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A team of financial advisors based in Latin America. We specialise in offering financial planning products for international professionals located abroad...

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Friday, 30 May 2014 21:11


U.S. - The U.S. economy shifted into reverse in the first three months of 2014 shrinking by an annualised rate of 1%, official estimates have shown.

It is the worst economic performance for the U.S. since the first quarter of 2011, it is also a significant fall on the 2.6% rise in economic output in the final quarter of last year.

The U.S. Commerce Department's first reading of gross domestic product (GDP) showed the economy grew at an annualised rate of just 0.1%.

Japan - Retail sales in Japan fell 4.4% in April, compared with the same period last year, as the effect of an increase in the country's sales tax began to take effect.

Japan raised the tax from 5% to 8% on 1 April, the first hike in 17 years.

The country faces rising social welfare costs due to an ageing population and is trying to rein in public debt.

Analysts said sales had dropped in part due to consumers rushing to make purchases ahead of the tax rise.

That trend was evident in March, when sales surged 11%, the fastest pace of growth since March 1997.

Russia - Russian equities have rallied strongly over recent weeks as investors set aside geopolitical tensions to examine the value opportunities in the heavily sold-off market.

The MSCI Russia index has gained 16.75% over the past month, outpacing the 4.29% increase in the wider MSCI Emerging Markets index and well above the MSCI World’s 2.63% advance. Investor sentiment has been boosted by signs of better relations between Russia and Ukraine.

The rally has been beneficial to funds focusing on eastern European equities, according to FE Analytics. Russian portfolios and Indian funds, which were buoyed by an opposition victory in the country’s elections, dominate a ranking of the 25 highest returning funds over the past month.

Middle East - Abu Dhabi’s stock index rose the most since December 2009 this week, as shares in Qatar and the United Arab Emirates gained before next week’s upgrade to ‘emerging markets’ status by MSCI.

The benchmark ADX General Index jumped 5.5% on Thursday, the most among more than 90 gauges tracked by Bloomberg globally. National Bank of Abu Dhabi PJSC, the largest lender in the U.A.E., soared 15%, the most since 2005 and the maximum allowed in a day.

Stocks are rallying in the Gulf region on speculation the MSCI upgrade will lure investors managing around $8tn in assets.

Emerging Markets - Emerging-market stocks headed for the longest stretch of monthly gains since 2009 this week, as economic stimulus in China, a new government in India and easing political tension in Ukraine attracted foreign investors.

The MSCI Emerging Markets Index lost 0.1%. The gauge has advanced 4.3% this month, headed for the biggest rally since October and a fourth straight gain. The most-active emerging-market exchange-traded fund in the U.S. has attracted a net $4.8bn of inflows in April and May, according to data compiled by Bloomberg.

“We are still optimistic on equities,” Tai Hui, chief Asia market strategist at JPMorgan Asset Management, said in a Bloomberg interview. “We start to see stabilization in China.”

Commodities - Gold futures reached a 16-week low this week, amid speculation that the U.S. will rebound from its winter slowdown.

The American economy contracted for the first time in three years from January through March, a government report on gross domestic product showed. Federal Reserve policy makers said at their April meeting that growth has strengthened after adverse weather took its toll. Fewer Americans than forecast filed applications for unemployment benefits last week.

Bullion tumbled 28% last year on expectations that the Fed would cut debt buying as the economy accelerates. Assets in global exchange-traded funds backed by gold are near the smallest since 2009, and money managers have cut their bets on a rally by about a third since this year’s peak in March.

Spotlight on: Time to buy Latin America?

Roberto Lampl, Head of Latin American Investments at Alquity Investment Management provides his outlook for the region.

Access to the investment story is available via the HIL Alquity Latin America fund (MC198).

Fund flows that persist over a period of time provide useful insight into investor sentiment and outlook over a particular asset class.

The cumulative amount of fund flows into Latin American equity (ETF and active funds) from April 2007 to the end of April 2014 has been rather erratic. During this period we saw flows peak at US$5bn during the 12 month period from April 2007 through April 2008, but the global financial crisis in 2008 caused a tremendous amount of redemptions in both ETFs and active funds, resulting in US$10bn outflows, which abruptly changed to inflows due to the combination of U.S. quantitative easing, China’s fixed asset investment programme, and Brazil’s fiscal expansionary policy. Such a combination resulted in strong equity market performance, with Latin America rising over 100% in 2009.

Historically, there has also been a clear correlation between the asset class (MSCI Latin America Index) and fund flows. The correlation in terms of direction has continued post 2011, with cumulative outflows of US$17bn from Jan 2011 to March 2014, while Latin America markets fell by roughly 25%. The Latin American markets didn’t decline more due to resilience and expansion in earnings growth and improved outlook in countries such as Mexico, Colombia, Chile and Peru. Indeed, it is Brazil that has been the significant underperformer declining by 32% (in USD) during this period.

Recently though we have seen fund inflows into the asset class; Brazil a long-term laggard has performed strongly from end of February through to May 26th, rising by 16%. In part that is due to its currency appreciating by 5% over this period, and also due to hope that the incumbent President Dilma Roussef will lose the upcoming presidential elections. The elections will be held in October, and the market hopes her fall in the recent polls will result in her failure to win. However, the market’s rise is based on speculation, not on fundamentals, and the near term outlook remains difficult, with the risk of energy rationing, its low level of competitiveness, weakening fiscal accounts and an overvalued currency.

The question should be will the recent reversal in fund flows persist? We believe investors acknowledge the attractive prospects of companies domiciled in Mexico, Chile, Colombia and Peru. Companies operating in these countries are supported by a common open-economic framework, while Brazil has a closed and highly protected economic model. These countries continue to show an ability to grow their level of industrial productivity and maintain inflation under control, whilst Brazilian policy doesn’t address the problem of low to no productivity improvement and inflation remaining stubbornly high. Fund flows are likely to come back, and though they may benefit the laggard Brazil in the short term, they will remain consistent in the years to come into the countries that have stability and investor friendly economic policy.

The Latin America ETF, the ILF US, is a proxy for most active funds and has over 55% of its exposure in Brazil, hence it is more of a ‘Brazil plus’ instead of a true Latin America fund. At Alquity we focus on the best companies, in the best markets with the best outlook. We do not let benchmarks shape our investment decisions. This is why we have over 80% of our fund invested outside of Brazil, which we believe is best for our investors over the medium term.

15th May 2014

9th May 2014