U.S. - The Dow Jones Industrial Average index reached a record high this week, helped along by last year’s worst-performing stocks: International Business Machines (IBM) and Caterpillar Inc.
Four months after reaching its previous closing high, the 30-stock gauge eclipsed the previous level, rising 0.3percent. It was the index’s third straight increase, coming after the Federal Reserve said it would continue to trim the pace of bond purchases as the economy gains momentum.
“Growth in economic activity has picked up recently, after having slowed sharply,” the Federal Open Market Committee said in a statement. “Household spending appears to be rising more quickly.”
Policy makers committee pared monthly asset buying to $45bn, its fourth straight $10bn cut, and said further reductions in “measured steps” are likely.
China - China is poised to overtake the U.S. as the world's largest economy far sooner than expected, according to new statistics.
The Asian giant will overtake the U.S. which has been the largest economy in the world since surpassing the UK in 1872, later this year, according to the World Bank.
That is well in advance of earlier estimates that the U.S. would not be overhauled until 2019.
In its first update since 2005, the World Bank's International Comparison Programme (ICP) concluded that "money goes further in poorer countries than previously thought," prompting an upgrade to the relative size of EM economies.
Though it remains well below the U.S. and other economies when measured on a GDP per capita basis, the ICP's latest figures show China's economy was 87% of the size of that of the U.S. in 2011 on a purchasing power parity (PPP) basis.
That is up from a figure of 43% as of 2005, and puts China on track to surpass the U.S. later this year on a PPP basis.
Japan - Vehicle deliveries last month in Asia’s second-largest auto market fell to the lowest since December 2012, after Japan raised its consumption tax for the first time 17 years, according to industry figures released on Thursday. In the run-up to the levy being increased 3percentage points to 8percent on April 1, sales had surged for seven straight months.
More broadly, the figures may foreshadow the extent of the consumer backlash resulting from the higher taxes Prime Minister Shinzo Abe imposed to counter the world’s biggest debt burden. Economists estimate that this quarter, Japan will see its biggest economic contraction since the earthquake and tsunami that ravaged the country three years ago.
“Any sane person was buying big-ticket items in February or March rather than in April,” Martin Schulz, an economist at Fujitsu Research Institute in Tokyo, said. “The Japanese carmakers will have to prove how much they really can work this very difficult market.”
Ukraine - The International Monetary Fund (IMF) has approved a $17.1bn bailout for Ukraine to help the country's beleaguered economy.
The loan comes amid heightened military and political tension between Ukraine and neighbouring Russia.
The loan is dependent on strict economic reforms, including raising taxes and energy prices.
The money will be released over two years, with the first instalment of $3.2bn available immediately.
The head of the IMF, Christine Lagarde, said the IMF would check regularly to ensure the Ukrainian government followed through on its commitments.
Russia - Russia is "experiencing recession now" because of damage caused by the Ukraine crisis, the International Monetary Fund (IMF) has said.
The fund, which cut its growth forecast for Russia, said $100bn would leave the country this year.
Antonio Spilimbergo, the IMF's mission chief in Moscow, said international sanctions were damaging the economy and threatening investment. Russia's economy contracted in the first three months of this year.
But Mr Spilimbergo said he expected that to continue.
"If you understand by recession two quarters of negative economic growth, then Russia is experiencing recession now," he added.
"The difficult situation and especially the uncertainty surrounding the geopolitical situation... and escalation of sanctions are weighing very negatively on the investment climate."
Asia - Asian policy makers have to push through structural economic reforms in order to withstand volatility inspired by U.S. tapering, according to the International Monetary Fund.
In a regional economic outlook report for Asia by the IMF, entitled ‘Sustaining the momentum; vigilance and reforms’, the organisation points to tightening of global liquidity as the key risk to Asian markets.
Additionally, a sharper than originally thought slowdown in China and waning effectiveness of Abenomics in Japan could be additional risks according to the IMF.
With the latter, the IMF sees structural reforms as vital to ensuring Abenomics-related measures follow through and boost growth.
The report reads: “With the risk of further bouts of volatility ahead, policy complacency will be penalised. Asia’s reform momentum must therefore be nurtured so as to secure the region’s position as the global growth leader.
Spotlight on: Investment Trends
The most recent Merrill Lynch Fund Managers survey found that there had been a significant swing from growth to value. In April, a net 40% of managers believed value stocks would outperform growth stocks over the next 12 months, three times the level in March.
This is part of wider nervousness over the lengthy outperformance of smaller and mid capitalisation stocks, and also of sectors such as technology and biotechnology. Valuations, in some cases, had started to look well ahead of realistic growth prospects. Although the most recent U.S. earnings season saw around three-quarters of companies beating expectations, in some cases these expectations had been lowered ahead of time, and some bellwether companies disappointed, notably among the technology companies.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said that investors were increasingly toning down their bullishness on U.S. growth stocks and their bearishness on emerging markets.
Mega cap has lagged over the past year. Partly this is structural - the real beneficiaries from an improving economic environment are unlikely to be the unwieldy large caps with their globally diversified earnings, but the smaller domestically focused companies. However, there is an increasing groundswell of opinion that this has gone too far and the difference in valuations is too great relative to growth prospects and earnings potential.
Small and mid cap stocks have outperformed the FTSE 100 over almost any time period. However, over the past month, the FTSE 100 has been around 3% ahead. Small and mid cap fell around 2%, while the FTSE 100 rose 1%. While it is dangerous to extrapolate a long-term trend from one month's numbers, it does suggest that markets may have hit an inflection point.
A number of the 'recovery' funds have done well in this environment, such as those from Schroders and Jupiter. Funds such as the Franklin Blue Chip fund and fund groups that prioritise quality, such as Aberdeen, have also done well. In contrast, the mid cap-focused funds lie firmly at the bottom of the performance tables.
Another question is whether active managers can continue their lengthy run of outperformance in this environment. 2013 was an outstanding year for active managers, with many significantly ahead of their benchmarks. However, if the market moves to favour larger capitalisation stocks, the performance of index trackers may start to outstrip active funds.
There are a number of things that may thwart this trend. There may be stronger momentum in earnings and investors may finally be convinced that many growth companies can make the impressive profits that are predicted for them. This is particularly the case if stronger corporate investment comes through. Equally, M&A activity - as has been seen in the pharmaceutical sector - may boost certain parts of the market.
However, investors who have ridden the strong performance of growth stocks, particularly those in the small and mid cap area would do well to be wary in this environment. It seems that the market may be on the cusp of a change in sentiment and the type of portfolio that has garnered strong returns over the past year, may not be appropriate from here.
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