Friday, June 28, 2013

Economic Summary for the week ended 26th June 2013

Global - The Bank for International Settlements (BIS) says banks have done their bit to help economic recovery and now governments must do more.
The Basel-based organisation, usually dubbed the "central banks' central bank", believes it is time to end the "whatever it takes" approach. It says it wants to see a return to "strong and sustainable growth".
Last week the U.S. central bank said it planned to stop its asset purchase programme, sparking market volatility. In its annual report, the BIS said the world's central banks had done what they could to offset the worst effects of the six-year long global credit crisis.
China - China’s central bank said it will use tools to safeguard stability in money markets and tight liquidity is set to ease, giving the first official signs of relief for a cash squeeze in the world’s second-largest economy.
The People’s Bank of China has provided liquidity to some financial institutions to stabilize money-market rates and will use short-term liquidity operations and standing lending-facility tools to ensure steady markets, according to a statement posted to its website on Tuesday. It also called on commercial banks to improve their liquidity management.
“The message is clear: the central bank doesn’t want to see a tsunami in China’s financial markets, and market rates will drop further,” said Xu Gao, Everbright Securities Co.’s Beijing-based chief economist, who previously worked at the World Bank. The PBOC is giving the market “a pill to soothe the nerves,” he said.
U.S. – U.S. home prices have seen their biggest annual rise since 2006, a closely-watched survey suggests.
The Standard & Poor's/Case Shiller index, which monitors single-family home prices across 20 cities, rose 12.1% in April compared to the same month last year.
The jump, due to increasing demand and a shortage of supply, was bigger than many analysts had been expecting.
Month-on-month, the index rose 2.5% in April compared to March.
Japan - Japan’s deputy economy minister said he’s confident the nation’s economic recovery will be seen in share prices after next month’s elections.
“I’m optimistic and expect the strength of the Japanese economy will be reflected in the stock market,” Yasutoshi Nishimura, 50, said in Tokyo on Tuesday. Markets are likely to “positively rate the government’s policies after the upper house elections once they see how determined we are to implement them.”
Victory for the Liberal Democratic Party-led coalition in the ballot planned for July 21 would end a split parliament that has slowed the passage of bills. The government’s task will then be to ensure its growth strategy, the third of the three Abenomics ‘arrows’ after monetary and fiscal stimulus, produces a sustained recovery in the world’s third-largest economy.
Forecasts - Capital Economics has revised up its forecasts for developed equity market performance this year, arguing that many downsides are now priced in.
The macroeconomics forecasting consultancy has lifted its outlooks for the FTSE 100, S&P 500 and Nikkei 225 for both this year and next. However, it adds that the upside for equities is limited.
Capital Economics chief global economist Julian Jessop says: “We had already anticipated a weak second half of the year, partly in anticipation of Fed tapering and partly due to concerns about the risks of a flare-up of the crisis in the eurozone.
“But Fed tapering would no longer come as a shock to the markets, and the risks of a meltdown in Europe have faded too.”
Jessop adds: “Admittedly, the upside for equities is also limited, given the fading support from U.S. monetary policy and the stage of the profit cycle. However, the improving economic outlook should provide some comfort, especially in the U.S., and valuations are not outrageous.
“Accordingly, we expect steady gains in equity prices – nothing spectacular, but better than many might fear against a backdrop of rising bond yields.”
Trends - Investors continued to pull money from emerging market funds last week, according to EPFR Global, although recent declines in other asset classes slowed.
The fund flow data provider reports that more than $3bn flowed out of emerging market equity funds worldwide during the week ending 19 June, while outflows from emerging market bond funds hit a 90-week high as the “exodus” from these regions continues.
Investors channeled money out of funds focused on top-tier emerging markets such as China, Brazil, Russia and South Africa. However, they maintained interest in frontier markets, as funds investing in this area have witnessed net inflows every week since mid-March.
Hong Kong - Moody's Investors Service has downgraded the outlook for Hong Kong's banking system to negative from stable, citing its "concerns regarding persistent negative real interest rates" and the institutions' "growing exposures to Mainland China".
