Economic Summary for the week ended 26th June 2013

Global - The Bank for International Settlements (BIS) says banks have done their bit to help economic recovery and now governments must do more.

The Basel-based organisation, usually dubbed the "central banks' central bank", believes it is time to end the "whatever it takes" approach. It says it wants to see a return to "strong and sustainable growth".

Last week the U.S. central bank said it planned to stop its asset purchase programme, sparking market volatility. In its annual report, the BIS said the world's central banks had done what they could to offset the worst effects of the six-year long global credit crisis.

China - China’s central bank said it will use tools to safeguard stability in money markets and tight liquidity is set to ease, giving the first official signs of relief for a cash squeeze in the world’s second-largest economy.

The People’s Bank of China has provided liquidity to some financial institutions to stabilize money-market rates and will use short-term liquidity operations and standing lending-facility tools to ensure steady markets, according to a statement posted to its website on Tuesday. It also called on commercial banks to improve their liquidity management.

“The message is clear: the central bank doesn’t want to see a tsunami in China’s financial markets, and market rates will drop further,” said Xu Gao, Everbright Securities Co.’s Beijing-based chief economist, who previously worked at the World Bank. The PBOC is giving the market “a pill to soothe the nerves,” he said.

U.S. – U.S. home prices have seen their biggest annual rise since 2006, a closely-watched survey suggests.

The Standard & Poor's/Case Shiller index, which monitors single-family home prices across 20 cities, rose 12.1% in April compared to the same month last year.

The jump, due to increasing demand and a shortage of supply, was bigger than many analysts had been expecting.

Month-on-month, the index rose 2.5% in April compared to March.

Japan - Japan’s deputy economy minister said he’s confident the nation’s economic recovery will be seen in share prices after next month’s elections.

“I’m optimistic and expect the strength of the Japanese economy will be reflected in the stock market,” Yasutoshi Nishimura, 50, said in Tokyo on Tuesday. Markets are likely to “positively rate the government’s policies after the upper house elections once they see how determined we are to implement them.”

Victory for the Liberal Democratic Party-led coalition in the ballot planned for July 21 would end a split parliament that has slowed the passage of bills. The government’s task will then be to ensure its growth strategy, the third of the three Abenomics ‘arrows’ after monetary and fiscal stimulus, produces a sustained recovery in the world’s third-largest economy.

Forecasts - Capital Economics has revised up its forecasts for developed equity market performance this year, arguing that many downsides are now priced in.

The macroeconomics forecasting consultancy has lifted its outlooks for the FTSE 100, S&P 500 and Nikkei 225 for both this year and next. However, it adds that the upside for equities is limited.

Capital Economics chief global economist Julian Jessop says: “We had already anticipated a weak second half of the year, partly in anticipation of Fed tapering and partly due to concerns about the risks of a flare-up of the crisis in the eurozone.

“But Fed tapering would no longer come as a shock to the markets, and the risks of a meltdown in Europe have faded too.”

Jessop adds: “Admittedly, the upside for equities is also limited, given the fading support from U.S. monetary policy and the stage of the profit cycle. However, the improving economic outlook should provide some comfort, especially in the U.S., and valuations are not outrageous.

“Accordingly, we expect steady gains in equity prices – nothing spectacular, but better than many might fear against a backdrop of rising bond yields.”

Trends - Investors continued to pull money from emerging market funds last week, according to EPFR Global, although recent declines in other asset classes slowed.

The fund flow data provider reports that more than $3bn flowed out of emerging market equity funds worldwide during the week ending 19 June, while outflows from emerging market bond funds hit a 90-week high as the “exodus” from these regions continues.

Investors channeled money out of funds focused on top-tier emerging markets such as China, Brazil, Russia and South Africa. However, they maintained interest in frontier markets, as funds investing in this area have witnessed net inflows every week since mid-March.

Hong Kong - Moody's Investors Service has downgraded the outlook for Hong Kong's banking system to negative from stable, citing its "concerns regarding persistent negative real interest rates" and the institutions' "growing exposures to Mainland China".

It added, "Residential, commercial, and industrial property prices in Hong Kong have all more than doubled since 2009, and are currently at historically high levels. There is growing integration between Hong Kong's economy with that of the Mainland.

"While the economic integration creates business opportunities for banks and their customers, it also entails risks. The Mainland's transition from an export and investment-driven economic growth model to a consumption-led model creates uncertainties and may expose overcapacity in certain industries."

