Friday, March 30, 2012

Economic Summary for the week ended 30 March 2012

Global - Recent improvements in the global economy are "very fragile" and an escalation of the eurozone crisis remains the most immediate concern, IMF deputy managing director Naoyuki Shinohara said on Tuesday.
While indicators had last year pointed to a big setback for the world there have in recent weeks been modest signs of improvement and stability in the key U.S. and European economies, he said in a lecture at a university in Bangkok.
"Important policy actions carried out by European policy makers have helped and most recently the agreement on a new programme for Greece ... has also brought some relief," he said. But, he said: "There is no room for complacency. A lot more needs to be done to give a fresh boost to growth."
U.S. - U.S. stocks started the week positively after Federal Reserve chairman Ben Bernanke hinted that the U.S. central bank would keep in place its supportive monetary policy.
Speaking to economists in Virginia, he said the job market remained weak despite three months of strong hiring.
The Fed needed to "remain cautious", he said, which many analysts took as a sign that interest rates would stay at record lows until 2014.
The S&P 500 climbed 1.4percent to 1,416.51 on Tuesday, its highest close since May 2008.
Meanwhile, Gold prices steadied around two-week highs on the same day, boosted by expectations that U.S. interest rates will stay lower for longer.
U.S. - The number of Americans seeking unemployment benefits dropped last week to the lowest level in almost four years, adding to evidence of an improving U.S. labour market.
Companies are retaining workers and hiring as sales pick up along with confidence in the expansion. The pace of employment has gained momentum in the past three months, helping drive income growth that may ease the strain of higher gasoline prices.
"The labour market is still improving at a modest pace," said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. "Across almost all sectors, companies have shed as many workers as they possibly can. Now, they're responding to the modest improvements in demand."
Russia - Russia's finances would be severely damaged by a sustained fall in oil prices, according to the credit rating agency, Standard and Poor's (S&P).
It estimates that a USD10 a barrel fall in the price of oil would reduce government revenue by USD26bn. The agency says Russia needs an average price of oil of USD120 per barrel to balance its budget this year.
If the price was to fall to USD60 a barrel then S&P says it would have to slash the country's credit rating.
S&P says that oil is likely to remain above USD100 per barrel but said there is a chance of a steep decline.
"It is worth noting that only slightly more than two years ago the average oil price was actually USD60, and one year later the price averaged slightly below USD80," said S&P credit analyst Kai Stukenbrock.
Australia - Australia's mining boom is just the "first taste" of Asia's ascendancy, Treasurer Wayne Swan said on Wednesday, with the region's new prosperity expected to transform the global economy.
Australia's chief economics minister said the shift of power towards Asia would have "truly enormous" implications for his country, which would find itself on the door-step of almost two-thirds of global GDP by 2050.
Surging resources exports to fast-growing China and its neighbours had recession-proofed Australia during the global financial crisis, and were expected to buoy it into the future, Swan said in a speech.
Asia - Asian policy makers are preparing to double a USD120bn reserve pool to defend the region against shocks, reducing their reliance on traditional backstops such as the International Monetary Fund as Europe saps resources.
Officials meeting in the Cambodian capital of Phnom Penh this week will discuss boosting to USD240bn the so-called 'Chiang Mai Initiative Multilateralization agreement', a foreign- currency reserve pool created by Japan, China, South Korea and 10 Southeast Asian nations that took effect in 2010.
Asian nations, holder of more than half of global reserves, are looking within themselves to protect the world's fastest- growing region as Europe and the U.S. struggle to recover from the worst economic slump since World War II.
Germany - German business confidence rose for the fifth month in a row in February, according to a closely watched survey.
The Ifo business climate index, which is based on a survey of 7,000 executives, edged higher to 109.8 in March, up from 109.6 in February.
Recent data on the German economy has been mixed. Last week, a report showed that German manufacturing activity contracted in March. Carsten Brzeski, an economist at ING Bank, said: "Today's Ifo index illustrates once again the sound economic fundamentals. Even at a slower pace, the German economy should remain the eurozone growth showcase of this year."
Commodities - Brent crude oil prices fell 1.1percent to USD123.53 on Thursday as it emerged leaders of developed economies are in talks to release emergency reserves to push fuel prices lower.
