23 Oct 2012

Macro Strategy Update

Market Update and Portfolio Strategy

Since the last market update, the theme that we have been expounding on is that markets rally on better bad news. So far, the economic data is confirming this.

US retail sales in September rose more than expected, rising 1.1% month-on-month against consensus expectations of 0.7%. Furthermore, the numbers in August were revised up from 0.9% to 1.2%. Industrial production also gained more than expected, up 0.4% against expectations of 0.2%. Other data points that surprised on the upside included housing starts (up 872K against 765K units), the Philadelphia Fed survey (up 5.7 against 0.5) and consumer sentiment (83.1 against 78.3). Clearly the economic community is behind the curve.

Even in Europe where some countries are in recession, there are signs of improvement. EU industrial production in August is up 0.6% against consensus expectations of -0.5%. This came about due to a strong showing by France (actual +1.5% v consensus -0.2%) and Italy (+1.7% v -0.5%), even as Germany struggled (-0.5% v -0.6%).

China's latest data also point to the better bad news theme. Industrial production for September is up 9.2% year-on-year against the consensus of 9.0% (August was 8.9%). Retail sales grew 14.2% against expectations of 13.1% growth (August was 13.2%). Exports grew 9.9% (consensus at 5.5% and August at 2.7%) while imports rose 2.4% (consensus at 2.2%, August at -2.6%).

It may be early but we could be at the beginning of a turnaround for the global economy which has been weighed down by a recession in Europe and a slowdown in the two biggest economies. Interestingly, this improvement comes at a time when markets are struggling. Global equities and junk bonds have failed to make any headway since mid-September. Commodities are in a mild correction (down 4.6% since mid-Sep) but the US dollar index has been ranging. However, this does not change the fact that risk markets have rallied strongly since June, signaling an improvement in the global economy. More likely, markets are taking a breather before trying to make further gains. We take comfort that TED spreads, a key measure of risk, continues to fall (Figure 1).

Image courtesy of Stockcharts.com

Figure 1: TED spreads falling


A slew of advance estimated PMI surveys will be released in the coming days. This should provide some confirmation of the better bad news theme, which will give markets another boost. Positive outlook maintained.

Portfolio Positions

No change from the last update.

IMPORTANT NOTES: This report is provided for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed to any other person without the prior written consent of GYC. The information and opinions expressed herein reflect a judgment of the markets at its original date of publication and are subject to change without notice. GYC does not warrant the accuracy, adequacy or completeness of the information herein and expressly disclaims liability for any errors or omissions. The information is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. Neither is past performance necessarily indicative of future performance. You should make your own assessment of the relevance, accuracy and adequacy of the information contained in the information provided and make such independent investigations as you may consider necessary or appropriate. Accordingly, neither GYC nor any of our directors, employees or Representatives can accept any liability whatsoever for any loss, whether direct or indirect, or consequential loss, that may arise from the use of information or opinions provided.

GYC FINANCIAL ADVISORY PTE LTD  1 Raffles Place #15-01 One Raffles Place, Singapore 048616
Tel: (65) 6349-1441 | Fax: (65) 6349-1440 | Email: enquiries@gyc.com.sg | Co Reg: 199806191-K
Website: www.gyc.com.sg