Logo

Passionate about investing

Broadgate: Weekly Briefing 1/6

1 June 2012

Brazil – Brazil is on the brink of a “historic” shift towards a lower interest rate regime that will change the foundations of the country’s financial and investment industries, says the head of its stock exchange.

Interest rates in Brazil were reduced to record lows on Thursday, being cut by 50 basis points to 8.5%. It is thought that Brazilian savers and investors are likely to start moving from simple deposit accounts and bonds to other more sophisticated forms of investment, including equities.

“Brazil’s savings culture is one of inflation and fixed-income investments. This may change it all,” Edemir Pinto, chief executive of BM&FBovespa, one of the world’s largest exchange companies by market capitalisation, told the Financial Times.

India – The Indian economy grew at the slowest rate since 2003 in the first three months of 2012, due to a widening trade gap and poor investment.

India’s gross domestic product (GDP) rose 5.3% in the first three months of 2012, down from 7.8% in the same period last year, official figures show. The growth figure was well below market expectations of 6.1%.

India is the third-largest economy in Asia but has been struggling with inflation and currency weakness.

Philippines – The Philippine economy beat expectations and expanded by 6.4% in the first quarter to become one of east Asia’s top performers, boosted by services such as tourism and business outsourcing, as well as consumer and government spending.

Analysts had been pessimistic as exports, which make up around 35% of economic output, had begun to slip in March. With demand from Europe and Asia slowing, they had projected growth in the first three months of the year of around 4.5%.

Instead, the country posted the highest first-quarter economic growth in east Asia except China, said Arsenio Balisacan, the Philippines’ economic planning chief.

U.S. – The number of Americans applying for unemployment insurance payments rose last week to a one-month high, a sign that progress in reducing joblessness may be stalling.

First-time claims for jobless benefits increased by 10,000 to 383,000 in the week ended May 26 from a revised 373,000 the prior week, the Labour Department said on Thursday.

Increased firings weaken the prospects for accelerating job growth, which in turn could weigh on consumer spending, the biggest part of the economy.

Germany – Germany’s unemployment rate slid to a new two-decade low in May, bucking a Europe-wide trend as the financial crisis continues.

The jobless rate declined to 6.7% from 6.8% in April after revisions, the Federal Labour Agency in Nuremberg said on Thursday. The number of people out of work was unchanged at 2.87 million.

Spain – Madrid was dealt a double blow on Thursday after it emerged that almost EUR100bn in capital had left the country in the first three months of the year and the head of the European Central Bank criticized its handling of Bankia, the troubled Spanish lender.

Data published by Spain’s central bank showed EUR97bn had been pulled out in the first quarter (around a 10th of the country’s GDP) as concerns mounted over Madrid’s ability to contain its economic and financial crises, which have forced government borrowing costs to euro-era highs.

Commodities – Gold is poised for the worst run of monthly losses in more than 11 years as concern that Europe’s fiscal crisis is escalating drove investors to seek the dollar as a haven over the precious metal.

Bullion is 6.1% lower in May for its biggest drop this year as the dollar rallied 5.1% against a six-currency basket including the euro.

Sectors – Luxury stocks have outperformed over the last six years despite the global financial crisis, figures from S&P Indices show.

The S&P Global Luxury Index delivered annualised returns of 9.3% in the six years to March 31, against the 6.2% per annum seen in the S&P Global Broad Market Index and the 4.9% in the S&P Global BMI Consumer Discretionary Index.

Liyu Zheng, research director at S&P Indices, said “The drivers of the index and its constituent stocks are increased demand for luxury goods and services, especially from emerging markets and the rapid expansion of retail networks in high potential markets.”

Consumer demand in the Asia Pacific region was cited as the main driver of the index’s outperformance. Although just 4.2% of the index’s constituents are based in Asia, more than half have significant exposure to the region.

Trends – Goldman Sachs has identified four countries that will drive global growth over the coming decade alongside the so-called Bric nations of Brazil, Russia, India and China.

The bank, which gave the investment world the concept of Bric ten years, says Mexico, South Korea, Turkey and Indonesia will be among the fastest growing countries of the next decade.

