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Broadgate: Weekly Briefing 30/10

30 October 2012

China – Chinese manufacturing showed signs of recovery in October, shrinking at a slower pace than in previous months, according to a report by HSBC.

The bank’s influential purchasing managers index (PMI) hit 49.1 this month, compared with 47.9 in September. That is the PMI’s highest level in three months, helped by a pick up in new orders.

The figure is the latest to suggest an improvement in the world’s second biggest economy.

Greece – Greece’s Finance Minister, Yiannis Stournaras, says the country has been given more time to hit bailout targets. Greece had been asking for two more years to meet the spending cuts demanded by international creditors.

Despite Mr Stournaras’ comments, European Central Bank (ECB) president Mario Draghi said later he was unaware that an extension had been agreed. Greece is having to meet the austerity targets in order to receive its bailout instalments.

Spain – Spanish unemployment climbed to a record high in the third quarter as a deepening recession left one in four workers jobless, adding pressure on Prime Minister Mariano Rajoy to seek a second European bailout.

Unemployment, the second highest in the E.U. after Greece, rose to 25.02% from 24.6% in the previous quarter, the National Statistics Institute said. That is the highest since at least 1976, the year after dictator Francisco Franco’s death led Spain to democracy.

“The situation is serious,” Ricardo Santos, an economist at BNP Paribas said. “There is still room for a deterioration in unemployment. Activity is weak and the government will reduce jobs as there are strict targets to adjust the number of public-sector temporary workers, especially in health and education.”

Chile – Chile locked in historic low borrowing costs for a Latin American nation in the sale of $1.5bn of dollar bonds, its first overseas debt offering in more than a year.

The country, rated Aa3 by Moody’s Investors Service, the highest grade in the region, priced 10-year bonds at a yield of 2.38%, Chilean Finance Minister Felipe Larrain said yesterday. Similarly rated 10-year notes from South Korea yield 2.71%.

“When a country can sell debt at 2.4%, it’s reasonable, and not just reasonable but responsible, to go out and finance itself at those levels,” Larrain said at a press conference in Santiago. “Chile has the lowest financing cost in the history of Latin America and the lowest finance cost of any emerging-market country.”

View – Investment veteran Warren Buffett expects U.S. growth to continue “inching ahead” of its Western counterparts, despite the looming fiscal cliff putting the country at risk of slipping back into recession.

“It is certainly better in the U.S. than it is in Europe. We are still inching ahead and I do not see any change in that as the U.S. has the steadiest trajectory,” he said.

Buffett, the billionaire investor and chairman of Berkshire Hathaway, also revealed he has been adding to stock holdings, following the Dow Jones’ recent sell off.

“If the market is down, I am happier buying. If I go to the supermarket and they have reduced prices, I feel better. So if I go to the stock exchange and they have reduced prices I feel better,” he said.

Regulation – U.S. tax authorities have postponed the implementation of the Foreign Account Tax and Compliance Act (Fatca) to allow firms more time to comply with the rules.

The Internal Review Service has pushed backed the deadline to 1 January 2014 for institutions to have procedures in place to meet Fatca reporting requirements.

Institutions will also have until 1 January 2017 to begin withholding U.S. tax from clients’ investment gains.

Fatca aims to tackle tax evasion by U.S. taxpayers through the use of foreign accounts. The rules initially required foreign financial institutions to report certain information about financial accounts held by U.S. investors from 30 June 2013. Firms that do not comply with Fatca face a 30% withholding tax on U.S. assets.

Commodities – Gold traders are the most bullish in three weeks as investors’ bullion holdings rose to a record on mounting speculation that central banks will add stimulus to bolster economic growth.

Central banks from Europe to China to the U.S. have pledged to do more to boost economies. The yen reached a four-month low versus the dollar this week on speculation the Bank of Japan will further expand stimulus and the Federal Reserve said it plans to continue buying bonds. Gold rose 70% as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June 2011.

“The whole economic situation is going to get worse rather than better,” said Thorsten Polleit, chief economist at Degussa Goldhandel GmbH, a precious metal trading and investment company in Frankfurt. “Paper currencies have already lost their function as a store of value and it’s getting worse. People are increasingly putting their savings into precious metals.”

Spotlight on: The flight to equity

Equity fund flows surged to EURO1.91bn in September, the first positive monthly figure since February, Morningstar’s latest European fund flows data has shown.

European large-cap funds saw EURO506m of fresh inflows, their first positive quarter since Q1 2011, while the Europe ex-UK large-cap equity category also saw its largest inflow since 2008 at EURO320m.

According to Morningstar, the recent moves by central banks and policymakers to ease monetary conditions have boosted investor sentiment, and September’s data suggest the disconnect between investor behaviour and equity market performance has ended.

“European fund investors have seemingly begun to embrace the idea that the euro may not implode after all,” said Ali Masarwah from Morningstar’s European research team.

“The comeback of equity funds in September suggests investors are finally reacting to buoyant equity markets and the announced Outright Monetary Transaction programme of the ECB.

However, Masarwah added although the extreme tailwind of a eurozone breakup has reduced, the impact of the crisis has not completely subsided.

“That said, the continuing bond fund glut in September and the sizeable flows into high yield bond funds over the past months indicate markets are still distorted by the monetary policy of the ECB and the persistent eurozone crisis,” he said.

Inflows into equities paled in comparison to fixed income funds, which saw EURO15.9bn of flows in September.

The third quarter inflows for bond funds totalled EURO53.24bn, the best quarterly intake since 2007. Global emerging bond, global high yield and USD high yield were the most popular over September and Q3.

Money market funds also suffered outflows of EURO18.3bn in September, reflecting yields precariously close to negative nominal terrain.

Global emerging markets saw the highest inflows in Morningstar’s equity categories, gathering EURO1.42bn in September and EURO1.75bn overall for the third quarter.

Morningstar said appetite for diversified emerging market equity products appeared stronger than single country funds. The bulk of funds in this area went to the Aberdeen Global Emerging Markets Equity fund, with inflows of EURO1.61bn year to date.

Morningstar’s UK large-cap blend equity, Germany large-cap equity and China equity sectors remained unloved, suffering net redemptions in September.

The third quarter also saw a sell-off among investors in US large-cap blend equity funds, with Allianz UK Equity suffering the worst redemptions at EURO558m over the quarter.

Meanwhile, multi-asset funds enjoyed strong inflows, with the Standard Life Investments Global Absolute Return Strategies (GARS) attracting the bulk of flows, taking in a combined EURO534m in September. However, news of the departure of the fund’s management team to join Invesco Perpetual has put the success story under threat, said analysts.

The firm that has gathered the most asset this year so far is PIMCO, which has attracted EURO10.4bn in the third quarter alone and EURO23.1bn year to date.

Meanwhile, Laurence Fink, chief executive officer and co-founder of BlackRock, said investors should have 100% of their investments in equities because of valuations and higher returns than bonds.

Investors who seek the safety of treasury bonds will have minimal returns and will not be able to meet their needs with the Fed expected to keep interest rates low, Fink told Bloomberg. In contrast, he highlighted the fact equities are trading at their lowest valuations in 20 or 30 years.

“I don’t have a view that the world is going to fall apart, so you need to take on more risk,” he said in an interview with Bloomberg Television.

“You need to overcome all this noise. When you look at dividend returns on equities versus bond yields, to me it is a pretty easy decision to be heavily in equities.”

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.