Sunday, December 23, 2012

Economic Summary for the week ended 20th Dec 2012

China - The World Bank has raised its growth forecast for China, saying stimulus measures and approval of infrastructure projects will help boost growth.
It added that the pick-up in factory output and investment "suggested that China's economy was bottoming out". The bank said it now expects China's economy to grow by 8.4% in 2013, up from its earlier projection of 8.1%.
A slowdown in China's growth in recent months had prompted policymakers to announce various stimulus measures.
The bank also raised its forecast for the developing East Asia region, excluding China. The grouping, which includes Thailand, Philippines, Indonesia and Burma, is now projected to grow 5.7% in 2013, up from the previous forecast of 5.5%.
The bank said that the region was likely to benefit from Thailand's recovery from last year's floods and strong growth in the Philippines.
Outlook - With less than two weeks left in 2012 a recent survey suggests that half of people around the world think the global economy will improve in 2013 and many plan to ring in the New Year with family and friends and improve their finances and health.
The Ipsos poll released on Tuesday revealed that Indians, Brazilians and Indonesians were the most optimistic that the economy will improve next year, with more than three quarters having a positive outlook.
But less than a third of Belgians, Spaniards, French, Poles and Italians were confident the global economy will get better.
"There is a great amount of optimism for the future," said Keren Gottfried, research manager at Ipsos Public Affairs, adding that the number had jumped 8% since last year.
And while many still had doubts about the world economy, 80% of the 18,500 people questioned in 24 countries for the survey believed 2013 would be a better year for them personally.
Europe - The E.U. and Singapore have agreed a free-trade agreement (FTA), the second such deal between the 27-nation bloc and a major Asian trading partner.
Last year E.U./Singapore trade was worth approximately USD97bn.
Singapore is the second largest Asian investor in the E.U., after Japan. The E.U. Commission says the deal, not yet signed by politicians, will help E.U. exports of cars and financial services. The E.U. is Singapore's second biggest trade partner after neighbouring Malaysia. The plan is to initial the FTA in early 2013.
Europe - European stocks climbed to their highest level in 19 months on Wednesday, as German business confidence rose more than forecast and optimism mounted that U.S. policy makers will reach an agreement on next year’s budget (so-called ‘fiscal cliff’ discussions).
The EuroStoxx 600 index climbed 0.5%. The equity benchmark advanced to its highest level since May 2011 after Standard & Poor’s upgraded Greece’s debt. The gauge has rallied 15% this year as the European Central Bank (ECB) announced an unlimited bond-buying plan and the Federal Reserve began a third round of asset purchases.
“The market is still focused on the fiscal-cliff talks in the U.S., in which investors seem to expect an agreement relatively soon,” said John Plassard, vice president at Mirabaud Securities LLP in Geneva. “News such as the upgrade of Greece’s credit rating is positive, albeit not a big surprise, helping to continue a year-end rally. Sentiment at the beginning of 2013 will be cautious as we face some political risk.”
Spain - Bad loans as a proportion of total lending at Spanish banks climbed to a record 11.23% in October, as the country’s economic slump led more companies and homeowners to miss credit payments.
The proportion rose from 10.71% in September as EUR7.4bn of loans defaulted in the month, to take the total of doubtful credit in the banking system to EUR189.6bn, the Bank of Spain said.
Spain’s economic slump, now in its fifth year, continues to drive defaults to record highs as lenders report rising impairments of corporate, home and consumer loans as well as those linked to real estate. Doubts about the ability of Spain’s weaker lenders to withstand mounting impairments of loans linked to real estate helped push the country to seek a European bailout for its banking system in June.
“It’s clear that these levels of bad loans are going to keep rising,” said Juan Pablo Lopez, an analyst at Espirito Santo Investment Bank. “The flows of entries into default are still very high.”
Greece - Standard & Poor's has increased its rating of Greece's sovereign debt by six notches, following efforts by its eurozone neighbours to keep it in the currency union.
The ratings agency said there has been "strong determination" within the eurozone to help Greece remain a member state. S&P has increased Greece's rating from 'selective default' to 'B-minus'.
