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Broadgate: Weekly Briefing 21/2

21 February 2013

Japan – Japan’s monthly trade deficit hit a record in January after its recent aggressive monetary policy stance weakened its currency sharply. Exports rose in January, the first jump in eight months, as its goods became more affordable to foreign buyers.

However, a weak currency also pushed up its import bill resulting in a monthly trade deficit of 1.6tn yen ($17.1bn), a 10% jump from a year ago.

Meanwhile, output data also indicated that things may be starting to change. Japan’s shipments to China rose by 3% in January from a year earlier, the first rise since May.

At the same time, exports to the U.S., the world’s biggest economy also jumped 10.9% further, adding to hopes of a recovery in the sector. Meanwhile, the pace of decline in exports to the European Union also slowed during the month.

There are hopes that as shipments to key markets recover and the yen continues to remain weak, Japan’s export sector may see a sustained recovery.

Japan – Japanese Prime Minister Shinzo Abe plans to ask U.S. President Barack Obama to approve shale gas exports to Japan, which has relied on fossil fuels to keep the world’s third biggest economy running after the 2011 Fukushima nuclear disaster.

Japan, the world’s biggest importer of liquefied natural gas, has increasingly turned to fossil fuels after most nuclear reactors were shuttered in the wake of Fukushima.

Japanese companies are investing in U.S. shale gas projects, which could begin exports from 2017 if they win government approval.

Importing U.S. gas would boost Japanese utilities’ bargaining power in negotiations with suppliers who benchmark their prices against more-expensive oil, said Reiji Ogino, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co. Utilities have sought government approval to raise electricity prices and pass on the burden of higher fuel bills to consumers.

Global – The economies of the Organisation for Economic Co-operation and Development (OECD) contracted by 0.2% in the last three months of 2012.

It was the first such decline for the group of developed countries since the beginning of 2009.

The eurozone was the biggest factor, with a 0.6% contraction. Japan and the U.K. shrank too and the U.S. saw no growth. The OECD’s figures highlight the continuing weakness that has afflicted the developed world.

At no stage since the financial crisis have developed economies grown very strongly. It has never been a convincing recovery.

But the figures for the final quarter of last year actually show a decline for the first time in nearly four years for the OECD as a whole.

U.K. – Britain’s benchmark, the FTSE 100 equity index extended gains on Wednesday to rise to new five-year highs, and breached a key psychological level which some traders said could induce moves higher.

The FTSE 100 was up by 0.4% at 6,401.79 on Wednesday, surpassing the key 6,400 point level. The stock market extended earlier gains after minutes from the Bank of England signalled a greater likelihood of more monetary stimulus measures, which have boosted equity markets around the world.

The FTSE 100 last traded above the 6,400 point mark in late May 2008.

China – China’s foreign direct investment fell for an eighth month in January, a sign that the recovery in the world’s second-largest economy has yet to revive confidence among overseas companies.

Inbound investment dropped 7.3% from a year earlier to $9.27bn, the Ministry of Commerce said. Non-financial outbound investment rose 12.3% to $4.91bn, the ministry data showed. China’s economic data in the first two months are distorted by the timing of the weeklong Lunar New Year holiday, which fell in January last year and February this year.

Rising employee and land costs have diminished China’s attractiveness as a destination for foreign investors, with labour-intensive manufacturers leaving for other Asian countries, HSBC Holdings Plc said in a report last month. Inbound investment dropped 3.7 percent last year as economic expansion was the weakest since 1999.

“Foreign enterprises are saying, ‘OK, China’s not growing as fast as in the past, maybe we should pull back a little bit,’” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said. “The big picture is that Chinese growth potential is being lowered by less appetite by foreign businesses to move their operations into China.”

At the same time, inflows are likely to rebound by 4.5% this year as businesses realize growth is improving and the nation won’t have a “hard landing,” Kowalczyk said.

Commodities – Gold traded little changed near a six-month low in London as investors weighed signs of economic improvement against stronger physical bullion demand, before the U.S. central bank releases minutes of its latest meeting.

“Bullion’s safe-haven properties as well as its traditional use in inflation hedges are irrelevant at this point,” Andrey Kryuchenkov, an analyst at VTB Capital in London, wrote in a report. “The market’s attention is set to turn to the Federal Open Market Committee’s January minutes.”

Spotlight on: Fund Manager global allocation survey

Global fund managers’ expectations of stock market returns in the U.S. have fallen to their lowest since 2008, according to research by Towers Watson.

The professional services firm’s latest investment manager survey shows that asset allocators expect U.S. equities to deliver returns of 7% during 2013. This is down from the expected 8% in 2012 and is the lowest level recorded since the poll’s inception in 2008.

Equity return expectations have also fallen for Australia, moving from 7% to 6%, but rose in all other major regions.

Investors expect the U.K. and Japanese stock markets to advance 6% in 2013, both up from 5%, the eurozone is tipped for 7% returns, up from 6%, and China is expected to return 10%, up from 7.8%.

But despite their muted outlook for the U.S., this country is the preferred investment target for global fund managers. Asset allocators have a preference towards U.S. and China and away from the eurozone.

Towers Watson global investment committee chairman Robert Brown says: “There are some positive economic signals coming out of the U.S. which, even though driven largely by government policies, seem to be reflected in managers’ view that the U.S. is the region with the most rewarding investment opportunities in 2013, followed by China, the eurozone and frontier markets.”

The survey also reveals that fund managers have adopted a stance of “guarded optimism” with many expecting to keep their portfolio risk levels the same or carry out modest increases during 2013. Investors think equity volatility will sit between 15% and 20% in the major economies this year, which is above the historical average but “somewhat lower” than the range seen in recent years.

Brown says: “Volatile markets and heightened risk awareness continue to make asset allocation very challenging as investors balance priorities like long-term de-risking, short-term market opportunities, rebalancing and maintaining a strategic asset allocation mix.

Towers Watson agrees with the market view that government bonds do not appear to be “great value” at the moment, after yields dropped on the back of central bank policy and safe-haven flows, and argue that equities seem to be better value.

“However, it is challenging to know what to do about it when the goal for many funds is to reduce risk overall and diversify from existing equity holdings,” Brown adds.

“So many funds are buying fewer bonds than before and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities.”

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.