Thursday, October 31, 2013

Economic Summary for the week ended 31st Oct 2013

U.S. - US shares hit fresh all-time highs on Tuesday, ahead of the conclusion of a Federal Reserve meeting that is expected to see economic stimulus measures maintained.
On Wall Street the Dow Jones closed up 111 points at 15,680 - beating the previous high set in September.
The Nasdaq was up 12 points at 3,952, just short of its March 2000 record.
The S&P 500 closed at a fresh high of 1,772, after gaining almost 10 points in the day's trading.
US traders broadly expect the US Fed to keep its programme of quantitative easing in place for several more months, and analysts say the economic indicators support that view.
The level of support provided to the economy by the Fed has become a significant factor in market sentiment in recent months.
Any sign that the economic recovery is stumbling is taken as an indication that stimulus measures will be kept in place, and will not be gradually tapered.
"The Fed has been pretty clear about making decisions dependant on data and the data the Fed has received since the last meeting have certainly not been upbeat," said Art Hogan, head of product strategy equity research at Lazard Capital Markets.
India - The new governor of the Reserve Bank of India, Raghuram Rajan, told the BBC in his first international interview that India has enough foreign-exchange reserves to safeguard against a repeat of the 1991 balance of payments crisis.
Mr Rajan said that India has enough money to pay for all of its short-term debts tomorrow if it needed to, as it has reserves that are equal to 15% of GDP. This is a key difference from two decades ago when the country was rescued by the IMF.
He said that a country with $280bn (£175bn) in reserves can finance itself, and points out that India's external debt is about 22% of GDP. He said that very few countries with such low level of debt has had an external crisis. Mr Rajan was also adamant about anyone who suggests that India should seek IMF assistance should know that there will be "no IMF, it's not going to happen". And that India is a creditor to the IMF.
Emerging Markets - Emerging market equity funds are taking “inordinate risks” by tilting their portfolios towards popular growth sectors and ignoring other parts of the market, Bank of America Merrill Lynch warns.
A note by the group argues that emerging market funds are “egregiously overweight” sectors such as consumer, internet and telecoms stocks while being “exceptionally underweight” in the state capitalist space.
FE Analytics shows the average fund in the IMA Global Emerging Markets sector has 22.1 per cent of its portfolio in consumer goods names, with another 20.5 per cent in telecoms, media and technology stocks.
BofA ML’s The GEMs Inquirer report says: “We think that prudent risk management demands recognising the substantial risks of this concentrated positioning in the emerging markets and to hedge the risks, or close this stretched position.
“In our view, while buying unpopular, undervalued stocks (mainly in the state capitalist sector) entails significant discomfort, continued overweighting of expensive growth stocks increasingly risks years of possible future underperformance.”
Spain - Spain has seen its first quarterly economic growth since 2011, according to data from the country's National Statistics agency INE.
The country's GDP grew 0.1% in the July-to-September period, after contracting for the previous nine quarters.
Its growth confirmed last week's estimates from the Bank of Spain.
Spain was one of the countries worst hit by the global economic crisis, with street riots and soaring unemployment. The statistics mean Spain is officially out of recession.
The INE said an increasing number of exports supported the growth, with a boost to the tourist industry from holidaymakers avoiding northern Africa and the Middle East.
Commodities - Gold advanced for the first time in three days as the smallest gain in U.S inflation in five months bolstered expectations that Federal Reserve policy makers meeting today will delay curbing stimulus measures.
Consumer prices increased 1.2 percent in the 12 months through September, the lowest since April, a government report showed today.
Gold has fallen 19 percent in 2013, while global equities advanced 18 percent, reaching the highest since 2008 today. BlackRock Inc. Chief Executive Officer Laurence D. Fink said yesterday that it’s imperative that the Fed begins trimming stimulus as the policy is contributing to “bubble-like markets.”
Spotlight on: Mexican investment themes in LatAm
Investors have been steering clear of Latin America as Brazil - once the region's engine of growth - is struggling with high inflation and falling GDP. But following reforms to the energy sector, Mexico could be a bright spot in the region, said BlackRock's Will Landers.
Finding someone bullish on investing in Latin America today seems to be a difficult task. Making the case for a continuation of a bear market in the region is relatively straight forward, based on the fact that the region’s biggest market, Brazil, continues to underperform global markets and its officials have failed to guide the country back to growth.
In addition, the second largest market in the region, Mexico, boasts some of the highest valuations one can find in the world, and the Andean markets offer a combination of high valuations and low liquidity. Mexico benefits from its proximity to the US and its ability to gain share in the manufactured import market given the competitiveness of Mexico's labour costs compared to China.
The pending energy reform recently proposed by President Peña Nieto's team has the potential to transform Mexico's energy sector into a major global player once again, reducing Mexico's dependency on imported sources of energy and increasing the investment rate in the country. Trading at 16x next year's earnings, it is not a cheap equity market, but one that should continue to be favoured by investors if it can deliver on its reform agenda.
The reality is that the reasons for investing in Latin America in the past are still very true today. The region’s demographics continue to rank among the most attractive in the world, with over 50% of the population being less than 30 years old.
In addition, years of keeping inflation under control, combined with better employment opportunities has expanded the middle classes in Brazil, Chile and Colombia, as well as in Peru and in Mexico albeit at a slower growth rate. This new consumer class is changing the economic dependencies from many of these economies, reducing the impact of global trade and increasing the importance of domestic growth.
Brazil boasts the enviable combination of 40 million new domestic consumers having entered the middle class over the last decade with one of the most attractive forward P/Es in the world, currently trading at close to 9x 2014 expected earnings.
The country has seen its equity market transformed by stricter minority shareholder protection rules, significant increase in the participation of small and mid-cap stocks and a strong entrepreneurial spirit that has allowed companies to succeed regardless of the economic climate.
The Andean region – Chile, Colombia and Peru – offers a combination of commodity growth in copper (Peru and Chile) and oil (Colombia) with significant investments in domestic infrastructure – especially Peru, but also Colombia.
Chile has been a quasi-developed market for a while, but the improvements in security in Colombia have returned that country to investors’ radars, both financial as well as strategic, while Peru continues to lead the region in terms of growth rates. In addition, intra-regional investments are creating multinational corporations with greater growth potential.

