Broadgate: Weekly Briefing 19/4
19 April 2013
U.S. – Fund managers have highlighted U.S. equities as the asset class most likely to show continued strength over the coming year, according to a survey by Fidelity Personal Investing.
Fidelity canvassed opinions across 13 different fund groups and found general optimism for global equities, in particular the U.S., with many managers pointing to recent events and figures for their reasoning.
One overriding theme in particular is the shale gas ‘revolution’ playing out in the U.S., which has been received as many as a positive sign for industry in the world’s largest economy.
Fidelity Worldwide Investment head of global equities Richard Lewis says: “One of the key drivers for the U.S. is the shale gas revolution which is resulting in low energy prices. This in turn is helping to re-industrialise the U.S.”.
U.S. – Meanwhile, the U.S. central bank has slightly upgraded its view of the U.S. economy, saying it expanded at a “moderate pace” in recent months.
The view comes in the Federal Reserve’s latest Beige Book report, which covers the period from late February to early April. The Fed highlighted growth in the manufacturing and construction sectors.
In its previous beige book report in January, the Fed said growth was only “modest to moderate”. In its latest report, the Fed also said that carmakers were performing strongly.
Yet it cautioned that consumer spending was only increasing at a “modest” pace.
Japan – A small rise in Japanese exports, improving business confidence and surging investment flows demonstrated early successes for Prime Minister Shinzo Abe’s radical pro-growth strategy, but firms have yet to see signs of a sustained boost to economic activity.
Abe’s push for aggressive fiscal and monetary policies to shock the world’s third-largest economy back into life after two decades of stagnation has driven the stock market up and the yen down since November.
The shift in gears climaxed with the Bank of Japan’s $1.4 trillion stimulus plan announced on April 4 to virtually double the monetary base by the end of 2014.
Russia – The pace of growth in the Russian economy, part of the once-fast moving Brics bloc of developing countries, slowed to 1.1% in the first three months of 2013.
The number contrasts sharply with the 4.9% acheived during the first three months of 2012.
The estimated figure came from deputy economy minister, Andrei Klepach. He said the slowdown emerged after growth for January and February were revised down.
Other Brics nations, Brazil, India, China and South Africa, are themselves experiencing slowing economic growth.
Russia’s economic minister, Andrei Belousov, warned recently that quarterly growth could turn negative before the end of the year. “We are not in a recession yet, but we could end up there,” he said.
U.K. – The International Monetary Fund’s twice-yearly look at the world economy has lowered its forecasts for most developed economies, including the UK.
The IMF said world growth would now be 3.3% for the year, down from 3.5% forecast six months ago.
For the UK, it is forecasting growth of just 0.7%, after saying in January that the country’s economy could expect 1% growth.
The IMF’s World Economic Outlook report also cut its forecast for the eurozone this year to -0.3%, with Germany, the strongest economy, expected to grow by 0.6%, but France on course to shrink by 0.1%.
China – China’s economy, the world’s second-largest, has slowed and performed worse than many analysts expected in the first three months of the year.
Annual growth was 7.7% in the January to March quarter, compared with 7.9% in the previous three months. Analysts had forecast a figure closer to 8%.
China wants to spur growth after it hit a 13-year low in 2012.
Over the past few years, China has relied heavily on its exports and investment spending to maintain a strong pace of growth. However, as economic growth in its key markets such as the U.S. and Europe has slowed, and its exports have weakened, there have been calls for China to rebalance its economy.
Commodities – Gold has fallen to its lowest level in two years, while wider commodity prices have also declined following disappointing Chinese economic data.
The price of the precious metal was down 9.2% to $1,395 an ounce on Wednesday.
Meanwhile, oil prices fell to four-month lows, with Brent crude down $2.29 to $100.75 a barrel, and the main U.S. share index, the Dow Jones, ended down 1.8%. This was the Dow’s biggest fall since November.
Analysts said a key factor in gold’s fall was the expectation that the US central bank, the Federal Reserve, will tighten monetary policy by stopping its quantitative easing (QE) programme.
This means that the rate of U.S. inflation is likely to fall, meaning investors have less reason to hold gold to avoid a corresponding decline in the value of cash investments.
Spotlight on: Goldman Sachs backs Asia
Goldman Sachs expects strong returns from equities to continue in the next three years, led by the Asia ex Japan region.
It expects annualised returns of 21.3% from this region, driven by strong economic earnings growth, good dividend yields and some expansion in multiples.
Of all global regions, the analysts expect the U.S. to show the slowest growth, with the annual forecast at around 9%, as the U.S. market “has already returned to its pre-crisis peak and the potential for performance therefore is smaller”.
The forecast sees Europe delivering a 19% annualised total return and Japan following slightly behind with returns of 15%.
In the research note, analysts said: “With a 2015 horizon, all regions look attractive on an absolute basis. On a relative basis, on balance, we see Asia ex Japan as the most attractive region.”
Equity returns will be mainly driven by earnings growth, which the analysts expect to range from 8% in the U.S. to 21% in Japan, with growth outside the U.S. driven by a rebound from cyclically weak margins.
Goldmans also forecasts a fall in P/E multiples to 1% annualised in Japan and a rise of between 1% in U.S. and 4% in Asia ex Japan.
The research takes a central scenario as a base case, but also looks at downside scenarios to model the potential risks faced by markets.
The main risk identified by the analysts is a disappointing economic recovery, as the forecasts are based on Goldman Sachs economists’ forecasts of global growth accelerating to 3.3% in 2013 and to more than 4% from 2014 to 2016.
“We judge markets to be roughly fairly priced for the current economic environment and therefore returns are unlikely to materialise on a sustained basis unless the economic recovery continued,” the note concludes.
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