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Broadgate: Weekly Briefing 30/11

30 November 2012

Trends – Equities were the highest-selling asset class for the second month in a row in October, according to U.K. Investment Management Association (IMA) figures, suggesting that risk appetite among investors is increasing on the back of the recent market upswing.

The month saw net retail sales of £924m, compared with just £655m in October last year.

Equities drew in the most, with £550m, the asset class’s highest inflows since April. Equities have experienced average monthly outflows of £9m over the last 12 months.

Fixed income remained the second best-selling asset class, with inflows of £336m, up from September. Global Emerging Markets helped to drive equity inflows, becoming the top-selling sector for the first time on record, followed by UK Equity Income.

China – The U.S. has decided not to declare China as having manipulated its currency to gain an unfair trade advantage.

But the Treasury did say that China’s currency, the yuan, remains “significantly undervalued” and urged China to make further progress.

In its semi-annual report, it said Beijing did not meet the criteria to be termed a ‘currency manipulator’, which could have sparked U.S. trade sanctions.

“The Chinese authorities have substantially reduced the level of official intervention in exchange markets since the third quarter of 2011, and China has taken a series of steps to liberalise controls on capital movements, as part of a broader plan to move to a more flexible exchange rate regime,” the U.S. Treasury said.

Global – Decisive policy action is needed to ensure the world is not “plunged back into recession”, according to the OECD.

The Organisation for Economic Co-operation and Development, which represents the world’s richest nations, also lowered its growth forecasts.

The group’s economies will grow by 1.4% next year, rather than the 2.2% forecast in May, it said. “The U.S. fiscal cliff, if it materialises, could tip an already weak economy into recession, while failure to solve the euro area debt crisis could lead to a major financial shock and global downturn.”

U.S. – Meanwhile, three out of four global investors expect President Barack Obama and congressional leaders to reach a short-term agreement to avert more than $600bn in spending cuts and tax increases scheduled to begin on Jan. 1.

Only 6% of investors anticipate a political impasse that would send the U.S. economy over the so-called fiscal cliff and into a recession, according to a Bloomberg Global Poll.

“Both sides understand the importance of striking a deal, increasing taxes and cutting entitlements,” says Richard Salerno, director of fixed income for Kovitz Management Corp. in Chicago. “The market just wants to know the rules going forward so they can move on and begin to lift us out of our fiscal mess.”

Brazil – Brazil’s economy is expected to have grown at an annualized rate of 4% or higher in the third quarter and is on track to maintain this pace though next year and into 2014, said Brazil Finance Minister Guido Mantega, on Wednesday.

Mr. Mantega said the economy was likely to have grown between 1% and 1.3% during the third quarter from the second, and is likely to expand at a similar pace in the fourth quarter, the report said. “We will close 2012 with an economy in recovery and growth mode,” Mr. Mantega was quoted as saying in the report. “We will enter 2013 with a growth rate of 4% and we will maintain this through 2013 and 2014.”

Greece – Eurozone finance ministers and the IMF reached a deal on an urgently needed bailout for debt-laden Greece on Tuesday.

They have agreed to cut debts by €40bn and have paved the way for releasing the next tranche of bailout loans, some €44bn.

The breakthrough came after more than 10 hours of talks in Brussels. It was the eurozone’s third meeting in two weeks on Greece. The deal opens the way for support for Greece’s teetering banks and will allow the government to pay wages and pensions in December.

Greece’s international lenders have agreed to take steps to reduce the country’s debts, from an estimated 144%, to 124% of its gross domestic product by 2020.

Commodities – Gold rebounded from the biggest drop in more than three weeks on Thursday, as investor holdings expanded to a record high and optimism returned that the so-called fiscal cliff in the U.S. will be avoided, hurting the dollar.

Treasury Secretary Timothy Geithner meets with congressional leaders on Thursday to discuss how to head off the combination of tax increases and spending cuts that may be implemented in January.

“The whole environment around the fiscal cliff is very uncertain,” said Bjarne Schieldrop, the Oslo-based head of commodity research at SEB AB. “The fiscal cliff will be on and off every other day. Most likely it won’t be resolved before the first quarter, but I think that the general direction for gold will be up. Record ETP holdings and central bank buying are giving good support to the sentiment.”

Gold for immediate delivery rose 0.2 percent to $1,723.16 an ounce on Thursday.

Spotlight on: Wealth managers poised to buy Japan on post-election hopes

The election of Shinzō Abe as Japanese prime minister could be the catalyst for the region to outperform after years of flagging returns, prompting asset allocators to review their underweight exposure to the country.

Liberal Democratic Party of Japan (LDP) leader Abe has voiced his intention to force the Bank of Japan into a more aggressive monetary policy and target an inflation rate of 3% if elected in snap elections in December.

Markets have responded well with the Nikkei 225 up 3.95% over the past month, compared to the FTSE 100’s loss of 1.84% and the S&P 500 down 2.94%.

The leadership contest, as well as other factors, has caused Jim O’Neill, chairman of Goldman Sachs Asset Management, to say Japan’s “moment is here”.

“The 3% inflation target is the sort of thing many were advising Japan in the mid to late 1990s when so many people mistakenly lost a lot of money betting against the yen,” he said.

“Go get all those guys out of retirement as the time has probably come. The outlook for the yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there.”

Wealth managers and multi-managers have also said developments in Japan are “interesting” and have prompted them to review their positions.

Guy Foster, senior fund analyst at Brewin Dolphin, said a 3% inflation target would be one of the highest targets in the world.

“The yen has been selling off and Japanese equities are up month-to-date,” he said.

“On the whole we are more positive. We have nothing in Japan at the moment but we are looking at adding to this.”

Robert Burdett, co-multi-manager head at Thames River Capital, said he is revisiting his neutral position.

“Our next direction is more likely to add rather than to take away from our holdings. If the LDP get back in and achieve aggressive monetary policy we would be bullish. The valuations have been compelling and on most measures the market is the cheapest it has ever been” he said.

Aberdeen Asset Management’s Aidan Kearney said the multi-manager range he co-runs is already slightly overweight Japan, relative to the peer group.

“We hold around 2% in our Cautious Managed fund and 6% in Equity Managed. We recognise Japanese equities are cheap and it has world market leaders in some sectors.

“It looks like the LDP will come back into power. It gives more fuel to the fire for more policy support and the expectation of this has led to strength in the market.”

Adding to Japanese exposure is also favoured by managers as a form of downside protection. Brewins’ Foster said Japanese equities are “becoming an uncorrelated asset in the right way” as they are moving in the opposite direction to most other markets.

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.