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Broadgate: Weekly Briefing 18/4

18th April 2014

Global – The growth of global commerce will pick up speed this year and next, says the World Trade Organization (WTO). Trade will grow by a “modest” 4.7% this year and by 5.3% in 2015, says the WTO.

Next year’s figure, if correct, would be in line with the average growth rate in world trade over the last 20 years.

These forecasts are consistent with other figures that show the world economy is gradually recovering from the financial crisis. There have been some sharp swings in global commerce since the onset of the crisis.

In 2009, for example, trade in goods declined by 12% and bounced back by 14% the following year.

China – China’s economy expanded by 7.4% in the first quarter of the year, better than many were expecting. But it is a slowdown from 7.7% growth in the final quarter of last year.

Other data released with the gross domestic product (GDP) figure showed industrial output rising 8.8% in March from one year ago.

Retail sales for the month of March spiked by 12.2%, underscoring China’s efforts to boost economic growth via domestic consumption. Last year China set its growth target for 2014 at 7.5%, part of efforts to stabilise the economy after years of fast-paced expansion.

China’s growth data is closely watched around the region. A slowdown could damage Asian economies, especially those which export commodities and industrial components to the world’s second largest economy.

Russia – The Russian economy may see zero growth this year because of the Ukraine crisis, Russia’s finance minister has admitted.

The minister, Anton Siluanov, warned the country’s economy faced “the most difficult conditions since the 2008 crisis”, Russian news agencies said.

Mr Siluanov said Russia had already seen capital flight of $63bn in the first three months of 2014. Russia’s annexation of Crimea is also set to increase state spending.

Mr Siluanov told a government meeting: “GDP growth is estimated as rather low, 0.5%. Perhaps it will be around zero.”

China – The U.S. has told China that its currency must be allowed to rise if it and the global economy are to see stable growth.

The U.S. Treasury’s twice-yearly report to policymakers says the yuan is “significantly undervalued”.

Unlike the euro and the dollar, the value of the yuan is not set by the market but is kept within certain limits of other world currencies.

The U.S. has long argued that the bands are set too low, making Chinese goods cheaper on the world market.

China had allowed the yuan – also known as the renminbi – to rise, but the report said this had not gone far enough. It also noted that “China has continued large-scale purchases of foreign exchange in the first quarter of this year, despite having accumulated $3.8tn in reserves, which are excessive by any measure.”

U.S. – U.S. retail sales saw their biggest gain in 18 months in March, according to official figures.

It is a further sign that the economy is shrugging off the effects of the third-coldest winter on record, which affected economic activity.

Retailers said sales were up 1.1% last month, the biggest rise since September 2012 and beating analysts’ forecasts. In addition, sales growth in February was revised up to 0.7% from an initial estimate of 0.3%.

Retail sales totalled $433.9bn in March, 3.8% higher than March 2013.

“Rising wealth, shrinking debt burdens and improving labour markets are helping American shoppers shake off the winter blues,” said Sal Guatieri, economist at BMO Capital Markets.

Sectors – Goldman Sachs has sought to reassure clients spooked by the recent falls in tech stocks, saying the U.S. is unlikely to suffer a 2000-style crash.

Last Thursday, the tech-focussed Nasdaq fell 3.1%, its worst single-day performance since 2011. Shares including Apple and Google all retreated from highs, taking many stocks into negative returns year-to-date.

But in a note, Goldman analyst David Costin said valuations were at more sensible levels than in the previous tech bubble in 2000.

“We believe the differences between 2000 and today are more important than the similarities, and the recent momentum drawdown is unlikely to precipitate a more extensive fall in share prices,” he said.

Trends – The sell-off in global markets might not end in a 10 to 15percent correction in the spring, but investors should expect one of this magnitude in the latter half of the year, according to Bank of America Merrill Lynch.

An analyst note from the group predicts that the weakness currently blighting stockmarkets will start to reverse later this month as investors return to areas that have sold off over 2014 so far.

