Economic Summary for the week ended 19th April 2014

Global - The growth of global commerce will pick up speed this year and next, says the World Trade Organization (WTO). Trade will grow by a "modest" 4.7% this year and by 5.3% in 2015, says the WTO.

Next year's figure, if correct, would be in line with the average growth rate in world trade over the last 20 years.

These forecasts are consistent with other figures that show the world economy is gradually recovering from the financial crisis. There have been some sharp swings in global commerce since the onset of the crisis.

In 2009, for example, trade in goods declined by 12% and bounced back by 14% the following year.

China - China's economy expanded by 7.4% in the first quarter of the year, better than many were expecting. But it is a slowdown from 7.7% growth in the final quarter of last year.

Other data released with the gross domestic product (GDP) figure showed industrial output rising 8.8% in March from one year ago.

Retail sales for the month of March spiked by 12.2%, underscoring China's efforts to boost economic growth via domestic consumption. Last year China set its growth target for 2014 at 7.5%, part of efforts to stabilise the economy after years of fast-paced expansion.

China's growth data is closely watched around the region. A slowdown could damage Asian economies, especially those which export commodities and industrial components to the world's second largest economy.

Russia - The Russian economy may see zero growth this year because of the Ukraine crisis, Russia's finance minister has admitted.

The minister, Anton Siluanov, warned the country's economy faced "the most difficult conditions since the 2008 crisis", Russian news agencies said.

Mr Siluanov said Russia had already seen capital flight of $63bn in the first three months of 2014. Russia's annexation of Crimea is also set to increase state spending.

Mr Siluanov told a government meeting: "GDP growth is estimated as rather low, 0.5%. Perhaps it will be around zero."

China - The U.S. has told China that its currency must be allowed to rise if it and the global economy are to see stable growth.

The U.S. Treasury's twice-yearly report to policymakers says the yuan is "significantly undervalued".

Unlike the euro and the dollar, the value of the yuan is not set by the market but is kept within certain limits of other world currencies.

The U.S. has long argued that the bands are set too low, making Chinese goods cheaper on the world market.

China had allowed the yuan - also known as the renminbi - to rise, but the report said this had not gone far enough. It also noted that "China has continued large-scale purchases of foreign exchange in the first quarter of this year, despite having accumulated $3.8tn in reserves, which are excessive by any measure."

U.S. – U.S. retail sales saw their biggest gain in 18 months in March, according to official figures.

It is a further sign that the economy is shrugging off the effects of the third-coldest winter on record, which affected economic activity.

Retailers said sales were up 1.1% last month, the biggest rise since September 2012 and beating analysts' forecasts. In addition, sales growth in February was revised up to 0.7% from an initial estimate of 0.3%.

Retail sales totalled $433.9bn in March, 3.8% higher than March 2013.

"Rising wealth, shrinking debt burdens and improving labour markets are helping American shoppers shake off the winter blues," said Sal Guatieri, economist at BMO Capital Markets.

Sectors - Goldman Sachs has sought to reassure clients spooked by the recent falls in tech stocks, saying the U.S. is unlikely to suffer a 2000-style crash.

Last Thursday, the tech-focussed Nasdaq fell 3.1%, its worst single-day performance since 2011. Shares including Apple and Google all retreated from highs, taking many stocks into negative returns year-to-date.

But in a note, Goldman analyst David Costin said valuations were at more sensible levels than in the previous tech bubble in 2000.

“We believe the differences between 2000 and today are more important than the similarities, and the recent momentum drawdown is unlikely to precipitate a more extensive fall in share prices,” he said.

Trends - The sell-off in global markets might not end in a 10 to 15percent correction in the spring, but investors should expect one of this magnitude in the latter half of the year, according to Bank of America Merrill Lynch.

An analyst note from the group predicts that the weakness currently blighting stockmarkets will start to reverse later this month as investors return to areas that have sold off over 2014 so far.

The catalysts for this is likely to be a stronger outlook for the U.S. economy, the reluctance of Chinese authorities to tighten policy and the unwinding of “extreme positions” that drove the first quarter’s reversal in markets.

That said, the bank’s analysts forecast a bigger correction for markets in the autumn of 2014 as attention turns back to the U.S. Federal Reserve and the eventual timing of its first rate rise.

“Improvement in growth expectations should benefit large-cap, value cyclical stocks such as Japan and the Dow Jones, especially as Fed rhetoric has seen overzealous positioning purged,” the note says.

Spotlight on: Time to despair about China? Hard landing fears could be overblown

China has posted better-than-expected growth figures for the opening quarter of 2014, leading some to question whether fears of hard landing in the world’s second largest economy have been unrealistic.

Data from China’s National Bureau of Statistics shows the country’s gross domestic product expanded by 7.4percent in the three months to the end of March, when compared with the same period in 2013.

Although this was down from the 7.7percent recorded in the final three months of 2013, the rate was higher than the 7.2percent forecast by analysts. At 7.4percent, growth is at its slowest since the third quarter of 2012.

Investor sentiment towards China has taken a beating over recent months after concerns mounted that the economy would go into a so-called hard landing. The Bank of America Merrill Lynch Fund Managers Survey for March showed this has recently improved, with the balance of asset allocators expecting the economy to weaken moving from 47percent to 34percent.

Schroders emerging market economist Craig Botham expect Chinese growth to slow further in the coming months.

“Financing conditions remain tight and the property market looks soft, and there’s not yet any obvious positive offset. Hopes of stimulus are overblown as we don’t expect to see more than minor measures aimed at supporting, not accelerating, growth,” Botham says.

“At this point the government seems comfortable with the growth rate; major stimulus was ruled out last week, most likely in full knowledge of the first quarter growth numbers. Headwinds will continue to slow China’s dash for growth over the rest of this year.”

