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Broadgate: Weekly Briefing 27/4

27 April 2013

Japan – The Nikkei share average climbed to a fresh, almost five-year high on Thursday, but the mood was tempered by sharp losses for Canon and Nintendo after they failed to meet investors’ expectations of strong earnings guidance.

Market analysts had expected Japanese companies to aggressively raise their earnings guidance after the yen weakened more than 14% this year, driven by bold government and central bank policies to revive growth.

Still, investors remained optimistic about Tokyo stocks on the view that the yen, which last traded at 99.13 to the dollar, still has room to weaken.

China – Growth in China’s manufacturing sector slowed in April, a survey by HSBC has indicated, adding to concerns about the country’s economic recovery.

The preliminary reading of HSBC’s Purchasing Managers’ Index (PMI) fell to 50.5, from 51.6 in March. A reading above 50 indicates expansion.

A drop in new export orders was blamed for the decline, a sign of weak global demand. Last year, China’s economy grew at its slowest pace in 13 years.

“New export orders contracted after a temporary rebound in March, suggesting external demand for China’s exporters remains weak,” said Qu Hongbin, China chief economist at HSBC in a statement.

Asian shares fell following the release of the data on Thursday, with the main index in Shanghai falling 1.4%.

Australia/China – Australia’s central bank is planning to invest around 5% of its foreign currency reserves in Chinese government bonds, its deputy governor has said.

It will be the first time the Reserve Bank of Australia (RBA) will invest in sovereign bonds of an Asian country other than Japan.

“This decision to invest in China is an important one,” Philip Lowe, deputy governor of the RBA said in a speech to the Australian Chamber of Commerce in Shanghai. It reflects the broader economic relationship between China and Australia and our increasing financial ties.

“It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets,” he added.

South Korea – South Korea’s growth rate hit a two-year high in the first three months of the year, boosted by a rebound in construction, investment and exports.

The economy grew by 0.9% in the January to March quarter from the previous three months, the central bank’s estimates showed.

The data is likely to help allay fears over the health of the Korean economy.

Earlier this year, the government cut its growth forecast for the current year amid a slowdown in exports.

However, the latest data showed a 3.2% quarter-on-quarter growth in exports during the period, that compares with a 1.2% drop in the previous quarter.

U.S. – Barclays Wealth head of investment strategy for EMEA Kevin Gardiner says the U.S. economy will still show better growth than investors are fearing in 2013, despite the latest indicators pointing to an abrupt slowing in the economy.

Gardiner says data from some parts of the U.S. economy looks weaker than expected, reinvigorating concerns of double-dip recession in the country. He says: “There has been a lot of discussion about whether the U.S. now is slowing down quite abruptly as we go into the second quarter.

However Gardiner believes many of these concerns prove to only to be short-term setbacks. He says: “We can see all sorts of issues that can induce some weakness in the economic profile on the short-term basis but the underlying conclusion from us about the US economy is that it is in better shape than investors are fearing.”

Germany – Germany will grow by just 0.5% this year, the government said on Thursday, raising its forecast by just 0.1% as a lack of investment and weak exports continue to be a drag on Europe’s largest economy.

The German Economy Ministry kept its 2014 forecast for solid growth of 1.6% and said it was upbeat as the global economy begins to regain traction and crisis-stricken euro zone states make progress with their reforms.

“There is every reason to look to the future with optimism. The German economy is picking up again and is successfully leaving an economic weak phase behind it,” German Economy Minister Philipp Roesler said in a statement.

Spain – Spain is set to unveil new measures later aimed at reviving the economy, a day after unemployment in the country hit another record.

Many economists believe the proposals will focus less on austerity and more on stimulus measures.

Spain saw violent anti-austerity protests on Thursday, with police reporting a number of injuries and the arrest of people suspected of planning to burn down a bank.

This came on the day official figures showed that unemployment in the eurozone’s fourth largest economy topped 27% in the first quarter of 2013. Unemployment reached 57.2% among people under 25 years old, the National Statistics Institute said.

Commodities – Central banks bought the most gold since 1964 last year, just before the collapse in prices into a bear market underscored investors’ weakening faith in the world’s traditional store of value.