It added, "Residential, commercial, and industrial property prices in Hong Kong have all more than doubled since 2009, and are currently at historically high levels. There is growing integration between Hong Kong's economy with that of the Mainland.
"While the economic integration creates business opportunities for banks and their customers, it also entails risks. The Mainland's transition from an export and investment-driven economic growth model to a consumption-led model creates uncertainties and may expose overcapacity in certain industries."
Commodities - The suggestion that the U.S. could start to curb quantitative easing has led to gold traders adopting their most bearish stance January 2010 as further falls in price are forecast.
Gold spot prices suffered a 6.4% fall to around $1,285 an ounce on Tuesday after Federal Reserve chairman Ben Bernanke said the central bank may slow its $85bn-a-month bond-buying programme if the U.S. economy continues to recover.
Gold has lost 22.5% over the year to date and is down more than 30% since its peak of about $1,900 in 2011. Commentators expect to see more falls, with some arguing the metal’s fair value is much lower than its current price.
A poll by Bloomberg found that 15 analysts expect the price of gold to see further falls next week, while five were neutral and six bullish. This is the most bearish response the survey has received in three-and-a-half years.
Spotlight on: Opportunities in the ASEAN region
The ASEAN region’s high pace of growth means many of its equity markets are undervalued. Camille Vergara fund manager of the GAM Star Emerging Asia Equities fund, explains why the area could be an even more attractive prospect than China 15 years ago.
The situation in Southeast Asia is more or less comparable to China 15 or 20 years ago except that current growth in Southeast Asia is much more dynamic. In the fourth quarter of 2012 alone, the average economic growth of the ten ASEAN countries was 6.5% year-on-year while inflation largely remains in check. By way of comparison, over the same period the economy in the eurozone contracted by 0.9%.
In addition, the incipient recovery in the U.S. economy and the drastic monetary easing by the Bank of Japan (BoJ) is giving Southeast Asia additional momentum. The U.S. economic revival is fuelling exports, particularly from the bigger manufacturing-heavy ASEAN countries.
Given the continued weakness of the yen and the low interest rates, many Japanese investors will sell their domestic government bonds and invest the money abroad, with the prospect of making currency gains and earning better returns.
In addition to dynamic growth, the region also offers investors a level of diversification which investing in a single market does not.
Singapore, for example, positions itself as the financial and transportation hub of the ASEAN region. Indonesia and Malaysia are the manufacturing centres while the Philippines is poised to become the business process outsourcing (BPO) centre with its growing call centre industry, which is thriving thanks to the educated, English-speaking labour pool.
Thailand’s aim is to be the logistics hub of the Sub Mekong Region, it is ideally located beside its neighbours Laos, Vietnam, Myanmar and Cambodia and will, along with China, embark on a major upgrade of its infrastructure in the next five years to improve connectivity by land, sea and air to create and capture growing trade benefits in the region.
Furthermore, in 2015, the ASEAN countries will form a free-trade area along the same lines as the EU, the ASEAN Economic Community (AEC). The free exchange of goods, services and labour will give the region an additional boost.
Regional merger and acquisition (M&A) activities will generate considerable synergies, enabling many companies to exploit economies of scale. M&A activity has increased in ASEAN companies over the past year, for example in the food and beverage industry as well as financial services.
Meanwhile, in Thailand, Indonesia and the Philippines (TIPs), an expanding middle class has sprung up, which is supporting the upturn through consumer spending. The TIPs have been outperforming Malaysia and Singapore, driven by robust economic growth and domestic demand.
The total population of these three markets is approximately 400 million and per capita income is roughly $3,000-$4,000, the level at which consumers start buying cars or having a mortgage. Meanwhile, Malaysia, being the more export-oriented economy, has been more affected by the slowdown of demand from the western economies.
