Broadgate: Weekly Briefing 17/2
17 February 2014
China – China’s trade surplus jumped to $31.9bn in January, easing concerns that the world’s second-largest economy may be stuck in a slowdown.
The figure was up 14% from a year earlier and stronger than forecasts for a $23.7bn surplus.
Imports rose by 10% from a year earlier to $175.27bn – led by record shipments of crude oil, iron ore and copper.
Exports increased by 10.6% from a year earlier, far faster than analysts’ forecasts, to $207.13bn.
The positive trade figures also add to expectations China will overtake the U.S. as the world’s largest trading nation this year.
U.S. – The U.S. House of Representatives has passed an increase in the government’s debt limit, after the Republicans gave up on their attempt to win concessions from the Democrats in return.
The House voted 221-201 to waive the $17.2tn debt limit for just over a year, with only 28 Republicans joining most of the Democrats.
Officials had said the U.S. could breach the debt limit by the end of February. The White House and others had warned of calamity if the U.S. defaulted.
The bill, when signed into law by President Barack Obama, will enable the U.S. government to borrow money to fund its budget obligations and debt service.
Greece – Greece is looking to return to international bond markets, in a bid to reassure international investors about its economic health.
The country, which defaulted in 2012, has recently seen yields on its 10-year bonds drop to just 7.6%, their lowest since May 2010, when the country’s debt problems heralded the start of the eurozone crisis.
In an interview with the Financial Times, Greek debt management office head Stelios Papadopoulos said: “It is the economic future of Greece, not its past, that we believe will be the key factor as institutional investors consider Greece’s return to the capital markets.”
He pointed out that the current debt servicing requirements of Greece are low and are expected to improve through the expected changes to its bailout terms.
In addition, he said the country will maintain a current account surplus “that will surprise on the upside”.
Papadopoulos added: “These are features that most countries, developed and emerging, would find enviable.”
Outlook – Global assets under management will hit $101.7trn in six years’ time, a 60% rise on 2012, according to PricewaterhouseCoopers.
The ‘Asset Management 2020: A Brave New World’ report predicts the $37.8trn boost would mean an annually compounding growth rate of 6% on 2012’s $63.9trn of assets.
PwC says the investments in the developing economies of South America, Asia, Africa and Middle East are likely to grow much faster than the developing nations. However, the majority of global assets will remain in the U.S. and Europe.
PwC Asset Management 2020 leader Rob Mellor says the turbulence of the past few years has prevented many asset management firms from bringing the “future into focus”.
He says: “But the industry stands on the precipice of a number of fundamental shifts that will shape the future of the asset management industry.”
Trends – Investors pulled record sums of money out of equity funds across the globe last week, with U.S. stock portfolios being hit by a significant “mini rotation” into bonds.
The week ending 5 February 2014 saw markets continue to wrestle with concerns over the shift in U.S. monetary policy, China’s slower growth and a cautious tone in the latest corporate earnings forecasts.
The week came to a close with a record $28.3bn redeemed from equity funds tracked by EPFR Global. Bond funds benefited from net inflows of $14.7bn – another new weekly record.
Brewin Dolphin head of fund management Ben Gutteridge comments: “With the Chinese slowdown and tapering of U.S. stimulus already well understood by the market, it would appear the recent weakness in U.S. economic data was the catalyst for the selloff in global stock markets.
Spotlight on: A ‘healthy’ correction for Japan?
Japanese equities have experienced a weak start to 2014 but with investors remaining positive on the outlook for valuations, corporate profits and the long-term structural reforms in Japan, could this be a “healthy” correction?
As with most developed markets, 2014 has been tough so far for Japan with the latest piece of bad news arriving last week when the Nikkei index fell 4%, bringing total losses year to date to 14%. Japanese shares have recovered somewhat since but the market remains down 9.66% since the start of the 2014.
This recent correction in Japanese equities can be attributed to a number of short-term influences from wider negative market sentiment and Japan’s strengthening currency, according to Invesco Perpetual head of Japanese equities Paul Chesson.
“There are a number of short term influences that have contributed to the market’s recent weakness, including a strengthening of the yen, general concerns about the impact of QE tapering by the U.S. Federal Reserve and volatility in some emerging market currencies and equity markets,“ he says.
Psigma Investment Management chief investment officer Tom Becket argues that the recent sell-off was also triggered by “hot money” pulling out of Japanese equities.
Becket believes that this has actually helped to remove ”some of the froth from the trade” making this particular correction a “healthy” one for the Japanese market.
He adds: “The two main knocks to Japan’s market have come from over-confidence of investors, leading to an overdue and healthy correction, and the strength of the yen.
“As you will have read in the myriad of comments over the last few months, our once lonely position in Japanese equities had become very crowded; hopefully the recent sell-off has blown some of the froth from the trade and knocked out some of the ’hot money’ investors.”
Industry experts also agree that with structural reforms in the Japanese economy under prime minister Shinzo Aber’s leadership continuing to make slow but steady progress, the longer-term outlook for Japan also remains positive.
Fidelity Worldwide Investment head of Japanese equities Alex Treves says: “Japan’s recovery continues to proceed steadily and the reflation theme remains on course.
”Prime Minister Abe will consolidate his policy agenda in the coming months and provide greater clarity on his multi-year roadmap for reforming Japan. It is important to be realistic about the likelihood of a sudden transformation, but equally the prospect of a long-term improvement in Japan’s outlook is very much alive.”
The Japanese equity team at Fidelity have therefore used the recent correction “as an opportunity to selectively add on weakness” and actively promote “buy on dip ideas”, according to Treves.
Japan’s progress in terms of earnings growth also “compares favourably” against other major markets, he adds.
Chesson goes further to argue that this earnings growth advantage also makes Japanese equities appear attractive when looking at valuations, something which is a “primary focus” for the team at Invesco.
He says: “At the start of the year the Topix was trading at around 15x consensus earnings to the end of the fiscal year in March 2014. This was roughly in line with other developed markets and with corporate profits in Japan growing more quickly than for their developed market peers we considered this valuation level to be attractive.
“The fiscal third quarter earnings season is currently in progress and in aggregate profits are broadly in line with expectations.”
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