Commodities - The suggestion that the U.S. could start to curb quantitative easing has led to gold traders adopting their most bearish stance January 2010 as further falls in price are forecast.

Gold spot prices suffered a 6.4% fall to around $1,285 an ounce on Tuesday after Federal Reserve chairman Ben Bernanke said the central bank may slow its $85bn-a-month bond-buying programme if the U.S. economy continues to recover.

Gold has lost 22.5% over the year to date and is down more than 30% since its peak of about $1,900 in 2011. Commentators expect to see more falls, with some arguing the metal’s fair value is much lower than its current price.

A poll by Bloomberg found that 15 analysts expect the price of gold to see further falls next week, while five were neutral and six bullish. This is the most bearish response the survey has received in three-and-a-half years.

Spotlight on: Opportunities in the ASEAN region

The ASEAN region’s high pace of growth means many of its equity markets are undervalued. Camille Vergara fund manager of the GAM Star Emerging Asia Equities fund, explains why the area could be an even more attractive prospect than China 15 years ago.

The situation in Southeast Asia is more or less comparable to China 15 or 20 years ago except that current growth in Southeast Asia is much more dynamic. In the fourth quarter of 2012 alone, the average economic growth of the ten ASEAN countries was 6.5% year-on-year while inflation largely remains in check. By way of comparison, over the same period the economy in the eurozone contracted by 0.9%.

In addition, the incipient recovery in the U.S. economy and the drastic monetary easing by the Bank of Japan (BoJ) is giving Southeast Asia additional momentum. The U.S. economic revival is fuelling exports, particularly from the bigger manufacturing-heavy ASEAN countries.

Given the continued weakness of the yen and the low interest rates, many Japanese investors will sell their domestic government bonds and invest the money abroad, with the prospect of making currency gains and earning better returns.

Diversification

In addition to dynamic growth, the region also offers investors a level of diversification which investing in a single market does not.

Singapore, for example, positions itself as the financial and transportation hub of the ASEAN region. Indonesia and Malaysia are the manufacturing centres while the Philippines is poised to become the business process outsourcing (BPO) centre with its growing call centre industry, which is thriving thanks to the educated, English-speaking labour pool.

Thailand’s aim is to be the logistics hub of the Sub Mekong Region, it is ideally located beside its neighbours Laos, Vietnam, Myanmar and Cambodia and will, along with China, embark on a major upgrade of its infrastructure in the next five years to improve connectivity by land, sea and air to create and capture growing trade benefits in the region.

Furthermore, in 2015, the ASEAN countries will form a free-trade area along the same lines as the EU, the ASEAN Economic Community (AEC). The free exchange of goods, services and labour will give the region an additional boost.

Regional merger and acquisition (M&A) activities will generate considerable synergies, enabling many companies to exploit economies of scale. M&A activity has increased in ASEAN companies over the past year, for example in the food and beverage industry as well as financial services.

Meanwhile, in Thailand, Indonesia and the Philippines (TIPs), an expanding middle class has sprung up, which is supporting the upturn through consumer spending. The TIPs have been outperforming Malaysia and Singapore, driven by robust economic growth and domestic demand.

The total population of these three markets is approximately 400 million and per capita income is roughly $3,000-$4,000, the level at which consumers start buying cars or having a mortgage. Meanwhile, Malaysia, being the more export-oriented economy, has been more affected by the slowdown of demand from the western economies.

Foreign capital

The influx of foreign capital into the ASEAN countries will continue to increase, providing the basis for the economic boom to continue. Many ASEAN countries need capital to invest in their infrastructure – for instance new roads, ports, power plants and grids – and the industrial sector has to finance investments in the expansion of production capacity.

The leading companies in the region are already able to compete internationally and are highly profitable. For instance, the leading Singaporean real estate development and management company now has investments worldwide, in China and Japan particularly.

In the first quarter of 2013 alone, the group increased its net profit by 41% to the equivalent of around $188m. Meanwhile, its share price has gained almost 50% in the last 12 months (as at 27 May 2013). Despite the share price gains of recent months, many of these markets are still relatively inexpensive given their growth potential.

Not without risk

There are specific points which investors should consider when investing in the ASEAN region. The political, cultural and, in particular, economic differences within Southeast Asia are considerable and investments into the region are not without risks.

The markets can be volatile because of the inflows and outflows of foreign capital, and the external value of local currencies also fluctuates strongly, which can have a negative impact on the performance of an investment. In some cases there are certain political risks that cannot be overlooked.

