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Broadgate: Weekly Briefing 17/2

17 February 2012

Europe – World stocks fell on Thursday amid growing fears that the latest deal to resolve Greece’s debt crisis is faltering.

Global markets rose briefly on Wednesday following news that China would keep investing in Europe and Greece would fulfill obligations imposed by its creditors. But those hopes waned after a European official warned Greece’s assurances might be inadequate, possibly jeopardizing the latest infusion of money from its European partners.

Asian investors were put off by the lack of a clear outcome over Greece.

Europe– Two of the eurozone’s biggest economies have fallen into recession, according to the latest economic figures.

Italy and the Netherlands both saw their economies shrink by 0.7percent in the fourth quarter, the second consecutive quarter of economic contraction. Germany had its first negative quarter since 2009 with a decline of 0.2percent, compared with the previous quarter.

But in France there was surprise growth of 0.2percent at the end of last year, attributed to healthy export growth.

Overall, the 17 nations that make up the eurozone saw economic activity shrink by 0.3percent in the fourth quarter. By comparison the U.S. reported growth of 0.7percent.

The eurozone has not slipped into recession as it reported growth of 0.1percent in the third quarter.

Japan – The Bank of Japan (BOJ) has made a surprise move to boost growth as the country’s economy continues to struggle.

The central bank has announced it is to expand its asset purchase programme by JPY10tn (USD130bn). The move comes just a day after data showed that Japan’s economy shrank by 2.3percent, more than expected in the last three months of 2011.

“The Bank will pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the Asset Purchase Program mainly through the purchase of financial assets,” the bank said.

U.S. – U.S. manufacturing grew for the second month in a row in January, according to figures released by the Federal Reserve.

A jump in auto production helped manufacturing grow by 0.7percent last month. December’s growth figure was also revised upwards to 1.5percent.

“Some encouragement can be taken from the sharp upward revision to the performance in December, which underscores the turnaround in U.S. economic fortunes in recent months.” said Millan Mulraine, from TD Securities in New York.

Greece – Eurozone finance ministers have demanded much greater oversight of Greece’s economy in return for a EUR130bn bailout package.

The E.U. praised Greece’s “substantial progress”, but demanded more detail, including a full timeline for implementing the measures. A decision on the bailout is expected to be finalised on Monday.

Greece faces a looming deadline in mid-March when it needs to make repayments on a 14.5bn-euro bond, or face bankruptcy.

Russia – Russia’s economy will remain dynamic in the first half of 2012 before losing steam in the final six months because the central bank will try to curb lending, Standard & Poor’s (S&P) has said.

“Following 4.2percent growth in 2011, we think the slowdown will lead to GDP growth of about 3.5percent for the full year,” Jean-Michel Six, chief economist for Europe at S&P, said in the report.

Russia, the world’s largest energy exporter last year, returned to output levels achieved before a 7.8percent contraction in 2009 as the global financial crisis shackled credit flows and dampened demand for commodities. Prime Minister Vladimir Putin, who is seeking to return as president in a March 4 election, has said Russia must grow by at least 6percent annually to become one of the world’s five largest economies in terms of purchasing power.

Commodities – Global demand for gold has been estimated at more than 4,000 tonnes, worth approximately USD206bn, during 2011, according to the World Gold Council.

According to the gold industry body, demand in 2011 was the highest level since 1997, driven by investment demand in India, China and Europe.

Marcus Grubb, managing director of investment at the World Gold Council, says: “What we can see from these 2011 figures is that there were two main factors driving the results: Asian growth and optimism on the one hand and western desire to protect assets against uncertainty on the other.

Spotlight on: Why Japan is a classic ‘special situation’

Chris Taylor, manager of the Neptune Japan Opportunities fund, insists that despite its headlines, investment in Japan can offer investors access to a potential growth story that many are foolishly ignoring.

Japan can best be summed up as a classic ‘special situation’, whereby investing in Japan is all about investing in companies and not the country. The two have very different prospects.

Essentially, Taylor argues, investors do not appreciate the underlying fundamental and positive corporate changes that have occurred across Japan’s industrial and commercial base, which make selective investment in Japanese stocks attractive.

They are still deterred by the market’s poor historic performance, the assumed negatives of an overvalued currency and the country’s ongoing structural problems.

The structural problems, worsened further by the tsunami, earthquake and nuclear plant triple disasters, are combined with little political will to tackle the problems.

By contrast, the Japanese corporate population has sought to escape their domestic negative demographic, fiscal and economic circumstances by investing very heavily outside of the OECD and has cut its operating costs within Japan to reduce its yen break even sales level.

So, despite the yen’s sustained strength, these measures have enabled Japanese firms to dominate many worldwide sectors, which combined with their truly global multinational nature and their larger exposure to non-OECD countries than their U.S. or European rivals has lifted their overall profitability back to where it was before the credit crunch.

A significant number of Japanese firms remain undervalued as investors do not yet appreciate the substantial positive changes that have occurred over the last few years. These changes should underpin their prospects to generate positive returns.

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.

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