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Broadgate: Weekly Briefing 2/5

2 May 2013

U.S. – Big moves in the technology and materials sectors helped the S&P 500 close at its highest ever level on Monday.

The index rose 0.7% to 1,593.61, eclipsing its earlier record close set on 11 April this year. The benchmark has now risen by more than 12% in the last six months.

Apple was among the big movers amid rumours its much-anticipated iPhone 5S could hit shelves as early as this summer, months ahead of a forecast autumn release.

U.S. stocks had slipped towards the end of last week following data that showed the U.S. economy had grown at a weaker than expected pace.

China – China has overtaken the U.S. as the world’s biggest market for personal computers, according to a market data report.

Research by the consultants IHS said PC shipments to the country rose to 69 million units in 2012.

The U.S. was the largest market up until 2011. Last year, it had orders for 66 million units. China is also the world’s biggest internet market, with more than 500 million users.

Laptops are the fastest rising sector in developed markets and have overtaken PCs, but in China the sale of desktops and laptops is evenly split.

The Chinese government is investing heavily in computer infrastructure, and plans to spend around 40 trillion yuan ($6.4tn) building rural infrastructure in the next 10 years.

Japan – Japan’s Topix Index rose on Tuesday, capping its best month in 14 years, as brokerages led the advance after Nomura’s quarterly profit more-than-tripled to the highest in seven years.

“We can expect some profit growth in domestic shares tied to government stimulus measures, if not as much as in exporters,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which manages about 10.2 trillion yen ($104 billion) in assets. “We may see a correction in Japanese stocks any time, and I don’t think the stocks are cheap in terms of valuation.”

Asia – The International Monetary Fund (IMF) has warned strong capital inflows into Asia have increased the risks from rapid credit growth and rising asset prices.

In its annual report on Asia, the IMF was optimistic about the region’s economy, which it expects to lead a “global three-speed recovery” with growth of 5.75% this year, according to the Financial Times.

However, the IMF urged policymakers to “stand ready to respond early and decisively to any prospective risks of overheating”, amid widening financial imbalances in certain economies.

The IMF said pressures caused by capital inflows could build if so-called ‘Abenomics’ has the desired impact on the Japanese economy.

Europe – Unemployment in the eurozone has surged to a fresh record high, while inflation has fallen to a three-year low, boosting expectations that the European Central Bank will cut interest rates.

Unemployment in the 17 countries using the euro hit 12.1% in March, up from February’s 12%, according to official figures from Eurostat.

A Reuters survey last week found that a majority of economists expect the European Central Bank (ECB) to cut the bank’s main refinancing rate by 25 basis points to a record low of 0.5%.

If the ECB was to cut rates, it would mark its first reduction since July last year.

Emerging Markets – Emerging stocks rallied to a one-month high this week, led by technology shares, as investors speculated central bank stimulus will boost demand for riskier assets. Russian stocks rose for the first time in four days on Monday.

“Monetary policies will remain on easing mode,” Vattana Vongseenin, chief executive officer at Phillip Asset Management Co., which oversees about $24 million of assets, said in Bangkok. “Low interest rates and high liquidity will continue to make equity investments attractive.”

Eight out of 10 groups in the MSCI Emerging Markets Index rose as a measure of technology stocks added 1.9%. The broad gauge has lost 2% this year, compared with a 9.7% increase in the MSCI World Index of developed-country stocks.

Commodities – Surging demand for gold from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years as the biggest price slump in three decades lures consumers, according to MKS (Switzerland) SA.

Premiums paid by wholesalers and bulk buyers in Dubai to secure a 1 kilogram bar of bullion are being quoted between $6 an ounce and $9 an ounce over the London cash price, said Frederic Panizzutti, global head of marketing and sales at the Swiss-based bullion refiner.

“Physical demand has been tremendous in a way I haven’t seen for a number of years,” said Jeffrey Rhodes, global head of precious metals at INTL FCStone Inc., who’s worked in the industry for more than three decades. “The price collapse prompted a physical gold rush and the evidence of the extent of that is the prolonged period of high premiums that we’ve seen.

Spotlight on: Schroders urge calm over China

Schroders head of global and international equities Virginie Maisonneuve remains focused on the long term outlook for China, urging investors not to read too much into data taken from a single quarter.

Recent economic data from China showed GDP grew by 7.7% in the first quarter, just short of the expected 8%, sparking a panic across markets last week.

However Maisonneuve argues alternatively that, “markets should look at China’s longer-term picture in light of the new government, and not overly focus on one quarter’s data.”

She describes the recent slowing in China as a “sticking point” also seen in weaker than expected data to come from America, which does not take away from the fact both economies are “heading in the right direction.”

She adds: “While the numbers show a moderate slowdown, we are not concerned. One-off factors have had a significant impact, such as weakness in food and catering as the anti-corruption campaign curtails business functions.”

Maisonneuve goes further to say that China’s economic figures also show more positive signs. She says: “Digging into the detail reveals positives such as the fourth consecutive gain in the services sector – this is encouraging given China’s need to re-balance its economy.”

The new leadership in China must be also allowed time for its plans to take effect, says Maisonneuve. She also notes that it is currently in the process of reviewing areas of reforms extending across state-owned-enterprises, fiscal policy and social security.

She adds: “As the country adjusts to its size it must focus on quality growth to avoid the pitfalls of over- investment and misallocation of capital. The upcoming structural reforms are therefore key.”

Although Maisonneuve does not expect growth in China to return to double digits, it should pick up over the next few quarters, as policy measures “ramp up” and boost infrastructure spending.

Further growth should also be aided by the property sector and investment in the manufacturing sector, following 18% profit growth.

Maisonneuve stresses that in the medium term, “the key to understanding China’s growth potential is to assess whether investment will take place in areas where it is needed and efficient.

“In this environment, and provided the U.S. and Japan continue to provide support, any weakness in the global equity markets should be used to accumulate positions, especially for funds which have benefitted in the past from a healthy allocation to bonds.”

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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