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Broadgate: Weekly Briefing 3/3

3rd March 2014

Markets – The FTSE 100 reached a 14-year high on Monday, while the S&P 500 hit a new record level, lifted by M&A activity.

The UK’s leading index closed at 6,865.86, up 0.4% on the day and within striking distance of the all-time closing high of 6,930 reached on 30 December 1999, the peak of the dotcom boom.

Monday’s close was the second-highest ever recorded by the index and sets the stage for a new record high.

The London market was lifted by a rally on Wall Street, where the S&P 500 hit a record high before dropping back to close 0.62% up at 1,847.

Meanwhile, Facebook founder Mark Zuckerberg addressed a conference on Monday, describing recent acquisition Whatsapp as a ‘bargain’ at the $19bn he paid for it.

China – China home prices have suggested a potential cooling-off in the housing sector at the start of this year.

Average new home prices in China’s 70 major cities rose 9.6% in January from one year ago, easing from December’s 9.9% increase.

This is the first slowdown in the rate of price increases in 14 months, since November 2012. Home prices in top-tier cities Beijing and Shanghai also rose in January, but at a slower rate from December.

Property purchases remain a popular investment choice in China, and that kept prices rising in 2013.

But the momentum slowed down late last year, after the People’s Bank of China, the central bank, progressively tightened monetary conditions to rein in excessive lending growth.

Germany – Germany’s economic growth in the final three months of last year was largely driven by overseas trade, according to official statistics.

The German economy grew by 0.4% in the quarter compared with the third quarter, the German statistics agency said, confirming its earlier estimate.

Despite the weak domestic demand at the end of last year, economists said they now expected it to pick up.

“High job security and rising incomes as well as very low inflation have been boosting consumer confidence to record highs lately and should translate into stronger household spending growth in 2014,” said Christian Schulz at Berenberg Bank.

Trends – The value of dividends paid by the world’s listed businesses has exceeded $1trn for the first time, according to research by Henderson Global Investors.

The asset management house’s Global Dividend Index reveals that global dividend payouts reached a record $1.03trn during 2013. This is an increase of $310bn over the past five years.

Payouts by UK companies have been in line with the global average, rising by 39percent since 2009. However, Henderson notes that the UK’s share of the global total is “disproportionately large” compared with the size of its economy, at 11percent.

Firms in the U.S. have lifted their dividends by 49percent over the past five years, with the country being the largest source of dividend income with payouts worth a collective $301.9bn.

Emerging markets now make up $1 in every $7 of global payouts. Businesses in these countries doubled dividends between 2009 and 2011 but growth has stalled in more recent years.

Brazil – Brazil’s central bank halved the pace of key rate increases on Wednesday, signaling the end of its tightening cycle is near as policy makers seek to tame inflation without further jeopardizing growth.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic rate to 10.75percent from 10.5percent.

Brazil’s central bank in the last eight meetings has lifted the key rate by 350 basis points from a record 7.25percent. Brazil has the highest benchmark borrowing costs of central banks that set interest rates in Latin America, according to data compiled by Bloomberg.

Economies – Nations have passed almost 500 laws to tackle climate change, with emerging economies led by Mexico and China making the most progress last year, a study by Globe International found.

A total of 62 out of the 66 countries examined have passed or are working on “significant” climate or energy-related laws, Globe said in a report this week. Venezuela, the United Arab Emirates, Saudi Arabia and Canada lack “flagship” legislation, according to the group, an alliance of global lawmakers.

Progress in passing laws is important in the battle to cut polluting greenhouse gases because the nations studied cover 88percent of world emissions. Domestic action is crucial to help secure an international agreement to fight global warming because it helps build trust between countries, Caroline Spelman, a U.K. lawmaker, said in an interview.

Frontier Markets – Egyptian stocks are displaying signs that investors favor a return to a military-backed rule to end three years of political turmoil and revive an economy stuck in its worst slump in two decades.

Share volume is up 159percent this year over 2013’s daily average, according to data compiled by Bloomberg, coinciding with voters’ approval of a new constitution and the military’s endorsement of Defense Minister Abdel-Fattah al-Seesi’s possible presidential bid. The benchmark EGX 30 Index rose 18percent in 2014, the fifth-best performance of more than 90 gauges tracked by Bloomberg.

Three years after protesters ended President Hosni Mubarak’s 29-year rule in a popular revolt that left hundreds dead and led to the slowest economic growth since 1992, local investors are piling back into Egyptian stocks amid speculation another military-backed ruler can restore order. The EGX 30 is trading near the highest since 2008, while volatility of the index fell last week to the lowest since before the start of the 2011 uprising.

Spotlight on: Is the recent gold rally sustainable?

The gold price has rebounded off lows seen at the end of last year, having endured one of its worst ever years in performance terms, but is the rally about to run out of steam?

Last year the precious metal tumbled 28% in value, its worst year since 1981, as the U.S. economy recovered apace, inflation remained subdued, and the crisis in Europe abated.

So far this year it has recovered some lost ground as fears over emerging markets widening deficits spooked investors.

Since closing at $1,202 at the end of 2013, it has climbed over 10%, and currently trades at $1,342.

However, a number of managers are dubious about adding to their positions, fearing the asset class is unlikely to move much higher from here in a world which has largely healed form the 2008 crisis.

Trevor Greetham, Fidelity’s asset allocation director and manager of its multi-asset range, said the positive outlook for the U.S. dollar, coupled with growing optimism about global growth, makes the recent rally look unsustainable.

“We had a ten-year bear market in the U.S. dollar, but now we could see a bull run lasting as much as five years, so I do not think the run higher is sustainable.

“If you wind the clock forward, interest rates could be at 5% in a few years time and, in that environment, people will question why they are holding gold, which does not yield anything.”

Greetham warned investors buying in now that the correction already seen last year could have much further to run.

“There is no real rock-bottom price for gold, or commodities, and although there are bargain hunters out there after such a big sell-off, we think the trend is negative from here,” he said.

“We might only be a third of the way through the correction in gold.”

Greetham said gold could even witness a repeat of the 20-year decline in gold seen after the last boom phase in the ’70s ended. Henderson’s multi-asset manager James de Bunsen agreed the outlook is questionable.

Although he sees a floor for the precious metal at around $1,200, unlike Greetham, the manager said he does not expect to make anything from holding gold this year.

“We have topped it up a bit but nothing meaningful, and we would estimate a 0% expected return from gold for this year,” he said.

De Bunsen said unless U.S. growth concerns return, he does see the asset class rocketing this year.

However, not all managers have the same view. Troy’s Sebastian Lyon remains a fan of the asset class via his £2.2bn Trojan fund, although he noted its failure to produce positive returns last year.

He said recently: “Liquidity remains our protection against and ammunition in falling markets. Our gold and index-linked bond insurance policies became cheaper last year, despite the risks they protect us against not diminishing.”

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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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