Capital Economics China economists Qinwei Wang and Julian Evans-Pritchard say today’s GDP figures strengthen the argument that fears over a Chinese hard landing are “overdone”.

“The economy is likely to weaken further on the back of slowing credit and property investment,” they write in a note.

“However, with consumption holding up relatively well, export demand warming and infrastructure investment possibly bottoming out, a sharp slowdown should be avoided. This makes the stimulus that many are expecting less likely.”

Wang and Evans-Pritchard point out that activity data, including industrial production and the output of electricity and cement, was “relatively upbeat” for Match and add to evidence that the country will be able to avoid a hard landing.

Capital Economics predicts that the Chinese economy will grow by 7.3percent in 2014.

Invesco Perpetual head of Asian equities Stuart Parks identifies a critical question for China as whether it can successfully move away from its reliance on credit-fuelled investment towards a more consumption-based growth model.

“Last November’s announcement of an ambitious new reform agenda gave us grounds for optimism - particularly initiatives focused on allowing market forces a more ‘decisive’ role in the allocation of resources, improving capital allocation and shifting income towards households,” he says.

“The Party leadership appeared to go out of its way to explain why wide-ranging reform is needed and we believe there is real potential for meaningful change in the medium term. The critical question is whether the authorities are prepared to let growth drop below their 7.5percent growth target as they try and implement reforms. My chief concern is that they are not prepared to make this potentially painful adjustment, preferring instead to try and smooth the transition.”

Parks adds that markets are unlikely to react positively until China starts to make solid progress in this reform agenda, which includes measures to allow the market to play a bigger role in the economy and permit the private sector to compete freely with state-owned enterprises.

“Until we see evidence of reforms, scepticism over China’s resolve to rebalance its economy and ability to control credit growth will remain a headwind for markets in the region. However, China has proven in the past that it can change quickly when challenged and there have been encouraging developments in other economies across the region,” he says.

“In our view, now is not the time to despair about China and the region in general as we believe that very little hope is being reflected in market valuations. Earnings growth expectations of 10percent for the region in 2014 look achievable to us and we are still able to find what we consider to be good-quality companies at attractive valuations.”

Economic Summary for the week ended 4th April 2014

Emerging Markets - Emerging market equities have posted more than a week of straight gains, allowing the asset class to reverse the loss seen over 2014 so far.

The MSCI Emerging Markets Index has risen for nine days in row, advancing 0.2%. This means the index is heading for its longest running streak since January 2013.

FE Analytics shows the MSCI Emerging Markets Index is down just 0.25% over the year to date. It fell almost 6.6% between the start of the year and 14 March but has risen by close to 6.8% since then.

The move back to emerging markets has been prompted by speculation that the Chinese authorities will move to stimulate the world’s second largest economy, which is showing signs of slowing, and data suggesting that economic activity is picking up in the U.S.

U.S. - Growth in U.S. manufacturing accelerated in March from the previous month.

The Institute for Supply Management's growth index rose to 53.7 from 53.2 in February. A reading above 50 indicates expansion. Manufacturing was spurred on by factories' productivity as they recovered from the severe winter weather.

Meanwhile, U.S. construction spending also rose in February compared with January, said the Commerce Department.

Japan - Japan has raised its consumption tax for the first time in 17 years in an attempt to rein in public debt. From Tuesday, sales tax will increase from 5% to 8%. It will rise again, to 10%, in October 2015.

Prime Minister Shinzo Abe said he would continue to take "necessary action" to address livelihood issues and keep Japan's economy on track.

The stepped tax increases are aimed at covering rising social welfare costs linked to Japan's ageing population. Japan currently has one of the lowest birth rates in the world. It also has the world's highest ratio of elderly to young people, raising serious concerns about future economic growth.

Trends - Investors fled Asian and North American funds this week, with outflows hitting record highs during the month of February, according to the latest figures from the U.K’s Investment Management Association (IMA).

The IMA monthly stats show some $156m was pulled from Asian equities over the course of the month while U.S. equity funds recorded $174m outflows over the same period. Both figures mark record outflows for each region.

Overall equities continued to be the best-selling asset class for the eleventh consecutive month in February with UK equity funds taking the top spot as the most popular region after recording net retail sales of $334m.

Russia - Funds investing in Russian and eastern European equities posted the worst performance over the opening three months of 2014 as the Ukraine crisis cast a shadow over the asset class.

Data from FE Analytics shows all ten of the first quarter’s worst performing funds specialise in Russian, emerging European or eastern European equities and all ten have lost money over the period.

Investors took flight from Russia after the country intervened in Crimea, eventually leading to the province voting to break with Ukraine and join the Russian Federation. This led to sanctions being placed on Russia by the E.U. and the U.S., with the situation still impacting market sentiment.

Asia - Stockmarkets in Asia have jumped after the Chinese government moved to ease the slowdown playing out in the world’s second largest economy.

A statement by the Chinese cabinet office says taxes will be cut for small businesses while the construction of railway lines across the country will be sped up.

“We will find innovative ways including fiscal and financial methods to … steady economic growth,” the statement added.

Both measures had already been announced as part of China’s economic plan for 2014. However, they had not previously be packaged together as a tool for boosting growth.

The move comes after China issued a series of disappointing economic reports, which heightened fears that the country is heading towards a so-called hard landing.

Spotlight on: Services sector boom to drive Emerging Market growth

Emerging market investors must take a closer look at the services being offered to developing world consumers if they are to unlock the real potential of the consumption story, according to Mark Mobius.

Franklin Templeton’s emerging markets veteran said service-based businesses are primed for rapid expansion.