At the same time, Saudi Arabia's oil minister said the country would do all it could to see lower oil prices.
The news shaved USD2 off the price of a barrel, which is up more than 15percent this quarter, and US oil stocks also closed weaker.
The U.S., U.K., France and Japan are mulling the release of billions of barrels of oil to the market in the hope lower fuel prices will boost economies.
Spotlight on: the importance of the price of oil
While the price of oil is rising, demand for the physical commodity is in retreat. Problems with Iran contribute to the story as a geopolitical risk premium is built into futures contracts, inflicting higher fuel costs on consumers.
The recently issued statement from HSBC that "oil is the new Greece" must have raised a smile or two in financial markets. Underneath, of course, lies a more serious concern.
With the European Union (EU) embargo on Iranian oil, the various other U.S. and E.U trade sanctions that are protests against Iran's nuclear programme, along with Iran's threat to close the Strait of Hormuz (through which 18percent of global oil passes), the price of oil has risen again in recent months.
The period from October 2011 to March this year witnessed a rise of about 20percent, with the price of Brent, the global benchmark for crude oil, hitting highs of about USD125 a barrel. Many wonder if the price will creep up again to the record high of USD147 in July 2008.
The surge in prices, which has generated debate in the financial media, comes at a fragile time for the world economy. Many feel that the associated rises in petrol and other costs are the dominant headwind to an economic recovery.
Given the situation with Iran, Nouriel Roubini, a prominent economist, recently warned that another spike in oil prices is the leading risk for the world economy. "You see a substantial geopolitical risk premium built into the oil price," says Tim Evans, an energy analyst with the Citi Futures Perspective team of Citigroup, the American financial services firm.
"It has become a one-issue market. We are essentially seeing long-side bets based on expectations of a loss of Iranian oil supply."
Evans says that a volatile mix of factors is in play. There is an appetite for risk, he says, but based around demand for a futures position, the buying of paper contracts, not the physical demand for petroleum. Real economic demand for oil, by contrast, is in retreat.
For the U.S., the world's largest consumer of petroleum, total petroleum demand in the four weeks ending March 9 is down 5.4percent year-on-year. Gasoline demand is down 7.2percent for the same period. Production, however, is 4percent a year higher than a year ago.
More generally, the International Energy Agency (IEA) has forecast shrinking demand for oil from developed nations for 2012, and modest growth in the developing world of 2.8percent.
"We are seeing a bit of a bubble, understandably connected to the take on Iran and the embargo," says Evans.
Imagine the unlikely scenario of Mahmoud Ahmadinejad, the Iranian president, suddenly being invited to the White House for talks, he suggests.
"That would probably spark downside chaos in the oil market."
The last decade has set in motion a peculiar new direction that the industry is still trying to get to grips with. This involves not only developments specific to oil but also macro trends that have driven what has been called the largest commodities boom in history.
As is well known, China and other developing nations provide huge demand for commodities as part of their drive to industrialise, urbanise and develop economically. In the context of rising commodity prices set off by this, the financial sector in the western world in turn has sought to profit from this development by marketing commodities as a new asset class - a term some refer to as a "financialization" process.
Consumers in the countries where quantitative easing (QE) has been introduced, however, face higher petrol prices and inflation. More generally, it is not difficult to see why rising oil and therefore petrol, fuel and heating costs, and inflation in general, are causing concern.
With stagnant or declining real wages, and high unemployment in many parts of the developed world, living standards are already coming under pressure. Inflation adds to the cost of living and, of course, has a more serious impact on the poorest of the world in the developing nations.
A complicating factor is that oil prices seem to play a paradoxical role in the global economy. While a high price punishes consumers and other producers, it also incentivises new capital to invest in new exploration, technology and extraction.
On the positive side, perhaps, is China's long-term role. Its demand for commodities is seeing it make a contribution in areas of the developing world such as Africa. It has the potential to become a major energy innovator in clean-tech.
Either way, with the global economy on a knife-edge, the future price of oil can be added to the seemingly ever-growing list of fundamentals that will determine the likely emergence from the recessionary conditions that many advanced economies currently find themselves in.

