NEWS,15.01.2013

Global economy enjoys sweeter sentiment

Global investors have entered 2013 in buoyant but not yet exuberant mood‚ according to the BofA Merrill Lynch Fund Manager Survey for January.The new year sees asset allocators assigning more funds to equities than at any time since February 2011‚ while their confidence in the world’s economic outlook has reached its most positive level since April 2010.Investors’ appetite for risk in their portfolios is now at its highest in nine years‚ while an increasing number judge equities as undervalued – particularly in Europe. Moreover‚ investors have reduced cash holdings to 3.8% from 4.2% in December.This marks the most positive reading of this measure of willingness to hold riskier investment assets since April 2011‚ though it has not reached levels that would represent a contrarian sell signal.Participants’ perception of the US fiscal crisis as the biggest “tail risk” for asset markets has calmed (down nearly 20% points in two months)‚ though it remains their largest concern. Views of China remain very positive‚ with a net 63% still anticipating a stronger economy this year‚ but one in seven sees a Chinese hard landing as their number one risk.Investors’ bullishness reflects a growing confidence in economic recovery. A net 59% now expect the global economy to strengthen this year‚ compared to a net 40% a month ago. This marks the panel’s most positive outlook since April 2010. An increasing proportion of respondents expect inflation to pick up as well.“Following the resolution of the US fiscal cliff‚ sentiment has surged. Half of investors now tell us that they would sell government bonds to buy higher-beta stocks‚ which is consistent with increasing growth and inflation expectations‚ and with our call for a ‘Great Rotation’ to start in 2013‚” said Michael Hartnett‚ chief investment strategist at BofA Merrill Lynch Global Research. “While the survey reveals pockets of exuberance‚ undemanding valuations in Europe should underpin equities unless earnings growth fails to materialize‚” added John Bilton‚ European investment strategist.49% of respondents now expect government bonds to be sold to fund purchases of higher beta equities and sustain the “risk on” rally. Last month‚ in contrast‚ only 37% saw the instrument as the likeliest source while 28% expected this to be reduction of cash balances (now 22%) and 19% expected defensive equities (now 15%).In this environment‚ the perception of Italy as a substantial “tail risk” for Europe has declined sharply. Only 17% of the panel now views the country as the biggest threat to the European story‚ compared to 26% in December. Assessments of the threats from France and Spain have worsened from last month‚ however‚ up to 34% and 29%‚ respectively.The panel has shifted its stance on financial stocks strongly‚ moving to its first net overweight in global bank names since February 2007 following a 15% move versus last month. Nevertheless‚ banks are still perceived as the global equity market’s most undervalued sector. The existing overweight in insurance has also been extended‚ particularly in Europe‚ and now stands its highest level since January 2007.In contrast‚ appetite for telecoms stocks has fallen to a net 25% underweight. This marks the sector’s lowest weighting from asset allocators since December 2005. While still in positive territory‚ pharmaceuticals have declined to a net 11% overweight. Their fall from a net 24% last month is January’s largest sectoral move.The perception that consumer staples companies are the most overvalued has also accelerated month-on-month.The new Japanese government’s policies continue to improve the country’s outlook. Its growth composite indicator now stands at a striking reading of 96.Against this background‚ global fund managers are turning more positive. A net 3% are now overweight Japanese equities‚ a sharp reversal of last month’s net 20% underweight. The proportion of investors viewing Japan as the most undervalued market increased this month as well‚ while a growing number see it as having the most favourable outlook for corporate profits.

