Exports slump despite gains to U.S. market Review

The Globe and Mail: 01/11/2013

BT1.01 - Define the basic terminology of international business (e.g. international trade, multinational enterprise, global company, exports, imports)

Summary

‘Slumping sales’ of Canadian exports around the world have led Canada’s trade deficit to its fourth highest ever. The deficit grew from a $600 million gap recorded in October 2012 up to a $2 billion one. In terms of gains to the U.S. market, the exports to the U.S. actually rose by 3.9% in November - led by energy and autos - but exports to everywhere else in the world fell 13.4%. This hit Canada’s lowest level of exports to countries other than U.S. in over two years. The imports rose 2.7% in November - led by commodities, autos, and electronics while imports of machinery and equipment sank 1.7%. This rise in imports though, suggests that consumers may have been buying more foreign goods rather than domestic goods. Canadian exports overall fell 0.9% which will have an impact on the mainly export- dependent economy. Farm product exports fell quite significantly by 14.6% as the drought in the U.S. started to slow. The rise in exports to the U.S., where their economy is starting to grow again, is a good sign however because it may contribute a ‘substantive improvement’ for Canada by the second half of this year, predicted Toronto-Dominion Bank economist, Leslie Preston. In other words, because the U.S. and Canada are interdependent on one another, the growth of one economy can provide some support to the other.

As the American drought slowed, Canadian agriculture export levels sank
Source: Bigthink.com

Connection

The basic terminology of international business used in this article consists of ‘imports’, ‘exports’, ‘merchandise trade deficit’, and more specific words like ‘commodities’. Most importantly to understand what this article is about, imports and exports must be differentiated between. An ‘import’ is a product or a service that a country is receiving from another. The opposite, an ‘export’ is a product or a service that a country is providing for another. For example, the article states that Canada had imports led by electronics and autos, while exports of Canadian farm products had fallen sharply. This means that Canada has imported more than it has exported, thus resulting in the ‘merchandise trade deficit’, (when the value of imports exceeds the value of exports) which is not always negative for a country’s economy as one might assume. More imports can allow consumers to have a better selection of unique products and can further encourage them to buy, yet fewer exports can leave Canadians with more domestic products to choose from - domestic means they are made in the home country - contributing to economic growth. The other term used when classifying Canadian imports was ‘commodities’ which usually refers to raw materials or other resources of higher value that can often be used in the process of creating new products. Since Canada is known as an export-based economy, it is recognized internationally as a country that is rich in commodities such as fresh water, agriculture, fish and various types of meat. This is why it seems rare for Canada’s exports to decrease internationally - because it is known to have a large range of commodities.

Source: http://www.ats-sea.agr.gc.ca/

Exports slump despite gains to U.S. market

The Globe and Mail: 01/11/2013

A gradual reawakening of the mighty U.S. economy is starting to power Canadian exports.

But slumping sales to virtually every other corner of the world in November swamped improving U.S. prospects, pushing Canada’s trade deficit to the fourth-highest level on record.

The merchandise trade deficit widened much more than expected to $2-billion, up from a revised $600-million gap in October, Statistics Canada reported Friday. (The October deficit was previously estimated at $200-million.)

Canada’s highest-ever trade deficit was in September, 2010: $2.6-billion.

Led by autos and energy, exports to the U.S. rose 3.9 per cent in November in what some economists say is a good omen of what lies ahead for Canadian exporters.

But exports to the rest of the world fell 13.4 per cent, plunging nearly 20 per cent to recession-ravaged Europe.

November’s surprisingly large trade deficit is forcing many economists to rethink their growth forecasts for the final three months of 2012. Many now project that the Canadian economy grew at a paltry 1-per-cent annual rate in the quarter, or worse.

BMO Nesbitt Burns senior economist Benjamin Reitzes, for example, said his 1.2-per-cent forecast is likely at risk.

“It looks like trade will take another bite out of already weak growth,” he said.

Over all, imports jumped 2.7 per cent in November, led by commodities, autos and electronic equipment. Pre-Christmas sales of Apple Inc.’s iPhone 5 helped spur a 5.6-per-cent jump in imports of mobile devices and other electronic and electrical equipment.

In a troubling sign for Canadian business investment, imports of machinery and equipment fell 1.7 per cent.

