November Global Update

Real Gross Domestic Product – the output of goods and services produced by labour and property located in the United Sates – increased at an annual rate of 2% in the third quarter of 2012, which is better than forecasted. In the second quarter, real GDP increased by 1.3%. The growth probably picked up in the third quarter following stronger consumer spending, an improving housing sector and increased defense spending. Though the figures that were released are better than expected, this would be the first time back to back figures have never exceeded 2% since the US emerged from the recession in 2009. The improving housing market has helped in boosting household confidence whilst companies have cut back on replacing outdated equipment on concerns of the so called “fiscal cliff”. Most analysts believe that the economy is going through a slow and stable recovery and consumers are regaining confidence; however business spending continues to be a concern. Consumer spending grew to a 2% annual rate over the last quarter compared to an annual growth of 1.5% in the second quarter of 2012. Retail sales in September and August had the best back to back showing since late 2010 as shoppers purchased goods from cars to iPhones; a sign that demand was heading towards the year-end holiday season high. Cars and light trucks sold at an annual rate of 14.9 million in September, the highest since March 2008.

Decreasing unemployment and strengthening home prices should mean that consumer confidence will continue to increase. Nonfarm payrolls rose in September by 114,000 compared to an increase of 142,000 the previous month, and analysts estimate the nonfarm payroll for October to be at 125,000. The steep increase in payrolls in August was believed to be from seasonal employment. The unemployment rate fell to a 3 year low of 7.8% in September from 8.1% and is expected to be at 7.9% in October. Employment and the economy has been the central theme in the campaigns of President Barack Obama and Republican challenger Mitt Romney ahead of the November 6th presidential election. No US president since World War II has faced re-election with unemployment over 8% and an unemployment rate of 7.8% has been the lowest since President Obama took office in 2009. The US stock market have been closed for the last two trading days in October due to hurricane Sandy and is expected to resume trading on the 1st of October; this has been the longest weather-related shutdown in more than a century. The presidential campaigns have been disrupted and both candidates and their running mates have tempered their campaigns, eager not to appear out of sync with more immediate worries over flooding, power outages, economic calamity and personal safety.

In the UK, GDP rose by 0.6% compared to the previous three months. The surge masks underlying weakness in the economy that may still prompt more stimulus from the Bank of England. As policy makers are still divided on the need for more bond purchases when the current round ends in November, a few have said there is “considerable scope” to add to the so called quantitative easing. Even with additional positive signs of late, the economy remains weak, while large downside risks particularly around the euro-area situation continue to harm. Most of the Bank of England members may still support at least some loosening of the monetary policy. However, some officials have different views on the need of more quantitative easing, with some of the nine Monetary Policy Committee members questioning its potential impact. Reports released on the 9th October by the National Institute of Economics and Social Research showed that the economy grew by 0.8% and between 0.2% and 0.3% after deducting distortions. On the other hand, estimates in the Bloomberg GDP survey ranged from no change to an increase of 0.8%. Recently released data gave a boost to the outlook, with inflation easing, unemployment falling and retail sales rising more than forecast. Consumer price growth eased to 2.2% in September, the slowest in almost 3 years, while retail sales increased by 0.6%. The labor-market report showed that payrolls rose to a record in the quarter through August, pushing the unemployment rate down to 7.9% from 8.1%.

In Europe, reports showed that Spain’s recession extended into the third quarter while inflation has stayed high in October. This signals that its government’s austerity programme to cut public deficit is also increasing living expenses. GDP in Spain shrank 0.3% quarter on quarter between July and September marking the fifth consecutive quarter of contraction. The reading was however slightly better, as economists forecasted a fall of 0.4%. On an annual basis, the economy has shrunk by 1.6% and is still in line to meet its end of the year GDP target. Spain’s conservatives, who have been in power since December, have laid out spending cuts and tax hikes worth over 60 billion Euros to the end of 2014 to cut the budget gap within EU guidelines. This measurement includes an across the board increase of the VAT rate, in force since 1st September, which has pushed up consumer prices and hit sentiment on the high street. Retail sales have fallen at the sharpest pace on record since September as shoppers who are already cash-strapped shielded away from purchases after the price hike. The Eurozone’s fourth largest economy is at the centre of the bloc’s debt crisis on concerns that the government cannot control its finances. Spain’s refinancing costs on international debt markets soared to a euro-era high in July but have since eased after the European Central Bank said it would activate a sovereign bond buying programme for countries that ask for European aid. Spain has however refrained from asking for aid in fear of austerity measures it would have to further suffer.

In Asia, export-oriented countries such as Korea, Taiwan and Japan, have been quite significantly affected by the recession in Europe, lacklustre growth in the US and a slowing China. While the export sector in ASEAN has been losing momentum in recent months (particularly commodity exports from Malaysia and Indonesia), their economic growth, surprisingly, has remained strong. Indonesia, the Philippines, Malaysia and Thailand grew at 6.4%, 5.9%, 5.4% and 4.2% year-on-year, respectively, in real terms in 2Q 2012. The weighted average real GDP growth for the ASEAN-51 was 5.0% in 2Q, still above the 18-year average of 4.7%. During this period, the growth of other Emerging Markets weakened to below the long-term mean. Therefore, the relative economic performance of ASEAN is really quite impressive. In China, government policy has been incrementally supportive for economic growth since the second quarter of this year, with moderate monetary and fiscal policy announcements. Exports, a key drag to economic growth, have slowed to a 3-year low to 1% in July. In mid-September, a string of policies were announced by Beijing to stabilize growth, including speeding up the export tax rebate, expanding financial support for exporters and simplifying custom procedures. Overall economic growth is expected to see signs of improvement entering into the fourth quarter as there came broader improving data points across housing starts, auto production and infrastructure construction. Chinese residential property continues to enjoy a recovery with new home sales growth maintaining a 13.3% year-on-year, after a 14.5% rise in July. That ended a run of nine consecutive months of negative year-on-year sales numbers. Stronger sales last month led to stronger residential investments, which are anticipated to continue going forward. Investment in residential property returned to 10.6% year-to-date. We have continued to maintain a risk adverse approach by minimizing exposure to aggressive equity markets and volatile commodities. Should there be a rally our portfolios are positioned to benefit through our US Equity funds and Mixed Asset funds which are moderately exposed to global equities.

I hope that you have enjoyed reading this post.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia