Economic Summary for the week ended 26th July 2013

UK Economy Shows Weak Recovery – Second quarter UK GDP growth of 0.6% may be weak but as it follows 0.3% over the first quarter, many commentators are concentrating on the fact it proves the UK economy is on a forward path.

Mouhammed Choukeir, chief investment officer at Kleinwort Benson, called the momentum from Q1 to Q2 “remarkable” considering fears of a “triple dip” recession have dominated newswires this year. Ian Kernohan, Economist at RLAM, also noted such commentary and said he hoped the debate will now move on from speculation over the potential for triple dips, to whether the weakest recovery on record is finally gathering pace.

Schroders European economist Azad Zangana said the details of the Office for National Statistics report shows almost 70% the Q2 GDP growth came from the services sector. "The estimates released today are preliminary and may be revised up or down. However, it appears that the economic recovery is broadening out with every major sub-sector making a positive contribution."

Marcus Bullus, trading director at stock brokers MB Capital, believes deep down the markets will be disappointed by the weak rate of growth shown in the Q2 figures. "0.6% is double what we had in the previous quarter but it still shows that the recovery is meek, not mind-blowing.”

He pointed out the UK still faces numerous challenges, not the least of which is static or negative wage growth, which will inhibit spending. "To achieve escape velocity, as Governor Carney refers to it, you need a strong consumer but the UK's consumers are still feeling bruised by weak confidence and rising prices.

"There's something artificial about the current resurgence of the economy. It doesn't really correlate to economic reality. It may be more of a lurch forward after years of austerity rather than the beginning of anything sustainable.”

Choukeir believes there are many aspects of this growth to indicate the recovery, while slow by historical standards, is sustainable. The UK Purchasing Managers Index (PMI) monthly survey, a leading indicator of growth, has been demonstrating expansion for each of the last three months; a first since early 2012, he noted. He went on to add that other surveys show exports are at their highest level since 2007 and that confidence in turnover and profitability is high; many businesses are expecting to hire more staff over the third quarter.

Manufacturing Recovery in Europe - Western Europe, and investors who have exposure to the region, finally received some good news. The latest monthly figure for the purchasing managers’ index (also known as PMI) beat expectations, showing that manufacturing appears to be expanding for the first time in two years. While the PMI reading of 50.1 was barely above the threshold that indicates growth, even a flat reading would have been a positive.

Europe continues to try to work its way out of its second recession since the global financial crisis, and it appears to be making progress. A Bloomberg survey of economists predicts a return to economic growth in the third quarter of the year. Germany, the cornerstone of the euro zone, also recorded a return to manufacturing growth in July after months of contraction. German manufacturing, in fact, is one of the most important data points to watch as Europe’s recovery tries to gain traction. If Germany can recover and continue to pull the regional economy along with it, Europe may yet get some lift. Its stock market is already up nearly 10 percent this month, and this latest data might keep the trend going.

Worst over for Vietnam? - As one of the world’s few remaining communist states, Vietnam’s relationship with foreign capitalists is complex. That hasn’t stopped private equity group Warburg Pincus closing the first tranche of a USD 200 million investment in the country’s largest mall owner. It’s early days, but for global investors Vietnam may be back in the game.

Warburg and its associates are buying about one-fifth of Vincom Retail, their first foray in the country. The investment will help parent Vingroup pare its debt load, and follows rival KKR’s decision earlier this year to double its stake in a Vietnamese fish-sauce maker.

It isn’t obvious Vietnam’s retail industry will deliver much juice in the short run. Retail sales grew 12 percent in the first six months, their slowest since 2003. Strip out 6.7 percent inflation, and real growth of retail spending barely beat last year’s 5 percent GDP growth.

Besides, the safety of assets remains a worry. Foreign creditors to shipmaker Vinashin found out that a “letter of comfort” from the government didn’t live up to its billing when the state-owned shipbuilder failed to honour a USD 600 million loan in 2010. After much bickering and a lawsuit – later dropped – from pugnacious U.S. hedge fund Elliott Advisers, the government offered lenders a settlement this year.