The more important story for Canada’s export-dependent economy: Exports over all fell 0.9 per cent, as those higher shipments to the U.S. were overwhelmed by declines virtually everywhere else. Exports to countries other than the U.S. hit their lowest level in more than two years.

Exports of farm products also fell sharply – down 14.6 per cent – as the effects of the long summer drought in the U.S. began to ease.

That leaves exports on a course to drop for a fourth-straight quarter in the October-December period of 2012. Exports are down 10 per cent since peaking at the end of 2011.

A key “silver lining” in the Statscan report is the rise in exports to the U.S., where the economy is beginning to gather steam, said Toronto-Dominion Bank economist Leslie Preston. But she acknowledged it may take until the second half of this year for the U.S. recovery to produce a “more substantive improvement in Canada’s trade picture.”

There are still fiscal worries in the United States, where a likely combination of higher taxes and less federal spending will dampen growth.

But there is also cause for optimism. The pace of job creation is gathering momentum, consumer spending is coming back as Americans work off their debts, and the long housing slump is over. That all bodes well for many of the products Canada sells, including energy, softwood lumber and autos.

Bank of Nova Scotia economist Derek Holt argued the November trade figures aren’t as bad as they look. He said the fall in exports was heavily influenced by lower prices of some key products.

The far more significant cause of the unexpectedly large trade deficit in November was the jump in imports, he said. And that suggests that consumers were busy spending and scooping up foreign goods. “It signals underlying strength in other areas of the economy,” Mr. Holt said.

Rediscover Hudson's Bay Review

Online.barrons.com: 12/17/2012

GE4.01 - Identify Canadian companies and industries that have benefited from increasing global business activity in the last few decades.

Summary
Canada’s oldest retailer, the Hudson’s Bay Company has certainly had a successful past. It began with the trading posts of which were strategically set up along Hudson’s Bay and has remained a strong company for two centuries. However, local investors are concerned about the current status of Hudson’s Bay as well as other retailers from Canada. The most recent owner of the company, Hudson’s Bay, comes from a real-estate family in the United States which has raised some concerns from the investors’ perspectives. Hudson’s Bay’s share price in November 2012 was recorded at $17.27 (Canadian), which declined by 15% from its original asking price of $20 and then settled at $16.75. Analysts concluded that this change seems too negative when compared to the company’s recent successes. As of today, the department store company generates annual revenue of about $4 billion from close to 25 million square feet of the stores, Hudson’s Bay, Home Outfitters, and Lord & Taylor - an American-based company. Hudson’s current owner, Richard A. Baker, understands that these department stores have to expand on the different brands they offer in order to attract more consumers and drive up their sales. His first steps were to hire a former-merchandising chief from Holt Renfrew to ‘restore its fashion sense’ and to replace the company’s management. New competition for Hudson’s Bay include Target and Nordstrom and cash flows are predicted to grow by 10% with each annual gain in revenue of 5%.

Hudson's Bay's new logo from thebay.com

Connection

Though Hudson’s Bay’s share prices may not have been as great for the company in the past year or so, the company has certainly experienced success in the last few decades by increasing its global business activity. In fact, the Hudson’s Bay Company definitely has a greater selection of products that are created in countries outside of Canada and has very little to offer in terms of domestic products. In the past few decades, Hudson’s Bay has managed to import a greater variety of brands that appeal to different consumers than it ever had before. In addition, the materials used in the process of making nearly all of the clothing and/or accessories come from places other than Canada. Even the olympic gear with Canadian logos stamped all over it has been made in foreign factories to reduce production costs and increase the company’s revenue. The Hudson’s Bay Company has not only increased global business activity through the selection of products though; the company, like many others, has an online store and was recently bought by an investor from the United States, Richard A. Baker who is attempting to revamp the company for future success. However unlike most companies of today with online stores, Hudson’s Bay actually does not ship outside of Canada, but this may lead consumers to travel to Canada for certain products that are exclusive or Baker might soon change this company policy in order to satisfy consumers’ wants from other countries.

Rediscover Hudson's Bay

Online.barrons.com: 12/17/2012 

Formed in 1680 to manage British fur-trade interests in North America, Canada's Hudson's Bay has a rich history on which to draw. Originally housed in forts near the bay, the retailer's outposts have been selling one of its customer favorites—tricolor blankets—for two centuries. Investors don't have nearly the same loyalty.

