The Word from Hansard, 22nd Sep 2009

The Word from Hansard

China’s stimulus spending and record bank lending are interrupting efforts to restructure the economy away from investment – and export-led growth toward private consumption, said the Asian Development Bank. The investment and lending boom prompted the bank to raise its forecast for China’s economic growth this year to 8.2% from a previous estimate of 7%, in a report released on Tuesday. It increased its 2010 forecast to 8.9% from 8%. President Barack Obama and his Group of 20 counterparts, meeting in Pittsburgh this week, will discuss policies to reduce imbalances in global spending and consumption that helped to trigger the financial crisis. China’s 4 trillion yuan (USD 586 billion) stimulus package, aimed at countering a slump in exports, is making the world’s third-biggest economy more dependent on investment. "The massive fiscal stimulus announced last year and the aggressive monetary easing in 2009 has softened the blow of the global slump," said Lee Jong-Wha, the ADB’s chief economist. The government’s challenge is to "swing attention back to the restructuring efforts after the economy is weaned off the fiscal stimulus," the report added.

UK Prime Minister Gordon Brown said the global economy has yet to feel the biggest impact of government-led spending programs to stimulate demand and reiterated concerns about removing them too early. "The stimulus that we have still got to give the world economy is greater than the stimulus we have already had," Brown told reporters in London on Monday before his departure on Tuesday for the Group of 20 meeting in Pittsburgh. "What we want to do is safeguard a recovery from a recession we feared would develop into a depression." Politicians in Britain are calling for the government to put the brakes on spending and to focus on curbing the budget deficit that next year will exceed 12% of gross domestic product, the most in the G-20.

Investors are buying Indian rupees, South Korean won and Brazilian reais, betting developing nations will raise interest rates even after the Group of 20 said it’s too early to end central bank support for the global economy. Swap contracts, in which traders exchange a fixed rate for a floating one, indicate the market is pricing in the fastest increases in borrowing costs in the G-20 in India and South Korea. The cost of a one-year agreement in India has risen to 1.55 percentage points over the central bank’s benchmark, up from 0.95 point on 30 June. Spreads in Indonesia and Brazil have also grown and are wider than the US, Germany and Japan. Threadneedle Asset Management, Schroders and Ashmore Investment Management say they are buying emerging-market currencies as policy makers in New Delhi, Seoul and Brasilia become more focused on avoiding inflation and stock-market bubbles than on supporting the global recovery. The won and the rupee will be the world’s best-performing currencies in the year ahead, each gaining about 7%, median estimates in Bloomberg strategist surveys show. "It’s going to be the emerging-market world that sees rate hikes first, and that should support currencies," said Richard House, who manages USD 2 billion in developing-nation fixed income at Threadneedle in London and started buying the rupee and the real in the past month. "India will be among countries that will be first."

Oil traders are paying more than ever in the options market to protect against a plunge in crude prices. The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch. Crude stockpiles in the US are 14% larger than a year ago and OPEC is pumping 600,000 barrels a day more than the world needs, according to the International Energy Agency. While the recovery from the global recession pushed oil up 62% this year to USD 72.04 a barrel in New York, growth alone isn’t likely to erode the glut by the end of next year because production exceeds demand, data from the Paris-based IEA shows. A drop in prices would penalise companies from Exxon Mobil Corp. to BP Plc and exporters Russia and Saudi Arabia. "If ever there was going to be a retreat below USD 60 a barrel, it is now," Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. "It was a very weak summer. We came out with more gasoline than we started."

Spotlight on global equity investing

Globalisation continues to power its way through the world’s financial system, driving change in stock markets, change in trade and economic growth trends and even change in accounting standards. In recognition of globalisation’s powerful effects, it is only sensible that investment strategies should take on a more global emphasis, according to James Saunders Watson at JPMorgan Asset Management.

This explains why global equity investing has emerged in recent years as an investments category with a growing following among investors. Advocates of the strategy first point to the integration of the global capital markets and the corresponding increase in new investment opportunities. But a closely-related argument in favour of global equity investing is the enhanced freedom afforded to portfolio managers in a global mandate can offer investors increased potential for outperformance, an improved risk/reward dynamic and greater diversification compared to traditional domestic or foreign-only strategies.

Defining the appropriate mix of domestic versus international market exposure is an important investment decision. Even when that split is resolved, an investor must also determine how best to divide international exposure amid the various geographies outside their home territory. In contrast, global equity investing sheds traditional geographical restrictions, allowing investment managers to pursue investment opportunities wherever they may be found.

A major factor that has paved the way for globalisation has been the government relaxation of capital flow restrictions, which has led to increased foreign investment into both financial market instruments (equity and debt) and real assets (land and buildings). Complementing this, a growing base of international capital market investors has encouraged the global accounting community to intensify standardisation efforts and enhance transparency. But perhaps the most important facet of globalisation from a stock analysis perspective is that a company’s home country has often become a less important factor in its operations, including prospects for revenue and profit generation.

What all this means for investors is that it increasingly makes sense to step outside the boundaries of a region-specific analysis in favour of a broader perspective. This is the main rationale for global equity investing – drivers of a given company’s stock performance are no longer limited to country specific factors. Also, in all likelihood, companies around the globe will continue to expand into foreign markets in search of cost efficiencies, growth and new sources of revenue. In a practical sense, the country where a stock is listed is becoming less and less relevant, as businesses operate on a global playing field.

Lifting geographical constraints on an investment mandate also gives portfolio managers the ability to select the most attractive investment opportunities from across the world. It is only logical that expanding the universe of stocks from which to choose also expands the potential for alpha generation. As ever, the key is to find the right manager, as well as deciding on an appropriate point of entry.

Hansard has a variety of fund links across a diverse range of asset classes ranging from commodities to emerging market equities to climate change solutions. To find out more about our fund links please contact your Hansard Account executive who will be able to assist you further.

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Hansard can accept no liability of any sort in relation thereto 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.

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