Friday, March 23, 2012

Economic Summary for the week ended 23rd March 2012

China - International Monetary Fund (IMF) head Christine Lagarde has said that China must stop its economy being too dependent on exports and investment.
She also said the yuan could become a global reserve currency if China implemented market-oriented changes.
"What is needed is a roadmap with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well-developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account," Ms Lagarde said.
"If all that happens, there is no reason why the renminbi will not reach the status of a reserve currency occupying a position on par with China's economic status."
China - The Chinese housing market and wider economy will descend into a soft landing according to a senior official with the IMF with in-depth knowledge of the Chinese economy. Even though the latest data shows apartment prices falling in 45 out of 70 cities and zero growth across the board, Zhu Min a deputy managing director at the IMF and former deputy governor of China's central bank believes that the increasing investment in social housing will counter the downward pressure on house prices leading to a more balanced market landing softly.
At the same conference, Reserve Bank of Australia Governor Glenn Stevens also expressed confidence in an economy he said is closing in on that of the U.S. "It seems likely that the Chinese economy will grow pretty strongly on average for a while yet," he said, adding that officials have "the will and the capacity" to spur the expansion as needed.
Japan - Japan posted a surprise trade surplus in February, after a record high deficit the previous month, as external demand picked up.
The surplus stood at YPY32.9bn (USD394m), the Ministry of Finance said. In January the deficit stood at JPY1.5tn.
Japan has had to increase energy imports, as most of its nuclear reactors remain shut.
Analysts said this was not necessarily a sign of a swing to surplus for Japan.
India - India's Finance Minister Pranab Mukherjee unveiled the country's annual budget this week, saying that the economy is turning around.
The government's plans for development have been hampered by a slowdown in the economy. During the last three months of 2011, India's economy grew at its slowest pace in three years.
Growth was 6.1percent in the fiscal third quarter, though on Friday Mr Mukherjee explained that it was only a temporary slowdown. He forecast that the economy would expand by 6.9percent in the current fiscal year ending in March, with growth accelerating to 7.6percent in the financial year running from 2012 to 2013.
Brazil - Brazil's finance minister has vowed to hold down the value of the real and enact new measures to protect domestic industries, in an attempt to revive the country's slumping economic growth.
"We don't want to lose our manufacturing sector," Guido Mantega told the Financial Times in an interview. "Brazil is not merely an exporter of commodities. We are not going to just sit by and watch while other countries devalue their currencies to give them a competitive advantage."
But like China and India, the country`s economy is slowing. In Brazil`s case an influx of cheap imports, especially from China, has punished its manufacturing sector. Industrial production fell 2.1percent in January compared with December, led by a 30percent decline in automotive production.
Europe - European Central Bank President Mario Draghi said the worst of the sovereign debt crisis is over.
"The worst is over, but there are still risks," Draghi said. "The situation has stabilized. The important indicators for the euro zone, like inflation, current account and above all the budget deficits, are better than, for example, in the U.S."
Investor confidence has returned and "the ball is now with governments," Draghi said. "They must sustainably secure the euro zone against crises."
