Economic Summary for the week ended 27th April 2013

Japan - The Nikkei share average climbed to a fresh, almost five-year high on Thursday, but the mood was tempered by sharp losses for Canon and Nintendo after they failed to meet investors' expectations of strong earnings guidance.

Market analysts had expected Japanese companies to aggressively raise their earnings guidance after the yen weakened more than 14% this year, driven by bold government and central bank policies to revive growth.

Still, investors remained optimistic about Tokyo stocks on the view that the yen, which last traded at 99.13 to the dollar, still has room to weaken.

China - Growth in China's manufacturing sector slowed in April, a survey by HSBC has indicated, adding to concerns about the country's economic recovery.

The preliminary reading of HSBC's Purchasing Managers' Index (PMI) fell to 50.5, from 51.6 in March. A reading above 50 indicates expansion.

A drop in new export orders was blamed for the decline, a sign of weak global demand. Last year, China's economy grew at its slowest pace in 13 years.

"New export orders contracted after a temporary rebound in March, suggesting external demand for China's exporters remains weak," said Qu Hongbin, China chief economist at HSBC in a statement.

Asian shares fell following the release of the data on Thursday, with the main index in Shanghai falling 1.4%.

Australia/China - Australia's central bank is planning to invest around 5% of its foreign currency reserves in Chinese government bonds, its deputy governor has said.

It will be the first time the Reserve Bank of Australia (RBA) will invest in sovereign bonds of an Asian country other than Japan.

"This decision to invest in China is an important one," Philip Lowe, deputy governor of the RBA said in a speech to the Australian Chamber of Commerce in Shanghai. It reflects the broader economic relationship between China and Australia and our increasing financial ties.

"It provides greater diversification of our investments and will help with our understanding of the Chinese financial markets," he added.

South Korea - South Korea's growth rate hit a two-year high in the first three months of the year, boosted by a rebound in construction, investment and exports.

The economy grew by 0.9% in the January to March quarter from the previous three months, the central bank's estimates showed.

The data is likely to help allay fears over the health of the Korean economy.

Earlier this year, the government cut its growth forecast for the current year amid a slowdown in exports.

However, the latest data showed a 3.2% quarter-on-quarter growth in exports during the period, that compares with a 1.2% drop in the previous quarter.

U.S. - Barclays Wealth head of investment strategy for EMEA Kevin Gardiner says the U.S. economy will still show better growth than investors are fearing in 2013, despite the latest indicators pointing to an abrupt slowing in the economy.

Gardiner says data from some parts of the U.S. economy looks weaker than expected, reinvigorating concerns of double-dip recession in the country. He says: “There has been a lot of discussion about whether the U.S. now is slowing down quite abruptly as we go into the second quarter.

However Gardiner believes many of these concerns prove to only to be short-term setbacks. He says: “We can see all sorts of issues that can induce some weakness in the economic profile on the short-term basis but the underlying conclusion from us about the US economy is that it is in better shape than investors are fearing.”

Germany - Germany will grow by just 0.5% this year, the government said on Thursday, raising its forecast by just 0.1% as a lack of investment and weak exports continue to be a drag on Europe's largest economy.

The German Economy Ministry kept its 2014 forecast for solid growth of 1.6% and said it was upbeat as the global economy begins to regain traction and crisis-stricken euro zone states make progress with their reforms.

"There is every reason to look to the future with optimism. The German economy is picking up again and is successfully leaving an economic weak phase behind it," German Economy Minister Philipp Roesler said in a statement.

Spain – Spain is set to unveil new measures later aimed at reviving the economy, a day after unemployment in the country hit another record.

Many economists believe the proposals will focus less on austerity and more on stimulus measures.

Spain saw violent anti-austerity protests on Thursday, with police reporting a number of injuries and the arrest of people suspected of planning to burn down a bank.

This came on the day official figures showed that unemployment in the eurozone's fourth largest economy topped 27% in the first quarter of 2013. Unemployment reached 57.2% among people under 25 years old, the National Statistics Institute said.

Commodities - Central banks bought the most gold since 1964 last year, just before the collapse in prices into a bear market underscored investors’ weakening faith in the world’s traditional store of value.

