Under the Mattress or into the World?

24/06/11

What to do with our hard-earned savings. We spend all these years building our nest-egg only to see interest rates on offer below the rate of inflation, volatility in the markets and sovereign debt all over the place. So where do I go to get some solid growth these days?

Global - The growth outlook in major industrialised nations is diverging, with activity improving in North America, China and Russia, and moderating in most European countries, the Organisation for Economic Co-operation and Development's (OECD) leading indicator for March showed on Monday. The OECD said its composite leading indicator for member countries rose to 103.2 points in March from 103.0 in February, well above a long-term average of 100.  The indicator showed "regained momentum in economic activity" in China and Canada while the U.S., Germany and Russia were also in the midst of above-trend expansion.

China - China's consumer price index (CPI) inflation in April was down on March but has still exceeded the official government target of 4%, according to the latest results from the country's statistics bureau. The 5.3percent year on year rise was down only slightly on the 5.4% number in March. The figure has lead to fresh speculation that China may be forced once again to raise interest rates. The People's Bank of China has already hiked rates four times since October 2010 in a bid to gain control over a perceived overheating of the economy. The rate on one-year deposits is currently 3.25%, while the lending rate remains at 6.31%

India- India's industrial production grew at the fastest pace in five months, underscoring the central bank's concerns that consumer demand is stoking inflation. Output at factories, utilities and mines rose 7.3% in March from a year earlier after a revised 3.7%gain in February, the commerce ministry said in a statement in New Delhi.  The Reserve Bank of India last week boosted interest rates for the ninth time in 15 months to damp price gains that are the highest among Asia's major economies. The International Monetary Fund, Goldman Sachs Group Inc. and Credit Suisse Group AG expect India's expansion to ease this year because of monetary tightening. "The RBI is focused at the moment on curbing demand to stem inflation," Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, said before the report. "Rising rates will ease demand and slow growth."

Germany - German exports surged in March to their highest level since records began, as the growing global economy lifted demand for its products and services. The country's exports for the month totalled EUR98.3bn, 7.3%higher than February. Its imports also reached an all-time high, up 3.1% to EUR79.4bn. Both imports and exports are the highest since data started to be collected in 1950.
Germany is the world's second-largest exporter.

Greece - Rating agencies are united in their negative outlook on Greece as Standard & Poor's, Moody's and Fitch all made further negative comment about the country's continued inability to repay its debt. At the end of last week, S&P's went as far as downgrading Greece's long and short-term sovereign credit to B from C, and from BB- to B respectively, following comments from its Labour Minister that it will not be able to raise funds with new bond issues next year, as it is required to by the terms of its bailout package. Fitch has retained its negative outlook for Greece, which has consistently failed to meet the agreed terms of its rescue package, while Moody's is making more negative noises placing its B1 local and foreign currency government bond ratings on review for possible downgrade. A debt restructure is now seen by many as inevitable, partly to keep German consumers and voters happy, though S&P's has already warned that any such voluntary restructure will be seen as a default.

U.S. - U.S. exports set a record in March, buoyed by the weak U.S. dollar and strengthening global demand as U.S. trade flows returned to levels last seen before the global financial crisis. U.S. exports grew 4.6percent in March to USD172.7bn, surpassing the record set in July 2008 before world trade took a sharp downturn. The March export rise was the biggest month-to-month gain in 17 years, the Commerce Department said in a report on Wednesday. "It's taken two-and-a-half years, but the level of exports has finally returned to pre-recession levels," said Paul Dales, senior U.S. economist with Capital Economics in Toronto.

Commodities - Gold and silver dropped, as the dollar advanced against major currencies, reducing demand for precious metals as an alternative investment.
Immediate-delivery gold fell as much as 0.7% to USD1,491.30 an ounce. "Gold is coming under pressure as the dollar is gaining some ground," said Ong Yi Ling, Singapore-based analyst with Phillip Futures Pte. "The trend for precious metals in the short term is still bearish."

Spotlight on: value in Europe
Investors should stop focusing on the sovereign debt crisis and build up their exposure to undervalued equities on the continent, according to Adrian Bignell, manager of the Invesco Perpetual European Opportunities fund.

"I think it is important that investors keep economics and investment separate. Everything that is going on in the economies of Ireland, Portugal and Spain has little bearing on the outlook for the European equity market," said Bignell.

"Media headlines about the sovereign debt crisis are very discouraging, but in reality European companies are on a par with those in the U.K. and U.S., at a much cheaper price." "Profit margins are above expectations, balance sheets are strong, and crucially stocks are available on a big discount, European equities are trading around 10.5 times earnings, compared with 14 times from the U.S.," he added.

According to Financial Express data, Invesco Perpetual European Opportunities has decreased its exposure to international equities in favour of the European market in the last six months. In October 2010 the fund's exposure to European equities was 63%, this figure is now just under 90%

Bignell says he has hedged his portfolio against the downside risks associated with the sovereign debt crisis by avoiding direct exposure to the PIIGS (Portugal, Ireland, Italy, Greece and Spain) economies and decreasing his exposure to financials. The fund was overweight in banking stocks in the spring of 2009 as a short-term play, but financials now account for only 7% of the portfolio. Invesco Perpetual European Opportunities has outperformed its IMA Europe ex UK sector by just under 19% in the last three years, albeit with significantly more volatility.

Bignell is particularly positive about Germany, which has a regional weighting of 23%in his portfolio. "Low interest rates and a weak currency are favourable for German exports, which are booming at the moment," he explained.

According to official statistics, only China made more money from exports than Germany in 2010.The manager also favours the small and mid cap markets over large caps, even though some commentators fear the out-performance of smaller companies may be coming to an end.

He commented: "We believe the best growth opportunities are still in the small and mid cap markets. Many large cap companies are attractively priced, particularly those in the pharmaceutical and industrial sector that are yielding up to 5%. However, smaller companies have better pricing power, and economic policy has less of an impact on them."

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