Broadgate: Weekly Briefing 16/9
16 September 2013
India – The Indian prime minister’s economic advisory council has lowered the growth outlook for the current financial year. It now expects the economy to expand by 5.3% this year, down from its earlier projection of 6.4% growth.
The new growth outlook is in line with the projections of the central bank and many other economists.
The council also warned that keeping the fiscal deficit within the budget target of 4.8% of gross domestic product (GDP) “could be a challenge”.
In its latest economic outlook, the council said that the fiscal deficit during the first four months of the current financial year had already reached 62.8% of the budgetary provision for the full year.
China – China’s economy is going through a “crucial” stage of restructuring, says the country’s Premier, Li Keqiang.
At the World Economic Forum in the Chinese port city of Dalian, Mr Li pledged to improve relations with foreign firms. He stressed that multinationals would get “equal treatment” with state-owned enterprises.
He added that China was well-placed to hit a growth target of 7.5% this year, despite a “complex” economic climate.
China posted its lowest growth in two decades for the second quarter of 2013, and there had been some concerns that the world’s second-largest economy might be headed for a so-called “hard landing”.
However, Mr Li sought to allay those fears by saying the Chinese economy was stable and had strong fundamentals.
Japan – Asian stocks soared this week, led by Japan’s Nikkei, as investor confidence was boosted by Tokyo winning the race to host the 2020 Olympics.
Sentiment was also helped by an upwards revision to Q2 GDP for the Japanese economy. The annualised estimate was revised up to 3.8%, compared to an expected figure of 2.6%.
The Nikkei index has jumped 2.4% on the positive news and the broader Topix is up 2.1% while the yen has slid against the dollar to 99.7.
According to Japan’s Prime Minster Shinzo Abe, the Olympics will spur construction and help beat deflation, delivering stronger economic growth.
U.S. – An anticipated reduction in stimulus by the Federal Reserve that has roiled the financial markets for months will be seen as “no big deal” if it goes ahead next week, according to a Bloomberg Global Poll of investors.
57% of those surveyed say they don’t expect a sudden change in the markets because investors already anticipate tapering action by the U.S. central bank. 8% see a rally on such news, while just under a third are looking for declines.
“A taper-lite seems priced in” by the markets, Greg Lesko, managing director at New York-based Deltec Asset Management LLC, said, referring to what he says will be a small reduction in stimulus by the Fed.
Opinions – The largest developing nations for the first time have the worst market opportunities as optimism for stronger growth shifts to the U.S. and Europe, according to a Bloomberg Global Poll.
India fared the poorest, followed by Brazil, Russia and China, a worldwide poll of investors, analysts and traders who are Bloomberg subscribers showed this week.
“The BRICs will always be playing second fiddle to the developed economies,” said survey respondent Ben Kelly, an analyst at Louis Capital Markets in London. “The pro-growth monetary policy of the U.S. allowed emerging countries to thrive due to very low or negative real rates,” he said, referring to borrowing costs adjusted for inflation.
Now that the U.S. and “to a certain extent Europe are beginning to stabilize, maybe part of this trade may unwind and we have seen that already in the bond markets,” Kelly said.
Commodities – As concerns over the Syria crisis persist, oil and gold prices have risen, prompting investors to look at commodities as “the only contrarian play left in the market”.
WTI Crude oil is currently trading at $108.5 per barrel and Brent has shot up to $115.6, while gold topped the $1,400 mark last week to enter a new bull market.
The Thomson Reuters/Jefferies CRB Commodity index has climbed more than 6% from its June trough, up from 275.6 on 28 June to 292.7 on 3 September.
Flows data from BofA Merrill Lynch shows investors have begun cautiously returning to commodities in the two weeks to 28 August, after 27 straight weeks of redemptions.
Spotlight on: Post-holiday allocations
The British summer months are traditionally a quiet time for the financial world. This year was no exception, with markets gently going nowhere throughout August, in spite of a raft of stronger economic news.
Commentators variously blamed concerns in Syria or the prospect of the end of quantitative easing but it was only as investors returned from their holidays towards the end of the month that markets gathered any meaningful direction.
The most significant trend was a wholesale move out of emerging markets. This was less a move out of risk assets (European equity fared well, for example) and more a clear move away from the developing economies as investors started to fret about their long-term growth prospects and, more importantly, their currencies.
The prospect of monetary tightening in the West has seen currency traders driving money towards developed markets in expectations of higher rates. This has hit currencies such as those of Brazil, India and Indonesia, particularly hard.
This was reflected in outflows from emerging market equity funds, which, in the last week of August, reached almost $4bn, according to data from EPFR Global.This was more than double the outflows for the previous week of $1.7bn. Emerging market debt was similarly unpopular, with $2bn exiting the sector in the last week of August, on the back of $1.3bn the week before.
Expert investors tend to be moving in the opposite direction to the wider market in terms of emerging market exposure. For example, Tim Wilson, manager of the Newton Managed Income fund, said he expects developing markets to be the major beneficiary of improved economic data in the West.
“They boast relatively low levels of debt, export-orientated economies and strong growth rates in comparison to their more developed peers, even if growth is currently subdued on a historic basis,” he said.
Stephen Thornber, manager of the Threadneedle Global Equity Income fund, goes one step further, maintaining an overweight to the unpopular Asian region. He is attracted by the region’s “fantastic growth”. That said, his exposure is in more defensive sectors, such as telecoms or utilities, in countries like Malaysia and Thailand, which have high population growth.
Meanwhile, the prospect of higher interest rates continue to trouble many expert investors or, at the very least, they are still avoiding conventional fixed income.
Tom Beckett, chief investment officer at Psigma, dipped a toe back into conventional government bonds for the first time since 2011, having bought some US treasuries on the basis that bonds had fallen “too far, too quickly”. However, he remains an exception.
Meena Lakshmanan, co-head of Investment Solutions, said: “There may be a bond rally if something goes wrong, such as an escalation in the Syrian crisis, but given where the US economy is, the downside on bonds still looks significantly greater than the upside. We remain less worried about default risk, so we are focusing our fixed income exposure on credit and floating rate areas.”
For Gary Potter, co-head of multi-manager at F&C Investments, the climate is still right for risk assets.
“The world is undergoing a marginal improvement in its prospects. Things are definitely off the bottom,” he said.
“We like the coupon in some bonds but most of the value has already been realised. That said, we have tempered our equity overweight as the market has edged near 6,600 because there are still a number of issues. We have been using any weakness to top up, rather than taking profits on the dips.”
The market has rallied in the early days of September and it should shortly become clear whether investors have returned from their holidays in a bullish mood. The possible military intervention in Syria and the end to quantitative easing are likely to continue to dampen spirits, however.
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