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Broadgate: Weekly Briefing 12/5

12 May 2014 

Global – The global economy will grow by less than expected this year as growth in developing economies slows, The Organisation for Economic Co-operation and Development predicts.

It expects 3.4% world growth this year, down from its 3.6% November forecast. In 2015, however, it still expects growth of 3.9%. It cut forecasts for China and the U.S.

“We are still not out of the woods yet,” said OECD Secretary General Angel Gurria.

However, in its report, it warned that “still-high unemployment in many countries and the subdued pace of growth in many emerging market economies relative to past norms” was likely to limit the momentum of the global recovery.

The OECD now forecasts 7.4% growth in China for this year, down from its 8.2% November forecast.

Meanwhile, the US economy is forecast to grow 2.6% this year against last November’s 2.9% estimate, because of a combination of bad weather in December and October’s government shutdown.

U.S. – In testimony in front of the U.S. Congress, Federal Reserve chair Janet Yellen said the US economy is on the mend but reaffirmed the central bank is prepared to act should it falter.

She said the Fed saw the US economy rebounding after a brutal winter that slowed growth. However, Ms Yellen added jobs growth has still not recovered, “A high degree of monetary accommodation remains warranted,” she said.

Indonesia – Indonesia has posted its slowest pace of economic growth since 2009, which may put pressure on the government, ahead of July’s presidential elections.

Southeast Asia’s biggest economy expanded by 5.2% in first three months of the year, which was below the median forecast for 5.6% growth. The weaker-than-expected data follows a series of aggressive interest rate hikes by the country’s central bank. Indonesia’s economy has also been impacted by slowing foreign investment.

“The general trend in Indonesia over the past couple of years has been one of slowing growth,” Daniel Martin from Capital Economics said.

China – Cities in China from Shanghai to Chongqing will grow the most among global metropolises in the next 16 years, according to a study by Oxford Economics Ltd.

By 2030, nine Chinese cities will join the world’s 50 biggest municipal economies, while eight in Europe will drop off the list, showed the paper released this week by the Oxford, England-based advisory firm. Of the 10 forecast to grow the most by gross domestic product, seven are in China, including Tianjin, Beijing, Guangzhou, Shenzhen and Suzhou.

China’s Premier Li Keqiang, who has advocated urbanization as a key to growth, is up against a shrinking pool of rural workers, rising local-government debt and mounting air pollution. Local governments have set up thousands of financing vehicles to fund projects from subways to sewage systems, which account for 80percent of state capital spending and 40percent of tax revenue, the World Bank estimates.

“China is already facing some challenges in its megacities, which include air quality, water quality and this is something that probably requires an even bigger effort to address if we want to make this process sustainable,” said Frederic Neumann, Hong Kong-based co-head of Asian economics research at HSBC Holdings Plc.

Spotlight on: Outlook on Japan from Chris Taylor, manager of the Neptune Japan Opportunities fund

We believe that Japan offers cheap, corporate earnings growth driven by good fundamentals.

Investors are underestimating this earnings growth as they have let down too many times by Japan over the last 30 years and just do not trust the market any more. A weakening Yen will act as a turbocharger to the nominal rate of earnings growth. For example, from the end of September 1982 to the 31 March 2014, the MSCI World Index has risen 26x, the S&P 500 Index is up 34x whilst the TOPIX has barely even managed 2.5x. Now, to be honest, these numbers reflect the brutal underlying fundamentals of those regions and countries over this period. However, if Japan is able to reverse this underperformance, it has got a very long way to go just to catch up with what the rest of the world has been up to, never mind exceed it.

Japanese equities have been lacklustre so far this year, do you think that the recovery is faltering?

Not as far as we can tell. We believe the market’s behaviour really reflects more a flow of funds whereby, to date, foreign investors who drove the market up over the tail end of 2012 and most of 2013 have divested. For example there have been ¥1.5 trillion aggregate sales of equity by foreign investors so far this year and this has not quite been matched by domestic buying. Domestic individuals have only bought about ¥1.35 trillion. That said, this is mostly ISA related and the thing is that the Japanese bureaucracy has got in the way of it here, because there are more than 5 million people that have applied for the ISA accounts and, so far, the bureaucrats have only approved somewhere between 1.5-2 million accounts. Although that sounds like bad news, ultimately it is good news because there is this money coming into the market over the balance of this year.

Has there been much impact from the consumption tax hikes at the beginning of April?

It has been mixed, because the additional VAT applies immediately and across the board, from a packet of crisps to an apartment. It has probably brought forward economic demand and may have robbed the second quarter of some, but in terms of more ordinary consumption, it has not changed. If you look at the March sales figures on a year-on-year basis, the department stores saw a 25percent jump in revenues, but they would particularly sell higher price items. Then if you looked at supermarkets, the increase was 9.4% and at convenience stores – where the Japanese do most of their day-to-day purchases – the year-on-year growth dropped to under 3%, so it just shows you that yes, it has happened, but it is very selective.

The trade deficit obviously hit a record high in March of ¥13.75 trillion. Were you expecting this and what are the consequences?

We were not that surprised as the whole point is that Japanese corporates are not exporters anymore, they are global multinationals. Therefore, on that basis, Yen weakness would not improve exports from Japan, simply because they are making and exporting from overseas what they used to make and export from Japan. It is exactly what you would expect with this transition from exporters to multinationals that Japanese exports are almost indifferent to Yen weakness.


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