Economic Summary for the week ended 31st Oct 2013

U.S. - US shares hit fresh all-time highs on Tuesday, ahead of the conclusion of a Federal Reserve meeting that is expected to see economic stimulus measures maintained.

On Wall Street the Dow Jones closed up 111 points at 15,680 - beating the previous high set in September.

The Nasdaq was up 12 points at 3,952, just short of its March 2000 record.

The S&P 500 closed at a fresh high of 1,772, after gaining almost 10 points in the day's trading.

US traders broadly expect the US Fed to keep its programme of quantitative easing in place for several more months, and analysts say the economic indicators support that view.

The level of support provided to the economy by the Fed has become a significant factor in market sentiment in recent months.

Any sign that the economic recovery is stumbling is taken as an indication that stimulus measures will be kept in place, and will not be gradually tapered.

"The Fed has been pretty clear about making decisions dependant on data and the data the Fed has received since the last meeting have certainly not been upbeat," said Art Hogan, head of product strategy equity research at Lazard Capital Markets.

India - The new governor of the Reserve Bank of India, Raghuram Rajan, told the BBC in his first international interview that India has enough foreign-exchange reserves to safeguard against a repeat of the 1991 balance of payments crisis.

Mr Rajan said that India has enough money to pay for all of its short-term debts tomorrow if it needed to, as it has reserves that are equal to 15% of GDP. This is a key difference from two decades ago when the country was rescued by the IMF.

He said that a country with $280bn (£175bn) in reserves can finance itself, and points out that India's external debt is about 22% of GDP. He said that very few countries with such low level of debt has had an external crisis. Mr Rajan was also adamant about anyone who suggests that India should seek IMF assistance should know that there will be "no IMF, it's not going to happen". And that India is a creditor to the IMF.

Emerging Markets - Emerging market equity funds are taking “inordinate risks” by tilting their portfolios towards popular growth sectors and ignoring other parts of the market, Bank of America Merrill Lynch warns.

A note by the group argues that emerging market funds are “egregiously overweight” sectors such as consumer, internet and telecoms stocks while being “exceptionally underweight” in the state capitalist space.

FE Analytics shows the average fund in the IMA Global Emerging Markets sector has 22.1 per cent of its portfolio in consumer goods names, with another 20.5 per cent in telecoms, media and technology stocks.

BofA ML’s The GEMs Inquirer report says: “We think that prudent risk management demands recognising the substantial risks of this concentrated positioning in the emerging markets and to hedge the risks, or close this stretched position.

“In our view, while buying unpopular, undervalued stocks (mainly in the state capitalist sector) entails significant discomfort, continued overweighting of expensive growth stocks increasingly risks years of possible future underperformance.”

Spain - Spain has seen its first quarterly economic growth since 2011, according to data from the country's National Statistics agency INE.

The country's GDP grew 0.1% in the July-to-September period, after contracting for the previous nine quarters.

Its growth confirmed last week's estimates from the Bank of Spain.

Spain was one of the countries worst hit by the global economic crisis, with street riots and soaring unemployment. The statistics mean Spain is officially out of recession.

The INE said an increasing number of exports supported the growth, with a boost to the tourist industry from holidaymakers avoiding northern Africa and the Middle East.

Commodities - Gold advanced for the first time in three days as the smallest gain in U.S inflation in five months bolstered expectations that Federal Reserve policy makers meeting today will delay curbing stimulus measures.

Consumer prices increased 1.2 percent in the 12 months through September, the lowest since April, a government report showed today.

Gold has fallen 19 percent in 2013, while global equities advanced 18 percent, reaching the highest since 2008 today. BlackRock Inc. Chief Executive Officer Laurence D. Fink said yesterday that it’s imperative that the Fed begins trimming stimulus as the policy is contributing to “bubble-like markets.”

Spotlight on: Mexican investment themes in LatAm

Investors have been steering clear of Latin America as Brazil - once the region's engine of growth - is struggling with high inflation and falling GDP. But following reforms to the energy sector, Mexico could be a bright spot in the region, said BlackRock's Will Landers.

Finding someone bullish on investing in Latin America today seems to be a difficult task. Making the case for a continuation of a bear market in the region is relatively straight forward, based on the fact that the region’s biggest market, Brazil, continues to underperform global markets and its officials have failed to guide the country back to growth.

In addition, the second largest market in the region, Mexico, boasts some of the highest valuations one can find in the world, and the Andean markets offer a combination of high valuations and low liquidity. Mexico benefits from its proximity to the US and its ability to gain share in the manufactured import market given the competitiveness of Mexico's labour costs compared to China.

The pending energy reform recently proposed by President Peña Nieto's team has the potential to transform Mexico's energy sector into a major global player once again, reducing Mexico's dependency on imported sources of energy and increasing the investment rate in the country. Trading at 16x next year's earnings, it is not a cheap equity market, but one that should continue to be favoured by investors if it can deliver on its reform agenda.

The reality is that the reasons for investing in Latin America in the past are still very true today. The region’s demographics continue to rank among the most attractive in the world, with over 50% of the population being less than 30 years old.

In addition, years of keeping inflation under control, combined with better employment opportunities has expanded the middle classes in Brazil, Chile and Colombia, as well as in Peru and in Mexico albeit at a slower growth rate. This new consumer class is changing the economic dependencies from many of these economies, reducing the impact of global trade and increasing the importance of domestic growth.

Brazil boasts the enviable combination of 40 million new domestic consumers having entered the middle class over the last decade with one of the most attractive forward P/Es in the world, currently trading at close to 9x 2014 expected earnings.

The country has seen its equity market transformed by stricter minority shareholder protection rules, significant increase in the participation of small and mid-cap stocks and a strong entrepreneurial spirit that has allowed companies to succeed regardless of the economic climate.

The Andean region – Chile, Colombia and Peru – offers a combination of commodity growth in copper (Peru and Chile) and oil (Colombia) with significant investments in domestic infrastructure – especially Peru, but also Colombia.

