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Broadgate: Weekly Briefing 10/8

10 August 2012

Emerging Markets – Emerging-market stocks rose to a 13-week high on Thursday as China’s inflation cooled for a fourth consecutive month in July, providing policy makers with more room to stimulate the world’s second-largest economy.

The MSCI Emerging Markets Index climbed 0.8% on Thursday, gaining for a fifth day and set for its strongest close since May 10.

“China’s inflation numbers triggered speculation that there will be more leeway for action and that market-friendly rhetoric by policy makers could continue,” said Lee Jin Woo, a fund manager at Seoul-based KTB Asset Management Co., which oversees $5.8bn in assets. “Interest in emerging-market assets will continue for a while following their under-performance.” he added.

China – China’s inflation dipped to a 30-month low in July, giving policymakers a bigger cushion to boost stimulus measures to spur economic growth.

Consumer prices rose by 1.8% in July, from a year earlier. That was down from a 2.2% growth rate in June and a 3% rise in May. China has been looking to spur domestic consumption amid a slowing global demand for its exports.

Analysts said the slowdown in the growth of consumer prices may see policymakers introduce further measures to boost growth.

“This number gives more room for policy easing,” said Zhang Zhiwei, chief China economist at Nomura in Hong Kong. He added that the rate of inflation was “likely be below the official 4% percent target for the year, so the policy focus for the government can stay clearly on growth”.

France – France’s economy will fall back into recession this quarter, the country’s central bank has predicted.

The Bank of France estimates that the economy will contract by 0.1% in July to September. It has already predicted a fall of the same level for April to June. France posted zero growth in the first quarter of the year.

France’s economy has been hit by the eurozone debt crisis, which has weakened demand for its exports.

U.K. – The Bank of England has cut its forecast for economic growth this year to almost zero and has predicted inflation will be below target in the medium term.

In its quarterly inflation report, released on Wednesday, the Bank said it expects to see no growth in the economy for 2012, down from the 0.8% predicted in the May report.

At a press conference on Wednesday, Bank governor Mervyn King described “storm clouds” rolling over the U.K. from the euro area.

U.S. – The U.S. trade deficit narrowed more than forecast in June as the biggest drop in crude oil prices in more than three years helped cut the nation’s import bill.

The gap shrank 11% to $42.9bn, the smallest since December 2010, from $48bn in May, Commerce Department figures showed.

“For all the talk about the troubles in Europe and China slowing, what’s going on around the world is not make or break for the U.S. recovery,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “This report is a positive in the sense that growth in the first half of the year was a little better than reported.”

Commodities – Stockpiles of the biggest crops will decline for a third year as drought parches fields across three continents, raising food-import costs already forecast by the United Nations to reach a near-record $1.24tn.

The speed of the destruction drove corn prices to a record high on Thursday and soybean prices to an all-time high last month, while wheat went to a four-year high. For investors, crops are the best-performing commodities this year, and Goldman Sachs Group Inc., Macquarie Group Ltd. and Credit Suisse Group AG say the trend will continue.

Commodities – Gold edged up on Thursday after China’s economic data added to hopes for more monetary easing there, though most investors remained on the sidelines, looking for clear signals on possible economic stimulus in Europe and the U.S.

Trading interest has been sluggish in the past few days as market participants wait for the European Central Bank to announce details of a bond-buying programme, while the U.S. Federal Reserve gave few hints on further easing at its last policy meeting in early August.

Spotlight on: Keeping faith in China

The much-publicised slowdown in the Chinese economy should not cause investors to “push the panic button” just yet, emerging markets fund manager Mark Mobius argues.

In his latest blog post, Mobius says the slowing expansion should be expected in an economy that is undertaking significant changes to move towards a more sustainable economic model.

“Slowing growth is a natural part of the evolution of an emerging economy, particularly one as large as China, the second-largest economy in the world,” he says.

“China is also undergoing structural changes that often come with the side-effect of a few growing pains.”

Mobius, manager of the GBP1.9bn Templeton Emerging Markets investment trust, notes that China is building a more consumption-focused economic model and is gradually loosening controls on its economy, which will pay off in the long term.

The manager points out that the Chinese authorities have a number of policy levers to help support the economy. These include the ability to lower interest rates further, ease limits on bank lending and channel investment in infrastructure projects.

In addition, Mobius sees the structural changes as creating investment opportunities, even as headline growth rates slow.

“Consumers and commodities are particular areas of interest, because we believe a transition to a more consumption-based economy should help support these sectors,” he writes.

“I have every reason to believe this transition should be successful and still believe China could continue powering ahead.”

This appraisal echoes the support that risk rating agency Fitch announced recently, saying “Official figures indicate that the Chinese economy is likely to avoid a hard landing in the short term. Fitch maintains its 8%projection for Chinese growth in 2012, implying annualised growth of 8% in the second half of the year.”

The group cites supportive monetary policy, better-than-expected banking lending rates in June, export growth out-pacing imports and a recent rise in fixed asset investment as positives for the country.

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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