The agency also praised the continuing efforts by Greece's government to cut its spending. Greece is currently receiving the second of two bailouts.
Spotlight on: Current fund manager sentiment
More investors than ever say they are bullish about China’s economic outlook, and more favour European rather than U.S. stocks for the first time in two years, a Bank of America monthly survey showed.
67% of money managers, who together oversee USD503bn, predicted that China’s economy will grow at a faster rate next year, the highest reading since the survey data started in 2003. Some 7% hold more European stocks than appear in benchmarks, the poll showed.
“Investor anxiety has been successfully sedated by central-bank liquidity policies in recent months,” Michael Hartnett, chief investment strategist at Bank of America’s Merrill Lynch unit, wrote. “Risk appetites are higher and hopes for economic activity have picked up, especially for Chinese growth.”
Optimism that the world’s second-largest economy will accelerate may help to offset concern that potential budget cuts and tax increases in the U.S. will curb global growth. A survey showed China’s manufacturing industry may expand for a second month in December, underscoring optimism the economy will recover following a seven-quarter slowdown.
40% of respondents said the global economy will improve, the highest reading in 22 months, while a net 11% said profits will increase, the most bullish result in 20 months.
U.S. Budget
The poll showed 47% of money managers rated America’s budget outlook as their top concern, compared with 22% who cited the euro area’s debt crisis. U.S. President Barack Obama and House Speaker John Boehner are trying to reach an agreement to prevent more than USD600bn in tax increases and spending cuts from coming into force in January.
Even as investors became more sanguine about global growth, allocations to equities remained unchanged from November, BofA said. Hedge funds were an exception, with net investment in shares jumping to 45%, the highest since August 2006.
“While bullish rhetorically, the lack of follow through in actual positioning suggests moderate conviction at best,” BofA said in the report to investors.
Average cash levels fell to 4.1% from 4.2% in November, BofA said. A net 41% said they hold fewer bonds than benchmarked, the lowest in eight months, whilst 5% said they hold more commodities than appear in indexes.
Overweight Europe
The share of respondents who said they are overweight in European equities) meaning they hold more of the region’s shares than are represented in global benchmarks), rose from 5% last month, the survey showed. Those saying they are overweight the U.S. fell to 5% from 11%, with the country falling behind Europe in investors’ favour for the first time since November 2010.
Investors remained underweight on Japan and the U.K., the survey showed. A majority are now under-invested in energy companies, for the first time since January 2009, BofA said.
A record high net 64% of respondents said companies are not investing enough, BofA said. A net 45% of investors now prefer companies to use idle cash to increase capital spending, the highest reading in 20 months, instead of paying back debt or returning it to shareholders.

Saturday, December 15, 2012

Economic Summary for the week ended 14th Dec 2012

China - China's economic growth rate may be gathering pace again, as the government released strong industrial output and retail sales figures.
Industrial production rose by 10.1% in November, compared with a year earlier, according to the official data from the National Bureau of Statistics. This was better than expected, and the strongest performance since March.
At the same time, China's retail sales increased by 14.9%. This was also the best showing for eight months.
"The Chinese economy is in the sweet spot now with rebounding GDP growth, rebounding earning growth and low inflation," said Lu Ting, China economist at Bank of America Merrill Lynch.
U.S. - Christine Lagarde has urged U.S. leaders to reach a deal to avoid the "fiscal cliff", warning that the uncertainty is damaging the global economy.
The head of the International Monetary Fund said that the U.S. had a duty "to try to remove uncertainty and doubt as quickly as possible".
The fiscal cliff refers to U.S. tax rises and spending cuts set to automatically come into force in January.
She added: "The U.S. is about 20% of the global economy. If the U.S. suffers as a result of the fiscal cliff, a complete wiping out of its growth, it is going to have repercussions around the world. If the U.S. economy has 2% less growth there will be 1% less growth in Mexico and China… there will be ripple effects outside of the U.S."
U.S. – Meanwhile, the U.S. Federal Reserve has said it plans to keep interest rates at close to zero at least until the U.S. unemployment rate falls below 6.5%.
The Fed previously had a date-driven target, rather than a data-driven one.
The Fed also said it will continue to buy $85bn a month of government bonds and mortgage-backed securities to try to boost the economy.