Chile has been a quasi-developed market for a while, but the improvements in security in Colombia have returned that country to investors’ radars, both financial as well as strategic, while Peru continues to lead the region in terms of growth rates. In addition, intra-regional investments are creating multinational corporations with greater growth potential.

Economic Summary for the week ended 10th Oct 2013

Global - The International Monetary Fund (IMF) has revised its forecast for global economic growth. It now expects global growth of 2.9% this year, a cut of 0.3% from July's estimate. In 2014 it expects global growth of 3.6%, down 0.2%.
It cited weakness in emerging economies for the cut.
Despite the improvement in growth in advanced economies such as the UK and U.S., the IMF warned that a slower pace of expansion in emerging economies such as Brazil, China and India, was holding back global expansion.
It expects growth in Russia, China, India and Mexico to be slower than it forecast in July.
In part, it says this is due to expectations of a change in policy by the U.S. central bank, the Federal Reserve. Simply the expectation that the U.S. could trim back its efforts to stimulate the U.S. economy has already had an impact on interest rates in emerging economies, the IMF said.
The IMF expects the U.S. to drive global growth.
But it warns that the political standoff over raising the U.S. government's borrowing limit, if it results in the U.S. defaulting on its debt payments, "could seriously damage the global economy".
Japan - Japan's aggressive policies aimed at reviving its economy may take 10 years to have a full impact, Akira Amari, Japan's minister in charge of economic revitalisation, has said.
Known as ‘Abenomics’, these include easing monetary policy, boosting stimulus and reforming key sectors. Some of these steps have already been introduced and have boosted growth.
But he warned that whilst it is easy to implement monetary stimulus measures, scaling them back can be tricky.
He told the BBC that Japan's central bank was likely to "learn from the experiences" of the U.S. Federal Reserve, which is widely expected to reduce its key stimulus programme in the coming months.
"The Fed Chairman, Ben Bernanke, is experimenting with it," Mr Amari said. "That's why one word from him can move stocks and currencies."
U.S. - There were signs of tentative progress on the U.S. fiscal deadlock on Wednesday as President Obama indicated he would accept a short-term increase in the nation's borrowing authority to avert a default.
According to Reuters, Obama's press secretary, Jay Carney, told reporters the President would be willing to accept a short-term debt ceiling increase in order to get past the potential crisis date of 17 Octoberwhen the government hits the $16.7trn borrowing limit.
Carney said while the White House would prefer to raise the ceiling longer term, at least for a year, he added "we have never stated and we are not saying today that the debt ceiling ought to be or can be any particular length of time."
A short-term increase would give Republicans and Democrats some breathing room, but by itself would not address the underlying issues preventing an agreement.
Meanwhile, China has critcised the "pitiful" and self-inflicted political deadlock in America over raising the country's borrowing limit, as premier Li Keqiang added his voice to concerns that the world’s biggest economy could default on its debt.
Mr Li told John Kerry, U.S. secretary of state, that China was paying “great attention” to the issue of raising America's $16.7 trillion debt ceiling.
China is the largest foreign owner of U.S. debt, holding more than $1.277 trillion in Treasury bills.
Emerging Markets - The capital outflows endured by the world’s developing economies are set to continue, as should interest rate hikes unless they can substantially bolster their fundamentals says Invesco chief economist John Greenwood.
Since the U.S. Federal Reserve first signalled an end to its massive $85bn per month bond buying programme, in May, emerging markets have suffered a significant market sell-offs and substantial capital outflows.
The knock on impact on fund performance has also been significant, where the average IMA Global Emerging Markets portfolio has shed 5% in the past six months alone while in comparison, the typical Global equity fund has risen by more than 3%.
Greenwood says: “The withdrawal of funds from emerging markets is likely to continue, as should countervailing policy measures such as interest rate hikes and currency interventions by EM authorities.”
Among the biggest emerging markets, including China, India and Brazil, growth has pulled back and the policy-makers are struggling to ensure smooth transitions to domestic-led growth models.
Commodities - Gold will extend losses into 2014 amid expectations the Federal Reserve will pare stimulus as the U.S. recovers, according to Morgan Stanley, adding to bearish calls from Goldman Sachs and Credit Suisse.
“We recommend staying away from gold at this point in the cycle,” Melbourne-based analyst Joel Crane said. Bullion will average $1,313 an ounce in 2014, down from the $1,420 forecast for this year, Morgan Stanley said in its quarterly metals report published this week.
Bullion is heading for the sixth weekly loss in seven and investment holdings are shrinking even as U.S. lawmakers wrangle over the debt ceiling and budget, seeking to avert a default and end a government shutdown. Gold is a “slam dunk” sell for next year because the U.S. will extend the recovery after lawmakers resolve the stalemate, Jeffrey Currie, Goldman’s head of commodities research, said this week.
Spotlight on: An alternative take on the U.S. debt issue
Multi-managers believe the political stalemate in the U.S. could be a prime opportunity to buy more risk assets, although there is concern about the looming debt ceiling.
Last week, for the first time in 17 years, the U.S. government partially closed down after the Republicans refused to agree spending plans that included President Obama’s affordable health care scheme, despite the reforms already being signed into law. If Congress does not agree its budget soon, it will run out of money on 17 October unless its debt ceiling is raised.
JP Morgan Asset Management Fusion fund range lead manager Tony Lanning notes suggestions which estimate that for each week the government is closed, 0.12% of economic quarterly annualised growth is lost.
Lanning says: “The debt ceiling and the impact of the shutdown could provide a meaningful opportunity to add more risk to our portfolios. So far markets have taken these events broadly in their stride.”
Fidelity Multi Asset Defensive fund manager Trevor Greetham remains bullish and believes when the smoke clears, investors will see an “equity-friendly backdrop.” He adds: “Any stock market weakness should present a buying opportunity.”
However Lanning views markets as being very complacent in regards to the debt ceiling. He says: “It seems to imply that investors have concluded that the ceiling will have to be raised, which it has been many times before.
”But were it not, several ratings agencies have said they will determine the U.S. is in default if it misses even one interest payment. The market has not priced this in.
Hargreaves Lansdown senior investment manager Adrian Lowcock says: “This does not look like a selling trigger. Investors should focus on their long-term goals and use any short term weakness as opportunities to invest.”
Meanwhile, it is the view of Fitch Ratings that global bonds, global equities and multi-asset funds will perform well in 2014 while other asset classes may suffer.
The ratings agency indicates improving investor confidence and an increasingly solid macro-economic background will support growth, but changing investor demand and intense market competition will cause uneven growth.
While global funds are set to perform well, domestic equities and government bonds could struggle due to changing investor demand. Fitch Ratings Fund and Asset Manager Rating Group director Alastair Sewell says: “AUM in traditional asset classes such as domestic equities or government bonds are threatened by changing investor allocations.
”In particular, managers that have large AUM in government bonds or aggregate portfolios would suffer from rising interest rates.” Fitch also points to the fact that half of European managers saw no inflows in the first three years to end of July 2013, while the top 10 firms received 50% inflows to bonds and mixed asset funds and 75% of inflows into equity funds.