Local investors are understandably skeptical about Hudson's Bay and other Canadian retailers. Department-store giant T. Eaton & Co. went public in 1998, only to file for "creditor protection" 15 months later. The real-estate machinations of Hudson's Bay's previous owner, the late Jerry Zucker—who sold its profitable credit-card operation to fund his purchase and then allowed its stores and management to deteriorate—left a bad taste. The most recent owner is from a prominent real-estate family in the U.S., which tends to raise investors' suspicions.

So it wasn't too surprising that when Hudson's Bay came public last month at 17 Canadian dollars ($17.27), the shares already were marked down by 15% from the original asking price of C$20. The stock (ticker: HBC.Canada) quickly settled afterward at C$16.75. Kathleen Wong, an analyst at Toronto-based Veritas, doesn't think that's cheap enough and has a C$12 target price.

That seems too negative, based on Hudson's Bay's recent successes.

Courtesy of Hudson's Bay Company

The retailer entered a new era in 2007 when a private-equity partnership bought it for C$1.1 billion. The partners' fund was spearheaded by Richard A. Baker, whose father, Robert, owns one of the biggest shopping-mall developers in the world and serves as chief executive of the fund.

The department-store company they created today generates about C$4 billion in annual revenue, gathered from operating about 25 million square feet of store space under three banners—the Hudson's Bay Company (also known as The Bay), with 90 Canadian stores; Home Outfitters, a bed and bath superstore with 69 locations in Canada; and U.S.-based Lord & Taylor and its 48 stores, which the firm purchased in 2006.

The younger Baker, who now heads the retailer, also can use Lord & Taylor as a guide. On a recent tour of the chain's famous Fifth Avenue flagship in Manhattan, he explained that Lord & Taylor has expanded its portfolio of designer brands and upgraded its technology to track everything from women's shoes to men's fashion to help drive sales. Despite a lot of initial skepticism from rivals, Lord & Taylor sales have grown to $210 per square foot in 2011, up 20% from $175 per square foot in fiscal 2009 (Lord & Taylor figures are in U.S. dollars). Adjusting for the roughly $20 million negative effect of Hurricane Sandy, Lord & Taylor's same-store sales would have jumped 3.7% in November.

"Rather than dealing in real estate and pricing his way out, Baker repositioned Lord & Taylor in New York, working with the brands to create a whole new retail environment," says Vince Camuto, a fashion designer for shoes and clothes.

Baker is trying to get similar momentum from Hudson's Bay. He hired Bonnie Brooks, a former merchandising chief at Canada's higher-end Holt Renfrew chain to restore the Bay's fashion sense and replaced management. It's refurbishing anchor stores and working more closely with important brands like Michael Kors and Burberry.

"We have world-class management people in every chair, the right vendor mix, and capital expenditure necessary to raise our sales per square foot," Baker says. The new executive team has a 14.6% equity stake.

What's intriguing is that the bar isn't set too high for Hudson's Bay to succeed. "We're not trying to invent anything new like J.C. Penney (JCP)," says Michael Culhane, chief financial officer of Hudson's Bay. At major department stores, sales average $240 per square foot, but Hudson's Bay's averages a measly $137 a square foot. The Canadian chain's three-to-five-year goal is $178 a square foot. "It's about using the existing space more productively," says Culhane.

The far-flung regional outposts remain the biggest worry to specialists like John Andrew, real-estate professor at Queen's University, in Kingston, Ontario. "Nobody goes to the centers in Kingston and Ottawa," he says. "You almost can't believe they're in the same franchise" as the more urbane stores in Montreal and Toronto, he says. Baker insists significant changes are being made at these stores.

It's also facing new competition from Target (TGT) and Nordstrom (JWN).

At C$16.75, Hudson's Bay is valued at 6.9 times enterprise value—market value plus net debt—divided by management's 2013 estimate of C$451 million in earnings before interest, taxes, depreciation, and amortization. That's near the top end of the roughly five to seven times that comparable retailers get. But for each 5% annual gain in revenue per square foot, annual cash flows are estimated to grow by 10%. Based on the 6.9 multiple, with net debt unchanged, the stock would be worth more than C$20. The company has also instituted a C36 cent dividend, for a yield of 2.2%.

