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Broadgate: Weekly Briefing 29/3

29 March 2013

Global – The world’s major economies will see stronger growth this year, but Europe’s recovery will continue to be slow, the Organisation for Economic Co-operation and Development (OECD) has said.

The OECD predicted stronger growth in the U.S., Japan and Germany. But it said concerns remained over the recovery of the wider eurozone.

It said governments would need to keep special measures in place to boost economic growth. Overall, the OECD forecast an average annualised growth of 2.4% among the seven biggest economies in the first quarter of this year.

That suggests a marked recovery from the last three months of 2012, when leading economies shrank at an annualised rate of 0.5%.

“The bottom line is that we are moderately more optimistic,” the OECD’s chief economist Pier Carlo Padoan told the Reuters news agency.

Cyprus – Stocks rallied on Thursday, sending the Standard & Poor’s 500 Index above its record closing level, and the euro rebounded from a four-month low as the reopening of banks in Cyprus eased concern about Europe’s debt crisis.

The S&P 500 jumped as much as 0.3% to 1,567.78 as of 11 a.m., eclipsing its previous all-time high of 1,565.15 set in October 2007, in response to the news.

China – China needs a “renewed reform momentum” to sustain long term growth, the OECD has said.

It said the financial sector, urbanization, state ownership and innovation were key areas for reforms. But it added that China had weathered the global financial crisis better than other OECD member countries.

It said China was on track to become the world’s biggest economy by 2016, after allowing for price differences. “It is well placed to enjoy a fourth decade of rapid catch-up,” the OECD said in a survey.

It also said that there were signs of China’s economic growth picking up pace again after the recent slowdown. However, it warned that in order “to sustain vigorous and socially inclusive growth over the longer run, renewed reform momentum is required”.

China/Brazil – China and Brazil have signed a currency swap deal, designed to safeguard against future global financial crises.

The pact, first announced last year, will allow their central banks to swap local currencies worth up to 190bn yuan or 60bn reais ($30bn).

Officials said this will ensure smooth bilateral trade, regardless of global financial conditions. Along with being the world’s second-largest economy, China is also Brazil’s biggest trading partner.

“If there were shocks to the global financial market, with credit running short, we’d have credit from our biggest international partner, so there would be no interruption of trade,” said Guido Mantega, Brazil’s economy minister.

The agreement was signed as part of the fifth Brics (Brazil, Russia, India, China and South Africa) summit being held in Durban, South Africa.

U.S. – The U.S. economy grew at a faster than expected 0.4% in the fourth quarter of 2012, the Department of Commerce has said.

The annualised figure was better than an earlier estimate of 0.1% growth, reflecting increased investments in plant and equipment. However, despite the upwards revision, the department warned that the economy remained “sluggish”.

The latest figures were a marked slowdown from the previous quarter.

An acute fall in defence spending and government expenditures hurt economic output, said the department.

Spotlight on: Fund manager sentiment more positive on banks

Global fund managers are now more positive on banks than at any time in more than six years, research from Bank of America Merrill Lynch shows.

According to the latest BofA ML Global Fund Manager Survey, a net 14% of asset allocators had an overweight position in banks at the start of March. This is an 8% increase on the previous month and the most positive managers have been on the sector since December 2006.

The shift comes as investors moved money into assets that are driven by growth in the U.S. economy, such as financials, consumer discretionary companies and real estate. The allocation to U.S. equities reached its highest level since July 2012 last month, with 14% of fund managers now overweight here.

BofA Merrill Lynch chief investment strategist Michael Hartnett says: “Relative U.S. economic outperformance on the back of the housing market’s ongoing improvement and the energy independence story will lead a secular uptrend in the dollar.

“U.S. equities’ leadership in the ‘great rotation’ suggests developed market equities are the likeliest winner in this scenario.”

Despite asset allocators’ constructive stance on equities, there are signs that risk appetites have slipped slightly. The ML Risk & Liquidity Composite Indicator dropped one percentage point during the past month – its first decline in nine months.

Fund managers seem more willing to fund their equity purchases by dipping into their cash holdings. Some 28% say they would use cash to buy stocks, up from 22% in the February survey.

Asset allocators are also showing willing to sell government bonds to fund their equity purchases. Investors’ underweight to bonds rose from a net 47% to a net 53% this month.

However, BofA ML highlights challenges to the enthusiasm for US equities. “The biggest downside risks to investor positioning is anything that weakens the bullish dominance of the U.S. domestic demand story or a surprise jump in commodity prices and rates,” the report says.

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.

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