Economic Summary for the week ended 19th Sep 2013

Global - Global stocks jumped to a five-year high on Thursday, while bonds and metals rallied after the Federal Reserve unexpectedly refrained from reducing U.S. monetary stimulus. The Malaysian ringgit strengthened the most since 1998.
The MSCI All Country World Index climbed 1.2%, set for the highest close since May 2008, as Asia’s benchmark index gained 2.4% and the Stoxx Europe 600 rose 1%. Standard & Poor’s 500 Index futures added 0.2%.
Many investors had speculated that the Federal Reserve would begin reducing its $85bn bond-buying plan this month. But in a statement released after its two-day policy meeting, the Fed said there was no fixed timetable for it to begin scaling back, or "tapering", its stimulus.
The central bank said it was taking a more cautious stance because of an "elevated" unemployment rate and concerns about the U.S. economic recovery. "The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," it said.
The Fed also cut its forecast for growth this year to between 2.0% and 2.3%. That compares to a June estimate of between 2.3% and 2.6%.
Japan - Japan’s exports rose the most since 2010 in August, boosting Prime Minister Shinzo Abe’s growth drive even as rising energy costs extended the streak of trade deficits to the longest since 1980.
Exports rose 14.7% from a year earlier, the sixth straight advance, a Finance Ministry report showed in Tokyo.
A surge in exports to the U.S., along with a rebound in shipments to China in the wake of bilateral tensions last year, are offering momentum to Japan as it prepares for the first sales-tax increase since 1997. Rising competitiveness from the yen’s 20% drop against the dollar in the past year also has helped manufacturers including Panasonic Corp. as they cope with higher energy costs with the nation’s nuclear industry shuttered.
“We are finally seeing a clear recovery in exports, led by a weak yen and a moderate global recovery,” said Takeshi Minami, chief economist at the Norinchukin Research Institute in Tokyo.
India - India has seen its growth forecast dramatically reduced to 5.3 % for the current fiscal year by the prime minister’s economic advisory panel, says Reuters.
GDP has been brought down to 5.3% from an original estimate of 6.4%. The lower estimate is closer to figures from India’s central bank and economists who have already predicted 5% GDP growth for the fiscal year.
The panel’s revised figure remains higher than GDP growth than the 5% witnessed over the fiscal year 2012/13.
India’s economy has battled decade-low growth along with a record current account deficit and a steep fiscal shortfall already this year, according to Reuters.
The prime minister’s economic advisory council has also warned that keeping India’s fiscal deficit within the budgeted target of 4.8% of GDP could prove difficult, while finance minister Palaniappan Chidambaram has stated that the target will not be exceeded.
Europe - The European Central Bank (ECB) is concerned that investors could be spooked by next year’s bank balance-sheet reviews and stress tests unless their results are carefully timed.
As the ECB prepares to take over supervision of all euro-area lenders in 2014, it will begin a three-phased analysis of the institutions coming under its umbrella. As laid out by Executive Board member Yves Mersch last month, the bank will start with a risk review before analyzing banks’ balance sheets and conducting stress tests in collaboration with the London-based European Banking Authority.
Now central bankers are wrestling with how to move through the exercise without releasing conflicting numbers at different times, particularly for banks that aren’t in good health.
Commodities - Gold fluctuated between gains and losses after jumping the most in 15 months following the Federal Reserves’ unexpected decision to reduce the pace of monthly bond purchases.
Gold for immediate delivery rose and fell as much as 0.4% before trading at $1,364.42 an ounce, taking this week’s gain to 2.8%. Prices added 4.1% on Wednesday, the most since June 1, 2012, rebounding after a drop below $1,300 for the first time in six weeks.
Spotlight on: Fund Manager confidence highest in almost 4 years
A net 72% of global investors expect the world economy to pick up over the next 12 months, according to August’s Bank of America Merrill Lynch Fund Manager Survey.
This number shows a “surge” from the 52% of respondents in July and is the highest amount in nearly four years.
More investors are bullish on the eurozone recovery than last month too, with 88% of European fund managers anticipating strengthening in the region by the end of 2013.
BofA Merrill Lynch European investment strategist John Bilton says: “The current earnings season shows global recovery reflected in European companies’ performance. With the eurozone the most undervalued major market by far, optimism on the region’s equities should be sustained.”
Specifically, sentiment towards China has improved within this time, with 32% of investors in August expecting China economic growth to be weaker, compared to the 65% from the previous month.
Sentiment to emerging markets continued to suffer in August, with EM equity exposure falling to its lowest level since November 2001 at 19% underweight.
BofA Merrill Lynch Global Research chief investment strategist Michael Hartnett says: “While global growth expectations have risen very rapidly, the good news is that cash levels remain high. Out-of-favour emerging markets offer some enticing opportunities to deploy these balances.”
In terms of portfolio weightings, the percentage of investors overweight equities crept up to a net 56% in August while those underweight to bonds increased to a net 57%.
In terms of regional weighting, there was a decrease in exposure to Japan equities from 27% in July to 19% in August.
August also saw the third largest overweighting to US equities in ten years, coinciding with 72% of investors favouring the US dollar over a 12-month horizon.
And stocks in the eurozone saw their highest allocation since January 2008, with 17% of asset allocators saying they are overweight to the region, a further 20% said they would overweight the market on a 12-month view.
The month also saw the highest exposure to UK stocks since December 2002, with this being the first overweight reading since February 2003.