He said this would be from a relatively low base and pointed to China, Nigeria and Indonesia as three examples of growing markets where service sector companies have limited penetration.

‘China has an unusually small share of services that comprises its GDP at 45% in 2012, the share was equal to the size of the country’s industrial sector - but it is not unique.’

‘In Indonesia, for example, services represented only 39% of GDP in 2012, while in Nigeria the figure was just 26%.’

Mobius said mobile services, such as telecoms and the use of smartphones, was an area of particular interest and expected further developments in both frontier and emerging markets.

‘Telecommunications companies have seen strong growth across emerging and frontier markets, with mobile services being particularly strong.’

‘Customers in many of these markets, especially in Africa, have been enthusiastic adopters of mobile technology, effectively bypassing traditional landline systems.’

This theme coincides with the growth of internet use for online retailing and money transfers as well, he said.

‘With legacy brick-and-mortar assets relatively scarce in many emerging markets, adoption of Internet-based trading has been rapid in many service industries.’

‘Latin American Internet trading platforms, Chinese online travel and ticketing businesses and African mobile money transfer businesses are examples of traditional service businesses adapting themselves to the online age.’

Mobius said Chinese-language internet portals have seen dramatic growth, as search engines and other value-added service businesses have benefited from the Chinese government’s reluctance to admit their U.S. equivalents.

‘Chinese consumers have been highly active adopters of mobile internet services and games, which in our view have provided a potentially large revenue stream to these businesses.’

Economic Summary for the week ended 1st March 2014

Markets - The FTSE 100 reached a 14-year high on Monday, while the S&P 500 hit a new record level, lifted by M&A activity.

The UK's leading index closed at 6,865.86, up 0.4% on the day and within striking distance of the all-time closing high of 6,930 reached on 30 December 1999, the peak of the dotcom boom.

Monday's close was the second-highest ever recorded by the index and sets the stage for a new record high.

The London market was lifted by a rally on Wall Street, where the S&P 500 hit a record high before dropping back to close 0.62% up at 1,847.

Meanwhile, Facebook founder Mark Zuckerberg addressed a conference on Monday, describing recent acquisition Whatsapp as a ‘bargain’ at the $19bn he paid for it.

China - China home prices have suggested a potential cooling-off in the housing sector at the start of this year.

Average new home prices in China's 70 major cities rose 9.6% in January from one year ago, easing from December's 9.9% increase.

This is the first slowdown in the rate of price increases in 14 months, since November 2012. Home prices in top-tier cities Beijing and Shanghai also rose in January, but at a slower rate from December.

Property purchases remain a popular investment choice in China, and that kept prices rising in 2013.

But the momentum slowed down late last year, after the People's Bank of China, the central bank, progressively tightened monetary conditions to rein in excessive lending growth.

Germany - Germany's economic growth in the final three months of last year was largely driven by overseas trade, according to official statistics.

The German economy grew by 0.4% in the quarter compared with the third quarter, the German statistics agency said, confirming its earlier estimate.

Despite the weak domestic demand at the end of last year, economists said they now expected it to pick up.

"High job security and rising incomes as well as very low inflation have been boosting consumer confidence to record highs lately and should translate into stronger household spending growth in 2014," said Christian Schulz at Berenberg Bank.

Trends - The value of dividends paid by the world’s listed businesses has exceeded $1trn for the first time, according to research by Henderson Global Investors.

The asset management house’s Global Dividend Index reveals that global dividend payouts reached a record $1.03trn during 2013. This is an increase of $310bn over the past five years.

Payouts by UK companies have been in line with the global average, rising by 39percent since 2009. However, Henderson notes that the UK’s share of the global total is “disproportionately large” compared with the size of its economy, at 11percent.

Firms in the U.S. have lifted their dividends by 49percent over the past five years, with the country being the largest source of dividend income with payouts worth a collective $301.9bn.

Emerging markets now make up $1 in every $7 of global payouts. Businesses in these countries doubled dividends between 2009 and 2011 but growth has stalled in more recent years.

Brazil - Brazil’s central bank halved the pace of key rate increases on Wednesday, signaling the end of its tightening cycle is near as policy makers seek to tame inflation without further jeopardizing growth.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic rate to 10.75percent from 10.5percent.

Brazil’s central bank in the last eight meetings has lifted the key rate by 350 basis points from a record 7.25percent. Brazil has the highest benchmark borrowing costs of central banks that set interest rates in Latin America, according to data compiled by Bloomberg.

Economies - Nations have passed almost 500 laws to tackle climate change, with emerging economies led by Mexico and China making the most progress last year, a study by Globe International found.

A total of 62 out of the 66 countries examined have passed or are working on “significant” climate or energy-related laws, Globe said in a report this week. Venezuela, the United Arab Emirates, Saudi Arabia and Canada lack “flagship” legislation, according to the group, an alliance of global lawmakers.

Progress in passing laws is important in the battle to cut polluting greenhouse gases because the nations studied cover 88percent of world emissions. Domestic action is crucial to help secure an international agreement to fight global warming because it helps build trust between countries, Caroline Spelman, a U.K. lawmaker, said in an interview.

Frontier Markets - Egyptian stocks are displaying signs that investors favor a return to a military-backed rule to end three years of political turmoil and revive an economy stuck in its worst slump in two decades.

Share volume is up 159percent this year over 2013’s daily average, according to data compiled by Bloomberg, coinciding with voters’ approval of a new constitution and the military’s endorsement of Defense Minister Abdel-Fattah al-Seesi’s possible presidential bid. The benchmark EGX 30 Index rose 18percent in 2014, the fifth-best performance of more than 90 gauges tracked by Bloomberg.

