Global Markets Weekly 18 February 2013

  • US data stands out as bright spot

    • Corporate cash piles go to work in “mega deals”

    • US consumers more confident than expected

    • Overall shrinkage in Q4 developed-economy GDP

  • Equities | Mega deals reflect rising confidence

    Political uncertainty has led businesses to choose building up large cash piles over investing. But reduced uncertainty has helped volatility fall to lows characteristic of the pre-crisis period, as measured by the VIX index. This has helped spur risk assets higher this year and, consequently, a renewed appetite for mergers and acquisitions (M&A).

    There have been false starts before, but this time it may be different. With the recent Heinz and Dell mega deals, global M&A now totals $339bn in the year to date. With only half of the first quarter gone, that’s already 70% of the total done in the same period last year. Looking for potential takeover targets could be a good investment theme this year…if political uncertainty remains low

  • Bonds | Linkers not the answer to UK inflation risk

    The Bank of England (BoE) raised its forecast for price rises in its latest quarterly inflation report, though inflation has remained at 2.7% for four months. While we see inflation as a risk in 2013, our central scenario is for moderate, though sticky, UK inflation of 2-3% over the next couple of years – at the top of the BoE’s range

    Many investors see index-linked gilts (linkers), which have returns linked to inflation, as a good hedge against inflation. However, this may not be the case if they aren’t held to maturity. What’s more, they take more of a hit than conventional bonds from rising yields – a risk that has increased with improving global growth.

    Returns can also undershoot inflation if you pay too much for linkers, which are currently expensive relative to historical trends. We believe real assets, such as gold and equities that pay rising dividends, are a better longer-term hedge.

  • Commodities | Large gold buyers with poor timing

    Central-bank gold purchases rose to a 48-year high of 535 tonnes, underlining gold’s continuing role in the building of currency reserves among emerging-economy central banks. The four major reserve currencies are currently offering record low interest rates and negative real returns, as well as depreciation through central-bank money printing.

    However, while central banks are significant players in the market, they have not been good at timing their purchases. In the past three years, central banks have added more than a thousand tonnes of gold to their reserves for about $55bn, compared to nearly three thousand tonnes sold by developed-economy central banks in the previous seven years for $49bn.

  • Currency | Sterling takes lead in race to the bottom

    The baton has been passed to the UK in the global race to shore up growth through a weak currency. The Swiss National Bank kicked off the competition in early 2012, as it set an overt floor under the euro to protect its exports. Japan took the baton later in the year, guiding 20%-plus weakening in the yen against the dollar.

    While policymakers have made no overt statement favouring a weak currency, sterling is down 6% against the euro and nearly 4% against the dollar so far in 2013 as the UK faces the threat of a triple-dip recession in its economy. But investors should view this race as more a marathon than a sprint. With comparably weak economic prospects in continental Europe, we expect sterling’s decline against its main trading partner to ease heading into mid-year.

Please view our Global Markets Weekly video.

Key data and events this week

Monday Eurozone finance ministers meeting
Tuesday US home builders survey
Wednesday US housing starts and Fed minutes released
Thursday Eurozone & US flash PMIs (business activity)
US lead indicator, home sales & Philly Fed index
Friday German Ifo index of business sentiment

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