Economic Summary for the week ended 1st Feb 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economic Summary for the week ended 16th Jan 2014

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

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

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

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

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

That is expected to support stronger growth in developing economies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Spotlight on: Outlook for 2014

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

Euro expansion

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

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

Japan’s challenge

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

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

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

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

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

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

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

Equities or bonds?

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

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

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

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

Inflation woes

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

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

Key risks

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

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

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

Economic Summary for the week ended 4th Dec 2013

India - India's current account deficit, a key area of concern, narrowed sharply in the second quarter after a series of measures helped curb gold imports.

The deficit fell to $5.2bn during the July-to-September quarter, down from $21bn during the same period last year.

A current account deficit is the difference between inflow and outflow of foreign currency and occurs when imports are greater than exports.

India's deficit had been widening raising fears over its economic health.

India's Finance Minister, P Chidambaram, said the latest numbers indicated that the country was "on target to contain the current account deficit".

According to India's central bank, the Reserve Bank of India (RBI), the current account deficit stood at 1.2% of the gross domestic product (GDP) during the quarter, down from 5% of GDP during the same period last year.

Surveys - A key global survey of international perceptions of official corruption has put Spain down six points to 40th place, following a series of recent scandals.

Only Syria, in the middle of a civil war, lost more points in the survey, carried out by the Berlin-based Transparency International. The list of 177 countries put Denmark and New Zealand top with 91 out of 100.

The U.K. is ranked in 14th place, up from 17 last year, with a score of 76 points out of 100.

The U.S. ranked 19th and China 80th, both unchanged from last year. Russia improved slightly to 127th place, from 133rd previously, and Japan was down one point at 18th.

Transparency International says the world's marginalised and poor remain the most vulnerable to corrupt officials.

Chris Sanders from the group said: "In practice, these numbers mean that corruption is a constant burden in daily life. This June, our global survey showed that you are twice as likely to pay a bribe if you live in a poor country."

Currencies - The Chinese yuan is now the second most used currency in trade finance, surpassing the euro in October.

According to the Society for Worldwide Interbank Financial Telecommunication, the yuan had a 8.66% share of letters of credit and collections in October compared with 6.64% for the euro.

China has been working to build the yuan’s role in global trade and investment by reducing controls on the currency and promoting it beyond local markets and to international players.

However, the U.S. dollar remains the leading currency with a share of 81.08%.

Commodities - Last month was the worst November for gold prices in more than 30 years, but investors pounced on the precious metal’s weakness to add to their positions.

According to gold exchange BullionVault, its clients have now bought back 60% of the 1.2 tonnes sold between April and June, taking their gold holdings above 32.6 tonnes in aggregate.

Although gold ETPs continued to see outflows, BullionVault said that sentiment towards the physical metal is on the up, even if it is still depressed versus last year’s levels and lower than in September 2011, when gold’s price streaked past $1,900 as investors fled for safety.

Predictions - One of the economists who shared this year’s Nobel Prize for economics has argued that the significant rise in stock and property prices risks creating a financial bubble.

Robert Shiller, who scooped the prize with Eugene Fama and Lars Peter Hansen for his research into market prices and asset bubbles, told German magazine, Der Spiegal, that the U.S. stockmarket and the Brazilian property market are the main areas of his concern.

The American economist’s work on financial bubbles, crises, market volatility and risk sharing has received widespread attention.

He told the magazine: “I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets. That could end badly.

“I am most worried about the boom in the U.S. stockmarket. Also because our economy is still weak and vulnerable.”

Markets - November saw developed market equities come close to the highs last seen in 2007, according to S&P Dow Jones Indices, while emerging markets continued to lose ground.

The S&P Global Broad Market Index shows that developed markets gained 1.61% over the month to 30 November, taking the year-to-date gain up to 22.12%. Emerging markets, on the other hand, fell 1.92% and saw their year-to-date loss reach 3.09%.