Southeast Asia could prove to be a more attractive opportunity than the China of 15 years ago, yet as with China, strong local expertise and an appreciation of the macroeconomic and political factors impacting the region are essential to those hoping to profit from Asia’s next big success story.

Economic Summary for the week ended 14th June 2103

U.S. - Rating agency Standard and Poor's has raised its credit outlook for the U.S. economy from negative to stable.

In August 2011, S&P downgraded the U.S. rating one notch from AAA to AA+, but now believes further downgrades are less likely as the economy continues to recover.

The news saw the U.S. dollar strengthen 1.3% against the Japanese yen, and 0.2% against the euro, but S&P is still concerned about the high levels of U.S. debt.

The U.S. Treasury Department, which had said that S&P's calculations in making its initial downgrade were flawed, welcomed the latest action. "We're pleased that they are recognising the progress in the U.S. economy and fiscal results," said Mary Miller, the Treasury's under secretary for domestic finance.

Japan - Japan has revised its first-quarter economic growth up to 1%, as part of government data released this week by the Cabinet Office.

Revisions to official data show the Japanese economy grew at an annualised rate of 4.1% throughout the first quarter, up from an original estimate of 3.5%.

Japan’s original estimate of 3.5% already marked the fastest growth rate recorded by any G7 economy for the period.

Strong household spending and an uptick in private residential investment are said to have been the biggest contributors to the expansion in the Japanese economy throughout the first quarter of 2013.

The quarter-on-quarter growth rate was also the highest since the 1.2% witnessed during the first three months of 2012.

China - The World Bank has cut its growth forecast for China amid warnings of slower but more stable global growth over the coming months.

The bank now expects China to grow 7.7% in 2013, down from its earlier projection of 8.4%, it also cut the forecast for global economic growth to 2.2% from 2.4%.

The bank said growth in China, the world's second-largest economy, had slowed as policymakers look to rebalance its growth model.

Emerging Markets - Emerging markets have lagged over the opening half of 2013, leading some investors to re-assess their exposure to these regions.

While the MSCI World is up 18.3% since the start of the year, the MSCI Emerging Markets Index gained just 2.2%. Despite this, BlackRock chief investment strategist Russ Koesterich says investors should consider emerging market options such minimum volatility funds, single-country or regional portfolios and venturing into frontier markets.

Koesterich says: “In light of the recent poor performance, many investors are asking me whether they should be abandoning emerging markets in favor of bets closer to home. My answer: clearly is ‘no’”.

Frontier Markets - The world’s least-developed markets are proving the most resilient to the three-week selloff that has erased $1.9tn of global equity value.

While the MSCI All-Country World Index of shares in advanced and emerging nations has lost 4.2% since May 22 amid speculation the Federal Reserve will pare monetary stimulus, the MSCI Frontier Markets Index returned 0.5%. Thirteen of the 15 top-performing stock gauges are in frontier countries, where the mean market value of $49bn compares with almost $19.5tn in the U.S.

Greece - Greece became the first developed nation to be cut to ‘emerging-market’ status by MSCI after the local stock index plunged 83% since 2007.

Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, said MSCI, whose equity indexes are tracked by investors worldwide. Qatar and the United Arab Emirates were raised to emerging markets, while Morocco was cut to a ‘frontier market’.

“It is unclear yet what the weight of the MSCI Greece will be on emerging markets, but in any case it will be significantly higher than that it has on developed markets,” Constantinos Zouzoulas, an analyst at Axia Ventures Group, a brokerage in Athens, said. “This could be positive news for the Greek market as it could attract more interest, although there could be pressure in the short term.”

Commodities - Hedge fund managers increased bets on a gold rally to the highest level in seven weeks this week, prior to a report showing that U.S. unemployment had dropped spurred the biggest reversal in prices since April.

U.S. payrolls rose 175,000 in May, signalling that companies are optimistic about the outlook for demand, the government said.

“We saw some short-term bullish sentiment build up, then the jobs data dashed all hopes of gold rising,” said Walter Hellwig, who helps manage $17bn of assets at BB&T Wealth Management in Birmingham, Alabama. “Any good news for the economy is not so good for gold. The debate about when the Fed will taper or end stimulus continues to pressure.”

Trends – ‘Financials’ were the chief driver of global expansion during May, with firms posting the fastest growth in over a year.

The robust pace was fuelled by companies reporting the largest inflows of new business since February 2012, according to economics consultancy Markit, which monitors trends across industries.

