Economic Summary for the week ended 7th April 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economic Summary for the week ended 29th March 2013

Global - The world's major economies will see stronger growth this year, but Europe's recovery will continue to be slow, the Organisation for Economic Co-operation and Development (OECD) has said.

The OECD predicted stronger growth in the U.S., Japan and Germany. But it said concerns remained over the recovery of the wider eurozone.

It said governments would need to keep special measures in place to boost economic growth. Overall, the OECD forecast an average annualised growth of 2.4% among the seven biggest economies in the first quarter of this year.

That suggests a marked recovery from the last three months of 2012, when leading economies shrank at an annualised rate of 0.5%.

"The bottom line is that we are moderately more optimistic," the OECD's chief economist Pier Carlo Padoan told the Reuters news agency.

Cyprus - Stocks rallied on Thursday, sending the Standard & Poor’s 500 Index above its record closing level, and the euro rebounded from a four-month low as the reopening of banks in Cyprus eased concern about Europe’s debt crisis.

The S&P 500 jumped as much as 0.3% to 1,567.78 as of 11 a.m., eclipsing its previous all-time high of 1,565.15 set in October 2007, in response to the news.

China - China needs a "renewed reform momentum" to sustain long term growth, the OECD has said.

It said the financial sector, urbanization, state ownership and innovation were key areas for reforms. But it added that China had weathered the global financial crisis better than other OECD member countries.

It said China was on track to become the world's biggest economy by 2016, after allowing for price differences. "It is well placed to enjoy a fourth decade of rapid catch-up," the OECD said in a survey.

It also said that there were signs of China's economic growth picking up pace again after the recent slowdown. However, it warned that in order "to sustain vigorous and socially inclusive growth over the longer run, renewed reform momentum is required".

China/Brazil - China and Brazil have signed a currency swap deal, designed to safeguard against future global financial crises.

The pact, first announced last year, will allow their central banks to swap local currencies worth up to 190bn yuan or 60bn reais ($30bn).

Officials said this will ensure smooth bilateral trade, regardless of global financial conditions. Along with being the world's second-largest economy, China is also Brazil's biggest trading partner.

"If there were shocks to the global financial market, with credit running short, we'd have credit from our biggest international partner, so there would be no interruption of trade," said Guido Mantega, Brazil's economy minister.

The agreement was signed as part of the fifth Brics (Brazil, Russia, India, China and South Africa) summit being held in Durban, South Africa.

U.S. - The U.S. economy grew at a faster than expected 0.4% in the fourth quarter of 2012, the Department of Commerce has said.

The annualised figure was better than an earlier estimate of 0.1% growth, reflecting increased investments in plant and equipment. However, despite the upwards revision, the department warned that the economy remained "sluggish".

The latest figures were a marked slowdown from the previous quarter.

An acute fall in defence spending and government expenditures hurt economic output, said the department.

Spotlight on: Fund manager sentiment more positive on banks

Global fund managers are now more positive on banks than at any time in more than six years, research from Bank of America Merrill Lynch shows.

According to the latest BofA ML Global Fund Manager Survey, a net 14% of asset allocators had an overweight position in banks at the start of March. This is an 8% increase on the previous month and the most positive managers have been on the sector since December 2006.

The shift comes as investors moved money into assets that are driven by growth in the U.S. economy, such as financials, consumer discretionary companies and real estate. The allocation to U.S. equities reached its highest level since July 2012 last month, with 14% of fund managers now overweight here.

BofA Merrill Lynch chief investment strategist Michael Hartnett says: “Relative U.S. economic outperformance on the back of the housing market’s ongoing improvement and the energy independence story will lead a secular uptrend in the dollar.

“U.S. equities’ leadership in the ‘great rotation’ suggests developed market equities are the likeliest winner in this scenario.”

Despite asset allocators’ constructive stance on equities, there are signs that risk appetites have slipped slightly. The ML Risk & Liquidity Composite Indicator dropped one percentage point during the past month - its first decline in nine months.

Fund managers seem more willing to fund their equity purchases by dipping into their cash holdings. Some 28% say they would use cash to buy stocks, up from 22% in the February survey.

Asset allocators are also showing willing to sell government bonds to fund their equity purchases. Investors’ underweight to bonds rose from a net 47% to a net 53% this month.

However, BofA ML highlights challenges to the enthusiasm for US equities. “The biggest downside risks to investor positioning is anything that weakens the bullish dominance of the U.S. domestic demand story or a surprise jump in commodity prices and rates,” the report says.

Economic Summary for the week ended 9th March 2013

Emerging Market Stocks Make Gains

Emerging market stocks rose, heading for the biggest weekly gain in more than two months, as economic data from China to Japan and the U.S. bolstered confidence in the global expansion.

The MSCI Emerging Markets Index (MXEF) advanced 0.5 percent to 1,063.20 on Thursday in Hong Kong, a two-week high. The gauge has risen 1 percent this week, poised for its biggest weekly gain since 4 January. China exports rose more than forecast in February, data showed on Friday. Japan’s economy exited a recession, while jobless claims in the U.S. unexpectedly fell last week. Data on Friday may show U.S. employers added 165,000 people to payrolls in February and the unemployment rate held at 7.9 percent, according to economists.

“The market remains well supported because of the recent economic data, which is playing catch-up to investors’ expectations,” Geoffrey Ng, who helps oversee USD1.8 billion as chief executive officer at Hong Leong Asset Management Bhd., in Kuala Lumpur.