S&P Dow Jones Indices senior index analyst Howard Silverblatt says: “Overall, developed markets are nearing their peak while emerging markets remain over 22% off than their October 2007 high – struggling with reduced growth expectations as their developed counterparts make progress in economic stability and recovery.”

Only three emerging markets posted a positive result last month, with China advancing 4.44%, Mexico 2.92% and Poland 1.27%. Indonesia was hit by the strongest fall after losing 12.19% in the four-week period, while Peru lost 9.15% and Columbia 8.03%.

Spotlight on: Has QE resulted in ‘bubble trouble’ for global equities?

Bill O'Neill is head of CIO research UK, UBS Wealth Management

On 25 November 2008, the U.S. Federal Reserve kicked off its QE programme.

Over the past five years, QE has become increasingly common in the global economic landscape.

Other developed countries have emulated it by launching similar programs, all of which helped cut borrowing costs and supported asset prices.

In fact, in the five years since QE took off, global equities have returned more than 15% on an annualised basis, treasuries close to 5%, and US high yield credit more than 20%.

This has been a great period for investment returns, but not so great for the growth of the global economy. This disconnect poses the question – does QE’s reflation of asset prices represent the creation of a bubble waiting to burst?

QE has distorted financial markets and, as a result, seems to have caused investor complacency.

The one month average level of bearish sentiment, measured by the American Association of Individual Investors is at levels last seen in early 2011 and 2012. On both occasions this level represented complacency.

Stock markets seem almost indifferent to whether fundamental economic data is good or bad, as support in the form of monetary policy acts as a safety net for investors.

This government intervention is occurring worldwide. Japan’s economics minister attempted equity strategy earlier in the year, setting a two-month target return of 17% on the Nikkei 225.

On the other side of the globe, ECB President Mario Draghi’s “do what it takes policy” in the eurozone implicitly guarantees positive returns on short-dated peripheral government bonds.

It is plain to see how investor complacency may arise from this powerful backing. Yet with investment returns having seen such a significant rise in the past five years, should investors prepare for an imminent bubble burst and end to confidence in equities?

Despite concerns, this indifferent sentiment among investors has not pushed asset valuations beyond reasonable levels. This is good news for long-term investors.

Looking at simple ratios of prices to earnings in equity markets, and at cyclically adjusted earning yields, it does not appear we are in a bubble, not least one fit to burst.

The net result is a cyclically adjusted earnings yield of 5.4%. This represents about a 10% discount to the 20-year median yield of 4.9%, showing that after a significant rally over the last five years, share valuations are fair to slightly high.

Clearly, the important point is there is scope for earnings to drive price appreciation.

Yet, investors should not expect a repeat of the 15% annualised returns they have enjoyed over the past five years.

Annual returns are likely to halve to around 7%-8%. Equally, it is highly unlikely high yield corporate bonds will continue to produce double-digit percentage returns.

Though a bubble does not appear to be emerging, investors should be aware that returns from equities may not be as impressive in the years to come, and inflation is also a risk.

Even moderate inflation could diminish returns for medium-term investors.

Although there will always be risks and warning signs to consider when investing in equities, we are not in the midst of a dangerous bubble in risk assets. Investors’ own bubbles will not be burst just yet.

Economic Summary for the week ended 22nd Nov 2013

Japan - Japan's exports have seen their biggest annual rise for three years.

Exports rose 18.6% to 6.1tn yen ($61bn) in the year to October, largely thanks to more car shipments, its ministry of finance said, this was above analysts' forecasts of about 16.5%.

A weak yen and an improving global economy has seen oversees demand pick up, but despite this and Prime Minister Shinzo Abe's looser monetary policies, Japan's economy remains fragile.

The yen has fallen approximately 14% against its U.S. dollar value in 2013, making Japanese goods cheaper for foreigners to buy. Car exports rose 31.3% year-on-year, while the volume of overall exports to the U.S. and European Union grew 5.3% and 8% respectively.

"U.S. private-sector demand remains strong and European economies appear to be bottoming out," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo, "If advanced economies recover, Japanese exports can rise more," he added.

