Broadgate: Weekly Briefing 27/01
27 January 2014
China – China’s economy, the world’s second-largest, has shown signs of stabilising, as 2013’s growth rate matched that for 2012, official data shows.
Gross domestic product (GDP) grew at an annual rate of 7.7% in the October-to-December period, down from 7.8% in the previous quarter, but it was still higher than the government’s target rate of 7.5%.
China is trying to maintain strong growth while rebalancing its economy.
China has said it wants to move away from an investment-led growth model to one driven by domestic consumption.
China – China’s central bank has injected fresh liquidity into the country’s large commercial banks ahead of the Lunar New Year holiday later this month.
The bank did not say how much cash it injected, but said the move was aimed at ensuring the “stability” of the monetary market ahead of the holidays.
The Lunar New Year is China’s most important festival and sees increased demand for cash among consumers.
The move also comes as China’s key interbank lending rate rose on Monday.
The seven-day repurchase rate, a key gauge of liquidity among banks, rose to nearly 6.5% on Monday, up from 4% earlier this month.
Japan – The Bank of Japan has opted to maintain current levels of quantitative easing as inflation continues to move closer to the central bank’s inflation target.
Members of the central bank’s policy board voted unanimously to avoid changing its massive stimulus package and instead continue with current levels of monetary easing.
The Bank of Japan’s stimulus plan involves the expansion of the monetary base by an annual pace of around ¥60-70trn through a series of asset purchases.
Bank of Japan governor Haruhiko Kuroda believes this level of stimulus can continue to support economic improvement and rising inflation.
“Such conduct of monetary policy will support the positive movements in economic activity and financial markets, contribute to a rise in inflation expectations, and lead Japan’s economy to overcome the deflation that has lasted for nearly 15 years,” he said.
Trends – Asset allocators are continuing to add risk to their portfolios even as concerns grow that stockmarkets are looking expensive, the latest Bank of America Merrill Lynch Fund Manager Survey shows.
BofA ML’s poll for January reveals that a net 4% of fund managers are taking higher than normal risks, which is a level close to record highs.
January’s risk-taking measure is up from 0% in December and marks only the third time in the survey’s history that the reading has been “solidly positive”.
In keeping with increased risk, a net 55% of asset allocators are overweight equities. This comes despite a net 7% of respondents saying stockmarkets are overvalued, its highest reading since 2000, with a net 72% believing US stocks are looking expensive.
Trends – Last week saw investors across the globe pull more than $20bn from money market funds and move further into equities, according to EPFR Global.
The fund flow data provider reports that collective flows into all the equity funds it tracks amounted to $9.4bn in the week ending 15 January, with retail investors making their strongest move to equities since early August. Net outflows from money market funds were over $21bn.
“Fund groups that carried some momentum into the new year again fared well, with Europe equity funds absorbing over $4bn, Japan equity funds taking in another $1.3bn and flows into China equity funds hitting a 51-week high,” the researcher says.
EPFR Global also reports that retail investors pulled money from bond funds for the 30th time in the past 33 weeks, driving total inflows into the asset class down to around $1bn, or around of fifth of the previous week’s $5.2bn net inflows.
Retail investors continued to steer clear of emerging markets funds last week. This means emerging market equity funds have not seen new retail money since early in the second quarter of 2013.
U.S. – The U.S. Treasury Department will offer $15bn in its first auction of floating-rate notes next week, trying to capitalize on robust investor demand for the safest short-term investments.
“Floating rate notes bring additional diversity to Treasury’s current portfolio and help support our goal of saving taxpayer dollars by financing the government’s borrowing needs at the lowest cost over time,” Mary Miller, the Treasury’s undersecretary for domestic finance, said in a separate statement.
Europe – Euro-area consumer confidence increased more than economists forecast in January, adding to signs that the currency bloc’s recovery is gathering momentum.
An index of household confidence in the euro area rose to minus 11.7 from minus 13.5 in December, the European Commission in Brussels said in a preliminary report on Thursday. That exceeds the median forecast of minus 13 in a Bloomberg News survey of 27 economists.
Positive economic signals are accumulating in the euro zone, with manufacturing output expanding more than forecast in January and retail sales up 1.4% in November from the previous month. European new-car sales surged the most in almost four years in December as price cuts by producers such as Renault SA and Ford Motor Co. helped generate a recovery that industry executives say will last in 2014.
Spotlight on: Outlook for 2014
Robert Jukes and Edward Smith, global strategists at Canaccord Genuity Wealth Management, have listed five key investment themes for the new year.
The pair expect equity markets to ‘take a pause’ for three to six months, before accelerating again in the second half of the year.
The five themes listed below are designed to provide investors with uncorrelated ideas for the coming year to make the most of global equity markets.
The strategists expect growth, interest rate and inflation differentials to continue to favour the US among the G10 currencies, causing the US dollar to steadily appreciate throughout the year.
“Portfolio flows favoured Europe in 2013, but with the marked equity valuation discount all but closed and further headwinds to growth, we believe this will not be the case in future,” they said.
“The clear risk to our view is that dovish surprises from the Fed boost sentiment towards riskier currencies. We believe this risk is lower than the market is pricing for.”
Corporate profit share under threat
The move from a labour share of national incomes to corporate savings, which has been happening since 1980s, is not supportive of growth and will not help western governments out of budgetary austerity, according to the duo.
“2014 will be the year policymakers start to address the growing imbalance,” they said. “Governments must incentivise investment, in particular in infrastructure and technology-focused educational reform, and drive wage growth.”
They are tipping the German consumer sector in particular to outperform in this environment, since the government is making steps to boost wage growth and consumption.
US industrial reshoring was one of the best performing themes in the group’s portfolios last year and the strategists expect the theme to emerge in the UK this year.
Jukes and Smith said: “We believe the repatriation of developed world supply chains will be a key investment theme, and the UK will also experience a reshoring trend starting in 2014.”
Déjà vu, all over again in Europe
Although many investors see the situation in Europe improving, the pair argue the recovery in the region is ‘no further forward’ in the short run.
“We believe the impending asset quality review could trigger renewed equity market volatility,” they said. “We expect the largest holes to be revealed in Spain, and Spanish equities are accordingly one of our largest underweights for 2014.”
Policy renormalisation and debt servicing burdens
The pair highlight the danger of rising interest rates and the effect this will have on household debt servicing costs.
They expect Canada, Sweden, Switzerland and the Netherlands to be the most affected by the rising debt servicing burden, which may act as a significant headwind to consumption growth.
“As monetary policy starts to tighten in 2014, we believe investors will do well to avoid consumer-sensitive equities within these countries,” they said.
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