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Across the Spectrum - 14th July 2009

US Treasury Secretary Timothy Geithner said the global economy probably will suffer setbacks during its recovery as nations adapt to a loss of wealth and surge in public debt. "This crisis has been brutal in the extent and severity of damage to economies around the world," Geithner said in the prepared text of a speech in Saudi Arabia. "Given the extent of damage to financial systems, the loss of wealth, the necessary adjustments to a long period of excessive borrowing around the world, it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporal reversals." Economies will need to start growing again before jobs can be created, he said. He also said credit conditions will remain "unusually tight," even though markets have opened up somewhat in response to government actions. The US yesterday reported a USD 1.1 trillion budget deficit for the fiscal year that began on 1 October. Geithner's visit to Saudi Arabia and the United Arab Emirates, two of the oil-exporting countries that are the fourth largest holders of US Treasury debt, comes as the US braces for a 2009 budget deficit of USD 1.8 trillion, more than four times the previous fiscal year's USD 459 billion shortfall.

Chinese stocks are among the world's best investments because the nation's economic growth is poised to exceed forecasts, according to Barton Biggs, who runs New York-based hedge fund Traxis Partners LP. Biggs said the US economy rebound is "in place" and may take the form of a so-called U-shape recovery, which may help the Standard & Poor's 500 Index climb 11% to 1,000 or higher this year. Shares in Asian markets including China and Hong Kong are also attractive after having retreated from their highs this year, he added. "The emerging markets, particularly Asia, are the growth area of the world and they're emerging from the financial crisis faster than any other part of the world," said Biggs. China's economy is expected to grow 8% this year, compared with a 2.5% contraction in the US, according to economic forecasts compiled by Bloomberg. "In terms of China, GDP growth is going to be 2 to 3 percentage points higher than the consensus," he said.

Singapore's government raised its economic forecast for 2009 as gains in construction and pharmaceutical output lifted the nation from its deepest recession since independence in 1965. GDP will shrink 4% to 6% this year, less than an earlier forecast for a contraction of as much as 9%, the trade ministry said in a statement on Tuesday. The economy expanded an annualised 20.4% last quarter from the previous three months, the first growth in a year. "The Singapore economy is back, and back with a vengeance," said Robert Prior-Wandesforde, a senior economist at HSBC Holdings plc in Singapore.

Latin American stocks are poised to rebound after a six-week slump as the US economy grows and earnings recover, according to Citigroup Inc. strategists. The MSCI Latin America Index has fallen 10.6% since reaching its high for the year on 1 June. "The correction in regional equity markets has reached our expected 10-15% range," Citigroup strategists Geoffrey Dennis and Jason Press wrote in a note. "Although the mood has turned sour on worries over the timing of economic recovery, we see little more downside from here and expect regional markets to break out to the upside again later this summer." Dennis, who said Latin American stocks were expensive on 1 June, now predicts as estimated total return of 24% for regional equities by the end of the year as the US economy resumes growing in the third quarter.

Oil put in its worst performance since January last week as supply is well above normal levels. A new consensus seems to be emerging that supply needs to be driven down before the price can go up again. While that is good news for consumers and businesses, with the world's governments clearly relieved, it is not such good news for investors. By Friday WTI oil was down 55 cents to USD 59.34, having fallen 11% in a week. On Wednesday, OPEC cut its oil demand forecasts. It now does not expect demand to rise back to 2008 levels until 2013. The strongest growth in demand is expected in developing countries and regions, in particular China and South Asia.

Spotlight on Standard & Poor's Fund Services' Annual Review of Emerging Markets

Most fund managers believe emerging markets will be the key economies that lead the world out of recession, according to Standard & Poor's Fund Services' annual review of global emerging markets, Latin America and the EMEA region (Europe, the Middle East and Africa).

Roberto Demartini, lead analyst, said fund managers and stock pickers with a "growth at a reasonable price" (GARP) approach felt now was their time to perform. He said this group believed that, after a low-quality rally, which many fund managers compared with the market conditions of 2003, the focus would shift towards quality growth names trading at attractive valuations. Demartini added that, while many managers were confident in the so-called "decoupling theory" last year, very few would be willing to name it now.

S&P said most survey respondents believed that, while the "essence" of the decoupling theory lied in diverging fundamentals between the developed and emerging worlds, the correlation between macroeconomic trends and stock market behaviour "was not perfect over the short run". According to S&P, managers see this as supporting the decoupling theory. Demartini said, "Looking forward, managers' view is that the market will be led more by fundamentals and earnings, as opposed to flows or sector rotation."

One manager who is particularly bullish on emerging markets is Bryan Collings, manager of the Ignis Hexam Global Emerging Markets fund. He said most UK and US investors had just 5% emerging markets exposure in their portfolios despite "sound structural drivers" and "impressive market performance". "It makes no sense to have so low an allocation to such a large and important asset class," he added.

Collings said there were a number of reasons why emerging markets were so attractive, including their growing number of consumers and favourable demographics. Emerging markets represent approximately 75% of the world's land mass and house more than 80% of the global population. Most of the future population growth is expected to be in emerging markets, where the population is expected to grow five times as fast as developed countries.

By 2030, more than one billion people in emerging markets are forecasted to join the ever-increasing consumer middle class. Currently, personal consumption in China accounts for only 37% of GDP compared with more than 60% and 70% in Europe and the US, respectively.

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