G20 summit – shift from West to East

Gordon Brown hailed a new era of economic co-operation at the close of the G20 summit last week, the G20 will become the premier body for monitoring international economic problems” said Brown.

The main outcome of the second G20 summit of 2009 following April’s gathering in London saw agreement that all future G20 proceedings will concentrate upon international economic policymaking, but will not replace the existing G7 or G8 groups. The primary focus of G8 will now be to consider international relations and foreign policy.

With this in mind, the focus of the latest G20 summit was economic recovery and financial regulation. Perhaps most compelling was the acknowledgement of the long-standing changes to the global economic landscape, namely the growing strength in some developing economies. The world leaders committed to a shift of at least five percent in the International Monetary Fund (IMF) voting share to developing economies from over-represented countries. The shift would make the split nearly 50-50 from the current share which is 57 percent for industrialized Western countries and 43 percent for mainly Eastern developing countries.

This shift from west to east is similarly acknowledged in the membership of the G20, which has 6 Asian members including Korea, China and Indonesia, as opposed to G8 which had only Japan. However, when it comes to gauging the G20 position, it would appear that increasingly, the members to watch are the US and China, or the “G2”. “If you want to find out what the world is going to do then take the US position and take China’s position and draw a line somewhere in the middle” said David Rothkopf, former senior official in the Clinton administration.

Some economic observers have questioned the influence of the G20, arguing that the decision making process will prove to be too unwieldy, likening it to the G8. There was no concrete economic stimulus plan as some expected, but there are hints that a new way of running the world economy is coming in to play. Leaders intend to build upon the ‘framework for strong, sustainable and balanced growth’ with a three step process*.

• 1.   Agree priorities for the world economy in annual G20 summits
• 2.   Countries submit reports to show how their domestic policies match those ambitions
• 3.   The IMF assesses whether national plans mesh together to support global objectives.
  
• The G20 will continue to meet regularly to monitor the progress of the resolution of the global economic crisis - with the next meeting scheduled for later this year.

• The general sentiment of this latest summit was that the collective G20 actions taken throughout 2009 have done enough to address the global recession so far. However, there is acknowledgement that more must be done to keep the global economy on the path to recovery and ensure that the lessons from the past have been properly learned. The new framework and membership changes for the G20 appear to be the first steps towards achieving this.

• If you would like to find out more about emerging markets visit our Investment ViewPoint: Analysis section, where we have been observing the investment prospects for Emerging Markets. For a general view, read Emerging Markets – ready for recovery? Or perhaps you are interested in an individual nation? View an in depth investment profile of Brazil in our latest Investment ViewPoint: Analysis, Brazil – time to smell the coffee?
  

*Source: Financial Times, 26/27 September 2009; “New Body takes on economic leadership”.

From Wall Street to High Street

It is one year since one of the most prestigious Investment Banks in the world, Lehman Brothers, collapsed sending financial shockwaves around the world which subsequently crippled the global financial system. As the world entered economic recession and organisations have been forced to cut back on costs and staff, almost every bank, business and financial market has been impacted by the ripple effect.

The impact on the UK’s high street has been significant. The list of firms which have gone into administration reads like an A to Z of the UK’s stores, including Adams the childrenswear retailer, Allied Carpets, Dolcis, MFI, The Officer’s Club, USC the designer clothes store, Woolworths and Zavvi, the music and DVD chain. These really have been unprecedented times.

Commentary on the likely path of recovery has been widespread, highlighting the need for a globally co-ordinated solution. Institutions such as the UK Monetary Policy Committee (MPC), the International Monetary Fund (IMF), the European Central Bank (ECB) and the US Federal Reserve have all been pivotal in the decision making process allowing markets to enter into a sustained period of growth in recent months.

This has caused market commentators to look at the recession and forecast The Shape Of Things To Come and what shape recovery will we see V, U, W or L?

V: short and shallow

U: a longer and deeper recession

W: a double dip recession

L: a depression/lasting recession

In recent months market reaction has been buoyant with every major market very much in a V shape recovery showing positive growth as captured in the charts below:

So are we in a bull market recovery or are the gains realised over the last few months too much too soon and a correction is likely in the form of a W, double dip recession?

Speaking at the Sibos conference in Hong Kong, William White, a former chief economist at the Bank of International Settlements had this to say “Are we going into a W shaped recession? Almost certainly. Are we going into an L? I would not be in the slightest bit surprised,” in reference to the protracted recession which affected Japan during the 1990’s. He went on to say “the only thing that would really surprise me is a rapid and sustainable recovery from the position we’re in.”