US could lose gold-chip rating

The United States could lose its top credit rating from a leading agency for the second time if there is a delay in raising the country's debt ceiling, Fitch Ratings warned Tuesday.Congress has to increase the country's debt limit, which effectively rules how much debt the US can have, by March 1 or face a potential default.There are fears that the debate will descend into the sort of squabbling and political brinkmanship that marked the last effort to raise the ceiling in the summer of 2011. The US Treasury Department warned then that it had nearly reached a point where it would be unable "to meet our commitments securely".Standard & Poor's was so concerned by the dysfunctional nature of the 2011 debate that it stripped the US of its triple A rating for the first time in the country's history. Like Fitch, Moody's has a negative view on the US outlook."The pressure on the US rating, if anything, is increasing," said David Riley, managing director of Fitch Ratings' global sovereigns division. "We thought the 2011 crisis was a one-off event ... if we have a repeat we will place the US rating under review."Fitch already has a negative outlook on the US as the country's debt burden has risen to around 100% of its gross domestic product, and has said it will make a decision on the rating this year, regardless of how the debt ceiling discussions pan out. The US government reached its statutory debt limit of nearly $16.4 trillion at the end of 2012 but has engineered extraordinary measures that should see it through February.Riley's comments come just two weeks after US lawmakers agreed a budget deal with the White House that avoided the so-called fiscal cliff of automatic tax increases and spending cuts that many economists thought could plunge the US economy, the world's largest, back into recession. Relief that a deal was cobbled together, albeit at the final hour, is one of the reasons why sentiment in the financial markets has been buoyant in the first trading days of the new year. Many stock indexes around the world are trading at multi-year highs."The fiscal cliff bullet was dodged .... (but it's) a short-term patch," said Riley.Riley warned that the different arms of the US government still have a number of issues to address. As well as increasing the debt ceiling, they have to agree to spending cuts that were delayed as part of the fiscal cliff agreement and back measures to avoid a government shutdown, potentially in March.Though short-term fixes are more likely than not, Riley said the US political environment is not as good as it should be for a country holding the gold-chip AAA rating. The past few years, Riley said, have been marked by "self-inflicted crises" between deadlines.The major reason behind the lack of swift action in the US is that the Democrats control the White House and the Senate, while the Republicans have a solid majority in the House of Representatives. Both sides have differing visions of the role of the state in society and often varying political objectives.Despite his cautious tone on the rating, Riley said the US has a number of huge advantages and that getting the country's public finances into shape will not require the same level of austerity that many countries in Europe have had to enact over the past few years, partly because the US economy is growing at a steady rate.Other factors that support the US's AAA rating are the country's economic dynamism, lower financial sector risks, the rule of law as well as the global benchmark status of the country's bonds and the dollar, Fitch says.However it says these "fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt".

US debt ceiling hike critical

Federal Reserve Chairperson Ben Bernanke on Monday urged US lawmakers to lift the country's borrowing limit to avoid a potentially disastrous debt default, warning that the economy was still at risk from political gridlock over the deficit. Likening Congress to a family arguing that it can improve its credit rating by deciding not to pay its credit card bill, Bernanke said that raising the legal borrowing limit was not the same as authorising new government spending. "It's very, very important that Congress takes the necessary action to raise the debt ceiling to avoid a situation where our government doesn't pay its bills," he told an event sponsored by the University of Michigan. The US Treasury says the country bumped into its borrowing limit on December 31, and it is now employing special measures to enable the government to meet its financial obligations. US leaders did agree at the beginning of January to extend tax cuts for all American families earning less than $450 000 a year to avoid a portion of a "fiscal cliff" of policies that Bernanke had warned would likely tip the economy into recession. But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic spending cuts that were postponed until March 1."We're not out of the woods because we are approaching a number of other fiscal critical watersheds coming up," Bernanke warned on Monday.The Fed last month opted to keep buying $85bn worth of Treasury bonds and mortgage-backed securities a month until it saw a significant improvement in the labor market outlook, in an aggressive bid to push down borrowing costs and spur hiring.It has held interest rates at nearly zero since December 2008 and has said it will keep them at this ultra-low level until unemployment reaches 6.5%, provided that inflation does not look likely to breach a threshold of 2.5%. US unemployment in December remained at a lofty 7.8%.The president of the San Francisco Federal Reserve Bank, John Williams, said earlier on Monday that he expected the central bank's bond buying would be needed "well into the second half of 2013." Minutes from the Fed's December 11-12 policy meeting released earlier this month showed several policy makers favored ending the bond purchases well before the end of this year, while a few officials thought the purchases would be warranted until the end of 2013.A third policy-maker who spoke on Monday, Dennis Lockhart, president of the Atlanta Federal Reserve Bank, stressed that the open-ended, or meeting-to-meeting nature, of the Fed's commitment to buy assets did not mean the policy would continue indefinitely. "'Open ended' does not mean 'without bound.' The program is not 'QE Infinity,'" he told the Rotary Club of Atlanta.