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.

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 TheBullionDesk.com in London said.

Spotlight on: Emerging Market outlook

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Economic Summary for the week ending 23rd Feb 2012

Greece - Eurozone finance ministers agreed a second bailout for Greece this week. Greece is to receive loans worth more than EUR130bn (USD170bn).

In return, Greece will undertake to reduce its debts to 120.5percent of its GDP by 2020 and accept an "enhanced and permanent" presence of E.U. monitors to oversee economic management.

Greece needs the funds to avoid bankruptcy on 20 March, when maturing loans must be repaid. After five straight years of recession, Greece's debt currently amounts to more than 160percent of its GDP.

Europe - Meanwhile, however, the eurozone's economy is heading into its second recession in just three years, while the wider E.U. will stagnate, an E.U. executive said on Thursday, warning that the area has yet to break its vicious cycle of debt.

Economic output in the 17 nations sharing the euro will contract 0.3percent this year, the European Commission said a report, reversing an earlier forecast of 0.5percent growth in 2012. The wider, 27-nation European Union, which generates a fifth of global output, will not manage any growth this year, the Commission forecast.

"The E.U. is set to experience stagnating GDP this year, and the euro area will undergo a mild recession," the Commission said in its interim forecast report.

Germany - German business confidence rose more than economists forecast to a seven-month high in February as progress in taming Europe's debt crisis tempered the risk of a recession.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, climbed to 109.6 from 108.3 in January. That's the fourth straight gain and the highest reading since July. Italian consumer confidence also rose more than forecast, a report showed on Thursday.

China - China's central bank has cut the amount of money banks must keep in reserve, in an effort to boost lending and sustain economic growth.

The reserve requirements will fall by half a percentage point from 24 February, the People's Bank of China (PBOC) said. Analysts said this could add as much as CNY400bn (USD63.5bn) to the financial system.

The Chinese economy is showing signs of slowing, as Europe's debt crisis damages Chinese exports.

Japan - Standard & Poor's (S&P) has maintained Japan's AA- long-term sovereign credit rating but warns that the country's outlook remains negative.

The ratings agency says the country's rating is "supported by the country's ample net external asset position, relatively strong financial system, and diversified economy".

It also cites the yen's status as a key international reserve currency as a support for its sovereign rating.

"However, Japan's sovereign ratings are constrained by the government's weak policy foundations, large fiscal deficits, and high debt, as well as prolonged deflation and an aging and shrinking workforce," S&P adds.

U.S. - Profits in the Standard & Poor's 500 Index are rising faster than its price, leaving the gauge 9percent cheaper than it was in April 2011, even though U.S. equities climbed within 6 points of last year's peak.

Corporate profits have topped analyst estimates for 12 straight quarters. Analysts that cover companies in the S&P 500 project earnings will rise this year to USD104.27 per share, the highest level ever, according to data compiled by Bloomberg. That would represent a 69percent increase in earnings since 2009, compared with the 22percent rally in the index in the past two years.

"The powerful recovery in earnings thus far has allowed market averages to rise without pushing the P/E ('Price-to-earnings ratio': a measure of the price paid for a share relative to the profit earnt per share) higher," said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc, who oversees USD600bn in investment. "Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn."

Commodities - The price of oil has reached its highest level since May last year as concerns mount over Iran's nuclear programme.

Benchmark crude oil rose by USD1.67 to USD105.27 a barrel and Brent crude futures rose 44 cents to USD120.49 on Wednesday, marking the second day in a row of rises after Iran announced oil export bans on the U.K. and France on Sunday.

The E.U. banned Iran's oil imports from 1 July over fears that it is developing nuclear weapons. The E.U. wants to stem Iran's oil revenues as part of sanctions which will restrict its ambitions to develop a nuclear capability.

Spotlight on: what the latest Greek deal means for its private investors

Whilst most of the news headlines this week have been focussed on an agreement being reached between Greece and its public creditors (namely the European Central Bank and International Monetary Fund), it is the country's private investor creditors that have suffered the most.

However, as important as it has been to reach a conclusion of the long running Greek debt issue, it is the distinct differences in the way in which public and private creditors are to be treated that is causing some commentators to worry about the long term effect this may have on the availability of private investment in the future, something that cannot afford to be compromised at a time when governments around the world are at their most desperate to attract inward investment.

Under the agreement of the Private Sector Involvement Procedure (PSIP), it is likely that the public sector will not suffer any loss on the basis that they are prepared to provide further finance to Greece at some point in the future. Furthermore, and most importantly, a clear precedent has been set should other eurozone countries (or indeed Greece, again) find themselves in a similar situation in the future, hardly encouraging news for private investors that would normally take on government debt.