Portugal - Portugal managed to borrow almost EUR2bn (USD2.65bn) at sharply lower prices in a short-term debt auction Wednesday, despite concerns about its chances of escaping a recession.
The government debt agency said it sold 12-month Treasury bills at an interest rate of 3.6percent, down from 4.9percent last month, and 4-month bills for 2.16percent, lower than the previous 3.8percent.
"This really is good news for Portugal," said Filipe Silva, debt manager at Portuguese financial group Banco Carregosa. "Rates are very significantly down, indicating the risk perception of Portugal is improving a lot."
Commodities - Global oil demand will hit a record high this year, the International Energy Agency (IEA) said on Tuesday, revising up consumption estimates as the world economy recovers from recession.
"There are signs of oil demand picking up in North America and the Pacific, Asia and the Middle East although consumption in Europe still looks weak," David Fyfe, head of the IEA's Oil Industry and Markets Division, told Reuters.
The IEA said refineries around the world would process nearly 1 million barrels per day (bpd) more oil in the second quarter than in the same period last year with China and Asian countries raising output most. This is up 300,000 bpd over the last estimate.
Spotlight on: Fund Manager Sentiment
Asset managers' sentiment towards Europe improved last month, a keenly-watched survey suggests, despite Greece confirming massive debt restructuring.
The Bank of America Merrill Lynch (BofA ML) European Fund Manager Survey also shows that asset allocators are becoming increasing concerned by commodity prices and the health of the Chinese economy.
The survey finds that 38percent of those polled regard E.U. sovereign debt funding as the biggest tail risk during March.
Although this was investors' largest concern of the month, it has fallen significantly from February when 59percent of respondents cited European sovereign debt funding as the strongest risk.
Gary Baker, European equity strategist at BofA ML, says it is interesting how Greek confirmed a debt swap with the majority of its bondholders during March yet the markets were relatively unmoved.
Baker claims the European Central Bank's EUR529.5bn liquidity injection into the banking system through its longer-term refinancing operation (LTRO) at the end of February is one of the drivers of this improving sentiment.
"That's testament to the fact that two years have been bought to allow banks to write down their exposure to Greek debt," he says.
"LTRO has done an awful lot more than just kicking the can down the road, it arguably prevented a catastrophe in the short term and enabled banks to fund themselves. I think it's more of game changer than a can-kicking exercise."
BofA ML's survey shows that commodity price inflation has emerged as the second largest tail risk for asset allocators. In February, about 4percent of fund managers highlighted this risk, but 16percent flagged it in March's poll.
Baker says investors view oil especially as being "very overvalued". Brent has been pushed persistently above the USD120 a barrel mark recently and is expected to remain at a high price in the coming months.
China was also found to be a growing concern among managers. Some 14percent said the Chinese real estate market is the largest risk in this month's survey, growing from 10percent in February.
"If you look across the globe, you've got broad-based improvement and recovery in pretty much every region apart from China," Baker adds. "There's some ambivalence on what the prospects for the Chinese economy are."
Thus it would appear that the debate regarding the apparent 'hard/soft' landing of China continues to split fund managers, investors and economists alike