Malaysian Currency Volatilities

Currency swings are rising in Malaysia at the world’s fastest pace as concern mounts that the ruling coalition will lose its 55-year grip on power after attracting more foreign capital than any other emerging market except Mexico.

Three-month implied volatility for the ringgit, a measure of expected exchange-rate moves used to price options, jumped 2.2 percentage points to 7.4 percent in 2013, more than any of the main global currencies. The ringgit has lost 1.6 percent this year and reached a five-month low in February as Credit Suisse Group AG and ING Groep NV cut their forecasts.

Polls show support for Prime Minister Najib Razak, who embarked on a USD 444 billion development plan to build railways and power plants, is the lowest since 2011 ahead of elections due before the end of June. Investors may pull from the local bond market as much as USD 10 billion, or 24 percent of their total holdings, as opposition leader Anwar Ibrahim pledged to review highway-toll contracts and the granting of tax permits to large companies, according to Credit Suisse.

“The volatility rate reflects worries of capital outflows in the lead up to the election, which looks uncertain at this time,” Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore, said in an interview. “In the long term, I am still positive on the fundamentals of the ringgit and the bond market in Malaysia.”

Malaysia, Southeast Asia’s third-largest economy after Indonesia and Thailand, attracted investment, including bonds and stocks, equivalent to 4.5 percent of gross domestic product in the year through September, the second-highest percentage among 21 developing nations after Mexico, according to strategists at Goldman Sachs.

Rising strength of the US Dollar

The dollar rose to the strongest since August 2009 against the yen on speculation an improving U.S. job market will prompt the Federal Reserve to slow stimulus even as Japan pledges to extend so-called quantitative easing.

The U.S. currency gained versus all except two of its 16 major counterparts before a report that economists said will show American employers stepped up hiring in February. The euro strengthened for a third day against the yen as analysts said German data today will show industrial production increased for a second month in January. Sweden’s krona fell against the dollar and the euro after industrial production declined.

“There’s been a market realization that the real economy in the U.S. is in a growth phase,” said Peter Frank, global head of currency strategy at Banco Bilbao Vizcaya Argentaria SA in London. “That’s a really strong reason to be bullish on the dollar. By the end of this year, the Fed will start to give details of how it’s going to withdraw its accommodative policy. There’s nothing positive for the yen right now.”

The dollar advanced 0.8 percent to 95.54 yen on Friday morning in London after climbing to 95.61, the highest level since 13 August 2009. The U.S. currency rose 0.1 percent to USD 1.3092 per euro after dropping 1.1 percent on Thursday, the biggest decline since 10 January. The yen fell 0.7 percent to 125.11 per euro.

Spotlight on Thai Stocks

Never before have Thai stocks rallied so much at a time when foreign investors were heading for the exit.

The benchmark SET Index (SET) rose 4.6 percent last month even as international money managers sold a net USD 583 million of the nation’s shares, the biggest outflow among the top 10 Asian markets. The advance, propelled by USD 611 million of purchases by domestic investors, is the largest for any month when net overseas withdrawals exceeded USD 500 million.

Thai citizens are driving equity gains as the nation’s USD 377 billion economy grows at the fastest pace since at least 1993 and local incomes climb. While Morgan Stanley is advising clients to cut stock holdings after valuations rose to record highs, Aberdeen Asset Management and ING Investment Management are still bullish. The SET index has recovered every time when foreign selling coincided with monthly losses since September 2008, rallying an average 22 percent in the next 12 months.

The SET index is up 13 percent this year. The MSCI Southeast Asia Index (MXSO) has advanced 4.9 percent in 2013, while the MSCI Emerging Markets Index has increased 0.5 percent.

Outflows from Thai stocks last month compare with USD 1.2 billion of inflows into Indonesia and USD 146 million of net purchases in the Philippines. The Jakarta Composite Index and the Philippine Stock Exchange Index both climbed 7.7 percent in February.

Capital outflows and Thailand’s widening current-account deficit spurred the government to devalue the baht on July 2, 1997, a move that helped spark the Asian financial crisis. Foreign investors withdrew about 30 billion baht, or USD 1 billion at current exchange rates, from Thai stocks in the 12 months ended June 1997.

Thailand’s economy and its financial markets have become more resilient to foreign withdrawals, according to ING’s Huang. The nation’s foreign-exchange reserves have grown more than 500 percent since the Asian crisis to about USD 179 billion as of 22 February, central bank data shows. Thailand will probably record a current-account surplus equivalent to 0.1 percent of gross domestic product in 2013, data from the International Monetary Fund show.

GDP expanded 18.9 percent in the three months through December, the fastest pace since Thailand began compiling figures in 1993, as manufacturing rebounded from the worst floods in almost 70 years in 2011, the government said on 18 February. The economy grew 6.4 percent in 2012, compared with the decade average of 4.2 percent. The expansion may slow to between 4.5 percent and 5.5 percent this year, according to government estimates.

Rising incomes and tax incentives for long-term investment have spurred more Thais to put money in stocks. The country’s per-capita GDP has increased to about USD 5,850 from USD 3,900 five years earlier, according to the Washington-based IMF. Thailand allows citizens to make tax-free investments of as much as 1 million baht a year into retirement and long-term equity funds.