Under the agreement, private investors could lose as much as 60percent on the EUR206bn of Greek debt that they own, collectively.

If agreed, the PSIP would present private investors with new bonds with a face value that is half that of the existing bonds. The new bonds would have a longer maturity and pay an average interest rate of less than 4percent (compared with an estimated 5percent on the existing bonds).

The painful alternative to private investors, however, is that without the deal, which would reduce Greece's debt load by at least EUR120bn, the private investors' bonds would likely become worthless. Many of these investors also hold debt from other eurozone countries, which would also lose value in the event of a Greek default.

The agreement taking shape is a key step before Greece can get a second, EUR130bn bailout from its European Union partners and the International Monetary Fund, although there are other issues involved before Greece can get that aid. The EU and the IMF signed off on a EUR110bn aid package for Greece in May 2010, most of which has already been disbursed.

Greece faces a EUR14.5bn bond repayment on March 20, which it cannot afford without additional help.

Private investors hold roughly two-thirds of Greece's debt, which has reached an unsustainable level, almost 200 per cent of the country's economic output. By restructuring the debt held by private investors, Greece and its EU partners are hoping to bring that ratio closer to 120 per cent by the end of this decade.

In return for the first bailout, Greece's public creditors, the International Monetary Fund, the European Union and the European Central Bank, have unprecedented powers over Greek spending. However, austerity alone will not fix Greece's problem. The country must also find ways boost its economic output, which at the moment is shrinking.

If a debt-exchange deal wasn't reached with private creditors and Greece was forced to default, the contagion fears it would very likely hit Europe's, and possibly the world's, financial markets.

It is the view of some, however, that the issue with the PSI procedure is that it does not reward public and private investors accordingly. The PSI precedent means that in the future, should a government debt crisis occur, private investors will be less willing to support troubled government debt, and speculators will be rewarded for being 'short' (i.e. betting against similar bonds).

Obviously this will impact the sustainability of government finances at precisely the time they would be seeking to generate confidence in their ability to service their debt obligations.

Economic Summary for the week ended 17 Feb 2012

Europe - World stocks fell on Thursday amid growing fears that the latest deal to resolve Greece's debt crisis is faltering.

Global markets rose briefly on Wednesday following news that China would keep investing in Europe and Greece would fulfill obligations imposed by its creditors. But those hopes waned after a European official warned Greece's assurances might be inadequate, possibly jeopardizing the latest infusion of money from its European partners.

Asian investors were put off by the lack of a clear outcome over Greece.

Europe - Two of the eurozone's biggest economies have fallen into recession, according to the latest economic figures.

Italy and the Netherlands both saw their economies shrink by 0.7percent in the fourth quarter, the second consecutive quarter of economic contraction. Germany had its first negative quarter since 2009 with a decline of 0.2percent, compared with the previous quarter.

But in France there was surprise growth of 0.2percent at the end of last year, attributed to healthy export growth.

Overall, the 17 nations that make up the eurozone saw economic activity shrink by 0.3percent in the fourth quarter. By comparison the U.S. reported growth of 0.7percent.

The eurozone has not slipped into recession as it reported growth of 0.1percent in the third quarter.

Japan - The Bank of Japan (BOJ) has made a surprise move to boost growth as the country's economy continues to struggle.

The central bank has announced it is to expand its asset purchase programme by JPY10tn (USD130bn). The move comes just a day after data showed that Japan's economy shrank by 2.3percent, more than expected in the last three months of 2011.

"The Bank will pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the Asset Purchase Program mainly through the purchase of financial assets," the bank said.

U.S. - U.S. manufacturing grew for the second month in a row in January, according to figures released by the Federal Reserve.

A jump in auto production helped manufacturing grow by 0.7percent last month. December's growth figure was also revised upwards to 1.5percent.

"Some encouragement can be taken from the sharp upward revision to the performance in December, which underscores the turnaround in U.S. economic fortunes in recent months." said Millan Mulraine, from TD Securities in New York.

Greece - Eurozone finance ministers have demanded much greater oversight of Greece's economy in return for a EUR130bn bailout package.

The E.U. praised Greece's "substantial progress", but demanded more detail, including a full timeline for implementing the measures. A decision on the bailout is expected to be finalised on Monday.

Greece faces a looming deadline in mid-March when it needs to make repayments on a 14.5bn-euro bond, or face bankruptcy.

Russia - Russia's economy will remain dynamic in the first half of 2012 before losing steam in the final six months because the central bank will try to curb lending, Standard & Poor's (S&P) has said.

