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Broadgate: Weekly Briefing 7/9

7 September 2012

Europe – European stocks advanced on Thursday as investors waited for ECB President Mario Draghi to give details of his plan to stem the region’s debt crisis. U.S. index futures and Asian shares also gained.

The Stoxx Europe 600 Index advanced 0.3%. The measure has surged 14% from this year’s low on June 4 as Draghi pledged to do everything possible to preserve the euro. Standard & Poor’s 500 Index futures also climbed 0.3% on Thursday, as did the MSCI Asia Pacific Index.

It is thought likely that Draghi will propose a blueprint to lower borrowing costs in Spain and Italy which will involve unlimited buying of government debt, with maturities of up to three years.

Greece – Greece’s international lenders have suggested measures which include increasing the maximum working week to six days.

This is thought to be one of several unofficial proposals to liberalise the labour market and increase government revenue, such proposals were not included in the original bailout agreement signed with the Greek government.

Greece needs the next payment of EUR31.5bn to allow it to continue servicing its debts.

Proposals in the document from the troika included:

  • Setting a single rate statutory minimum wage
  • Reducing regulatory burdens
  • Making work schedules more flexible
  • Setting a minimum daily rest of 11 hours
  • Eliminating restrictions on the minimum and maximum time between morning and afternoon shifts.

China – The China Development Bank will sell USD1.6bn in asset-backed securities this week, the country’s biggest securitisation deal, and its first in three years.

China had barred the sale of asset-backed securities in 2009 when the global financial crisis dampened their reputation & popularity.

But after a boom in lending over the past few years, Chinese banks need to free up balance sheet space, and parcelling loans to investors via securitisation is likely to be an important part of this process.

Chinese regulators remain cautious, placing sharp limits on how banks can operate. They will be able to convert no more than Rmb50bn of assets into securities this year, less than 0.1% of outstanding loans in the banking system.

The resumption of securitisation, however small, is seen by analysts as an answer to many bottlenecks in China’s financial system.

India – Indian equities are attracting the highest foreign flows in the emerging market regions, as investors speculate that the worst may be over for the nation’s biggest companies after profitability slumped to an eight-year low.

Offshore funds have invested a net USD12.3bn into Indian shares this year, the most among 10 Asian markets outside China, tracked by Bloomberg. The average profit margin before interest, taxes, depreciation and amortization of the 30 companies in the BSE India Sensitive Index, or Sensex, narrowed to 19.5% in the June quarter, the lowest since December 2003, data compiled by Bloomberg shows.

“With China’s growth slowing, India looks the best among BRIC countries year to date,” Taina Erajuuri, a fund manager in Helsinki at FIM Asset Management overseeing about USD1.2bn of emerging-market assets, said. “India’s economy is less dependent on exports to Europe than China and Russia.” Erajuuri said she’s been a buyer of Indian equities this year.

Brazil – Brazil sold USD1.25bn of bonds in the Latin American country’s first international dollar debt sale since January, the government sold the 2.625% bonds due in January 2023, Brazil’s Treasury announced.

Brazil returned to international markets as record low interest rates in Europe, Japan and the U.S. spur demand for higher-yielding assets.

“There’s demand out there for higher-quality emerging- market paper,” according to David Bessey, who helps manage about USD16bn of emerging-market debt including Brazilian bonds at Prudential Financial Inc.

Trends – Equities will be the most popular asset class for advisers in 2012/13, that’s according to research from Neptune Investment Management.

60% of advisers interviewed believe equities will be the favoured asset class for investors, this is followed by 23.5% for fixed income, with commodities and property gaining 3.5% and 2.4% of the votes.

The news contrasts strongly with figures from the U.K.’s Investment Management Association (IMA), which show fixed income funds continue to dominate sales. The latest figures from the IMA show fixed-income funds witnessed GBP480m of net retail sales in July, which is the 11th month running fixed-income has been the bestselling asset class.

Commodities – Gold topped USD1,700 an ounce for the first time since March on Thursday, as speculation that the European Central Bank (ECB) will announce unlimited purchases of government bonds to defuse the region’s debt crisis boosted the euro.

“The ECB action today is going to be beneficial for gold,” said Walter de Wet, the head of commodities research at Standard Bank Plc.

Meanwhile, it has been suggested that gold will be at USD1,840 an ounce by the end of 2012, Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. told Bloomberg.

Spotlight on: Being best-placed for the next equity bull run

Pessimistic investors are overlooking signs that the global recovery is already underway and should increase their exposure to equities now if they don’t want to miss out on the next bull run, according to Bob Doll, senior adviser to BlackRock.

Doll claims that policymakers have upped their game and are providing reflationary support to the world’s markets, meaning that stocks should continue to grind unevenly higher.

“On balance, we believe that the cyclical outlook is improving and that the near-term dangers may be receding instead of intensifying,” he said.

“If our outlook is correct, global financial markets may currently be discounting an overly pessimistic economic outlook, suggesting that risk assets may have more room to run.

BlackRock predicts growth of 2% in the U.S. economy and says the market is in reasonable shape. “Given better relative economic and earnings growth levels as well as highly accommodative monetary policies, we continue to favour U.S. stocks vs global benchmarks,” he commented.

He also claimed that a third round of quantitative easing (QE3) would be positive for the country and said he was unconcerned about the threat of a “fiscal cliff” as he believes policy makers will once again reach an agreement at the last minute to prevent this.

“Although the sides remain far apart and statesmanship is sorely lacking in Washington DC, we still think there is a better-than 50% chance that we’ll see an eleventh- or twelfth-hour agreement to enact a temporary extension of the Bush-era tax cuts and a delay in scheduled spending cuts with real and hopefully long-term action being taken in early 2013,” he explained.

Although the U.S. unemployment rate isn’t coming down, Doll says there are signs of a recovery.

“We have been seeing signs of improved business investment levels, increases in consumer spending and a recovery in the housing market, but the labour market remains troubled and the recent rise in energy prices will weigh on sentiment and spending levels.”

On the prospects for the eurozone Doll is also cautiously optimistic.

“This Thursday, the ECB will meet and expectations are high that president Mario Draghi will clarify plans to purchase distressed bonds and help repair Europe’s financial markets.”

“The outlook for Europe remains murky, but we expect that policy-makers’ pro-growth policies should help the region’s economy to recover (although peripheral European countries will likely remain in recession into next year),” he 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.