The long-term prospects for Thailand’s economy and stock market are both positive because infrastructure spending is increasing and the country is luring foreign direct investment, Medha Samant, an investment director at Fidelity Worldwide Investment, which oversees about USD 240 billion, said by phone from Hong Kong on 28 February. The USD 1.2 billion Fidelity Thailand Fund (FIDLTHI) returned about 13 percent this year.

Prime Minister Yingluck Shinawatra’s government approved on 27 February a 2 trillion baht infrastructure-spending plan to build high-speed trains and mass transit networks.

“The next catalyst will be when the government starts to disburse money regarding these projects,” Pong Ho Yin, a Hong-Kong based money manager at Allianz Global Investors, said. “That will provide more confidence to the foreigners.”

Earnings in the SET index will probably climb 28 percent in the next 12 months, versus 18 percent for MSCI’s developing-nations gauge, according to projections coomplied by Bloomberg.

Many Thais “have had great success and spectacular returns by investing in companies with sound fundamentals such as strong earnings growth,” according to Sompong Cholkadeedamrongkul, a 60-year-old private investor in Bangkok. “There were several occasions that heavy selling by foreign investors gave me opportunities to buy shares of those companies at bargain prices.”

Economic Summary for the week ended 1st March 2013

India - India's finance minister has announced an unexpected rise in public spending for the next financial year in an attempt to revive its sluggish economy. However, he vowed to cut the country's deficit as he unveiled new taxes on the super rich as well as large businesses.

Chidambaram said that increased foreign investment was key to reviving growth in India's economy. The budget comes at a time when India's growth rate has slowed, hurt by both global and domestic factors.

Asia's third-largest economy is projected to grow by 5% in the current financial year, far below the 7.6% growth projected in last year's budget.

China - China’s transition toward consumer-led growth and away from exports may be occurring faster than the government realizes.

Official data may have understated household consumption and incomes by $1.6tn last year, according to estimates by Morgan Stanley.

The reason being that China’s statisticians haven’t kept pace with structural changes in household spending such as housing and health care, which have grown rapidly, Hong Kong-based strategists Jonathan Garner and Helen Qiao said.

The finding suggests that such spending amounts to about 46% of GDP, higher than the 35% generally estimated and well below that of other large economies during periods of rapid growth, the report said.

That means the shift to consumption-driven growth and away from exports has been under way for some time, Garner and Qiao said. And it implies that household spending as a share of GDP has risen 2.4% points since 2008, while the official data suggests a 0.5% point decline.

Emerging Markets - Bubbles have yet to form in emerging market bonds and equities, according to Capital Economics, although there is a risk of this happening in the coming two years.

Emerging markets have seen renewed interest from investors of late. As a result, the JP Morgan Emerging Market Bond Plus index’s yield recently dropped to a record low of 4.5% while the annual average return of the MSCI Emerging Market equity index has been 20%, in dollar terms, for the past four years.

In its latest Global Markets Focus report, Capital Economics says: “Although these developments have prompted claims that a bubble is forming in financial markets in the emerging world, we are unconvinced.

“Looking ahead, though, a bubble could form in the next two years particularly in dollar-denominated emerging market bonds, primarily as a result of monetary stimulus in advanced economies.”

U.S. - Orders for durable goods in the U.S. fell 5.2% in January, the first fall in five months, as orders for aircraft fell.

Excluding transportation orders, which can be volatile, orders rose 1.9%, the highest rate since December 2011, said the Commerce Department.

Factories saw a 6.3% rise in demand for non-defence capital goods, pointing to a rebound in business confidence.

Meanwhile, separate data suggested that sales of previously-owned U.S. homes continued to recover in January.

Europe - A new cap on bankers' bonuses agreed in Brussels on Thursday was hailed by its supporters as a breakthrough to rein in the financial sector, but dismissed by critics as a reckless move that would drive bankers abroad or force up their base pay.

Bankers in Europe could be barred from receiving bonuses equal to more than their base salaries as soon as next year, following agreement in Brussels on Thursday. Shareholders would be allowed to vote to raise the cap to double base pay, but no higher.

The cap addresses public anger at what many European politicians describe as rampant greed in the financial sector. Many people on the continent blame huge bonuses for encouraging bankers to take outsized risks that caused the 2008 financial crisis, when banks had to be bailed out with public funds.

Europe - European stocks climbed on Thursday, with the benchmark index heading for its ninth straight monthly gain, as European Central Bank President Mario Draghi and Federal Reserve Chairman Ben S. Bernanke signalled they would maintain monetary support measures.

“Thanks to a strong mix of positive business results and signals of central banks remaining expansive, the upward trend on equity markets is strengthened and may continue,” said Daniel Gschwend, portfolio manager at Diem Client Partner AG in Zurich, which oversees more than 1bn Swiss francs ($1.08bn) in assets. “Looking at this long winning streak, however, I expect a substantial correction will soon be needed.”

Italy –The FTSE 100 and stockmarkets on the continent fell on Wednesday on the back of renewed uncertainty in the eurozone, following an election in Italy ending in stalemate.

Italy faces political deadlock after its election failed to produce a clear winner. In a shock result, comic Beppe Grillo’s anti-establishment 5-Star Movement became the country’s strongest party but no-one was able to secure a majority.

Leeds University Business School professor of monetary economics Giuseppe Fontana told the BBC: “It is not difficult to speculate that this morning markets and policymakers are asking the big question - what is the future of the euro area?.

“Italy is the third largest economy in the eurozone area and there is a question about is this a way, a democratic way, to tell markets and policymakers to change course about austerity measures and start to stimulate again the economy?”.

