11 - 18th Nov summary

Global Markets Weekly 11 - 18 November 2013

http://www.coutts.com/wealth-management/investment-perspective/global-markets-weekly/2013/18-nov-2013/index.asp
http://www.zerohedge.com/news/2013-11-22/sp-closes-above-1800-posts-7th-consecutive-weekly-increase-longest-streak-2007

Economics

Ireland leads improving periphery – looks set to request an exit from Troika programme EU, ECB and IMF. Suggests it can fund itself but challenges remain. Will attempt to raise money in bond markets next year – without line of credit in place from Troika. Has accumulated €25bn in cash, well above the 6-10€bn of bond issuance next year. Enough funds to finance itself for some time – can approach Troika again if needed – although there is some conditionality (probably the reason Ireland opted for no credit line).  Although in reality, this success is dubious and has come at a cost – severe austerity measures (à highest emigration in Europe, country’s debt to GDP is 123%, 4x higher than before the banks were bailed out). Spain too is expected an end to its bailout program – which ultimately went to struggling banks rather than government – and needed only €40bn of the €100bn offered. Enormous problems like billions in bad debt and high unemployment still plague Spain.

Expect other two bailout recipients – Greece and Portugal to remain under some form of support/.control from Troika.

Equities

Chinese equities have rebounded from a sharp sell-off amid initial disappointment – as details emerged from seminal plenary session of China’s leaders. Report was thin – some measures been announced – land reform, loosening of the one-child policy, marking it easier for labour to move across the country and encouraging the private sector.

Pivotal couple of weeks for the UK and Eurozone central-bank policy – bringing an upgrade to UK growth forecasts and an unexpected rate cut in Europe (0.5 to 0.25%). After a strong performance over the pase year, UK equity valuations are probably becoming less attractive – neutral outlook. Europe still potentially attractive as an equity market – supported by more aggressive stimulus from the ECB (counterargument: maybe that’s already priced in and valuations aren’t that attractive?)

Bonds

Shrinking yield premiums (spreads) of non-government over safer government bonds, and an uncertain fiscal and monetary policy outlook in the US mean that finding value in fixed income markets is getting challenging.

Take of US Fed winding down QE may die down after Chairman-elect Yellen noted need to support fragile recovery by maintaining easy monetary policy. With yields low, we are careful in balanacing duration (sensitivity to interest-rate changes) against risk of default – taking less credit risk when buying longer-dated (higher duration) bonds and vice versa. Favour three areas: dollar-denominated Asian debt, emerging-market corporate bonds and financial debt.

Commodities
Latest quarterly report from World Cold Council shows D for gold fell in Q3 with large redemptions of Gold ETFs. Whilst ETF outflows grab the headlines, report shows demand for physical gold remains robust – led by Chinese consumers buying jewellery. Irrelevant for market price, however. Despite 5 years of aggressive central bank stimulus, many economies still rely on proactive policymaking. Global risks still exist – and the world will still face continuing easy monetary policy probably. Fundamentals still favour gold over medium term.