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Broadgate: Weekly Briefing 20/7

20 July 2012

China – China will be able to engineer a soft landing despite recent signs of a slowdown, according to Fitch Ratings.

Last week official numbers showed the the world’s second largest economy as growing by just 7.6% in the second quarter of 2012, which is the slowest pace recorded for three years.

Fitch says: “Official figures indicate that the Chinese economy is likely to avoid a hard landing in the short term. Fitch maintains its 8% projection for Chinese growth in 2012, implying annualised growth of 8.1% in the second half of the year.”

The group cites supportive monetary policy, better-than-expected banking lending rates in June, export growth outpacing imports and a recent rise in fixed asset investment as positives for the country.

China – Property prices in 70 Chinese cities rose slightly in June, compared to May, after eight months of decline. Home prices rose 0.3% in Beijing and 0.2% in Shanghai compared to the previous month, official data showed.

China had implemented two years of curbs on the real estate market in order to bring prices down. However, as the economy slowed to a three-year low in the second quarter, measures have been taken to boost growth. The Chinese central bank has cut key interest rates twice in recent months. Analysts said this and other steps have broken the trend of falling home prices.

U.S. – Ben Bernanke offered a gloomy outlook for the U.S. economy but the Federal Reserve chairman offered no hint of further monetary easing in testimony to Congress.

“We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we’ve seen recently is enduring, and whether or not the economy is likely to continue to make progress,” he said, warning that progress in reducing a 8.2% unemployment rate “seems likely to be frustratingly slow”.

The testimony initially disappointed markets on Wednesday which are expecting a signal of further monetary easing from the Federal Reserve.

Europe – Eurozone economies are in critical danger and in dire need of expansive quantitative easing measures from the European Central Bank (ECB), according to an International Monetary Fund (IMF) staff report.

The report gave detailed recommendations to the ECB, calling on it to cut interest rates further (it cut the headline rate by 25 basis points to 0.75% earlier this month) and embark on a QE programme that should involve “sizeable sovereign bond purchases.”

Italy – Moody has cut the credit rating for 13 Italian banks only a few days after cutting the Italian government’s bond rating.

The ratings agency dropped seven banks by one notch and another six by two notches. They all remain investment grade.

Moody’s says the action follows a weakening of the Italian government’s credit profile.

Moody’s said that banks are normally rated in line with the government, citing “multiple channels of shared exposure and contagion”. The rating agency said Italian banks have substantial exposure to the domestic economy and high direct exposure to sovereign debt.

Spain – Spain sold EUR2.98bn of notes this week, in line with its maximum target, and its borrowing costs surged as demand for the securities weakened. The country’s bonds fell after the sale.

The Treasury sold notes due in 2014 at an average yield of 5.204%, compared with 4.335% when they were last sold on June 7. It sold five-year notes at 6.459%, compared with 6.072% on June 21.

Commodities – Oil fell from a seven-week high this week on concern fuel demand may falter after China signalled more economic weakness and analysts cut their profit forecasts for European companies at the fastest rate since 2009.

Futures slid as much as 0.7% after advancing a fifth day yesterday, the longest run of gains since April. The labour situation in China, the world’s second-biggest crude user, will become more “severe” Premier Wen Jiabao said, according to a statement on the government’s website.

Commodities – Gold edged up on Thursday after two straight days of losses as the dollar weakened, although investors were less than convinced of its direction given the uncertainty over the Federal reserves’ stimulus measures and persistent worries about Europe.

The strength in the dollar has been pressuring gold, which has risen barely 1% year to date and has been especially sensitive to signals from the U.S. Federal Reserve on its attitude towards monetary easing, which would lift inflation outlook and boost investor interest in bullion.

Spotlight on: Africa – foundations for growth

According to economic fundamentals, the ‘factors of production’ of land, labour and capital are regarded as the basic ingredients required for achieving profit. If this stands true then Africa is extremely well placed both now & in the future to sustain the truly explosive growth in the region’s recent development.

Africa possesses the first factor, land, in abundance, accounting for 20% of the world’s land mass. In addition, it is home to an array of the world’s natural resources; 89% of the platinum group of metals, 74% of the chrome, 60% of the diamonds, 12% of the proven oil reserves, 9% of the natural gas and 40% of the gold.

The sheer volume of land is clear to see, but it is the relentless, global demand for natural resources that has meant that vast amounts of these resources are being continuously exported out of Africa, bringing wealth to the region. This growth has resulted in local industries booming and much-needed developments in domestic infrastructure, something which, until recently, was relatively unheard of.

With regards labour, Africa has a population of over 1 billion people, which is growing ever-faster. Unlike in previous periods, this isn’t a burgeoning, dependent population. Instead it is a young, vibrant one where the number of people of working age is greater than those who are not.

Similar to the phenomenon in the USA when the so-called ‘baby-boomers’ came to working age, and also in China in the 1990s, this can create an environment which underpins an economic boom. A median age of 19.7 years in Africa compares to an equivalent age of 29.2 for Asia, 32 for the BRIC nations, and 40.1 for Europe.

In addition to the favorable demographic of the population is the fact that the youth is now in education for much longer than generations before, which may enable Africa to utilize this new, better educated workforce to herald the next BRIC style growth opportunity.

Finally, with regards capital. In a year when most developed economies are hoping to maintain positive growth, the International Monetary Fund is predicting that in 2012, Africa will achieve economic growth of almost 6%.

Further, it predicts that seven of the world’s ten fastest growing economies between 2011 and 2015 will be in Africa.

The economic growth story is only one part of the ‘capital’ story though. In addition, and again dispelling a popular myth about Africa, the continent has very low debt levels compared to more developed regions. Africa’s median debt-GDP ratio is 37%, as compared with G8 nations’ median of 84%.

The factors above lead many industry commentators us to believe that the time is now to invest in Africa as it is ripe for an explosion of economic growth.

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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