This latest rise in output in the financials industry follows a trend which has been recorded in each month since January 2012, with the exception of a marginal reduction last June.

Behind the overall expansion of the financial industry was a sharp acceleration in the ‘other financials’ sector, which comprises non-bank financials and investment service companies.

Spotlight on: How Malaysia's elections benefit the ASEAN market

Soo Hai Lim, Head of ASEAN research at Barings Asset Managers shares his thoughts on the effect of the recent elections in Malaysia & it’s wider implications on the region.

In a largely weak global growth environment, we remain positive on the investment prospects for the countries making up the Association of South East Asian Nations (ASEAN). The regional grouping is made up of Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Our view is based on a robust growth outlook and domestic dynamics, which we believe should continue to limit the region’s exposure to any negative external shocks from Europe and elsewhere.

ASEAN equities have significantly outperformed the rest of Asia ex Japan in recent years, and we expect the region to continue to deliver superior returns relative to not only the rest of Asia ex Japan but also other emerging markets across the globe.

Economic growth in the region is being driven by structural change in the form of rising consumer and infrastructure spending, meaning that the ASEAN economies are substantially less dependent on global growth than other emerging markets, in our view.

Early May saw important elections in Malaysia, south-east Asia’s third-largest economy, as the governing coalition (Barisan Nasional) held on to power and extended its 56-year rule in a keenly contested race.

In our view, political stability in Malaysia is positive for the wider ASEAN region and we believe the election result should allow for a widening and deepening of the government’s economic reform programme.

The market’s reaction to the result has so far been positive, with the MSCI Malaysia index rising by 5.9% in U.S. dollar terms since the election on 5 May(to 29 May). The wider MSCI South East Asia index has also rallied slightly, returning 0.8% over the same period.

Although we have been relatively cautious on Malaysia for some time, we have recently increased our exposure, while remaining underweight relative to the benchmark index.

We will likely continue to add or initiate positions in domestic stocks where we believe performance has been hampered by the uncertainty leading into the elections. Longer term, we are also encouraged by signs that the Malaysian economy is enjoying a stronger investment cycle similar to other large regional economies.

Despite an improving economic and political outlook for Malaysia, our preferred markets remain Thailand, Indonesia and the Philippines (also known as the ‘TIP’ markets).

Thematically, the favourable economic fundamentals of ASEAN lead us to focus on direct beneficiaries of the region’s structural increase in infrastructure and consumer spending. We continue to find the best representation of these types of companies in the fast-growing TIP economies.

Economic Summary for the week ended 18th May 2013

Big Differences Between 1990s Bull Market and This One

The S&P 500 has returned a spectacular 26.2 percent on an average annual basis since bottoming in March 2009, a performance that more or less mimics what happened ahead of the tech-stock bubble that burst in March 2000. The bursting of the tech bubble in 1999 erased more than USD 5 trillion in stock-market value and many market observers see dark parallels between that time and the present.

There are key differences, however. Valuations on the S&P 500 remain around historical averages, even after returning 164 percent since the market hit bottom 50 months ago. Shares trade at around 16 times trailing 12-month profits compared to an average of 25 during the late 1990s. Equity returns this time around have been accompanied by earnings growth, as earnings have surged by about 20 percent per year since 2009, twice as fast as they did during the dot-com advance.

Bears argue that today’s price-to-earnings ratios suggest investors lack confidence in the sustainability of earnings growth and don’t trust this rally. Bulls counter that they imply stocks are valued fairly and have further room to run.

The bulls also have this on their side: the Federal Reserve is providing the economy with an unprecedented level of support. In the late 1990s, the Fed was actively looking to cool the pace of economic growth (GDP growth exceeded 4 percent and inflation was heating up) and raised interest rates six times from 1999 to 2000. By contrast, GDP growth since 2009 has averaged 2 percent annually, and the Fed has kept interest rates near zero percent for the past five years while it has pumped USD 2.3 trillion of economic stimulus into the economy, all in the name of spurring growth.

Also, the rally of the late 1990s was driven largely by individual, as opposed to institutional, investors. Today’s rally has taken place despite individual investors, who have pulled more than USD 400 billion from equity funds over the past four years and have added more than USD 1 trillion to bond funds (in 2013 alone, bond funds through mid-May received more than four times as much money as equity funds).

There’s a lot of scepticism about the state of the US economy and the current stock-market rally. Yet market dynamics today are more conducive to further stock gains than they were in the late 1990s.

