Friday, May 25, 2012

Economic Summary for the week ended 25th May 2012

Europe - Markets across Europe set new lows for 2012 on Wednesday after countries were told by Brussels to prepare contingency plans for a Greek exit. The message from European Union (E.U.) officials knocked shares across Europe, with the major markets all posting losses.
The FTSE 100 closed down 2.5%, its lowest finish so far in 2012, while the German Dax lost 2.3%, and the French Cac 40 closed 2.62% down.
The U.S. provided a little stability for investors, with the S&P 500 closing up 0.17%, while the Dow Jones edged down slightly by 0.05%. The Nasdaq rose 0.39%.
Spain - Spain can't continue much longer with its current high borrowing rates, its prime minister warned on Wednesday as he urged a joint European response to keep the region's debt problems from getting worse.
Spain's borrowing rates are high, and rising, because of fears that its government finances might be overwhelmed by the costs of rescuing its ailing banking sector. High borrowing rates are at the heart of Europe's crisis and have already caused Greece, Ireland and Portugal to need bailouts.
U.K. - The U.K. economy shrank more than initially estimated in the first quarter after construction was revised to show a deeper slump, which may bolster the case for the Bank of England to restart bond purchases.
GDP fell 0.3%, compared with a 0.2% decline estimated last month, the Office for National Statistics said. Construction output fell 4.8%, the most in three years and more than the 3% initially estimated, while services and production were unrevised.
China - China has said it will take measures to boost demand and investment amid fears of a slowdown in its economy. On Wednesday, the government said it will encourage private investment in sectors such as energy, railways and telecommunications.
The move comes as its export sector, one of the biggest drivers of growth, has been hurt by falling global demand.
China's central bank has cut the reserve ratio requirement, the amount of money that banks need to hold in reserves, three times in the past six months. It is thought that the central bank may further reduce the reserve requirements for banks in the coming months as well as cut interest rates.
East Asia - The eurozone debt crisis could harm the growth of East Asian economies, the World Bank has warned.
The bank said that a "serious disruption" in the eurozone could hurt growth and dent demand for exports from East Asia. It said that East Asian countries need to boost domestic demand to re-balance their economies and sustain growth.
The bank warned that a faster than expected slowdown in China was also a threat to the region's growth.
"A slowing China, which comprises 80% of developing East Asia's GDP is a drag on growth across much of the region given China's growing role as an export destination and source of foreign investment," the bank said in its latest report.
Japan - Japan's credit rating has been downgraded by two levels by rating agency Fitch on concerns about the country's high levels of debt.
Fitch cut Japan's rating to A+ from AA and warned that further downgrades were possible.
Japan has by far the highest debt to GDP ratio of any major economy, although much of this debt is held by domestic investors.
"[Japan's] fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk." Fitch said.
Companies - Prada Ltd, the Italian fashion company that owns the Miu Miu and Church's brands, plans to add 260 stores in the next three years to tap demand in emerging markets including Brazil, China and Persian Gulf countries.
Demand for Prada leather goods and other items is rising even as China's economic growth slows and Europe's debt crisis weighs on consumer spending. The company is benefiting from increasingly wealthy Chinese tourists who are fuelling growth in Europe as it also targets markets in the Middle East.
"We are expanding in Morocco, Istanbul, Beirut, Dubai and Qatar," CEO Patrizio Bertelli said. "Brazil is also a big market we're looking at."
Commodities - Gold gained for the first time in four days in New York as central banks increased their holdings and the U.S. dollar declined.
Central banks continued to buy bullion in April as Turkey raised its reserves by 29.7 metric tons and Ukraine, Mexico and Kazakhstan also increased their holdings, IMF data shows.
"We regard the central banks as a stabilizing element on the gold market and anticipate increasing buying of gold if its price should fall towards the USD1,500 per ounce mark," Commerzbank AG said in a report on Thursday.
