate early next year.

Those plans call for production to increase to 70 in the ninth batch of jets, of which about half would go to Britain and other foreign buyers. The Pentagon plans to award Lockheed a preliminary contract to start buying some materials for those planes later this year or early next.

In the memo, Kendall told program officials to prepare by November 15 a range of acquisition options for that ninth batch of jets that would include “strong, event-based criteria and financial incentives” for Lockheed and engine maker Pratt Whitney, a unit of United Technologies Corp (UTX.N).

He said he wanted a range of options given uncertainty about future U.S. budget levels, and to “provide a linkage between program performance and production quantities.”

Kendall said he planned to “provide strong financial incentives to LM and PW to complete development and drive down cost in both production and sustainment.”

The memo also ordered the Pentagon’s top official for systems engineering to complete an independent assessment of the manufacturing risks associated with increasing production by November 15.

Kendall also asked the head of the Cost Analysis and Program Evaluation office to finalize a new estimate for the cost to operate and maintain the fleet of F-35 jets over the next 55 years as part of the fiscal 2015 budget submission.

The CAPE’s previous estimate was $1.1 trillion, but the Pentagon’s F-35 program office puts the cost at $857 billion.

Kendall said the production costs were under control and coming down in line with projections, and progress in the development program had been close to plan.

Projected costs for operating and maintaining the plane were also decreasing, but further improvements were needed, the memo said.

It was also critical for the program to start follow-on development to meet the needs of the U.S. military and its partners to deal with emerging threats, the memo said.

Lockheed had no immediate comment on the memo.

(Editing by Bob Burgdorfer)

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SEC sues investor over alleged Carter’s insider-trading scheme

Tue Oct 29, 2013 8:13pm EDT

(Reuters) – The Securities Exchange Commission filed a civil complaint Tuesday against a retired hedge-fund investment consultant and market analyst who allegedly participated in an insider trading scheme involving Atlanta-based clothing marketer Carter’s Inc.

Dennis Rosenberg, 70, was able to trade in advance of marketing-moving news from Carter’s based on tips received from a former executive at the company between 2005 and 2010, according to the complaint in federal court in Georgia.

Rosenberg passed along tips to investment advisers at two hedge funds, who also traded on the information, the complaint said.

The tips netted Rosenberg approximately $500,000 in ill-gotten gains, losses avoided and consulting fees based on tips to a hedge-fund client, the complaint said. The individuals who received the tips made about $2 million in combined losses avoided and profits, according to the complaint.

Rosenberg, who has not admitted or denied the allegations, has agreed to hand over $500,000, plus $108,000 in interest, the SEC said. A decision on civil monetary penalties will be made at a later date, according to the SEC.

A lawyer for Rosenberg declined to comment on the case.

Rosenberg is the second insider-trading case by the SEC over the alleged Carter’s scheme. In August 2012, the SEC sued the company’s former vice president of investor relations, Eric Martin, who agreed to a consent order in September barring him from serving as an officer or director at a public company.

Martin also pleaded guilty in December to a criminal charge for tipping others to non-public information while employed at Carter’s, and is currently awaiting sentencing, according to the SEC.

Another former vice president at Carter’s, Richard Posey, pleaded guilty in June to conspiracy to commit securities fraud in connection with alleged insider-trading, according to the complaint.

Carter’s, a publicly listed company, markets apparel for babies and young children. In 2005, it acquired OshKosh B’Gosh Inc, a well-known children’s clothing brand. The case is Securities and Exchange Commission v. Rosenberg, U.S. District Court for the Northern District of Georgia, No. 13-3559.

(Reporting by Jessica Dye in New York; Editing by Lisa Shumaker)

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Sainsbury’s takes price comparison spat with Tesco to high court

Tue Oct 29, 2013 8:06pm EDT

LONDON (Reuters) – Supermarket J Sainsbury (SBRY.L) will take its spat over price comparisons with Tesco (TSCO.L) to Britain’s high court, challenging a ruling by the advertising watchdog in favor of its rival.

Britain’s supermarkets are battling intensely for market share in tough economic conditions. Advertising is a major battleground.