Germany - German retail sales rose the most in more than six years in January as falling unemployment bolstered consumer confidence.

Sales, adjusted for inflation and seasonal swings, jumped 3.1% from December, when they dropped 2.1%, the Federal Statistics Office in Wiesbaden said today. That’s the biggest increase since December 2006, the office said.

“Domestic demand in Germany is solid, driven by a stable labor market and higher real wages,” said Carsten Brzeski, senior economist at ING Group in Brussels. “With foreign demand picking up as well, the German economy should return to growth in the first quarter.”

Spotlight on: Future for gold?

Marlborough Fund Manager’s Angelos Damaskos says that money printing is the only option available to many western economies struggling under the weight of debt, which will boost both inflation and the price of gold.

The U.S. administration managed to agree a partial deal on the "fiscal cliff" negotiations on New Year’s Eve.

Nevertheless, full agreement is still subject to the resolution of a number of issues, the most important being approval by Congress to raise America’s debt ceiling.

This would allow it to borrow more to refinance existing obligations in addition to financing the stimulus programmes launched recently; tantamount to an agreement to print more money while borrowing more from abroad.

There are two other important issues relating to cutting government expenditure and raising taxes to reduce the deficit in cash-flow.

An increase in the debt limit would exacerbate the situation, leading to higher inflation due to the additional liquidity and a subsequent dampening of economic growth.

The second concern is that cutting government expenditure while raising taxes would also negatively impact growth and employment and disincentivise new investment in productive capacity.

Understandably, politicians are undecided. Their position is similar to a household earning less than their regular outgoings, having no savings and piling on debt via credit cards and bank overdrafts.

Finding ways to reduce expenses requires undesirable adjustments to lifestyle, while possibilities to increase income are hard to find.

At the same time, creditors are knocking on the door, asking when they might get their money back. The economic activity of the household will have to be reduced if it is to avoid losing valuable assets to the banks.

The main advantage of a public body in control of its own finances, such as the U.S., is that it can print money to inflate the value of the debt.

The difficulty is doing this without angering its creditors, who may ask for their money back. It is a fine-balance politically, with politicians walking the tightrope.

The European Union is in a similar, possibly worse, situation. The additional burden of cultural differences among member states makes reaching an agreement on debt levels, cuts in expenditure and a fiscal union difficult.

Under the circumstances, many investors sense the risk that the value of their money held in U.S. dollars or euros could fall.

The potential loss in purchasing power due to increased money supply and the consequent inflation could be significant. In their quest for alternative stores of value, many look to gold as a safe-haven.

This investment demand has propelled the gold price to a six-fold increase over the last 12 years.

Many now believe that, as the governments of the U.S. and E.U. have stated their intent to print more money in order to stimulate their economies, the debt problems might be resolved sooner rather than later.

They therefore suggest that we saw the peak in the price of gold when it reached $1,927 per ounce in 2011.

This argument ignores the potential impact of inflation and the economies' inability to invest in new productive capacity.

Other more cautious investors are still looking for stores of value, such as gold. As more people become convinced that their money is at risk of losing its value, a rush to buy gold could push its price to a much higher level than that reached in 2011.

Damaskos’s belief that this situation is likely to happen in the next 12 months as politicians struggle to find alternative ways to resolve the debt problems and the electorate becomes restless. When the gold price reaches new highs, the current undervaluation of gold mining shares will be stark for all to see, causing a sharp re-rating of the sector.

Economic Summary for the week ended 21st Feb 2013

Japan - Japan's monthly trade deficit hit a record in January after its recent aggressive monetary policy stance weakened its currency sharply. Exports rose in January, the first jump in eight months, as its goods became more affordable to foreign buyers.

However, a weak currency also pushed up its import bill resulting in a monthly trade deficit of 1.6tn yen ($17.1bn), a 10% jump from a year ago.

Meanwhile, output data also indicated that things may be starting to change. Japan's shipments to China rose by 3% in January from a year earlier, the first rise since May.

At the same time, exports to the U.S., the world's biggest economy also jumped 10.9% further, adding to hopes of a recovery in the sector. Meanwhile, the pace of decline in exports to the European Union also slowed during the month.

There are hopes that as shipments to key markets recover and the yen continues to remain weak, Japan's export sector may see a sustained recovery.

Japan - Japanese Prime Minister Shinzo Abe plans to ask U.S. President Barack Obama to approve shale gas exports to Japan, which has relied on fossil fuels to keep the world’s third biggest economy running after the 2011 Fukushima nuclear disaster.

Japan, the world’s biggest importer of liquefied natural gas, has increasingly turned to fossil fuels after most nuclear reactors were shuttered in the wake of Fukushima.

Japanese companies are investing in U.S. shale gas projects, which could begin exports from 2017 if they win government approval.

Importing U.S. gas would boost Japanese utilities’ bargaining power in negotiations with suppliers who benchmark their prices against more-expensive oil, said Reiji Ogino, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co. Utilities have sought government approval to raise electricity prices and pass on the burden of higher fuel bills to consumers.

Global - The economies of the Organisation for Economic Co-operation and Development (OECD) contracted by 0.2% in the last three months of 2012.

It was the first such decline for the group of developed countries since the beginning of 2009.

The eurozone was the biggest factor, with a 0.6% contraction. Japan and the U.K. shrank too and the U.S. saw no growth. The OECD's figures highlight the continuing weakness that has afflicted the developed world.

