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Broadgate: Weekly Briefing 10/3

10 March 2014

China – China has set its economic growth target for the year at 7.5%, as it looks to continue its efforts to stabilise the economy. The country also set its inflation goal at 3.5%, aimed at keeping prices in check.

After years of impressive growth rates, China has seen its rate of expansion slide after a slowdown domestically and in key markets.

In 2013, the country grew at a pace of 7.7%, about the same as in 2012.

Japan – The Nikkei index climbed to a five-week high on Thursday as a weak yen, and positive pensions news, provided a boost for shares. The index closed up 1.59% at 15,134, the highest close since 29 January, while the Topix index was up 1.3% to 1,228.

A weak yen has helped power certain sectors, including exporters, and this continued overnight.

However, the region also reacted well to news that the Government Investment Pension Fund in Japan has announced that pension funds need not stick to a “domestic bond-centric” portfolio as the country moves out of deflation.

The Abe government is pushing pension funds to invest less in bonds and more in stocks to generate higher returns for the country’s ageing population.

Spain – Spain’s government is set to approve on Friday new rules that will make it easier for debt-laden companies to refinance loans and will also free up capital at banks that have set aside provisions against corporate bankruptcies.

The new rules will allow indebted but viable companies more flexibility to extend maturities on bank loans, negotiate haircuts and arrange debt-for-equity swaps with creditors.

U.S. – Fourth quarter United States GDP growth has been revised down to an annualised 2%. Most of the drop was due to lower than estimated durables consumption, especially cars, fewer exports and lesser inventories.

Durables consumption grew 2.5% in the final quarter, rather than the forecast 5.9%.

Meanwhile, business investment was revised much higher. It increased 7.3% over the quarter; the first estimate put it at just 3.8%.

That offset an even larger fall in residential investment which plummeted 8.7% as existing house sales dropped off.

Asia – Singapore is poised to surpass Tokyo as the Asian city with the most ultra-high-net-worth individuals within a decade, as its stature as a financial center increases with the region’s growth.

Singapore will have 4,878 people with $30mn or more in assets excluding their principal residence by 2023, a 55 percent gain from last year, and trailing only London globally, according to a report from Knight Frank LLP yesterday. The number of these millionaires in Tokyo will climb 8% to 3,818, ranking the city fourth worldwide after New York.

“The main battleground is Asia, where a handful of locations are slugging it out in the hope of establishing a clear lead as the region’s alpha urban hub,” Nicholas Holt, Knight Frank’s Asia-Pacific head of research, said in a statement.

Trends – Investors increased their risk appetite in 2013 within the European funds industry by pulling $129bn from money market funds over the course of the year, according to Lipper.

Over the same time span, equity funds and mixed asset funds saw $127bn and $117bn in net inflows respectively.

With the European fund industry enjoying net sales of $253bn into mutual funds throughout the year, bond funds were the most popular with 133bn in inflows.

The most successful fund house in terms of sales last year, Pimco, has slipped from the top spot to outside the top 25 for 2013.

In turn, BlackRock took the top spot with $31bn of sales with JP Morgan following with $29bn of sales.

Spotlight on: The growth of the forgotten Eurozone peripheries

Countries on the eurozone periphery such as Greece and Spain have endured years of weakness but there have been positive signs of strength in these economies recently.

Greece has battled recession for six years, although hopes are increasing that the country will return to growth in 2014. The latest official data shows the Greek economy contracted by an annualised 2.6% in fourth quarter of 2013, down from a 3% drop in the previous three-month period.

Meanwhile, the Spanish economy grew by 0.3% in the final three months of 2013, up from 0.1% in the prior quarter and posting the biggest rise since the start of 2008.

Henderson European Selected Opportunities fund manager John Bennett says: “As far as Europe goes our own offered-up surprise for the year ahead is our contention that long suffering Spain and Greece will rival the UK in vying for the Old Continent’s fastest growers.

“Now that would require some rewritten narratives.”

Argonaut chief investment officer Barry Norris argues that Greece is likely to emerge from recession soon and highlights a number of positives for the economy.

Greece’s current and fiscal accounts are now in surplus while its government debt has been restructured. Meanwhile, foreign direct investment in the country has started to pick up as investors approach the country with fresh eyes.

Norris, who says a recovery in the country would be Europe’s most important economic and political development in 2014, added Greek banks to his Argonaut European Alpha and Argonaut European Absolute Return funds last year.

“The best time to invest in a country is often when its economy is emerging from recession and all of the bad news is in the rearview mirror,” the manager says.

“We have highlighted the European banking sector as the most obvious stock market beneficiary on many occasions, and it should come as no surprise that the Greek banks are the most geared equity investments to the ‘Grecovery’.”

Threadneedle European equities manager Dan Ison says Spain is an example of “the poster children of the eurozone reforms” as it can now finance itself in open market, has become more competitive and is benefitting from falling unemployment.

“Generally speaking, those economies that have enacted the most dramatic economic reforms have delivered better equity market performance. Despite significant external pessimism about Europe’s ability for self-help, it has begun to work,” he says.

“Economies which instituted the bolder and tougher reforms are now looking towards a significant pick-up in growth compared to 2013. We expect this top-line growth to drive improved earnings in 2014, helping them to catch up with other developed markets.”

JP Morgan Asset Management chief market strategist for Europe and UK Stephanie Flanders agrees that “good news” can be seen in the crisis-hit economies of Greece, Spain and Ireland.

But she adds that it remains “early days” for the eurozone recovery as business lending continues to fall while unemployment is stubbornly high.

“I’m not expecting to see a strong bounce-back in growth in the eurozone in 2014,” Flanders says.

“In fact, I expect that the European Central Bank will have to take more steps to confront the risk of deflation. But the news from the Continent is a lot more encouraging than it was.”

Eurozone-crisis

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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