Broadgate: Weekly Briefing 16/3
16 March 2012
China – China has said it will allow the yuan to float more freely as part of its efforts to reform currency policy. The move comes as China has been facing pressure from its trading partners to let the yuan appreciate.
Beijing has been accused of keeping the value of its currency artificially low to help its exporters. It has risen by almost 8percent in the past 24 months against the dollar.
However, China’s trading partners as well as currency analysts continue to maintain that despite the rise, the yuan is still undervalued. This, critics believe, gives China an unfair advantage in international trade.
China – China’s stocks fell on Thursday, driving the benchmark level to the lowest level in almost a month, as a drop in foreign investment boosted concerns a slowdown in the world’s second-biggest economy will worsen.
“The economy is still on a downward trend and first quarter corporate earnings won’t be very good,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “A further big slump may not be possible because valuations for large companies are pretty low.”
Foreign direct investment in China fell for a fourth straight month in February as companies reined in spending amid a slowdown in the world’s second-biggest economy and the prolonged European debt crisis.
Investment declined 0.9percent to USD7.73bn last month from a year earlier, the Ministry of Commerce said in a statement, following a 0.3percent drop in January.
Global – London remains the top city in the world for foreign investment, according to a KPMG report that reflects the rise of emerging economies.
The next two cities are Shanghai and Hong Kong, China’s financial capitals, consulting firm KPMG and Greater Paris Investment Agency said.
Brazil’s Sao Paulo had the biggest leap, to fourth, increasing investment by 160percent over the past two years.
Brazil – Brazil’s real weakened this week after Federal Reserve policy makers raised their outlook for U.S. growth, suggesting that they are less likely to begin a third round of bond buying that would further depreciate the dollar.
Brazil’s real weakened with most other emerging-market currencies after the Federal Open Market Committee said on Wednesday that it expects “moderate economic growth” and predicted the U.S. unemployment rate “will decline gradually.” The comments reduced speculation the central bank will resume buying bonds to stimulate the world’s largest economy, which would increase the dollar supply and fuel demand for higher-yielding assets.
Europe – Ernst & Young LLP said the euro- area economy will probably contract more this year than it previously predicted as governments across the region reduce budget deficits.
Gross domestic product among the 17 countries that share the single currency is set to shrink 0.5 percent in 2012, compared with the 0.1percent decline forecast in December, Ernst & Young’s Mark Otty, based in London, wrote in the company’s spring forecast.
Countries from Greece to the Netherlands are implementing tax increases and spending cuts to help stem deficits amid the region’s sovereign debt crisis, now in its third year. The cuts will collectively reduce euro-area GDP by more than 1percentage point in both 2012 and 2013, Ernst & Young estimated.
U.S. – A long-delayed U.S./South Korea free trade agreement (FTA) that has stirred controversy in both countries took effect on Thursday, although the opposition in Seoul has vowed to renegotiate it if it wins elections this year.
The deal between the world’s top economy and Asia’s fourth largest will boost trade by billions of dollars and create tens of thousands of jobs, the two sides say, making it one the biggest deals of its kind.
“The U.S/S Korea agreement is a landmark deal with an important ally,” U.S. Trade Representative Ron Kirk said in a statement hailing the accord as the most significant U.S. free trade pact in 20 years.
Currencies – The yen has hit an 11-month low against the dollar as the U.S. currency strengthened on hopes of a recovery in the world’s largest ec
The Japanese currency hit 84.18 yen to the dollar in Asian trade on Thursday.
That figure compares with 75.31 yen in October last year, which prompted an intervention in the currency markets by the Japanese central bank.
A weak yen is good news for Japanese exporters because it makes their goods more affordable to foreign buyers.
Spotlight on: Chinese Equity outlook, from HSBC
The likelihood of a so-called ‘hard-landing’ in China continues to attract significant attention from market commentators. Some insist that it is only a matter of time whilst others maintain that the economy is built on solid foundations and pass the suggestion merely as scare mongering.
Mandy Chan, manager of the HSBC China Equity fund, gives her thoughts on the developments of the Chinese economy over recent months in a Q&A session.
Q: How did Chinese equities perform in January?
A: In January, Hong Kong-listed Chinese equities posted a strong rally, sparked by improving sentiment on Chinese policy makers’ call to boost confidence in the domestic equity market, some stabilisation in the sovereign debt situation in Europe, and the recent strength in US economic data. The MSCI China index rose 10.7percent in January and ended the month at a Price to Earnings ratio of 9.3x. Within the index, the three best-performing sectors were information technology, financials and energy, whilst the three worst-performing sectors were consumer staples, utilities and healthcare.
Q: What are your views on the economic data released during the month?
A: Economic numbers were also supportive. China’s January manufacturing purchasing manager index (PMI) came in at 50.5 (compared with 50.3 in December), a better-than-expected figure. China’s December consumer price index inflation came in at 4.1percent year on year, down from 4.2percent year on year in November. From a liquidity perspective, M2 growth (a measure of the amount of money available in the economy at a specified time) had a more notable rebound to +22.0percent quarter on quarter in sequential terms. In December, Chinese banks ramped up new loan creation to CNY640.5bn from CNY562.2bn in November.
Q: How has the Fund performed recently?
A: The Fund outperformed its benchmark in January. From an allocation perspective, our underweight position in consumer staples, on the back of their relatively expensive valuations, was beneficial to performance. Fortunately, defensive utilities underperformed in the rally, as the portfolio does not have any holdings in this sector. Furthermore, our overweight stance in the banking sector continues to reward.
At a stock level, we continue to like large banks, given the relative strengths of their fundamentals and the overall distressed valuation levels of the Chinese banking sector. Our portfolio holdings, in particular Industrial & Commercial Bank of China, continued to outperform strongly in December. Our overweight in Ping An Insurance was also rewarded as the stock recovered its valuation. China Petroleum & Chemical Corp. is also amongst the top contributing stocks, as refineries have benefited from falling inflation levels.
Q: What do you think are the key factors now and in the near future?
A: We think the newly released January PMI and December’s change in monetary stance reconfirm our earlier view of a soft-landing scenario in China. The country’s January PMI rose to a four-month high of 50.5, compared to 50.3 previously, beating the market consensus of 49.6. Given that PMI was still rising, especially in a Lunar New Year month when there tends to be some downside distortion, and retail sales growth (18.1percent) were also better than expected, there are early signs that economic activity growth is stabilising.
On the other hand, December’s sequential growth of the supply of capital, with loans all registering higher readings than in November, suggest gradual policy easing is starting to work. The European Central Bank’s long-term refinancing operation and the recent strength in U.S. economic data have had the benefit of reducing systemic risks and, consequently, lowering the probability of downside risks for Chinese exports to some extent. Although a few issues, such as a slowdown in bank deposit growth and weaker property investment, could pose renewed challenges to the market in the first quarter, we expect policy makers to progress with further necessary easing measures in order to stabilise growth. Thus, current valuation levels should provide buying opportunities in companies with sound fundamentals.
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.