Economic Summary for the week ended 11th Sep 2013

India - The Indian prime minister's economic advisory council has lowered the growth outlook for the current financial year. It now expects the economy to expand by 5.3% this year, down from its earlier projection of 6.4% growth.

The new growth outlook is in line with the projections of the central bank and many other economists.

The council also warned that keeping the fiscal deficit within the budget target of 4.8% of gross domestic product (GDP) "could be a challenge".

In its latest economic outlook, the council said that the fiscal deficit during the first four months of the current financial year had already reached 62.8% of the budgetary provision for the full year.

China - China's economy is going through a "crucial" stage of restructuring, says the country's Premier, Li Keqiang.

At the World Economic Forum in the Chinese port city of Dalian, Mr Li pledged to improve relations with foreign firms. He stressed that multinationals would get "equal treatment" with state-owned enterprises.

He added that China was well-placed to hit a growth target of 7.5% this year, despite a "complex" economic climate.

China posted its lowest growth in two decades for the second quarter of 2013, and there had been some concerns that the world's second-largest economy might be headed for a so-called "hard landing".

However, Mr Li sought to allay those fears by saying the Chinese economy was stable and had strong fundamentals.

Japan - Asian stocks soared this week, led by Japan's Nikkei, as investor confidence was boosted by Tokyo winning the race to host the 2020 Olympics.

Sentiment was also helped by an upwards revision to Q2 GDP for the Japanese economy. The annualised estimate was revised up to 3.8%, compared to an expected figure of 2.6%.

The Nikkei index has jumped 2.4% on the positive news and the broader Topix is up 2.1% while the yen has slid against the dollar to 99.7.

According to Japan's Prime Minster Shinzo Abe, the Olympics will spur construction and help beat deflation, delivering stronger economic growth.

U.S. - An anticipated reduction in stimulus by the Federal Reserve that has roiled the financial markets for months will be seen as “no big deal” if it goes ahead next week, according to a Bloomberg Global Poll of investors.

57% of those surveyed say they don’t expect a sudden change in the markets because investors already anticipate tapering action by the U.S. central bank. 8% see a rally on such news, while just under a third are looking for declines.

“A taper-lite seems priced in” by the markets, Greg Lesko, managing director at New York-based Deltec Asset Management LLC, said, referring to what he says will be a small reduction in stimulus by the Fed.

Opinions - The largest developing nations for the first time have the worst market opportunities as optimism for stronger growth shifts to the U.S. and Europe, according to a Bloomberg Global Poll.

India fared the poorest, followed by Brazil, Russia and China, a worldwide poll of investors, analysts and traders who are Bloomberg subscribers showed this week.

“The BRICs will always be playing second fiddle to the developed economies,” said survey respondent Ben Kelly, an analyst at Louis Capital Markets in London. “The pro-growth monetary policy of the U.S. allowed emerging countries to thrive due to very low or negative real rates,” he said, referring to borrowing costs adjusted for inflation.

Now that the U.S. and “to a certain extent Europe are beginning to stabilize, maybe part of this trade may unwind and we have seen that already in the bond markets,” Kelly said.

Commodities - As concerns over the Syria crisis persist, oil and gold prices have risen, prompting investors to look at commodities as “the only contrarian play left in the market”.

WTI Crude oil is currently trading at $108.5 per barrel and Brent has shot up to $115.6, while gold topped the $1,400 mark last week to enter a new bull market.

The Thomson Reuters/Jefferies CRB Commodity index has climbed more than 6% from its June trough, up from 275.6 on 28 June to 292.7 on 3 September.

Flows data from BofA Merrill Lynch shows investors have begun cautiously returning to commodities in the two weeks to 28 August, after 27 straight weeks of redemptions.

Spotlight on: Post-holiday allocations

The British summer months are traditionally a quiet time for the financial world. This year was no exception, with markets gently going nowhere throughout August, in spite of a raft of stronger economic news.

Commentators variously blamed concerns in Syria or the prospect of the end of quantitative easing but it was only as investors returned from their holidays towards the end of the month that markets gathered any meaningful direction.

The most significant trend was a wholesale move out of emerging markets. This was less a move out of risk assets (European equity fared well, for example) and more a clear move away from the developing economies as investors started to fret about their long-term growth prospects and, more importantly, their currencies.

The prospect of monetary tightening in the West has seen currency traders driving money towards developed markets in expectations of higher rates. This has hit currencies such as those of Brazil, India and Indonesia, particularly hard.

This was reflected in outflows from emerging market equity funds, which, in the last week of August, reached almost $4bn, according to data from EPFR Global.This was more than double the outflows for the previous week of $1.7bn. Emerging market debt was similarly unpopular, with $2bn exiting the sector in the last week of August, on the back of $1.3bn the week before.

Manager views

Expert investors tend to be moving in the opposite direction to the wider market in terms of emerging market exposure. For example, Tim Wilson, manager of the Newton Managed Income fund, said he expects developing markets to be the major beneficiary of improved economic data in the West.

“They boast relatively low levels of debt, export-orientated economies and strong growth rates in comparison to their more developed peers, even if growth is currently subdued on a historic basis,” he said.

Stephen Thornber, manager of the Threadneedle Global Equity Income fund, goes one step further, maintaining an overweight to the unpopular Asian region. He is attracted by the region’s “fantastic growth”. That said, his exposure is in more defensive sectors, such as telecoms or utilities, in countries like Malaysia and Thailand, which have high population growth.

Meanwhile, the prospect of higher interest rates continue to trouble many expert investors or, at the very least, they are still avoiding conventional fixed income.

Tom Beckett, chief investment officer at Psigma, dipped a toe back into conventional government bonds for the first time since 2011, having bought some US treasuries on the basis that bonds had fallen “too far, too quickly”. However, he remains an exception.

