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Broadgate: Weekly Briefing 14/6

14 June 2013

U.S. – Rating agency Standard and Poor’s has raised its credit outlook for the U.S. economy from negative to stable.

In August 2011, S&P downgraded the U.S. rating one notch from AAA to AA+, but now believes further downgrades are less likely as the economy continues to recover.

The news saw the U.S. dollar strengthen 1.3% against the Japanese yen, and 0.2% against the euro, but S&P is still concerned about the high levels of U.S. debt.

The U.S. Treasury Department, which had said that S&P’s calculations in making its initial downgrade were flawed, welcomed the latest action. “We’re pleased that they are recognising the progress in the U.S. economy and fiscal results,” said Mary Miller, the Treasury’s under secretary for domestic finance.

Japan – Japan has revised its first-quarter economic growth up to 1%, as part of government data released this week by the Cabinet Office.

Revisions to official data show the Japanese economy grew at an annualised rate of 4.1% throughout the first quarter, up from an original estimate of 3.5%.

Japan’s original estimate of 3.5% already marked the fastest growth rate recorded by any G7 economy for the period.

Strong household spending and an uptick in private residential investment are said to have been the biggest contributors to the expansion in the Japanese economy throughout the first quarter of 2013.

The quarter-on-quarter growth rate was also the highest since the 1.2% witnessed during the first three months of 2012.

China – The World Bank has cut its growth forecast for China amid warnings of slower but more stable global growth over the coming months.

The bank now expects China to grow 7.7% in 2013, down from its earlier projection of 8.4%, it also cut the forecast for global economic growth to 2.2% from 2.4%.

The bank said growth in China, the world’s second-largest economy, had slowed as policymakers look to rebalance its growth model.

Emerging Markets – Emerging markets have lagged over the opening half of 2013, leading some investors to re-assess their exposure to these regions.

While the MSCI World is up 18.3% since the start of the year, the MSCI Emerging Markets Index gained just 2.2%. Despite this, BlackRock chief investment strategist Russ Koesterich says investors should consider emerging market options such minimum volatility funds, single-country or regional portfolios and venturing into frontier markets.

Koesterich says: “In light of the recent poor performance, many investors are asking me whether they should be abandoning emerging markets in favor of bets closer to home. My answer: clearly is ‘no’”.

Frontier Markets – The world’s least-developed markets are proving the most resilient to the three-week selloff that has erased $1.9tn of global equity value.

While the MSCI All-Country World Index of shares in advanced and emerging nations has lost 4.2% since May 22 amid speculation the Federal Reserve will pare monetary stimulus, the MSCI Frontier Markets Index returned 0.5%. Thirteen of the 15 top-performing stock gauges are in frontier countries, where the mean market value of $49bn compares with almost $19.5tn in the U.S.

Greece – Greece became the first developed nation to be cut to ‘emerging-market’ status by MSCI after the local stock index plunged 83% since 2007.

Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, said MSCI, whose equity indexes are tracked by investors worldwide. Qatar and the United Arab Emirates were raised to emerging markets, while Morocco was cut to a ‘frontier market’.

“It is unclear yet what the weight of the MSCI Greece will be on emerging markets, but in any case it will be significantly higher than that it has on developed markets,” Constantinos Zouzoulas, an analyst at Axia Ventures Group, a brokerage in Athens, said. “This could be positive news for the Greek market as it could attract more interest, although there could be pressure in the short term.”

Commodities – Hedge fund managers increased bets on a gold rally to the highest level in seven weeks this week, prior to a report showing that U.S. unemployment had dropped spurred the biggest reversal in prices since April.

U.S. payrolls rose 175,000 in May, signalling that companies are optimistic about the outlook for demand, the government said.

“We saw some short-term bullish sentiment build up, then the jobs data dashed all hopes of gold rising,” said Walter Hellwig, who helps manage $17bn of assets at BB&T Wealth Management in Birmingham, Alabama. “Any good news for the economy is not so good for gold. The debate about when the Fed will taper or end stimulus continues to pressure.”

Trends – ‘Financials’ were the chief driver of global expansion during May, with firms posting the fastest growth in over a year.

The robust pace was fuelled by companies reporting the largest inflows of new business since February 2012, according to economics consultancy Markit, which monitors trends across industries.

This latest rise in output in the financials industry follows a trend which has been recorded in each month since January 2012, with the exception of a marginal reduction last June.

Behind the overall expansion of the financial industry was a sharp acceleration in the ‘other financials’ sector, which comprises non-bank financials and investment service companies.

Spotlight on: How Malaysia’s elections benefit the ASEAN market

Soo Hai Lim, Head of ASEAN research at Barings Asset Managers shares his thoughts on the effect of the recent elections in Malaysia & it’s wider implications on the region.

In a largely weak global growth environment, we remain positive on the investment prospects for the countries making up the Association of South East Asian Nations (ASEAN). The regional grouping is made up of Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Our view is based on a robust growth outlook and domestic dynamics, which we believe should continue to limit the region’s exposure to any negative external shocks from Europe and elsewhere.

ASEAN equities have significantly outperformed the rest of Asia ex Japan in recent years, and we expect the region to continue to deliver superior returns relative to not only the rest of Asia ex Japan but also other emerging markets across the globe.

Economic growth in the region is being driven by structural change in the form of rising consumer and infrastructure spending, meaning that the ASEAN economies are substantially less dependent on global growth than other emerging markets, in our view.

Early May saw important elections in Malaysia, south-east Asia’s third-largest economy, as the governing coalition (Barisan Nasional) held on to power and extended its 56-year rule in a keenly contested race.

In our view, political stability in Malaysia is positive for the wider ASEAN region and we believe the election result should allow for a widening and deepening of the government’s economic reform programme.

The market’s reaction to the result has so far been positive, with the MSCI Malaysia index rising by 5.9% in U.S. dollar terms since the election on 5 May (to 29 May). The wider MSCI South East Asia index has also rallied slightly, returning 0.8% over the same period.

Although we have been relatively cautious on Malaysia for some time, we have recently increased our exposure, while remaining underweight relative to the benchmark index.

We will likely continue to add or initiate positions in domestic stocks where we believe performance has been hampered by the uncertainty leading into the elections. Longer term, we are also encouraged by signs that the Malaysian economy is enjoying a stronger investment cycle similar to other large regional economies.

Despite an improving economic and political outlook for Malaysia, our preferred markets remain Thailand, Indonesia and the Philippines (also known as the ‘TIP’ markets).

Thematically, the favourable economic fundamentals of ASEAN lead us to focus on direct beneficiaries of the region’s structural increase in infrastructure and consumer spending. We continue to find the best representation of these types of companies in the fast-growing TIP economies.

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.