Saturday, March 17, 2012

Economic Summary for the week ending 17 March 2012

China - China has said it will allow the yuan to float more freely as part of its efforts to reform currency policy. The move comes as China has been facing pressure from its trading partners to let the yuan appreciate.
Beijing has been accused of keeping the value of its currency artificially low to help its exporters. It has risen by almost 8percent in the past 24 months against the dollar.
However, China's trading partners as well as currency analysts continue to maintain that despite the rise, the yuan is still undervalued. This, critics believe, gives China an unfair advantage in international trade.
China - China's stocks fell on Thursday, driving the benchmark level to the lowest level in almost a month, as a drop in foreign investment boosted concerns a slowdown in the world's second-biggest economy will worsen.
"The economy is still on a downward trend and first quarter corporate earnings won't be very good," said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. "A further big slump may not be possible because valuations for large companies are pretty low."
Foreign direct investment in China fell for a fourth straight month in February as companies reined in spending amid a slowdown in the world's second-biggest economy and the prolonged European debt crisis.
Investment declined 0.9percent to USD7.73bn last month from a year earlier, the Ministry of Commerce said in a statement, following a 0.3percent drop in January.
Global - London remains the top city in the world for foreign investment, according to a KPMG report that reflects the rise of emerging economies.
The next two cities are Shanghai and Hong Kong, China's financial capitals, consulting firm KPMG and Greater Paris Investment Agency said.
Brazil's Sao Paulo had the biggest leap, to fourth, increasing investment by 160percent over the past two years.
Brazil - Brazil's real weakened this week after Federal Reserve policy makers raised their outlook for U.S. growth, suggesting that they are less likely to begin a third round of bond buying that would further depreciate the dollar.
Brazil's real weakened with most other emerging-market currencies after the Federal Open Market Committee said on Wednesday that it expects "moderate economic growth" and predicted the U.S. unemployment rate "will decline gradually." The comments reduced speculation the central bank will resume buying bonds to stimulate the world's largest economy, which would increase the dollar supply and fuel demand for higher-yielding assets.
Europe - Ernst & Young LLP said the euro- area economy will probably contract more this year than it previously predicted as governments across the region reduce budget deficits.
Gross domestic product among the 17 countries that share the single currency is set to shrink 0.5 percent in 2012, compared with the 0.1percent decline forecast in December, Ernst & Young's Mark Otty, based in London, wrote in the company's spring forecast.
Countries from Greece to the Netherlands are implementing tax increases and spending cuts to help stem deficits amid the region's sovereign debt crisis, now in its third year. The cuts will collectively reduce euro-area GDP by more than 1percentage point in both 2012 and 2013, Ernst & Young estimated.
U.S. - A long-delayed U.S./South Korea free trade agreement (FTA) that has stirred controversy in both countries took effect on Thursday, although the opposition in Seoul has vowed to renegotiate it if it wins elections this year.
The deal between the world's top economy and Asia's fourth largest will boost trade by billions of dollars and create tens of thousands of jobs, the two sides say, making it one the biggest deals of its kind.
"The U.S/S Korea agreement is a landmark deal with an important ally," U.S. Trade Representative Ron Kirk said in a statement hailing the accord as the most significant U.S. free trade pact in 20 years.
Currencies - The yen has hit an 11-month low against the dollar as the U.S. currency strengthened on hopes of a recovery in the world's largest economy.
The Japanese currency hit 84.18 yen to the dollar in Asian trade on Thursday.
That figure compares with 75.31 yen in October last year, which prompted an intervention in the currency markets by the Japanese central bank.