Meena Lakshmanan, co-head of Investment Solutions, said: “There may be a bond rally if something goes wrong, such as an escalation in the Syrian crisis, but given where the US economy is, the downside on bonds still looks significantly greater than the upside. We remain less worried about default risk, so we are focusing our fixed income exposure on credit and floating rate areas.”

For Gary Potter, co-head of multi-manager at F&C Investments, the climate is still right for risk assets.

“The world is undergoing a marginal improvement in its prospects. Things are definitely off the bottom,” he said.

“We like the coupon in some bonds but most of the value has already been realised. That said, we have tempered our equity overweight as the market has edged near 6,600 because there are still a number of issues. We have been using any weakness to top up, rather than taking profits on the dips.”

The market has rallied in the early days of September and it should shortly become clear whether investors have returned from their holidays in a bullish mood. The possible military intervention in Syria and the end to quantitative easing are likely to continue to dampen spirits, however.

Economic Summary for the week ended 7th Sep 2013

Rising Demand Adds to Evidence World Growth is Picking Up – Euro zone businesses had their best month in over two years in August as orders increased for the first time since mid-2011 while growth in China's services sector hit a five-month high, underpinned by new orders and business optimism. Pockets of weakness remain across the world, however. Dataon Wednesday showed Indian services activity shrank in August at its quickest pace since the depths of the global financial crisis. Italian services also contracted more than expected and the downturn continued in France. "The advanced economies have clearly picked up, China is the exception among the major emerging economies but the other emerging economies are still struggling and India in particular," said Andrew Kenningham, senior global economist at Capital Economics.

Emerging economies are particularly vulnerable to a tightening of United States monetary policy, the International Monetary Fund warned in a note prepared for the Group of 20 meeting in St. Petersburg this week. Markets are preparing for the Federal Reserve to begin slowing down its huge bond-buying program this month as the US recovery remains on track.

The US Institute of Supply Management is due to publish its PMI for US services on Thursday and a Reuters poll predicted a dip to 55.0 from July's 56.0. A sister survey on Tuesdaycovering factories showed a surprise upturn. Markit's Eurozone Composite Purchasing Managers Index (PMI) rose to 51.5 last month from 50.5 in July, its highest reading since June 2011. The headline figure was revised down a touch from a preliminary reading of 51.7. Anything over 50 indicates expansion.

But there are still major differences between Europe's two most important economies. The composite PMI for Germany, the euro zone's largest, jumped to a seven-month high of 53.5, but the French PMI dipped to 48.8 from 49.1. Across the channel, a rush of new business last month drove the fastest growth in Britain's services sector for more than six years, challenging the Bank of England's cautious outlook for the economy. It's services PMI beat forecasts with a rise to 60.5.

Led by firm US growth, the outlook is gradually improving for advanced economies and even crisis-weary Europe is at last joining the recovery, the OECD said on Tuesday, but warned a slowdown in many emerging economies meant global growth would remain sluggish.

The Chinese Markit/HSBC Services Purchasing Managers' Index (PMI) climbed to 52.8 in August after seasonal adjustments, up from July's 51.3 and the highest since March. Qu Hongbin, an HSBC economist, cited new business growth as the key driver of the PMI and expected the momentum to be sustained. "A rebound in manufacturing output is expected to support service industry growth in the coming months," Qu said.

Any improvement will cheer investors as fears of a sharp slowdown in the world's second largest economy had kept markets in check but the good news will be tempered by a slowdown in India, Asia's third largest economy. Having fallen below the 50-mark in July for the first time in nearly two years India's services PMI slipped further last month and with a survey of factories published on Monday showing activity shrank for the first time since early 2009, the picture is grim.India's economic growth has almost halved in the past two years and the economy grew 4.4 percent in April-June, its slowest quarterly growth rate since early 2009. The weak run is set to continue with macroeconomic uncertainty and tighter financial conditions weighing on growth," said Leif Eskesen, HSBC's chief India economist.

Emerging Nations Save USD 2.9 Trillion Reserves in Rout - Developing nations from Brazil to India are preserving a record USD 2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.

Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.

After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.

“If fundamentals are going against you, it’s not credible to defend a currency level - investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”

The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.

Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to USD 2.9 trillion as of 28 August, from USD 2.95 trillion on 31 Decemberand an all-time high of USD 2.97 trillion in May,. The holdings increased from USD 722 billion in 2002. The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds USD 3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.

Spotlight On: Indonesia Loses its Allure as Prices Chill Buyouts

Indonesia has lost much of its allure for private equity as steep valuations restrain buyouts in a country that two years ago was, in the words of one investor, “probably the sexiest destination in the emerging markets.”

International private-equity firms have acquired stakes in four Indonesian companies this year, down from 10 in 2011 and seven last year, according to data compiled by Bloomberg and the Asian Venture Capital Journal. Total transaction values fell from USD 649 million for the nine deals in 2011 where terms were disclosed to USD 324 million for the six deals last year for which prices were available, the data show.

Deals have fallen precipitously this year, to USD 87 million for three of the four announced deals. “Expectations have been high over the past two years for private-equity deal making in Indonesia,” said Nicholas Bloy, Kuala Lumpur-based managing partner at Navis Capital Partners Ltd., which oversees USD 3 billion in public and private equities in Asia. “But many players in the industry had a sobering reality check and now need to be more realistic in their return expectations, as they are facing inflated valuations by sellers.”

Even after its 22 percent decline from its all-time high on May 20, the Jakarta Composite Index (JCI) has surged 75 percent over the past four years, compared with a 11 percent increase in the MSCI Emerging Markets Index. The companies in the Jakarta index are trading at 17 times earnings, compared with 11 times earnings for companies in the MSCI Emerging Markets Index, according to data compiled by Bloomberg. “Value expectations have been at record highs,” Bloy said. “Cautious investors are looking at valuations in a different way than bullish entrepreneurs.”

In addition to valuations, deal making is being chilled by shifting government regulations, which complicate market assumptions for acquirers, and competition from strategic buyers.