Spotlight on: Fears of China's supposed property bubble
The booming Chinese property sector has long been a central point to analysts' speculation as to whether the second largest global economy is heading for a hard or soft landing, if at all.
As recently as March, China's property sector was attracting increasingly nervous attention from fund managers, 14% of which cited it as the riskiest sector for asset allocators (according to a Bank of America Merrill Lynch fund manager survey).
Mark Martyrossian, a founding partner at Tiburon Partners (a fund management business offering UCIT compliant funds with an Asian bias), has dismissed these views of the real estate market as "sour grapes", with western investors voicing discontent more out of sour grapes than calculated honesty.
He says: "I think the western view of Chinese property is misguided. We have messed up our economies in much part by lending too much money to people who can't pay it back and that has partly been in property, sub-prime [having been] the poster child. I think a lot of people look across at China and they feel we've messed it up and I think they are going to mess it up as well.
"Look at the fundamentals; luxury residency is a tiny part of the Chinese property market as a whole, [between 6% and 7%] but it makes better headlines to talk about ten million dollar luxury residentials in Shanghai than it does it to talk about 10m 500sq/f boxes of social housing that is being churned out in China and has been for the last couple of years."
Martyrossian says the primary difference between a property bubble, such as the sub-prime mortgage crisis or the Japanese real estate collapse in the nineties and the Chinese situation is the presence of debt.
"Do I lose sleep over the Chinese property market posing a systemic risk to the economy as in Japan in the eighties or sub-prime in the late nineties?" he asks.
"No, because it's not built on debt. Property bubbles are dangerous when they are built on debt. Prices may come down."
Schroders' Jim Rehlaender has made a similar case in recent weeks, arguing that markets have "unique structural factors offering it strong support."
China's National Bureau of Statistics confirmed that investment in real estate development in the first quarter was over CNY1tn , representing year-on-year growth of 23.5% but four percentage points lower than in 2011.
Rehlaender, who co-manages the GBP596.9m Schroders Global Property Securities with Al Otero, concedes that the Chinese housing market is viewed with "anxiety" but points out that unique structural factors offer it strong support.
However, Rehlaender says: "People also forget when looking at China that it is unlike any market in the world in that the government never relinquishes ownership of the land.
"In the case of a developer who can't perform, the government takes, or refunds the land premium, and the land could be retained or 'sold' later to another developer."
The manager, who holds 3.5% of his portfolio in emerging markets such as China, also points out that higher-quality property companies, such as China Overseas Land and Investment, have seen "solid" home sales and improving margins.
Rehlaender adds that investors should be prepared to see some bankruptcies by companies among the 85,000 residential developers that cannot complete their projects.
But he concludes: "Although we understand the concerns that have been raised about the Chinese residential market, we believe that we are past the crisis point".

Thursday, May 10, 2012

Economic Summary for the week ended 10th May 2012

China - China has reported a trade surplus that is almost double industry expectations as domestic demand slows.
Exports climbed by 4.9percent, while imports grew by just 0.4percent, down from the 5.3percent growth recorded in March. The latest results represent the second consecutive month whereby a surplus has been reported, following a deficit of USD31.5bn in February.
The results will renew concerns that China's domestic economy is not responding to government attempts to stimulate demand after it cited this as a priority earlier this year.
Russia - Russia's central bank refrained from cutting interest rates for a fifth month, signalling reluctance to deploy monetary stimulus to bolster growth as it focuses on containing inflation.
Bank Rossii in Moscow left the refinancing rate at 8percent, the central bank said in a statement on Thursday.
The world's largest energy exporter cut inflation below Italy's rate for the first time in March and reduced it further last month as some food prices fell. Vladimir Putin, sworn in for his third term as president on May 7, battled inflation during his first eight years in the Kremlin after the rate peaked at 127percent in July 1999.
