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Broadgate: Weekly Briefing 4/1

4 January 2013

U.S. – U.S. politicians have been urged to do more to resolve the budget by the two largest credit rating agencies.

The warning comes despite the U.S. narrowly agreeing a deal to stave off the U.S. “fiscal cliff” of spending cuts and tax rises worth $600bn.

Rating agency Moody’s said lawmakers would need to take additional steps to lower the ballooning budget deficit. Rival agency Standard and Poor’s added: “Washington’s governance and policymaking had become less stable.”

The deficit has topped $1tn in each of the past four years. Moody’s said that if it failed to cut the deficit, the government’s top credit rating could be at risk.

The fiscal cliff measures – $536bn of tax rises and $109bn of spending cuts – had been due to come into effect at midnight on Monday, but Congress agreed a deal to avoid the worst of the measures late on Tuesday.

The total amount of debt that the government can borrow is currently set at $16.4tn and the government is set to run out of money in the next two months if this limit is not raised by Congress.

Emerging Markets – Emerging-market stocks rose for a ninth day on Thursday, the longest gaining stretch in more than 14 months, as data showing expansion in Chinese service industries and U.S. manufacturing bolstered confidence in the global economy.

The MSCI Emerging Markets Index added 0.1% on Thursday, having climbed 2.1% to a 10-month high on Wednesday. Commodities and stocks worldwide rallied on Wednesday, following U.S. lawmakers passing a bill that undone tax increases for most households.

“Economic indicators in China and the U.S. are raising optimism that the global economy is on a steady path of recovery,” said Budsares Yunniyom, a fund manager at Asset Plus Fund Management Co. in Bangkok, which oversees about $800mn of assets. “That may support further gains in emerging-market equities as most investors are willing to raise holdings in risky assets.”

Latin America – The two biggest financial markets in Latin America swapped their long-held positions in 2012, with Mexico surging ahead and Brazil lagging, catching many U.S. fund investors in the region off guard.

Stocks in Brazil, which had benefited over the past decade from a fast-growing consumer class and Chinese purchase of commodities, suffered as the government increased regulation of key sectors of the economy and Asian demand waned. In the third quarter of 2012, Brazil’s economy grew only 0.9% from a year earlier, while Mexican growth was 3.3%.

Mexico’s fortunes rose partly because of its closer ties to modest U.S. growth and hopes that the new Mexican government will undertake major reforms that could boost the economy.

“This time last year most folks were quite positive on Brazil and it was quite a crowded trade,” said Adam Kutas, manager of Fidelity’s Latin America fund. “Mexico had underperformed in the region for eight or 10 years, so it was under-owned.”

China – The service sector in China has expanded at its fastest pace for four months, adding to evidence that an economic rebound might be sustained.

The non-manufacturing purchasing managers’ index (PMI) rose to 56.1 in December from 55.6 in November. A reading above 50 indicates expansion.

The data also showed that the construction sector had seen strong growth in new orders. Singapore – Singapore’s economy has averted a technical recession, as it reported better-than-expected growth data for the fourth quarter.

The economy expanded 1.1% in the October to December period, from a year earlier, advance estimates showed.

On a quarter-on-quarter basis, the economy grew 1.8%. That is up from a 6.3% contraction in the third quarter.

Growth was boosted by a rebound in the services industries, which include retail, finance and insurance sectors. For the full year, the government said it estimates the economy to have grown by 1.2%, that is lower than its forecast of around 1.5% annual growth for 2012.

India – Global fund holdings of Indian debt jumped 26% last year to a record high, leading Schroder Investment Management to suggest that Asia’s highest-yielding investment-grade bonds are worth buying in 2013.

International funds poured $6.9bn into local-currency government and company securities, boosting ownership to $32.94bn, according to exchange data. Investments touched an all-time high of $32.99bn on Jan. 1 and have jumped more than fourfold since 2009. A December offering of bond-purchase quotas to foreigners by the market regulator was oversubscribed.

Schroder sees “good” returns in 2013 after Prime Minister Manmohan Singh unveiled India’s most-aggressive policy changes in a decade to improve public finances and spur growth. Ten-year bonds in India yield 7.99%, compared with 3.56% in China and 5.14% in Indonesia.

Germany – Chancellor Angela Merkel has warned that the German economic climate in 2013 will be “even more difficult”.

In her new year message, she also cautioned that the eurozone debt crisis was far from over. However, she did say that reforms designed to address the roots of the problem were beginning to bear fruit.

Germany, Europe’s largest economy, has been the paymaster in the eurozone crisis, a move unpopular with many German voters and some conservative MPs in Mrs Merkel’s coalition.

Analysts say most Germans remain wary of eurozone bailouts but generally approve of Mrs Merkel’s handling of the crisis. In October, the German government slashed its forecast for economic output in 2013 to 1.0%, compared to 1.6% previously anticipated.

Spotlight on: Fiscal cliff resolution…..?

Nouriel Roubini, an American economist also known as ‘Doctor Doom’ following his anticipation of the collapse of the U.S. housing market and the worldwide recession which started in 2008 and ended in 2009, has warned that the market euphoria surrounding the U.S. fiscal cliff deal is unsustainable, arguing the longer-term outlook for the world’s biggest economy remains “bleak”.

Writing for the Financial Times, the prize-winning economist described the U.S. deal struck by the Democrats and Republicans as “mini” and “no victory”.

With U.S. policymakers stopping short of including spending cuts in the deal, another crisis is around the corner, stated Roubini.

“If no action is taken by March 1, $110bn of spending cuts will commence, and at about the same time, the U.S. will hit its statutory debt limit, known colloquially as the debt ceiling,” he said.

“Later in 2013, a bigger debate on medium-term fiscal consolidation will begin. This will lead to another dispute between Republicans, who want to shrink the size of the federal government, and Democrats, who want to maintain it but are unsure how to pay for it.”

Roubini is even more pessimistic about the U.S.’ longer term fiscal outlook, arguing middle class citizens should pay higher taxes to support a stronger economy.

He said the fiscal cliff deal will translate into a 1.2% drag on GDP this year, which will push the U.S. economy dangerously close towards another recession, given that growth is currently running at around 2%.

“The longer-term picture is bleaker still. The reality is that America is yet to wake up to the full extent of its fiscal nightmare,” he said.

“Neither Democrats nor Republicans recognise that maintaining a basic welfare state, which is right and necessary in our age of globalisation, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich.

“A deal that extends unsustainable tax cuts for 98% of Americans is therefore a victory that will ultimately end in defeat for Mr Obama.” Roubini said.

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.