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Broadgate: Weekly Briefing 4/11

4 November 2013

U.S. – US shares hit fresh all-time highs on Tuesday, ahead of the conclusion of a Federal Reserve meeting that is expected to see economic stimulus measures maintained.

On Wall Street the Dow Jones closed up 111 points at 15,680 – beating the previous high set in September.

The Nasdaq was up 12 points at 3,952, just short of its March 2000 record.

The S&P 500 closed at a fresh high of 1,772, after gaining almost 10 points in the day’s trading.

US traders broadly expect the US Fed to keep its programme of quantitative easing in place for several more months, and analysts say the economic indicators support that view.

The level of support provided to the economy by the Fed has become a significant factor in market sentiment in recent months.

Any sign that the economic recovery is stumbling is taken as an indication that stimulus measures will be kept in place, and will not be gradually tapered.

“The Fed has been pretty clear about making decisions dependant on data and the data the Fed has received since the last meeting have certainly not been upbeat,” said Art Hogan, head of product strategy equity research at Lazard Capital Markets.

India – The new governor of the Reserve Bank of India, Raghuram Rajan, told the BBC in his first international interview that India has enough foreign-exchange reserves to safeguard against a repeat of the 1991 balance of payments crisis.

Mr Rajan said that India has enough money to pay for all of its short-term debts tomorrow if it needed to, as it has reserves that are equal to 15% of GDP. This is a key difference from two decades ago when the country was rescued by the IMF.

He said that a country with $280bn (£175bn) in reserves can finance itself, and points out that India’s external debt is about 22% of GDP. He said that very few countries with such low level of debt has had an external crisis. Mr Rajan was also adamant about anyone who suggests that India should seek IMF assistance should know that there will be “no IMF, it’s not going to happen”. And that India is a creditor to the IMF.

Emerging Markets – Emerging market equity funds are taking “inordinate risks” by tilting their portfolios towards popular growth sectors and ignoring other parts of the market, Bank of America Merrill Lynch warns.

A note by the group argues that emerging market funds are “egregiously overweight” sectors such as consumer, internet and telecoms stocks while being “exceptionally underweight” in the state capitalist space.

FE Analytics shows the average fund in the IMA Global Emerging Markets sector has 22.1 per cent of its portfolio in consumer goods names, with another 20.5 per cent in telecoms, media and technology stocks.

BofA ML’s The GEMs Inquirer report says: “We think that prudent risk management demands recognising the substantial risks of this concentrated positioning in the emerging markets and to hedge the risks, or close this stretched position.

“In our view, while buying unpopular, undervalued stocks (mainly in the state capitalist sector) entails significant discomfort, continued overweighting of expensive growth stocks increasingly risks years of possible future underperformance.”

Spain – Spain has seen its first quarterly economic growth since 2011, according to data from the country’s National Statistics agency INE.

The country’s GDP grew 0.1% in the July-to-September period, after contracting for the previous nine quarters.

Its growth confirmed last week’s estimates from the Bank of Spain.

Spain was one of the countries worst hit by the global economic crisis, with street riots and soaring unemployment. The statistics mean Spain is officially out of recession.

The INE said an increasing number of exports supported the growth, with a boost to the tourist industry from holidaymakers avoiding northern Africa and the Middle East.

Commodities – Gold advanced for the first time in three days as the smallest gain in U.S inflation in five months bolstered expectations that Federal Reserve policy makers meeting today will delay curbing stimulus measures.

Consumer prices increased 1.2 percent in the 12 months through September, the lowest since April, a government report showed today.

Gold has fallen 19 percent in 2013, while global equities advanced 18 percent, reaching the highest since 2008 today. BlackRock Inc. Chief Executive Officer Laurence D. Fink said yesterday that it’s imperative that the Fed begins trimming stimulus as the policy is contributing to “bubble-like markets.”

Spotlight on: Mexican investment themes in LatAm

Investors have been steering clear of Latin America as Brazil – once the region’s engine of growth – is struggling with high inflation and falling GDP. But following reforms to the energy sector, Mexico could be a bright spot in the region, said BlackRock’s Will Landers.

Finding someone bullish on investing in Latin America today seems to be a difficult task. Making the case for a continuation of a bear market in the region is relatively straight forward, based on the fact that the region’s biggest market, Brazil, continues to underperform global markets and its officials have failed to guide the country back to growth.

In addition, the second largest market in the region, Mexico, boasts some of the highest valuations one can find in the world, and the Andean markets offer a combination of high valuations and low liquidity. Mexico benefits from its proximity to the US and its ability to gain share in the manufactured import market given the competitiveness of Mexico’s labour costs compared to China.

The pending energy reform recently proposed by President Peña Nieto’s team has the potential to transform Mexico’s energy sector into a major global player once again, reducing Mexico’s dependency on imported sources of energy and increasing the investment rate in the country. Trading at 16x next year’s earnings, it is not a cheap equity market, but one that should continue to be favoured by investors if it can deliver on its reform agenda.

The reality is that the reasons for investing in Latin America in the past are still very true today. The region’s demographics continue to rank among the most attractive in the world, with over 50% of the population being less than 30 years old.

In addition, years of keeping inflation under control, combined with better employment opportunities has expanded the middle classes in Brazil, Chile and Colombia, as well as in Peru and in Mexico albeit at a slower growth rate. This new consumer class is changing the economic dependencies from many of these economies, reducing the impact of global trade and increasing the importance of domestic growth.

Brazil boasts the enviable combination of 40 million new domestic consumers having entered the middle class over the last decade with one of the most attractive forward P/Es in the world, currently trading at close to 9x 2014 expected earnings.

The country has seen its equity market transformed by stricter minority shareholder protection rules, significant increase in the participation of small and mid-cap stocks and a strong entrepreneurial spirit that has allowed companies to succeed regardless of the economic climate.

The Andean region – Chile, Colombia and Peru – offers a combination of commodity growth in copper (Peru and Chile) and oil (Colombia) with significant investments in domestic infrastructure – especially Peru, but also Colombia.

Chile has been a quasi-developed market for a while, but the improvements in security in Colombia have returned that country to investors’ radars, both financial as well as strategic, while Peru continues to lead the region in terms of growth rates. In addition, intra-regional investments are creating multinational corporations with greater growth potential.

LATAM

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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