U.S. - The U.S. trade deficit widened at its fastest rate for 10 months in March. Official figures from the Commerce Department show the deficit at USD51.8bn in March, up from USD45.4bn in February.
Rising imports of oil, cars, mobile phones and clothing contributed to a 5.2percent rise in exports to USD238.6bn, which more than cancelled out a 2.9percent rise in exports to USD168.6bn.
Exports to Europe hit a record high, despite the eurozone debt crisis.
Greece - The eurozone's rescue fund has decided to hold back EUR1bn (USD1.3bn) of the latest instalment of its bailout to Greece.
This comes after a majority of Greeks voted against the political parties that supported the country's bailouts and the austerity they have imposed. As with previous disbursements to Greece, the European Financial Stability Fund (EFSF) will transfer the EUR4.2 into a segregated account which will be used for debt service payments.
The uncertainty of whether Greece might leave the eurozone has spooked investors and angered European officials, who want Greece to stick to the austerity cuts previously agreed.
Greece is due EUR39.4bn of its EUR110bn bailout before the end of June.
Germany - German exports grew for the third month in a row in March, with goods worth EUR98.9bn (USD128bn) exported.
German firms had the most success in markets outside the European Union (E.U.), where they recorded growth of 6.1percent compared with the year before.
"The German economy is profiting from the revival of world trade," said Ulrike Rondorf of Commerzbank. "Demand from the U.S. has increased and from Asia too. As German companies are very competitive they are especially well placed to profit from this."
Portugal - Portugal has angered its' locals with the decision to scrap four of its 14 public holidays. Two religious festivals and two other public holidays will be suspended for five years from 2013.
The country agreed a EUR78bn bailout deal with the E.U., European Central Bank (ECB) and International Monetary Fund (IMF) last year and recently passed the latest review of its spending cuts. It is hoped the suspension of the public holidays will improve competitiveness and boost economic activity.
Commodities - Goldman Sachs Group Inc. stood by its forecast for a rally in gold this year, saying that the precious metal will advance to USD1,840 an ounce over six months as the U.S. central bank embarks on a third round of stimulus in June.
The precious metal remains the "currency of last resort," according to analysts led by Jeffrey Currie in a report issued on Wednesday, the same day that gold sank to the lowest level in four months as Europe's debt crisis boosted the dollar. The forecast implies a 15percent surge.
Spotlight on: Investor sentiment for the next 12 months
The second annual BNY Mellon-sponsored survey conducted by the Economist Intelligence Unit (EIU) has found that almost half (47percent) of respondents believe that we will see the exit from the euro zone of one or more peripheral countries in the next 12 months, and only 17percent of survey respondents consider the E.U. among their top markets for asset price growth potential in the next 12 months. Meanwhile, the EIU identifies an oil price spike, tied in part to tensions over Iran's nuclear programme, to be the main obstacle to global growth.
A survey of some 800 institutional investors and corporate executives drawn from 77 different countries, The Search for Growth: Opportunities and Risk for Institutional Investors in 2012examines investor views about the prospects for growth across a range of asset classes, sectors and regions. According to the survey, global investors feel moderately optimistic about growth prospects over the next 12 months, in large part to the apparent stabilisation of the European debt markets, which is buying time for E.U. member states to engineer an economic recovery. But opinions among survey respondents and interviewees vary widely according to region, especially given the dramatically different growth prospects of emerging Asian and euro zone countries.
Speaking at Economist Conferences' Bellwether Europe summit in London on Thursday, Cynthia Steer, Head of Manager Research and Investment Solutions at BNY Mellon Investment Management, discussed how south-south trade relations are redrawing the financial map of the world. "I believe we are on the verge of a revolutionary new chapter in emerging markets investing, as burgeoning trade relations between developing countries create a new South Silk Trade Route," said Steer.