"Following 4.2percent growth in 2011, we think the slowdown will lead to GDP growth of about 3.5percent for the full year," Jean-Michel Six, chief economist for Europe at S&P, said in the report.

Russia, the world's largest energy exporter last year, returned to output levels achieved before a 7.8percent contraction in 2009 as the global financial crisis shackled credit flows and dampened demand for commodities. Prime Minister Vladimir Putin, who is seeking to return as president in a March 4 election, has said Russia must grow by at least 6percent annually to become one of the world's five largest economies in terms of purchasing power.

Commodities - Global demand for gold has been estimated at more than 4,000 tonnes, worth approximately USD206bn, during 2011, according to the World Gold Council.

According to the gold industry body, demand in 2011 was the highest level since 1997, driven by investment demand in India, China and Europe.

Marcus Grubb, managing director of investment at the World Gold Council, says: "What we can see from these 2011 figures is that there were two main factors driving the results: Asian growth and optimism on the one hand and western desire to protect assets against uncertainty on the other.

Spotlight on: Why Japan is a classic 'special situation'

Chris Taylor, manager of the Neptune Japan Opportunities fund, insists that despite its headlines, investment in Japan can offer investors access to a potential growth story that many are foolishly ignoring.

Japan can best be summed up as a classic 'special situation', whereby investing in Japan is all about investing in companies and not the country. The two have very different prospects.

Essentially, Taylor argues, investors do not appreciate the underlying fundamental and positive corporate changes that have occurred across Japan's industrial and commercial base, which make selective investment in Japanese stocks attractive.

They are still deterred by the market's poor historic performance, the assumed negatives of an overvalued currency and the country's ongoing structural problems.

The structural problems, worsened further by the tsunami, earthquake and nuclear plant triple disasters, are combined with little political will to tackle the problems.

By contrast, the Japanese corporate population has sought to escape their domestic negative demographic, fiscal and economic circumstances by investing very heavily outside of the OECD and has cut its operating costs within Japan to reduce its yen break even sales level.

So, despite the yen's sustained strength, these measures have enabled Japanese firms to dominate many worldwide sectors, which combined with their truly global multinational nature and their larger exposure to non-OECD countries than their U.S. or European rivals has lifted their overall profitability back to where it was before the credit crunch.

A significant number of Japanese firms remain undervalued as investors do not yet appreciate the substantial positive changes that have occurred over the last few years. These changes should underpin their prospects to generate positive returns

Economic Summary for the week ended 10th Feb 2012

Greece - Greek Prime Minister Lucas Papademos failed to secure the support of his coalition for a raft of new austerity measures, after more than seven hours of talks. He met officials from three parties on Wednesday night to try to secure a deal leading to a fresh bailout package. The main problem appears to be pension cuts worth EUR600m reportedly proposed in a draft text agreed by the troika and the prime minister. The document is also said to include a 20percent minimum wage reduction and the sacking of 15,000 public sector workers. The stalemate potentially further jeopardises the bailout of EUR130bn that Greece needs in order to meet its March debt obligations. Meanwhile, private sector lenders are negotiating with Greece to write off up to 70percent of the value of the money that the Greek government currently owes them.

Germany - Germany's trade surplus reached EUR158bn in 2011 on record exports that rose 11.4percent to top EUR1tn for the first time. The national statistics office also said that imports rose 13.2percent to reach an all-time high of EUR902bn. In 2010, the trade surplus for Europe's biggest economy was EUR155bn. German exports to countries outside the 27-nation European Union showed the strongest growth last year, up 13.6percent to EUR432.8bn. Exports to other European Union countries rose 9.9percent to EUR627.3bn. Of those, EUR420.9bn went to the eurozone bloc, 8.6percent rise.

India - India's economic growth is likely to dip below 7percent for the 2011-12 financial year, new government statistics show. The downward revision reflects the slowdown in mining, agriculture and manufacturing sectors. On Monday, ratings agency Standard and Poor's warned there could be a downgrade in India's investment-grade credit rating. Despite the growth forecast reduction, the main Sensex stock exchange has continued to perform well, up almost 15percent this year.

Global - Global stocks hit a fresh six-month high on Wednesday as hopes for a worldwide economic recovery were outweighed by the lingering eurozone fiscal crisis. The FTSE All-World equity index was up 0.4percent, its best level since the start of August. Wall Street's S&P 500 started the session with a gain of 0.1percent, leaving the benchmark index just 1percent short of its best close since the summer of 2008. The FTSE Eurofirst 300 advanced 0.3percent as miners and banks stocks demonstrated promise. The move higher in core bond yields and main equity gauges enforces the conviction among traders that better economic data from the world's two biggest economies, the U.S. and China, mean global commerce can absorb the fallout from the eurozone's debt woes. The yields on Italian debt remain at four-month lows, another sign, say some, that the chances of sovereign debt contagion, beyond Greece, and potentially Portugal, is becoming increasingly unlikely.