Three years after protesters ended President Hosni Mubarak’s 29-year rule in a popular revolt that left hundreds dead and led to the slowest economic growth since 1992, local investors are piling back into Egyptian stocks amid speculation another military-backed ruler can restore order. The EGX 30 is trading near the highest since 2008, while volatility of the index fell last week to the lowest since before the start of the 2011 uprising.

Spotlight on: Is the recent gold rally sustainable?

The gold price has rebounded off lows seen at the end of last year, having endured one of its worst ever years in performance terms, but is the rally about to run out of steam?

Last year the precious metal tumbled 28% in value, its worst year since 1981, as the U.S. economy recovered apace, inflation remained subdued, and the crisis in Europe abated.

So far this year it has recovered some lost ground as fears over emerging markets widening deficits spooked investors.

Since closing at $1,202 at the end of 2013, it has climbed over 10%, and currently trades at $1,342.

However, a number of managers are dubious about adding to their positions, fearing the asset class is unlikely to move much higher from here in a world which has largely healed form the 2008 crisis.

Trevor Greetham, Fidelity's asset allocation director and manager of its multi-asset range, said the positive outlook for the U.S. dollar, coupled with growing optimism about global growth, makes the recent rally look unsustainable.

"We had a ten-year bear market in the U.S. dollar, but now we could see a bull run lasting as much as five years, so I do not think the run higher is sustainable.

"If you wind the clock forward, interest rates could be at 5% in a few years time and, in that environment, people will question why they are holding gold, which does not yield anything."

Greetham warned investors buying in now that the correction already seen last year could have much further to run.

"There is no real rock-bottom price for gold, or commodities, and although there are bargain hunters out there after such a big sell-off, we think the trend is negative from here," he said.

"We might only be a third of the way through the correction in gold."

Greetham said gold could even witness a repeat of the 20-year decline in gold seen after the last boom phase in the '70s ended. Henderson's multi-asset manager James de Bunsen agreed the outlook is questionable.

Although he sees a floor for the precious metal at around $1,200, unlike Greetham, the manager said he does not expect to make anything from holding gold this year.

"We have topped it up a bit but nothing meaningful, and we would estimate a 0% expected return from gold for this year," he said.

De Bunsen said unless U.S. growth concerns return, he does see the asset class rocketing this year.

However, not all managers have the same view. Troy's Sebastian Lyon remains a fan of the asset class via his £2.2bn Trojan fund, although he noted its failure to produce positive returns last year.

He said recently: "Liquidity remains our protection against and ammunition in falling markets. Our gold and index-linked bond insurance policies became cheaper last year, despite the risks they protect us against not diminishing."

Economic Summary for the week ended 14th Feb 2014

China - China's trade surplus jumped to $31.9bn in January, easing concerns that the world's second-largest economy may be stuck in a slowdown.

The figure was up 14% from a year earlier and stronger than forecasts for a $23.7bn surplus.

Imports rose by 10% from a year earlier to $175.27bn - led by record shipments of crude oil, iron ore and copper.

Exports increased by 10.6% from a year earlier, far faster than analysts' forecasts, to $207.13bn.

The positive trade figures also add to expectations China will overtake the U.S. as the world's largest trading nation this year.

U.S. - The U.S. House of Representatives has passed an increase in the government's debt limit, after the Republicans gave up on their attempt to win concessions from the Democrats in return.

The House voted 221-201 to waive the $17.2tn debt limit for just over a year, with only 28 Republicans joining most of the Democrats.

Officials had said the U.S. could breach the debt limit by the end of February. The White House and others had warned of calamity if the U.S. defaulted.

The bill, when signed into law by President Barack Obama, will enable the U.S. government to borrow money to fund its budget obligations and debt service.

Greece - Greece is looking to return to international bond markets, in a bid to reassure international investors about its economic health.

The country, which defaulted in 2012, has recently seen yields on its 10-year bonds drop to just 7.6%, their lowest since May 2010, when the country’s debt problems heralded the start of the eurozone crisis.

In an interview with the Financial Times, Greek debt management office head Stelios Papadopoulos said: “It is the economic future of Greece, not its past, that we believe will be the key factor as institutional investors consider Greece’s return to the capital markets.”

He pointed out that the current debt servicing requirements of Greece are low and are expected to improve through the expected changes to its bailout terms.

In addition, he said the country will maintain a current account surplus “that will surprise on the upside”.

Papadopoulos added: “These are features that most countries, developed and emerging, would find enviable.”

Outlook - Global assets under management will hit $101.7trn in six years’ time, a 60% rise on 2012, according to PricewaterhouseCoopers.

The ‘Asset Management 2020: A Brave New World’ report predicts the $37.8trn boost would mean an annually compounding growth rate of 6% on 2012’s $63.9trn of assets.

PwC says the investments in the developing economies of South America, Asia, Africa and Middle East are likely to grow much faster than the developing nations. However, the majority of global assets will remain in the U.S. and Europe.

PwC Asset Management 2020 leader Rob Mellor says the turbulence of the past few years has prevented many asset management firms from bringing the “future into focus”.

He says: “But the industry stands on the precipice of a number of fundamental shifts that will shape the future of the asset management industry.”

Trends - Investors pulled record sums of money out of equity funds across the globe last week, with U.S. stock portfolios being hit by a significant “mini rotation” into bonds.

The week ending 5 February 2014 saw markets continue to wrestle with concerns over the shift in U.S. monetary policy, China’s slower growth and a cautious tone in the latest corporate earnings forecasts.

The week came to a close with a record $28.3bn redeemed from equity funds tracked by EPFR Global. Bond funds benefited from net inflows of $14.7bn - another new weekly record.

Brewin Dolphin head of fund management Ben Gutteridge comments: “With the Chinese slowdown and tapering of U.S. stimulus already well understood by the market, it would appear the recent weakness in U.S. economic data was the catalyst for the selloff in global stock markets.