Baker does have a real-estate card to play. He could create a real-estate investment trust that would cash in on the structure's recent popularity. Just a couple weeks ago, Loblaw(L.Canada), the big Canadian grocery chain, announced it would create a REIT in 2013, sending its shares 24% higher. Baker concedes his interest but says it's years away if it does occur. Hudson's Bay stock could be worth as much as an extra $8 a share, by Wong's reckoning, if it followed the Loblaws model.

That's a nice kicker for shareholders, but we'd prefer to see some fundamental gains at the northern outposts first.

Asia's Cheapest Market Review

Barron’s: 12/17/2012
WM1.01 - Analyse the physical, economic, and social factors that have influenced international business relationships over time.

Summary

South Korea is a developed country in Asia that has avoided recession even during the global financial crisis. It’s stock market is among some of the cheapest ones in the world with trading at just nine times the 2012 profits. However, it has a reputation of being a mainly cyclical market, attracting foreigners to the variety of gadgets and cars that are produced there. At one point when South Korea’s economy slowed, the country’s net debt to equity reached 300% leading to earnings getting wiped out by the interest expenses. Korean companies had leverage down to 44% by the end of 2011, but they can take more action to reward shareholders as the 14% dividend-payout ratio could increased all the way up to 27%. Internationalization of the shareholder base is said to cause some changes in behaviour, however. South Korea’s population is rapidly aging too with its young to old ratio (old classified as those 65 years and above, young as below 65) expected to decrease from 12.6 to just 5.4 by the year 2020, which would make it among the worst in Asia. That could lead companies to pay more dividends in order to attract more investors. The country’s cultural profile has began to benefit from Asia’s middle class even before PSY’s top watched video on Youtube, “Gangnam Style”. The country also has increased its exports by 3.9% caused by an 11% increase in exports to China and 29% to Southeast Asia. In terms of its economy, South Korea’s current unemployment rate is 3% while the inflation rate is a ‘tame’ 1.6% and the currency’s value may rise due to the increased export of electronics. The overall economic growth is expected to rise from 2.2% up to 3% this year.

"Gangnam Style" singer PSY is a great representative of South Korea's pop culture industry today
Source: Shazamers.com

Connection

Many  factors can have major influences over different countries’ international business relationships. The main social factors as mentioned about South Korea include certain population characteristics like age, race and sometimes even gender. In South Korea, the population’s age ratio from young to old is generally expected to decrease between now and 2020 which might make the country less appealing for some investors or convince companies to pay more dividends to attract and appease these investors. Another social factor that may influence their international business relationships is the country’s culture. For instance, if a country’s culture involves inequalities between people based on gender, age, or race, most businesses may be less likely to build relationships with that country in fear of their employees being treated poorly or not being able to hire certain people. South Korea’s pop cultural industry however, is currently very strong with the rise of K-pop artists like PSY - with Youtube’s most watched video - and SHINee. Foreign record labels may be more inclined to sign these artists before those in their home country because they are already so successful in Asia and can therefore help the record companies. 

Economic factors that influence international business relationships are the unemployment rate, the inflation rate, and the currency’s exchange rate. A low unemployment can seem both attractive and unattractive though. If a business sees it as a country with a very motivated workforce, they would think it is attractive because they might find more people who are interested in working for them. But at the same time, some might assume that with a low unemployment rate of 3% comes fewer people who are actually looking for a job or willing to switch jobs for another company. The inflation rate is also influential in international business relationships because it generalizes the price changes on a year to year basis and since South Korea has one of Asia’s lower rates at 1.6%, it makes for a more stable economy with fewer price fluctuations each year. Lastly, the currency exchange rate is a highly significant economic factor that influences these trade relationships. Many companies in North America operate factories in other places with lower exchange rates, meaning their currency is of a lower value than the American or Canadian dollar. South Korea’s currency is very low compared to the American dollar (1,074 wons = $1US) and could therefore allow American businesses to operate at cheaper rates. 