China - China has attracted 5.77% more foreign direct investment (FDI) in the first 10 months of the year, compared to 2012. Government figures show FDI totalled $97bn over the period.

In October alone, the country attracted $8.4bn, an increase on a year earlier but down from September's figure.

Ministry of Commerce spokesman Shen Danyang said foreign investment policy would remain stable and transparent as China carried out its reform agenda.

U.S. - The leading U.S. equity markets hit fresh record highs on Monday, suggesting a ‘Santa rally’ is well underway in the run up to Christmas.

The Dow passed the 16,000 mark for the first time ever, while the S&P 500 recorded a fresh high above 1,800.

Year to date, the Dow is up 22% and the S&P is up 26%, showing growing investor confidence following a strong results season and a continuation of QE.

Janet Yellen, who is soon expected to take over as the head of the U.S. central bank, mounted a defence of quantitative easing in her first address to Congress last week, giving investors hope loose monetary policy will remain in place to support equity markets for some time to come.

Brazil - The Brazilian Ibovespa index declined the most in seven weeks this week, on speculation Latin America’s largest economy will remain stalled, making stock rallies hard to sustain.

The Ibovespa slid 2.3% at Tuesday’s close in Sao Paulo, the biggest decline sinceSept. 30 and the worst performance among major global benchmarks. Sixty-nine of 72 stocks on the index fell. The real weakened 0.5% to 2.2759 per dollar.

Brazil’s gross domestic product will expand 2.45% this year and next, according to the median forecast of analysts surveyed by Bloomberg. The economy grew 0.9% last year, the worst performance since the 2009 financial crisis.

Trends - New York has overtaken London as the world’s top financial centre, according to a survey of senior financial services executives commissioned by Kinetic Partners, the global professional services firm.

Those surveyed also said they foresaw London’s influence declining further in coming years, with “only a quarter of banking, asset management and hedge funds leaders now thinking that London will still be a contender for the world’s pre-eminent global financial centre in five years’ time,” a summary of the survey’s findings said.

The survey for Kinetic Partners’ 2014 Global Regulatory Outlook report sees the proportion of executives who name London as the leading financial centre drop to 40%, down from 65% in the same survey last year.

Almost half, or 49%, now name New York instead, up from 31% a year ago.

Looking forward, 40% still expect New York to be top of the global financial world in 2018, but just 26% – and only 24% of the 132 chief executives questioned – think the same of London, down from 41% last year, the summary of the survey’s findings noted.

Spotlight on: Un-loved Russia?

Robin Geffen, fund manager & CEO of Neptune Investments (the managers of the underlying asset to MC148 & MC148S2, the HIL Neptune Russia & Greater Russia fund) shares his thoughts on the lack of appreciation for the favourable position that Russia now finds itself in.

At a time of emerging market fragility, Russia stands out for the resilience of its economic framework. In the near term, lower oil prices and tighter monetary conditions have weighed on Russia’s economic activity, but as global interest rates begin to recover alongside improving global economic growth, countries with demands on foreign capital in the form of current account deficits will be vulnerable. Russia has one of the larger current account surpluses within emerging markets and a debt to GDP ratio of just 11% – compared to 60% in 2000 – and is far less dependent on foreign capital. This, along with a more stable foreign exchange landscape and a target of decreasing inflation year-on-year, is creating a stable savings and investment platform which we believe will significantly benefit the equity market.

Indeed, policymakers have been addressing the systemic weaknesses that were exposed in the global financial crisis and, as a result, Russia’s resilience to external shocks has improved dramatically. These reforms, however, have been significantly underappreciated by market participants: whilst there has been a significant reduction in systematic risk, the market’s valuation suggests precisely the opposite.

Dividends

Following the MSCI Russia Index’s 76% increase in dividends in 2012, the market now offers an attractive 4% yield. The driving force behind this increase in dividends has been the government itself, which last year gave the final approval to legislation requiring state-owned entities (SOEs) to pay out 25% of their net income to shareholders. This measure affects a large number of Russia’s blue-chip stocks, ranging from energy-sector heavyweights such as Gazprom and Rosneft to consumer-facing companies that include the national airline carrier Aeroflot and telecommunications provider Rostelecom.

