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.

Economic Summary for the week ended 9th August 2013

Chinese Economic Data Points To End of Slowdown - China's economy could be stabilising, the latest set of economic figures from the country has suggested. Factory output in July rose 9.7% compared with a year ago, ahead of expectations and up from the previous month's figure of 8.9%. Consumer prices held steady in July, rising 2.7% from a year earlier, matching the rate seen in June.

China's growth rate has been slowing at its fastest pace since the global financial crisis in 2008. In the second quarter of the year, China's economy grew by 7.5% compared with the previous year, down from 7.7% in the January to March period. The government has set a target of 7.5% growth for the whole of 2013, which would mark the lowest rate of expansion in more than two decades.

In other data released on Friday, the producer price index fell 2.3% in July from a year earlier compared with a drop of 2.7% in June. However, although July's retail sales jumped by 13.2% compared with last year, that was a slower pace of growth than the 13.5% recorded between June 2012 and June 2013. On Thursday, trade figures showed export and import growth rebounded in July.

Analysts welcomed the latest data, but said more evidence would be needed before it would be safe to say whether the economy was beginning to pick up again. You Hongye, economist at Essence Securities, said: "Broadly speaking, economic growth is stabilising and recovering slightly, but we still need to see whether the momentum could be sustained."

Xu Dongshi, from Galaxy Securities in Beijing, said: "The easing PPI drop also implies signs of stabilising of the industrial sector. But it's still too early to say that China's economy is on the track of rebounding as it takes time to resolve economic structural problems."

Japan’s Debt Exceeds 1 Quadrillion Yen as Abe Mulls Tax Rise - Japan’s national debt exceeded 1,000 trillion yen for the first time, underscoring the case for Prime Minister Shinzo Abe to proceed with a sales-tax increase to shore up government finances.

The country’s outstanding public debt including borrowings reached a record 1,008.6 trillion yen (USD 10.46 trillion) as of 30 June, up 1.7 percent from three months earlier, the finance ministry said in Tokyo on Friday. Larger than the economies of Germany, France and the U.K. combined, the amount includes 830.5 trillion yen in government bonds.

The world’s heaviest debt burden will weigh on Abe when he decides next month whether to implement a two-step plan to double the tax on consumers in a nation with ballooning welfare costs. While boosting the levy would drag on growth, Moody’s Investors Service yesterday warned that a worsening of finances would erode confidence in government bonds.

“Ballooning public debt underlines the need for Abe to push for a sales-tax increase,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo. “This is a minimum policy requirement for his government.”

The levy on consumption is due to be raised to 8 percent in April from the current 5 percent, followed by an increase to 10 percent in October 2015. Abe said he would make a final call on the plan after the release of revised second-quarter gross domestic product data on 9 September.

The sales-tax law enacted last year gives Abe the power to postpone the rise should he conclude that the economy is unable to weather the austerity measure.

Russian GDP Unexpectedly Slows – Russia’s economy unexpectedly slowed in the second quarter to extend a slide that’s threatening to push the world’s largest energy exporter near recession.

Gross domestic product expanded 1.2 percent from a year earlier, the Federal Statistics Service in Moscow said today in an e-mailed report. That was below all 19 forecasts in a Bloomberg survey, which had a median estimate of 2 percent. The Economy Ministry had projected that output expanded 1.9 percent in the period.

The surprise deceleration underscores the challenges Russia faces from weaker global demand for its commodities, which is compounding a domestic slowdown. Russia’s central bank left its main rates unchanged for an 11th month today while signalling increased concern about economic expansion.

“Second-quarter GDP is seriously disappointing and is a very strong argument for monetary-policy easing,” said Piotr Matys, an emerging-markets economist at 4Cast Ltd. in London. “Weak external demand and investments are still the main drag on the economy, but we suspect that final consumption, which has been the only relatively strong component so far, may have weakened as well.”

Spotlight On: Schroder’s Global Macro Economic Outlook

Bob Jolly, Head of Macro at fund manager Schroders, gave his views on the global macro economic outlook this week.

“We expect market volatility to remain high in the coming months and have moved to a more cautious stance. However, volatility creates opportunity for active fund managers, so we are remaining vigilant for mispriced investment opportunities to exploit when markets overshoot in either direction.

Looking ahead into the remainder of 2013 our central expectation is that the US will continue to slowly accelerate and exit so-called ‘stall-speed’ growth. Banks have been loosening their credit standards, companies are increasing their capital expenditure and the house prices are starting to accelerate. There has already been a shift in the Federal Reserve’s thinking due to the gradual economic improvements – away from Quantitative Easing and towards tapering – and this has caused a great deal of market volatility.