Growth in private equity in Indonesia has turned out to be “lumpy” rather than “a straight line,” said Juan Delgado-Moreira, a Hong Kong-based managing director at Hamilton Lane Advisors LLC, which invests in private equity. “There is a bid-ask gap to bridge” because of high prices in the stock market, “which some would say is overheated” despite the recent drop, he said. Delgado in January 2012 had said that “Indonesia is probably the sexiest destination in the emerging markets now,” calling it “one of the key long-term investment destinations in Asia.”

Large global private-equity firms this year have been selling more than buying. Deals in Indonesia have failed because of unrealistically high valuation expectations by sellers. One consumer company seeking a valuation at 12 to 14 times earnings before interest, taxes, depreciation and amortization for a private-equity stake should have been priced around eight times Ebitda based on comparable public companies, according to Navis Capital’s Bloy. “When you have a slight divergence you can adjust, but here you can’t bridge the gap,” Bloy said. “Someone has to give.”

If the selloff in share prices as well as Indonesia’s rupiah continues, it may improve opportunities for private-equity investors, according to Sebastien Lamy, a Singapore-based partner at management consultancy Bain & Co.

The rupiah has plunged 13 percent this year to the weakest level in four years, making it the worst performer among Southeast Asia’s currencies, according to data compiled by Bloomberg. “If the stock-market adjustment lasts, it will also have an impact on private-equity valuations, and those lower valuations would mean that private equity deploys more capital in the country,” Lamy said. “A lasting devaluation of the rupiah will have the same effect.”

High asking prices have also been bolstered by the prospect of increasing economic expansion. Growth rates in Indonesia, Southeast Asia’s largest economy and home to 249 million people, are forecast to increase from 5.8 percent this year to 6.4 percent in 2015, according to the median forecast of 24 economists surveyed by Bloomberg. That’s higher than projections for neighboring Malaysia and about double the growth expected for the global economy.

Economic growth of about 6 percent a year would mean Indonesia’s economy will surpass Germany and the U.K. in size by 2030, according to a report last year by consulting firm McKinsey & Co. By 2020, the number of middle-class and affluent Indonesians may double to more than 141 million, Boston Consulting Group said in a March report. That’s greater than the population of Japan, and almost that of Russia.

Economic Summary for the week ended 30th August 2013

Growth Beats Estimate as US Weathers Budget Cuts: Economy - The US economy expanded more than estimated in the second quarter, providing evidence that growth is picking up as the nation overcomes the effects of federal tax increases and budget cuts.

Gross domestic product rose at a 2.5 percent annualised rate, up from an initial estimate of 1.7 percent, Commerce Department figures showed on Friday in Washington. Other reports today showed claims for unemployment benefits dropped and consumer confidence weakened.

The improvement in growth shows the world’s largest economy gaining momentum after a drought, Superstorm Sandy and budget battles in Washington stalled growth in the last three months of 2012. Recent data have shown the labour market is gaining strength while home prices rise, bolstering household finances.

“The economy is doing fine,” said Brian Jones, a senior US economist at Societe Generale in New York, who correctly projected the gain in GDP. “It is going to weather the sequestration. Growth will accelerate in the second half.”

Japan’s Prices Rise Most Since 2008 in Boost for Abe - Japan’s consumer prices increased at the fastest pace since 2008 in July, as energy costs rise and Prime Minister Shinzo Abe makes progress in pulling the economy out of 15 years of deflation.

Consumer prices excluding fresh food climbed 0.7 percent from a year earlier, the statistics bureau said on Friday in Tokyo. Industrial output increased a less-than-forecast 3.2 percent from the previous month.

“Japan is moving into real inflation,” said Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan official. “Today’s data is encouraging for the BOJ, and they are likely to keep monetary policy on hold.”

Higher energy costs following the shutdown of the country’s nuclear reactors drove prices higher as the BOJ rolls out an unprecedented easing that helped spur a third straight quarter of growth. The central bank’s pledge in April to double the monetary base over two years has weakened the yen, which has tumbled 20 percent against the dollar over the past year, making imported oil and wheat more expensive.

Malaysia Plans Projects-to-Subsidy Curbs to Contain Budget Gap - Malaysia said it plans to delay infrastructure projects, cut subsidies and may start a consumption tax, seeking to contain the budget deficit and bolster a shrinking current-account surplus.

Public building projects with high import content are most likely to be rescheduled, Idris Jala, a minister in the Prime Minister’s Department, told reporters in Kuala Lumpur on Thursday. The government may unveil plans to adjust subsidies as early as next week and is trying to include a goods and services tax in its 2014 budget, said Mohd Irwan Serigar Abdullah, secretary general at the finance ministry.

Asia’s policy makers are working to regain investor confidence as the prospect that the US will reduce stimulus spurs outflows from the region, with Indonesia’s central bank holding an unscheduled board meeting on Thursday. The ringgit has fallen 7.9 percent this year, and Fitch Ratings cut Malaysia’s rating outlook to negative last month, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform.

“The market expects us to manage our deficit and balance of payments in a way to ensure the market will have confidence in the macro and fiscal management of this country,” Prime Minister Najib Razak told reporters in Putrajaya, outside Kuala Lumpur. “The details relating to that will be announced when appropriate.”

The benchmark FTSE Bursa Malaysia KLCI Index has fallen 5.9 percent from a record on July 24.

Construction of a subway in Kuala Lumpur, the country’s biggest infrastructure project, won’t be among those projects held up, said Jala, who heads the government’s Performance Management & Delivery Unit.

Dialogues on the implementation of a goods and services tax have been underway, said Najib, who is also finance minister. “Whether this is included in the budget or not, we’ll have to wait for the budget,” said the premier, who is due to deliver his 2014 fiscal plans on 25 October.

GST would take 14 months from next year to implement if the government goes ahead, Irwan said. To ease the public’s burden, rebates would be given to some people and smaller companies, and some essential items like rice and baby milk could be zero-rated, he said.

A consumption tax is “a must not an option,” said Irwan.“We are trying our best to include it in this year’s budget.”

Malaysia is on target to lower its budget deficit to 4 percent of gross domestic product this year and to 3 percent in 2015, Irwan said. It aims to achieve a surplus in 2020, he said.