The EIU research found that, while investors appear buoyed by recent events, the fundamentals of the global economy have not improved significantly, and new risks have arisen to replace older ones. Following the stock market rally that opened 2012, the survey begs the question whether investors are pinning too much hope on what appears to be just a slight respite in financial markets. Survey responses indicate that investors believe the principal risks the market will face in 2012 relate to geopolitical events rather than strictly market-based developments.
Some of the key findings from the report include the following:
Investors see some opportunities in global financial markets - among survey respondents, 85percent perceive significant opportunities, although 51percent acknowledge that there are major downside risks. The easing of the European debt crisis, coupled with a somewhat better economic performance in the U.S., has created a more stable outlook for financial markets, though this relief may prove to be short lived.
Geopolitics rather than market forces will govern the outcome in 2012 - hopes for further improvement hinge less on economic activity generated by the private sector than on governments' ability to play their geopolitical roles properly. The Economist Intelligence Unit's forecast still places the threat of an oil price spike, tied in part to tensions over Iran's nuclear programme, as the main obstacle to global growth.
European investors are more optimistic than the global aggregate about the euro zone's future - almost half (47percent) of survey respondents agree that an austerity plan would be likely to collapse in one or more peripheral euro zone countries, prompting the exit of one or more in the next 12 months. But less than one-third (29percent) of European investors think this scenario is likely.
Investor sentiment echoes grim forecast for the euro zone - only 17percent of survey respondents consider the E.U. among their top markets for asset price growth potential in the next 12 months. More than 60percent expect the euro itself to decrease in value, the worst projected performance for any currency covered in the survey and a dramatic turnabout from 2011, when 53percent of respondents expected the euro to appreciate.
Slower growth in China and India shifts attention to smaller emerging economies - smaller economies are likely to benefit from demographic trends as well as economic or political factors. 40percent of respondents based in the euro zone consider South-east Asia as offering the best potential for asset price growth, the second most highly selected region or country.

Thursday, May 3, 2012

Economic Summary for the week ended 3rd May 2012

U.S. - The Dow Jones index in New York closed at its highest level for more than four years on Wednesday after data showed U.S. manufacturing was stronger than expected in April. The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 54.8 last month from 53.4 in March (a figure above 50 indicates expansion).
The Dow rose 66 points to finish the session at 13,279, its highest since 28 December 2007. The index has been rising steadily since sinking below the 7,000 mark at the beginning of 2009, and broke back above 13,000 in February this year.
China - Chinese and Russian co-operation in the energy sector will expand beyond the traditional Oil and Gas arena as economic ties between the 2 countries continue to tighten, industry experts say.
Russia exported a total of 7.17mn tons of Crude Oil worth USD2.06bn to China in the first 3 months of this year, an 81.4percent increase from the same period last year.
The Oil and Gas sectors make up more than 20percent of Russia's GDP, while China, the World's 2nd-largest economy and Crude Oil consumer, depends heavily on imports of foreign Crude Oil, more than 55percent, to support its economic growth.
China - China's manufacturing activity has expanded for the fifth month in a row, easing concerns about a sharp slowdown in the world's second-largest economy.
The official Purchasing Manager's Index (PMI) rose to 53.3 in April from 53.1 in March, the statistics bureau said. "The message is that Chinese manufacturing is growing, not as fast as in years past but faster than in the fourth quarter last year and enough to achieve the government's growth target for the year," said Dariusz Kowalczyk of Credit Agricole CIB.
India - Indian exports fell in March for the first time in two and a half years as Europe's debt crisis and slower Chinese growth hurt demand.
Merchandise shipments dropped 5.7percent from a year earlier to USD28.7bn, the government said in a statement on Tuesday. Imports rose 24.3percent to USD42.6bn, leaving a trade deficit of USD13.9bn.
"The fragile global economy doesn't augur well for Indian exports," Rupa Rege Nitsure, an economist at state-owned Bank of Baroda in Mumbai, said before the report. "The widening trade deficit and slowing economic growth pose significant risks to India's macroeconomic stability."