Thursday, October 10, 2013

Economic Summary for the week ended 10th Oct 2013

Global - The International Monetary Fund (IMF) has revised its forecast for global economic growth. It now expects global growth of 2.9% this year, a cut of 0.3% from July's estimate. In 2014 it expects global growth of 3.6%, down 0.2%.
It cited weakness in emerging economies for the cut.
Despite the improvement in growth in advanced economies such as the UK and U.S., the IMF warned that a slower pace of expansion in emerging economies such as Brazil, China and India, was holding back global expansion.
It expects growth in Russia, China, India and Mexico to be slower than it forecast in July.
In part, it says this is due to expectations of a change in policy by the U.S. central bank, the Federal Reserve. Simply the expectation that the U.S. could trim back its efforts to stimulate the U.S. economy has already had an impact on interest rates in emerging economies, the IMF said.
The IMF expects the U.S. to drive global growth.
But it warns that the political standoff over raising the U.S. government's borrowing limit, if it results in the U.S. defaulting on its debt payments, "could seriously damage the global economy".
Japan - Japan's aggressive policies aimed at reviving its economy may take 10 years to have a full impact, Akira Amari, Japan's minister in charge of economic revitalisation, has said.
Known as ‘Abenomics’, these include easing monetary policy, boosting stimulus and reforming key sectors. Some of these steps have already been introduced and have boosted growth.
But he warned that whilst it is easy to implement monetary stimulus measures, scaling them back can be tricky.
He told the BBC that Japan's central bank was likely to "learn from the experiences" of the U.S. Federal Reserve, which is widely expected to reduce its key stimulus programme in the coming months.
"The Fed Chairman, Ben Bernanke, is experimenting with it," Mr Amari said. "That's why one word from him can move stocks and currencies."
U.S. - There were signs of tentative progress on the U.S. fiscal deadlock on Wednesday as President Obama indicated he would accept a short-term increase in the nation's borrowing authority to avert a default.
According to Reuters, Obama's press secretary, Jay Carney, told reporters the President would be willing to accept a short-term debt ceiling increase in order to get past the potential crisis date of 17 Octoberwhen the government hits the $16.7trn borrowing limit.
Carney said while the White House would prefer to raise the ceiling longer term, at least for a year, he added "we have never stated and we are not saying today that the debt ceiling ought to be or can be any particular length of time."
A short-term increase would give Republicans and Democrats some breathing room, but by itself would not address the underlying issues preventing an agreement.
Meanwhile, China has critcised the "pitiful" and self-inflicted political deadlock in America over raising the country's borrowing limit, as premier Li Keqiang added his voice to concerns that the world’s biggest economy could default on its debt.
Mr Li told John Kerry, U.S. secretary of state, that China was paying “great attention” to the issue of raising America's $16.7 trillion debt ceiling.
China is the largest foreign owner of U.S. debt, holding more than $1.277 trillion in Treasury bills.
Emerging Markets - The capital outflows endured by the world’s developing economies are set to continue, as should interest rate hikes unless they can substantially bolster their fundamentals says Invesco chief economist John Greenwood.
Since the U.S. Federal Reserve first signalled an end to its massive $85bn per month bond buying programme, in May, emerging markets have suffered a significant market sell-offs and substantial capital outflows.
The knock on impact on fund performance has also been significant, where the average IMA Global Emerging Markets portfolio has shed 5% in the past six months alone while in comparison, the typical Global equity fund has risen by more than 3%.
