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Broadgate: Weekly Briefing 19/11

19 November 2013

China – China’s leaders have unveiled a series of reforms aimed at overhauling its economy over the next decade. In a statement issued after a closed-door summit, they promised the free market would play a bigger role.

A new committee will oversee internal security to guard against social unrest, and farmers will be given more property rights over their land.

The Communist Party leaders said markets would be allowed to play a leading role. State ownership would remain a pillar of the economy.

“The core issue is to straighten out the relationship between government and the market, allowing the market to play a decisive role in allocating resources and improving the government’s role,” the statement said, Reuters news agency reports.

Trends – Investors fled U.S. equities last week as the stockmarket hit record highs and a clutch of imminent policy meetings worldwide increase economic uncertainty.

Fund flow data analyst EPFR Global says $7bn was pulled from U.S. equity funds it tracks over the week ending 6 November and flows into global equities “heavily favoured” funds that don’t invest the US.

The S&P 500 hit its highest ever peak last week, before a sharp sell off toward the week’s end as worries crept in about the how much value was left in the market.

Predictions – Next year will see the global economy grow faster than in the two years previous with developed countries leading the way, says BNY Mellon chief economist Richard Hoey.

Hoey describes himself as being “broadly optimistic” on the outlook for the global economy overall in 2014 and expects both developed and emerging markets will see better economic growth throughout the year, compared with both 2012 and 2013.

However Hoey details that developed markets will be the main driver of this expansion, implying that the fall back in emerging market growth versus developed economies seen already this year could be set to continue.

He says: “The outlook for 2014 I believe is for a faster pace of global economic expansion than occurred in 2012 and 2013 and that acceleration is likely to be led by the developed countries.”

The “fading burden” of the global financial crisis is attributed by Hoey as one of several reasons why developed economies are likely to push ahead in 2014 along with continued stimulative monetary policy across different developed countries.

Opinions – The majority of investors expect the Fed to begin tapering QE in March next year, according to research from Bank of America Merrill Lynch.

The Fed previously stressed that “there is no fixed calendar” for when it will begin pulling back on QE as part of an announcement in September, contrary to widespread expectations that tapering would begin that month.

The BofA ML fund manager survey for November asked global fund managers when they expect the Fed will begin reducing its bond-purchasing programme, between the dates December 2013 through to 2015, or later.

A 48% majority of managers believe tapering is most likely to start in March 2014 in line with Yellen’s appointment as Fed chairman, while only 21% of managers overall expect the Fed to introduce QE tapering before this date.

Commodities – Investors have started to return to gold as a hedge against any potential disruption to the continued rally in world equity markets.

Gold has fallen significantly over the course of 2013, dropping from $1,675.35 an ounce at the start of the year to a low point of $1,200 towards the end of June. The price has recovered slightly since then to reach around $1,280 this week.

ETF Securities head of research and investment strategy Nicholas Brooks says investor concern about “a potential excessive rally in cyclical assets”, as well as concern about the health of the eurozone, could see stronger flows return to gold.

Industries – Moody’s Investors Service cut its ratings on four of the biggest U.S. banks this week, after deciding the government would be less likely to help them repay creditors in a crisis.

Morgan Stanley, Goldman Sachs, JPMorgan and Bank of New York had their senior holding company ratings lowered one level on Thursday, after Moody’s concluded a review of eight U.S. banks that began in August.

U.S. banking regulators have been preparing rules and procedures that seek to allow the government to wind down even the largest financial companies without providing taxpayer assistance. The plans would require investors to accept losses and could require bonds to be converted into equity capital.

Spotlight on: Alternative indicators driving Africa’s growth

Sebastian Kahlfeld, fund manager at Deutsche Asset & Wealth Management, explains why locally produced goods, are helping Sub-Saharan African countries create a new ‘emerging’ middle class.

Economic growth in emerging markets mostly means a significant jump in construction output. So, a simple way to measure growth in Africa is by looking at the number of construction cranes in view.

While companies based as far away as Spain and Korea benefit from this, there are also goods from lower down the value chain required in large quantities, which currently are mostly produced locally. A good example is cement, which has a domestic transport cost effectiveness of around 300km.

The cement market provides a good representation of the local conditions of an economy during a major growth phase, and can be very profitable in booming markets.

In Africa, a single tonne of cement can cost up to $250 (the cost in Europe is around $100, while production costs are around $30-$60). This high cost is due to international exporters facing problems at the harbour, where there is often limited capacity which can lead to high import duty.

Over the past ten years, demand for cement in developed markets has fallen by around 4% annually, but in emerging markets it has increased by 8%.

Africa lags behind only Asia, where production is completely dominated by China. For example, of the 3.6 billion tonnes of cement produced in 2012, 60% came from China, 6% from India and 5% from Africa.

An African middle class

High population growth alone is not a driver for infrastructure (or cement production). But alongside this growing market, economic growth rates are also increasing. On average, these have been above 5% in the Sub-Saharan African countries for a decade.

Taking the example of Nigeria, urban household consumption is bound to grow 2.5x between 2012 and 2022, thereby reaching a level of $20bn. Similar trends in growth can be witnessed in Ghana or in Kenya, where almost half of the population is younger than 15 years old, having an impact on everything from banking to beer. Considering the masses entering the labour force, plus the rising wage levels, the multiplier effect becomes difficult to ignore.

An increase of households due to additional effects of urbanisation and household fragmentation, estimated by Bank of America Merrill Lynch at 4.1% pa, comes as an additional benefit. The impact on falling poverty levels, according to an African Development Bank study, is telling.

The study says despite uneven growth in income levels, every 1% increase in average income growth leads to a 1.5% decline in the frequency of a dollar a day poverty.

Accordingly, recent news of multinational consumer goods companies reporting slowing growth in more established emerging markets, highlights the potential of frontier markets, such as the ones in Africa, once again.

It is obvious things are still far from good for the average consumer, given 80% of Nigerians are living on less than $2 a day. However, research indicated close to 60% of those are earning ‘almost’ $2 a day, and could easily surpass this soon.

This would result in them entering the low-end middle class ($2-$20 a day), where additional income becomes available for purchases beyond the pure daily necessities.

Issues ahead

But on the other hand, bigger issues remain. No cement factory would work if there was not a continuous supply of electricity. But whereas most businesses can be run without significant involvement of the government, the supply of power cannot. This leads to problems in electricity generation and makes distribution particularly protracted.

The needs are obvious – you can see this from the widespread presence of diesel generators wherever continuous supply of electricity is adamant. However, things are changing.

Just recently, the Nigerian government successfully concluded the privatisation of 15 power plants, with the wider ambition to boost power generation four times by 2020. The success of this process is yet to be seen, but recent transactions and IPOs in other regions spark mild optimism.

For many years now, Kenya has demonstrated the highest economic dynamism as evident by investment in infrastructure and education. The recent discovery of massive oil reserves provides hope that over the next ten years, the country will see an impressive development in diversifying its economy and making it more independent from energy imports.

Coupled with political stability and reform programs, these markets may succeed in beating stagnation for the long term. There is no real need for excessive optimism for such assumptions: elections in Ghana in 2012, and Kenya in 2013, set the benchmark for other countries. The real number of political conflicts and civil disturbances has decreased and with increasing stability, companies will be able exploit new opportunities – as is the impressive case with cement consumption.


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.