Spotlight on: A ‘healthy’ correction for Japan?

Japanese equities have experienced a weak start to 2014 but with investors remaining positive on the outlook for valuations, corporate profits and the long-term structural reforms in Japan, could this be a “healthy” correction?

As with most developed markets, 2014 has been tough so far for Japan with the latest piece of bad news arriving last week when the Nikkei index fell 4%, bringing total losses year to date to 14%. Japanese shares have recovered somewhat since but the market remains down 9.66% since the start of the 2014.

This recent correction in Japanese equities can be attributed to a number of short-term influences from wider negative market sentiment and Japan’s strengthening currency, according to Invesco Perpetual head of Japanese equities Paul Chesson.

“There are a number of short term influences that have contributed to the market’s recent weakness, including a strengthening of the yen, general concerns about the impact of QE tapering by the U.S. Federal Reserve and volatility in some emerging market currencies and equity markets,“ he says.

Psigma Investment Management chief investment officer Tom Becket argues that the recent sell-off was also triggered by “hot money” pulling out of Japanese equities.

Becket believes that this has actually helped to remove ”some of the froth from the trade” making this particular correction a “healthy” one for the Japanese market.

He adds: “The two main knocks to Japan’s market have come from over-confidence of investors, leading to an overdue and healthy correction, and the strength of the yen.

“As you will have read in the myriad of comments over the last few months, our once lonely position in Japanese equities had become very crowded; hopefully the recent sell-off has blown some of the froth from the trade and knocked out some of the ’hot money’ investors.”

Industry experts also agree that with structural reforms in the Japanese economy under prime minister Shinzo Aber’s leadership continuing to make slow but steady progress, the longer-term outlook for Japan also remains positive.

Fidelity Worldwide Investment head of Japanese equities Alex Treves says: “Japan’s recovery continues to proceed steadily and the reflation theme remains on course.

”Prime Minister Abe will consolidate his policy agenda in the coming months and provide greater clarity on his multi-year roadmap for reforming Japan. It is important to be realistic about the likelihood of a sudden transformation, but equally the prospect of a long-term improvement in Japan’s outlook is very much alive.”

The Japanese equity team at Fidelity have therefore used the recent correction “as an opportunity to selectively add on weakness” and actively promote “buy on dip ideas”, according to Treves.

Japan’s progress in terms of earnings growth also “compares favourably” against other major markets, he adds.

Chesson goes further to argue that this earnings growth advantage also makes Japanese equities appear attractive when looking at valuations, something which is a “primary focus” for the team at Invesco.

He says: “At the start of the year the Topix was trading at around 15x consensus earnings to the end of the fiscal year in March 2014. This was roughly in line with other developed markets and with corporate profits in Japan growing more quickly than for their developed market peers we considered this valuation level to be attractive.

“The fiscal third quarter earnings season is currently in progress and in aggregate profits are broadly in line with expectations.”

Economic Summary for the week ended 7th Feb 2014

U.S. - Janet Yellen has been sworn in as chair of the Federal Reserve, the US central bank, replacing Ben Bernanke in the role. She is the first woman to hold the post at the Washington-based bank.

A respected economist, her main task will be managing the winding down of the bank's bond-buying stimulus programme without damaging her country's recovering economy.

Ms Yellen, 67, had been Mr Bernanke's deputy for three years.

U.S. - US Treasury secretary Jack Lew has issued a warning that the US could default on its debt by the end of February.

The debt ceiling was originally suspended by the US government back in October 2013 in order to end the US government shutdown but the $16.7bn (£10.2bn) limit is set to be reinstated this Friday.

Speaking yesterday in Washington, Lew warned that the US will not be able to meet debts unless Congress increases its borrowing limit. “Without borrowing authority, at some point very soon, it would not be possible to meet all of the obligations of the federal government,” he said.

He does acknowledge that the Treasury could use emerging measures, such as accounting mechanisms, as a way of paying US debts until the end of February following the reinstatement of the limit this week.

Japan - Japan's consumer prices have risen at their fastest pace in more than five years, marking more progress in the country's battle against deflation.

Data showed that core consumer prices, excluding fresh food, rose by 1.3% in December from a year earlier, which was higher than market forecasts.

The latest figures give a boost to Prime Minister Shinzo Abe, who has pledged to end 15 years of falling prices and revive economic growth. Japanese stocks rose by nearly 1%.

Investors were also cheered by Japan's employment and manufacturing data released on Friday, which provided more evidence that Asia's second-biggest economy is recovering.

Europe - Eurozone manufacturing grew strongly in January on the back of new orders, a closely-watched business survey suggests, with Germany leading the way.

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 54 in January, its strongest month since May 2011 - a figure above 50 indicates growth.

This compares to December's figure of 52.7 and reflects the overall pickup in eurozone economic activity.

But France failed to break the 50 mark.

"The eurozone manufacturing recovery gained significant further momentum in January, with final PMI readings for Germany, France and the region as a whole all exceeding the earlier flash estimates," said Chris Williamson, Markit's chief economist.

Trends - Adviser sentiment towards emerging market investment has increased significantly over the last quarter, according to the latest Baring Asset Management Investment Barometer.

The fund manager said two in five (41%) advisers think their clients should increase their emerging market equity exposure. This is up eight percentage points from the previous barometer in September last year when the figure stood at 33%.

The quarterly research also found only 17% of IFAs think clients should cut back on emerging market equity exposure, down from a quarter in the previous survey.

Some 70% are either ‘very' or ‘quite' favourable towards emerging market equities - with only 3% ‘very' unfavourable.

This comes despite recent figures showing an economic slowdown in China. The country's GDP growth slowed to a 14-year low, according to latest economic figures.

