and the weakness continues

Equity markets were largely down over the week ended 13 April 2012, with global equities losing -2.6% for the week. Amongst the various regions, the developed markets were the week's worst performers as fears over Europe and its debt crisis overshadowed positive earnings reports in the US. Emerging Markets were down by -2.0%, with Brazil and India leading the decline with losses of -3.9% each. Asia ex Japan lost -1.3%, despite the outperformance of China which shrugged off lower than expected GDP growth to post returns of 0.4% for the week.

Europe and the US posted the weakest returns amongst the developed nations as debt worries in Europe continued to resurface, sparking concerns over the health of the financial sector despite positive earnings results from major corporates such as JP Morgan and Wells Fargo. Europe lost -3.0% for the week, while the US did slightly better, losing -2.9% in the week.

The SGD appreciated against several major currencies over the week, with gains of 1.1% and 1.3% against the USD and EUR. To find out more on our take on the latest monetary policy changes, investors could read on for our Singapore segment, as well as take a look at Idea of The Week: Benefiting From A Stronger Singapore Dollar [13 Apr 12]. Investors who wish to find out more on our view on the local equity market, could take a look at What's Holding Back Singapore Equities?

Despite the weak start to the quarter, global equity markets have seen one of the best quarters in recent times as highlighted in our Equity Market Review 1Q 12: A Positive Quarter for All Markets.

[All returns in SGD terms]

Investors may refer to Market Valuations as of 13 April 2012 for more details.

US: trade deficit shrinks unexpectedly

The trade deficit unexpectedly shrank to USD 46 billion in February, following a better-than-expected USD 52.5 billion deficit in January, beating consensus estimates of a USD 51.7 billion figure. Helping to narrow the trade gap was a drop in imports - the measure declined 2.7% month-on-month in February after a 2.1% increase in January. The decline in imports was led by consumer goods and industrial supplies. While this may help to add to GDP in 1Q12, the decline in imports may be slightly worrying as an indication of weakening in future demand.

Europe: debt jitters return

Debt worries once again reared its ugly head in Europe, with yields on Spanish and Italian bonds on the rise, sending the Spanish IBEX and Italian FTSE MIB equity indices down -5.3% and -5.6%for the week respectively (in local currency). Spanish and Italian bonds saw their yields rise by 22 and 7 basis points respectively to end the week at 5.977% and 5.523%. Prompting the market to worry over Spain were the ECB's details of the Long Term Refinancing Operations Information gleaned from the ECB show that Spanish banks borrowed EUR 227.6 billion in March, nearly 50% more than February’s borrowing of EUR 150 billion. Meanwhile, credit default swaps (CDS) on 5 year Spanish debt have reached historic highs of 502.46 and the 10 year spread over German bunds have reached 423 basis points (4.23%), highlighting the difference in perceived risk in Spanish debt as compared to German bunds.

With suggestions and hopes that the ECB will continue with its securities market program which sees the institution purchase sovereign bonds over the open market, Europe’s debt crisis has clearly not gone away and is indeed beginning to resurface after having been pushed to the side in the past 3 months. Given that risks to the downside are becoming more pronounced in the European periphery with the Italian and Spanish economies struggling, we do not expect the ECB to withdraw its policy support in the foreseeable future.

china: gdp, trade & loan growth

Exports in China unexpectedly grew 8.9% year-on-year in March, exceeding market estimates of a 7% growth. Imports missed market estimates of a 9% growth rate and slowed to 5.3% year-on-year growth. Faster exports growth led to an unexpected trade surplus of USD 5.35 billion, a massive rebound from the trade deficit of USD 31.48 billion in February. The trade figures indicate that the global economy is starting to recovery albeit at a slow pace, suggesting that China can still rely on exports growth to offset sluggish growth in domestic demand in the short term. In addition, new loans in March reached 1.01 trillion Yuan, exceeding estimates of 797.5 billion Yuan. This puts China on track to exceed its loan target this year. The figure indicates more favourable liquidity situation as compared to what we saw in previous months, when new loans figures had been disappointing.

On the other hand, other figures published this week point to a relatively more pessimistic picture of China’s overall economy. GDP in the first quarter slowed to 8.1% year-on-year, which was below estimates of 8.4% and a marked slowdown from the 8.9% year-on-year growth we saw in 4Q 2011. We also saw industrial production and retail sales figures remaining at relatively weak levels. Industrial production growth was at 11.9% and retail sales growth was at 14.8% in March; both figures were similar to those seen in 2009. Disappointing figures will likely boost the government to implement further policies in order to support growth.

South East Asia

Singapore: Monetary Policy & GDP surprise

In the MAS Monetary Policy Statement for April 2012, the MAS is continuing its policy of “modest and gradual appreciation” of the SGD-NEER policy band, but with two changes:

1. Slope increased slightly (which should entail a faster anticipated rate of appreciation of the SGD against trading partner currencies)
2. Narrower policy band (suggests that MAS has a view that global currency volatility is likely to decrease, and also places greater importance on currency stability)

The announcement came as a surprise as almost all economists surveyed prior to the announcement had expected the rate of appreciation to remain unchanged. The move also stands out amongst actions by other central banks in the region, where a tendency towards looser monetary policy has been an overriding theme. The preference to act early to stem inflationary issues suggests that global growth fears are now less in focus. In response to the announcement, the SGD has appreciated modestly against major currencies like the USD and EUR.

We maintain our preference for SGD-hedged/funds managed from an SGD-perspective in the fixed income space as the long-term appreciation story of the SGD against major currencies like the USD or EUR was reinforced by latest policy announcement. Investors who wish to find out more about the policy statement as well as the outlook for Singapore equities could read Idea of The Week: Benefiting From A Stronger Singapore Dollar [13 Apr 12] and What's Holding Back Singapore Equities?

Malaysia: Industrial Production Growth Accelerates

Industrial production growth in February accelerated to 7.5% on a year-on-year basis after growing 0.3% in January. The figure was better than the consensus estimates of a 5% growth and was mainly supported by stronger growth in manufacturing and electricity output, which grew 9.4% and 11.3% respectively on a year-on-year basis. Growth in mining output also improved, gaining 1.9% as compared with a -2.7% contraction in January. Industry production is likely to improve going forward in view of improving US economy and stabilisation of the European debt crisis, lending feasibility to the prospects of global growth.