But changes in the way it does this will mean more money is pumped into the economy.
"The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions," the Fed said in a statement.
Emerging Markets - Emerging-market stocks rose for a seventh day on Thursday, led by technology companies, and currencies strengthened after the U.S. Federal Reserve expanded its bond- buying program and the outlook for display makers improved.
“There is optimism that a global economic recovery will boost consumer demand and that is driving technology stocks higher,” Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India) Pvt. in Mumbai, said. “Emerging-market equities have run up quite a bit now and investors will keenly watch the U.S. fiscal-cliff negotiations and corporate performance in the upcoming earnings season for more cues.”
The MSCI Emerging Markets Index has advanced 14% this year, compared with a 13% increase in the MSCI World Index.
Europe - The European Union reached a landmark deal on Thursday to make the European Central Bank the bloc's top banking supervisor, giving E.U. leaders greater confidence that they are gaining the upper hand over the euro zone's debt crisis.
E.U. finance ministers forged a deal on the single supervisor in the early hours of Thursday after lengthy talks. Leaders will give their stamp of approval at a summit starting later in the day, their last of 2012, and also discuss closer fiscal ties for their troubled currency area.
After a year of crisis management, during which Greece had a close brush with the euro zone exit, getting an agreement on the first stage of a banking union is a victory for the E.U. and represents a bold step towards pooling sovereignty.
Japan – Revised growth figures for Japan have suggested that the world's third-largest economy is in recession.
The economy shrank by 0.9% in the July-September quarter, while the April-June quarter was revised from 0.1% growth to show a contraction of 0.03%.
That means that Japan is technically in recession, having contracted for two quarters in a row.
Spotlight on: Equity outlook in to 2013
Dominic Rossi, chief investment officer of equities at Fidelity, presents the case for and against a strong run for the asset class next year, and highlights the sectors and regions he expects to shine.
Next year will be another challenging and event-driven one for equity investors to negotiate. Markets face a number of risks with binary outcomes, not least the imminent fiscal cliff facing the U.S. economy.
While the prospects for earnings growth in most developed equity markets are now more modest, a positive case can be made for a re-rating of equities, yet this is dependent on progress being made against some powerful headwinds.
The positive case for equities rests on three supportive factors:
  • Equity valuations are reasonable relative to history, with price/earnings (PE) ratios of around 13 to 14 times trailing 12-month earnings. While this is not extremely low, the relative attractions of equities are enhanced when valuations are compared with sovereign and investment grade bonds.
  • We have seen sustained outflows from equities in the last few years, so much so that institutional levels of equity ownership are now at 30-year lows. Equities are an unloved asset class and there is growing scope for a reversal of this trend.
  • Volatility has subsided. I have always believed a reduction in volatility is a prerequisite to any re-rating in equities. Encouragingly, the VIX (a broad index measure of market volatility) has fallen back to around 15%, having remained below 20% since July.
  • While these factors make a re-rating possible, there are some considerable hurdles to be overcome that could prevent it. In my view, there are three key risks facing equity markets in 2013:
  • Lack of a resolution to the U.S. fiscal cliff would throw the U.S. and global economies into recession. The likelihood of going over the cliff, and detracting around 4% from GDP, is being underestimated given the ideological divide in Congress.
  • The economic, sovereign and banking crisis in Europe remains unresolved despite central bank promises having had a favourable impact. With politics in peripheral countries becoming radicalised, there is the potential for more flare-ups. Unfavourable debt dynamics and poor economic fundamentals suggest further deterioration is likely.
  • Geopolitics, particularly in the Middle East, could pose a significant and unpredictable risk in 2013, this being the year that the confrontation between Israel and Iran over nuclear facilities is likely to come to a head.
  • So what can investors do? With government bonds failing to provide a store of value after inflation, investors will continue to search for yield, particularly in short-duration assets.
    In this respect, equity income remains an attractive story given the dividend yields available on equities compared with government bonds.
    In Europe, investors can expect yields of around 3% to 4%, except in financials where many dividends have been scrapped.
