28 Jan 2013

Macro Strategy Update

Market Update

So far, 2013 has started on a positive note. Economic data released continue to show improvement in the global economy over the past few months. Germany's ifo business climate index (Figure 1) rose for the third successive month while the forward looking business expectations index continues to trend higher, indicating more good news from Europe's largest economy in the months ahead. Europe has moved from being a macro risk to the world, to potentially being a small positive contributor to global economic growth if trends persist.

Figure 1

Meanwhile, flash PMI reports from the major economies are pointing to better performance from the manufacturing sector. China and the US continue to expand while Europe's contraction is slowing. China manufacturing PMI is estimated at 51.9, a 24-month high while the US manufacturing sector is expanding at an accelerated pace (56.1 versus 54.0). Importantly, new orders were rising, a sign of future strength for the sector. While Europe is still stuck in a recession, the Eurozone combined manufacturing and services sector PMI came in at 48.2, a 10-month high. It is quite evident that the recession is ebbing in Europe.

All these positive news have more or less been transmitted by markets over the last three months as growth assets like cyclicals (Figure 2), financials and high yield bonds have outperformed the market. These same sectors continue to outperform for the first four weeks of the year, another sign of better times ahead.

Image courtesy of Stockcharts.com

Figure 2

The Bank of Japan may have disappointed markets with the decision to implement monetary easing only in 2014, but given that a change in governor is due in April and the government is likely to appoint a monetary dove to head the BoJ, we should see more aggressive action then. The fact that the Japanese yen continues to make new lows against major currencies demonstrates the market's faith in this scenario.

Sentiment may have turned bullish, judging by the positive comments on equities from the World Economic Forum at Davos. The American public seems to be falling in love with stocks again1 as seen from the inflows into equity mutual funds. As the economic and political landscape improves, this shift in investor sentiment can drive markets much higher, but it may also mark the last phase of the bull market.

Portfolio Positions

No change from our previous stance. We are still looking for an opportunity to take some profit off the table by selling some equities. We thus urge you to speak to your advisers as to whether your portfolio is affected by our recent recommendations.



References
1. As Worries Ebb, Small Investors Propel Markets. 25 January 2013 NYT

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