Nations from Colombia to Greece to South Africa bought gold as prices rose for an 11th year in 2011, highlighting the reversal of a three-decade-long bout of selling that diminished the world’s biggest bullion hoard by 19%. The World Gold Council says they added 534.6 metric tons to reserves in 2012, the most in almost a half century, and expects purchases of 450 to 550 tons this year, valued now at as much as $25.3bn.

Central banks are the biggest losers, with about $560bn of value erased since gold reached a record $1,921.15 an ounce in September 2011. The metal was already in the eighth year of its longest bull market since the end of World War I when reserves started expanding again in 2008. They were also buying in 1980 when bullion peaked at the equivalent of $2,400 in today’s money, and selling in 1999 as prices slumped to a 20-year low.

“They sell at the wrong time and buy at the wrong time,”said Walter Hellwig, who helps manage $17bn of assets at BB&T Wealth Management in Birmingham, Alabama. “They aren’t traders. They are looking at it as a long-term holding, as an ultimate reserve currency. With the benefit of hindsight, they tend to get it wrong more often than not.”

Equities - Central banks, guardians of the world’s $11tn in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23% said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5tn yen ($35.2bn) by 2014.

Managers of banks’ assets are looking for alternatives to holding government bonds after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows. Central banks’ foreign- exchange holdings have increased by about $8.5tn globally in the past decade, exceeding levels needed for day-to-day currency administration.

Spotlight on: Three investment themes shaping markets in 2013

Two of JP Morgan’s global market strategists advise brokers & investors how to position their portfolios if they want to benefit from the major growth trends of the year.

Maintaining an overweight equity position, diversifying across the global fixed income market and raising emerging markets exposure offer the best hope of being a successful investor in 2013, according to JP Morgan.

Strategists at the group say that, with intervention from world central banks pushing fixed income yields ever lower while equity prices continue to rise, investors need to follow these three themes if they want to succeed in the current uncertain environment.

Stay overweight equities

Dan Morris, global market strategist at JP Morgan, says that although equity prices have surged in recent months, he has not seen any suggestion that they will fall back in the foreseeable future.

"The FTSE 100 is up around 10% since the beginning of the year on a total return basis, and the S&P 500 index has reached record highs," he said. "Given the range of global factors supporting stocks, the UK and US equity rallies look like they may still have room to run."

"In the U.S., surging household wealth bolstered by a recovering housing market along with a resilient and deleveraged consumer is positive for equities, but it is important to keep in mind that the fiscal drag stemming from Washington's deficit-reduction policies remain a headwind, stocks still look cheap relative to bonds."

Make sure you have diverse bond exposure

Andrew Goldberg, who is also a global market strategist at the company, says that the mass liquidity the world’s central banks have injected into the financial system means investors need to diversify globally across the fixed income market.

However, he warns that yields from fixed interest assets cannot and will not stay at such low levels for ever.

"Investors should be looking for carry and flexibility with the prospect of rising yields," he said.

"For most, however, the immediate challenge remains grappling with today's painfully low-rate environment. Cash accounts are not keeping pace with inflation and investors have to broaden the search for income."

"Non-traditional sources such as global dividend-yielding equities, emerging markets debt and high yield bonds look like compelling alternatives."

Don’t ignore the emerging markets

Goldsmith says that although the emerging markets have been a source of disappointment in recent times, it would be unwise to avoid the area completely.

According to FE Analytics, the MSCI Emerging Markets index has returned 350.75% over the last decade, compared with 149.79 and 104.81% from the FTSE All Share and S&P 500, respectively. However, the MSCI Emerging Markets index has underperformed against both the FTSE All Share and S&P 500 over one, three and five years.

Nevertheless, Goldsmith says that the low sovereign debt levels in this area of the market and the fact that they are historically cheap mean now could be the perfect buying opportunity.

"Emerging markets have disappointed investors on a relative basis in recent months, but they look attractively priced and poised for stronger performance," he said.

"Emerging markets have a good combination of low indebtedness and robust GDP growth and represent an opportunity for long-term investors able to tolerate some volatility to achieve higher growth."

"No adviser will be able to predict the future, but understanding exactly where we are today makes you a more informed investor," he added.