Just over a third (35%) of IFAs believe slowing growth in China will be the biggest global macro-economic challenge to investment growth in the next six months - down from more than half (55%) in the previous Barometer and from 38% in the respective study in 2012.

Spotlight on: Emerging market sell-off

The latest round of selling in emerging market economies saw the MSCI EM index fall 6.6% in January. But which emerging markets suffered the worst of the sell-off?

The ongoing contagion in emerging markets has dragged down many indices - with developed as well as emerging markets all falling.

Last week, following a sharp depreciation in emerging market currencies, central banks responded with a series of rate hikes to prevent further slides.

Rather than offset currency falls, the hikes added to the panic currently embroiling emerging economies, and helped push markets down across the board.

But nowhere suffered more than EMs last month. From fears about the impact of currency depreciation versus the US dollar, to concerns over external trade imbalances and electoral risk, the sector has seen all manner of worries raised by the investment community.

In turn equity prices have slumped, with even powerhouse economies such as China seeing their exchanges sold-down sharply.

But which economies have suffered the worst falls? Unsurprisingly, Turkey was the worst performing EM losing 13.27% in January, having aggressively hiked rates after the lira lost over 30% on the dollar last month.

South Africa, which was also forced into an interest rate rise, lost 10.1%, with Brazil, Chile and Colombia making up the rest of the bottom five.

Below is a table showing the extent of their equity market losses in January. (all indices are MSCI indices)

South Africa -10.16%

Brazil -10.77%

Chile -12.60%

Colombia -12.60%

Turkey -13.27%

But it is not all bad news. While it has been doom and gloom for many regions, there have been a few bright spots for investors across the emerging world.

A number of emerging markets protected investors' capital in January, and others even saw some positive returns.

Egypt topped the charts, returning 6.02%, while Indonesia returned 4.26% despite being one of the EM countries with a large current account deficit.

The country was helped by improved manufacturing numbers, with Indonesian banks and miners seeing upgrades from a number of investment banks.

Greece, which was reclassified as an emerging market last year, also avoided the worst of the losses, with manufacturing data out last week showing growth for the first time since August 2009.

Below are the top five performing EMs since the start of the year.

Egypt 6.02%

Indonesia 4.26%

Peru 0.29%

Phillippines 0.24%

Greece 0.17%

Economic Summary for the week ended 1st Feb 2014

U.S. - The US Federal Reserve announced a $10bn reduction in its monthly bond purchases from $75bn to $65bn in the second straight month of winding down stimulus efforts.

The central bank had been buying bonds in an effort to keep interest rates low and stimulate growth. In a statement, the Fed said that "growth in economic activity picked up" since it last met in December.

Although the move was expected, US shares still fell on the news.

The Fed left its overnight interest rate unchanged at 0% - the level it has been at since December 2008.

Global - With expectations that volatility will increase this year, BlackRock chief investment strategist Russ Koesterich stresses the need to diversify into international stocks.

After “unusually low” levels of volatility in 2013, the onset of QE tapering from the US Federal Reserve this year will likely see market volatility “climb to levels that are closer to long-term averages, according to Koesterich.

“While we still think stocks will post gains this year, those gains will be accompanied by more ups and downs,” he adds.

Against this backdrop Koesterich reinforces the need for diversification into international names, particularly within the US market.

Japan - Japan has reported a record annual trade deficit after the weak yen pushed up the cost of energy imports.

Its deficit rose to 11.5 trillion yen ($112bn) in 2013 - a 65% jump from a year ago.

Japan has seen its energy imports rise in recent years following the closure of its nuclear reactors in the aftermath of the tsunami and earthquake in 2011.

But it is having to pay more for those imports after a series of aggressive policy moves weakened the yen sharply.

The Japanese currency fell more than 20% against the US dollar between January and December last year.

Taiwan - Taiwan’s economy expanded at a faster-than-estimated pace in the fourth quarter last year, as a recovery in Europe and the U.S. boosted the island’s exports.

Gross domestic product rose 2.92% from a year earlier after increasing 1.66% in the third quarter, the statistics bureau said in a preliminary report in Taipei.

The World Bank this month raised its global growth forecasts as the easing of austerity policies in advanced economies supports their recovery. Taiwan’s finance ministry last week revised its exports figures for the fourth quarter and full year to reflect missing data, showing sales climbed 1.4% in 2013 after shrinking 2.3% the previous year.

India - India's central bank has unexpectedly raised interest rates in an attempt to rein in stubbornly high consumer prices in a crucial election year.

The Reserve Bank of India (RBI) raised the benchmark repo rate - the amount at which it charges to lend to commercial banks - to 8% from 7.75%.

The RBI said that another near-term hike was unlikely if inflation eased to a more comfortable level.

India's main gauge of inflation, the wholesale price index (WPI), rose 6.16% in December, from a year earlier. While that was a slight fall on from the previous month, the rate continues to remain an issue with the central bank.

Trends - Investors poured money into European equity funds in the third week of 2014 while continuing to shun the world’s emerging markets.

European equity fund across the globe took more than $4bn in new money during the week ending 22 January, according to fund flow data provider EPFR Global, as the move towards developed market stocks continued in force.

“Investors continue to favor regional funds over country specific ones, with Europe and Europe ex-UK regional funds accounting for three-quarters of the week’s total inflows,” EPFR Global says.

“But both UK and Spain equity funds posted weekly inflow records and investor appetite for the PIIGS markets [of Portugal, Italy, Ireland, Greece and Spain], measured in flows as a percentage of assets under management, remains strong.”

Spotlight on: Emerging markets: Not the time to be underweight this unloved asset class?

