Ecomonic Summary for the week ended 12th Jan 2012

Global - European shares consolidated close to two year highs on Friday after Europe's Central Bank expressed cautious optimism on the euro zone's prospects.

Strong Chinese trade data on Thursday also helped lift economists' expectations of a steady global recovery this year, pushing the MSCI index of world shares to a new eight-month high.

"People are starting to come back to the stock market because they don't have any other option," said Edward Page Croft, managing director at Stockopedia.

"Equities are very overdue a rest but that shouldn't make people throw in the towel in my opinion as they will continue to be supported by central banks' very accommodative policies."

Japan - The Japanese government has approved a fresh 10.3 trillion yen ($116bn) stimulus package in an attempt to spur a revival in its economy.

The package will include infrastructure spending, as well as incentives for businesses to boost investment. Tokyo estimates that the stimulus will boost Japan's economy by 2% and create 600,000 jobs.

Japan's economy has suffered a dip in exports amid slowing global demand and subdued domestic consumption.

The world's third-largest economy is currently in a recession, having contracted for two quarters in a row.

China - China has reported better-than-expected trade data, adding to optimism that growth in the world's second-largest economy may be rebounding.

Exports, a key driver of expansion, rose 14.1% in December from a year earlier. Most analysts had forecast a figure closer to 4%. Imports also rose, climbing 6% and indicating stronger domestic demand.

There have been worries about the state of China's economy after growth fell to a three-year low.,

"The export data especially is very good news as it shows that external demand for Chinese products is picking up," said Dariusz Kowalczyk, a senior economist at Credit Agricole-CIB in Hong Kong.

Emerging Markets - Emerging-market equity funds recorded their biggest-ever weekly inflows as the U.S. budget deal and China’s economic rebound fuelled investor demand for riskier assets.

The funds attracted a net $7.4bn in the week ended Jan. 9 and assets under management reached an all-time high of $781bn, according to Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley in Hong Kong. Developing-nation debt funds lured their second-largest inflows of $2bn, Garner said, citing data compiled by research firm EPFR Global.

Mutual fund purchases have helped spur a 22% rebound in the benchmark MSCI Emerging Markets Index from last year’s low on June 4. While big inflows tend to foreshadow short-term market declines, Garner said the combination of global monetary stimulus, accelerating economic growth and an improving outlook for earnings will support share prices. His year-end target for the MSCI index is 14% higher than Thursday’s close.

Greece - The latest unemployment rate for Greece has risen to 26.8%, the highest figure recorded in the European Union.

The official Greek data for October sees Greece overtake Spain as the country with the highest unemployment rate in Europe.

So far, the European Central Bank, International Monetary Fund, and the European Commission have pledged a total of 240bn euros ($315bn) in rescue loans, of which Greece has received more than two thirds.

It is thought that the unemployment rate will move higher still, following the introduction of further austerity measures in 2013.

Commodities – U.S. oil production will jump by a quarter by 2014 to its highest level in 26 years, figures suggest. This is mainly because of the discovery of vast reserves of shale oil.

The Energy Information Administration (EIA) in the U.S. also forecast average global oil prices would fall from $112 a barrel in 2012 to $99 in 2014.

It said U.S. oil imports would fall by a quarter between 2012 and 2014, because of rising domestic production and the discovery of shale gas.

Many have hailed shale gas as the saviour of the U.S. energy market. In fact, the International Energy Agency (IEA) has said it expects the U.S. to overtake Russia as the world's biggest gas producer by 2015 and to become "all but self-sufficient" in its energy needs by about 2035.

Spotlight on: Seeking out BRIC market growth opportunities

The factors underpinning the rapid growth of the so-called BRIC nations may weaken further in the coming years, recent research by Capital Economics suggests.

In its Emerging Markets Economic Outlook report, the macroeconomic forecasting consultancy highlighted a number of medium-term challenges facing Brazil, Russia, India and China.

The near-term outlook for emerging markets as a whole has improved in recent months, the group said. Capital Economics’ emerging markets GDP tracker suggest that growth bottomed out in the fourth quarter of 2012 and most emerging nations started 2013 with positive momentum.

However, the consultancy added that growth in the BRICs is likely to slow over the coming five years, with part of this slowdown being the result of permanent rather than temporary factors.

