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.

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.