Emerging markets had a tough 2013 and events of the last week have seen them sell off even more. But should investors be cautious about being underweight emerging markets right now?

The MSCI Emerging Markets Index dropped 4.08% during 2013 after investors become worried by the impact of the Federal Reserve’s tapering on these countries and signs of slowing economic growth across the region. Over 2014 so far, the index has shed another 6.42% as currency weakness sharpened.

Fund managers plan to shun emerging markets over the coming months too. The most recent Bank of America Merrill Lynch Fund Manager Survey found that a net 28% of asset allocators say they want to be underweight emerging markets on a 12-month view.

However, others argue that investors who have gone underweight emerging markets should consider increasing their weightings to take advantage of the long-term valuation opportunities that have appeared in the space.

Iveagh chief investment officer Chris Wyllie says: “We’re not going gangbusters on emerging markets but we are saying we don’t think you should be underweight now. If you have been clever or lucky enough to be out or underweight then you should be moving back at least to neutral.”

Wyllie says the economic catalyst for a recovery in emerging markets is not yet present, although “the value is strong” and creating opportunities.

He adds: “With markets at 1.5x price-to-book, pretty much whenever you’ve bought them at that level you’ve made good returns from there.”

The CIO also points out that worries such as the devaluation of some countries’ currencies, fears of a hard landing in China and political events such as elections are “inherent risk factors” in emerging markets but seem to be spooking markets nonetheless.

“From a lot of the narrative, it sounds like this is just starting. I hear a lot of comments like ‘it has a lot worse to get yet’ or ‘it’s only just started’. Actually, this has been going on for three years, nearly four, already,” Wyllie says.

“If you look at the risk factors people are name-checking to justify still selling, even after a very pronounced period of underperformance, we don’t feel there is any fresh information to justify selling out.”

JP Morgan Asset Management global emerging markets strategist George Iwanicki says emerging markets look “tactically oversold” as investors have reacted to the Fed’s tapering as though it were full-scale monetary tightening.

He also argues that the falls in emerging market currencies which has sparked the latest sell-off could actually be a good development over the longer-term.

“As painful as it may be in the short term, it is actually very positive that the brunt of the pain from tapering is being felt through currency adjustments; this is making emerging markets more competitive as a whole,” Iwanicki says.

“Encouragingly, we are seeing central banks responding with orthodox moves like rate hikes; India, Brazil, and even Turkey raised rates. This is a key difference versus the 1990s and should reassure investors’ confidence in emerging markets.”

The strategist notes that the market seem to be concentrating on the problems in Argentina, Venezuela and Ukraine. But while the challenges facing these countries are “significant”, they are not directly relevant for equity investors.

He says: “From a stock investor perspective, we believe the emerging market earnings slowdown is largely cyclical, driven by the emerging market business cycle.

“After a prolonged growth slowdown and currency adjustment, emerging market valuations have fallen to a buy territory: price-to-book below 1.5x, emerging markets are cheap on 10-year price/earnings versus the US and the gap with Europe is rapidly diminishing.”

F&C multi-managers Gary Potter and Rob Burdett have recently started to take another look at emerging markets, and Asia in particular, after being heavily underweight the asset class in 2013.

“We think 2014 will be a transition year for emerging markets,” Potter says.

“Of course it’s hard to look at it as a bloc as you have vastly different circumstances in China to India to Brazil. The QE withdrawal in the US will continue to affect emerging markets to a point but we do think emerging markets have changed significantly for the better since the 1997 Asian crisis and the 1998 Russian crisis.”

Potter and Burdett have started to put small amounts of money back into Asia after seeing the compelling valuations present in the region, but remain underweight. This has been funded by taking profits in the US, following a strong 2013 that saw the S&P 500 rise by 29.93%. “On a price-to-book basis, some of the cheapest markets are in emerging markets,” Potter says.

“Asia has traded this low only three times in the past 30 or 40 years, I think, and if you buy Asia at this price you are definitely going to make money over the next five to 10 years.”

Economic Summary for the week ended 16th Jan 2014

U.S. - Negotiators from the US Senate and House of Representatives have agreed on a spending deal worth $1trn which reduces the risk of another government shutdown, at least until October.

The broad spending deal, which is the first the US government has agreed since 2009, details how the country’s budget will be spent and marks another move in the return to regular budgeting by Washington.

It follows a 16-day government shutdown in October last year after a standoff between Republicans and Democrats - who control the House and Senate respectively - led to legislation appropriating funds for fiscal year 2014 not being enacted.

The new deal updates the US’ spending priorities after several years of “continuing resolutions” have kept the government functioning but prevented funds from being reallocated.

Global - The global economy is at a "turning point", the World Bank has said, as it forecasts stronger growth for 2014. In its annual report on the world economy, the bank said richer countries appeared to be "finally turning a corner" after the financial crisis.

That is expected to support stronger growth in developing economies.

But it warned growth prospects "remained vulnerable" to the impact of the withdrawal of economic stimulus measures in the US. The US Federal Reserve has already begun to wind down its monthly bond-buying programme, previously set at $85bn (£52bn) a month.

There is concern this could push up global interest rates, which could affect the flow of money in and out of developing countries and lead to more volatile international financial markets.

Europe - European shares scaled fresh 5-1/2 year highs on Wednesday, buoyed by strong data and a brighter outlook for the global economy, as well as by easing regulatory concerns about euro zone banks.

Financial stocks provided the biggest boost to the FTSEurofirst 300 index after the European Central Bank said lenders will not be required to adjust sovereign debt portfolios they hold to maturity to reflect current market values.

The biggest gainers, such as Societe Generale and B P Milano, have large exposure to sovereign bonds in the region.