End of the Bond Party?

As bonds continue their march upwards, we cannot help but think of the now infamous words spoken by Chuck Prince, then CEO of Citibank, in July 2007: "As long as the music is playing, you've got to get up and dance...We're still dancing." Clearly there are many investors who are approaching the bond market thinking the glass is half full – in reality, there are merely a few drops left in there. Their logic is simple: growth has slowed down (once again), inflation is in check and Japan has now jumped head-first into the quantitative easing party – so keep buying bonds while the music is still playing. The problem is that the music must stop at some point. When it does the effect could be violent.

Central banks around the world have embarked on unprecedented levels of quantitative easing and many believe that this could end in a "ketchup in the bottle effect" – imagine persistently tapping the bottom of a glass ketchup bottle until the ketchup finally bursts out at an unstoppable rate.

Quantitative easing programmes were launched in response to the plummeting of the money multiplier following the financial crisis. If (or when) those programmes succeed, the money multiplier will rise again, resulting in uncontrollably fast monetary growth. At that point, central bankers will have to make the difficult choice between sustaining sharply higher levels of inflation or sacrificing a fledgling recovery. In anticipation of this dilemma, central bankers have been circulating academic papers about the virtues of targeting nominal GDP rather than inflation.

Anyone buying a long-dated bond today is betting on their ability to anticipate ahead of all of the other players in the game when the music will stop. A better path for investors is to reduce interest rate duration and maintain exposure to inflation-linked assets. Commodities and real assets have performed well in inflationary environments historically, and are an integral part of a diversified portfolio. The stakes are high, and who knows how many chairs will be left this time.

Gains in the Brazilian Stock Market

Brazil is no sprinter. The world's eighth-largest economy has grown at a 3.25 percent annual clip since 2000, compared with 2.7 percent for the US and 10 percent for China. Brazil's stock market, however, is up more than 12 percent per year on average over the past 12 years, compared with about 1 percent for the S&P 500 and 5 percent for Hong Kong's Hang Seng Index. Can it continue to race ahead at such a heart-thumping pace? The answer largely depends on three important variables: Brazil's inflation rate, China, and stock valuations.

Inflation in Brazil gets out of control every so often, and it can hammer stocks. Inflation topped 10 percent in 2002, driving equities down by more than 50 percent. The current consensus is for a more moderate 5 percent inflation rate in 2013, so that's not a big worry. But then there's China, the biggest importer of Brazilian commodities. That demand also affects investors because energy and materials account for more than 40 percent of the Brazilian stock market. Right now, the consensus outlook for China GDP is positive, calling for a slight increase next year, to 8.4 percent. Meanwhile, Brazil's stock valuations are reasonable, with a price-earnings ratio of about 11 times 2012 estimated earnings across the MSCI Brazil Index.

Because firstly Brazil's inflation is moderate, secondly China doesn't appear to be on the ropes and thirdly valuations aren't bad, Brazilian stocks may be a good bet now according to some analysts. There are caveats, though, and the biggest one is the global economy, and not just with respect to exports. Brazil could also be vulnerable to investor fear should the global debt crisis worsen. Italo Lombardi, a Latin America economist at Standard Chartered Bank, connected the dots recently when he pointed out that concerns have spread from Greece to Portugal and Spain. "In this scenario," Lombardi said, "risk aversion tends to go up, which affects demand for Brazilian assets in general, including stocks."

Spotlight on the Rise in Japan’s GDP

Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.

Gross domestic product rose an annualised 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. Nominal GDP, which is unadjusted for changes in prices, rose 1.5 percent, also the most in a year.

Today’s report shows while consumers, aided by a stock-market surge, are responding to the reflation campaign mounted by Prime Minister Shinzo Abe and Bank of Japan chief Haruhiko Kuroda, companies remain cautious. That may change as the yen’s 20 percent slide against the dollar in the past six months spurs profits and Abe's administration embarks on reducing regulations.

“Japan is clearly back from stagnation last year,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “The key from here is whether Abe can unveil a strong growth strategy. If he succeeds, that will boost business investment to support growth.” Abe plans next month to unveil his so-called third arrow of structural reform, following the first two arrows of monetary and fiscal stimulus.

Nominal GDP rose 0.4 percent last quarter from the previous three months, less than the median forecast for a 0.5 percent advance. The so-called GDP deflator, a broad measure of prices across the economy, tumbled 1.2 percent from a year before, the most since the final three months of 2011, underscoring Kuroda’s challenge as he seeks to end more than a decade of entrenched deflation.