Elsewhere, the story is less positive. In China, for example, data suggests that economic activity resulted in an investment splurge following the credit crisis of 2008, leading to over-investment across sectors such as infrastructure and export companies. In our view this has resulted in overcapacity. Furthermore, this over-investment was funded by debt, resulting in rising levels of household and corporate debt. Indeed, data suggests Chinese households have never been so indebted.

However, much of this has been priced into market valuations so we are not too negative on China from an investment perspective. In addition, the government is making the longer term outlook more promising by putting its emphasis on encouraging quality of economic growth, rather than quantity by enacting policies that focus on moving the economy from being export-driven to a more consumption-based model.

Europe’s situation, meanwhile, is concerning and in some respects we believe economic conditions are worsening. Bank lending is contracting, the output gap has continued to grow and, with inflation falling sharply, it appears the European Central Bank has not been aggressive enough. The eurozone is already closer to deflation than many believe and tax increases (particularly duty and VAT) have been disguising underlying disinflationary pressures. In Spain for example, if you exclude taxes from its headline inflation rate, then the country is already seeing disinflation. Adding to the uncertain outlook for the eurozone is the upcoming German election in September, political posturing in the run-up to which could be an additional source of market volatility.

In the UK policymakers’ focus has been on boosting growth by kick starting the housing market. So far this has been positive as the economic backdrop is improving. However, we believe that it is too early to become optimistic, as inflation has acted as a tax on incomes resulting in falling real incomes for the UK population.

In our portfolios we will be closely watching market volatility that is likely to ebb and flow around expectations of central bank actions. Following recent market falls we have been seeking to add to positions which have become less crowded, but we are not adding aggressively to risk markets.

The key in such an environment is to be nimble. On the duration front, for example, we expect market noise to cause movements in government bond yields and present opportunities on both the long and short side.

Currently we have a neutral duration stance. However, we have been buying some duration at the front end of the yield curve in Europe as we think the market has priced in rate hikes that are unlikely to happen given the economic outlook for the eurozone. Meanwhile we have a short exposure to 10-year US Treasuries as we think the US economy will continue to improve and yields could grind higher.

On a country basis we now have zero exposure to peripheral eurozone sovereign bonds after we took profits from our Portuguese and Irish positions earlier in the quarter.

Valuations in the credit market do not look particularly attractive compared to history. However, regardless of Fed tapering, we are in an environment of abundant liquidity, low interest rates, and there is little prospect of inflation in the near future given the size of output gaps. As a result, cash is unlikely to appeal to investors and credit markets will continue to be underpinned by the hunt for yield. We continue to follow a thematic approach to help identify the most attractive credits. In a difficult overall environment for credit, we think prudent credit selection backed up by rigorous research will be rewarded.

Within foreign exchange, we no longer have a short exposure to the Australian dollar, but maintain our short exposure to the Japanese yen, which we expect to be the world’s weakest currency. Recent positions we have favoured include a long position in the Indian rupee and a long exposure to the Russian ruble. We have also recently implemented a short position in the Chinese renminbi.”

Economic Summary for the week ended 2nd August 2013

US jobs data may show strength, prompt stimulus end - Investors positioned for a strong U.S. jobs report on Friday, balancing the likelihood it will confirm the economy is recovering with wariness it might prompt the Federal Reserve to end its stimulus earlier. But coming just after Fed Chairman Ben Bernanke tried to ease concerns about an imminent tapering of its money-printing stimulus, a strong number could reignite some market volatility.

The prospect of an end to stimulus - which has pumped billions of dollars into world markets - has already battered some assets, notably in emerging markets. "The data in the US is picking up appreciably at the moment. It's all pointing to a better (jobs) number today and bond markets should be scared," said William Hobbs, head of equity strategy at Barclays Wealth.

The payrolls report is forecast to show an increase of 184,000 in jobs outside the farm sector last month and the jobless rate dropping to 7.5 percent from 7.6 percent, according to a Reuters poll. The unemployment rate is closely monitored by the Fed as it gauges when to cut back its USD 85 billion a month bond-buying program.

Japan says GDP growth could slow to 1 percent after sales tax hike – Japan's economic growth will slow to 1.0 percent in fiscal 2014/15, less than half the pace expected this year, as a planned sales tax hike weighs temporarily on consumption, government forecasts showed.

In fiscal 2013/14, which began in April, Japan's economy is forecast to expand 2.8 percent as an improving labour market bolsters consumer spending and as policies to end 15 years of deflation start to take hold, the cabinet office said. That is an upgrade from the government's previous forecast of 2.5 percent growth.

Prime Minister Shinzo Abe has to decide this later this year whether to carry out a plan that would raise the 5 percent sales tax to 8 percent from next April and then to 10 percent in October 2015. Private consumption is expected to grow 0.5 percent in fiscal 2014/15, less than the 2.1 percent growth forecast for the current fiscal year, the cabinet office said.