The sector is already up 9.3% this year. It received a boost this week when banking regulators agreed to ease regulation of balance sheets to try to avoid crimping financing for the world's economy.

"Euro zone banks had good news from Basel at the beginning of the week, and it looks like regulators are lessening the regulatory burden on the banking sector," Gerard Lane, equity strategist at Shore Capital, said.

Trends - Fund investors poured money into bond portfolios and cash while selling equities in the first full week of 2014, in contrast to the apparent start of the ‘great rotation’ at the beginning of last year.

According to fund flow data provider EPFR Global, bond funds captured a net $5.2bn of new money during the week ending 9 January, while equity funds were hit with a collective redemption of $427m. Money market funds took almost $23bn.

Within the fixed-income space, European bond funds benefited from their largest inflows since late April 2013 while US bond funds took the most money since the middle of November. Furthermore, emerging markets local currency bond funds broke a 14-week outflow streak to capture new money.

EPFR Global says: “In contrast to the first full week of 2013, when record setting flows into EPFR Global-tracked emerging market and global equity funds kicked the ‘great rotation’ narrative into high gear, the new year kicked off with bond funds posting their biggest weekly inflow since early May while equity funds recorded modest net redemptions.”

Commodities - Global demand for energy will grow at a slower pace over the next two decades, a report from the oil giant BP predicts.

BP's Energy Outlook says energy demand will rise by 41% between now and 2035 - less than the 55% growth seen over the past 23 years. It said increased fuel efficiency in developed economies was behind the predicted slowdown.

But demand from emerging economies is expected to continue to rise strongly.

Some 95% of the growth in global demand will come from developing countries, BP predicts, with China and India alone accounting for half the increase.

In contrast, energy demand in advanced economies in North America and Europe is expected to see only slow growth.

Spotlight on: Outlook for 2014

Anna Stupnytska, macro economist at Goldman Sachs Asset Management, reveals the group’s global outlook for 2014.

Euro expansion

The euro area’s expansion is poised to continue in 2014, although growth acceleration is likely to be muted, especially given weak credit growth. The material progress by the peripheral countries in improving competitiveness, and pushing through structural reform, should help reap growth benefits. We expect further rebalancing between the core and periphery to continue gradually, together with slow convergence of financial conditions within the euro area.

At the same time, the European Central Bank will need to ease policy further to combat disinflationary forces. Certainly, Germany could help the process by raising wages faster and tolerating higher inflation, but this seems unlikely.

Japan’s challenge

Japan faces a significant challenge in 2014, as it seeks to consolidate the positive growth impulse of Abenomics against the backdrop of the consumption tax hike. A fiscal package of around ¥5tn should come into force and, despite a volatile growth path, we expect Japan to grow at trend of 1.5% in 2014.

Our growth outlook points to greater divergence in monetary policy cycles, as we expect the Federal Reserve to start tapering in the first half of 2014. Interestingly, Japan’s current efforts to import inflation mean it is exporting disinflation to its trading partners, including Europe. Emerging headwinds.

After a weak 2013, we expect growth and emerging market economies to finally start picking up momentum, despite moderately higher global interest rates. However, in our view, none of the eight growth markets, for which we produce forecasts, will be able to reach their trend growth in 2014.

Progress on post-crisis structural reforms has been disappointing, and the recent sluggish growth has reflected this. Only China and Mexico have delivered good news on this front recently.

Pressures on external funding from rising rates globally, and a slower China, will nevertheless serve as headwinds going forward.

Countries with persistent current account deficits, such as Turkey, South Africa, Brazil, India, and Indonesia, are likely to feel the pressure of tighter financial conditions, especially in light of elevated inflation levels.

Moderately-paced growth in private sector credit should be a welcome support to the cycle, while, domestically, credit growth is showing signs of stabilisation in parts of Asia and Latin America. As the US and Europe accelerate, countries more tightly associated with developed market consumers, such as Korea and Mexico, should also be positioned well.

Equities or bonds?

We believe equities are best positioned to perform well in this stage of the cycle, and developed market equities are favoured. While flows into developed market equities have already been strong, we expect better corporate earnings, particularly in Europe and Japan, to drive the next leg of the equity rally.

The prospect of further easing by the Bank of Japan, coupled with domestic asset allocation shifts into riskier assets, could provide a strong impetus for the Japanese market.

The benign environment for equities should also be supportive for corporate credit spreads, although the upside could be limited by stretched valuations and, for cash bonds, higher sensitivity to the rise in US rates.

For currencies, we expect broad dollar strength, driven by wider interest rate differentials and the dollar’s relative ‘cheapness.’ In fixed income, we expect US rates to move higher overall, particularly for longer-dated instruments.

Inflation woes

While global inflation is expected to remain subdued on average, mainly driven by below-target rates in developed markets, intensifying inflationary pressures in some growth and emerging markets will make policy trade-offs more difficult.

Indonesia, Brazil, Russia, and Turkey face the prospects of tighter monetary policy as a result of unemployment being close to potential, and are likely to be more vulnerable. Once a broader growth pick-up becomes more evident, emerging market equities could be well positioned to deliver positive returns, particularly given attractive current valuations relative to developed markets.

Key risks

The main risks to our views are: US growth weakness, tighter-than-expected US monetary policy, and stress in China’s financial system. In either of the first two cases, equity markets would likely see a material sell-off in the face of either lower earnings, or the diminishing effects of loose monetary policy.

A repricing of monetary policy prospects could create a difficult environment for investors as correlations between stock and bond returns could turn positive, leaving fewer places to take shelter.

Regarding the large amount of leverage in China’s financial system, we will be watching for potential signs of stress in the banking system and real estate market. While the government’s balance sheet remains strong, unintended tightening could be particularly challenging for commodity producers and the broader growth and emerging market universe.