Foreign capital
The influx of foreign capital into the ASEAN countries will continue to increase, providing the basis for the economic boom to continue. Many ASEAN countries need capital to invest in their infrastructure – for instance new roads, ports, power plants and grids – and the industrial sector has to finance investments in the expansion of production capacity.
The leading companies in the region are already able to compete internationally and are highly profitable. For instance, the leading Singaporean real estate development and management company now has investments worldwide, in China and Japan particularly.
In the first quarter of 2013 alone, the group increased its net profit by 41% to the equivalent of around $188m. Meanwhile, its share price has gained almost 50% in the last 12 months (as at 27 May 2013). Despite the share price gains of recent months, many of these markets are still relatively inexpensive given their growth potential.
Not without risk
There are specific points which investors should consider when investing in the ASEAN region. The political, cultural and, in particular, economic differences within Southeast Asia are considerable and investments into the region are not without risks.
The markets can be volatile because of the inflows and outflows of foreign capital, and the external value of local currencies also fluctuates strongly, which can have a negative impact on the performance of an investment. In some cases there are certain political risks that cannot be overlooked.
Southeast Asia could prove to be a more attractive opportunity than the China of 15 years ago, yet as with China, strong local expertise and an appreciation of the macroeconomic and political factors impacting the region are essential to those hoping to profit from Asia’s next big success story.

Saturday, June 15, 2013

Economic Summary for the week ended 14th June 2103

U.S. - Rating agency Standard and Poor's has raised its credit outlook for the U.S. economy from negative to stable.
In August 2011, S&P downgraded the U.S. rating one notch from AAA to AA+, but now believes further downgrades are less likely as the economy continues to recover.
The news saw the U.S. dollar strengthen 1.3% against the Japanese yen, and 0.2% against the euro, but S&P is still concerned about the high levels of U.S. debt.
The U.S. Treasury Department, which had said that S&P's calculations in making its initial downgrade were flawed, welcomed the latest action. "We're pleased that they are recognising the progress in the U.S. economy and fiscal results," said Mary Miller, the Treasury's under secretary for domestic finance.
Japan - Japan has revised its first-quarter economic growth up to 1%, as part of government data released this week by the Cabinet Office.
Revisions to official data show the Japanese economy grew at an annualised rate of 4.1% throughout the first quarter, up from an original estimate of 3.5%.
Japan’s original estimate of 3.5% already marked the fastest growth rate recorded by any G7 economy for the period.
Strong household spending and an uptick in private residential investment are said to have been the biggest contributors to the expansion in the Japanese economy throughout the first quarter of 2013.
The quarter-on-quarter growth rate was also the highest since the 1.2% witnessed during the first three months of 2012.
China - The World Bank has cut its growth forecast for China amid warnings of slower but more stable global growth over the coming months.
The bank now expects China to grow 7.7% in 2013, down from its earlier projection of 8.4%, it also cut the forecast for global economic growth to 2.2% from 2.4%.
The bank said growth in China, the world's second-largest economy, had slowed as policymakers look to rebalance its growth model.
Emerging Markets - Emerging markets have lagged over the opening half of 2013, leading some investors to re-assess their exposure to these regions.
While the MSCI World is up 18.3% since the start of the year, the MSCI Emerging Markets Index gained just 2.2%. Despite this, BlackRock chief investment strategist Russ Koesterich says investors should consider emerging market options such minimum volatility funds, single-country or regional portfolios and venturing into frontier markets.
Koesterich says: “In light of the recent poor performance, many investors are asking me whether they should be abandoning emerging markets in favor of bets closer to home. My answer: clearly is ‘no’”.
Frontier Markets - The world’s least-developed markets are proving the most resilient to the three-week selloff that has erased $1.9tn of global equity value.
While the MSCI All-Country World Index of shares in advanced and emerging nations has lost 4.2% since May 22 amid speculation the Federal Reserve will pare monetary stimulus, the MSCI Frontier Markets Index returned 0.5%. Thirteen of the 15 top-performing stock gauges are in frontier countries, where the mean market value of $49bn compares with almost $19.5tn in the U.S.