Poor contract enforcement and endemic corruption won’t go away soon, but Warburg and KKR may be right in betting that the economy is on the mend. Inflation – which peaked at 23 percent in August 2011 – is under control. And that’s giving the authorities wiggle room to revive growth: large companies will see their tax rates fall to 22 percent next year, from 25 percent at present. Developers like Vingroup can now improve their cash flows by paying land costs to the government in instalments.

Credit is also reviving as the government starts to tackle bad debt, at almost a fifth of total bank loans. Vingroup’s cost of local borrowing has fallen from above 20 percent early last year to around 13 percent, while the stock market is up 42 percent from January 2012. The worst may be over for Vietnam; investors should pay attention.

Spotlight On: Where Have All The Safe Havens Gone?

Midway through 2013, strategists, economists and analysts have taken pause to weigh up the events that have dominated investor sentiment over the first six months of the year and predict what will cast shadows over the second half. With markets still reliant on central bank liquidity and the erosion of safe havens in recent months, conditions are expected to remain challenging - although some commentators see opportunities emerging.

Charles Stanley investment analyst Rob Morgan says the stand-out trend of 2013 so far has been a high correlation between asset classes. While it could be argued this undermines diversification within portfolios, Standard Life global thematic strategist Francis Hudson sees it as a positive development.

“It signifies a healthier market and provides scope to do fundamental bottom-up analysis. It also shows a move away from risk-on, risk-off trading, due to liquidity flooding in from central banks,” she says.

So-called safe assets have also been affected. Gold and cash have seen a turnaround, with the former experiencing poor fortunes in the market – signified by the worst drop in value in 34 months – and cash being seen as the only safe asset left. Hudson says: “It is interesting that cash is seen as a safe asset because it used to be quite risky. That is a change that tells us about the outlook for inflation.” Morgan adds: “Apart from cash we have not got a safe asset class anymore. That is a problem for investors because the benefits of diversification worked well in the past.”

However, Legal & General global equities strategist Lars Kreckel sees gold’s fall from favour as a positive sign. He says: “It is one of the most promising signs that we are not looking at the start of a bear market. If people have been worried about inflation getting out of control, we would not have expected the gold price to fall so much.”

The main event so far is arguably Federal Reserve chairman Ben Bernanke’s suggestion that the pace of quantitative easing in the US could slow later this year, which brought the stockmarket rally to a halt and ushered in a global sell-off. F&C director of global strategy Ted Scott says: “There was a big rise in bond yields everywhere, especially emerging markets. We also saw an enormous withdrawal of capital from riskier products and a move into safe havens.” This showed just how vulnerable markets still are to sentiment. Newton global strategist Peter Hensman says: “We are expecting markets to remain skittish. There was confidence at the beginning of the year around central banks and this has diminished as we have gone on. “As some of the certainty starts to reduce then we will continue to have a more difficult period. The excessive optimism starts to reverse a bit.”

Investors also continued to be driven by a hunger for yield. With QE impacting yields and the outlook improving, many expected a great rotation out of bonds and into equities. However, now the end of QE may be on the cards, there is the possibility there will be another mass movement of money. Morgan says: “That fear manifested itself with Bernanke’s comments and there was a potential policy change all of a sudden. All that risk got taken off the table again. We are back to November and December levels in a way. I think people will still look to add risk because there is an underlying demand for it. Potentially, we will have a more stable period. It will it be a stockpicking environment going forward.”

Kreckel believes that if markets become more confident and signs of global economic expansion return, asset classes will see a shift in favour as investors move from more defensive, income-focused parts of the market towards growth. “The acceleration in global growth will begin in the second half. If this picks up it will be more about growth than the dividend,” he says. “With bonds yields rising, such income characteristics are not as attractive and investors will want economic beta and exposure to economic cyclicals.”