China’s recovery is expected to peter out later in 2013 and the country’s new leadership has yet to announce any concrete steps to move the world’s second largest economy away from its reliance on investment spending and towards domestic demand, the report noted.

In India, policymakers also face the challenge of pushing through reforms that will allow the economy to maintain its strong growth rates of the past. “The package of reforms announced in late 2012 has raised hopes of a new approach, but these look likely to founder in the face of political opposition,” Capital Economics said.

The consultancy argued that Brazil is approaching the limits of its consumption-led growth model, adding: “Growth over the next decade will need to be driven more by investment, but this will require difficult structural reforms.”

Capital Economics also said the above risk applies to Russia. Meanwhile, resources-rich Brazil and Russia may both find that commodity prices fail to prop up their spending as they have done over the past ten years.

However, the forecaster said some emerging markets outside of the main names could expect to see healthy growth rates in the years ahead.

“While the BRICs look set to slow, the outlook for other emerging markets is improving,” the report concluded.

“In Latin America, we think Mexico will outperform Brazil over the next five years. In Asia, we are bullish on the Philippines and Indonesia. Finally, in Africa, while South Africa is likely to struggle, we are upbeat on the prospects for Nigeria, Kenya and Ghana.”

Of course, identifying the markets that are predicted to deliver outperformance for BRIC markets in the future is the role of the fund manager. In turn, however, identifying the fund manager that is best positioned and able to act upon their convictions is the role of the end-client’s advisor.

Economic Summary for the week ended 4th Jan 2013

U.S. - U.S. politicians have been urged to do more to resolve the budget by the two largest credit rating agencies.

The warning comes despite the U.S. narrowly agreeing a deal to stave off the U.S. "fiscal cliff" of spending cuts and tax rises worth $600bn.

Rating agency Moody's said lawmakers would need to take additional steps to lower the ballooning budget deficit. Rival agency Standard and Poor's added: "Washington's governance and policymaking had become less stable."

The deficit has topped $1tn in each of the past four years. Moody's said that if it failed to cut the deficit, the government's top credit rating could be at risk.

The fiscal cliff measures - $536bn of tax rises and $109bn of spending cuts - had been due to come into effect at midnight on Monday, but Congress agreed a deal to avoid the worst of the measures late on Tuesday.

The total amount of debt that the government can borrow is currently set at $16.4tn and the government is set to run out of money in the next two months if this limit is not raised by Congress.

Emerging Markets - Emerging-market stocks rose for a ninth day on Thursday, the longest gaining stretch in more than 14 months, as data showing expansion in Chinese service industries and U.S. manufacturing bolstered confidence in the global economy.

The MSCI Emerging Markets Index added 0.1% on Thursday, having climbed 2.1% to a 10-month high on Wednesday. Commodities and stocks worldwide rallied on Wednesday, following U.S. lawmakers passing a bill that undone tax increases for most households.

“Economic indicators in China and the U.S. are raising optimism that the global economy is on a steady path of recovery,” said Budsares Yunniyom, a fund manager at Asset Plus Fund Management Co. in Bangkok, which oversees about $800mn of assets. “That may support further gains in emerging-market equities as most investors are willing to raise holdings in risky assets.”

Latin America - The two biggest financial markets in Latin America swapped their long-held positions in 2012, with Mexico surging ahead and Brazil lagging, catching many U.S. fund investors in the region off guard.

Stocks in Brazil, which had benefited over the past decade from a fast-growing consumer class and Chinese purchase of commodities, suffered as the government increased regulation of key sectors of the economy and Asian demand waned. In the third quarter of 2012, Brazil's economy grew only 0.9% from a year earlier, while Mexican growth was 3.3%.

Mexico's fortunes rose partly because of its closer ties to modest U.S. growth and hopes that the new Mexican government will undertake major reforms that could boost the economy.

"This time last year most folks were quite positive on Brazil and it was quite a crowded trade," said Adam Kutas, manager of Fidelity's Latin America fund. "Mexico had underperformed in the region for eight or 10 years, so it was under-owned."

China - The service sector in China has expanded at its fastest pace for four months, adding to evidence that an economic rebound might be sustained.