Economic Summary for the week ended 19th April 2013

U.S. - Fund managers have highlighted U.S. equities as the asset class most likely to show continued strength over the coming year, according to a survey by Fidelity Personal Investing.

Fidelity canvassed opinions across 13 different fund groups and found general optimism for global equities, in particular the U.S., with many managers pointing to recent events and figures for their reasoning.

One overriding theme in particular is the shale gas ‘revolution’ playing out in the U.S., which has been received as many as a positive sign for industry in the world’s largest economy.

Fidelity Worldwide Investment head of global equities Richard Lewis says: “One of the key drivers for the U.S. is the shale gas revolution which is resulting in low energy prices. This in turn is helping to re-industrialise the U.S.”.

U.S. – Meanwhile, the U.S. central bank has slightly upgraded its view of the U.S. economy, saying it expanded at a "moderate pace" in recent months.

The view comes in the Federal Reserve's latest Beige Book report, which covers the period from late February to early April. The Fed highlighted growth in the manufacturing and construction sectors.

In its previous beige book report in January, the Fed said growth was only "modest to moderate". In its latest report, the Fed also said that carmakers were performing strongly.

Yet it cautioned that consumer spending was only increasing at a "modest" pace.

Japan - A small rise in Japanese exports, improving business confidence and surging investment flows demonstrated early successes for Prime Minister Shinzo Abe's radical pro-growth strategy, but firms have yet to see signs of a sustained boost to economic activity.

Abe's push for aggressive fiscal and monetary policies to shock the world's third-largest economy back into life after two decades of stagnation has driven the stock market up and the yen down since November.

The shift in gears climaxed with the Bank of Japan's $1.4 trillion stimulus plan announced on April 4 to virtually double the monetary base by the end of 2014.

Russia - The pace of growth in the Russian economy, part of the once-fast moving Brics bloc of developing countries, slowed to 1.1% in the first three months of 2013.

The number contrasts sharply with the 4.9% acheived during the first three months of 2012.

The estimated figure came from deputy economy minister, Andrei Klepach. He said the slowdown emerged after growth for January and February were revised down.

Other Brics nations, Brazil, India, China and South Africa, are themselves experiencing slowing economic growth.

Russia's economic minister, Andrei Belousov, warned recently that quarterly growth could turn negative before the end of the year. "We are not in a recession yet, but we could end up there," he said.

U.K. - The International Monetary Fund's twice-yearly look at the world economy has lowered its forecasts for most developed economies, including the UK.

The IMF said world growth would now be 3.3% for the year, down from 3.5% forecast six months ago.

For the UK, it is forecasting growth of just 0.7%, after saying in January that the country's economy could expect 1% growth.

The IMF's World Economic Outlook report also cut its forecast for the eurozone this year to -0.3%, with Germany, the strongest economy, expected to grow by 0.6%, but France on course to shrink by 0.1%.

China - China's economy, the world's second-largest, has slowed and performed worse than many analysts expected in the first three months of the year.

Annual growth was 7.7% in the January to March quarter, compared with 7.9% in the previous three months. Analysts had forecast a figure closer to 8%.

China wants to spur growth after it hit a 13-year low in 2012.

Over the past few years, China has relied heavily on its exports and investment spending to maintain a strong pace of growth. However, as economic growth in its key markets such as the U.S. and Europe has slowed, and its exports have weakened, there have been calls for China to rebalance its economy.

Commodities - Gold has fallen to its lowest level in two years, while wider commodity prices have also declined following disappointing Chinese economic data.

The price of the precious metal was down 9.2% to $1,395 an ounce on Wednesday.

Meanwhile, oil prices fell to four-month lows, with Brent crude down $2.29 to $100.75 a barrel, and the main U.S. share index, the Dow Jones, ended down 1.8%. This was the Dow's biggest fall since November.

Analysts said a key factor in gold's fall was the expectation that the US central bank, the Federal Reserve, will tighten monetary policy by stopping its quantitative easing (QE) programme.

This means that the rate of U.S. inflation is likely to fall, meaning investors have less reason to hold gold to avoid a corresponding decline in the value of cash investments.