Moreover, these higher payouts have not been confined to state companies and have catalysed a response in the private sector too. Companies are deeply concerned with their own low valuations and are determined to remain competitive with their state-run peers. A good example of this is Lukoil, the largest private oil producer in Russia. Management at Lukoil has engaged very actively with the investment community and has listened to the demands of its shareholders. Having never cut its dividend, Lukoil has committed to grow its dividend by at least 15% annually. We consider these strong cash returns to shareholders to be an increasingly compelling argument to invest in Russia at these historically low valuation levels.

Improving business environment

To quantify progress, the government has targeted moving from 122nd in the World Bank Doing Business Index in 2010 to 20th by 2020. Progress so far has been impressive, with Russia rising to 92nd in the recently announced 2014 report. The main focus is on speeding the process of starting a business, simplifying doing business and making it cheaper to operate businesses. Improvements include shortening the number of days to receive a construction permit, reducing the number of hours to complete tax returns, and cutting the time taken to pass goods through customs, among many others. These policies provide a very supportive backdrop to investing in Russia and will be key to improving sentiment and unlocking value.

Fixed asset investment

With the 2014 Winter Olympics in Sochi just one of many ongoing infrastructure projects, capital investment is becoming a burgeoning investment theme. In 2012, Russia’s investment-to-GDP ratio stood at 22%, a ratio the government is aiming to raise to 27% by 2018. The key levers behind this will be a growing savings base, issuing infrastructure bonds and the development of public-private partnerships, all things the government is actively pursuing.

In particular, the government’s target of increasing fixed asset investment provides significant opportunities for industrial stocks with exposure to priority areas. One of these areas is transportation infrastructure, which is consistently increasing its share of total fixed asset investment spending. For example, the Federal Target Programme (FTP) spend on the rail system is expected to reach RUB300bn by 2014, up from just over RUB200bn in 2011.

Neptune Russia & Greater Russia Fund

The Fund is exposed to three key themes: rising consumer spending, energy and infrastructure spend.

Rising consumer spending power has been a long-held theme of ours in Russia. We continue to favour consumer staples, where strong top-line growth is now being complemented by rising gross margins. There remains significant scope to increase margins through greater scale as retail penetration continues to rise and the market consolidates. For example, we have seen a significant gross margin improvement across the sub-sector in the past 24 months as increasing scale is providing better purchasing terms with suppliers. Furthermore, food retail sales continue to grow at high single digit levels despite historically low inflation. We also continue to access the consumer theme through the financials, consumer discretionary and information technology sectors.

We also maintain significant exposure, albeit a large underweight relative to the Index, in the energy sector. Russian oil companies continue to have the lowest ‘lift’ costs in the world, extracting oil at much lower costs than their competitors. They are therefore well-placed to outperform, even if the oil price does drift lower, whilst benefiting from growing dividends.

The third sector that we have strong conviction in is industrials, which we expect to benefit from increasing investment into infrastructure and logistics.

Looking forward, we remain positive on Russia. We consider the market to be very attractively valued and the scale of its discount wholly unjustified. Reflecting this outlook, the Fund remains fully invested in its favoured sectors and is well-positioned to take advantage of this investment opportunity.

Summary

In our opinion, reforms that have been undertaken in Russia have been underappreciated by the market. We believe that there has been a significant reduction in systemic risk, whilst the market has suggested precisely the opposite. Consequently, we believe that the Russian market has significant re-rating potential and that when investor sentiment begins to improve there is enormous value to be unlocked. The Neptune Russia & Greater Russia Fund remains very well positioned to capture this value through our focus on high growth consumer-facing sectors and companies that provide strong cash returns to shareholders.

Economic Summary for the week ended 8th Nov 2013

China - China's service sector grew at its fastest pace in a year in October, the latest sign of a recovery in the world's second-largest economy.