Nations from Colombia to Greece to South Africa bought gold as prices rose for an 11th year in 2011, highlighting the reversal of a three-decade-long bout of selling that diminished the world’s biggest bullion hoard by 19%. The World Gold Council says they added 534.6 metric tons to reserves in 2012, the most in almost a half century, and expects purchases of 450 to 550 tons this year, valued now at as much as $25.3bn.

Central banks are the biggest losers, with about $560bn of value erased since gold reached a record $1,921.15 an ounce in September 2011. The metal was already in the eighth year of its longest bull market since the end of World War I when reserves started expanding again in 2008. They were also buying in 1980 when bullion peaked at the equivalent of $2,400 in today’s money, and selling in 1999 as prices slumped to a 20-year low.

“They sell at the wrong time and buy at the wrong time,”said Walter Hellwig, who helps manage $17bn of assets at BB&T Wealth Management in Birmingham, Alabama. “They aren’t traders. They are looking at it as a long-term holding, as an ultimate reserve currency. With the benefit of hindsight, they tend to get it wrong more often than not.”

Equities – Central banks, guardians of the world’s $11tn in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23% said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5tn yen ($35.2bn) by 2014.

Managers of banks’ assets are looking for alternatives to holding government bonds after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows. Central banks’ foreign- exchange holdings have increased by about $8.5tn globally in the past decade, exceeding levels needed for day-to-day currency administration.

Spotlight on: Three investment themes shaping markets in 2013

Two of JP Morgan’s global market strategists advise brokers & investors how to position their portfolios if they want to benefit from the major growth trends of the year.

Maintaining an overweight equity position, diversifying across the global fixed income market and raising emerging markets exposure offer the best hope of being a successful investor in 2013, according to JP Morgan.

Strategists at the group say that, with intervention from world central banks pushing fixed income yields ever lower while equity prices continue to rise, investors need to follow these three themes if they want to succeed in the current uncertain environment.

Stay overweight equities

Dan Morris, global market strategist at JP Morgan, says that although equity prices have surged in recent months, he has not seen any suggestion that they will fall back in the foreseeable future.

“The FTSE 100 is up around 10% since the beginning of the year on a total return basis, and the S&P 500 index has reached record highs,” he said. “Given the range of global factors supporting stocks, the UK and US equity rallies look like they may still have room to run.”

“In the U.S., surging household wealth bolstered by a recovering housing market along with a resilient and deleveraged consumer is positive for equities, but it is important to keep in mind that the fiscal drag stemming from Washington’s deficit-reduction policies remain a headwind, stocks still look cheap relative to bonds.”

Make sure you have diverse bond exposure

Andrew Goldberg, who is also a global market strategist at the company, says that the mass liquidity the world’s central banks have injected into the financial system means investors need to diversify globally across the fixed income market.

However, he warns that yields from fixed interest assets cannot and will not stay at such low levels for ever.

“Investors should be looking for carry and flexibility with the prospect of rising yields,” he said.

“For most, however, the immediate challenge remains grappling with today’s painfully low-rate environment. Cash accounts are not keeping pace with inflation and investors have to broaden the search for income.”

“Non-traditional sources such as global dividend-yielding equities, emerging markets debt and high yield bonds look like compelling alternatives.”

Don’t ignore the emerging markets

Goldsmith says that although the emerging markets have been a source of disappointment in recent times, it would be unwise to avoid the area completely.

According to FE Analytics, the MSCI Emerging Markets index has returned 350.75% over the last decade, compared with 149.79 and 104.81% from the FTSE All Share and S&P 500, respectively. However, the MSCI Emerging Markets index has underperformed against both the FTSE All Share and S&P 500 over one, three and five years.

Nevertheless, Goldsmith says that the low sovereign debt levels in this area of the market and the fact that they are historically cheap mean now could be the perfect buying opportunity.

“Emerging markets have disappointed investors on a relative basis in recent months, but they look attractively priced and poised for stronger performance,” he said.

“Emerging markets have a good combination of low indebtedness and robust GDP growth and represent an opportunity for long-term investors able to tolerate some volatility to achieve higher growth.”

“No adviser will be able to predict the future, but understanding exactly where we are today makes you a more informed investor,” he added.

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.