A weak yen is good news for Japanese exporters because it makes their goods more affordable to foreign buyers.
Spotlight on: Chinese Equity outlook, from HSBC
The likelihood of a so-called 'hard-landing' in China continues to attract significant attention from market commentators. Some insist that it is only a matter of time whilst others maintain that the economy is built on solid foundations and pass the suggestion merely as scare mongering.
Mandy Chan, manager of the HSBC China Equity fund, gives her thoughts on the developments of the Chinese economy over recent months in a Q&A session.
Q: How did Chinese equities perform in January?
A: In January, Hong Kong-listed Chinese equities posted a strong rally, sparked by improving sentiment on Chinese policy makers' call to boost confidence in the domestic equity market, some stabilisation in the sovereign debt situation in Europe, and the recent strength in US economic data. The MSCI China index rose 10.7percent in January and ended the month at a Price to Earnings ratio of 9.3x. Within the index, the three best-performing sectors were information technology, financials and energy, whilst the three worst-performing sectors were consumer staples, utilities and healthcare.
Q: What are your views on the economic data released during the month?
A: Economic numbers were also supportive. China's January manufacturing purchasing manager index (PMI) came in at 50.5 (compared with 50.3 in December), a better-than-expected figure. China's December consumer price index inflation came in at 4.1percent year on year, down from 4.2percent year on year in November. From a liquidity perspective, M2 growth (a measure of the amount of money available in the economy at a specified time) had a more notable rebound to +22.0percent quarter on quarter in sequential terms. In December, Chinese banks ramped up new loan creation to CNY640.5bn from CNY562.2bn in November.
Q: How has the Fund performed recently?
A: The Fund outperformed its benchmark in January. From an allocation perspective, our underweight position in consumer staples, on the back of their relatively expensive valuations, was beneficial to performance. Fortunately, defensive utilities underperformed in the rally, as the portfolio does not have any holdings in this sector. Furthermore, our overweight stance in the banking sector continues to reward.
At a stock level, we continue to like large banks, given the relative strengths of their fundamentals and the overall distressed valuation levels of the Chinese banking sector. Our portfolio holdings, in particular Industrial & Commercial Bank of China, continued to outperform strongly in December. Our overweight in Ping An Insurance was also rewarded as the stock recovered its valuation. China Petroleum & Chemical Corp. is also amongst the top contributing stocks, as refineries have benefited from falling inflation levels.
Q: What do you think are the key factors now and in the near future?
A: We think the newly released January PMI and December's change in monetary stance reconfirm our earlier view of a soft-landing scenario in China. The country's January PMI rose to a four-month high of 50.5, compared to 50.3 previously, beating the market consensus of 49.6. Given that PMI was still rising, especially in a Lunar New Year month when there tends to be some downside distortion, and retail sales growth (18.1percent) were also better than expected, there are early signs that economic activity growth is stabilising.
On the other hand, December's sequential growth of the supply of capital, with loans all registering higher readings than in November, suggest gradual policy easing is starting to work. The European Central Bank's long-term refinancing operation and the recent strength in U.S. economic data have had the benefit of reducing systemic risks and, consequently, lowering the probability of downside risks for Chinese exports to some extent. Although a few issues, such as a slowdown in bank deposit growth and weaker property investment, could pose renewed challenges to the market in the first quarter, we expect policy makers to progress with further necessary easing measures in order to stabilise growth. Thus, current valuation levels should provide buying opportunities in companies with sound fundamentals.

