Far East consumers give Western companies a boost

In this week’s bulletin:

  • UK GDP continues to contract but inflation outlook better
  • China’s economy slows, reflecting concerns over slowing global growth
  • Stock markets rise on belief that more stimulus is on the way
  • Far East consumers give Western companies a boost
  • Falling prices suggest that gold is losing its shine

 

Olympic legacy?

  • UK GDP continues to contract but inflation outlook better

Whilst Team GB athletes at the Velodrome, Olympic Stadium and on the water brought a golden end to the Olympic Games and a warm glow to everyone who witnessed it, the latest data on the UK economy indicates it would struggle to finish at the village fete egg-and-spoon race!

On the fifth anniversary of the start of the global credit crisis, the Bank of England’s latest Inflation Report significantly downgraded its forecasts for economic growth for the rest of 2012 and 2013. With the UK already firmly mired in a double-dip recession, the Bank said it now expects growth to be flat for the rest of the year, with only a modest rise to 1.3% next year, down from 2% in the last Report.

Later in the week the UK’s trade data was equally disappointing, reflecting the difficulty the economy faces trying to grow when global growth is slowing. Exports were badly hit, not just to the eurozone, which account for over 40% of our trade, but also by slowing growth in the US and China (more of which later). With the extra bank holiday for the Queen’s Diamond Jubilee compounding the problem, the result was the worst trade deficit this millennium.

However, the economic data continues to confuse many commentators, with imports remaining steady and employment continuing to rise, suggesting that perhaps the gloom is overdone. This was reinforced by better-than-expected construction figures, indicating that the second-quarter GDP numbers may be revised upwards in the coming months, admittedly to a still disappointing -0.5%. Consumers will be pleased to hear the Governor of the Bank of England confirm that inflation remains on course to meet its target of 2%; yet fears have already begun to build over the effect on food prices of the worst drought in more than half a century in the American Midwest. Again, we caution investors from setting too great a stall on the ability of any institution, no matter how august and well-resourced, to successfully predict these big macro themes.

 

Politicians’ turn to take the stage

  • China’s economy slows, reflecting concerns over slowing global growth
  • Stock markets rise on belief that more stimulus is on the way

Outside the UK, concerns over the eurozone took a back seat for once to be replaced by news that China’s economy made a (relatively) sluggish start to the summer: growth slowed to an annualised 7.6% in the second quarter, its slowest pace since the height of the credit crisis more than four years ago. However, with inflation also falling, this time to an 18-month low of 1.8%, analysts believe there is scope for Beijing to adopt a more stimulating monetary and fiscal policy. Indeed, the news prompted Premier Wen Jiabao to declare that the government’s priority is to support growth.

So how did markets react? Well, perhaps surprisingly, by rising to levels last seen in April on the back of consistently stronger trading sessions. The FTSE 100 closed the week at 5,847, up 1% on the week and 4.9% on the year (excluding dividends). The S&P finished above the psychologically important 1,400 level at 1,405, up 11.8% so far this year. And after a very challenging 2011, the emerging market index has clawed back much of its losses, posting year-to-date gains of 7%. It seems that investors are betting that political leaders and central bankers will take the necessary steps to avoid a significant global slowdown and an unseemly break-up of the eurozone. With the FTSE British Government All Stocks Index (gilts) up 3.8% and the global high-yield markets returning 9.1%, it seems that, despite the gloomy headlines, 2012 has so far turned out to be a reasonable one for investors.

The question of exactly what form these steps should take troubled commentators and analysts. Consistent themes include reducing interest rates in the UK, Europe and China and introducing further monetary stimulus (QE) in the UK and Japan, providing support to risk assets such as equities. Indeed Andrew Posen, an outgoing member of the MPC, challenged Sir Mervyn King in the Financial Times to broaden out QE to include the purchase of private-sector assets rather than limit its activities to the gilt markets. In an interesting initiative, Ed Milliband is said to be drawing up proposals for a National Investment Bank – a government-owned bank with the aim of directing more money into the economy – amidst continued concerns that QE is becoming less effective as banks hoard cash rather than lend to hard-pressed businesses. However, unlike the Olympic athletes, it seems that politicians and central bankers across the globe are happy to inch slowly to a solution rather than sprint forcibly to the line. Time will tell whether the markets will give them the scope for such apparent sloth.

In the round we believe that we could well see a further round of quantative easing and perhaps even a cut in the base rate to (an unbelievable) 0.25% later in the year – hardly welcome news for hard-pressed savers.

In corporate news the headlines were dominated by another bank, this time Standard Chartered, which was forced to strongly deny claims by the US authorities of illegal trading with Iran: UK commentators counterclaimed that the allegations were a deliberate attempt to damage London’s reputation and shift business to New York; so much for the so-called ‘special relationship’.

 

Profits rising in the East

Far East consumers give Western companies a boost

However, away from another week of bank bashing, eyes were drawn to two global companies, Nestlé and Prudential, which are clearly benefiting from a theme we have discussed in previous bulletins; that of gaining exposure to the emerging markets via large, blue-chip western companies. Indeed, whilst the Prudential’s Chief Executive, Tidjane Thiam, was willing to confirm “We are happy to be based in London… It is a good place to be because it is our historic home and a good market to recruit talented people”, it was noticeable that profits from its Asian business are up 26% on the year and the interim dividend was raised by 5.7% (another consistent theme).

In a similar vein, Nestlé, the Swiss consumer staples giant, increased profits by 8.9% in the first half of the year but by an impressive 11.6% in Asia, Oceania and Africa, as consumers in emerging economies continue to develop a taste for biscuits, cakes and coffee from Western brands.

 

Gold loses its shine

With gilt yields remaining at near-historic lows, the Financial Times on Monday noted that flows into equity income funds have continued to flourish now that 85% of FTSE 100 companies are yielding more than government bonds. Away from the bond and equity markets, gold has again begun to capture the headlines. After reaching a peak of $1,922 per troy ounce in September, at the height of the Greek debt crisis, gold has fallen to $1,611 per ounce, despite improving over recent weeks. This volatility has surprised many who viewed gold as a permanent safe haven. As the Daily Telegraph highlighted, investors holding popular gold funds have suffered more as the mining companies held by these funds (as a proxy for physical gold and other commodities) have suffered greater losses. As always, we believe the most appropriate course of action is for investors to diversify across a range of asset classes and investment houses rather than seeking returns (or a safe haven) from any one investment.

And after a wonderful two weeks of athletic excellence, an event that showed Britain at its best, we hope that the economic journey to Rio de Janeiro for the 2016 Games will be somewhat smoother than the last four years.

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