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Broadgate: Weekly Briefing 26/4

26 April 2012

U.K. – The U.K. is officially back in recession as preliminary figures show the economy contracted 0.2percent in Q1.

The Office for National Statistics (ONS) confirmed GDP contracted in the first quarter in preliminary figures, which, following the previous quarter’s contraction of 0.3percent, means the U.K. is considered to be in recession.

The figures confirm analysts’ fears of a double-dip recession. The U.K. was last in recession in 2009 and, despite a strong 2010, has failed to recover in the way many had hoped. The ONS said the economy has shown no growth over the past year and has recovered less than half the output lost during the recession in 2008 and 2009.

Europe – A survey of eurozone banks has allayed fears that a credit crunch in the eurozone may be underway. Only a net 9percent of 131 banks tightened their lending conditions in the last three months, according to the European Central Bank’s latest quarterly survey.

The data suggests that emergency loans provided by the ECB have helped stave off a sudden curtailment of lending. But ECB President Mario Draghi said that the outlook for the eurozone economy this year remained weak “Available indicators for the first quarter of 2012 broadly confirm a stabilisation in economic activity at a low level,” he said.

Mr Draghi also warned that, despite the greater readiness of banks to lend, the demand for loans from businesses was likely to remain subdued.

Spain – Budget Minister Cristobal Montoro said Spain would damage European and global growth if it misses budget-deficit targets and threatened to take over the accounts of regions that don’t reorder their finances.

“Spain’s future and Europe’s future are at stake because we are big enough to hurt the whole of Europe and to threaten the global economic recovery,” Montoro told lawmakers in Madrid. The government will take all measures needed because “for all parts of the administration the deficit target is unconditional,” he said.

“We have no reason to doubt the absolute commitment of the Spanish government to undertake the necessary reforms,” European Central Bank President Mario Draghi told a European Parliament committee in Brussels. “Remarkable progress has been achieved and is being achieved.”

India – India’s sovereign credit outlook has been lowered to negative from stable by Standard & Poor’s (S&P) on risks of slower economic growth and a widening current-account deficit, taking the nation a step closer to junk status.

“India’s investment and economic growth have slowed, and its current-account deficit has widened,” S&P said in a statement, reaffirming its BBB- long-term India rating, the lowest investment grade. “We are revising the outlook on the long-term ratings on India to negative to reflect at least a one-in-three likelihood of a downgrade.”

Bonds fell, stocks declined and the rupee pared gains after S&P said India’s rating could be lowered because of diminishing growth prospects, a deterioration in trade performance or slow progress on fiscal reforms. The Indian government has the widest budget deficit among the largest emerging economies, while the current-account shortfall reached an unprecedented USD19.6bn in the three months through December.

U.S. – U.S. companies from Apple Inc. to 3M co. are surpassing earnings estimates at the highest rate in two years as economic growth at home helps drive demand and counter a drag from Europe.

“The domestic economy is faring far better than people thought and that, even in the face of Europe and the slowdown in the emerging world, is blowing away estimates,” said Jim Paulsen, chief investment strategist for Well Capital Management, which oversees approximately USD333bn.

Profits running ahead of forecasts may help ease investor concern that a shrinking economy in Europe and slower growth in China will weigh down earnings this year.

China – China’s stocks rose for the third time in four days after Premier Wen Jiabao pledged to maintain steady economic growth and U.S. housing data bolstered the outlook for exports to the world’s biggest economy.

“The government has the tools to stem a decline in economic growth and they will act when the situation worsens,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “Earnings are still a major concern and will limit a rebound. Trading will be range-bound for the time being.”

The Shanghai index has climbed 9.4percent this year amid speculation the government will take measures to boost the economy. “China has confidence that it will sustain steady and robust economic growth,” Wen said “We will remain committed to reform and opening up.”

Commodities – Gold fell to USD1,623.55 an ounce on Wednesday, the lowest level since April 5, on concern the political climate in France and the Netherlands may complicate Europe’s struggle to contain the debt crisis. The Akshaya Tritiya festival, considered an auspicious day to buy precious metals, is celebrated today in India, last year’s biggest bullion buyer.

“India’s jewellery demand or physical interest from the world’s top buyer is very slack in spite of the Akshaya Tritiya festival this week, which is a concern,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said on Wednesday, “Investor interest is limited.”

Spotlight on: the importance of ‘top-down’ portfolio allocation

The key contributor to the growth in value of your client’s policy is the portfolio of funds chosen both at outset and throughout the lifetime of the bond. Thus, if the bond is assumed to be the ‘vehicle’ used to achieve your client’s saving goals, the funds chosen could be seen as the fuel needed in order for it to travel in the right direction.

However, the consequences of not spending enough time on portfolio construction can be far-reaching and extremely damaging to the value of your client’s investment bond over its lifetime.

A common issue is an unknowing over-investment in a particular sector, asset class or geographic region, resulting in the value of the portfolio being largely dependent on the fortunes of the over-invested holding, a scenario at odds with the most basic principles of diversification.

It is particularly easy to become over-invested in a single area if attention isn’t paid to the make-up of individual funds within a portfolio. As an example, many global equity funds follow leading indices that may be overweight in the Financial sector or U.S. Equities (for example) at any given time. In this scenario, a client that has another fund within their portfolio that invests solely in Financials, in a bid to diversify sector coverage, may unknowingly find themselves over exposed to the sector.

Just as important as the initial research and portfolio allocation is the on-going maintenance of the portfolio on a regular basis, in order to prevent the likelihood of ‘portfolio drift’. Portfolio drift is an issue whereby the combined make-up of a portfolio of funds changes over time. If, for example, the manager of a single fund in the portfolio changes his outlook on the Healthcare sector and instead chooses to invest in the Construction sector, the overall make-up of the portfolio can become significantly different to how it may have looked when originally allocated, which, if done properly, should complement the client’s risk/return profile.

Different advisers base their fund recommendations on varying factors. Some will favour particular fund managers, others might look solely at performance or independent ratings, whilst some may look at portfolio construction from a ‘top-down’ perspective – first deciding which asset types, sectors or asset types best suit their client’s profile and building a portfolio of funds that meet these requirements. Top-down portfolio allocation, therefore, is concerned with selecting assets (initially, at least) on a purely macroeconomic basis, with further filtering (concerning preferred fund managers or performance for example) being a secondary part of the process.

In recognition of this and in order to assist brokers with their top-down fund selection process, Hansard has developed a new web-based fund application, available on Hansard OnLine now.

The new Unit Fund Centre (UFC) provides access to a wealth of fund information, enabling you to refine your research to those funds that best fits your client’s needs, or your personal outlook on the global economy from a top-down perspective. The UFC also brings together each of the Hansard OnLine fund tools into one, central location.

For example, if you would like to view only those funds that hold stocks in the Telecommunications sector that have a geographical focus in the Asia Pacific region, the UFC will return a list of funds that meet this specific criteria. Of course, funds can also be grouped based on their sector currently and fund management group, for ease of use.

Once presented with the results, interactive performance and holdings data can be further researched to choose the right funds towards constructing a suitable fund portfolio.

Consensus amongst many of the world’s leading asset managers suggests that the current unpredictability of the markets looks set to continue for some time to come. Only by understanding where your clients are invested during these times are you able to appreciate the vulnerability or stability of their fund portfolios during such turmoil – the UFC can assist you in doing this.

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.

clientservices@broadgatefinancial.com