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Broadgate: Weekly Briefing 21/12

21 December 2012

China – The World Bank has raised its growth forecast for China, saying stimulus measures and approval of infrastructure projects will help boost growth.

It added that the pick-up in factory output and investment “suggested that China’s economy was bottoming out”. The bank said it now expects China’s economy to grow by 8.4% in 2013, up from its earlier projection of 8.1%.

A slowdown in China’s growth in recent months had prompted policymakers to announce various stimulus measures.

The bank also raised its forecast for the developing East Asia region, excluding China. The grouping, which includes Thailand, Philippines, Indonesia and Burma, is now projected to grow 5.7% in 2013, up from the previous forecast of 5.5%.

The bank said that the region was likely to benefit from Thailand’s recovery from last year’s floods and strong growth in the Philippines.

Outlook – With less than two weeks left in 2012 a recent survey suggests that half of people around the world think the global economy will improve in 2013 and many plan to ring in the New Year with family and friends and improve their finances and health.

The Ipsos poll released on Tuesday revealed that Indians, Brazilians and Indonesians were the most optimistic that the economy will improve next year, with more than three quarters having a positive outlook.

But less than a third of Belgians, Spaniards, French, Poles and Italians were confident the global economy will get better.

“There is a great amount of optimism for the future,” said Keren Gottfried, research manager at Ipsos Public Affairs, adding that the number had jumped 8% since last year.

And while many still had doubts about the world economy, 80% of the 18,500 people questioned in 24 countries for the survey believed 2013 would be a better year for them personally.

Europe – The E.U. and Singapore have agreed a free-trade agreement (FTA), the second such deal between the 27-nation bloc and a major Asian trading partner.

Last year E.U./Singapore trade was worth approximately USD97bn.

Singapore is the second largest Asian investor in the E.U., after Japan. The E.U. Commission says the deal, not yet signed by politicians, will help E.U. exports of cars and financial services. The E.U. is Singapore’s second biggest trade partner after neighbouring Malaysia. The plan is to initial the FTA in early 2013.

Europe – European stocks climbed to their highest level in 19 months on Wednesday, as German business confidence rose more than forecast and optimism mounted that U.S. policy makers will reach an agreement on next year’s budget (so-called ‘fiscal cliff’ discussions).

The EuroStoxx 600 index climbed 0.5%. The equity benchmark advanced to its highest level since May 2011 after Standard & Poor’s upgraded Greece’s debt. The gauge has rallied 15% this year as the European Central Bank (ECB) announced an unlimited bond-buying plan and the Federal Reserve began a third round of asset purchases.

“The market is still focused on the fiscal-cliff talks in the U.S., in which investors seem to expect an agreement relatively soon,” said John Plassard, vice president at Mirabaud Securities LLP in Geneva. “News such as the upgrade of Greece’s credit rating is positive, albeit not a big surprise, helping to continue a year-end rally. Sentiment at the beginning of 2013 will be cautious as we face some political risk.”

Spain – Bad loans as a proportion of total lending at Spanish banks climbed to a record 11.23% in October, as the country’s economic slump led more companies and homeowners to miss credit payments.

The proportion rose from 10.71% in September as EUR7.4bn of loans defaulted in the month, to take the total of doubtful credit in the banking system to EUR189.6bn, the Bank of Spain said.

Spain’s economic slump, now in its fifth year, continues to drive defaults to record highs as lenders report rising impairments of corporate, home and consumer loans as well as those linked to real estate. Doubts about the ability of Spain’s weaker lenders to withstand mounting impairments of loans linked to real estate helped push the country to seek a European bailout for its banking system in June.

“It’s clear that these levels of bad loans are going to keep rising,” said Juan Pablo Lopez, an analyst at Espirito Santo Investment Bank. “The flows of entries into default are still very high.”

Greece – Standard & Poor’s has increased its rating of Greece’s sovereign debt by six notches, following efforts by its eurozone neighbours to keep it in the currency union.

The ratings agency said there has been “strong determination” within the eurozone to help Greece remain a member state. S&P has increased Greece’s rating from ‘selective default’ to ‘B-minus’.

The agency also praised the continuing efforts by Greece’s government to cut its spending. Greece is currently receiving the second of two bailouts.

Spotlight on: Current fund manager sentiment

More investors than ever say they are bullish about China’s economic outlook, and more favour European rather than U.S. stocks for the first time in two years, a Bank of America monthly survey showed.

67% of money managers, who together oversee USD503bn, predicted that China’s economy will grow at a faster rate next year, the highest reading since the survey data started in 2003. Some 7% hold more European stocks than appear in benchmarks, the poll showed.

“Investor anxiety has been successfully sedated by central-bank liquidity policies in recent months,” Michael Hartnett, chief investment strategist at Bank of America’s Merrill Lynch unit, wrote. “Risk appetites are higher and hopes for economic activity have picked up, especially for Chinese growth.”

Optimism that the world’s second-largest economy will accelerate may help to offset concern that potential budget cuts and tax increases in the U.S. will curb global growth. A survey showed China’s manufacturing industry may expand for a second month in December, underscoring optimism the economy will recover following a seven-quarter slowdown.

40% of respondents said the global economy will improve, the highest reading in 22 months, while a net 11% said profits will increase, the most bullish result in 20 months.

U.S. Budget

The poll showed 47% of money managers rated America’s budget outlook as their top concern, compared with 22% who cited the euro area’s debt crisis. U.S. President Barack Obama and House Speaker John Boehner are trying to reach an agreement to prevent more than USD600bn in tax increases and spending cuts from coming into force in January.

Even as investors became more sanguine about global growth, allocations to equities remained unchanged from November, BofA said. Hedge funds were an exception, with net investment in shares jumping to 45%, the highest since August 2006.

“While bullish rhetorically, the lack of follow through in actual positioning suggests moderate conviction at best,” BofA said in the report to investors.

Average cash levels fell to 4.1% from 4.2% in November, BofA said. A net 41% said they hold fewer bonds than benchmarked, the lowest in eight months, whilst 5% said they hold more commodities than appear in indexes.

Overweight Europe

The share of respondents who said they are overweight in European equities) meaning they hold more of the region’s shares than are represented in global benchmarks), rose from 5% last month, the survey showed. Those saying they are overweight the U.S. fell to 5% from 11%, with the country falling behind Europe in investors’ favour for the first time since November 2010.

Investors remained underweight on Japan and the U.K., the survey showed. A majority are now under-invested in energy companies, for the first time since January 2009, BofA said.

A record high net 64% of respondents said companies are not investing enough, BofA said. A net 45% of investors now prefer companies to use idle cash to increase capital spending, the highest reading in 20 months, instead of paying back debt or returning it to shareholders.

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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