Earlier this year, Sainsbury’s complained to the Advertising Standards Authority (ASA) over market leader Tesco’s “Price Promise” scheme.

The scheme compares the cost of a basket of Tesco’s branded, own-label and fresh food against what it regarded as the same or equivalent products from Sainsbury’s and other main rivals.

Sainsbury’s argued it was unfair to compare own-brand items on price alone and not take account of provenance and other ethical issues.

It said it was wrong for Tesco to match products such as its “Everyday Value” ham, which is produced somewhere in the European Union, with Sainsbur’s “basics” ham, which is British.

In July the regulator sided with Tesco. Sainsbury’s appealed, but this month the ASA’s independent reviewer Hayden Philips also ruled in Tesco’s favor.

Sainsbury’s, battling to be the UK’s No. 2 grocer with Wal-Mart’s (WMT.N) Asda in terms of sales, is now taking the case to a judicial review at the high court and expects a hearing in the summer of 2014, when it will present several hundred examples of what it regards as unfair product comparisons.

“This is a point of principle,” commercial director Mike Coupe told reporters, noting it was the first time the firm had gone for a judicial review outside of property planning issues.

“We do not believe it is fair or reasonable to compare own label products because almost by definition they come from different sources,” he said, adding that Sainsbury’s was being backed by partner organizations Fairtrade, the Marine Stewardship Council (MSC), the Forest Stewardship Council (FSC) and animal welfare charity the RSPCA.


Coupe said the firm particularly took issue with Tesco’s assertion that for value-conscious customers ethical considerations do not play a part in purchasing decisions.

“This is incomprehensible because of Tesco’s position on horsemeat, where they through their advertising have said publicly that sourcing credentials are important and yet through their price comparisons decided that it’s less important or not important,” he said.

Unlike Tesco and Asda, Sainsbury’s was not implicated in a scandal over foods found to contain horsemeat when they were labeled as containing other meats.

Tesco dismissed Sainsbury’s latest legal move. “Sainsbury’s argument against Price Promise has been heard and rejected twice already,” said Tesco’s UK marketing director David Wood.

He said Tesco’s scheme offered customers reassurance on the price of their whole shop, in store and online, not just on the big-brand products.

“When family budgets are under pressure, that is the kind of help customers want and the real question for Sainsbury’s is why they aren’t trying to do the same for their customers?”

Tesco launched “Price Promise” in March, comparing its prices with prices from Sainsbury’s, Asda and No. 4 grocer Morrisons. If the comparison shows the basket would have been cheaper at a competitor, Tesco automatically issues a coupon for the difference up to 10 pounds ($16.13) when customers receive their shopping receipts.

Sainsbury’s “Brand Match” scheme compares the prices of branded products only.

The advertising spat is the latest in a long list of disputes between the two grocers. Though Tesco overtook Sainsbury’s as Britain’s No. 1 retailer in 1995, Sainsbury’s has performed better of late.

Tesco issued its first profit warning in over 20 years in January 2012, while Sainsbury has posted 35 consecutive quarters of like-for-like sales growth.

($1 = 0.6199 British pounds)

(Editing by Pravin Char)

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With tough market at home, China’s heavy gear makers gain traction overseas

Tue Oct 29, 2013 7:55pm EDT

BEIJING (Reuters) – When Guangxi Liugong Machinery (000528.SZ) was bidding to sell wheel loaders to a Thai rice merchant a few years ago, company president Zeng Guangan knew he needed to customize his equipment to beat off Komatsu Ltd (6301.T) and other Japanese rivals.

“Thailand has been using Japanese wheel loaders for years,” explained Zeng. “The seating was getting higher and higher, but the vehicle’s arm wasn’t long enough.” That works for loading dirt or concrete blocks, but was unwieldy for hauling rice.

Liugong’s modifications won over buyers, and the Guangxi-based firm says it now makes one of every three wheel loaders sold in Thailand. It has also increased its marketing in Brazil, Russia, India and Turkey, helping increase overseas revenue to 30 percent of its total sales – up from below 9 percent in 2010.