The non-manufacturing purchasing managers' index (PMI) rose to 56.1 in December from 55.6 in November. A reading above 50 indicates expansion.

The data also showed that the construction sector had seen strong growth in new orders. Singapore - Singapore's economy has averted a technical recession, as it reported better-than-expected growth data for the fourth quarter.

The economy expanded 1.1% in the October to December period, from a year earlier, advance estimates showed.

On a quarter-on-quarter basis, the economy grew 1.8%. That is up from a 6.3% contraction in the third quarter.

Growth was boosted by a rebound in the services industries, which include retail, finance and insurance sectors. For the full year, the government said it estimates the economy to have grown by 1.2%, that is lower than its forecast of around 1.5% annual growth for 2012.

India - Global fund holdings of Indian debt jumped 26% last year to a record high, leading Schroder Investment Management to suggest that Asia’s highest-yielding investment-grade bonds are worth buying in 2013.

International funds poured $6.9bn into local-currency government and company securities, boosting ownership to $32.94bn, according to exchange data. Investments touched an all-time high of $32.99bn on Jan. 1 and have jumped more than fourfold since 2009. A December offering of bond-purchase quotas to foreigners by the market regulator was oversubscribed.

Schroder sees “good” returns in 2013 after Prime Minister Manmohan Singh unveiled India’s most-aggressive policy changes in a decade to improve public finances and spur growth. Ten-year bonds in India yield 7.99%, compared with 3.56% in China and 5.14% in Indonesia.

Germany - Chancellor Angela Merkel has warned that the German economic climate in 2013 will be "even more difficult".

In her new year message, she also cautioned that the eurozone debt crisis was far from over. However, she did say that reforms designed to address the roots of the problem were beginning to bear fruit.

Germany, Europe's largest economy, has been the paymaster in the eurozone crisis, a move unpopular with many German voters and some conservative MPs in Mrs Merkel's coalition.

Analysts say most Germans remain wary of eurozone bailouts but generally approve of Mrs Merkel's handling of the crisis. In October, the German government slashed its forecast for economic output in 2013 to 1.0%, compared to 1.6% previously anticipated.

Spotlight on: Fiscal cliff resolution.....?

Nouriel Roubini, an American economist also known as ‘Doctor Doom’ following his anticipation of the collapse of the U.S. housing market and the worldwide recession which started in 2008 and ended in 2009, has warned that the market euphoria surrounding the U.S. fiscal cliff deal is unsustainable, arguing the longer-term outlook for the world’s biggest economy remains "bleak".

Writing for the Financial Times, the prize-winning economist described the U.S. deal struck by the Democrats and Republicans as "mini" and "no victory".

With U.S. policymakers stopping short of including spending cuts in the deal, another crisis is around the corner, stated Roubini.

"If no action is taken by March 1, $110bn of spending cuts will commence, and at about the same time, the U.S. will hit its statutory debt limit, known colloquially as the debt ceiling," he said.

"Later in 2013, a bigger debate on medium-term fiscal consolidation will begin. This will lead to another dispute between Republicans, who want to shrink the size of the federal government, and Democrats, who want to maintain it but are unsure how to pay for it."

Roubini is even more pessimistic about the U.S.' longer term fiscal outlook, arguing middle class citizens should pay higher taxes to support a stronger economy.

He said the fiscal cliff deal will translate into a 1.2% drag on GDP this year, which will push the U.S. economy dangerously close towards another recession, given that growth is currently running at around 2%.

"The longer-term picture is bleaker still. The reality is that America is yet to wake up to the full extent of its fiscal nightmare," he said.

"Neither Democrats nor Republicans recognise that maintaining a basic welfare state, which is right and necessary in our age of globalisation, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich.

"A deal that extends unsustainable tax cuts for 98% of Americans is therefore a victory that will ultimately end in defeat for Mr Obama." Roubini said.

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.

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.

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.

Economic Summary for the week ended 29th Nov 2012

Trends - Equities were the highest-selling asset class for the second month in a row in October, according to U.K. Investment Management Association (IMA) figures, suggesting that risk appetite among investors is increasing on the back of the recent market upswing.

The month saw net retail sales of £924m, compared with just £655m in October last year.