Spain - The Spanish economy is officially in recession, according to the latest figures. The National Statistics Institute said the economy shrank 0.3percent over the three months to the end of March, the second consecutive quarterly contraction, although the contraction was not quite as much as economists had been expecting.
Concern over the weakness of the economy and the deficit has driven up the cost of borrowing for Spain, raising fears it will need a bailout.
Japan - The Bank of Japan (BOJ) has increased its stimulus programme for the second time in just over two months in a bid boost the country's economic growth. The central bank said it would expand its purchase of Japanese government bonds by JPY10tn (USD123bn).
The move comes as Japan's economy continues to struggle amid a slowdown in key export markets such as the U.S. and eurozone and weak domestic demand. The BOJ also left its key interest rate unchanged between zero and 0.1percent.
Commodities - Gold declined for a third day in New York on Wednesday, on speculation economic growth will reduce the need for the Federal Reserve to add to stimulus measures.
Three voting members of the Federal Open Market Committee said they don't see a need to ease policy further as the economy maintains its expansion. Gold-backed exchange-traded products fell to a three-month low after prices reached a two- week high on Tuesday. Gold imports by India plunged to 30 to 35 metric tons in April from 90 tons a year earlier, the Bombay Bullion Association said.
Spotlight on: the appeal of equity income funds
In an environment of relative low, or at best 'volatile' growth, some fund advisers turn to investment funds that concentrate less on picking stocks that are set to achieve stellar outperformance, and instead look to those stocks that are likely to pay a regular, reliable dividend.
In most cases, it is the larger market leaders of the various sectors that continue to pay reasonable dividends, with small-mid cap stocks instead focussing on establishing market share through gradual growth. Of course, in addition to the attraction of dividend yield, it is the established industry leaders that provide peace of mind and a history of longevity for investors to take faith in during such uncertain times.
It is the proven ability of these companies to weather economic storms that fund managers call upon when choosing stocks for the best equity income funds.
Richard Turnill, manager of the underlying asset to the new Hansard BlackRock Global Equity Income fund (MX56 in HEL, MC146 in HIL) appreciates the current economic mood, but insists that there are still plenty of opportunities for growth.
The continuing euro crisis, fiscal tightening in the G7 nations, profit margins at peak levels and a modest policy response from China are among the key factors responsible for the poor outlook, Turnill says.
"We are in a process of longer-term structural shifts in the global economy. This has been well known by the market for the last few years," he added. "We continue to believe that high growth rates in emerging markets will be counteracted by much slower growth in the highly indebted developed markets."
Turnill co-manages the Blackrock Global Income fund with Stuart Reeve and together they look to exploit the trend for dividend growth in overseas companies.
Blackrock Global Income is set to pass its first anniversary in May. Its six-month return of 4.97percent puts it in the top quartile of the IMA Global Equity Income sector.
Commenting on the fund's performance, Turnill said: "From a sector perspective, telecommunication services, in which we are overweight, and consumer discretionary, which we are underweight in, drove underperformance. Royal Dutch Shell detracted, despite the rising oil prices, as lower gas prices affected earnings and the company was sued over the spillage."
"On the other hand, the Swedish company Svenska Handelsbanken was a top contributor to the fund's performance as the bank reported an increase in earnings and the banking sector in general bounced back during the period."
Turnill added that in the current environment global equities have performed well and continue to look attractive, especially compared with bonds.
"Equity markets generated modestly positive returns in March and strong returns more broadly over the quarter. This was driven by US economic data which continued to improve in the first quarter and global central banks supported the market with further liquidity measures. This gave equities strong returns for the start of the year," he said.
"Stocks continued to climb a wall of worry; major concerns include Europe flirting with recession, the eurozone continuing to struggle with a debt crisis, a growth slowdown in China and elections looming globally. Over the quarter market leadership rotated away from higher Beta names; companies with strong fundamentals led by the end of March."