“The steps announced are reassuring and will help calm fears about the large fiscal deficit and debt, and worsening current-account position,” Chua Hak Bin, a Singapore-based economist at Bank of America Corp., said by e-mail. “What will probably help are also steps to address ballooning government spending and operational costs, and not just tax increases.”

Brazil raises interest rate to 9% to battle inflation – The central bank's monetary policy committee, the Copom, voted unanimously for a third straight half percentage point rate rise. The Copom left the door open for more hikes by reiterating that the latest rise is part of an ongoing rate-adjustment process. A fall in the value of Brazilian real has stoked inflation, currently 6.15%.

The currency's fall has been blamed on an outflow of capital triggered by expectation that the US Fed will end its stimulus policy, leading to a stronger dollar. The real has lost 20% of its value against the dollar since the start of the year. Other emerging nations, including in southeast Asia, have suffered similar currency problems.

Higher interest rates would help Brazil control inflation, and also bolster investors' confidence, the International Monetary Fund said in a report on Wednesday. Fabio Akira, chief Brazil economist at JPMorgan, said further rate hikes were likely. He is forecasting a 50 basis points rise in October and another 25 points rise later in the year. Last week, the real fell to as low as 2.45 to the dollar, its lowest level since December 2008.

Spotlight On: Europe – Escape from Austerity

In Europe there are finally signs that the long nightmare of the debt crisis is drawing to a close, although few Europeans can have a positive perspective on current economic conditions. The unemployment rate at 10.9% across the European Union (and 12.1% in the eurozone) represents a colossal waste of human potential and accumulated misery. Moreover, two ugly recessions have left real output across the continent below its level of six years ago.

However, there are unmistakable signs that Europe is on the mend. The actions of the European Central Bank (ECB) in recapitalising the banking system and standing behind the government bonds of peripheral nations have convinced investors to bid down the yields on sovereign debt, reducing the risk of another financial crisis. In the real economy, the eurozone composite purchasing managers’ index (PMI) in July was at its highest level in two years, suggesting a return to positive real GDP growth. At a micro level, the economy is benefiting from improving consumer confidence, a return to trade surplus and plenty of pent-up demand.

However, the European crisis has never been about Europe as a whole but rather the radical difference in economic performance across Europe and how currency union has bound regional fortunes together. Total employment is still falling, deficits are still high and the debt-to-GDP ratio is still rising in most of the nations at the centre of the debt problems of the last decade.

This remains a significant risk for Europe. The advent of the euro led to a significant increase in the interdependence of European financial systems, and the various stuttering attempts to stem the problems in the periphery have only increased this mutual dependence. Even as a long-term proposition, an exit of a peripheral country from the euro due to domestic economic collapse would inflict painful losses on eurozone taxpayers and likely revive crisis conditions with their now well-known disastrous implications for lending.

For investors, however, this continuing risk needs to be considered in the context of some compelling valuations in European equities. The ECB’s very accommodative stance and its equally dovish guidance (in line with both the Fed and the Bank of England) have left both short-term rates and long-term Bund yields at extremely low levels. Indeed, the gap between the earnings yield on stocks and long-term term government bond yields is significantly wider in Germany than in either Japan or the US, suggesting there is value to be found in European equities.

Economic Summary for the week ended 17th August 2013

Productivity in U.S. Rises Above Forecast as Output Grows - The productivity of U.S. workers rose more than projected in the second quarter as the world’s largest economy expanded.The measure of employee output per hour increased at a 0.9% annualised rate, after a 1.7% decline in the prior three months, a Labor Department report showed today in Washington. Expenses per worker rose at a 1.4% rate, greater than estimated.

Even with the second-quarter pickup, productivity was unchanged in the 12 months ended in June, below the average 2.4% annual gain in the 2000-2011 period, the report showed. Businesses are reaching the limit of how much efficiency they can squeeze from their existing staff, a sign they may take on more workers once they see faster sales.

“Productivity is growing at an extremely slow pace,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, who projected a 0.8% increase. “We’re in an environment where businesses are finding it very difficult to eke out more from the labour they employ. We could see more hiring, but the bad news is, if you’re a worker, you’re seeing your pay cheque barely go up.”

Hong Kong Raises 2013 Growth Outlook on Second Quarter Spurt - Hong Kong’s economy expanded more than estimated in the second quarter on consumer spending and investment, prompting the government to raise its forecast for the full-year expansion. Gross domestic product rose 0.8% in the April-June period from the previous three months after a 0.2% gain in the first quarter, the government said on Friday.

A strengthening economy may aid Hong Kong Chief Executive Leung Chun-ying, whose popularity dropped in July to the lowest since he took office amid allegations of wrongdoing by members of his administration and calls for electoral reform. The government said that growth this year will be between 2.5% and 3.5%, after in May estimating a gain of between 1.5% in 3.5%.

“The risk is still pretty much the external environment and that includes the Chinese economy, because Hong Kong depends on them in terms of exports of goods and services,” Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong, said before the release. “Hong Kong will do better because we’re looking for a continued recovery in the U.S. economy and the bottoming out in the Chinese economy.”

The economy expanded 3.3% from a year earlier in the second quarter, the government said, from a revised 2.9% pace in the first three months.

Indian Rupee falls to Record Low Against US Dollar – The Indian rupee has hit a record low against the dollar despite recent efforts to prop-up the currency. On Wednesday India's central bank put further restrictions on the amount of money that companies and individuals can send out of the country. That had little impact and the rupee fell to 62.03 to the dollar, below its previous low of 61.80 hit on 6 August.

Overseas investors have been pulling money out of Indian shares and debt on concerns over the economy. According to official data, international investors have withdrawn USD 11.58bn in shares and debt from India's markets since the beginning of June. India's economy had been growing at a fast clip, reaching annual growth of 9%. In recent months, it has seen a sharp decline largely because of a slowdown in its manufacturing and services sectors. "There is a complete lack of faith in the markets. There are fears that the RBI (Reserve Bank of India) measures may not help improve the rupee," said Param Sarma, chief executive with NSP Forex.