Greenwood says: “The withdrawal of funds from emerging markets is likely to continue, as should countervailing policy measures such as interest rate hikes and currency interventions by EM authorities.”
Among the biggest emerging markets, including China, India and Brazil, growth has pulled back and the policy-makers are struggling to ensure smooth transitions to domestic-led growth models.
Commodities - Gold will extend losses into 2014 amid expectations the Federal Reserve will pare stimulus as the U.S. recovers, according to Morgan Stanley, adding to bearish calls from Goldman Sachs and Credit Suisse.
“We recommend staying away from gold at this point in the cycle,” Melbourne-based analyst Joel Crane said. Bullion will average $1,313 an ounce in 2014, down from the $1,420 forecast for this year, Morgan Stanley said in its quarterly metals report published this week.
Bullion is heading for the sixth weekly loss in seven and investment holdings are shrinking even as U.S. lawmakers wrangle over the debt ceiling and budget, seeking to avert a default and end a government shutdown. Gold is a “slam dunk” sell for next year because the U.S. will extend the recovery after lawmakers resolve the stalemate, Jeffrey Currie, Goldman’s head of commodities research, said this week.
Spotlight on: An alternative take on the U.S. debt issue
Multi-managers believe the political stalemate in the U.S. could be a prime opportunity to buy more risk assets, although there is concern about the looming debt ceiling.
Last week, for the first time in 17 years, the U.S. government partially closed down after the Republicans refused to agree spending plans that included President Obama’s affordable health care scheme, despite the reforms already being signed into law. If Congress does not agree its budget soon, it will run out of money on 17 October unless its debt ceiling is raised.
JP Morgan Asset Management Fusion fund range lead manager Tony Lanning notes suggestions which estimate that for each week the government is closed, 0.12% of economic quarterly annualised growth is lost.
Lanning says: “The debt ceiling and the impact of the shutdown could provide a meaningful opportunity to add more risk to our portfolios. So far markets have taken these events broadly in their stride.”
Fidelity Multi Asset Defensive fund manager Trevor Greetham remains bullish and believes when the smoke clears, investors will see an “equity-friendly backdrop.” He adds: “Any stock market weakness should present a buying opportunity.”
However Lanning views markets as being very complacent in regards to the debt ceiling. He says: “It seems to imply that investors have concluded that the ceiling will have to be raised, which it has been many times before.
”But were it not, several ratings agencies have said they will determine the U.S. is in default if it misses even one interest payment. The market has not priced this in.
Hargreaves Lansdown senior investment manager Adrian Lowcock says: “This does not look like a selling trigger. Investors should focus on their long-term goals and use any short term weakness as opportunities to invest.”
Meanwhile, it is the view of Fitch Ratings that global bonds, global equities and multi-asset funds will perform well in 2014 while other asset classes may suffer.
The ratings agency indicates improving investor confidence and an increasingly solid macro-economic background will support growth, but changing investor demand and intense market competition will cause uneven growth.
While global funds are set to perform well, domestic equities and government bonds could struggle due to changing investor demand. Fitch Ratings Fund and Asset Manager Rating Group director Alastair Sewell says: “AUM in traditional asset classes such as domestic equities or government bonds are threatened by changing investor allocations.
”In particular, managers that have large AUM in government bonds or aggregate portfolios would suffer from rising interest rates.” Fitch also points to the fact that half of European managers saw no inflows in the first three years to end of July 2013, while the top 10 firms received 50% inflows to bonds and mixed asset funds and 75% of inflows into equity funds.