Sunday, February 16, 2014

Economic Summary for the week ended 14th Feb 2014

China - China's trade surplus jumped to $31.9bn in January, easing concerns that the world's second-largest economy may be stuck in a slowdown.
The figure was up 14% from a year earlier and stronger than forecasts for a $23.7bn surplus.
Imports rose by 10% from a year earlier to $175.27bn - led by record shipments of crude oil, iron ore and copper.
Exports increased by 10.6% from a year earlier, far faster than analysts' forecasts, to $207.13bn.
The positive trade figures also add to expectations China will overtake the U.S. as the world's largest trading nation this year.
U.S. - The U.S. House of Representatives has passed an increase in the government's debt limit, after the Republicans gave up on their attempt to win concessions from the Democrats in return.
The House voted 221-201 to waive the $17.2tn debt limit for just over a year, with only 28 Republicans joining most of the Democrats.
Officials had said the U.S. could breach the debt limit by the end of February. The White House and others had warned of calamity if the U.S. defaulted.
The bill, when signed into law by President Barack Obama, will enable the U.S. government to borrow money to fund its budget obligations and debt service.
Greece - Greece is looking to return to international bond markets, in a bid to reassure international investors about its economic health.
The country, which defaulted in 2012, has recently seen yields on its 10-year bonds drop to just 7.6%, their lowest since May 2010, when the country’s debt problems heralded the start of the eurozone crisis.
In an interview with the Financial Times, Greek debt management office head Stelios Papadopoulos said: “It is the economic future of Greece, not its past, that we believe will be the key factor as institutional investors consider Greece’s return to the capital markets.”
He pointed out that the current debt servicing requirements of Greece are low and are expected to improve through the expected changes to its bailout terms.
In addition, he said the country will maintain a current account surplus “that will surprise on the upside”.
Papadopoulos added: “These are features that most countries, developed and emerging, would find enviable.”
Outlook - Global assets under management will hit $101.7trn in six years’ time, a 60% rise on 2012, according to PricewaterhouseCoopers.
The ‘Asset Management 2020: A Brave New World’ report predicts the $37.8trn boost would mean an annually compounding growth rate of 6% on 2012’s $63.9trn of assets.
PwC says the investments in the developing economies of South America, Asia, Africa and Middle East are likely to grow much faster than the developing nations. However, the majority of global assets will remain in the U.S. and Europe.
PwC Asset Management 2020 leader Rob Mellor says the turbulence of the past few years has prevented many asset management firms from bringing the “future into focus”.
He says: “But the industry stands on the precipice of a number of fundamental shifts that will shape the future of the asset management industry.”
Trends - Investors pulled record sums of money out of equity funds across the globe last week, with U.S. stock portfolios being hit by a significant “mini rotation” into bonds.
The week ending 5 February 2014 saw markets continue to wrestle with concerns over the shift in U.S. monetary policy, China’s slower growth and a cautious tone in the latest corporate earnings forecasts.
The week came to a close with a record $28.3bn redeemed from equity funds tracked by EPFR Global. Bond funds benefited from net inflows of $14.7bn - another new weekly record.
Brewin Dolphin head of fund management Ben Gutteridge comments: “With the Chinese slowdown and tapering of U.S. stimulus already well understood by the market, it would appear the recent weakness in U.S. economic data was the catalyst for the selloff in global stock markets.
Spotlight on: A ‘healthy’ correction for Japan?
Japanese equities have experienced a weak start to 2014 but with investors remaining positive on the outlook for valuations, corporate profits and the long-term structural reforms in Japan, could this be a “healthy” correction?
As with most developed markets, 2014 has been tough so far for Japan with the latest piece of bad news arriving last week when the Nikkei index fell 4%, bringing total losses year to date to 14%. Japanese shares have recovered somewhat since but the market remains down 9.66% since the start of the 2014.
This recent correction in Japanese equities can be attributed to a number of short-term influences from wider negative market sentiment and Japan’s strengthening currency, according to Invesco Perpetual head of Japanese equities Paul Chesson.
“There are a number of short term influences that have contributed to the market’s recent weakness, including a strengthening of the yen, general concerns about the impact of QE tapering by the U.S. Federal Reserve and volatility in some emerging market currencies and equity markets,“ he says.
Psigma Investment Management chief investment officer Tom Becket argues that the recent sell-off was also triggered by “hot money” pulling out of Japanese equities.
Becket believes that this has actually helped to remove ”some of the froth from the trade” making this particular correction a “healthy” one for the Japanese market.
He adds: “The two main knocks to Japan’s market have come from over-confidence of investors, leading to an overdue and healthy correction, and the strength of the yen.
“As you will have read in the myriad of comments over the last few months, our once lonely position in Japanese equities had become very crowded; hopefully the recent sell-off has blown some of the froth from the trade and knocked out some of the ’hot money’ investors.”
Industry experts also agree that with structural reforms in the Japanese economy under prime minister Shinzo Aber’s leadership continuing to make slow but steady progress, the longer-term outlook for Japan also remains positive.
Fidelity Worldwide Investment head of Japanese equities Alex Treves says: “Japan’s recovery continues to proceed steadily and the reflation theme remains on course.
”Prime Minister Abe will consolidate his policy agenda in the coming months and provide greater clarity on his multi-year roadmap for reforming Japan. It is important to be realistic about the likelihood of a sudden transformation, but equally the prospect of a long-term improvement in Japan’s outlook is very much alive.”
The Japanese equity team at Fidelity have therefore used the recent correction “as an opportunity to selectively add on weakness” and actively promote “buy on dip ideas”, according to Treves.
Japan’s progress in terms of earnings growth also “compares favourably” against other major markets, he adds.
Chesson goes further to argue that this earnings growth advantage also makes Japanese equities appear attractive when looking at valuations, something which is a “primary focus” for the team at Invesco.
He says: “At the start of the year the Topix was trading at around 15x consensus earnings to the end of the fiscal year in March 2014. This was roughly in line with other developed markets and with corporate profits in Japan growing more quickly than for their developed market peers we considered this valuation level to be attractive.
“The fiscal third quarter earnings season is currently in progress and in aggregate profits are broadly in line with expectations.”

