Broadgate: Weekly Briefing 24/2
24 February 2014
Global – The International Monetary Fund (IMF) has issued a series of recommendations for international reform that could boost the size of the global economy by $2.25tn. The ‘Global Prospects and Policy Challenges’ report from the IMF arrives shortly before G20 finance ministers are due to meet this weekend in Australia.
The IMF calls for an extensive range of changes to be made across the global economy including reform of product and labour markets, political reform, increased competitiveness in some European economies and infrastructure investment.
The report estimates that when combined these efforts could add $2.25tn to the global economy by 2018.
In particular the IMF highlights that attempting to rebalance and reform product and labour markets as well as increasing infrastructure investment could boost global growth by 0.5% each year.
Japan – Japan’s monthly trade deficit has more than doubled to a new record after a weakened currency drove up the cost of fuel imports, while exports slowed.
Japan’s trade gap rose by 71% to 2.79tn yen ($27.3bn; £16.4bn) in January from a deficit of 1.3tn yen in December.
This comes after imports rose by 25%, outweighing a 9.5% rise in exports.
Japan has posted large trade deficits for 19 straight months, raising concerns the government’s stimulus policy may be having a counter effect.
Prime Minister Shinzo Abe has been looking to weaken the value of Japan’s currency to stimulate economic growth and end nearly two decades of deflation.
His measures, which have come to be known as “Abenomics”, include increasing the money supply in the country to drive down the value of the currency.
U.S. – The U.S. Federal Reserve intends to continue reducing economic stimulus measures, minutes of the central bank’s January meeting have confirmed.
The Fed’s policy makers said they expected to cut monthly bond-buying in predictable $10bn steps.
The Fed cut its bond-buying programme to $65bn a month at the end of its most recent meeting in January.
That came despite a string of disappointing U.S. economic data, including weak jobs figures.
The bond purchasing programme is intended to keep interest rates low and stimulate growth.
Europe – Business growth in the eurozone eased this month but the bloc’s economy continued to expand at a “robust pace”, a closely watched survey suggests.
The latest Markit eurozone composite purchasing managers’ index (PMI) dipped to 52.7 from 52.9 in January. A figure above 50 indicates expansion.
Within the bloc, Germany and France continued to see contrasting fortunes.
German companies saw strong growth, but activity among French firms declined for the fourth month in a row.
Asia – Meanwhile, shares across Asia fell on Thursday after the latest Chinese manufacturing data came in at a seven-month low.
The reading of HSBC’s preliminary manufacturing purchasing managers index for February was 48.3, down from 49.5 in the previous month. A score below 50 indicates a contraction in factory activity.
As a result, Hong Kong’s Hang Seng index slid 1.1% to 22,412, while the news also affected the Australian dollar and the Japanese yen.
Trends – Global fund managers have taken their exposure to banks to record levels, while continuing to scale back their weightings to global emerging markets.
The Bank of America Merrill Lynch Fund Manager Survey for February shows a net 28% of asset allocators now have an overweight to banks – up from just 16% in the previous month.
This means the allocation to global banks has reached a record high, with the overweight sitting at 2.4 standard deviations above its 10-year average.
BofA ML says: “In the wake of the global financial crisis, banks were unloved and GEM were portfolio darlings. The reversal in sentiment between these two investments appears complete this month.”
The survey shows a net 29% of fund managers are now underweight global emerging markets – almost double the net 15% underweight seen in the previous month.
Spotlight on: Sustainable investing in frontier markets
Paul Robinson, CEO of Alquity Investment Management, explains how investors in emerging and frontier markets can use a sustainable investment strategy to their advantage.
How are sustainable investment strategies evolving?
With growth of 425% in the environmental, social and governance (ESG) space since 2006, and nearly $35tn in assets under management, the signs are sustainable investment is set to become mainstream.
In short, sustainable investment is an approach integrating long-term ESG criteria into decisions made on investment and ownership, with a view to making superior, risk-adjusted financial returns.
Initial moves into sustainable investing sought to exclude any sectors or companies from a potential investable universe if they fell into ‘sin’ categories, such as arms, tobacco or pornography. Today, the concept of sustainable investing has moved on.
Rather than simply screening out ‘toxic’ stocks, a more considered approach is used, known as environmental, social and governance (ESG) investing. This type of investing examines a company’s approach to areas such as the local community, its employees, health and safety, and corporate governance.
Traditionally, ‘impact investing’ and ‘socially responsible investing’ have accepted lower financial returns as a trade off for meeting social or environmental goals. However, such trade-offs should soon be a thing of the past.
What are the benefits of sustainable investing?
Sustainable investment goes beyond traditional financial analysis, identifying companies which have sustainable business models. This is so that financial returns to the investor are maximised over the long term, as well as making sure investing is happening in a responsible way. Indeed, the kinds of risks sustainable investment can pick up are the quiet storms which often reconfigure the financial landscape when they make landfall.
The benefits of investing according to ESG principles are exemplified by examining the tale of two oil companies: BP and Exxon. To an ordinary investor, these two companies would probably have had many similarities prior to the Gulf of Mexico disaster in April 2010.
However, an ESG investment approach would have considered records from the United States Occupational Safety and Health Administration.
These would have shown BP had run up 760 “egregious, willful” safety violations during the three years prior to the Gulf of Mexico disaster. By comparison, Exxon had just one similar citation over the same period.
Clearly, actively employing ESG has more benefits than simply keeping one’s conscience clear.
How does ESG work in the frontier markets?
In relatively immature markets such as Africa, where issues of corruption and labour troubles often rear their heads, ESG investing is particularly valuable. By looking at a company’s environmental, social and governance record you can invest wisely early on, with fewer concerns about the macro issues facing the country.
The financial context of Nigeria today, for example, has many similarities to Russia’s situation in 1995. At that time, Russia was perceived as ‘high risk’ due to corruption, among other issues.
However, it was also at the beginning of a 10-year growth spurt which would bring in returns upwards of 1,200% for investors. By investing early, you get such returns.
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.