The physical factors may include geographical features like location. South Korea is located closest to China, Japan, and of course North Korea, but China and Japan are the top two countries it exported to in 2012. Taking each of these factors into account, South Korea looks like it could become one of the better markets in Asia one day, but should develop more international business relationships that will allow it to achieve higher levels of economic growth.

$1 US =  ₩1,074, Source: ivanenkorea.com

Asia's Cheapest Market

Barron's: 12/17/2012

South Korea was that rare developed nation to avoid falling into recession during the global financial crisis, yet such resilience hasn't endeared the world's 11th largest economy to investors. Today, the Korean stock market is among the cheapest on the planet, trading at just nine times 2012 profits—well below 13 times for the Asia Pacific, or multiples of 10.4 for China, 14.1 for Japan, and 14.6 for India.

Blame that steep discount on outdated perceptions. Despite an improving domestic economy, Korea still can't shake its reputation for being a deeply cyclical market hitched to foreigners' appetite for the gadgets and cars it exports. Companies can seem clueless about courting investors, who are further put off by the complex ownership structures of the chaebols, or conglomerate groups. Geographically, South Korea is overshadowed by China to the west and Japan to the east (not to mention that missile-hoarding neighbor to its north). A cumbersome exchange rate, with 1,074 Korean won to each dollar, isn't winning fans.

JDHeaton/age fotostock

Seoul's Myeongdong shopping district: Investors are expanding their focus beyond export-oriented companies to domestic consumer plays.

But things are changing. "What made Korea cyclical was excessive leverage," notes Citigroup Asian strategist Markus Rosgen; net debt to equity, once as high as 300%, meant that interest expenses often wiped out earnings when the global economy slowed. But by late 2011, Korean companies had whittled average leverage down to 44%, and earnings volatility has gone from 180% higher than the regional average to 20% lower. Since 2005, in fact, per-share earnings there have been less volatile year-over-year than, say, Singapore, Malaysia, the Philippines, or Hong Kong. Yet investors haven't given it credit, and valuation multiples haven't expanded much.

Korean companies also can do much more to reward shareholders. Their 14% dividend-payout ratio is among the world's stingiest and could rise to 27% if Korea were to merely catch its regional peers. "Internationalization of the shareholder base will lead to changes in behavior," Rosgen argues, but more important is the country's rapidly aging population. Between 2000 and 2020, the ratio of young to old in Korea, which Rosgen generously defines as those younger than 65 to those older, will shrink from 12.6 to just 5.4. That will become among the worst in Asia, and could persuade companies to pay more dividends to attract and appease investors.

Meanwhile, Korea continues to benefit from Asia's burgeoning middle class. Even before the Korean rapper PSY's Gangnam Style video snagged nearly a billion views to become YouTube's most-watched video, the country's cultural profile was rising. These days, affluent Chinese think nothing of hopping on the two-hour flight connecting Shanghai and Seoul for a weekend of recreational shopping and marathon karaoke. In November, Korean exports grew 3.9% year-over-year, lifted by an 11% bump in exports to China and a 29% jump in exports to Southeast Asia. At 3%, the unemployment rate is among the lowest in Asia, and inflation is tame at about 1.6%. Not surprisingly, investors are expanding their focus from big exporters to domestic consumer plays.

Barclays Capital sees Korean economic growth accelerating to 3% in 2013 from 2.2% this year. The currency could strengthen slightly with rebounding electronics exports and the won's growing safe-harbor status, which helps locals' buying power. Yet expectations for Korea's stock market remain muted, since strategists are reluctant to pencil in multiple expansion before the global economy has stabilized. Chanik Park, Barclays' Seoul-based equity strategist, sees more inbound visitors and thinks index provider MSCI could reclassify Korea to developed-market status. But the firm's 2013 target for the Kospi is just 2200, a mere 11% above recent levels near 1978.

More-optimistic longer-term investors who see better days ahead for Korean stocks might consider exchange-traded funds like iShares MSCI South Korea (ticker: EWY) or the consumer-heavy First Trust South Korea AlphaDEX (FKO). Barclays suggests a "barbell" strategy featuring profitable exporters like LG Display(034220.Korea) and Samsung Electronics (005930.Korea), as well as defensive domestic picks like Hyundai Home Shopping (057050.Korea), Lotte Shopping(023530.Korea), and the casino operator Paradise (034230.Korea).