The Bank of Japan’s plans to double the monetary base, a measure of the supply of money in the economy, have helped the yen weaken more than 15 percent against the dollar and almost 14 percent against the euro this year, the largest declines of the 16 major currencies.

The Nikkei 225 Stock Average (NKY) has climbed almost 45 percent this year, more than twice the gain in the Standard & Poor’s 500 Index. Meantime, bonds have tumbled as inflation expectations have risen. Ten year government bond yields jumped the most in almost a decade until the Bank of Japan on Wednesday announced a 2.8 trillion yen (USD 27 billion) infusion of funds.

“Some say Japanese stocks may be too high but the GDP shows the strength of economy may justify the uptick trend in stocks,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “I see a chance that Japan will have even better growth this quarter.”

Economic Summary for the week ended 10th May 2013

China - China's trade growth accelerated in April, beating analyst expectations, a positive sign for the country's fragile economic recovery.

Exports surged by 14.7% compared with a year earlier. That is up from 10% in March. Imports also rose by 16.8% up from 14.1%.

The data meant a trade surplus for China, reversing a surprise deficit in March. However, some analysts raised questions about the accuracy of the data.

"I have no strong conviction whether the data reflects reality," said Zhiwei Zhang, chief China economist at Nomura in Hong Kong.

Japan - Japan's Nikkei has continued its surge, rising above the 14,000 mark for the first time since June 2008.

The benchmark index rose 3.6% to 14,180 on its first day of trading after the Golden Week holiday.

Japanese markets have jumped recently after its central bank unveiled aggressive moves, including doubling the money supply, to spur growth.

On Tuesday, markets were also reacting to last week's events, including a rate cut by the European Central Bank.

"Stocks must account for a few sessions of most positive activity in overseas markets, which have resulted in a sharply weaker yen, all of which will be tonic for buying," said Hiroichi Nishi from SMBC Nikko Securities.

"Signs that the U.S. economy is improving, as well as the European Central Bank's rate cut are most encouraging fundamentally."

South Korea - South Korea has cut interest rates in a surprise move aimed at boosting growth and countering a weak Japanese yen.

Its central bank, the Bank of Korea, lowered its benchmark rate to 2.5% from 2.25%, the first cut in seven months. South Korean exporters are seeing their price competitiveness suffer after the Japanese government's recent aggressive policy stance weakened the yen.

"This rate cut means that the Bank of Korea admits that the economy is not as good as they think," said Jun Min-Kyoo from Korean Investment and Securities.

U.S. - The Dow Jones index closed above 15,000 for the first time on Wednesday as strong German factory data pushed U.S. and European share markets higher.

The Dow rose 87 points to 15,056. It has been rising rapidly over the past six months, and was boosted by better-than-expected jobs figures last week.

Meanwhile, the world’s most famous investor, Warren Buffett, has forecast that despite U.S. indices surging to new highs, there is still more to come.

Speaking to CNBC the Berkshire Hathaway boss said: “”You’ll see (stock) numbers a lot higher than this in your lifetime.”

Buffett, dubbed the Sage of Omaha, said while he felt stocks are not as cheap as they were just a few years ago, they were “reasonably priced”. He conceded there could be a correction at any time but warned against attempts to time the market.

Mexico - Mexico had its credit rating raised by Fitch Ratings on the prospect that proposed legal changes will boost growth in Latin America’s second-largest economy. The peso surged to the strongest level since August 2011.

Fitch increased the rating to BBB+, the third-lowest investment grade level, from BBB, putting it in line with Moody’s Investors Service’s Baa1 rating. The move reverses a cut that Fitch carried out in November 2009, when falling oil output and a recession curbed tax revenue.

Fitch said in a statement that the increase reflects Mexico’s economic resilience and that it sees “greater than anticipated commitment of the new administration and Congress to pass structural reforms.” President Enrique Pena Nieto, who took office in December, has pledged to push through legal changes to boost tax collection and open the state-controlled energy industry to more private investment.

U.K. - Shares in London soared to another five year high on Tuesday as the FTSE 100 index played catch up after the May Day bank holiday.

