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Simon Ibbetson Economi Commentay - May 2013
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Simon Ibbetson Economi Commentay - May 2013

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The equity market rallied for the second consecutive week on a better than expected jobs report and global central banks reaffirming their accommodative stance. The S&P 500 and Dow Jones Industrial …

The equity market rallied for the second consecutive week on a better than expected jobs report and global central banks reaffirming their accommodative stance. The S&P 500 and Dow Jones Industrial Average indices both reached new all-time highs after finishing the week up approximately 2%. The NASDAQ Composite index, which has lagged for the year, surged 3.2% higher. The higher beta small-cap stocks outperformed large-cap stocks. In terms of style, large-cap growth stocks outperformed large-cap value stocks. The best performing sectors were info tech and energy, while the worst performing sectors were the defensive sectors: utilities and telecom.

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  • 1. Wednesday, 13 April 2013Page 1EEccoonnoommiicc CCoommmmeennttaarryyMMaayy 22001133US and Developed MarketsThe equity market rallied for the second consecutive week on a better than expected jobs report andglobal central banks reaffirming their accommodative stance. The S&P 500 and Dow Jones IndustrialAverage indices both reached new all-time highs after finishing the week up approximately 2%. TheNASDAQ Composite index, which has lagged for the year, surged 3.2% higher. The higher beta small-cap stocks outperformed large-cap stocks. In terms of style, large-cap growth stocks outperformedlarge-cap value stocks. The best performing sectors were info tech and energy, while the worstperforming sectors were the defensive sectors: utilities and telecom.In fund-flow news, Lipper reported that U.S based equity mutual funds took in $1.9 billion for the week,the 17th consecutive week of inflows. In earnings news, the current season is quickly winding downwith over 80% of the companies in the S&P 500 index having already reported quarterly results. So far,72% have beaten street earnings estimates, which is higher than the historical average of 63%.However, only 47% have beaten sales estimates, which is much lower than the long term average of62%.The US economy added +165,000 jobs in April, close to the 12-month moving average (+173,000).Those worried about a fiscally-induced fiasco in the labour market need not. Job growth proceeded at apace nearly identical to last years pace. Data from the establishment report indicated monthly gains of+185,000 in private-sector service-providing jobs. This subset continues to make new highs in totalemployment (now well above pre-recession levels now). Temporary help services rose +30,800 on themonth, also a good leading indicator.The S&P500 is now decisively above the 2007 highs and the UK FTSE & German DAX also followed thistrend reaching new highs for the year. Japan is the leading performer among developed markets YTD(+31% in local currency terms) due to the large JPY devaluation. US markets are outperformingEurope/UK and the emerging markets.
  • 2. Wednesday, 13 April 2013Page 2AustraliaThe RBA has cut interest rates to 2.75%. This is the lowest since the 1950’s. Reported inflation remainssubdued at 2.5% y/y effectively giving the RBA a green light for further cuts. Manufacturing datashows the sector is at its weakest for 4 years. The strong AUD is often cited as the reason for theweakness but this has been the case for over 3 years now. Rising labour & energy costs and the lack ofproductivity gains to offset these costs are a more plausible explanation. Unemployment has risen to a3 year high of 5.6% & is expected to continue to rise. The RBA’s plan that house construction will fillthe void from mining investment is not working at present as housing finance data remains weak. Themining sector may continue to suffer as our bigest trading partner continues to cut back on the importsof raw materials. Copper imports to China last quatre were down more than 27%. Simlar trends areseen across all the hard commodity secors. It is not a surprise as Chinees growth contiues to fall, down0.2% on expectations at 7.5% annualised for last quarter.Residential housing has been supported by the strong buying by the SMSFs for investment puposes.Any talk by the government to tighten up on this sector could see the property market weakenconsiderbly. While the unemployment rate is still supportive of the housing sector, as is the 2% ininterest rate cuts we have had in the last year, the ease of borrowing is getting harder and the pressureof rael inflation on the housholds is a further brake to activety.