Scott is more sceptical of equities being given a boost in the second half of the year and believes bonds may start to receive more attention, especially if the demand for yield still dominates investors’ vision. “A lot of high-income assets were changed up to find yields. There was actually the reverse this time. As bond yields went up, the worst performers in equity markets were high-yielders,” he says. “There was also a bubble in dividend-paying stocks. Looking ahead, the question is the strength of company earnings and the strength of the market.”

If nothing else, so far this year has reiterated how big a part sentiment plays in global markets. With asset classes behaving in a highly correlated way, and investors prioritising yield yearnings, the biggest stand-out theme that has a lot of people on their guard is what the Fed will do next. Hensman says: “We are expecting some of the more challenging conditions that recently appeared to continue through the second half of the year.”

Economic Summary for the week ended 12th July 2013

US Markets - Minutes of the Federal Reserve's last policy meeting say officials want more evidence of a jobs market recovery before winding up stimulus measures. The minutes show that "about half" of the Fed's board felt the USD 85bn-a-month stimulus programme could be phased out by the end of 2013. Speculation that the Fed might halt quantitative easing within a couple of months had unnerved Wall Street. But the news that there would be no immediate exit sent US markets higher.

Africa’s Economy “seeing fastest growth” - Africa's economy is growing faster than any other continent, according to the African Development Bank (AfDB). A new report from the AfDB said one-third of Africa's countries have GDP growth rates of more than 6%.

The costs of starting a business have fallen by more than two-thirds over the past seven years, while delays for starting a business have been halved. The continent's middle class is growing rapidly - around 350 million Africans now earn between USD 2 and USD 20 a day. The share of the population living below the poverty line in Africa has fallen from 51% in 2005 to 39% in 2012. Africa's collective gross domestic product (GDP) per capita reached USD 953 last year, while the number of middle income countries on the continent rose to 26, out of a total of 54.

The AfDB's Annual Development Effectiveness Report said the growth was largely driven by the private sector, thanks to improved economic governance and a better business climate on the continent. "This progress has brought increased levels of trade and investment, with the annual rate of foreign investment increasing fivefold since 2000. For the future, improvements in such areas as access to finance and quality of infrastructure should help improve Africa's global competitiveness," the report said.

The AfDB points to the increase in regional economic co-operation and intra-African trade as being the drivers of growth in the future. However, the AfDB said inadequate infrastructure development remained a "major constraint" to the continent's economic growth. "Africa currently invests just 4% of its collective GDP in infrastructure, compared with China's 14%," the bank's report said. "While sustainable infrastructure entails significant up-front investments, it will prove cost-effective in the longer term."

Despite the improving picture overall, the AfDB cautioned that substantial differences in incomes remained. "The challenge will be to address continuing inequality so that all Africans, including those living in isolated rural communities, deprived neighbourhoods, and fragile states are able to benefit from this economic growth," it said.

US Borrowing - Americans are once again spending more on credit, increasing their borrowing by USD 19.6 billion in May, according to the US Federal Reserve. It is the biggest increase in borrowing in more than a year and reflects renewed confidence among US consumers. More debt could help increase consumer spending, which accounts for more than 70% of US economic activity.

The total amount of borrowing reached a record USD 2.84 trillion, with student loans reaching USD 1 trillion.Borrowing in the category that includes credit cards was at its highest level since 2010. Economists say that is significant as credit card debt is often quickly translated into economic activity.

Gold Mining Shares - Shares in gold mining companies have fallen 64% since their peak in August 2011 and are trading below their net asset value for the first time since 1980, potentially reaching a point where investors will find them attractive once more, according to Hargreaves Lansdown’s senior investment manager Adrian Lowcock.

The metal itself has fallen 35% from its peak of USD 1,900 in September 2011 to USD 1,235 as at 8 July, and both of these declines compare with a rise of 35% for the MSCI World Index from August 2011 to June this year. Trying to call the bottom of the gold market is a bit like trying to catch a falling knife. However, all investments have a price at which point they become very attractive to investors. Momentum remains very much against gold mining shares and as Sir John Templeton once said ‘if a particular industry or type of security becomes popular with investors the popularity will always prove temporary and, when lost, may not return for many years’.