Saturday, February 8, 2014

Economic Summary for the week ended 7th Feb 2014

U.S. - Janet Yellen has been sworn in as chair of the Federal Reserve, the US central bank, replacing Ben Bernanke in the role. She is the first woman to hold the post at the Washington-based bank.
A respected economist, her main task will be managing the winding down of the bank's bond-buying stimulus programme without damaging her country's recovering economy.
Ms Yellen, 67, had been Mr Bernanke's deputy for three years.
U.S. - US Treasury secretary Jack Lew has issued a warning that the US could default on its debt by the end of February.
The debt ceiling was originally suspended by the US government back in October 2013 in order to end the US government shutdown but the $16.7bn (£10.2bn) limit is set to be reinstated this Friday.
Speaking yesterday in Washington, Lew warned that the US will not be able to meet debts unless Congress increases its borrowing limit. “Without borrowing authority, at some point very soon, it would not be possible to meet all of the obligations of the federal government,” he said.
He does acknowledge that the Treasury could use emerging measures, such as accounting mechanisms, as a way of paying US debts until the end of February following the reinstatement of the limit this week.
Japan - Japan's consumer prices have risen at their fastest pace in more than five years, marking more progress in the country's battle against deflation.
Data showed that core consumer prices, excluding fresh food, rose by 1.3% in December from a year earlier, which was higher than market forecasts.
The latest figures give a boost to Prime Minister Shinzo Abe, who has pledged to end 15 years of falling prices and revive economic growth. Japanese stocks rose by nearly 1%.
Investors were also cheered by Japan's employment and manufacturing data released on Friday, which provided more evidence that Asia's second-biggest economy is recovering.
Europe - Eurozone manufacturing grew strongly in January on the back of new orders, a closely-watched business survey suggests, with Germany leading the way.
Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 54 in January, its strongest month since May 2011 - a figure above 50 indicates growth.
This compares to December's figure of 52.7 and reflects the overall pickup in eurozone economic activity.
But France failed to break the 50 mark.
"The eurozone manufacturing recovery gained significant further momentum in January, with final PMI readings for Germany, France and the region as a whole all exceeding the earlier flash estimates," said Chris Williamson, Markit's chief economist.
Trends - Adviser sentiment towards emerging market investment has increased significantly over the last quarter, according to the latest Baring Asset Management Investment Barometer.
The fund manager said two in five (41%) advisers think their clients should increase their emerging market equity exposure. This is up eight percentage points from the previous barometer in September last year when the figure stood at 33%.
The quarterly research also found only 17% of IFAs think clients should cut back on emerging market equity exposure, down from a quarter in the previous survey.
Some 70% are either ‘very' or ‘quite' favourable towards emerging market equities - with only 3% ‘very' unfavourable.
This comes despite recent figures showing an economic slowdown in China. The country's GDP growth slowed to a 14-year low, according to latest economic figures.
Just over a third (35%) of IFAs believe slowing growth in China will be the biggest global macro-economic challenge to investment growth in the next six months - down from more than half (55%) in the previous Barometer and from 38% in the respective study in 2012.
Spotlight on: Emerging market sell-off
The latest round of selling in emerging market economies saw the MSCI EM index fall 6.6% in January. But which emerging markets suffered the worst of the sell-off?
The ongoing contagion in emerging markets has dragged down many indices - with developed as well as emerging markets all falling.
Last week, following a sharp depreciation in emerging market currencies, central banks responded with a series of rate hikes to prevent further slides.
Rather than offset currency falls, the hikes added to the panic currently embroiling emerging economies, and helped push markets down across the board.
But nowhere suffered more than EMs last month. From fears about the impact of currency depreciation versus the US dollar, to concerns over external trade imbalances and electoral risk, the sector has seen all manner of worries raised by the investment community.
In turn equity prices have slumped, with even powerhouse economies such as China seeing their exchanges sold-down sharply.
But which economies have suffered the worst falls? Unsurprisingly, Turkey was the worst performing EM losing 13.27% in January, having aggressively hiked rates after the lira lost over 30% on the dollar last month.
South Africa, which was also forced into an interest rate rise, lost 10.1%, with Brazil, Chile and Colombia making up the rest of the bottom five.
Below is a table showing the extent of their equity market losses in January. (all indices are MSCI indices)
South Africa -10.16%
Brazil -10.77%
Chile -12.60%
Colombia -12.60%
Turkey -13.27%
But it is not all bad news. While it has been doom and gloom for many regions, there have been a few bright spots for investors across the emerging world.
A number of emerging markets protected investors' capital in January, and others even saw some positive returns.
Egypt topped the charts, returning 6.02%, while Indonesia returned 4.26% despite being one of the EM countries with a large current account deficit.
The country was helped by improved manufacturing numbers, with Indonesian banks and miners seeing upgrades from a number of investment banks.
Greece, which was reclassified as an emerging market last year, also avoided the worst of the losses, with manufacturing data out last week showing growth for the first time since August 2009.
Below are the top five performing EMs since the start of the year.
Egypt 6.02%
Indonesia 4.26%
Peru 0.29%
Phillippines 0.24%
Greece 0.17%