Spotlight on: Goldman Sachs backs Asia

Goldman Sachs expects strong returns from equities to continue in the next three years, led by the Asia ex Japan region.

It expects annualised returns of 21.3% from this region, driven by strong economic earnings growth, good dividend yields and some expansion in multiples.

Of all global regions, the analysts expect the U.S. to show the slowest growth, with the annual forecast at around 9%, as the U.S. market "has already returned to its pre-crisis peak and the potential for performance therefore is smaller".

The forecast sees Europe delivering a 19% annualised total return and Japan following slightly behind with returns of 15%.

In the research note, analysts said: "With a 2015 horizon, all regions look attractive on an absolute basis. On a relative basis, on balance, we see Asia ex Japan as the most attractive region."

Equity returns will be mainly driven by earnings growth, which the analysts expect to range from 8% in the U.S. to 21% in Japan, with growth outside the U.S. driven by a rebound from cyclically weak margins.

Goldmans also forecasts a fall in P/E multiples to 1% annualised in Japan and a rise of between 1% in U.S. and 4% in Asia ex Japan.

The research takes a central scenario as a base case, but also looks at downside scenarios to model the potential risks faced by markets.

The main risk identified by the analysts is a disappointing economic recovery, as the forecasts are based on Goldman Sachs economists' forecasts of global growth accelerating to 3.3% in 2013 and to more than 4% from 2014 to 2016.

"We judge markets to be roughly fairly priced for the current economic environment and therefore returns are unlikely to materialise on a sustained basis unless the economic recovery continued," the note concludes

Economic Summary for the week ended 7th April 2013

Cyprus - Cyprus has agreed to a set of measures that will release a EUR10bn ($12.8bn) international bailout.

The International Monetary Fund (IMF), which is contributing EUR1bn, says they are "challenging" and will require "great efforts" from its population. They will mean a doubling of taxes on interest income to 30% and a rise in corporation tax from 10% to 12.5%.

The plan, designed to stabilise the banking system and government finances, was agreed in principle last week.

Cyprus's new finance minister Harris Georgiades, speaking on his first day in the post, said he was determined to honour the country's commitments: "The responsibility is great, and the expectations of our citizens greater. Our promise is that we will make every effort for what is best for the nation. Under your guidance I am sure we will succeed."

Europe - European Central Bank (ECB) President Mario Draghi signalled the ECB stands ready to cut interest rates if the economy deteriorates and said officials are considering additional measures as a debt crisis enters its fourth year.

“Our monetary policy stance will remain accommodative for as long as needed,” Draghi said at a press conference in Frankfurt after the ECB kept its benchmark interest rate at a record low of 0.75 percent.

“In the coming weeks, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability,” he said. The ECB is “ready to act.”

India - India's PM Manmohan Singh has said he is confident the country's economy will bounce back and that the current downturn is "temporary".

Mr Singh said he did not believe "our future is at 5% growth" and added that India "can get back to an 8% growth rate". India's growth has dipped in recent months, mostly due to a slowdown in its manufacturing and services sectors.

Foreign investors have also been wary of entering the Indian market amid a delay in key reforms. In February, India lowered its growth forecast to 5% for the year to 31 March 2013, underlining the challenges it faces in reviving the sluggish economy.

Japan - Japan's central bank surprised markets on Tuesday with the size of its latest stimulus package, as it tries to spur growth and end years of falling prices.

The move was seen as a clear signal by the bank's new boss, Haruhiko Kuroda, that he was willing to spend heavily to achieve an inflation target of 2%.

The bank said it would increase its purchase of government bonds by YEN50tn ($520bn) per year, that is the equivalent of almost 10% of Japan's annual gross domestic product.

The bank added that it would buy longer-term government bonds as well as riskier assets. "The previous approach of incremental easing wasn't enough to pull Japan out of deflation and achieve 2% inflation in two years," Mr Kuroda said.

The Nikkei reacted positively, hitting its highest level in almost five years, climbing as much as 4.7% to 13,225.62, its highest since August 2008.

U.S. - New York's Dow Jones and S&P 500 share indexes set new all-time highs on Wall Street on Tuesday.