The plan to raise the sales tax will add 0.2 percentage point to gross domestic product (GDP) in fiscal 2013/14 as shoppers rush to buy goods before the first tax hike, according to a cabinet office official. But the tax increase would then subtract 0.6 percentage point from economic growth in fiscal 2014/15 as consumers scale back purchases, the official said. Overall consumer prices are expected to rise 3.3 percent in fiscal 2014/15, but excluding the tax hike prices will rise 1.2 percent, the cabinet office said. In comparison, overall consumer prices are forecast to rise 0.5 percent in fiscal 2013/14, the cabinet office said.

The sales tax hike is meant to be the first step towards fixing Japan's public debt, which at more than double annual GDP, is the biggest burden in the industrial world. Abe has made economic recovery and the defeat of deflation his top priorities, but there are concerns he could delay the pace of tax hikes to avoid a slowdown in growth. The Bank of Japan unleashed an intense burst of monetary stimulus on April 4, promising to double the supply of money through aggressive asset purchases to meet its 2 percent inflation target in roughly two years.

Latin American stocks rise on encouraging global outlook - Latin American stocks rose on Thursday as China manufacturing data and the US Federal Reserve's promise to continue an USD 85-billion-per-month bond-buying program helped lift regional shares. Mexico's IPC index approached a near two-month high, while Chile's stock exchange snapped its five-session slide.

China on Thursday released data showing its manufacturing sector grew slightly more than expected in July. China, the world's second-largest economy, is Brazil's biggest trading partner and a key purchaser of Latin American commodities exports, such as iron ore, soy, copper and petroleum.

The Fed's bond-buying program has kept US interest rates low and limited fixed-income returns, prompting investors to buy higher-risk assets such as emerging market stocks. Recent Fed suggestions that the program may be wound down had fuelled selling of assets in Latin America.

"The movement today in our market, based as strongly as it is on commodities, is upward," said Gillmor Monteiro, an investment manager at Intrader in Sao Paulo. He added that shares of lenders are rising today because of the expectation of low-interest rates in the near future.

Brazil's benchmark Bovespa index snapped a three-session slump on Thursday, rising 1.15 percent to 48,787.10 points in early afternoon trading.

Spotlight On: Rethinking Emerging Market Allocations

Following five years of review, MSCI, whose equity indexes are tracked by investors with about USD 7 trillion in assets, recently announced that they will promote the United Arab Emirates (UAE) and Qatar from frontier-market status as of May 2014.

“It has been a long journey, but we’ve finally arrived,” said Georges Elhedery, head of global markets for the Middle East and North Africa at HSBC Holdings Plc when the move was announced on 12 June. “Today’s decision firmly establishes the region on the emerging-markets growth map in the minds of global institutional investors.”

The upgrades have the potential to draw USD 800 million of new funds into Qatari and UAE shares, according to HSBC. Economies in the six-nation Gulf Cooperation Council are growing three times faster than developed markets as governments funnel oil wealth into infrastructure projects, including plans to build stadiums and roads in Qatar before the nation hosts the 2022 soccer World Cup.

MSCI raised Qatar and UAE after they adopted changes including a buyer cash-compensation procedure, which enables investors to be paid in cash if a security is unavailable for delivery on settlement day. Qatar, the world’s biggest exporter of liquefied natural gas, has raised foreign-ownership limits of companies in its USD 141 billion stock exchange, the Qatar Exchange cited Finance Minister Yousef Hussain Kamal as saying in June.

This recent news has led to a rethink of emerging markets, investors are embracing countries that have improved their balance sheet and don't rely on outside funding for growth. Some investors are looking for extra insulation from future market gyrations. Stocks from Middle Eastern oil-and-gas producers have held up better than other emerging markets. Oil prices have risen recently, even as most other commodities have fallen. These countries' currencies are also pegged to the US dollar, so they aren't affected when the greenback rallies.

MSCI has released indicative indices for the UAE and Qatar, together with weights, following the MSCI’s announcement in June. The UAE companies include EMAAR Properties, DP World Ltd and Aldar Properties PJSC, while the Qatari companies include Qatar National Bank, Qatar Electricity & Water Co and Qatar Telecom.

According to Bloomberg consensus estimates the UAE companies are projected to witness strong income growth both in 2013 and 2014 and respectable BEst 2014E dividend yield averaging 3.1%. Strong UAE stock market YTD (DMGI +47%) has resulted in the Qatari stocks trading on lower multiples (QE Index +12% ) and having higher projected BEst 2014E dividend yields of 5.2%, with a majority of companies also projected to have double digit net income growth in 2014, according to the Bloomberg consensus estimates.

In the global hunt for yield, both the UAE and Qatari markets have companies offering attractive dividend yields, supported by income growth, and unlike a majority of other emerging and frontier markets the UAE and Qatar do not suffer from currency risk, given their US dollar pegs.

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.