Friday, March 9, 2012

Economic Summary for the week ending 9th 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 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."

Saturday, March 3, 2012

Economic Summary for the week ending 2nd March 2012

U.S. - The U.S. stock market reached a major landmark on Tuesday, in its journey back from lows hit during the financial crisis.
The Dow Jones industrial average closed above 13,000 for the first time since 19 May 2008, just four months before the collapse of Lehman Brothers.
Analysts say it reflects a growing confidence in the U.S. economy and solid profit reports from U.S. companies.
"Two months ago, we were talking about a double-dip recession. Now consumer confidence is growing," said Ryan Detrick, senior technical strategist for Schaffer's Investment Research.
"A major milestone like 13,000 wakes up a lot of investors who have missed a lot of this rally."
Greece - Greece's parliament has passed a further EUR3.2bn (USD4.3bn) of spending cuts, a move required before the country can start to receive a second bailout package.
With an extra EUR130bn (USD174bn) of loans available from the International Monetary Fund and fellow eurozone nations, MPs voted for new pension cuts and a reduction in the minimum wage.
Greece needs the fresh loans to be able to repay EUR14.5bn of bonds. These bonds mature on 20 March.
Portugal - Portugal has passed the latest review of its continuing spending cuts and economic reforms, the country's Finance Minister Vitor Gaspar has said.
It paves the way for the government to receive the next EUR14bn (USD19bn) round of bailout funds from the European Union (E.U.), European Central Bank (ECB) and International Monetary Fund (IMF). Portugal is to get EUR78bn in total.
China - The World Bank has called upon China to overhaul its financial sector in a bid to secure sustainable economic growth.
A joint report by the World Bank and the Development Research Center of China's State Council predicts China will become the world's largest economy by 2030 but says a number of reforms are needed if the country's growth rate is to be maintained.
Robert Zoellick, president of the World Bank, says: "Central to the report's findings is the need for China to modernise its domestic financial base and move to a public financial system, at all levels of government, that's transparent and accountable, overseen by fewer but stronger institutions."
"China has an opportunity to avoid the middle-income trap, promote inclusive growth, without further intruding on the environment, and continue its progress towards becoming a responsible stakeholder in the international economy," Zoellick adds.
Asia - China's manufacturing expanded at a faster pace in February and a gauge for India showed sustained growth, indicating that Asian economies are maintaining momentum even as Europe's debt crisis caps exports.
Thursdays' data, along with a surprise gain in Japanese companies' capital spending and South Korea's biggest increase in exports in six months, add to signs that global growth prospects are improving as the U.S. recovery strengthens and Europe works to contain its debt crisis.
"Pent-up demand will produce an export-led bounce in Asian economic activity" now that Europe's debt turmoil is receding, said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, which accurately forecast today's China PMI result.
Commodities - The price of gold fell more than 5percent on Thursday as investors became more confident about the health of the global economy.
Gold hit a low of USD1,688.44 an ounce on Wednesday, after trading as high as USD1,791.49 an ounce.
Sentiment was boosted by comments from Ben Bernanke, the chairman of the U.S. central bank, who said the U.S. economy is continuing to recover. Analysts said hopes of a recovery in the U.S. economy may see an increased appetite for more risky assets.
Although the recent economic data from the U.S. had been encouraging, some analysts warned that the recovery remained fragile and any new concerns about growth may see investors turn back to gold.
Spotlight on: The potential of a China/U.S. trade war
China will endeavour to import more premium items and luxury goods this year to avoid a costly trade war but will not curb its own exports, predicted a former Chinese trade official in an interview with Reuters.
Disagreements between China and its trade partners over issues from solar panel subsidies to airline emissions fees are on the rise as the global economy slows and U.S. politicians sharpen their rhetoric ahead of a presidential election in the fall.
"We must prepare for a big trade war this year," said Wei Jianguo, a former vice commerce minister who is now a government advisor. "But since Chinese consumers demand Western cosmetics and handbags, why can't we greatly boost imports of such products?" he added.
Earlier this week, U.S. President Barack Obama signed an executive order creating a new government team to enforce trade rules, a step widely seen as aimed at China, and senior lawmakers want to push a bill that would allow the U.S. to impose duties on subsidised Chinese goods.
China has largely remained quiet about the Obama administration's move to create the 50-60 person trade unit, suggesting its leaders hope to avoid a loud dispute with the U.S. in a year when China goes through its own sensitive leadership transition.
As for Europe, Wei said China should cut import duties to encourage more purchases by China's affluent consumers, who enthusiastically buy Louis Vuitton handbags and Italian suits.
But in a reminder that China can also act tough on trade issues, local media reported on Thursday that China-backed Hong Kong Airlines Ltd has threatened to cancel an Airbus aircraft order over an EU airline emissions fee scheme, which has sparked strong opposition from China.
China has previously threatened to hold back on purchasing Airbus aircraft in retaliation against the plan.
China, the world's largest exporter selling USD1.9tn worth of products to overseas markets in 2011, often uses big orders for American products, from Boeing aircraft to soybeans, as a way of deflecting U.S. anger over its huge trade deficit.
It is also the biggest target for anti-dumping charges (when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market competition.). Those cases increasingly come from emerging markets like India and Brazil, China's key export markets for the future. "Developed countries will target us. Our friends, emerging markets, will also target us," Wei said.
But while China faces increased protectionism, a trade war is less likely, said Chin Leng Lim, a professor of law and a trade expert at the University of Hong Kong.
"The protectionism issue is separate from fear of a trade war, there is some control over the fear of a trade war because it takes two hands to clap," he said.
However the situation evolves, there is a consensus of opinion from many fund commentators that China will soon surpass the U.S. as the world's largest economy, primarily through it exports and local consumption of foreign brands. Hansard has a number of unit funds that can best position your clients to take advantage of this growth, as part of a diversified portfolio.