Friday, 5 October 2012

Week in review: Europe’s great comeback…

Having been written off as a certain victory for the US, the Ryder Cup provided a spectacular triumph for the Europeans, spurred on by the talismanic Ian Poulter. This was a case of sport imitating finance as the no-less-talismanic Mario Draghi has inspired the euro and European shares to outperform US counterparts over recent months.

Overall this week has seen investors grind out another week of positive returns, despite some set-backs on the economic data front. Equities gained in most markets and, as has become common in recent months, Greek shares were in the lead (more than 10% higher at the time of writing). Indeed the Greek equity index is now up 65% since its nadir on 5th June. Though one of those quirks of statistics – that enormous gain would have done little to erase the losses for long-term holders. The index remains 85% below the peak it reached almost exactly five years ago.

You wouldn’t be surprised by the weak performance of the Greek market, with its well-trailed economic problems, but you might be surprised to know that domestically-listed Chinese shares also reached a peak five years ago, and remain 65% below that level today. That market has been closed for one of China’s Golden Weeks; two 7-day national holidays in spring and autumn. Hong Kong-listed Chinese shares were traded and rose 0.4% but these too languish some 50% below their October 2007 peaks.

They will have received little cheer from September’s Purchasing Managers Index (PMI) for China which were released this week and, whilst improving, continued to signal mild contraction. The non-manufacturing equivalent index also disappointed forecasters. China continues to struggle to balance the competing needs of restraining the housing market whilst stimulating consumption.

The authorities will receive some aid from the loose monetary policy of the United States, as this provides a monetary stimulus to China too. I posted a Chinese currency manipulation primer on the blog last October to explain why this was a threat to China in the inflationary days of 2011. Now it ought to be a source of support.

One country which does not benefit from QE is Japan which continues to struggle due to the strength of the Japanese Yen. As readers will remember from last week the Yen/Dollar exchange rate is a meaningful determinant of the Japanese equity market performance so, when the Bank of Japan announced no further measures to stimulate the economy it helped the Japanese market to another week of underperformance. There is an expectation among commentators that the Bank will recoil eventually, providing a meaningful stimulus, but for now their reticence justifies our long-standing bearishness on the market.

As Mike has described, the US non-farm payroll numbers were a somewhat mixed bag but overall treated as positive. The headline number beat expectations modestly and provided revisions totalling 86,000 jobs for previous months. A surge in part-time employment helped the unemployment rate to drop to the 7.8% level last seen in January 2009. Whilst on paper this might make investor fears that a tighter labour market brings the distant withdrawal of stimulus into slightly sharper focus, the Federal Reserve Minutes this week provided further reassurance that only a tangible improvement in economic performance will lead to that withdrawal.

Guy Foster
Head of Portfolio Strategy

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