At no stage since the financial crisis have developed economies grown very strongly. It has never been a convincing recovery.

But the figures for the final quarter of last year actually show a decline for the first time in nearly four years for the OECD as a whole.

U.K. - Britain's benchmark, the FTSE 100 equity index extended gains on Wednesday to rise to new five-year highs, and breached a key psychological level which some traders said could induce moves higher.

The FTSE 100 was up by 0.4% at 6,401.79 on Wednesday, surpassing the key 6,400 point level. The stock market extended earlier gains after minutes from the Bank of England signalled a greater likelihood of more monetary stimulus measures, which have boosted equity markets around the world.

The FTSE 100 last traded above the 6,400 point mark in late May 2008.

China - China’s foreign direct investment fell for an eighth month in January, a sign that the recovery in the world’s second-largest economy has yet to revive confidence among overseas companies.

Inbound investment dropped 7.3% from a year earlier to $9.27bn, the Ministry of Commerce said. Non-financial outbound investment rose 12.3% to $4.91bn, the ministry data showed. China’s economic data in the first two months are distorted by the timing of the weeklong Lunar New Year holiday, which fell in January last year and February this year.

Rising employee and land costs have diminished China’s attractiveness as a destination for foreign investors, with labour-intensive manufacturers leaving for other Asian countries, HSBC Holdings Plc said in a report last month. Inbound investment dropped 3.7 percent last year as economic expansion was the weakest since 1999.

“Foreign enterprises are saying, ‘OK, China’s not growing as fast as in the past, maybe we should pull back a little bit,’” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said. “The big picture is that Chinese growth potential is being lowered by less appetite by foreign businesses to move their operations into China.”

At the same time, inflows are likely to rebound by 4.5% this year as businesses realize growth is improving and the nation won’t have a “hard landing,” Kowalczyk said.

Commodities - Gold traded little changed near a six-month low in London as investors weighed signs of economic improvement against stronger physical bullion demand, before the U.S. central bank releases minutes of its latest meeting.

“Bullion’s safe-haven properties as well as its traditional use in inflation hedges are irrelevant at this point,” Andrey Kryuchenkov, an analyst at VTB Capital in London, wrote in a report. “The market’s attention is set to turn to the Federal Open Market Committee’s January minutes.”

Spotlight on: Fund Manager global allocation survey

Global fund managers’ expectations of stock market returns in the U.S. have fallen to their lowest since 2008, according to research by Towers Watson.

The professional services firm’s latest investment manager survey shows that asset allocators expect U.S. equities to deliver returns of 7% during 2013. This is down from the expected 8% in 2012 and is the lowest level recorded since the poll’s inception in 2008.

Equity return expectations have also fallen for Australia, moving from 7% to 6%, but rose in all other major regions.

Investors expect the U.K. and Japanese stock markets to advance 6% in 2013, both up from 5%, the eurozone is tipped for 7% returns, up from 6%, and China is expected to return 10%, up from 7.8%.

But despite their muted outlook for the U.S., this country is the preferred investment target for global fund managers. Asset allocators have a preference towards U.S. and China and away from the eurozone.

Towers Watson global investment committee chairman Robert Brown says: “There are some positive economic signals coming out of the U.S. which, even though driven largely by government policies, seem to be reflected in managers’ view that the U.S. is the region with the most rewarding investment opportunities in 2013, followed by China, the eurozone and frontier markets.”

The survey also reveals that fund managers have adopted a stance of “guarded optimism” with many expecting to keep their portfolio risk levels the same or carry out modest increases during 2013. Investors think equity volatility will sit between 15% and 20% in the major economies this year, which is above the historical average but “somewhat lower” than the range seen in recent years.

Brown says: “Volatile markets and heightened risk awareness continue to make asset allocation very challenging as investors balance priorities like long-term de-risking, short-term market opportunities, rebalancing and maintaining a strategic asset allocation mix.

Towers Watson agrees with the market view that government bonds do not appear to be “great value” at the moment, after yields dropped on the back of central bank policy and safe-haven flows, and argue that equities seem to be better value.

“However, it is challenging to know what to do about it when the goal for many funds is to reduce risk overall and diversify from existing equity holdings,” Brown adds.

“So many funds are buying fewer bonds than before and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities.”

Economic Summary for the week ended 15th Feb 2013

The Equity Bull Market

Global equity prices this year have added to their late 2012 gains, with many stock markets hitting new cyclical highs.

Some market participants are now claiming that complacency has set in and, thus, stocks are primed for a tumble. While equities are becoming overbought on a short-term basis, the Macro Research Board Risk Appetite Indicator is still positive on a 6-12 month horizon, and expects stock bulls to be well rewarded, while bond bulls face a disappointing year ahead.

Retail investment flows and sentiment gauges have a good record of flagging equity market turning points, as extremes occur just as the tide is set to turn. To this end, a surge of inflows to stock mutual funds in the US during January has raised the fear that the bull run is nearing an end.

Over the past year, there have been near-record outflows from equity funds, while bond funds have received near record inflows over the same period. While there has clearly been a lift in sentiment recently, one month does not make a trend and it is premature to claim investors are now excessively optimistic and thus "fully invested". Rather, the Macro Research Board Risk Appetite Indicator has risen only to neutral levels, implying that there are no technical roadblocks to higher equity prices.

