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Broadgate: Weekly Briefing 1/2

1st February 2013

Greece – Greece’s finance minister believes that the worst is over for his country. “There is definitely a glimmer of hope; light at the end of the tunnel,” Yannis Stournaras said this week.

As reforms were rushed through and a massive austerity package passed late last year, Greece secured a significant amount of bailout money from its international creditors.

“The probability of Greece leaving the euro – Grexit – is now very small”, he told the BBC.

“We have managed to turn the economy around. From the markets, there’s much more optimism. Deposits are coming back to banks, the government is paying its arrears to the private sector and there is a change in how Europe sees us. So all of the leading indicators are positive. We are two-thirds of the way towards our target. So people can have hope.”

U.K. – London’s leading share index is on course to record its best January performance since 1998, despite fears the U.K. economy could fall into a triple-dip recession later this year.

The FTSE 100 has risen 5.7% so far this month, driven higher by upbeat U.S. earnings figures. The ‘great rotation’ out of bonds has been one of the main drivers behind the FTSE’s strong start to the year, despite ongoing economic weakness.

The last time the FTSE 100 reached such a level in January was 1998, when the leading index rose from 5,135 to 5,458, representing a 5.9% gain.

Germany – German unemployment unexpectedly declined in January, adding to signs that Europe’s largest economy is gathering pace.

The number of people out of work fell a seasonally adjusted 16,000 to 2.92 million, the Nuremberg-based Federal Labor Agency said.

The Bundesbank said last week the economy appears to be recovering from its fourth-quarter slump, when gross domestic product may have dropped as much as 0.5%. Confidence among entrepreneurs and investors rose more than economists estimated in January and a gauge of activity in service industries climbed to a 19-month high.

Russia – Russia’s economy probably grew last year at the weakest pace since a contraction in 2009 and is set to slow further, casting doubt on President Vladimir Putin’s drive for an investment-led acceleration in output.

Gross domestic product expanded 3.6% in 2012, down from 4.35% the previous two years, according to the median of 18 estimates in a Bloomberg survey. The Economy Ministry estimated growth at 3.5%. The Federal Statistics Service in Moscow will report the data this week.

The slowdown highlights the challenges facing the world’s largest energy exporter as oil prices are forecast to stagnate this year and Europe’s stumbling economy saps demand for Russian commodity exports. The government began an open campaign this month to push the central bank to lower rates, a step the regulator is resisting because of concerns the economy is already growing near its potential.

“We need a government that is more proactive on the reform side,” Peter Westin, chief strategist at Aton Capital in Moscow, said. “The central bank is doing a good job, but the government is definitely behind the curve when it comes to what needs to be done to stimulate the economy.”

Argentina – The tumble in Argentine stocks that sent valuations to an almost four-year low has spurred Morgan Stanley Investment Management and BlackRock to buy.

Timothy Drinkall, whose Morgan Stanley Frontier Emerging Markets Portfolio rose 26% in the past 12 months, said he bought Argentine shares last year after avoiding the country altogether earlier in 2012. By Dec. 31, the nation’s equities accounted for a larger percentage of holdings than were in the fund’s benchmark index.

The MSCI Argentina Index of five companies with operations in the South American country has rebounded 16% this year following a 39% fall in 2012 that was sparked by President Cristina Fernandez de Kirchner’s seizure of the nation’s largest oil company and restriction of imports and capital flows.

“Valuations are at extreme low levels,” said Drinkall, whose frontier fund beat 98% of peers tracked by Bloomberg during the past 12 months. “Sometimes for a market to adjust upwards, things just have to be less bad.”

Philippines – The Philippines has posted better-than-expected economic growth, boosted by the strong performance of the country’s services sector.

Its economy grew 6.6% in 2012, the statistical bureau said, beating the government’s target of 5 to 6% growth. The bureau added that a “substantial improvement” in manufacturing and construction sectors also aided growth.

Strong domestic demand has helped cushion the impact of a global slowdown on the Philippines’ economic growth.

“The pace of Philippine growth has consistently surprised on the upside in the past year, as the economy displays resilience against global headwinds and is driven primarily by domestic engines,” said Radhika Rao, an economist with Forecast Pte.

Spotlight on: The U.S. economy heading for recession, or a rebound?

The headline news from the U.S. this week was that gross domestic product had contracted in the fourth quarter. However, many economists and market commentators suggest that the headline does not necessarily tell the full story and that in fact, the U.S. economy is due more of a rebound than a recession.

The economy will bounce back in the current quarter after cuts to defence spending and reducing inventory growth adversely affected gains for consumers and businesses in the final three months of 2012, according to economists at JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley. Businesses probably will rebuild stockpiles while consumers and companies keep on spending.

“It would be a mistake to view this drop in GDP, driven by temporary corrections in defence spending and inventories, as a possible warning of recession,” Nigel Gault, chief U.S. economist for IHS Global Insight in Lexington, Massachusetts, said. “We expect GDP growth to rebound to around 2% in the first quarter.”

The expansion will stay on course thanks to a “mounting” housing recovery, a steadily improving job market and reviving demand for U.S. exports, said Mark Zandi, chief economist for Moody’s Analytics Inc. He sees GDP expanding 2.1% in 2013, after rising 2.2% last year.

The 0.1% decline in output in the final three months of the year was the economy’s worst performance since the second quarter of 2009, when the U.S. was still technically in a recession, according to figures from the Commerce Department in Washington.

After stripping out the inventory and defense data, the“tone of the report was positive,” said Peter Newland, an economist in New York for Barclays Plc. Consumer spending growth picked up to 2.2% from 1.6% in the third quarter, while business investment accelerated.

The steep drop in military outlays and restrained inventory building last quarter partly was a payback for the previous three months, when they both added to GDP. The slowdown in stockpiling also stemmed from supply-chain disruptions from superstorm Sandy.

Taking the two quarters together puts the “underlying” growth rate at about 1.5%, economists David Greenlaw and Ted Wieseman at Morgan Stanley in New York said in a note. That’s the pace they forecast for the first three months of 2013.

“Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” the Federal Reserve said at the conclusion of a two-day meeting in Washington this week. “Household spending and business fixed investment advanced, and the housing sector has shown further improvement.”

An improving job market and rising home prices should alleviate the effects of higher payroll taxes. Government figures to be released on Friday are projected to show that employers added 165,000 workers to payrolls in January after a gain of 155,000 in December, according to the median forecast of economists surveyed by Bloomberg.

The housing revival is also a plus for the economy. Homebuilding climbed 11.9% last year, the best performance since 1992.

“In the United States, we’re becoming increasingly optimistic,” Michael DeWalt, a spokesman for Peoria, Illinois-based Caterpillar Inc. , the world’s largest maker of construction and mining equipment, said. “We expect U.S. housing industry to help the economy in 2013.”

The S&P/Case-Shiller index of property values in 20 U.S. cities increased 5.5% in the year through November, the biggest gain since August 2006, according to data released on Jan. 29.

Furthermore, a strengthening world economy also should bolster American exporters.

China reported economic growth accelerated in the fourth quarter for the first time in two years, raising prospects that a regional lift will fuel demand for U.S. goods. Developing nations are projected to expand 5.5% in 2013, more than last year, while Europe stabilizes, according to projections from the World Bank.

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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