The non-manufacturing Purchasing Managers' Index (PMI) rose to 56.3 in October from 55.4 in September. The report comes just days after data showed that China's manufacturing PMI also rose to an 18-month high in October.

China's service sector, which includes construction and aviation, accounts for nearly 43% of its overall economy. The PMI is a key gauge of the sector's health and a reading above 50 indicates expansion.

"The non-manufacturing sector should continue to develop at a stable rate over the next few months, though there still needs to be more market training and promotion to further release the service sector's potential," said Cai Jin, vice-president of the China Federation of Logistics and Purchasing.

U.S. - The Dow Jones Industrial Average closed at a record high on Wednesday.

The index was helped by a 4% gain for shares in Microsoft, which rose following a report that the company has narrowed its search for a new chief executive.

Overall the Dow Jones Industrial Average closed 128 points or 0.8% higher at 15,746. The S&P 500 closed 0.4% higher at 1,770 - just one point short of its record.

"The markets are going to slowly drift up higher, unless there is something to keep it from happening," said Randy Frederick, from stock broker Charles Schwab.

Traders are also betting that the US Federal Reserve (the Fed) is unlikely to end its stimulus programme in the near future. Currently it is pumping $85bn into the economy every month by buying government bonds, which is helping to keep interest rates extremely low.

Late on Tuesday the president of the San Francisco Federal Reserve Bank said the Fed should wait for more solid evidence of economic growth before phasing out that effort.

"What's seeping into the market is the increasing likelihood [the Fed] will keep zero percent interest rates for 18 months longer than they had signalled previously," said Steven Einhorn from the hedge fund Omega Advisors.

Industries - One-fifth of the world’s biggest banks may be broken up or sold as part of a “radical course correction” to boost shareholder returns, according to McKinsey& Co.

The number of global universal banks may drop to fewer than 10 from about 25 as they narrow their focus on products or regions, the consulting firm said in an annual review of the industry this week. Ninety global lenders are generating higher returns by following one of five distinct strategies described by McKinsey, according to the report.

“It’s not as if it can’t be done,” Fritz Nauck, a director at the consulting firm and a co-author of the report, said in an interview. “It’s about how do the other banks get there or how does this consolidation start to bring the overall industry up in terms of performance.”

Global banks’ return on equity climbed to 8.6% in 2012 from 7.9% a year earlier, still below the 10% to 12% average cost of equity, a measure of the minimum return required by shareholders, McKinsey said in the report.

Commodities - Gold held gains after the biggest advance in almost two weeks as investors await reports that may show the U.S. economy lost momentum last quarter and employers added fewer workers, boosting the case for sustained stimulus.

Bullion for immediate delivery was at $1,318.78 an ounce on Thursday, when prices climbed 0.5%, the most since Oct. 24.

Europe - The European Commission has said the European economy has reached a "turning point", but the eurozone will grow less quickly than previously expected. The Commission said there were "signs of hope" that had started to turn into "tangible positive outcomes".

Although in the eurozone, the 18 nations that use the euro, it predicted growth of just 1.1% next year. This is the second downward revision of 2014 eurozone growth this year, after it was cut from 1.4% to 1.2% in May.

Jonathan Loynes, chief European economist at Capital Economics, said the subdued forecasts reflected the "general sluggishness" of the eurozone economy.

Spotlight on: Japanese Equities, from Chris Taylor of Neptune

Chris Taylor, manager of the Neptune Japan Opportunities fund (the underlying asset to the HIL Neptune Japan Opportunities fund, MC133, available in HIL), assesses the outlook for Japan.

Japanese Prime Minister Shinzo Abe’s, and his deputy Taro Aso’s, intentions for Japan are best understood after appreciating their family histories and the fiscal time bomb facing Japan.

Both their families have over 150 years of history in providing both ministers and prime ministers to successive Japanese governments which, combined with the country’s savings being insufficient to fund the burgeoning national debt within five to seven years, means both men see it as their deep-rooted duty to rescue the country from an otherwise inevitable bankruptcy. They also see Japan’s economic resurgence as a prerequisite to re-establishing Japan’s position in the world.