Equities drew in the most, with £550m, the asset class's highest inflows since April. Equities have experienced average monthly outflows of £9m over the last 12 months.

Fixed income remained the second best-selling asset class, with inflows of £336m, up from September. Global Emerging Markets helped to drive equity inflows, becoming the top-selling sector for the first time on record, followed by UK Equity Income.

China - The U.S. has decided not to declare China as having manipulated its currency to gain an unfair trade advantage.

But the Treasury did say that China's currency, the yuan, remains "significantly undervalued" and urged China to make further progress.

In its semi-annual report, it said Beijing did not meet the criteria to be termed a 'currency manipulator', which could have sparked U.S. trade sanctions.

"The Chinese authorities have substantially reduced the level of official intervention in exchange markets since the third quarter of 2011, and China has taken a series of steps to liberalise controls on capital movements, as part of a broader plan to move to a more flexible exchange rate regime," the U.S. Treasury said.

Global - Decisive policy action is needed to ensure the world is not "plunged back into recession", according to the OECD.

The Organisation for Economic Co-operation and Development, which represents the world's richest nations, also lowered its growth forecasts.

The group's economies will grow by 1.4% next year, rather than the 2.2% forecast in May, it said. "The U.S. fiscal cliff, if it materialises, could tip an already weak economy into recession, while failure to solve the euro area debt crisis could lead to a major financial shock and global downturn."

U.S. - Meanwhile, three out of four global investors expect President Barack Obama and congressional leaders to reach a short-term agreement to avert more than $600bn in spending cuts and tax increases scheduled to begin on Jan. 1.

Only 6% of investors anticipate a political impasse that would send the U.S. economy over the so-called fiscal cliff and into a recession, according to a Bloomberg Global Poll.

“Both sides understand the importance of striking a deal, increasing taxes and cutting entitlements,” says Richard Salerno, director of fixed income for Kovitz Management Corp. in Chicago. “The market just wants to know the rules going forward so they can move on and begin to lift us out of our fiscal mess.”

Brazil - Brazil's economy is expected to have grown at an annualized rate of 4% or higher in the third quarter and is on track to maintain this pace though next year and into 2014, said Brazil Finance Minister Guido Mantega, on Wednesday.

Mr. Mantega said the economy was likely to have grown between 1% and 1.3% during the third quarter from the second, and is likely to expand at a similar pace in the fourth quarter, the report said. "We will close 2012 with an economy in recovery and growth mode," Mr. Mantega was quoted as saying in the report. "We will enter 2013 with a growth rate of 4% and we will maintain this through 2013 and 2014."

Greece - Eurozone finance ministers and the IMF reached a deal on an urgently needed bailout for debt-laden Greece on Tuesday.

They have agreed to cut debts by €40bn and have paved the way for releasing the next tranche of bailout loans, some €44bn.

The breakthrough came after more than 10 hours of talks in Brussels. It was the eurozone's third meeting in two weeks on Greece. The deal opens the way for support for Greece's teetering banks and will allow the government to pay wages and pensions in December.

Greece's international lenders have agreed to take steps to reduce the country's debts, from an estimated 144%, to 124% of its gross domestic product by 2020.

Commodities - Gold rebounded from the biggest drop in more than three weeks on Thursday, as investor holdings expanded to a record high and optimism returned that the so-called fiscal cliff in the U.S. will be avoided, hurting the dollar.

Treasury Secretary Timothy Geithner meets with congressional leaders on Thursday to discuss how to head off the combination of tax increases and spending cuts that may be implemented in January.

“The whole environment around the fiscal cliff is very uncertain,” said Bjarne Schieldrop, the Oslo-based head of commodity research at SEB AB. “The fiscal cliff will be on and off every other day. Most likely it won’t be resolved before the first quarter, but I think that the general direction for gold will be up. Record ETP holdings and central bank buying are giving good support to the sentiment.”

Gold for immediate delivery rose 0.2 percent to $1,723.16 an ounce on Thursday.

Spotlight on: Wealth managers poised to buy Japan on post-election hopes

The election of Shinzō Abe as Japanese prime minister could be the catalyst for the region to outperform after years of flagging returns, prompting asset allocators to review their underweight exposure to the country.