Indian authorities are concerned that the weak rupee is stoking inflation. The nation relies on imports of crude oil, chemicals and some foodstuffs, which are priced in dollars. The weak rupee makes those more expensive, a cost that is eventually handed on to the consumer. In July, India's main gauge of inflation, the Wholesale Price Index, was 5.79% higher than a year earlier, up from 4.86% in June.

Spotlight On: What’s Next in 2013 – Question and Answer Session with BlackRock

Question. When will central banks begin changing policy and what impact will that have?

Answer from BlackRock. Policy dominates markets – that’s likely to be a key theme for the rest of this year and beyond. Central bankers have expended too much capital – of the monetary, intellectual and reputational kind – to reverse their stimulus policies prematurely and risk a stillborn economic recovery. But monetary policy is starting to diverge.

With tapering of asset purchases in the US expected to start as soon as this year, many market participants anticipate that the world’s largest economy will become the first in the developed world to put up interest rates.

By contrast, Europe remains in a more difficult position that will likely warrant further accommodative monetary policy. Unemployment is at a record 12.2% in the eurozone as governments implement austerity measures, consumer spending remains constrained and credit contracts given banks continue to delever. The Bank of England is also likely to remain accommodative via its own open market purchase programme, having characterised the UK’s recovery as being weak by historical standards. In Asia, the Bank of Japan is seeking to create growth, and has embarked upon an aggressive monetary policy campaign of quantitative easing that is three times the size of open market purchases in the US.

So what does all of this mean for investors? We would continue to advocate underweight positions in core government bonds. Volatility is up, and we believe it will remain elevated. Even with the recent increase in real interest rates, we still believe Treasuries are overvalued and expect that yields are likely to rise over the long term.

Question. What is the state of the global economy? Are risks from Europe receding?

Answer from BlackRock. Global economic growth is still stuck in a low gear, with little sign of an acceleration ahead. Indeed, in the second quarter, many areas of the world appeared to be decelerating further – particularly many emerging markets. There is less risk of a widespread global recession than there was a year ago, but overall global growth is still hovering around a relatively slow 3.3% to 3.5%. One surprising bright spot has been Japan. Following decades of economic stagnation, the country’s economy grew at an astounding rate of 4.1% in the first quarter. Japan’s new economic policies and increasing confidence is feeding through to the underlying economy.

The near-term threat of an outright Eurozone breakup has definitely receded. Although the economic data is mixed there are some signs of improvement in the underlying economic fundamentals. Certainly the economic data is stabilizing albeit at low level. Overall the region’s banking system is fragile and undercapitalised and remains a source of potential market gyrations. Tail risks such as austerity measure in Greece, or the banking systems in Cyprus remain, but these risks are generally short lived in the global capital markets given the perceived support provided by the European central Bank (EcB) to economies/financial systems at risk. Real European wide reform will require more resolute political will than we’ve seen so far, but we don’t expect much progress ahead of German elections in September.

Question. Where are the best opportunities in stocks for the next six months and beyond?

Answer from BlackRock. Generally speaking, we prefer equities over bonds but investors must brace for more volatility. Most equity valuations look reasonable – with notable exceptions in Southeast Asia and Mexico. In the US, stocks are not as cheap as last year, but we would suggest a focus on cyclical sectors of the market (but not those that are overly exposed to the US consumer), like the energy and technology sectors which both look inexpensive.

Outside of the US, we are seeing some good values in international stocks. While we would back away from yield plays in the US, dividend stocks look cheaper elsewhere. They still trade at discount to broader equities, and still offer higher yields. The UK and Europe dividend equity markets remain attractive given the recent uptick in economic data and outcome statements from the EcB and BoE indicating that interest rates may remain at low level for the foreseeable future. In addition, the uncertainty about growth and the level and direction of interest rates and inflation make minimum volatility equity wrappers another potential option for investors.

Elsewhere, emerging markets have underperformed so far this year and are trading at a significant discount compared to developed markets. We believe valuations have reached depressed levels and this may present some attractive entry points. In particular, we are seeing good long-term value in parts of Asia and Latin America.

At the sector level, many defensive stocks are at their peaks of profitability and valuation – and have outperformed their more economically sensitive counterparts. But valuations of consumer brands and other defensives now look stretched. For example, our research shows that US defensives (minus healthcare) are in the top valuation decile of the past 35 years on a price/earnings basis. As a result, these stocks may not provide the downside protection investors have come to expect.

Question. Will emerging markets’ underperformance continue?

Answer from BlackRock. In the short term, we would not be surprised to see additional performance challenges for emerging markets (EM). Slowing growth, concerns over the Chinese banking system and a general preference among investors for US stocks have been hurting performance and these trends are not going away any time soon. In addition, a less accommodative monetary regime and a stronger dollar will represent headwinds for many EM countries. Finally, anaemic growth in most of the developed world will hinder their exporters. All of this leads us to believe that anomalies and relative value opportunities are likely to emerge. Differences between emerging markets are growing – and investors need to become more discerning.

Over the longer term – say, three to five years – however, we believe EM stocks represent good value, given that they are trading at more than a 30% discount to their developed counterparts, the largest gap since the crisis of 2008. Although the stellar economic growth we saw in China/India in 2010 is not likely to be repeated, EM growth as a whole should continue to outpace that of developed markets. In addition, while EMs face numerous headwinds, by many measures these countries are more stable than many of their developed peers, with lower sovereign debt, significant currency reserves and (with some notable exceptions) relatively stable current account balances. Together, stronger macroeconomic conditions and attractive valuations make for a compelling long-term argument for EM equities.

Question. What of the gold price?

Answer from BlackRock. We believe that investors should still hold gold as a long-term, strategic part of their portfolios. However, we expect gold prices to remain volatile, and anticipate a general downward bias in the price. Sentiment has clearly changed in the gold market and investors my consider reducing holdings in this asset class. Gold prices are facing the headwind of rising real interest rates (adjusted for inflation) for the first time in years. Many investors focus on inflation and the US dollar when thinking about gold prices, but real interest rates actually tend to have a more significant effect. All else being equal, higher real interest rates should create a less supportive environment for gold.