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Broadgate: Weekly Briefing 9/3

9 March 2012

Greece – A leading European Union official has urged private holders of Greek bonds to sign up to a vital debt swap deal ahead of a deadline later on Thursday.

Economic and Monetary Affairs Commissioner Olli Rehn said there would be no better offer, and the deal was vital for eurozone financial stability.

Greece needs at least 75percent of bondholders to agree to take a 53.5percent cut in the value of their holdings.

Greece needs the deal if it is to receive a second bailout. On Wednesday, the Institute of International Finance said that just under 40percent of private holders of the outstanding Greek debt had agreed to it.

Germany – German factory orders unexpectedly declined in January as foreign demand for investment goods such as machinery slumped.

Orders, adjusted for seasonal swings and inflation, fell 2.7percent from December, when they gained 1.6percent, the Economy Ministry in Berlin said.

The economy, Europe’s largest, contracted in the fourth quarter of 2011 as the sovereign debt crisis curbed demand for its exports across the euro region.

Brazil – Brazil has become the sixth-largest economy in the world, the country’s finance minister said on Wednesday.

The Latin American nation’s economy grew 2.7percent last year, official figures show, confirming that Brazil has overtaken the U.K.

The Brazilian economy is now worth USD2.5tn, according to Finance Minister Guido Mantega, although Mr Mantega was keen to play down the symbolic transition, which comes after China officially overtook Japan as the world’s second-biggest economy last year.

“It is not important to be the world’s sixth-biggest economy, but to be among the most dynamic economies, and with sustainable growth,” he said.

BRIC – The BRICs group of Brazil, China, India and Russia have the four most active central banks among Group of 20 nations.

Research shows that each of the countries has made more than 20 changes to benchmark interest rates or reserve requirements over the past four years.

No other central bank in the G-20 has implemented more than 19 changes, with policy makers in emerging-market peers Mexico and South Korea matching the European Central Bank’s 12. The BRICs have had to cope with “much more volatile” inflation than other nations, causing the frequent rate changes and heightening the chance for policy error, said Nick Chamie, head of emerging markets at RBC Capital Markets.

“To a varying degree, the more volatile the interest-rate and economic cycle, the more possibilities of making some policy mistakes,” Chamie said. “So far they have managed their cycle pretty well.”

India – The U.S. has reported India to the World Trade Organization, challenging its ban on imports of American poultry.

India has banned shipments of U.S farm products, including poultry meat and chicken eggs, since 2007 to prevent the spread of avian flu.

U.S. authorities said that India had imposed the ban to protect local industry and that it violates global trade rules. The move comes just days after the U.S. created a new panel to crack down on unfair trade practices by its partners.

Ron Kirk, U.S. Trade Representative, said that India’s ban was “clearly a case of disguising trade restrictions by invoking unjustified animal health concerns, the United States is the world’s leader in agricultural safety and we are confident that the World Trade Organization will confirm that India’s ban is unjustified.”

China – China’s stocks fell for a third day on Wednesday, the longest losing streak in almost two months, on concern a global slowdown will hurt earnings.

China cut its 2012 economic growth target to 7.5percent on March 5, down from 8percent over the past seven years, as the European debt crisis and sluggish U.S. recovery dampen demand for goods from the world’s largest exporter.

Commodities – Gold gained for the first time in four days on Wednesday as some investors bought the metal after its drop to the lowest level in almost six weeks.

Bullion slipped 1.9percent on Thursday as the dollar strengthened and commodities slid on concern slower growth will cut demand.

“Gold is likely to benefit from further investment dip buying interest,” James Moore, an analyst at TheBullionDesk.com in London said.

Spotlight on: Emerging Market outlook

Michael Konstantinov, manager of the Allianz RCM BRIC Stars fund, explains why, despite a good start to the year, there is still significant upside potential in the emerging markets.

“This year has started with a bang for emerging markets with the MSCI Emerging Markets Index up 14.2percent by mid-February and the MSCI BRIC (Brazil, Russia, India and China) up by an even more impressive 17.89percent. This has all meant that emerging markets have seen their best start of the year since 2001.

This rally has the potential to continue throughout 2012, should key drivers stay in place and possible risks remain muted. If this is the case, investors should consider allocating wisely into emerging markets to ensure they are able to capture the potential continuation of this risk rally.

The BRICs and other emerging equity markets have profited recently from the improved risk environment in global financial markets. Financial markets have been positively affected by new measures by both the ECB (European Central Bank) and the Bank of Japan which have improved the liquidity conditions in their respective markets.

In Europe this took the form of the long-term refinancing operation run by the ECB, which offered cheap money to the region’s banks, there was a strong take up, resulting in an additional EUR489bn in borrowing.

In Japan further quantitative easing was introduced by the Bank of Japan, bringing its asset-purchasing fund to JPY30tn; this marked the first expansion of economic stimulus here since October 2011.

We have also seen a continued commitment by the Fed, in the U.S. to keep monetary policy very accommodative until the end of 2014. The improvement in liquidity that these moves have created has alleviated some of the risk aversion that drove down markets at the end of 2011.

This has resulted in significant fund flows into emerging market equity funds, with a total year to date of USD19bn, which already equals 57percent of the 2011 cumulative outflows.

This is evidence that investors who withdrew assets last year, are allocating back to emerging markets during this rally, helping to build on the momentum we have so far seen this year.

Lastly, the case for the BRICs is well supported from a valuations perspective. At the start of the year the cheapest exposure to emerging markets was found in the BRIC countries. On top of this the BRICs’ valuations were also at the lowest we have seen in recent history. This attracted investors to invest in these markets when their risk appetite returned.

Despite the recent rally in the BRIC markets there is still significant upside potential. Markets have rallied but have still not reversed the de-rating that followed the introduction of the tight monetary and fiscal policies that we have seen over the last 18 months to combat inflation.

As these policies continue reversing there should be more room for valuations to increase further, in addition to the strong earnings growth forecast this year for BRICs of around 11percent.

Despite the bright outlook and positive start to the year, risks remain for the investment case in BRICs. The major risk for all investors is the potential re-emergence of risk aversion which could happen if the eurozone crisis erupts once again.

This could lead to knock on effects on the growth momentum in the U.S., Japan and China, which could all slow creating global recessionary concerns. However, as the BRICs enter a period of lower inflationary pressure they have the flexibility, means and willingness to introduce policies to counterbalance any global slowdown. We should not forget that it is the domestic side of the economies with their growing middle class which is the main driver of economic growth.

Ultimately, we believe the positives still outweigh the risks for a BRIC or wider emerging market investment as low expectations continue to be priced into the market. We believe that despite the good start to the year there is still significant upside potential in the emerging markets, and the BRICs in particular.

Valuations in the BRICs continue to remain at appealing levels and earnings growth over the next 12 months remains strong. Therefore, on a medium term view we should continue to see rewarding returns in these markets.”

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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