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Broadgate: Weekly Briefing 31/5

31 May 2013

U.S./Japan – The Organisation for Economic Cooperation and Development (OECD) forecasts global economic growth will accelerate in 2014 with both the U.S. and Japan continuing to outpace the euro area.

“The global economy is moving forward and it is doing so at multiple speeds,” OECD Chief Economist Pier Carlo Padoan said in the organization’s semi-annual Economic Outlook. Differing monetary and fiscal choices across the major developed economies are driving regional divergence with “each path carrying its own mix of risks,” he said.

Global central banks are continuing to try to bolster their economies, with the Federal Reserve buying $85bn of debt per month and the Bank of Japan unveiling unprecedented stimulus last month. In the euro region, where the European Central Bank cut its benchmark rate to a record low this month, the OECD said “more can be done through further non-conventional measures.”

U.S. – U.S. house prices in March were up 10.9% from a year earlier, the biggest rise in nearly seven years, according to a closely-watched survey. The S&P/Case-Shiller index also said all 20 U.S. cities measured posted annual gains for the third straight month.

Meanwhile, separate data showed U.S. consumer confidence in May rose to its highest level in more than five years.

The two reports boosted investor sentiment, with the Dow Jones closing up 0.7% at 15,409 earlier in the week, another record.

Japan – Japanese equities have started to regain some of the ground lost since last week after the Nikkei rose 1.2% in Tuesday’s trading.

On Thursday of last week, the Nikkei index fell by more than 7%, driven by fears over weak Chinese manufacturing data, rising Japanese bond yields and concerns the U.S. Federal Reserve may put a stop to quantitative easing.

After a slight 0.9% bounce on Friday, the market lost another 3.2% on Monday to stand down 10% from its high last Wednesday.

China – The International Monetary Fund (IMF) has cuts its economic growth forecast for China, with weakness in the global economy set to hit exports.

The IMF said it now expected the world’s second largest economy to grow by “around 7.75%” this year, and at about the same pace in 2014.

That is lower than the 8% forecast for 2013 that the IMF made in its World Economic Outlook, published last month.

Speaking to reporters in Beijing, IMF first deputy managing director David Lipton said: “Chinese export growth has been, after years and years of very rapid growth, very slow because of the state of the global economy and we now are taking our projections of the global economy into effect.”

Brazil – Brazil’s economy grew less than expected for the fifth straight quarter as faster inflation erodes purchasing power.

Authorities responded to slower growth by cutting borrowing costs to a record low, reducing payroll taxes, slashing energy tariffs and cutting levies on consumer goods. Risks are mounting that growth will remain sluggish now that the central bank board has started raising borrowing costs to prevent price increases from further hurting consumers.

“Nothing in Brazil is at crisis levels, but it’s all going in the wrong direction,” Tony Volpon, the head of emerging-market research in the Americas at Nomura Holdings Inc., said. “There’s a perception of steady deterioration.”

Malaysia – The Malaysian economy will grow stronger in the second half of this year, driven by the removal of the political uncertainty and the government’s firm economic policy, says Credit Suisse Securities managing director Stephen Hagger.

He said Malaysia would join a very exclusive club currently comprising the Philippines and Thailand which have all the three certainties, primarily economic, corporate earnings and political stability.

In the first quarter of this year, the Malaysian economy has been put on hold, with everyone predicting the date of the 13th General Election, he said.

“Based on our forecasts, the Malaysian economy is to grow somewhere around 5% this year, boosted by the government’s Economic Transformation Programme (ETP),” he told reporters.

Hagger said the consistent growth of the gross domestic product and political stability in Malaysia would strengthen the economy.

Trends – Equities regained their position as the bestselling asset class during April with net retail sales of £799m ($1.2bn), according to figures from the U.K’s Investment Management Association.

The IMA’s monthly report also reveals mixed asset funds were the second bestselling asset class with net retail sales of £610m ($925m).