It is clear that the debate about whether we are finally seeing a sustained period of growth is still raging. Last week the Governor of the Bank of England, Mervyn King spoke at a cross-party Treasury Select Committee where he had this to say about the prospects for the UK economy "Following a precipitate fall in economic activity at the end of last year and the start of this, there are now signs that growth has resumed in the third quarter," However, he also warned the strength of the upturn remains “highly uncertain”. Mr King’s comments had an unsettling affect on Sterling with a significant sell off in cable (GBP/USD) as his comments reached the market.

On Friday the IMF Managing Director, Dominique Strauss-Kahn commented on a delayed correlation between economic recovery and unemployment saying "if we have in mind that the global economy will only fully recover when unemployment goes down, then it will take more time. Because as everybody knows, there is some delay between the time when growth comes back and the time when the employment situation improves". The IMF currently hold the view that the global economy is likely to recover in the first half of 2010 with employment levels taking longer to recover.

So whilst it appears global management of the recession has begun to take hold at a macro-economic level, there remains conflicting views on the speed and path the recovery will take and when it is likely to fully restore the confidence in micro-economic activity for local businesses and shops on the high street.

It has been generally accepted that ‘global problems require global solutions’ and this is where this weeks G20 Summit in Pittsburgh should be very influential. The twenty richest nations meet this week to discuss the state of the economy with unemployment and economic growth among the top agenda points to discuss.

Indeed, the Organisation for Economic Co-Operation and Development’s (OECD) Secretary General, Angel Gurria has stated “Employment is the bottom line of the crisis. We cannot claim victory simply because we see indicators of recovery picking up and we should not just assume that growth will take care of this.” And with the OECD predicting 57 million people being out of work in OECD countries by 2010 if the recovery fails to gain momentum then it is clear that this week’s summit could have a significant impact on the future prospects of the global economy and, closer to home, the UK high street. With more people unemployed, and less spending on the high street, the potential is for the vicious circle to continue. In this case we can certainly expect to see a W or L shaped recession take shape in the coming months.

We will be reviewing the output from the G20 summit in next week’s ViewPoint including analysis of how the summit has been received by industry commentators across the globe.

If you are looking to take advantage of the continued market opportunities, then iShares offer easy access to indices with the potential to take advantage of short term market movements. You can access major markets, for example the US through the iShares S&P 500 or the iShares FTSE 100 giving you low cost access to the UK market. Alternatively, for longer-term investors who think that the markets are in for sustained market recovery, iShares can also be an excellent cost-efficient tool for you to use in order to gain access to these markets. Remember that ETFs are traded like shares and may not be for everyone. They closely track the performance of an index and as such their value can go down as well as up and you may get back less then you invested.

If you are an experienced investor looking to capitalise on market volatility and comfortable with the idea of leveraged investments why not take a look at CFDs or FST to speculate the movement of specific indices or stocks. If you want to take a view on the world’s currencies and profit in both rising and falling markets then FX can be a useful tool to get access to these markets. However, due to the leveraged nature of these investments you can lose more than you invested. Please remember however, that the value of these investments may go down as well as up and you can lose money as well as gain. Barclays Stockbrokers do not give advice and if you have any doubt about the suitability of these investments you should seek professional advice.

Whatever your viewpoint, whatever shape you think the economic recovery will take, you can monitor all the latest news flows and market movements by logging in to your account and visiting our research centre.

Following substantial gains in commodities in recent months it is easy to see why this asset class has proven popular with investors. Gold flirted with $1020 an ounce mark this month, oil hit its highest price of the year in August at $74.15 a barrel and sugar hit a 28 year high breaking through 24 cents per pound due to a shortage of supply. Whilst there have been positive signs that equity markets are rallying in recent months some commentators remain cautious as to whether this points to a sustained economic recovery or merely short-term growth which will be followed by further falls and rises in the market.

However, despite the global economic climate it is being suggested in some quarters that, current conditions are providing a ‘sweet spot’ for equities. Liquidity has significantly improved in recent months following the intervention of Central Banks allowing firms to start to turn the levers required to achieve stability and future growth. It can be suggested that this is being evidenced by all major equity markets, with the exception of Japan, having made progress in the last week following buoyant market conditions and supportive economic data.

Research from Barclays Wealth also suggests valuations are undemanding, growth is returning, liquidity is high and inflation is negligible, all the ingredients generally required to fuel future growth appear to be in place.

You can review the performance of equity markets in the table below:

Source: Barclays Wealth, FactSet

So what about specific stocks or sectors? There appears to be a strong consensus among market analysts favouring a return to up-weighting equities as part of a diversified portfolio. Financials, healthcare, energy and telecoms are just some of the sectors enjoying specific positive commentary from analysts.

You can also find out more about which stocks are proving to be the most popular by accessing our research centre and reading up on specific buy and sell recommendations by a panel of independent market analysts. Alternatively you can view the top ten trades executed through the Barclays Stockbrokers website to see which stocks are proving popular.