The blue chip index climbed as high as 6,563.35 in the middle of the afternoon carrying on Friday's rally after better than expected job creation figures from the U.S. revealed unemployment fell to 7.5%. Aside from its recent rally it has not been above 6500 in the last five years. The FTSE was last above 6550 in the first week of December 2007. The next nearest high would require the index to jump by 100 points to 6661.30 which was achieved before the financial crisis had taken hold in the third week of October 2007.

Commodities - Gold futures posted the biggest gain in almost two weeks as demand for bars and jewellery increased in India and China, the world’s largest consumers of the metal.

Imports by China from Hong Kong more than doubled to an all-time high in March, Hong Kong government data showed on Wednesday. India’s purchases are set to top 100 metric tons in May for the second straight month, according to India Pvt., a bullion refiner. Last month, gold had the biggest two-day drop in 33 years, slumping into a bear market, although subsequently climbed 12% from a 26-month low on April 16.

“The jump in prices was mainly on reports of strong physical buying from India and China,” Michael Smith, the president of T&K Futures & Options Inc. “Imports by China in April may have been even higher than in March.”

Spotlight on: Cyclical stocks start to outperform, suggesting more room for market growth

Cyclical stocks are starting to outperform their defensive peers, suggesting the ongoing rally could be extended even further.

The uplift which has boosted world stockmarkets since the start of the year has been dominated by defensive sectors such as healthcare rather than by financials and other cyclicals, that would typically lead market rally.

The S&P 500 Healthcare sector, for example, rose 23% over the opening three months of 2013 - outperforming the 18% gain in the S&P 500 Financials sector.

However, defensives’ outperformance appears to have moderated in the weeks since, with U.S. financials rising 4.2% in the first eight days of May against a 1.6% increase in healthcare.

BlackRock chief investment strategist Russ Koesterich adds: “Some of the more expensive defensive sectors of the market such as the utilities sector are underperforming, while the technology sector has experienced better results and still looks inexpensive.”

In the UK, banks have so far outperformed pharmaceuticals during May. The FTSE All-Share Banks sector is up 13.9% year to date, against the FTSE All Share Pharmaceuticals and Biotechnology sector’s 21%.

But over the course of May so far, banks have firmed 3.3% while pharmaceuticals have dropped by 0.8%.

Forex.com research director Kathleen Brooks says: “Even though the global economic backdrop is shaky, investors are still piling into equities. Even more interestingly, the cyclical, or risky, sectors of the S&P 500 are starting to outperform the defensive sectors.

“When this happens it suggests two things: investors are more confident and the markets may see another leg higher.”

However, Brooks notes that economic data needs to continue to improve if cyclical areas are to continue their bull run.

Economic Summary for the week ended 2nd May 2013

U.S. - Big moves in the technology and materials sectors helped the S&P 500 close at its highest ever level on Monday.

The index rose 0.7% to 1,593.61, eclipsing its earlier record close set on 11 April this year. The benchmark has now risen by more than 12% in the last six months.

Apple was among the big movers amid rumours its much-anticipated iPhone 5S could hit shelves as early as this summer, months ahead of a forecast autumn release.

U.S. stocks had slipped towards the end of last week following data that showed the U.S. economy had grown at a weaker than expected pace.

China - China has overtaken the U.S. as the world's biggest market for personal computers, according to a market data report.

Research by the consultants IHS said PC shipments to the country rose to 69 million units in 2012.

The U.S. was the largest market up until 2011. Last year, it had orders for 66 million units. China is also the world's biggest internet market, with more than 500 million users.

Laptops are the fastest rising sector in developed markets and have overtaken PCs, but in China the sale of desktops and laptops is evenly split.

The Chinese government is investing heavily in computer infrastructure, and plans to spend around 40 trillion yuan ($6.4tn) building rural infrastructure in the next 10 years.

Japan - Japan’s Topix Index rose on Tuesday, capping its best month in 14 years, as brokerages led the advance after Nomura’s quarterly profit more-than-tripled to the highest in seven years.

“We can expect some profit growth in domestic shares tied to government stimulus measures, if not as much as in exporters,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which manages about 10.2 trillion yen ($104 billion) in assets. “We may see a correction in Japanese stocks any time, and I don’t think the stocks are cheap in terms of valuation.”

Asia - The International Monetary Fund (IMF) has warned strong capital inflows into Asia have increased the risks from rapid credit growth and rising asset prices.

In its annual report on Asia, the IMF was optimistic about the region's economy, which it expects to lead a "global three-speed recovery" with growth of 5.75% this year, according to the Financial Times.