Other Chinese machinery makers, including Sany Heavy Industry (600031.SS), Zoomlion Heavy Industry Science Technology (000157.SZ) (1157.HK) and XCMG Construction Machinery (000425.SZ), are also turning to emerging markets for growth as they wrestle with cut-throat competition at home, exacerbated by a supply glut – partly a legacy of heavy stimulus spending in the wake of the global financial crisis.

Zoomlion and Sany are due to announce January-September results later on Wednesday. Smaller rival Liugong on Tuesday said its third-quarter profit rose 2.6 percent, while XCMG’s net income dropped 45.5 percent.

Shares in Sany and XCMG have fallen by around a third so far this year, while Zoomlion is down 40 percent. The sector median stock price decline is just 6 percent.

Meantime, Caterpillar Inc (CAT.N) and Komatsu say China remains a bright spot in a global market suffering from a downturn in orders for mining equipment. While the global market is forecast to grow to $189 billion by 2017, the world’s two leading equipment makers have this month cut their full-year profit outlooks.

“Market demand (in China) may not be falling as much as before, but the industry has yet to feel the breezes of spring,” said Shi Yang at UK-based industry consultancy Off-Highway Research Ltd. “Foreign companies’ clients in China are mostly big state enterprises and their business tends to be more stable.”


Chinese equipment makers are gaining traction overseas, pulled by the construction boom underway in Southeast Asia and South America, where new home and infrastructure building has lifted demand for affordable earth-moving gear.

In January-June, Sany’s sales outside China rose by two-thirds from a year earlier, with growth in Asia Pacific up more than 90 percent. Same-town rival Zoomlion – whose annual sales of close to $8 billion make it the world’s No.6 construction machinery maker – also made breakthroughs in Thailand, Chile, Costa Rica and Ecuador with its truck-mounted concrete pumps and concrete mixing plants.

“Emerging markets represent a good opportunity when domestic demand is weak,” said Xu Mingle, an analyst with BOC International. “Even though export volumes remain small and cannot offset the slump at home, it at least cushions the blow.”

While Caterpillar, Komatsu and Volvo AB (VOLVb.ST) remain dominant in most emerging economies, Chinese gear is making inroads. In 2011, XCMG group won a $745 million bid to supply cranes, concrete pumps, excavators and other equipment for a housing project in Venezuela that Caterpillar also bid for.

A year earlier, Liugong beat Caterpillar, Komatsu and South Korea’s Hyundai Heavy Industries Co Ltd (009540.KS) and Doosan Heavy Industries Construction Co Ltd (034020.KS) to provide wheel loaders and excavators for an afforestation campaign in Turkey, according to Liugong vice president Luo Guobing.

“Chinese companies are certainly not yet the largest in these markets, but they’re getting really aggressive,” said Raymond Tsang, a Shanghai-based partner at consultant Bain Co.


Encouraged by the rising popularity of Chinese equipment, Samcorp, a Hong Kong based dealer, started selling Zoomlion and Lonking Holdings Ltd’s (3339.HK) products in Peru three years ago. It recently opened another showroom in Columbia.

“People like these products,” said company director Laurence Lam. “They are almost as good as those made by Western companies, but 30 percent cheaper.”

Chinese equipment manufacturers are also gaining access and recognition in emerging markets as they have improved their component sourcing, according to Hermann Beck, an executive vice president at ZF Friedrichshafen AG. Besides the German parts maker, Chinese firms are turning to Eaton Corp (ETN.N) and Cummins Inc (CMI.N) for parts, he said.

There have also been offshore acquisitions. Over the last five years, Chinese firms have bought a variety of struggling European equipment makers, including Italy’s CIFA Spa, Germany’s Putzmeister Holding GmbH, and Poland’s Huta Stalowa Wola, which has boosted access to Eastern Europe.

Industry executives caution that it will take time for Chinese companies to compete against global giants such as Caterpillar, which operates at the higher end of the value chain and books about 65 percent of its sales outside North America.

“They’re going to have to learn how to be domestic players around the world, the way we did,” said Ron DeFeo, Chairman and CEO of Terex Corp (TEX.N), which now increasingly faces Chinese companies in emerging markets.

“You can’t just make it in China and ship it abroad.”

($1 = 6.0840 Chinese yuan)

(Editing by Ian Geoghegan)

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