  • 3. Wednesday, 13 April 2013Page 3As we head towards the 5 year anniversary of the Global Financial Crisis markets are heading back tothe pre-crash levels. When one stands back and compares the local and world economies now and thenwe wonder how markets can be approaching the same level.
  • 4. Wednesday, 13 April 2013Page 4Emerging MarketsEmerging market dollar-pay debt spreads tightened this week. Banco de la República, Colombiascentral bank, held the policy rate at 3.25% following a cumulative 200 basis points of easing over thepast nine months. Authorities said they were pausing to consider the effects of both the monetarystimulus and the governments fiscal stimulus program. The Reserve Bank of India cut its keyrepurchase rate by 0.25% for the third straight month, to 7.25%, as expected. Monetary officials areattempting to prop up growth, but remain wary of elevated inflation and a large current accountdeficit.S&P upgraded the Philippines credit rating to BBB-, from BB+, giving the country its secondinvestment-grade rating following Fitch in March. The rating agency highlighted the Philippinesimproved debt levels, strong external profile, and lower inflation as reasons for the upgrade. Sloveniascredit rating was cut two notches by Moodys to Ba1, from Baa2. The country has faced solvencyquestions due to its struggling banking sector, though it successfully placed bonds in internationalmarkets to ease financing needs.Emerging markets remain a mixed bag saw Chinas Shanghai Composite slumped to a 4 month lowfollowing poor PMI numbers (see below) & is –1.8% YTD. Mexico, Brazil & Russia, all previousinvestment darlings, are also negative YTD ,but the Philippines is up 25% YTD making it one of the bestmarkets globally with Indonesia is also up 14% & Thailand is +13%. Despite the mixed performanceAsian stocks that pay a reasonable dividend yield have been much sought after, driving prices higher asglobal investors chase yield. Singapore, HK & Indonesian property/REIT stocks have been outstandingperformers.Japan’s radical new policies seriously threaten emerging equity market returns, especially in Asia. Inparticular, a weaker yen improves Japan’s export competitiveness against the more industrialisedcountries of Korea and Taiwan. Japanese investors are repatriating funds from overseas (contrary tomost expectations). Moreover, Asian index valuations are high, Japan’s notoriously low
  • 5. Wednesday, 13 April 2013Page 5SummaryThe delicate balance between the continued quantitative easing programs of the developed nations,now topping $10 trillion, and the optimism that the markets read into every encouraging statistic, iskeeping markets on the level. While there is no doubt that equity markets have been boosted by allthis additional liquidity the foundations of this recovery are built on sand. Despite the fact that we areall becoming immune to the rumblings of the debt markets, collapsing banks, defaulting countries anddepositors losing vast amounts of their savings, there is still the real risk that this unproven strategy ofquantitative easing may fail to be the saviour of the financial markets.In the short term, the next six to twelve months, we see the markets remaining marginally positive.The risk is that some external event may trigger more uncertainty and cause further fear in themarkets.As we move forward in a period of slow growth those countries which reject their austerity programswill fall further and further into debt. At some stage the bond markets are going to start pricing thesecountry bonds more realistically. When that happens we expect to see economic conditions in thosecountries worsen considerably. Austerity may be the least of their problems! A collapsing economy,sovereign debt default and civil unrest as a result of ballooning unemployment, higher taxes andprotectionist strategies may make the austerity program look a lot more attractive!
  • 6. Wednesday, 13 April 2013Page 6DisclaimerThe information and any recommendations contained in this document are for the benefit of the addressee only and aremade as at the date of this document. Nothing in this document constitutes “personal advice.”Any investments made as a result of any of these recommendations are subject to investment risks including loss of incomeand capital. The performances of all investments are subject to a range of external factors, including economic and politicalfactors that at any time may change the outlook. 358 Pty Ltd does not guarantee any rate of return, the performance of aninvestment nor the repayment of capital. Nothing in this document constitutes an offer to invest.This document may include information that was prepared or compiled by third parties. 358 Pty Ltd believe the informationto be reliable at the date of this document. However, 358 Pty Ltd make no warranties or representations as to the accuracyor completeness of the document or its contents.To the extent permitted by law, 358 Pty Ltd excludes all liability to any party for any loss, costs or damage incurred as aresult of reliance on this document or its contents.