China - China's central bank pledged support for first-home buyers as a crackdown on real estate speculation threatens to trigger a property slump in the world's second biggest economy. Officials will increase support for construction of affordable housing and ensure that "loan demand from first-home families" is met, the People's Bank of China said. Policy makers aim to limit public discontent by making housing more affordable, with Vice Premier Li Keqiang, a possible contender to be the next premier, describing the distribution of low-cost homes as a key test of government credibility. At the same time, the ruling Communist Party aims to avoid the economic "hard landing" that Fitch Ratings recently said is a key global risk.

U.S. - Federal Reserve Chairman Ben S. Bernanke is holding to his pledge to keep borrowing costs close to zero at least through late 2014 even after unemployment unexpectedly fell to a three-year low this week. Bernanke told the Senate Budget Committee that the decline in the jobless rate to 8.3percent in January veils weaknesses in the U.S. labour market. Fed officials last month said they didn't expect such progress until the fourth quarter. "It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work," Bernanke said in response to a lawmaker’s question during his testimony. "There are also a lot of people who are either out of the labour force because they don't think they can find work" or who have taken part-time jobs.

Spotlight on:  Value in Equities

Investors should have 100 percent of investments in equities because of valuations and higher returns than bonds, said Laurence D. Fink, chief executive officer of BlackRock Inc., the world's largest money manager.

Investors who seek the safety of government bonds will have minimal returns and will not be able to meet their needs with the U.S. Federal Reserve expected to keep interest rates low, said Fink, who in 1988 co-founded the New York-based manager with USD3.5tn of assets. By contrast, equities are trading at the lowest valuations in 20 or 30 years.

"I don't have a view that the world is going to fall apart, so you need to take on more risk," he said in Hong Kong on Wednesday. "You need to overcome all this noise. When you look at dividend returns on equities versus bond yields, to me it’s a pretty easy decision to be heavily in equities."

The Federal Open Market Committee last month pledged they would keep borrowing costs low through at least late 2014 to boost the economy and put more Americans back to work, extending a previous end date of mid-2013. Investors pulled money from funds that buy equity stocks for a fifth year in 2011.

Fink said in a May 31 interview he's more bullish on equities than bonds because companies are benefiting from the weak dollar and have surplus cash to invest for growth. While equities around the world were off to the best start in 18 years, the S&P 500 Index gained just 1.2percent since Fink's prediction last year, compared with the 6.8percent return in U.S. government bonds, according to Bank of America Merrill Lynch indexes.

Meanwhile, the MSCI All-Country World Index rallied 5.8percent last month, topping gains in commodities and handing investors January's best returns in almost two decades, according to data compiled by Bloomberg.

"I'm very bullish on the market," he said, citing the increased liquidity from the U.S. and European central banks. "I think the market is focusing too much on noise like Greece. And yet we’re going to have a lot of volatility and we’re going to have to live with it."

Economic Summary of the week ending 02 Feb 2012

Global - Strategists at some of the world's biggest banks are retracting on their bearish ('downbeat') forecasts, following the best start to a year for global stocks since 1994 and gains of more than 7percent in emerging-market currencies.

Just two weeks after saying that investors should "remain cautious," Larry Hatheway, the chief economist at UBS, raised his recommendations on global shares and high-yield bonds in a note to customers entitled, "Wrong, but not too late.", and Benoit Anne, the global head of emerging-markets strategy at Societe Generale, said their estimates for developing nations were proven wrong.

The MSCI All-Country World Index climbed 5.7percent in January, surprising strategists at Bank of America, Goldman Sachs and Barclays who had forecast first-half losses because of Europe's debt crisis. JPMorgan Chase and Citigroup, which predicted the rally in stocks, say it will continue as the U.S. housing market rebounds and China eases lending restrictions to bolster economic growth.

"In hindsight, everybody was so negative at the end of last year, there was nowhere for the market to go but up" said Mary Ann Bartels, the New York-based head of technical and market analysis at Bank of America.

Global - The World Trade Organisation's (WTO) appeals body has upheld a ruling that China restricted exports of certain raw materials to protect its domestic manufacturers.

China had appealed a WTO ruling in July that it had broke global trade rules.

The U.S., Europe, and Mexico argued that China's export block on such things as magnesium and bauxite drove up prices. China had argued that its export limits on nine raw materials were needed to protect the environment.