The equity advance should be choppier than in recent months with markets becoming overbought, but valuations remain compelling (and still very negative for government bonds). Moreover, the fundamental backdrop is slowly improving, with US and emerging economies regaining momentum, and global manufacturing surveys recovering to positive territory in January.

Monetary policies around the world will remain hyper-accommodative until the global economic expansion is decisively back on track. Therefore, there is a compulsive argument that investors should consider staying cyclically positive on stocks, especially relative to bonds.

Asian Stocks

Asian stocks rose after the Bank of Japan maintained its asset-purchasing programme before its governor steps down next month. An unexpected contraction in Japan's economy fuelled speculation policy makers will boost efforts to end deflation.

The MSCI Asia Pacific Index climbed 0.3 percent to 133.64 on Wednesday in Tokyo. About four shares advanced for each three that fell. Hong Kong's market reopened on Thursday while China, Taiwan and Vietnam remain shut for the Lunar New Year.

"Once the new governor takes over, we’ll see an acceleration of the pace of monetary easing," said Shane Oliver, Sydney-based head of strategy at AMP Capital Investors Ltd. "Valuations remain reasonable and monetary policy will remain accommodative. We're starting to transition into a phase where global growth picks up and that transfers through to earnings."

Bank of Japan Governor Masaaki Shirakawa and his colleagues left monetary policy unchanged, while raising their assessment for the economy. Shirakawa and his two deputies step down on 19 March.

EU Transaction Tax

The European Union will propose a far-reaching tax on financial transactions which could be collected worldwide as soon as 1 January next year by the 11 nations that have so far signed up to participate.

The plan by the EU in Brussels, to be outlined shortly, invokes "residence" and "issuance" ties to firms in participating countries, in a bid to prevent traders from escaping the levy by trading outside the tax's zone. The plan says that to escape the proposed tax entirely, firms in other nations would have to entirely cease financial-services business with the 11 EU nations involved.

The proposal marks a new stage in the EU's efforts to raise revenue from the financial sector and curb what it sees as a "patchwork" of local levies. Like a prior, failed proposal for all 27 EU nations, Thursday's plan would set a rate of 0.1% for stock and bond trades and 0.01% on derivatives trades.

The EU estimates the arrangement could raise EUR 30 billion (USD 40 billion) to EUR 35 billion per year. It would need approval by the 11 participants to proceed. All EU nations can sit in on the talks and have the option to join.

The proposals would exclude certain types of trading from the scope of the tax: day-to-day transactions by individuals and non-financial firms; primary offerings of stocks and bonds; and trades with central banks, the European Stability Mechanism and other official institutions. According to EU documents, it also would exclude trades in units of collective investment funds along with certain restructuring operations.

Repurchase agreements would be included, though they would be taxed differently from trades with an outright buyer and seller.

The plan also would include pension funds. The EU intends to argue that a well-designed tax could make pension funds safer by encouraging them to make untaxed purchases on the primary market and hold securities to maturity.

When EU ministers last month allowed the 11 willing nations to proceed with transaction-tax negotiations, the spillover effects on pension funds were a concern.

The Netherlands will wait before deciding whether to sign up, said Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area finance ministers. "One of the criteria for us is our pension funds," he said. "It's very important that these pension funds are not harmed by a new tax."

A weighted majority of EU finance ministers backed the measure in a Brussels meeting last month. The U.K., home to the Europe's largest financial centre, abstained along with Malta, the Czech Republic and Luxembourg. The Confederation of British Industry said yesterday that the tax plan's extended scope will require extensive review.

"The Commission’s FTT proposals are now significantly different from its initial plans, so the impact on growth and jobs must be assessed before proceeding," Matthew Fell, CBI director for competitive markets, said in a statement.

While the U.S. will study the proposal, it doesn't support the European financial transactions tax, according to a U.S. Treasury Department spokeswoman. The tax would harm U.S. investors who bought affected securities, a concern that Treasury officials have raised with their European counterparts, the spokeswoman said.

Demand for Gold

Gold demand rose 3.8 percent in the fourth quarter as Indian purchases jumped, narrowing the first drop in annual usage in three years, the World Gold Council said. India remained last year's biggest buyer, ahead of China.

Global demand gained to 1,195.9 metric tons in the quarter, the most ever for an October-to-December period, from 1,151.7 tons a year earlier, as Indian consumption surged 41 percent, the London-based industry group said today in a report. Jewellery usage rose 11 percent to the highest since the first quarter of 2011, leaving total demand for 2012 down 3.9 percent at 4,405.5 tons. That’s still 15 percent more than the five-year average.

Purchases in India, which the council had expected to be replaced by China as the top buyer, rose toward year-end on seasonal buying and expectations of higher import duties, it said. While holdings in gold-backed exchange-traded products reached a record in December as prices posted a 12th straight annual gain, the metal failed to set an all-time high for the first time since 2007. China's economic growth accelerated for the first time in two years in the fourth quarter.

"The real driver was the rise in jewellery, and within that you saw India being key" in the fourth quarter, Marcus Grubb, managing director of investment research at the council, said. "China's economy is now re-accelerating quite strongly into January and February. Both Indian and Chinese demand will be higher in 2013."

Gold for immediate delivery traded at USD 1,644.65 an ounce in London on Wednesday, down 1.8 percent this year. Prices averaged a record USD 1,717.86 in the fourth quarter, up 2.1 percent from a year earlier and 3.9 percent higher than the third quarter. They averaged an all-time high USD 1,669 in 2012, boosting the value of last year's demand to USD 236.4 billion, the most ever.