    Balance sheets are healthy, cash-flow is solid and payout ratios are low with scope to grow. I think we will see earnings and dividend growth of 4% to 5% in 2013, particularly at large high-quality companies.
    So, if you combine 3% to 4% dividends and estimated growth of 4% to 5%, we can generate attractive total returns of 7% to 8%, which should support further flows into equity income funds.
    In terms of sectors, I expect the leadership we have seen over the last year to continue. Quality will remain a powerful theme and stocks with high returns on invested capital will continue to attract a premium.
    I think selected healthcare, technology and consumer stocks remain attractive. There are high-quality stocks available with strong franchises benefiting from structural tailwinds; many of these are also returning cash to shareholders, such as Nestlé, Unilever, and Sanofi.
    With these strong multinational companies, investors can be fairly confident that they will get their money back and in the meantime, they receive a higher income than they would from investing in sovereign bonds. Some pharmaceutical companies are on single-digit PE ratios despite having among the highest returns on capital.
    Among technology companies too, there is good scope for dividend growth: some of the large technology stocks have matured into stable, lower-growth businesses that offer attractive total returns.
    While the estimated 3.5% yield on Microsoft may seem a little low, this is covered about four times by cash. This means that it has the potential to grow dividends in the future significantly ahead of earnings.
    The Chinese economy is well placed to have a rebound in 2013; inflation has been brought under control and the leadership transition is now out of the way, suggesting policy can be accommodative. Investors appear to have discounted economic growth rates in the 6% to 8% range and the market should perform relatively better now that these headwinds have passed.
    In developed markets, the U.S. looks attractive if the fiscal cliff can be successfully navigated. The housing market is recovering, which is a key bellwether for the broader economy, and consumer confidence is also picking up.
    In energy, the U.S. could become the largest producer of both gas and oil thanks to the exploitation of its shale reserves. But it is the broader effect of cheap energy costs on the economy that is particularly supportive; this will give the U.S. a competitive advantage among advanced economies and play a central role in the renaissance of U.S. manufacturing.

    Friday, December 7, 2012

    Economic Summary for the week ended 4th Dec 2012

    U.S. – U.S. output per worker grew by its fastest rate since 2010 in the third quarter of this year, according to official data. The Labour Department said that productivity among non-farm workers rose by an annual rate of 2.9% in the third quarter of this year.
    The rise suggests companies are finding ways of getting employees to work harder, rather than hiring extra staff.
    Consumer spending remains weak in the U.S. and the output is being driven by companies building up stocks.
    India - India's government has won a crucial vote in parliament on its controversial plans to open the retail sector to foreign competition.
    After a two-day heated debate, MPs in the lower house approved the plan to allow foreign investment of up to 51% in multi-brand retail.
    Parliament, which was deadlocked over the issue, resumed business this week after the government agreed to a vote.
    It is hoped that the agreement will help the government push ahead with further economic reforms.
    Argentina - Fitch has downgraded the credit rating of Argentina and admitted the country will probably default.
    The ratings agency has cut its long-term ratings for Argentina by five notches from B to CC and its short term rating from B to C.
    Argentina is appealing against a U.S. ruling ordering it to pay $1.2bn to foreign creditors holding bonds that it defaulted on in 2001. The government has until 15 December to reimburse the hedge funds, which declined two previous debt swaps. Argentina defaulted on $100bn of bonds in 2001, a record amount at the time.
    Companies - Apple Inc. plans to spend more than $100mn next year on building Mac computers in the U.S., shifting a small portion of manufacturing away from China, the country that has handled assembly of its products for years.
    “Next year we’re going to bring some production to the U.S.,” Chief Executive Officer Tim Cook said in an interview. “This doesn’t mean that Apple will do it ourselves, but we’ll be working with people and we’ll be investing our money.”
    Apple, which until the late 1990s made and assembled many products in the U.S., moved manufacturing to Asia to take advantage of the region’s lower labor costs. The planned investment makes up a fraction of Apple’s $121.3bn in cash, and probably won’t significantly affect profit margins. Still, it reflects pressure on companies to create even a modest number of domestic jobs as the unemployment rate hovers near 8% and the economy rebounds from the recession that ended in 2009.
