Broadgate: Weekly Briefing 4/5
4 May 2012
U.S. – The Dow Jones index in New York closed at its highest level for more than four years on Wednesday after data showed U.S. manufacturing was stronger than expected in April. The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 54.8 last month from 53.4 in March (a figure above 50 indicates expansion).
The Dow rose 66 points to finish the session at 13,279, its highest since 28 December 2007. The index has been rising steadily since sinking below the 7,000 mark at the beginning of 2009, and broke back above 13,000 in February this year.
China – Chinese and Russian co-operation in the energy sector will expand beyond the traditional Oil and Gas arena as economic ties between the 2 countries continue to tighten, industry experts say.
Russia exported a total of 7.17mn tons of Crude Oil worth USD2.06bn to China in the first 3 months of this year, an 81.4percent increase from the same period last year.
The Oil and Gas sectors make up more than 20percent of Russia’s GDP, while China, the World’s 2nd-largest economy and Crude Oil consumer, depends heavily on imports of foreign Crude Oil, more than 55percent, to support its economic growth.
China – China’s manufacturing activity has expanded for the fifth month in a row, easing concerns about a sharp slowdown in the world’s second-largest economy.
The official Purchasing Manager’s Index (PMI) rose to 53.3 in April from 53.1 in March, the statistics bureau said. “The message is that Chinese manufacturing is growing, not as fast as in years past but faster than in the fourth quarter last year and enough to achieve the government’s growth target for the year,” said Dariusz Kowalczyk of Credit Agricole CIB.
India – Indian exports fell in March for the first time in two and a half years as Europe’s debt crisis and slower Chinese growth hurt demand.
Merchandise shipments dropped 5.7percent from a year earlier to USD28.7bn, the government said in a statement on Tuesday. Imports rose 24.3percent to USD42.6bn, leaving a trade deficit of USD13.9bn.
“The fragile global economy doesn’t augur well for Indian exports,” Rupa Rege Nitsure, an economist at state-owned Bank of Baroda in Mumbai, said before the report. “The widening trade deficit and slowing economic growth pose significant risks to India’s macroeconomic stability.”
Spain – The Spanish economy is officially in recession, according to the latest figures. The National Statistics Institute said the economy shrank 0.3percent over the three months to the end of March, the second consecutive quarterly contraction, although the contraction was not quite as much as economists had been expecting.
Concern over the weakness of the economy and the deficit has driven up the cost of borrowing for Spain, raising fears it will need a bailout.
Japan – The Bank of Japan (BOJ) has increased its stimulus programme for the second time in just over two months in a bid boost the country’s economic growth. The central bank said it would expand its purchase of Japanese government bonds by JPY10tn (USD123bn).
The move comes as Japan’s economy continues to struggle amid a slowdown in key export markets such as the U.S. and eurozone and weak domestic demand. The BOJ also left its key interest rate unchanged between zero and 0.1percent.
Commodities – Gold declined for a third day in New York on Wednesday, on speculation economic growth will reduce the need for the Federal Reserve to add to stimulus measures.
Three voting members of the Federal Open Market Committee said they don’t see a need to ease policy further as the economy maintains its expansion. Gold-backed exchange-traded products fell to a three-month low after prices reached a two- week high on Tuesday. Gold imports by India plunged to 30 to 35 metric tons in April from 90 tons a year earlier, the Bombay Bullion Association said.
Spotlight on: the appeal of equity income funds
In an environment of relative low, or at best ‘volatile’ growth, some fund advisers turn to investment funds that concentrate less on picking stocks that are set to achieve stellar outperformance, and instead look to those stocks that are likely to pay a regular, reliable dividend.
In most cases, it is the larger market leaders of the various sectors that continue to pay reasonable dividends, with small-mid cap stocks instead focussing on establishing market share through gradual growth. Of course, in addition to the attraction of dividend yield, it is the established industry leaders that provide peace of mind and a history of longevity for investors to take faith in during such uncertain times.
It is the proven ability of these companies to weather economic storms that fund managers call upon when choosing stocks for the best equity income funds.
Richard Turnill, manager of the underlying asset to the new Hansard BlackRock Global Equity Income fund (MX56 in HEL, MC146 in HIL) appreciates the current economic mood, but insists that there are still plenty of opportunities for growth.
The continuing euro crisis, fiscal tightening in the G7 nations, profit margins at peak levels and a modest policy response from China are among the key factors responsible for the poor outlook, Turnill says.
“We are in a process of longer-term structural shifts in the global economy. This has been well known by the market for the last few years,” he added. “We continue to believe that high growth rates in emerging markets will be counteracted by much slower growth in the highly indebted developed markets.”
Turnill co-manages the Blackrock Global Income fund with Stuart Reeve and together they look to exploit the trend for dividend growth in overseas companies.
Blackrock Global Income is set to pass its first anniversary in May. Its six-month return of 4.97percent puts it in the top quartile of the IMA Global Equity Income sector.
Commenting on the fund’s performance, Turnill said: “From a sector perspective, telecommunication services, in which we are overweight, and consumer discretionary, which we are underweight in, drove underperformance. Royal Dutch Shell detracted, despite the rising oil prices, as lower gas prices affected earnings and the company was sued over the spillage.”
“On the other hand, the Swedish company Svenska Handelsbanken was a top contributor to the fund’s performance as the bank reported an increase in earnings and the banking sector in general bounced back during the period.”
Turnill added that in the current environment global equities have performed well and continue to look attractive, especially compared with bonds.
“Equity markets generated modestly positive returns in March and strong returns more broadly over the quarter. This was driven by US economic data which continued to improve in the first quarter and global central banks supported the market with further liquidity measures. This gave equities strong returns for the start of the year,” he said.
“Stocks continued to climb a wall of worry; major concerns include Europe flirting with recession, the eurozone continuing to struggle with a debt crisis, a growth slowdown in China and elections looming globally. Over the quarter market leadership rotated away from higher Beta names; companies with strong fundamentals led by the end of March.”
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