Liberal Democratic Party of Japan (LDP) leader Abe has voiced his intention to force the Bank of Japan into a more aggressive monetary policy and target an inflation rate of 3% if elected in snap elections in December.

Markets have responded well with the Nikkei 225 up 3.95% over the past month, compared to the FTSE 100’s loss of 1.84% and the S&P 500 down 2.94%.

The leadership contest, as well as other factors, has caused Jim O’Neill, chairman of Goldman Sachs Asset Management, to say Japan’s “moment is here”.

“The 3% inflation target is the sort of thing many were advising Japan in the mid to late 1990s when so many people mistakenly lost a lot of money betting against the yen,” he said.

“Go get all those guys out of retirement as the time has probably come. The outlook for the yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there.”

Wealth managers and multi-managers have also said developments in Japan are “interesting” and have prompted them to review their positions.

Guy Foster, senior fund analyst at Brewin Dolphin, said a 3% inflation target would be one of the highest targets in the world.

“The yen has been selling off and Japanese equities are up month-to-date,” he said.

“On the whole we are more positive. We have nothing in Japan at the moment but we are looking at adding to this.”

Robert Burdett, co-multi-manager head at Thames River Capital, said he is revisiting his neutral position.

“Our next direction is more likely to add rather than to take away from our holdings. If the LDP get back in and achieve aggressive monetary policy we would be bullish. The valuations have been compelling and on most measures the market is the cheapest it has ever been” he said.

Aberdeen Asset Management’s Aidan Kearney said the multi-manager range he co-runs is already slightly overweight Japan, relative to the peer group.

“We hold around 2% in our Cautious Managed fund and 6% in Equity Managed. We recognise Japanese equities are cheap and it has world market leaders in some sectors.

“It looks like the LDP will come back into power. It gives more fuel to the fire for more policy support and the expectation of this has led to strength in the market.”

Adding to Japanese exposure is also favoured by managers as a form of downside protection. Brewins’ Foster said Japanese equities are “becoming an uncorrelated asset in the right way” as they are moving in the opposite direction to most other markets.

Economic Summary for the week ended 15th Nov 2012

Italy - Italy sold three-year bonds at the lowest rate in more than two years on Wednesday and the Treasury took advantage of growing demand for the country’s debt to auction securities with a maturity longer than 15 years.

The Rome-based Treasury sold €3.5bn of its benchmark three-year bond to yield 2.64%, less than the 2.86% at the last auction of the same securities on Oct. 11. The Treasury also auctioned €1.5bn of debt due in 2023 and one in 2029, the first sale of a security with a maturity of more than 15 years since May 2011.

“The resilience of Italian debt to the recent deterioration in market sentiment is quite remarkable and stems entirely from the signaling effect of the ECB’s new bond-buying program,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “This is the longest period of relative calm in Italy’s bond market since the crisis erupted in July 2011.”

Europe - Workers across the European Union (E.U.) are staging a series of protests and strikes against rising unemployment and austerity measures this week.

Organisers of the strike are urging national leaders to abandon austerity measures and address growing social anxiety. Strikes are expected in Spain, Greece, Portugal and Italy, with other protests planned in Belgium, Germany, France and some eastern E.U. states.

Airlines across Europe have been cancelling and rescheduling flights. Spain and Portugal have been particularly hit, airlines are recommending passengers to check the schedules before travelling to airports.

China - Global fund managers’ confidence in the Chinese economy has reached a three-year high, according to the latest Bank of America Merrill Lynch fund manager survey.

A net 51% of investors polled across Asia Pacific, global emerging markets and Japan believe that China’s economy will strengthen in the coming year, the highest reading since July 2009 and the largest single month increase since February 2009.

European investment strategist at Bank of America Merill Lynch, John Bilton, commented: “While sentiment within Europe remains weak, rising allocations to global stocks tell us confidence in general is improving. The jump in China optimism shows how fast sentiment can turn around.”

The survey revealed a growing appetite for equities with exposure to emerging markets, especially China.

U.S./Commodities - The U.S. will overtake Saudi Arabia as the world's biggest oil producer "by around 2020", an International Energy Agency (IEA) report has said.

The IEA said the reason for this was the growth and development in the U.S. of extracting oil from shale rock, this has enabled the U.S. to gain significantly more extractable oil resources.