“There may be further to fall before we reach the bottom, however, investors who are willing to accept the risks might find some attractive long-term opportunities by investing in gold mining shares,” said Lowcock. He explained that analysis of the World Datastream Gold Mining Index showed the price to book of gold miners is 0.95 having been at 1.61 a year ago.This implies that gold mining companies’ current market price is lower than the value of their assets. Many of the miners have appointed new management, which Lowcock said could lead to further write downs of the valuations of many projects. “They are likely to write down the valuations to the lowest possible level as they can attribute the overvaluation to the previous management – throw out everything including the kitchen sink. “Book values are likely to fall further still, however, with gold shares having fallen 64% they are already pricing significant further falls in the book values of gold mining companies,” Lowcock concluded.

Spotlight on: the Prospects for the Chinese Economy

Napoleon Bonaparte said “Let China sleep, for when she awakes, she will shake the world”. In the following two centuries, the country has indeed spent much of the time in a fairly dormant state. Alongside Japan and the rest of East Asia, China accounted for over half of global activity and 60% of world industrial production in 1820; by 1875 their overall share had fallen below 20% - similar to that of the United Kingdom.

Through a combination of wars, occupations, revolution and political upheaval, China remained in this state until well into the 20th Century. But since “waking up”, following a series of reforms in 1979 and entry into the World Trade Organisation in 2001, the global impact has been profound. China’s share of world exports rose five-fold during this period, to just over 5% of global GDP, as its economy has consistently expanded at 8-9% annual rates. The impact of this major new trading partner has been felt both in global goods and commodity markets, with substantial weakening of price pressures in the former and rising prices a feature of the latter.

More recently, however, China’s growth rate has slowed; interbank lending rates have risen to record highs; and worries have begun to emerge about a “hard landing” for the economy. Are these concerns justified?

One worry has been the fact that rapid credit growth in China has not translated into stronger economic activity. In 2013 Q1, credit expanded at an annual pace of over 20%, more than twice the rate of nominal GDP growth. This “gap” has been widening since early 2012. It could be that there is just a natural lag between borrowing and investment, implying a pick-up in investment growth in 2013. However, there is little sign of this in the latest data: fixed-asset investment decelerated to a below-expectations annual growth rate of 20.6% in the first four months of the year from 20.9% in the first quarter. One concern is that, rather than financing productive investment, new credit is being used by corporates and local government to refinance old debt – creating potential risks for both the official banking sector and the burgeoning ‘shadow’ financial system of wealth management companies, insurance companies and trust loans.

Precursors to a ‘hard landing’ for China, which could reduce annual GDP growth to a 3% annual pace at its height, could therefore include an acceleration in ‘shadow’ borrowing, at increasingly short maturities and higher rates; reports of financial problems in local government or companies; and developments that increase the risk of a policy error.

China’s demographics have also been causing concern. An exceptionally rapid transition from high to low birth and death rates, thanks in part to the “one-child policy”, means that China’s population is ageing faster than that of most other countries. As a result, the size of the working-age population is set to shrink rapidly, which could drag down China’s ability to grow.

But it would be wrong to get overly gloomy. While the growth of China’s shadow banking sector is a concern, the government is showing an increasing appetite to regulate its more “frothy” aspects. The authorities’ urbanisation strategy should also provide some offset to the effects of population ageing through efficiency gains from population concentration and infrastructure development. Using US experience as a benchmark, Chinese cities arguably have the potential to add a full percentage point to cumulative GDP growth over the next ten years.

China may not achieve double-digit growth rates in the decade ahead, but a 7% annual pace – in line with the government’s target – remains plausible, if dependent on a relatively smooth reform process. Challenges lie ahead for China, but we’re some way from being sleepy yet.

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.”