    Europe - European stock markets hit fresh 2012 highs on Thursday and some traders eyed more rallies after equity indexes broke key resistance levels.
    Technical analysts said the fact that the Euro STOXX had at one stage managed to clear the 2,610 level pointed to more potential rallies, provided it could close above that level.
    "The potential for this symbolic formation which has been building for about a year now extends out to next spring, and could see the index climbing towards the 3,000 points zone, or 15% plus upside," said Societe Generale chartist Loic De Galzain.
    Greece - Greece is perceived to have the most corrupt public sector of all 27 EU countries, a new global survey reveals.
    Worldwide, Denmark, Finland and New Zealand were seen as the least corrupt nations, while Afghanistan, North Korea and Somalia were perceived to be the most corrupt.
    Transparency International's 2012 Corruption Perceptions Index gathered views on 176 countries worldwide.
    Greece's global ranking fell from 80th in 2011 to 94th in 2012, reflecting the country's continuing economic turmoil and widespread tax evasion.
    "Governments need to integrate anti-corruption actions into all public decision-making", said Huguette Labelle, chair of Transparency International (TI), a body set up in 1993 to expose and tackle countrywide corruption.
    Germany - German factory orders surged almost four times as much as economists forecast in October, driven by foreign demand.
    Orders, adjusted for seasonal swings and inflation, jumped 3.9% from September, the Economy Ministry in Berlin said. It revised September’s drop to 2.4% from 3.3%. The increase in October is the biggest since January 2011.
    “The music is playing outside the euro region, where the label ‘Made in Germany’ is enjoying everlasting popularity,” said Mario Gruppe, an economist at NordLB in Hanover. “That’s good news for the economic outlook. We’re in for a cold winter but not a recession.”
    Spotlight on: Commodity views in to 2013
    Gold, silver and corn will outperform other raw materials next year as a weaker dollar and rising investor demand bolster precious metals while supply curbs aid grains, Morgan Stanley said this week, listing top picks for 2013.
    Silver will track gold, which is poised to gain on low real interest rates, buying by central banks and geopolitical uncertainty, analysts including Peter Richardson and Hussein Allidina wrote in a report, reiterating an October call. Corn and soybeans should benefit from harvest delays in South America, they said. The bank is bearish on aluminum, sugar, nickel and uranium as supplies are set to outpace demand.
    Commodities as tracked by the Standard & Poor’s GSCI Spot Index are down 0.4% this year, led by declines in coffee, cotton and sugar. The gauge almost doubled in the three years to 2011 as central banks and governments around the world took action to boost their economies dented by the global financial crisis in 2008. Morgan Stanley joins Goldman Sachs Group in predicting the so-called super-cycle isn’t over.
    “Higher prices in recent years have brought both a supply and demand response, bringing many to call for the end” of the super-cycle, they wrote. “We view this as too simplistic. Commodities are cyclical but the elasticity of supply and demand, as well as the length of the cycle, vary significantly.” Gold may average $1,853 an ounce in 2013, while silver may be $35 an ounce, Morgan Stanley said. That compares with gold’s average of $1,668 so far this year and $31.1542 for silver.
    Overweight Call
    Goldman reiterated an overweight call on commodities, on Wednesday, forecasting prices will return 7% in 12 months, Jeffrey Currie, head of commodity research, wrote in a report.
    “With commodity-supply constraints easing, Chinese growth slowing and producer-company returns normalizing, it is tempting to say the super-cycle is over”, Currie wrote. “Current developments are simply the next phase of a commodity-investment cycle that began in the late 1990s. We therefore view the current transition as a renaissance, rather than an end.”
    Goldman, backing crude, corn and copper, expects gold to peak in 2013 on a recovery in the U.S. economy. In contrast, Morgan Stanley called for higher prices on low nominal and negative real interest rates, as well as risks in the Middle East and central-bank buying. So-called negative real interest rates describe savings rates that are lower than inflation.
    Central Banks
    Spot gold, up 8% in 2012, is rallying for a 12th year as central banks join investors buying bullion to diversify assets. South Korea, Brazil and Russia are among those adding to gold reserves this year. Holdings in exchange-traded products are at a record, data compiled by Bloomberg show.