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Broadgate: Weekly Briefing 14/01

14 January 2013

Global – European shares consolidated close to two year highs on Friday after Europe’s Central Bank expressed cautious optimism on the euro zone’s prospects.

Strong Chinese trade data on Thursday also helped lift economists’ expectations of a steady global recovery this year, pushing the MSCI index of world shares to a new eight-month high.

“People are starting to come back to the stock market because they don’t have any other option,” said Edward Page Croft, managing director at Stockopedia.

“Equities are very overdue a rest but that shouldn’t make people throw in the towel in my opinion as they will continue to be supported by central banks’ very accommodative policies.”

Japan – The Japanese government has approved a fresh 10.3 trillion yen ($116bn) stimulus package in an attempt to spur a revival in its economy.

The package will include infrastructure spending, as well as incentives for businesses to boost investment. Tokyo estimates that the stimulus will boost Japan’s economy by 2% and create 600,000 jobs.

Japan’s economy has suffered a dip in exports amid slowing global demand and subdued domestic consumption.

The world’s third-largest economy is currently in a recession, having contracted for two quarters in a row.

China – China has reported better-than-expected trade data, adding to optimism that growth in the world’s second-largest economy may be rebounding.

Exports, a key driver of expansion, rose 14.1% in December from a year earlier. Most analysts had forecast a figure closer to 4%. Imports also rose, climbing 6% and indicating stronger domestic demand.

There have been worries about the state of China’s economy after growth fell to a three-year low.,

“The export data especially is very good news as it shows that external demand for Chinese products is picking up,” said Dariusz Kowalczyk, a senior economist at Credit Agricole-CIB in Hong Kong.

Emerging Markets – Emerging-market equity funds recorded their biggest-ever weekly inflows as the U.S. budget deal and China’s economic rebound fuelled investor demand for riskier assets.

The funds attracted a net $7.4bn in the week ended Jan. 9 and assets under management reached an all-time high of $781bn, according to Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley in Hong Kong. Developing-nation debt funds lured their second-largest inflows of $2bn, Garner said, citing data compiled by research firm EPFR Global.

Mutual fund purchases have helped spur a 22% rebound in the benchmark MSCI Emerging Markets Index from last year’s low on June 4. While big inflows tend to foreshadow short-term market declines, Garner said the combination of global monetary stimulus, accelerating economic growth and an improving outlook for earnings will support share prices. His year-end target for the MSCI index is 14% higher than Thursday’s close.

Greece – The latest unemployment rate for Greece has risen to 26.8%, the highest figure recorded in the European Union.

The official Greek data for October sees Greece overtake Spain as the country with the highest unemployment rate in Europe.

So far, the European Central Bank, International Monetary Fund, and the European Commission have pledged a total of 240bn euros ($315bn) in rescue loans, of which Greece has received more than two thirds.

It is thought that the unemployment rate will move higher still, following the introduction of further austerity measures in 2013.

Commodities – U.S. oil production will jump by a quarter by 2014 to its highest level in 26 years, figures suggest. This is mainly because of the discovery of vast reserves of shale oil.

The Energy Information Administration (EIA) in the U.S. also forecast average global oil prices would fall from $112 a barrel in 2012 to $99 in 2014.

It said U.S. oil imports would fall by a quarter between 2012 and 2014, because of rising domestic production and the discovery of shale gas.

Many have hailed shale gas as the saviour of the U.S. energy market. In fact, the International Energy Agency (IEA) has said it expects the U.S. to overtake Russia as the world’s biggest gas producer by 2015 and to become “all but self-sufficient” in its energy needs by about 2035.

Spotlight on: Seeking out BRIC market growth opportunities

The factors underpinning the rapid growth of the so-called BRIC nations may weaken further in the coming years, recent research by Capital Economics suggests.

In its Emerging Markets Economic Outlook report, the macroeconomic forecasting consultancy highlighted a number of medium-term challenges facing Brazil, Russia, India and China.

The near-term outlook for emerging markets as a whole has improved in recent months, the group said. Capital Economics’ emerging markets GDP tracker suggest that growth bottomed out in the fourth quarter of 2012 and most emerging nations started 2013 with positive momentum.

However, the consultancy added that growth in the BRICs is likely to slow over the coming five years, with part of this slowdown being the result of permanent rather than temporary factors.

China’s recovery is expected to peter out later in 2013 and the country’s new leadership has yet to announce any concrete steps to move the world’s second largest economy away from its reliance on investment spending and towards domestic demand, the report noted.

In India, policymakers also face the challenge of pushing through reforms that will allow the economy to maintain its strong growth rates of the past. “The package of reforms announced in late 2012 has raised hopes of a new approach, but these look likely to founder in the face of political opposition,” Capital Economics said.

The consultancy argued that Brazil is approaching the limits of its consumption-led growth model, adding: “Growth over the next decade will need to be driven more by investment, but this will require difficult structural reforms.”

Capital Economics also said the above risk applies to Russia. Meanwhile, resources-rich Brazil and Russia may both find that commodity prices fail to prop up their spending as they have done over the past ten years.

However, the forecaster said some emerging markets outside of the main names could expect to see healthy growth rates in the years ahead.

“While the BRICs look set to slow, the outlook for other emerging markets is improving,” the report concluded.

“In Latin America, we think Mexico will outperform Brazil over the next five years. In Asia, we are bullish on the Philippines and Indonesia. Finally, in Africa, while South Africa is likely to struggle, we are upbeat on the prospects for Nigeria, Kenya and Ghana.”

Of course, identifying the markets that are predicted to deliver outperformance for BRIC markets in the future is the role of the fund manager. In turn, however, identifying the fund manager that is best positioned and able to act upon their convictions is the role of the end-client’s advisor.

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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