In a statement, the appeals body said China must now "bring its export duty and export quota measures into conformity with its WTO obligations".

Europe - Unemployment in the eurozone hit a record high at the end of last year, the Eurostat agency has said.

The jobless rate in the 17 countries that use the single currency was 10.4percent in December, unchanged from November's figure which was revised up from 10.3percent.

Some 16.5 million people were out of work in the eurozone in December, up 751,000 on the year before.

The highest unemployment rate remains in Spain (22.9percent), while the lowest is in Austria (4.1percent).

Greece - Greece has rejected German proposals for the E.U. to hold power over its budget.

Culture Minister Pavlos Yeroulanos said that it would be "impossible" for Greece to cede control of its tax and spending powers. There are concerns that the measures Greece has taken to cut its budget deficit have not gone far enough.

Meanwhile, Greece and its private creditors are close to a deal to cut the country's debt levels. Charles Dallara and Jean Lemierre, representing the creditors, said on Saturday that they were "close to the finalisation" of a deal that would see banks and investors write off approximately 50percent of the money they are owed.

Japan - Japan's industrial output rose more than expected in December as manufacturers recovered from the aftermath of the floods in Thailand.

Factory output rose 4percent from the previous month, the Ministry of Economy, Trade and Industry said, compared with a 2.7percent decline in November.

The rebound was led by a recovery in car and electronics manufacturing.

However, Japan's manufacturing has yet to see full recovery. Compared to a year earlier, industrial output fell 4.1percent.

Brazil - Brazil's real rallied to the strongest level in almost three months on Wednesday as signs of increased manufacturing output worldwide spurred optimism about global growth and fuelled demand for higher-yielding assets.

Manufacturing in China, Brazil's largest trading partner, rose last month as the world's second-biggest economy withstood weaker exports driven by the European debt crisis. A gauge of manufacturing in the euro area beat estimates in January while a report on Thursday showed U.S. factory output grew at the fastest pace in seven months. The data fuelled bets of increased demand for Brazilian exports such as iron ore and sugar, said Felipe Brandao, emerging-markets strategist at Icap do Brasil.

"The market is being influenced by the positive impact of international equities and a more optimistic climate because of this data in Europe and China," Brandao said "This data is driving stocks this morning and benefiting risk assets."

Commodities - Gold extended gains on Thursday, rising to its highest level in nearly two months, as the euro firmed on upbeat global manufacturing data and expectations that a Greek debt deal to avoid a default was close at hand.

Investors now await the release of U.S. weekly jobless claims data to gauge the health of the world's largest economy, after higher January factory activity was reported for China, the U.S. and Germany.

Gold added USD4.74 an ounce to USD1,748.44 an ounce, having earlier risen to a high of USD1,751.30 an ounce, its strongest since December 8. Gold remains below a lifetime high around USD1,920 an ounce achieved last September.

Spotlight on: the case for India

Its poor absolute market performance and equally poor relative economic performance has dampened enthusiasm for India. However, many believe that this should lead to investment opportunities opening up, not closing down.

A 20percent loss (in addition to a weak rupee) for Indian equities in 2011 represents their worst performance in decades. It was also branded the most disappointing BRIC nation by Goldman Sachs chairman Jim O'Neill, highlighting a poor record in productivity, foreign direct investment and reform. Rather than writing off the world's most populous country, he says serious leadership is required to ensure India achieves China-style development.

On top of this, India's growth estimates have declined in recent months, largely due to its high fiscal deficit, weak rupee and ongoing inflation fears.

But advocates of the region suggest that the prospects for the market in 2012 and beyond are far healthier than these headline-grabbing numbers would suggest.

What were previously full valuations have recently reversed and many managers are seeing better opportunities now than for some time. There are also positives on the macroeconomic front with tightening interest rates, predicted to be cut further, and monetary policy. Inflation too is expected to fall, to around 6.5percent by the end of Q1.

Some fund managers are pinning hopes on the positives arising from weak equity performance with Barings, for example, recently launching an India equity fund citing "an opportunity for nimble investors, with valuations as low as they have been since late 2008".

The long-term opportunity and biggest potential for India, as is being witnessed in China, comes from its demographics, particularly its burgeoning young workforce, in a decade, its population will be greater than China's.

While not ignoring the risks that remain with an investment in India (its bureaucracy, a high fiscal deficit, weak rupee, ongoing inflation fears etc) many feel that the negative numbers that were produced in 2011 will not automatically follow through to 2012 and beyond. It is the view of many long-term strategists that if investors can be both nimble and long-term minded, India may well be worth considering