The Word from Hansard (2nd December 2008)

The Word from Hansard

Investors with the UK ’s biggest bank are buying back into emerging market equities in the wake of the recent sell-off. HSBC said the sector now offered compelling opportunities to investors with a medium to long-term horizon, the stocks having come off their highs recently as the global economy comes under pressure. HSBC’s Alex Tarver, global emerging market product specialist, said while short-term risk remained, the fundamentals were still solid for earnings in the BRIC regions. He argued that the recent sell-off across markets in Brazil , Russia , India and China had been overdone, and although he conceded earning estimates needed to come back a little, the price had already come back too far. He said, "Earnings are now strong and sustainable. They will have to fall back a bit but probably not as far as the price has come back. The regions have better prospects than developed markets." HSBC is focusing on the longer-term picture for the regions, noting that fundamentals, such as having large, young, populations, expanding labour forces, and high savings rates, would drive long-term growth. Tarver suggested either buying in now or drip-feeding money into the region, in order to gain or maintain exposure to the economies concerned.

Global financial stocks are likely to outperform industrials during 2009, Fidelity asset-allocator Trevor Greetham has predicted, but investors will face hard choices. Greetham, manager of Fidelity Multi-Asset Strategic fund, said that investors will have to contend with a "tug of war" between falling earnings and attractive valuations. He added that investors hoping for flat markets and the predictability of a downturn after the historical volatility of 2008 are likely to be disappointed, however. "Markets are likely to remain extremely volatile as investors weigh up bad news on the economy against an unprecedented array of central bank and government stimulus packages," said Greetham. He added, "Rather than trying to time moves into and out of stocks, investors looking for a lower risk profile would do best to diversify their exposure across a range of asset classes or invest in a balanced fund. Interest rate-sensitive sectors such as consumer cyclicals and defensive areas such as staples and healthcare will be the most attractive areas for equity investors. Financials are likely to outperform industrials."

The Swiss National Bank is becoming the first central bank in Europe to learn what it’s like to live in a zero interest-rate world leaving it with little room for further cuts. On 20 November the bank reduced the short-term rate it uses to steer borrowing costs to 0.1%. SNB President Jean-Pierre Roth may instead have to find new tools, such as "quantitative easing", to restore the flow of credit through the economy and head off the risk of deflation. The unorthodox tool was last deployed by the Bank of Japan a number of years ago when policy makers kept their key rate at zero and flooded the banking system with cash to encourage lending.

The SNB’s challenge may soon be shared by other central banks. The Bank of England’s Governor openly discussed the possibility of zero interest rates for the first time on 25 November. The European Central Bank will cut is benchmark rate to 1.5% next year, according to a Bloomberg News survey, with Citigroup saying a move to zero is possible. The US government is already starting to use unorthodox methods. The US central bank on 25 November said it will purchase as much as USD 600 billion in debt issued or backed by government-chartered housing finance companies.

Thirty-year US Treasury bonds are returning the most since 1995 as investors bet the Federal Reserve will buy the securities to help bring down long-term borrowing costs. The so called long bond has returned 27.8% this year, including a 15.6% gain in November, Merrill Lynch & Co index data show. Market commentators wonder how long the "bubble" will last as, despite the expense, investors are enticed to buy the debt for fear of missing out on even more gains.

Crude oil has fallen to its lowest level in more than three years as demand in the US has weakened more than expected. Oil for January delivery is down to USD 47.36 In New York, 68% down from its height last July. OPEC will reduce crude production when it meets in Algeria this month and they expect oil demand to drop further next year.

Spotlight on Latin America

Brazil may access USD 6.35 billion of its yet to be approved sovereign wealth fund to enable the state development bank (BNDES) to boost lending to local companies as external credit has become increasingly scarce. Brazil ’s government wishes to secure economic growth of 4% next year. President da Silva asked Congress in July to establish a wealth fund that would hold the equivalent of 0.5% of the gross domestic product in 2008. However, the bill, approved by Congress on 4 November still needs Senate approval.

Peru ’s economy grew 9.5% in the third quarter, the fastest pace in Latin America . Peru ’s National Statistics Institute says growth slowed only slightly after expanding by 9.9% in the first two quarters compared to the same period in 2007. The Institute said Peru ’s construction, mining and fishing industries largely withstood the downturn being experienced elsewhere. Peru ’s government expects growth to slow to 6% next year as deflated prices affect its mineral exports.

A report by Mexico ’s central bank shows that its economy will expand 0.38% in 2009. Economists raised their forecast inflation this year to 6.27% from 5.84% earlier. Speculators increased bets last week that the peso will decline against the US dollar as figures from the Commodity Futures Trading Commission show. The peso’s slump over the past three months has encouraged Mexican workers abroad to send more money home in October, the dollar inflow rising 13% over October 2007.

While market turbulence continues to be evident, the current trading ranges, although historically wide for lack of liquidity reasons, may be setting the scene for a pattern that investors may just get used to working with. There is perhaps some indication that market commentators are feeling more comfortable that the values exposed at the low ends of these trading ranges are now close enough to the "bottom" for absolute mid-term valuation concerns to be alleviated. This is usually observed by reference to historically attractive double figure yields in a world where short-term interest rates are low and declining and the outlook for inflation is uncertain. Your Hansard account executive will be pleased to illustrate how potential opportunities can be captured using a combination of our product and fund structures.

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.