The catalysts for this is likely to be a stronger outlook for the U.S. economy, the reluctance of Chinese authorities to tighten policy and the unwinding of “extreme positions” that drove the first quarter’s reversal in markets.

That said, the bank’s analysts forecast a bigger correction for markets in the autumn of 2014 as attention turns back to the U.S. Federal Reserve and the eventual timing of its first rate rise.

“Improvement in growth expectations should benefit large-cap, value cyclical stocks such as Japan and the Dow Jones, especially as Fed rhetoric has seen overzealous positioning purged,” the note says.

Spotlight on: Time to despair about China? Hard landing fears could be overblown

China has posted better-than-expected growth figures for the opening quarter of 2014, leading some to question whether fears of hard landing in the world’s second largest economy have been unrealistic.

Data from China’s National Bureau of Statistics shows the country’s gross domestic product expanded by 7.4percent in the three months to the end of March, when compared with the same period in 2013.

Although this was down from the 7.7percent recorded in the final three months of 2013, the rate was higher than the 7.2percent forecast by analysts. At 7.4percent, growth is at its slowest since the third quarter of 2012.

Investor sentiment towards China has taken a beating over recent months after concerns mounted that the economy would go into a so-called hard landing. The Bank of America Merrill Lynch Fund Managers Survey for March showed this has recently improved, with the balance of asset allocators expecting the economy to weaken moving from 47percent to 34percent.

Schroders emerging market economist Craig Botham expect Chinese growth to slow further in the coming months.

“Financing conditions remain tight and the property market looks soft, and there’s not yet any obvious positive offset. Hopes of stimulus are overblown as we don’t expect to see more than minor measures aimed at supporting, not accelerating, growth,” Botham says.

“At this point the government seems comfortable with the growth rate; major stimulus was ruled out last week, most likely in full knowledge of the first quarter growth numbers. Headwinds will continue to slow China’s dash for growth over the rest of this year.”

Capital Economics China economists Qinwei Wang and Julian Evans-Pritchard say today’s GDP figures strengthen the argument that fears over a Chinese hard landing are “overdone”.

“The economy is likely to weaken further on the back of slowing credit and property investment,” they write in a note.

“However, with consumption holding up relatively well, export demand warming and infrastructure investment possibly bottoming out, a sharp slowdown should be avoided. This makes the stimulus that many are expecting less likely.”

Wang and Evans-Pritchard point out that activity data, including industrial production and the output of electricity and cement, was “relatively upbeat” for Match and add to evidence that the country will be able to avoid a hard landing.

Capital Economics predicts that the Chinese economy will grow by 7.3percent in 2014.

Invesco Perpetual head of Asian equities Stuart Parks identifies a critical question for China as whether it can successfully move away from its reliance on credit-fuelled investment towards a more consumption-based growth model.

“Last November’s announcement of an ambitious new reform agenda gave us grounds for optimism – particularly initiatives focused on allowing market forces a more ‘decisive’ role in the allocation of resources, improving capital allocation and shifting income towards households,” he says.

“The Party leadership appeared to go out of its way to explain why wide-ranging reform is needed and we believe there is real potential for meaningful change in the medium term. The critical question is whether the authorities are prepared to let growth drop below their 7.5percent growth target as they try and implement reforms. My chief concern is that they are not prepared to make this potentially painful adjustment, preferring instead to try and smooth the transition.”

Parks adds that markets are unlikely to react positively until China starts to make solid progress in this reform agenda, which includes measures to allow the market to play a bigger role in the economy and permit the private sector to compete freely with state-owned enterprises.

“Until we see evidence of reforms, scepticism over China’s resolve to rebalance its economy and ability to control credit growth will remain a headwind for markets in the region. However, China has proven in the past that it can change quickly when challenged and there have been encouraging developments in other economies across the region,” he says.

“In our view, now is not the time to despair about China and the region in general as we believe that very little hope is being reflected in market valuations. Earnings growth expectations of 10percent for the region in 2014 look achievable to us and we are still able to find what we consider to be good-quality companies at attractive valuations.”

BWB

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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