Their recent electoral successes should ensure governmental stability, with Japan having endured 15 prime ministers over the last 25 years. This time Abe has a clear majority in both houses of parliament, strong electoral support and most importantly dominates his own party, the LDP (Liberal Democratic Party). Prior infighting within the LDP was the main cause of the historic prime ministerial turmoil.

Abenomics

The current administration has both the political will as well as the political power to pursue the required dramatic policy shifts. These entail aggressive monetary easing to stimulate loan growth, substantially higher government infrastructure and defence spending to kick-start the economy, and deregulatory measures to make more efficient use of resources such as men, money and materials.

In the short term, this means taking on greater budget deficits and outstanding national debt to finance the recovery which, once it has taken hold, will eventually lead to improved tax receipts that reverse the fiscal deterioration.

Yen weakness: the unintended consequence

The intended doubling of the money supply in two years compared to a relatively static economy should undermine the yen and see it fall substantially, aided by further fiscal deterioration.

The yen’s fall is merely an “unintended consequence of their domestic policies”. Compared to the US, the sum of money involved in easing is greater than all three QE fundings, acting on an economy less than a third of the size and in two years rather than five.

This means the Japanese efforts are over ten times as cash, time and GDP intensive as the US actions. This illustrates the dramatic nature of Abe’s policies to rescue Japan.

The intended yen weakness is crucial to the success of Abe’s policy measures. The currency’s fall would lift the yen value of the overseas derived profits, which would then be repatriated to fund increased full-time employment, higher base wages and renewed capital investment. These in turn will lift domestic GDP and tax receipts.

Currently, 85% of employed Japanese pay no income tax, as well as 35% of the workforce not enjoying full-time employment. The average wage of ¥4m puts most individuals below the tax threshold, which is also why the authorities have become increasingly dependent upon indirect taxes i.e. why the consumption tax is being increased next year. However, the latter’s potential negative economic impact will be offset by equivalent supplementary budget expenditure.

Japanese multinationals

Yen depreciation should not be seen as a ‘competitive’ devaluation, as Japan’s multinationals no longer export all they produce from Japan as they did over 30 years ago when a cheap yen was essential to their success.

They now make and sell substantially more outside of the country than within it. Nissan, for instance, exports only 14% of its entire worldwide production from Japan, while 72% of all its vehicles are already made abroad, so a cheaper yen is of no major benefit. Instead, the impact is translational, lifting only the yen value of its overseas derived earnings.

The adopted 2% inflation target is aimed principally at mobilising Japan’s huge savings pool to be spent and boost the economy via ending the prevailing deflationary mentality through a price hike shock.

Japanese individuals behaved rationally while prices fell by saving and putting off purchases, which helped raised their potential spending power but shrank the economy.

Now they will have to deploy these savings or see their spending power whittled away by inflation. Their resultant likely sale of Japanese government bonds (JGBs) will be absorbed by the Bank of Japan’s annual quantitative easing (QE) program of ¥50trn ($500bn equivalent), which is roughly half the size of QE 3 in the US but acting on an economy a third the size, so 50% more aggressive.

In practice, expenditure to-date has averaged almost ¥70trn and has peaked at over ¥90trn, so greatly larger than the US’s QE 3 maximum purchases.

Japan version 2.0

In summary, Shinzo Abe’s polices are not aimed at political reform or an ‘old versus new Japan’ environment. It is largely about rejuvenating the country by improving the way it operates.

Japan version 1.0 worked well from the 1950s to the 1980s but then become obsolete. Abe’s ‘reboot’, or Japan version 2.0, involves pursuing quick, aggressive and very substantial policy changes to avoid the otherwise inevitable national bankruptcy i.e. Japan version 0.0.

Economic Summary for the week ended 31st Oct 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Spotlight on: Mexican investment themes in LatAm

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

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

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

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

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

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

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

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

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

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

Economic Summary for the week ended 10th Oct 2013

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