Spotlight on Current Fund Manager Sentiment

Confidence in a strong global economic outlook has consolidated while investors have indicated that they see support from current equity valuations after the recent rally, according to the Bank of America Merrill Lynch Fund Manager Survey for February.

A net 59 percent of investors believe the global economy will strengthen in the year ahead, in line with the reading in January, which marked four consecutive months of rising sentiment. The outlook for profits has improved with a net 39 percent of the panel saying that profits worldwide will improve in the coming 12 months, up from a net 29 percent in January. The desire for higher capital expenditure is strong with 48 percent of investors saying that capex is the best use of corporate cash – the highest reading since April 2011.

Investors have indicated that they continue to perceive value in equities in light of strong market performances of early 2013. A net 13 percent of global investors still say that equities are under-valued. At the same time, a net 82 percent say bonds are overvalued, the second-highest level recorded by the survey with the highest coming at the peak of the European sovereign bond crisis in 2012.

Risk appetite has also remained steady month-on-month. Average cash balances in portfolios remain at 3.8 percent, though the net percentage of investors overweight cash has fallen to 2 percent this month from 8 percent in January, the lowest reading since February 2011.

"The continued high level of optimism is a concern and markets may be vulnerable to bad news, but valuation support suggests any correction should be short and shallow, and our core 'Great Rotation' theme remains in play," said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research. "Investors are striking a balance between the optimism over growth and caution over investment decisions. Investors have so far resisted taking an exuberant stance," said John Bilton, European investment strategist.

Allocations towards equities have held at the highs reached in January. A net 51 percent of asset allocators remain overweight global equities. Within equities, sectoral allocations highlight a bias towards a measured easing of risk appetite with a shift towards defensive assets.

Pharmaceuticals, a traditional defensive sector, has returned to the number one sectoral pick for global investors, having been third in the pecking order a month ago. The proportion of investors overweight the sector rose to 27 percent from 11 percent in January.

Cyclical sectors become less popular. The biggest month-on-month faller was Technology, which saw a negative 12 percentage point swing in the number of investors overweight the sector. Materials also suffered a double-digit fall in the percentage of overweights. The number of respondents overweight Technology, Industrials and Energy also fell.

Japanese equities continue to benefit from a positive shift in sentiment by global investors. A net 7 percent of asset allocators say they are overweight Japanese equities this month, up from a net 3 percent in February. In December, a net 20 percent were underweight Japanese equities.

Local sentiment and risk appetite appears strong. A net 29 percent of Japanese investors responding to the Regional Fund Manager Survey say they are underweight cash, up from a net 5 percent one month ago. Automotives, Technology and Banks are the three most popular sectors domestically.

Global investors have indicated that their positive view towards Japan will continue. A net 21 percent of the panel says that the outlook for corporate profits in Japan is more favorable than for anywhere else, up from a net 4 percent in January. Accordingly, a net 9 percent says that Japan is the region they would most like to overweight. Two months ago, a net 17 percent said Japan was the region they most wanted to underweight.

This positive outlook comes at a time when investors see the yen as weakening, despite the fact that the currency is close to fair value based on the IMF's definition of currency valuation. Four out of ten respondents to the global survey say that USD/JPY rising to 100 is likely to happen before a U.S. debt downgrade, a Spanish bailout or gold breaking through USD 2,000 per ounce.

An overall total of 251 panelists with USD 691 billion of assets under management participated in the survey from 1 February to 7 February.

Economic Summary for the week ended 1st Feb 2013

Greece - Greece's finance minister believes that the worst is over for his country. "There is definitely a glimmer of hope; light at the end of the tunnel," Yannis Stournaras said this week.

As reforms were rushed through and a massive austerity package passed late last year, Greece secured a significant amount of bailout money from its international creditors.

"The probability of Greece leaving the euro - Grexit - is now very small", he told the BBC.

"We have managed to turn the economy around. From the markets, there's much more optimism. Deposits are coming back to banks, the government is paying its arrears to the private sector and there is a change in how Europe sees us. So all of the leading indicators are positive. We are two-thirds of the way towards our target. So people can have hope."

U.K. - London’s leading share index is on course to record its best January performance since 1998, despite fears the U.K. economy could fall into a triple-dip recession later this year.

The FTSE 100 has risen 5.7% so far this month, driven higher by upbeat U.S. earnings figures. The ‘great rotation' out of bonds has been one of the main drivers behind the FTSE's strong start to the year, despite ongoing economic weakness.

The last time the FTSE 100 reached such a level in January was 1998, when the leading index rose from 5,135 to 5,458, representing a 5.9% gain.

Germany - German unemployment unexpectedly declined in January, adding to signs that Europe’s largest economy is gathering pace.

The number of people out of work fell a seasonally adjusted 16,000 to 2.92 million, the Nuremberg-based Federal Labor Agency said.

The Bundesbank said last week the economy appears to be recovering from its fourth-quarter slump, when gross domestic product may have dropped as much as 0.5%. Confidence among entrepreneurs and investors rose more than economists estimated in January and a gauge of activity in service industries climbed to a 19-month high.

Russia - Russia’s economy probably grew last year at the weakest pace since a contraction in 2009 and is set to slow further, casting doubt on President Vladimir Putin’s drive for an investment-led acceleration in output.