In terms of sectors, funds in IMA UK Equity Income products were the most popular during the month, with net retail sales of £358m ($542m).

This was the highest sales recorded for the sector since April 2007 when £378m of net retail sales was accrued. The last time this was the bestselling sector was November 2012.

Alternatives – Gold and wine prices that tracked each other in the past decade amid demand for alternative assets are now diverging after bullion slumped into a bear market as some investors lost faith in the metal as a store of value.

The Liv-ex Fine Wine 100 Index tripled in the past 10 years and gold advanced fourfold. The wine gauge rose 5.9% this year as bullion slid 17%. Credit Suisse predicts that the metal may drop to $1,100 an ounce in a year, or 21% less than now. Conversely, the Wine Investment Fund, which manages about $50mn of assets, expects the Liv-ex gauge to rise by about another 7.6% by the end of December.

Demand for gold, wine and other alternative assets gained in the past several years as equities retreated and bond yields tumbled to record lows as central banks printed money on an unprecedented scale. Gold held through exchange-traded products exceeded all but two of the world’s central-bank reserves. Holdings fell 18% this year as equities rallied on mounting confidence that economic growth is strengthening.

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Spotlight on: Latin America’s breakaway trade bloc

Four countries are increasingly being mentioned in the same business circles: Chile, Colombia, Mexico and Peru.

They are the founding members of the Pacific Alliance, the region’s newest trade bloc. Their presidents met in the Colombian city of Cali last week to sign a deal to scrap the majority of tariffs on trade between the four nations.

They also discussed tax harmonisation and further convergence of their stock exchanges. They have agreed to drop visa requirements, allowing their citizens (more than 200 million people) to travel more easily between the four countries.

Since the Pacific Alliance was established last year, local entrepreneurs and politicians have been shouting of their praise of it. Some regard it as the most exciting business development in the region for years.

“If you put them together, the four countries of the alliance would have the ninth biggest economy in the world, with around 2.7% of global GDP ” says Juan Eduardo Errazuriz, a Chilean businessman. “They account for half of all Latin American trade with the rest of the world.”

The four alliance members are setting their sights on China as their next big trade partner. The meeting, which included six other Latin American countries as well as three from outside the continent, did not have the United States as an attendee, a significant absence from a country that is currently Latin America’s main export market.

Costa Rica and Panama want to join it. Countries as diverse as Canada, Japan, New Zealand and Uruguay have asked for observer status. Even Spain says it wants to get involved.

Some would argue that Latin America doesn’t need another trade alliance, there is Mercosur, a trade bloc dominated by Argentina and Brazil; and there is Alba, the left-wing brainchild of Venezuela’s late-President Hugo Chavez.

There is also the Can (the Community of Andean Nations); and there are Unasur and Celac, two relatively new regional bodies committed to greater regional integration.

In addition, around a dozen countries on both sides of the Pacific, including Chile, Mexico and Peru, are negotiating a new trade agreement, the Trans-Pacific Partnership (TPP).

But it is the Pacific Alliance that seems to have captured the imagination of the business community due to the dynamism of its member economies.

The Peruvian and Chilean economies were the fastest growing in South America last year, expanding by 6.3% and 5.6% respectively. The Colombian and Mexican economies grew more slowly but still outstripped the regional average.

All four countries are outward-looking, with a particular interest in Asian markets. Chile has more free trade agreements in place than any other country in the world, and Mexico is not far behind.

Despite the increased integration between the alliance countries, there is still scope for much more.

Mr Errazuriz estimates that only 7% of Chile’s total trade goes to the other three countries of the alliance, and that only 3% of foreign direct investment flowing into Chile comes from Colombia, Mexico and Peru.

“That suggests there’s room to grow in both directions,” he says.

Latin America has a long history of talking about regional integration but often it has not amounted to much. Despite common cultures and languages, its nations have tended to view each other as rivals in trade rather than partners.

But that is starting to change, with inter-regional trade on the rise. The Pacific Alliance looks set to be part of that transformation.

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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