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Broadgate: Weekly Briefing 14/10

14 October 2013

Global – The International Monetary Fund (IMF) has revised its forecast for global economic growth. It now expects global growth of 2.9% this year, a cut of 0.3% from July’s estimate. In 2014 it expects global growth of 3.6%, down 0.2%.

It cited weakness in emerging economies for the cut.

Despite the improvement in growth in advanced economies such as the UK and U.S., the IMF warned that a slower pace of expansion in emerging economies such as Brazil, China and India, was holding back global expansion.

It expects growth in Russia, China, India and Mexico to be slower than it forecast in July.

In part, it says this is due to expectations of a change in policy by the U.S. central bank, the Federal Reserve. Simply the expectation that the U.S. could trim back its efforts to stimulate the U.S. economy has already had an impact on interest rates in emerging economies, the IMF said.

The IMF expects the U.S. to drive global growth.

But it warns that the political standoff over raising the U.S. government’s borrowing limit, if it results in the U.S. defaulting on its debt payments, “could seriously damage the global economy”.

Japan – Japan’s aggressive policies aimed at reviving its economy may take 10 years to have a full impact, Akira Amari, Japan’s minister in charge of economic revitalisation, has said.

Known as ‘Abenomics’, these include easing monetary policy, boosting stimulus and reforming key sectors. Some of these steps have already been introduced and have boosted growth.

But he warned that whilst it is easy to implement monetary stimulus measures, scaling them back can be tricky.

He told the BBC that Japan’s central bank was likely to “learn from the experiences” of the U.S. Federal Reserve, which is widely expected to reduce its key stimulus programme in the coming months.

“The Fed Chairman, Ben Bernanke, is experimenting with it,” Mr Amari said. “That’s why one word from him can move stocks and currencies.”

U.S. – There were signs of tentative progress on the U.S. fiscal deadlock on Wednesday as President Obama indicated he would accept a short-term increase in the nation’s borrowing authority to avert a default.

According to Reuters, Obama’s press secretary, Jay Carney, told reporters the President would be willing to accept a short-term debt ceiling increase in order to get past the potential crisis date of 17 October when the government hits the $16.7trn borrowing limit.

Carney said while the White House would prefer to raise the ceiling longer term, at least for a year, he added “we have never stated and we are not saying today that the debt ceiling ought to be or can be any particular length of time.”

A short-term increase would give Republicans and Democrats some breathing room, but by itself would not address the underlying issues preventing an agreement.

Meanwhile, China has critcised the “pitiful” and self-inflicted political deadlock in America over raising the country’s borrowing limit, as premier Li Keqiang added his voice to concerns that the world’s biggest economy could default on its debt.

Mr Li told John Kerry, U.S. secretary of state, that China was paying “great attention” to the issue of raising America’s $16.7 trillion debt ceiling.

China is the largest foreign owner of U.S. debt, holding more than $1.277 trillion in Treasury bills.

Emerging Markets – The capital outflows endured by the world’s developing economies are set to continue, as should interest rate hikes unless they can substantially bolster their fundamentals says Invesco chief economist John Greenwood.

Since the U.S. Federal Reserve first signalled an end to its massive $85bn per month bond buying programme, in May, emerging markets have suffered a significant market sell-offs and substantial capital outflows.

The knock on impact on fund performance has also been significant, where the average IMA Global Emerging Markets portfolio has shed 5% in the past six months alone while in comparison, the typical Global equity fund has risen by more than 3%.

Greenwood says: “The withdrawal of funds from emerging markets is likely to continue, as should countervailing policy measures such as interest rate hikes and currency interventions by EM authorities.”

Among the biggest emerging markets, including China, India and Brazil, growth has pulled back and the policy-makers are struggling to ensure smooth transitions to domestic-led growth models.

Commodities – Gold will extend losses into 2014 amid expectations the Federal Reserve will pare stimulus as the U.S. recovers, according to Morgan Stanley, adding to bearish calls from Goldman Sachs and Credit Suisse.

“We recommend staying away from gold at this point in the cycle,” Melbourne-based analyst Joel Crane said. Bullion will average $1,313 an ounce in 2014, down from the $1,420 forecast for this year, Morgan Stanley said in its quarterly metals report published this week.

Bullion is heading for the sixth weekly loss in seven and investment holdings are shrinking even as U.S. lawmakers wrangle over the debt ceiling and budget, seeking to avert a default and end a government shutdown. Gold is a “slam dunk” sell for next year because the U.S. will extend the recovery after lawmakers resolve the stalemate, Jeffrey Currie, Goldman’s head of commodities research, said this week.

Spotlight on: An alternative take on the U.S. debt issue

Multi-managers believe the political stalemate in the U.S. could be a prime opportunity to buy more risk assets, although there is concern about the looming debt ceiling.

Last week, for the first time in 17 years, the U.S. government partially closed down after the Republicans refused to agree spending plans that included President Obama’s affordable health care scheme, despite the reforms already being signed into law. If Congress does not agree its budget soon, it will run out of money on 17 October unless its debt ceiling is raised.

JP Morgan Asset Management Fusion fund range lead manager Tony Lanning notes suggestions which estimate that for each week the government is closed, 0.12% of economic quarterly annualised growth is lost.

Lanning says: “The debt ceiling and the impact of the shutdown could provide a meaningful opportunity to add more risk to our portfolios. So far markets have taken these events broadly in their stride.”

Fidelity Multi Asset Defensive fund manager Trevor Greetham remains bullish and believes when the smoke clears, investors will see an “equity-friendly backdrop.” He adds: “Any stock market weakness should present a buying opportunity.”

However Lanning views markets as being very complacent in regards to the debt ceiling. He says: “It seems to imply that investors have concluded that the ceiling will have to be raised, which it has been many times before.

”But were it not, several ratings agencies have said they will determine the U.S. is in default if it misses even one interest payment. The market has not priced this in.

Hargreaves Lansdown senior investment manager Adrian Lowcock says: “This does not look like a selling trigger. Investors should focus on their long-term goals and use any short term weakness as opportunities to invest.”

Meanwhile, it is the view of Fitch Ratings that global bonds, global equities and multi-asset funds will perform well in 2014 while other asset classes may suffer.

The ratings agency indicates improving investor confidence and an increasingly solid macro-economic background will support growth, but changing investor demand and intense market competition will cause uneven growth.

While global funds are set to perform well, domestic equities and government bonds could struggle due to changing investor demand. Fitch Ratings Fund and Asset Manager Rating Group director Alastair Sewell says: “AUM in traditional asset classes such as domestic equities or government bonds are threatened by changing investor allocations.

”In particular, managers that have large AUM in government bonds or aggregate portfolios would suffer from rising interest rates.” Fitch also points to the fact that half of European managers saw no inflows in the first three years to end of July 2013, while the top 10 firms received 50% inflows to bonds and mixed asset funds and 75% of inflows into equity funds.

BWB

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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