Barclays Stockbrokers does not give advice, if you unsure as to the suitability of equity investments please seek independent financial advice.

Regular readers of Investment ViewPoint will recall that in April we discussed a number of topics including G20, Euro weakness vs. Sterling strength, Green shoots of a US recovery and the UK Budget Announcement. In each of these articles we focused on key themes which we believed could prove interesting for investors in the future. This week we take a look back at those macro-economic decisions reached in April and assess the affect these developments have had on the world’s mainstream markets and economies

In April the agenda for the world’s richest nations as they assembled together in London for the G20 summit was very much to focus on the macro measures required to revive the global economy. Quantitative easing was agreed as a central tool for stimulating recovery with a $1.1 trillion package announced in an attempt to address the credit crunch. At the time Gordon Brown, the British Prime Minister was quoted as saying “This is the day the world came together to fight back against the global recession” Markets initially rallied on the back of this news with the FTSE closing up 4.3% on 2nd April taking it over the 4,000 mark for the first time since February. Fast forward five months and the FTSE is now trading at around 4,950, a two year high – suggesting that the fiscal packages announced have had a sustained positive effect on global markets as captured below.

With regard to global currencies, Sterling has been a big winner strengthening against both the Euro and the US Dollar. Back in April, 1 euro would buy you 91 pence but will now only buy you 87 pence. With respect to the US Dollar £1 will now get you $1.64 of the greenback versus the measly $1.44 on offer back in April. However, what about the world’s largest economy? Despite the US Dollar devaluing against the pound in recent months is it really all still doom and gloom or are we finally starting to see those green shoots that have been long heralded?

Last week the US government reported better than expected GDP results which showed the economy had shrunk by 1% (vs. a consensus estimate of 1.5%) in what looks like another sign on the road to recovery and in the last few months we have had Japan, Germany, Hong Kong and France all come out of recession. Here in the UK, GDP for the 2nd quarter fell by 0.7% (consensus -0.8%) and only last week the OECD (Organisation for Economic Co-operation and Development) downgraded its forecast for the UK economy saying the UK will miss out on this early global recovery from recession which has started. So we can see that not only have global economic measures had a profound effect on the global economy but, closer to home, the UK economy is now showing signs of recovery albeit not as quickly as competing economic nations.

If you have a view on how these macro economic decisions may continue to influence financial markets, you can do so through a number of products at Barclays Stockbrokers. Our foreign exchange platform, BARXdirect:FX allows you to speculate on the movement of the world’s currencies, whether they are rising or falling. Equally our CFD and Financial Spread Trading (FST) products have proven popular as clients look to take advantage of falling and rising indices and equities with the FTSE 100 one of our most actively traded instruments. If you are more conservative in your trading approach but would still like to get diversified exposure to some of these economies you can do so through a range of trackers including Exchange Traded Funds (ETFs) and structured products.

Always bear in mind though that these investments can fall as well as rise in value and with FX, CFD and FST products you can lose significantly more than your initial deposit or margin payment. The investments are not suitable for everyone; if you are in doubt about their suitability for you, you should seek independent advice.

You can keep up to date with market news and events by visiting our Research Centre and of course future Investment ViewPoint articles as we continue to track and analyse market trends.

Renewed hope for Japan?

A landslide victory for the Democratic Party of Japan (DPJ) over the long-ruling conservative Liberal Democrats (LDP) has signaled the historic end of what had come to be known as the ‘1955’ system, raising hopes of reform for the world’s second-largest economy.

Initial market reaction following the election was positive. The Nikkei hit a near 11-month high before easing back following poor performance of the Shanghai Composite Index – see our Investment ViewPoint: Comment ‘No immunity from uncertainty’, while the Japanese yen rose to a seven-week high against the US dollar.

The DPJ now faces a number of challenges to sustain this positivity in the coming months, the most prominent being the economic crisis. The Japanese economy has struggled to emerge from recession, with unemployment at 5.7%, it’s highest ever rate, and debts equal to 172% of GDP in 2008, according to the Organisation for Economic Co-operation and Development.

Yukio Hatoyama, the leader of the DPJ has pledged to boost welfare and reform bureaucracy, shifting government support from corporations to helping consumers and workers. However some economic analysts are wary that the party may over-spend in light of the country’s debt problems.

Nonetheless, this appears to be Japan’s chance to break away from the economic stagnation of recent years – and whilst the DPJ victory appears to have been well priced-in to the market, the removal of any political uncertainty is often good for financial markets.

If you are looking for investment exposure to Japan you could consider the iShares MSCI Japan which tracks the MSCI Japan Index and offers exposure to over 300 large and mid cap Japanese companies, if unsure as to this investment seek independent advice.

To follow the Japanese story further, access the latest news and market movements by visiting our Research Centre.