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Across the Spectrum - 20th April 2009

China's economy, the world's third largest, may rebound this quarter as Premier Wen Jiabao's 4 trillion yuan (USD 585 billion) stimulus package cushions the effects of the global recession. Urban fixed-asset investment increased by almost a third in March and industrial-output growth accelerated, reports accompanying China's gross domestic product figures showed last week. First-quarter GDP grew 6.1%, the slowest pace in a decade, as exports slowed. "The economy has gained significant momentum since February," said Sun Mingchun, an economist at Nomura Holdings Inc. in Hong Kong, who predicts the economy will expand 8% this year. "We still expect a V-shaped recovery." A pickup in China will contribute "strongly" to growth in the rest of Asia by increasing demand for commodities and products from around the region, according to the World Bank.

Japan's consumer confidence sentiment rose to a five-month high in March, a sign that the recession in the world's second largest economy is abating. The confidence index rose to 28.9 from 26.7 in February, the Cabinet Office said in Tokyo last Friday. The index has advanced for three months since December when at 26.2 it was at its lowest since figures began in 1982. Prime Minister Taro Aso last week unveiled a record 15.4 trillion yen (USD 156 billion) stimulus plan that included measures to create and save jobs. Confidence among Japanese merchants rose to an eight-month high in March after the government began handing out cash to households and started discounts on highway tolls as part of an earlier package.

The euro dropped to less than USD 1.30 for the first time in a month and fell versus the yen on concern disagreement is deepening amid European Central Bank policy makers on the measures needed to combat the recession. The euro declined against eight of the 16 most-active currencies after ECB Executive Board member Lorenzo Bini Smaghi said the bank's benchmark 1.25% rate is "very close" to its floor, the Financial Times Deutschland reported. Two central bank council members said last week they may support a rate of less than 1%."It's inevitable, you're going to get disagreement on the ECB's council," said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. "Currency politics will be a key issue this week." The euro dropped to USD 1.2975 in London earlier today, from USD 1.3044 in New York last Friday. It earlier declined to USD 1.2967, the lowest level since 17 March. The euro fell to 128.48 yen, from 129.33 yen, after touching 128.17, the weakest since 30 March.

Crude oil fell as a stronger dollar reduced the appeal of commodities and on concern inventories will rise as the global recession reduces demand for fuel. Oil dropped as the dollar rose to a one-month high versus the euro, making crude less attractive as a currency and inflation hedge. "The fundamentals don't support a higher oil price, demand is still weak," said Thina Saltvedt, an oil analyst at Nordea Bank AB in Oslo. "Inventories need to come down before you can expect the market to balance. The oil market seems to be reacting to the dollar," she said. Crude oil for May delivery fell as much as USD 2.03, or 4%, to USD 48.30 a barrel in electronic trading on the New York Mercantile Exchange. Prices are up 9% this year. June futures were down USD 1.70, or 3.2%, at USD 50.77 a barrel.

Andrew Kelly, UK equity long/short hedge fund manager at Ignis Cartesian, has dismissed the widely accepted belief that gold is a relative safe haven in market volatility and anticipates its price falling to below USD 400 per ounce in the medium-term. Kelly said, "We believe the market consensus on gold is wrong. The attraction of gold as an investment to a large degree reflects an aversion to almost all other asset classes but this will not last forever. In most respects gold mining follows a similar pattern to other resource investments. Rising prices have boosted returns substantially, and although costs have risen to some extent, margins are now very high. We anticipate that such margins in the long term will return to more normal levels." Kelly believes the bullish view on gold has been compounded by the short-term low interest rate environment, which made a zero yield on gold less of a deterrent than normal. He said that unlike other commodities such as oil, there was no natural floor for the gold price and the only sure guarantee of making money from it would be from further price rises in the precious metal, something he thinks is highly unlikely.

Spotlight on Russian equities

Investors looking for strong returns in 2009 should consider the low valuations in the Russian equities market, according to fund manager Jupiter. Elena Shaftan, head of Jupiter's emerging European equities team said the Russian market was likely to be a strong performer this year as economic conditions improved. She said, "The factors that drove the market down last year (the devaluing rouble, falling oil prices and forced selling by over-leveraged domestic investors) have largely played out. Valuations are highly attractive, Russia is trading at a discount of about 45% to global emerging markets."

The recommendation came as Morningstar recognised Russia as the top-performing European equities category during the first quarter, with the average fund returning 8.8% over the period. Shaftan said the rouble was also likely to prove more stable after it was devalued in January, particularly if oil prices stabilise as well, increasing the level of investment in the economy. "This reduces capital outflows, particularly the speculative holding of dollars, allowing funds to flow into the real economy and creating scope for economic indicators to improve."

Shaftan said her team had increased exposure to Russian equities across their portfolios from 30% to approximately 45% at the end of March. She added, "Regional markets have started to recover, but valuations are still far from reflecting mid-term growth potential of eastern European economies. The aftermath of a financial crisis can create opportunities for equity investors, as valuations are driven to unjustifiably cheap levels relative to earnings that are at the bottom of the cycle."

But the outlook for other countries in the region was less clear, as the average fund in the Morningstar Emerging Europe ex Russia category posted losses of 16.9% during the first quarter of 2009. Shaftan said the team had avoided countries such as Ukraine and Hungary as well as the Baltic states and the Balkans, which depend more on capital inflows or exports. But a number of these countries continued to receive support from other countries to cover short-term funding gaps, she said, making them attractive markets in the long-term.

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.


If you have a question, want to arrange for a free financial review or just want further information I can be contacted on +33 (0)325461631, via my website
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