Monday, February 3, 2014

Economic Summary for the week ended 1st Feb 2014

U.S. - The US Federal Reserve announced a $10bn reduction in its monthly bond purchases from $75bn to $65bn in the second straight month of winding down stimulus efforts.
The central bank had been buying bonds in an effort to keep interest rates low and stimulate growth. In a statement, the Fed said that "growth in economic activity picked up" since it last met in December.
Although the move was expected, US shares still fell on the news.
The Fed left its overnight interest rate unchanged at 0% - the level it has been at since December 2008.
Global - With expectations that volatility will increase this year, BlackRock chief investment strategist Russ Koesterich stresses the need to diversify into international stocks.
After “unusually low” levels of volatility in 2013, the onset of QE tapering from the US Federal Reserve this year will likely see market volatility “climb to levels that are closer to long-term averages, according to Koesterich.
“While we still think stocks will post gains this year, those gains will be accompanied by more ups and downs,” he adds.
Against this backdrop Koesterich reinforces the need for diversification into international names, particularly within the US market.
Japan - Japan has reported a record annual trade deficit after the weak yen pushed up the cost of energy imports.
Its deficit rose to 11.5 trillion yen ($112bn) in 2013 - a 65% jump from a year ago.
Japan has seen its energy imports rise in recent years following the closure of its nuclear reactors in the aftermath of the tsunami and earthquake in 2011.
But it is having to pay more for those imports after a series of aggressive policy moves weakened the yen sharply.
The Japanese currency fell more than 20% against the US dollar between January and December last year.
Taiwan - Taiwan’s economy expanded at a faster-than-estimated pace in the fourth quarter last year, as a recovery in Europe and the U.S. boosted the island’s exports.
Gross domestic product rose 2.92% from a year earlier after increasing 1.66% in the third quarter, the statistics bureau said in a preliminary report in Taipei.
The World Bank this month raised its global growth forecasts as the easing of austerity policies in advanced economies supports their recovery. Taiwan’s finance ministry last week revised its exports figures for the fourth quarter and full year to reflect missing data, showing sales climbed 1.4% in 2013 after shrinking 2.3% the previous year.
India - India's central bank has unexpectedly raised interest rates in an attempt to rein in stubbornly high consumer prices in a crucial election year.
The Reserve Bank of India (RBI) raised the benchmark repo rate - the amount at which it charges to lend to commercial banks - to 8% from 7.75%.
The RBI said that another near-term hike was unlikely if inflation eased to a more comfortable level.
India's main gauge of inflation, the wholesale price index (WPI), rose 6.16% in December, from a year earlier. While that was a slight fall on from the previous month, the rate continues to remain an issue with the central bank.
Trends - Investors poured money into European equity funds in the third week of 2014 while continuing to shun the world’s emerging markets.
European equity fund across the globe took more than $4bn in new money during the week ending 22 January, according to fund flow data provider EPFR Global, as the move towards developed market stocks continued in force.
“Investors continue to favor regional funds over country specific ones, with Europe and Europe ex-UK regional funds accounting for three-quarters of the week’s total inflows,” EPFR Global says.
“But both UK and Spain equity funds posted weekly inflow records and investor appetite for the PIIGS markets [of Portugal, Italy, Ireland, Greece and Spain], measured in flows as a percentage of assets under management, remains strong.”
Spotlight on: Emerging markets: Not the time to be underweight this unloved asset class?
Emerging markets had a tough 2013 and events of the last week have seen them sell off even more. But should investors be cautious about being underweight emerging markets right now?
The MSCI Emerging Markets Index dropped 4.08% during 2013 after investors become worried by the impact of the Federal Reserve’s tapering on these countries and signs of slowing economic growth across the region. Over 2014 so far, the index has shed another 6.42% as currency weakness sharpened.