However, the IMF urged policymakers to "stand ready to respond early and decisively to any prospective risks of overheating", amid widening financial imbalances in certain economies.

The IMF said pressures caused by capital inflows could build if so-called ‘Abenomics’ has the desired impact on the Japanese economy.

Europe - Unemployment in the eurozone has surged to a fresh record high, while inflation has fallen to a three-year low, boosting expectations that the European Central Bank will cut interest rates.

Unemployment in the 17 countries using the euro hit 12.1% in March, up from February's 12%, according to official figures from Eurostat.

A Reuters survey last week found that a majority of economists expect the European Central Bank (ECB) to cut the bank's main refinancing rate by 25 basis points to a record low of 0.5%.

If the ECB was to cut rates, it would mark its first reduction since July last year.

Emerging Markets - Emerging stocks rallied to a one-month high this week, led by technology shares, as investors speculated central bank stimulus will boost demand for riskier assets. Russian stocks rose for the first time in four days on Monday.

“Monetary policies will remain on easing mode,” Vattana Vongseenin, chief executive officer at Phillip Asset Management Co., which oversees about $24 million of assets, said in Bangkok. “Low interest rates and high liquidity will continue to make equity investments attractive.”

Eight out of 10 groups in the MSCI Emerging Markets Index rose as a measure of technology stocks added 1.9%. The broad gauge has lost 2% this year, compared with a 9.7% increase in the MSCI World Index of developed-country stocks.

Commodities - Surging demand for gold from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years as the biggest price slump in three decades lures consumers, according to MKS (Switzerland) SA.

Premiums paid by wholesalers and bulk buyers in Dubai to secure a 1 kilogram bar of bullion are being quoted between $6 an ounce and $9 an ounce over the London cash price, said Frederic Panizzutti, global head of marketing and sales at the Swiss-based bullion refiner.

“Physical demand has been tremendous in a way I haven’t seen for a number of years,” said Jeffrey Rhodes, global head of precious metals at INTL FCStone Inc., who’s worked in the industry for more than three decades. “The price collapse prompted a physical gold rush and the evidence of the extent of that is the prolonged period of high premiums that we’ve seen.

Spotlight on: Schroders urge calm over China

Schroders head of global and international equities Virginie Maisonneuve remains focused on the long term outlook for China, urging investors not to read too much into data taken from a single quarter.

Recent economic data from China showed GDP grew by 7.7% in the first quarter, just short of the expected 8%, sparking a panic across markets last week.

However Maisonneuve argues alternatively that, “markets should look at China’s longer-term picture in light of the new government, and not overly focus on one quarter’s data.”

She describes the recent slowing in China as a “sticking point” also seen in weaker than expected data to come from America, which does not take away from the fact both economies are “heading in the right direction.”

She adds: “While the numbers show a moderate slowdown, we are not concerned. One-off factors have had a significant impact, such as weakness in food and catering as the anti-corruption campaign curtails business functions.”

Maisonneuve goes further to say that China’s economic figures also show more positive signs. She says: “Digging into the detail reveals positives such as the fourth consecutive gain in the services sector – this is encouraging given China’s need to re-balance its economy.”

The new leadership in China must be also allowed time for its plans to take effect, says Maisonneuve. She also notes that it is currently in the process of reviewing areas of reforms extending across state-owned-enterprises, fiscal policy and social security.

She adds: “As the country adjusts to its size it must focus on quality growth to avoid the pitfalls of over- investment and misallocation of capital. The upcoming structural reforms are therefore key.”

Although Maisonneuve does not expect growth in China to return to double digits, it should pick up over the next few quarters, as policy measures “ramp up” and boost infrastructure spending.

Further growth should also be aided by the property sector and investment in the manufacturing sector, following 18% profit growth.

Maisonneuve stresses that in the medium term, “the key to understanding China’s growth potential is to assess whether investment will take place in areas where it is needed and efficient.

“In this environment, and provided the U.S. and Japan continue to provide support, any weakness in the global equity markets should be used to accumulate positions, especially for funds which have benefitted in the past from a healthy allocation to bonds.”

Economic Summary for the week ended 27th April 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Spotlight on: Three investment themes shaping markets in 2013

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

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

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

Stay overweight equities

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

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

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

Make sure you have diverse bond exposure

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

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

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

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

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

Don’t ignore the emerging markets

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

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

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

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

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

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

Economic Summary for the week ended 19th April 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Spotlight on: Goldman Sachs backs Asia

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

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

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

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

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

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

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

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

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

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