Equity markets posted strong gains over the week ended 14 September 2012, as the Federal Reserve’s commitment to boost economic growth aided investor sentiment. The MSCI Emerging Markets index gained 3.6%, helped by strong gains by Brazil, Russia and India, which delivered week-on-week returns in excess of 5%. Russia’s benchmark index has gained a hefty 11.8% in September alone as oil prices rebounded from their June lows (Brent prices have risen 29.5% in USD terms since 21 June 2012), while a slew of reform measures in India have raised expectations of better economic conditions ahead for the beleaguered economy, helping the Indian equity market to a 6.4% month-to-date return.
[All returns in SGD terms unless otherwise stated]
Investors may refer to Market Valuations as of 14 September 2012 for more details.
US: Bernanke Unleashes “QE 3”
Fed Chairman Ben Bernanke announced further quantitative easing measures on 13 September, highlighting concerns that “without further policy accommodation, economic growth may not be strong enough to generate sustained improvement in labour market conditions”. The FOMC (Federal Open Market Committee) announced that it would purchase additional agency mortgage-backed securities to the tune of USD40 billion per month (while also continuing its programme of extending the maturity of its current portfolio, along with the reinvestment of principal payments, which would have the effect of increasing the Fed’s holdings of longer-term securities by approximately USD85 billion a month), with no fixed ending date given except that such action would be done “until improvement is achieved in a context of price stability”. The FOMC also guided that “exceptionally low levels for the federal funds rate are likely warranted at least through mid-2015”, an extension from the “late 2014” guidance offered previously.
Given that interest rates are already near historical lows, the latest announcement of further bond purchases is not likely to have a significant impact on borrowing costs; nevertheless, the open-ended commitment by the Fed to continue supporting the economy is certainly a positive, which has boosted investor sentiment and spurred interest in riskier assets like equities (longer-dated bond yields actually rose after the Fed’s announcement). On the flipside, the willingness of the Fed to act also signals that economic growth remains sub-optimal, and policy headwinds from the so-called “fiscal cliff” may send growth even lower from current muted levels. We retain our forecasts for the US economy to avoid slipping back into recession, and expect modest growth to persist for the world’s largest single-country economy.
UK: Jobless Claims Fall
Jobless claims fell at its fastest rate in over 2 years in August, declining by -15,000 to reach 1.57m, the fastest rate of decline since February 2010. The decline in claims beat expectations of no improvement and comes on the back of a downwards (positively) revised -13,600 fall in July. However, given that London accounted for 5,500 of the fall in jobless claims, the recent Olympics could have been the catalyst for the recent decline. Despite the latest decline in jobless claims, the claimant count (number of people claiming unemployment-related benefits) remained at 4.8% in August, the same downward revised level it was at in July 2012.
China: Weak exports
In China, exports rose by just 2.7% year-on-year, missing market expectations of 2.9% growth. Imports were even more disappointing, contracting by -2.6% year-on-year, compared with a 3.5% increase expected by the consensus. Trade data highlights sustained weakness in both external and domestic demand, and having disappointed for two consecutive months, we expect the government to start implementing further easing measures to support economic growth (plans for an estimated USD 156 billion worth of infrastructure investment have been announced), in order to help offset the negative impact from weak external demand.
India: reforms announced
The India government has recently announced plans to boost the flailing economy, after taking an important step to rein in the fiscal deficit by hiking the price of diesel by 5 rupees a litre, the first hike in 15 months. To boost foreign investment, foreign supermarket chains will be allowed into the country, with the foreign direct investment (FDI) limits in supermarkets and airlines raised to 49%, while FDI limits in media will be raised to 74%. There were also reports that the government is poised to sell stakes in Hindustan Copper, National Aluminum, MMTC Ltd and Oil India Ltd. Whether these measures will be sufficient to stem weak economic growth remains to be seen, with industrial production remaining sluggish (the Index of Industrial Production gained just 0.1% in July 2012 after a -1.8% contraction in June), while inflation (which has been a key issue forcing the RBI to put off interest rate cuts) is likely to rise following the hike in fuel prices.
ASEAN: Rates On Hold, Growth weakening
Following in the footsteps of neighbours Malaysia and Thailand, Indonesia left its reference rate on hold (at 5.75%), as fairly solid economic growth and the emerging risk of higher inflationary pressure gave Bank Indonesia fewer reasons to ease monetary policy. Bank Indonesia believes that recent developments in the external environment are pointing toward an improved current account deficit in 3Q 12, and is adopting a “wait-and-see” approach in deciding whether to take further policy measures if global economic conditions worsen.
In Malaysia, the Industrial Production Index in July grew by 1.4% year-on-year as compared with a 3.7% year-on-year growth in June. The weaker-than-expected growth was due to the -10.4% year-on-year contraction in mining output, which offset the 5.5% and 2.8% year-on-year growth in manufacturing and electricity output. While domestic consumption remains resilient in Malaysia, we believe that production is unlikely to grow steadily in the coming months as semiconductor sales and exports growth have continued weakening.
Exports in Russia continued to contract in July, declining 3.2% year-on-year, compared with the 7.7% decline recorded in June. Despite the slight improvement in figures compared with the previous month, this was the second consecutive month of declines, highlighting the Russian economy’s sustained slowdown. Plus, the exports figure missed market estimates, coming in at US$40.6bn only, compared with estimates of US$42bn. Russia’s economy has continued to slowdown in recent months amidst weak external growth and demand, which has weighed on oil exports, especially from Europe. Last week, Russia’s economy minister, Mr. Belousov, also reiterated that the economy will slow down in the second half of the year, probably growing below 3%, as compared with the 4.5% year-on-year growth seen in the first half of the year; this will bring the whole year’s growth down to 3.5%, according to the official forecast.
GEMs: exports, tax cuts
Exports in Russia continued to contract in July, declining -3.2% year-on-year, compared with the -7.7% decline recorded in June. Despite the slight improvement in figures compared with the previous month, this was the second consecutive month of declines, highlighting the Russian economy’s sustained slowdown. Plus, the exports figure missed market estimates, coming in at USD40.6 billion only, compared with estimates of USD42 billion. Russia’s economy has continued to slow in recent months amidst weak external growth and demand, which has weighed on oil exports, especially from Europe. Last week, Russia’s economy minister, Mr. Belousov, also reiterated that the economy will slow down in the second half of the year, probably growing below 3%, as compared with the 4.5% year-on-year growth seen in the first half of the year; this will bring the whole year’s growth down to 3.5%, according to the official forecast.
Brazil's stimulus measures to boost its economy continued with the expansion of payroll tax cuts to 25 industries and the reduction of taxes on capital goods for businesses. The tax cuts are expected to cost the government close to USD 6.41 billion in tax revenue and will take effect in January 2013.