Fund managers plan to shun emerging markets over the coming months too. The most recent Bank of America Merrill Lynch Fund Manager Survey found that a net 28% of asset allocators say they want to be underweight emerging markets on a 12-month view.
However, others argue that investors who have gone underweight emerging markets should consider increasing their weightings to take advantage of the long-term valuation opportunities that have appeared in the space.
Iveagh chief investment officer Chris Wyllie says: “We’re not going gangbusters on emerging markets but we are saying we don’t think you should be underweight now. If you have been clever or lucky enough to be out or underweight then you should be moving back at least to neutral.”
Wyllie says the economic catalyst for a recovery in emerging markets is not yet present, although “the value is strong” and creating opportunities.
He adds: “With markets at 1.5x price-to-book, pretty much whenever you’ve bought them at that level you’ve made good returns from there.”
The CIO also points out that worries such as the devaluation of some countries’ currencies, fears of a hard landing in China and political events such as elections are “inherent risk factors” in emerging markets but seem to be spooking markets nonetheless.
“From a lot of the narrative, it sounds like this is just starting. I hear a lot of comments like ‘it has a lot worse to get yet’ or ‘it’s only just started’. Actually, this has been going on for three years, nearly four, already,” Wyllie says.
“If you look at the risk factors people are name-checking to justify still selling, even after a very pronounced period of underperformance, we don’t feel there is any fresh information to justify selling out.”
JP Morgan Asset Management global emerging markets strategist George Iwanicki says emerging markets look “tactically oversold” as investors have reacted to the Fed’s tapering as though it were full-scale monetary tightening.
He also argues that the falls in emerging market currencies which has sparked the latest sell-off could actually be a good development over the longer-term.
“As painful as it may be in the short term, it is actually very positive that the brunt of the pain from tapering is being felt through currency adjustments; this is making emerging markets more competitive as a whole,” Iwanicki says.
“Encouragingly, we are seeing central banks responding with orthodox moves like rate hikes; India, Brazil, and even Turkey raised rates. This is a key difference versus the 1990s and should reassure investors’ confidence in emerging markets.”
The strategist notes that the market seem to be concentrating on the problems in Argentina, Venezuela and Ukraine. But while the challenges facing these countries are “significant”, they are not directly relevant for equity investors.
He says: “From a stock investor perspective, we believe the emerging market earnings slowdown is largely cyclical, driven by the emerging market business cycle.
“After a prolonged growth slowdown and currency adjustment, emerging market valuations have fallen to a buy territory: price-to-book below 1.5x, emerging markets are cheap on 10-year price/earnings versus the US and the gap with Europe is rapidly diminishing.”
F&C multi-managers Gary Potter and Rob Burdett have recently started to take another look at emerging markets, and Asia in particular, after being heavily underweight the asset class in 2013.
“We think 2014 will be a transition year for emerging markets,” Potter says.
“Of course it’s hard to look at it as a bloc as you have vastly different circumstances in China to India to Brazil. The QE withdrawal in the US will continue to affect emerging markets to a point but we do think emerging markets have changed significantly for the better since the 1997 Asian crisis and the 1998 Russian crisis.”
Potter and Burdett have started to put small amounts of money back into Asia after seeing the compelling valuations present in the region, but remain underweight. This has been funded by taking profits in the US, following a strong 2013 that saw the S&P 500 rise by 29.93%. “On a price-to-book basis, some of the cheapest markets are in emerging markets,” Potter says.
“Asia has traded this low only three times in the past 30 or 40 years, I think, and if you buy Asia at this price you are definitely going to make money over the next five to 10 years.”