Greece - Greece became the first developed nation to be cut to ‘emerging-market’ status by MSCI after the local stock index plunged 83% since 2007.
Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, said MSCI, whose equity indexes are tracked by investors worldwide. Qatar and the United Arab Emirates were raised to emerging markets, while Morocco was cut to a ‘frontier market’.
“It is unclear yet what the weight of the MSCI Greece will be on emerging markets, but in any case it will be significantly higher than that it has on developed markets,” Constantinos Zouzoulas, an analyst at Axia Ventures Group, a brokerage in Athens, said. “This could be positive news for the Greek market as it could attract more interest, although there could be pressure in the short term.”
Commodities - Hedge fund managers increased bets on a gold rally to the highest level in seven weeks this week, prior to a report showing that U.S. unemployment had dropped spurred the biggest reversal in prices since April.
U.S. payrolls rose 175,000 in May, signalling that companies are optimistic about the outlook for demand, the government said.
“We saw some short-term bullish sentiment build up, then the jobs data dashed all hopes of gold rising,” said Walter Hellwig, who helps manage $17bn of assets at BB&T Wealth Management in Birmingham, Alabama. “Any good news for the economy is not so good for gold. The debate about when the Fed will taper or end stimulus continues to pressure.”
Trends – ‘Financials’ were the chief driver of global expansion during May, with firms posting the fastest growth in over a year.
The robust pace was fuelled by companies reporting the largest inflows of new business since February 2012, according to economics consultancy Markit, which monitors trends across industries.
This latest rise in output in the financials industry follows a trend which has been recorded in each month since January 2012, with the exception of a marginal reduction last June.
Behind the overall expansion of the financial industry was a sharp acceleration in the ‘other financials’ sector, which comprises non-bank financials and investment service companies.
Spotlight on: How Malaysia's elections benefit the ASEAN market
Soo Hai Lim, Head of ASEAN research at Barings Asset Managers shares his thoughts on the effect of the recent elections in Malaysia & it’s wider implications on the region.
In a largely weak global growth environment, we remain positive on the investment prospects for the countries making up the Association of South East Asian Nations (ASEAN). The regional grouping is made up of Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Our view is based on a robust growth outlook and domestic dynamics, which we believe should continue to limit the region’s exposure to any negative external shocks from Europe and elsewhere.
ASEAN equities have significantly outperformed the rest of Asia ex Japan in recent years, and we expect the region to continue to deliver superior returns relative to not only the rest of Asia ex Japan but also other emerging markets across the globe.
Economic growth in the region is being driven by structural change in the form of rising consumer and infrastructure spending, meaning that the ASEAN economies are substantially less dependent on global growth than other emerging markets, in our view.
Early May saw important elections in Malaysia, south-east Asia’s third-largest economy, as the governing coalition (Barisan Nasional) held on to power and extended its 56-year rule in a keenly contested race.
In our view, political stability in Malaysia is positive for the wider ASEAN region and we believe the election result should allow for a widening and deepening of the government’s economic reform programme.
The market’s reaction to the result has so far been positive, with the MSCI Malaysia index rising by 5.9% in U.S. dollar terms since the election on 5 May(to 29 May). The wider MSCI South East Asia index has also rallied slightly, returning 0.8% over the same period.
Although we have been relatively cautious on Malaysia for some time, we have recently increased our exposure, while remaining underweight relative to the benchmark index.
We will likely continue to add or initiate positions in domestic stocks where we believe performance has been hampered by the uncertainty leading into the elections. Longer term, we are also encouraged by signs that the Malaysian economy is enjoying a stronger investment cycle similar to other large regional economies.
Despite an improving economic and political outlook for Malaysia, our preferred markets remain Thailand, Indonesia and the Philippines (also known as the ‘TIP’ markets).
Thematically, the favourable economic fundamentals of ASEAN lead us to focus on direct beneficiaries of the region’s structural increase in infrastructure and consumer spending. We continue to find the best representation of these types of companies in the fast-growing TIP economies.