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Broadgate: Weekly Briefing 24/8

24 August 2012

Emerging Markets – Emerging-market stocks headed for the biggest gain in two weeks on Thursday, following that speculation policy makers in the U.S. and China will ease monetary policy to boost growth in the world’s largest economies.

The MSCI Emerging Markets Index climbed 0.8%, bound for the steepest rise since Aug. 9.

“Everybody is waiting for easy money to come to lift up all asset prices,” Pankaj Kumar, who helps manage 1.8bn ringgit ($580mn) as chief investment officer at Kurnia Insurans (Malaysia). “When you have more money being printed in the system, it encourages risk-taking and equities will be the direct beneficiaries.”

China – Property prices in China rose in July amid cuts in borrowing costs and after some local governments eased restrictions on purchases. Beijing has been trying to curb speculation in the property sector to prevent the formation of asset bubbles.

New home prices rose in 50 cities, compared to the previous month, figures released over the weekend showed.

“A new trend does appear to be materialising as home prices continue on an upward trajectory after the Chinese government began to loosen certain levers to address concerns around a slowing economy,” said Mark Budden, of consultancy firm EC Harris.

Thailand – Thailand’s economy grew more than forecast in the April to June period helped by domestic consumption and continued recovery in manufacturing.

Growth was 3.3% in the second quarter, analysts had forecast growth of 1.7%.

Thailand has taken various measures to boost domestic demand to help recover from last year’s devastating floods. Analysts said the steps had helped offset a decline in global demand for exports. “Thailand is one of the more resilient economies compared with its Asian peers with regards to the risk and headwinds from the U.S. and Europe,” said Philip Wee, of DBS bank.

U.S. – Spending cuts and tax rises due to take effect in 2013 could trigger a sharp slowdown in the U.S. economy, Congress’s budget office has said.

It warned that unless Congress acts to avert a “fiscal cliff”, the U.S. could see its gross domestic product (GDP) shrink by 0.5% next year.

In its report, the CBO said it expected the U.S. recovery “to continue at a modest pace” for the rest of 2012 and estimated that unemployment would remain stuck at above 8%.

But it warned that “substantial changes to tax and spending policies” would cause the U.S. to tip back into recession in 2013.

Russia – Russia finally entered the World Trade Organisation (WTO) on Wednesday after 19 years of negotiations that meant the country was the last big economy outside the global trade body.

World Bank economists estimate a boon for Russia’s economy of $49bn a year, or about 3% of GDP, over the mid-term from the increased competition and greater foreign investment that entry is expected to bring.

“In terms of overall economic impact, it will be relatively low. Russia is a country where most of its exports are not products that other countries want to keep out,” said Roland Nash, chief strategist at Verno Capital, a Moscow hedge fund.

“But this is a watershed moment that is much more about signalling that Russia is open for business and is adopting an institutional framework that it can’t change and that the rest of the world can trust.”

Australia – Australian Resources Minister Martin Ferguson said the nation’s mining boom has ended as BHP Billiton Ltd. delayed approval of its Olympic Dam expansion that Deutsche Bank AG estimated at A$33bn ($34.7bn) of spend.

“You’ve got to understand, the resources boom is over” Ferguson told Australian radio. “It has got tougher in the last six to 12 months.”

Australia’s economy has been powered by the biggest resource bonanza since a gold rush in the 1850s as Chinese-led demand for iron ore, coal and natural gas brought investment projects the government estimated to be worth A$500bn. BHP, the world’s biggest mining company, said it doesn’t expect to approve any spending on major projects this fiscal year as metal prices decline amid sluggish global growth.

Commodities – The spot price of gold climbed by over 1% to $1,655 an ounce onThursday as the Federal Reserve said it is likely to ease monetary policy soon unless there is a sharp change in economic data.

It is the first time the precious metal has risen above the $1,660 an ounce mark since early May, as investors waited for clarity on Fed policy.

Spotlight on: Latin America – reasons to be optimistic

Will Landers, senior portfolio manager of the BlackRock Latin American investment trust (the underlying asset to C08, available in HIL & HEL), shares his thoughts on why the region has much to offer canny investors who are prepared to think long term.

For many investors, Latin America evokes memories of hyperinflation, debt defaults, less than ideal corporate governance, and an investment universe that is mostly correlated with commodities (and therefore China).

On the other hand, those investors who have been involved with Latin America over the last decade, have experienced one of the best regional equity performances in the world, with a ten-year accumulated return of over 450% to the end of July 2012 – hardly the type of reward to be expected from the former.

The reality is that Latin America has come a long way during the past decade, placing the region as a core component of global asset allocators given its attractive risk reward for those with more than a very short-term investment horizon. So what has changed? Plenty.

For starters, hyperinflation is a thing of the past. Brazil was the poster child of hyperinflation during the 1980s and 1990s – at one point inflation surpassed 80%, on a monthly basis, in 1989. The Real Plan, started by then finance minister Fernando Henrique Cardoso in July of 1994, marked the end of hyperinflation.

Its three pillars of inflation targeting as the only mission for its central bank, a free trading currency, and running a primary surplus to reduce the country’s debt levels have helped to bring Brazil today to a situation where the central bank is conducting monetary policy to manage the decimal point of the annual inflation rate.

Other serious countries in the region like Mexico, Chile, Colombia and Peru have a similar policy on the inflation targeting mission, allowing all these countries to have annual inflation rates in the single digits.

The biggest impact of the low inflation rate has been on the growth of domestic demand in these economies. It is well documented that inflation is a tax burden on economies overall, but especially on the less affluent segments of the population. Falling inflation allowed domestic interest rates to fall, while also allowing for wages to grow in real terms.

Again, this has been evident to an extreme in Brazil, where income distribution has improved to levels not seen in many economies – the poorest 10% of Brazil’s population enjoyed a 69% growth in annual income from 2001 to 2009 (vs. 13% for the wealthiest 10%).

This wealth effect is multiplied by the fact that the region sports one of the most attractive demographic pyramids in the world, with 55% of its population being below the age of 30 years.

As a result, not only does the region enjoy a young population, but this population is reaching peak earnings years at a time of economic prosperity, which should give continuity to its growth.

Furthermore, the growth in domestic consumption moves Latin America away from being “just” a commodity story. Commodities are certainly important for many countries in the region, and many companies listed on its exchanges. From oil in Mexico and Venezuela to copper in Chile and Peru, commodities can be an important factor for economic growth. Brazil’s stock market is also led by two commodity giants – Petrobras on petroleum and Vale on mining (especially iron ore, but also copper and nickel).

Exports overall (and not just commodities) account for approximately 11% of Brazil’s GDP – a smaller participation in GDP than even the U.S. Exports in general, and China specifically, are more important growth factors for countries like Chile and Peru where copper represents a larger portion of gross domestic product.

Overall, Latin America has come a long way to now becoming an interesting investment alternative for investors, local or global. While no market has proven to be a safe haven in periods of high stress, the region has proven its ability to differentiate itself when fundamentals are driving the market, outperforming global markets when the focus is on country and company-specific fundamentals. Are we entering another one of those phases? Only time (and Europe) will tell.

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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