Katie Koch, from the office of the chairman at Goldman Sachs Asset Management, told the Morningstar Investment Conference 2012 that to label these eight nations as emerging markets is “quite insulting”.

According to Goldman Sachs, these eight markets will be the top contributors to global growth over the next ten years. The smallest contributor of these eight, Turkey, is expected to contribute the same amount to global growth as the UK over this period.

Spotlight on: A shift to the East

East Asia is a region that is getting noticed. At the World Economic Forum in Bangkok over the next two days, the main topics of discussion will be how best to develop its opportunities and tackle its problems.

But can the region really help offset the slowdown that has hit the U.S. and Europe,and can it get the global economy motoring again?

While East Asia may not be the best-known of global regions, it contains a mix of established powerhouses, such as China, and so-called ‘frontier’ destinations such as Indonesia, Thailand, Vietnam, Singapore and the Philippines.

With the U.S. and Europe stuck in a period of slow growth and recession, East Asia is becoming increasingly important, not just to local companies but also the global economy.

“It is the rise of the East that is driving the fundament shift in the world’s centre of economic gravity,” says Pushan Dutt, a professor of economics at business school Insead. “East Asian economies are starting to have a much bigger share of global GDP, they are key to the global production chain and a large chunk of the world’s population lives here.”

According to the World Bank, the developing East Asia region, which includes China, grew by 8.2% in 2011.

Even if you exclude China, the world’s second-largest economy, the region’s growth rate was still a healthy 4.2% and it is forecast to expand by 5.2% in the current year.

One of the key factors helping growth has been increasing domestic demand and coverage. As the economies have grown, so have income levels, giving more spending power to consumers.

East Asia has also benefited from growth in the size of the working-age population.

Not only has that ensured a steady supply of labour, it also means that more people have been earning money, which they have been either saving or spending, helping underpin growth in their respective economies.

Growing domestic consumption has also helped offset a slowdown in exports from the region after demand from key markets such as the U.S. and Europe slowed.

Analysts say that East Asian consumers are likely to play an increasingly bigger role in global growth. “Currently the world suffers from a lack of demand,” says Mr Dutt of Insead. “The U.S. and Europe are not consuming enough and you need an alternate source of demand, for which East Asia is a potential candidate.”

The other main factor behind East Asia’s expansion has been the rise in investment, both domestic and foreign.

Many of the region’s economies are at a developing stage, which means that governments in those countries have been allocating resources and funds to improve infrastructure.

“Within the region, there is a huge demand for investment, especially in infrastructure, but also in areas such as sanitation, clear drinking water and housing,” says Prakriti Sofat, an economist with Barclays Capital.

In its latest report on the region, the World Bank noted that higher investment, particularly in infrastructure, “offers the potential to sustain growth” in the region.

At the same time, the region has also become the destination of choice for foreign investors.

Emerging economies in East Asia accounted for 43% of all foreign direct investment in developing areas globally last year.

Yet while there are a lot of positives, the region is not immune from problems. There is no doubt that a slowdown in China, which comprises 80% of developing East Asia’s GDP, would significantly damage the region’s prospects.

However, some analysts also believe that if the slowdown in China is a gradual one, then it might in fact be beneficial for the other economies of East Asia.

With China consuming less, commodity prices would drop, putting a cap on inflation and freeing up money for development projects and spending, says Ruchir Sharma, managing director of Morgan Stanley and the author of Breakout Nations.

He adds that with manufacturing costs also rising in China, other nations may be able to start ramping up their own manufacturing operations. “As costs in China go up, manufacturing could be moving more to places such as Indonesia, Philippines and Thailand,” he explains.

A shift of manufacturing would most likely be accompanied by increased investment and job creation, which in turn would help stoke consumer demand and spending.

Access to the East Asia economic story can be gained via C09, the Hansard South East Asia (Neptune South East Asia) fund, available in HIL & HEL. To find out more about this or any of our other unit funds please contact your Hansard Account Executive, who will be able to assist you further.

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.

Clientservices@broadgatefinancial.com