The IEA predicts that the U.S. will be producing 11.1 million barrels per day by 2020, compared with 10.6 million from Saudi Arabia.

It warns that the big growth in U.S. oil and gas production could have significant geopolitical implications, as it may make the U.S. less dependent on the Middle East.

Trends - Hong Kong ended New York’s 11-year reign as the home of the world’s most expensive district for retailers as luxury-brand companies competed for space to sell goods to mainland Chinese tourists.

Average annual rents at Causeway Bay on Hong Kong Island rose 35% to $2,630 per square foot at the end of June from a year ago, Cushman & Wakefield Inc. estimates. Hong Kong overtook Fifth Avenue in Manhattan, while Paris’s Avenue des Champs-Elysees rose to third in a global ranking of 326 prime shopping locations published by the real estate broker on Wednesday.

“New York and Hong Kong are slugging it out at the top,” Mark Burlton, a London-based partner at Cushman’s cross-border retail team, said in an interview. “The Chinese customer is helping float a lot of ships across the world,” prompting luxury stores in the main global shopping destinations to hire Chinese-speaking workers, he said.

Commodities - Gold will probably rally to a record above $2,000 an ounce next year as central banks ramp up stimulus to sustain the recovery, according to Raymond Key, London-based global head of metals trading at Deutsche Bank AG.

“We’ll take out $2,000, we’ll go higher,” Key said whilst attending the London Bullion Market Association’s annual conference. “That’s on the view that they’ll continue to print money.”

Spotlight on: Positive signs

The ‘great rotation’ out of bonds and into equities has started to get underway, the latest Bank of America Merrill Lynch (BofAML) Fund Manager Survey suggests.

The survey, which was carried out in early November, found asset allocators have increased their positions in equities over the past month while lowering their exposure to bonds. This is the fifth month running that this trend has been seen.

A net 35% of global fund managers are now overweight equities, compared with a net 25% reporting this in last month’s poll. Meanwhile, a net 35% are underweight bonds, up from 26% one month earlier.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research, said: “Momentum has gathered behind the idea that we are on the cusp of a ‘great rotation’ out of bonds and into equities. The only missing ingredient is a resolution to the U.S. fiscal cliff.”

The U.S. fiscal cliff - a $600bn series of tax rises and government spending cuts that threatens to send the world’s largest economy back into recession - remains the biggest tail risk for asset managers, cited by 54% of the survey’s panel. This is up from 42% a month ago.

But asset allocators’ optimism over the global economy outweighed the fear created by the fiscal cliff, with a 34% of respondents expecting the world economy to strengthen in the coming 12 months. After a monthly rise of 14%, this is the highest optimism in the global economy has been since February 2009.

However, asset classes outside of equities showed little sign of benefitting from higher levels of risk taking. Allocations to commodities fell over the month, remained flat for real estate and rose by just two percentage points for alternatives.

The BofAML Fund Manager Survey polled 248 panelists with $695bn of assets under management. It was carried out between 2 November and 8 November.

The findings of the survey were further supported by TheCityUK research group, reporting that the amount of money managed by the global fund management industry rose by 5% over the year so far, reaching a record high.

According to TheCityUK’s latest Fund Management Report, conventional assets under management (AUM) across the globe increased to $84.1trn by the end of September. They are now 13% above the pre-crisis record.

Raquel Hughes, strategy director at TheCityUK, said: “On the whole, the global fund management industry has recovered quickly from the sharp fall in assets under management that occurred at the outset of the credit crisis.”

The report, which is sponsored by Cannon Place, also predicted total funds will reach $85.2trn by the end of 2012. But looking at the gains for the year so far, Hughes said: “Most of this recovery has come from market performance rather than new inflows.”

The U.S. was found to be the large store of AUM, accounting for almost half of assets. The U.K. came in second place with 8% of the total, followed by Japan.

Pension assets were shown to account for almost 40% of global funds, with the remainder divided equally between mutual and insurance funds. When alternative assets and funds of wealthy individuals are included, total assets across the globe are around $120trn.

“We have found that the longer term effects of the economic slowdown include more cautious investment strategies and more diversification across asset classes and geographical regions,” Hughes added.