Gross domestic product expanded 3.6% in 2012, down from 4.35% the previous two years, according to the median of 18 estimates in a Bloomberg survey. The Economy Ministry estimated growth at 3.5%. The Federal Statistics Service in Moscow will report the data this week.

The slowdown highlights the challenges facing the world’s largest energy exporter as oil prices are forecast to stagnate this year and Europe’s stumbling economy saps demand for Russian commodity exports. The government began an open campaign this month to push the central bank to lower rates, a step the regulator is resisting because of concerns the economy is already growing near its potential.

“We need a government that is more proactive on the reform side,” Peter Westin, chief strategist at Aton Capital in Moscow, said. “The central bank is doing a good job, but the government is definitely behind the curve when it comes to what needs to be done to stimulate the economy.”

Argentina - The tumble in Argentine stocks that sent valuations to an almost four-year low has spurred Morgan Stanley Investment Management and BlackRock to buy.

Timothy Drinkall, whose Morgan Stanley Frontier Emerging Markets Portfolio rose 26% in the past 12 months, said he bought Argentine shares last year after avoiding the country altogether earlier in 2012. By Dec. 31, the nation’s equities accounted for a larger percentage of holdings than were in the fund’s benchmark index.

The MSCI Argentina Index of five companies with operations in the South American country has rebounded 16% this year following a 39% fall in 2012 that was sparked by President Cristina Fernandez de Kirchner’s seizure of the nation’s largest oil company and restriction of imports and capital flows.

“Valuations are at extreme low levels,” said Drinkall, whose frontier fund beat 98% of peers tracked by Bloomberg during the past 12 months. “Sometimes for a market to adjust upwards, things just have to be less bad.”

Philippines - The Philippines has posted better-than-expected economic growth, boosted by the strong performance of the country's services sector.

Its economy grew 6.6% in 2012, the statistical bureau said, beating the government's target of 5 to 6% growth. The bureau added that a "substantial improvement" in manufacturing and construction sectors also aided growth.

Strong domestic demand has helped cushion the impact of a global slowdown on the Philippines' economic growth.

"The pace of Philippine growth has consistently surprised on the upside in the past year, as the economy displays resilience against global headwinds and is driven primarily by domestic engines," said Radhika Rao, an economist with Forecast Pte.

Spotlight on: The U.S. economy heading for recession, or a rebound?

The headline news from the U.S. this week was that gross domestic product had contracted in the fourth quarter. However, many economists and market commentators suggest that the headline does not necessarily tell the full story and that in fact, the U.S. economy is due more of a rebound than a recession.

The economy will bounce back in the current quarter after cuts to defence spending and reducing inventory growth adversely affected gains for consumers and businesses in the final three months of 2012, according to economists at JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley. Businesses probably will rebuild stockpiles while consumers and companies keep on spending.

“It would be a mistake to view this drop in GDP, driven by temporary corrections in defence spending and inventories, as a possible warning of recession,” Nigel Gault, chief U.S. economist for IHS Global Insight in Lexington, Massachusetts, said. “We expect GDP growth to rebound to around 2% in the first quarter.”

The expansion will stay on course thanks to a “mounting” housing recovery, a steadily improving job market and reviving demand for U.S. exports, said Mark Zandi, chief economist for Moody’s Analytics Inc. He sees GDP expanding 2.1% in 2013, after rising 2.2% last year.

The 0.1% decline in output in the final three months of the year was the economy’s worst performance since the second quarter of 2009, when the U.S. was still technically in a recession, according to figures from the Commerce Department in Washington.

After stripping out the inventory and defense data, the“tone of the report was positive,” said Peter Newland, an economist in New York for Barclays Plc. Consumer spending growth picked up to 2.2% from 1.6% in the third quarter, while business investment accelerated.

The steep drop in military outlays and restrained inventory building last quarter partly was a payback for the previous three months, when they both added to GDP. The slowdown in stockpiling also stemmed from supply-chain disruptions from superstorm Sandy.

Taking the two quarters together puts the “underlying” growth rate at about 1.5%, economists David Greenlaw and Ted Wieseman at Morgan Stanley in New York said in a note. That’s the pace they forecast for the first three months of 2013.

“Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” the Federal Reserve said at the conclusion of a two-day meeting in Washington this week. “Household spending and business fixed investment advanced, and the housing sector has shown further improvement.”

An improving job market and rising home prices should alleviate the effects of higher payroll taxes. Government figures to be released on Friday are projected to show that employers added 165,000 workers to payrolls in January after a gain of 155,000 in December, according to the median forecast of economists surveyed by Bloomberg.

The housing revival is also a plus for the economy. Homebuilding climbed 11.9% last year, the best performance since 1992.

“In the United States, we’re becoming increasingly optimistic,” Michael DeWalt, a spokesman for Peoria, Illinois-based Caterpillar Inc. , the world’s largest maker of construction and mining equipment, said. “We expect U.S. housing industry to help the economy in 2013.”

The S&P/Case-Shiller index of property values in 20 U.S. cities increased 5.5% in the year through November, the biggest gain since August 2006, according to data released on Jan. 29.

Furthermore, a strengthening world economy also should bolster American exporters.

China reported economic growth accelerated in the fourth quarter for the first time in two years, raising prospects that a regional lift will fuel demand for U.S. goods. Developing nations are projected to expand 5.5% in 2013, more than last year, while Europe stabilizes, according to projections from the World Bank.