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Broadgate: Weekly Briefing 3/2

3 February 2012

Global – Strategists at some of the world’s biggest banks are retracting on their bearish (‘downbeat’) forecasts, following the best start to a year for global stocks since 1994 and gains of more than 7percent in emerging-market currencies.

Just two weeks after saying that investors should “remain cautious,” Larry Hatheway, the chief economist at UBS, raised his recommendations on global shares and high-yield bonds in a note to customers entitled, “Wrong, but not too late.”, and Benoit Anne, the global head of emerging-markets strategy at Societe Generale, said their estimates for developing nations were proven wrong.

The MSCI All-Country World Index climbed 5.7percent in January, surprising strategists at Bank of America, Goldman Sachs and Barclays who had forecast first-half losses because of Europe’s debt crisis. JPMorgan Chase and Citigroup, which predicted the rally in stocks, say it will continue as the U.S. housing market rebounds and China eases lending restrictions to bolster economic growth.

“In hindsight, everybody was so negative at the end of last year, there was nowhere for the market to go but up” said Mary Ann Bartels, the New York-based head of technical and market analysis at Bank of America.

Global – The World Trade Organisation’s (WTO) appeals body has upheld a ruling that China restricted exports of certain raw materials to protect its domestic manufacturers.

China had appealed a WTO ruling in July that it had broke global trade rules.

The U.S., Europe, and Mexico argued that China’s export block on such things as magnesium and bauxite drove up prices. China had argued that its export limits on nine raw materials were needed to protect the environment.

In a statement, the appeals body said China must now “bring its export duty and export quota measures into conformity with its WTO obligations”.

Europe – Unemployment in the eurozone hit a record high at the end of last year, the Eurostat agency has said.

The jobless rate in the 17 countries that use the single currency was 10.4percent in December, unchanged from November’s figure which was revised up from 10.3percent.

Some 16.5 million people were out of work in the eurozone in December, up 751,000 on the year before.

The highest unemployment rate remains in Spain (22.9percent), while the lowest is in Austria (4.1percent).

Greece – Greece has rejected German proposals for the E.U. to hold power over its budget.

Culture Minister Pavlos Yeroulanos said that it would be “impossible” for Greece to cede control of its tax and spending powers. There are concerns that the measures Greece has taken to cut its budget deficit have not gone far enough.

Meanwhile, Greece and its private creditors are close to a deal to cut the country’s debt levels. Charles Dallara and Jean Lemierre, representing the creditors, said on Saturday that they were “close to the finalisation” of a deal that would see banks and investors write off approximately 50percent of the money they are owed.

Japan – Japan’s industrial output rose more than expected in December as manufacturers recovered from the aftermath of the floods in Thailand.

Factory output rose 4percent from the previous month, the Ministry of Economy, Trade and Industry said, compared with a 2.7percent decline in November.

The rebound was led by a recovery in car and electronics manufacturing.

However, Japan’s manufacturing has yet to see full recovery. Compared to a year earlier, industrial output fell 4.1percent.

Brazil – Brazil’s real rallied to the strongest level in almost three months on Wednesday as signs of increased manufacturing output worldwide spurred optimism about global growth and fuelled demand for higher-yielding assets.

Manufacturing in China, Brazil’s largest trading partner, rose last month as the world’s second-biggest economy withstood weaker exports driven by the European debt crisis. A gauge of manufacturing in the euro area beat estimates in January while a report on Thursday showed U.S. factory output grew at the fastest pace in seven months. The data fuelled bets of increased demand for Brazilian exports such as iron ore and sugar, said Felipe Brandao, emerging-markets strategist at Icap do Brasil.

“The market is being influenced by the positive impact of international equities and a more optimistic climate because of this data in Europe and China,” Brandao said “This data is driving stocks this morning and benefiting risk assets.”

Commodities – Gold extended gains on Thursday, rising to its highest level in nearly two months, as the euro firmed on upbeat global manufacturing data and expectations that a Greek debt deal to avoid a default was close at hand.

Investors now await the release of U.S. weekly jobless claims data to gauge the health of the world’s largest economy, after higher January factory activity was reported for China, the U.S. and Germany.

Gold added USD4.74 an ounce to USD1,748.44 an ounce, having earlier risen to a high of USD1,751.30 an ounce, its strongest since December 8. Gold remains below a lifetime high around USD1,920 an ounce achieved last September.

Spotlight on: the case for India

Its poor absolute market performance and equally poor relative economic performance has dampened enthusiasm for India. However, many believe that this should lead to investment opportunities opening up, not closing down.

A 20percent loss (in addition to a weak rupee) for Indian equities in 2011 represents their worst performance in decades. It was also branded the most disappointing BRIC nation by Goldman Sachs chairman Jim O’Neill, highlighting a poor record in productivity, foreign direct investment and reform. Rather than writing off the world’s most populous country, he says serious leadership is required to ensure India achieves China-style development.

On top of this, India’s growth estimates have declined in recent months, largely due to its high fiscal deficit, weak rupee and ongoing inflation fears.

But advocates of the region suggest that the prospects for the market in 2012 and beyond are far healthier than these headline-grabbing numbers would suggest.

What were previously full valuations have recently reversed and many managers are seeing better opportunities now than for some time. There are also positives on the macroeconomic front with tightening interest rates, predicted to be cut further, and monetary policy. Inflation too is expected to fall, to around 6.5percent by the end of Q1.

Some fund managers are pinning hopes on the positives arising from weak equity performance with Barings, for example, recently launching an India equity fund citing “an opportunity for nimble investors, with valuations as low as they have been since late 2008”.

The long-term opportunity and biggest potential for India, as is being witnessed in China, comes from its demographics, particularly its burgeoning young workforce, in a decade, its population will be greater than China’s.

While not ignoring the risks that remain with an investment in India (its bureaucracy, a high fiscal deficit, weak rupee, ongoing inflation fears etc) many feel that the negative numbers that were produced in 2011 will not automatically follow through to 2012 and beyond. It is the view of many long-term strategists that if investors can be both nimble and long-term minded, India may well be worth considering.

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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