Broadgate: Weekly Briefing 21/1
21 January 2013
India – Indian economic growth may rebound in 2013 while falling short of the government’s 8% target, as inflation risks limit the extent interest rates can be lowered to spur consumption and investment.
Gross domestic product in Asia’s third largest economy will rise 6.5% in the year through March 2014, according to the median of 30 estimates in a Bloomberg News survey. That compares with a 10-year average of 7.8% and the Finance Ministry’s projection of 5.7% to 5.9% in 2012-2013.
Prime Minister Manmohan Singh revived stalled policy overhauls in September to stem a slowdown in expansion, steps that helped send stocks to a two-year high this week on bets that a recovery has begun. While inflation eased to a three-year low of 7.18% in December, it remains the fastest among the biggest emerging markets. A record current account gap is threatening to damp the rupee, adding to price pressures.
China – China’s economy, the world’s second largest, is showing signs of a rebound that could help it emerge from its worst economic period in 13 years.
According to the latest government figures, growth picked up to 7.9% in the final three months of 2012, from 7.4% in the previous quarter. This was driven by state investment in infrastructure projects and efforts to get consumers and companies to spend.
Economic stability is seen as vital for China as its new leaders take over.
“It is obvious that the slowdown in the Chinese economy has halted for the moment,” said Fraser Howie, an economist and co-author of Red Capitalism. “But one has to be mindful that any recovery will be limited in its scope, not least because of the various headwinds that China is facing,” he added.
Currencies – The world is on the brink of a fresh “currency war,” Russia has warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.
“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference on Wednesday in Moscow.
The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it damages the competitiveness of other economies and provokes retaliation.
Colombia – Colombian Finance Minister Mauricio Cardenas says that when he travels next week to Switzerland for a meeting of the world’s richest capitalists, he won’t be lobbying for investment. After spending his first four months on the job trying to protect the economy from a currency rally, he doesn’t need more dollar inflows.
“I’m just going to tell a good story,” Cardenas, who will attend the World Economic Forum’s annual meeting in Davos, said in an interview on Tuesday in Bogota.
Foreign direct investment this year should surpass last year’s record USD16bn, Cardenas said, keeping pressure on manufacturers struggling to compete with a currency that outperformed all of Latin America in 2012. While the government can boost dollar purchases and take other steps to weaken the peso toward a “more natural” level of 1,800 per dollar, Colombia’s track record for market-friendly policies will make it attractive to investors for some time to come, he said.
Spotlight on: investors move from bonds to stocks
Global fund managers’ risk appetite has reached a nine-year high as the ‘great rotation’ from bonds towards equities continues to gather pace, Bank of America Merrill Lynch (BofA ML) research shows.
According to the bank’s Global Fund Manager Survey, the proportion of asset allocators taking higher-than-normal risk reached its highest level since January 2004 at the start of the new year.
Furthermore, the number of fund managers taking out market protection dropped to its lowest point since the first quarter of 2008. Cash levels also fell for the sixth month running, moving from a high of 5.3% in June 2012 to their present 3.8%.
A net 51% of asset allocators are now overweight equities – the most bullish stance seen since February 2011. The underweight to banks that has persisted since February 2007 also ended as investors moved overweight on the sector.
Within equities, managers have shifted towards cyclicals, with technology and industrials becoming the favourite sectors, and away from defensives. The weighting to telecoms, for example, has fallen to its lowest since December 2005.
Allocations to bonds dropped to their lowest since May 2011, with a net 53% of managers underweight when it comes to fixed income. In further evidence that a great rotation is in its early stages, 49% of investors now expect to sell government bonds to purchase higher-beta equities.
Investor confidence has improved markedly in recent months. The US fiscal cliff remains the leading tail risk among fund managers, cited by 37% of respondents. But this is down from 47% in December and 54% in November.
Meanwhile, a net 59% expect the global economy to strengthen over the coming year – up from a net 40% one month ago. China is a particular bright spot, with a 63% of allocators expecting the world’s second largest economy to secure a stronger recovery this year.
Michael Hartnett, chief investment strategist at BofA ML Global Research, said: “Following the resolution of the US fiscal cliff, sentiment has surged.
“Half of investors now tell us that they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations and with our call for a ‘great rotation’ to start in 2013.”
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