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Across the Spectrum - 10/03/2009

The global economy is nearing the start of a rebound, top central bankers have said this week. Central bankers from the Group of 10 industrialised nations, including the UK, France, Germany, Japan and the United States, offered a more optimistic outlook at their meeting at the Bank for International Settlements in Switzerland. "We have a number of elements that are suggesting that we are approaching the moment where you would have a pick up," said European Central Bank head Jean-Claude Trichet, spokesman for the influential group.

Malaysia's government has announced an additional 60 billion ringgit (USD 16.3 billion) in spending and tax incentives over the next two years as it predicted the nation's first recession in a decade. Malaysia is spending 8.4 billion ringgit to accelerate projects under its five-year plan and will spend 700 million ringgit on programmes to create jobs. The government will recruit 63,000 people to work in various state agencies and reduce tax for workers, said Finance Minister and Deputy Prime Minister Najib Razak. Malaysia's two plans combined are equivalent to about 10% of GDP. Singapore has spent about 8% and China over 10% on stimulus packages.

China vehicle sales rose 25% in February, the first gain in four months, after the government cut taxes for some models, helping the country extend its lead as the world's largest car maker this year. Sales of cars, buses and trucks climbed to 827,600. China has halved retail taxes on small cars and drawn up plans to give out vehicle subsidies in rural areas to revive demand after car sales rose at their slowest pace in a decade last year. "Consumers are regaining confidence because of the government's stimulus policies," said Ricon Xia, an analyst at Daiwa Research Institute in Shanghai.

Mexico replaced Brazil as UBS AG's favourite equity market in Latin America because investors have already factored in a severe recession this year. Declines this year means Mexican stocks are trading at the lowest valuations in at least 10 years, while the nation's largest companies will probably be able to return to profit by raising prices, UBS strategist Damian Fraser wrote in a report this week. Mexico's Bolsa Index is valued at 11 times reported earnings, compared with 8.7 times for the Brazilian stock index, according to data tracked by Bloomberg. "For the first time in recent history, Mexico's market multiples are in line with Brazil's, despite comprising less cyclical, more defensive stocks," the analyst wrote.

The yen and the dollar have weakened as advances in stocks have curbed demand from investors seeking refuge. The yen fell the most against the South Korean won. The pound climbed against the euro after UK housing sales fell to their lowest level since 1978. The euro approached a two-month high against the yen on speculation European investors will bring home overseas earnings before the end of the first quarter. "We've seen some stabilisation so that has undermined the US dollar and allowed the euro to make some gains," said Daragh Maher, a currency strategist at the investment banking arm of Credit Agicole. The yen depreciated to 124.94 per euro in New York from 124.65 yesterday. The dollar weakened to USD 1.2707 per euro from USD 1.2611. The dollar declined to 98.33 yen from 98.84.

Crude oil traded little changed near USD 47 as Qatar said OPEC needs 100% compliance with existing quotas before discussing a fresh production cut. OPEC has lowered output three times since September to combat price declines and prevent a glut on world markets. Ministers meet in Vienna on 15 March. Crude oil for April delivery traded USD 47.22 earlier today in New York.

Gold fell for a second day in London as a gain in equities may reduce demand for gold as an alternative investment. "If risk perceptions ease, then of course you'll see the appetite for gold do the same," said Daniel Brebner, executive director of commodity research at UBS in London. Gold for immediate delivery dropped as much as USD 12.67 or 1.4% to USD 909.30 an ounce earlier. Prices fell 1.9% yesterday.

Spotlight on Asian Optimism

Asian markets stand at an interesting point after the ravages of 2008, with the much vaunted decoupling theory in tatters. Many commentators has suggested that the region had shed its long-term reliance on the US, driven by growth in China and India. But after a strong 2007, these markets were down significantly last year. Overall, Asia proved very liable to global shocks. Export-dependent countries, such as Singapore, are expected to go into recession this year, suffering from a much depleted US consumer.

Against this background, share prices have plunged almost as far as during the Asian financial crisis of a decade ago. Funds investing in the region have suffered a difficult time, with the average fund down around 30% over the 12 months to the start of February according to Morningstar figures.

Asia's performance is not substantially worse than other equity markets but such losses are significant for a region thought to be more insulated than in the past. Its banks are also generally more healthy than Western counterparts and have not needed such drastic government intervention. Commentators highlight this superior banking picture and a general lack of corporate and personal debt as key structural factors behind longer-term Asian strength.

Invesco Perpetual head of Asian equities Stuart Parks predicts growth of 7% and 5% for China and India respectively this year, which remains strong in a global context. He points out that Asian economies, with the exception of South Korea, are not leveraged and high savings levels should support domestic demand. The banking sector has limited exposure to toxic assets and is generally well capitalised, which should lead to robust lending rates and decent access to capital. Parks says, "The region's authorities have been proactive in attempts to ease the effects of the downturn through lower interest rates and fiscal stimulus packages. The most notable of these was the USD 580 billion spending programme announced by China, equivalent to 15% of GDP. It is worth remembering, that for the most part, Asia is structurally sound." Many managers feel that recent equity falls have also removed pockets of overvaluation in the region and left Asia at historically cheap levels.

HSBC economists Frederic Neumann and Robert Prior-Wandesforde also predict a return to positive growth in Asia as the year progresses. The pair believe the region has been hit by two recessions, domestic and external, rather than just collapsing exports. Overseas shipments did fall from October, providing a crippling hit to the region's vast export machine but they said domestic demand had already started to decline over the summer, with investment and consumption starting to slow rapidly. "Here, the inflation surge over the first half of 2008 and attendant monetary tightening are mostly to blame," they add.

Looking ahead, they believe domestic demand should begin to pick up as price pressures abate and interest rates come down. In tandem with powerful fiscal stimulus, the HSBC economists expect this will cause growth to turn positive as the year progresses. To put some numbers on this, they predict Asia excluding Japan, in weighted terms, will grow by 5.5% this year, down from 7% in 2008. Within this, Korea, Taiwan, Singapore, and Hong Kong, will see their economies contract on a full-year basis, with China and India more resilient given their vast internal markets and limited exposure to turbulence elsewhere.

Aberdeen Asia managing director Hugh Young is another high profile commentator who believes the recent demand shock will be short term. He says Asian economies must now focus on the next stage of their development, which will see domestic demand take over from external demand and the region's markets truly decouple from the West. He says, "What we are witnessing is a critical point at which economic dominance shifts rapidly from one global force to another. Asia's time has come. "With the region set to emerge from the credit crunch stronger than ever, now is without doubt one of the most attractive times to invest in Asian-Pacific equities I have witnessed in 25 years."

 

The information set out herein has been obtained from various public sources and is published by way of information only. The Spectrum IFA Group can accept no liability of any sort in relation there to and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

 

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

 

This information is only provided as a guide and, if you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.

 


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www.financialexpat.com or via e-mail steven.grover@spectrum-ifa.com  
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