The rallies mean the stock markets are returning to levels not seen since before the global financial crisis.

The Dow rose 89 points, to close at 14,662 on Tuesday, after an earlier intraday high of about 14,684, the broader Standard & Poor's 500 closed at a record high of 1,570, suggesting investors are regaining confidence in the U.S. economy.

The Dow has more than doubled in value since it plummeted to less than 6,550 points in the depth of the crisis in March 2009.

Commodities - Gold fell to the lowest levels since May on Wednesday, nearing a bear market, on signs that investors are seeking higher returns in equities as the global economic recovery cuts demand for haven assets.

Global holdings of exchange-traded products backed by gold are down 7.4% this year, data compiled by Bloomberg show. Prices fell 7.3% this year through yesterday, while the MSCI All-Country World Index of equities advanced 5.3%. The metal may continue to decline as the resilience of the financial system to recent developments in Italy and Cyprus suggests reduced risk of a so-called major meltdown, Credit Suisse Group AG said on Wednesday.

Spotlight on: Is there any value left in emerging market debt?

Emerging market debt (EMD) had a good run over the past year and many investors are increasingly allocating to the asset class as the search for yield continues. However, these facts have caused some to question how much value is remaining in EMD.

Last year saw emerging market bond investors well rewarded. The JP Morgan Emerging Market Bond Index Global Core, for example, rose 18.62% during 2012 while flows into emerging market bond exchange traded products reached $6bn in 2012, double the level seen in the previous year.

However, this rise in popularity has come with questions about the value remaining in the EMD space. With yields on local currency bonds issued by emerging market governments falling from 6.8% one year ago to about 5.9% today, some investors are asking if it is too late to allocate to this asset class.

BlackRock chief investment strategist Russ Koesterich does not believe the market is overcrowded yet despite the recent pick-up in interest. Although most investors have allocated to emerging market equities, the same cannot be said of the regions’ debt.

“Among institutional investors, ownership of emerging market debt is still extremely low,” he says. “The largest defined benefit plans, for instance, have allocations to international debt in general of around 2% and among retail investors, current allocations to emerging market debt are negligible.”

Emerging markets experience faster growth rates than the developed world and tend to have greater macroeconomic stability, especially when it comes to their fiscal situations. Koesterich says the “big story” in emerging market debt is the improvement in credit quality, in both an absolute sense and relative to developed markets, as a result of these factors.

Meanwhile, EMD offers higher yields than developed market bonds despite the decline seen over the past 12 months. The strategist points out that the recent fall in emerging market yields has been “much less precipitous” than drop in developed market yields.

Old Mutual Voyager Strategic Bond fund manager Anthony Gillham agrees that the low levels of EMD adoption, healthy fundamentals and higher yields make a strong investment case for the asset classes.

“In a world hungry for investment income, emerging market debt is an increasingly interesting asset class. There are risks, as there are with any investment, but there are good fundamental reasons attracting investors,” Gillham says.

“Is emerging market debt over owned? U.S. pension funds, the largest globally by assets, have only around 3% of their assets in emerging market debt. That such a significant proportion of global investors own such a small amount of the asset class, a level that is incongruent with the increase in emerging markets’ global share of GDP, suggests to us that the asset class is far from over owned.

“In our view, despite the strong returns of recent years and the considerable inflows, local currency emerging market debt remains attractive, offering exposure to markets that are driving the global economy forward yet still generating a positive yield after inflation.”

HSBC Private Bank investment strategist Esty Dwek is also positive on emerging market bonds, arguing that the asset class can continue to deliver value despite the “extraordinary performance” seen in 2012.

She highlights Brazilian, Mexican and Turkish debt as being some of the most attractive in the emerging market space while China’s offshore bond sector and the local Russian market are other sources of attractive opportunities.

“While we acknowledge that emerging market debt performance cannot match that of last year, we believe that there is still some value in emerging market, on the hard currency corporate side and the local currency side. We believe that flows will continue into the region, supported by higher growth, healthier fundamentals and attractive carry,” Dwek says.

“We therefore believe that it is not time to sell out of emerging market debt, but rather time to be ever more selective in our exposure, both in terms of currency exposure and in terms of credit segment.”