Monthly Insight: April 2012
As we conclude the month of April, we are reminded that the green shoots shown in the global recovery will not take hold until growth returns to Europe. The crisis continues as evidenced in the rising borrowing costs of 10-year bond of 5.71% and 5.90% for Italy and Spain respectively. Europe has been in a recessionary like environment but it has been recently confirmed that Spain and U.K. are in a double dip recession in addition to 9 other European countries that are already in recession. Since debt crisis started in last summer, Euro leaders have developed many tools including $ 1 trillion firewall but markets are not sure whether it will be enough given the Italy and Spain debt size. The current framework of painful austerity measures, country specific institutional reforms (e.g. labor, tax), official financing (e.g. IMF) and debt relief from private creditors will lead to a better Europe in the long term but the framework is not creating the growth required today. The conditions in the Euro zone continues to deteriorate as unemployment rose to 10.8 % as of February 2012, GDP revised downward to -0.3 % for 2012 and government debt to GDP ratio rose to 87.2% at the end of 2011. With such dire conditions, the social stability is at risk as evidenced in Greece riots, Spain anti-austerity protest and it will spread to other euro zone members. Interestingly, the U.S. approach to the financial crisis including its own debt crisis shows us that austerity approach needs to be moderated in the Europe. U.S. leaders know that its own fiscal house needs to be addressed but it will do so at its own pace without risking the economy recovery. The tension between austerity vs. fiscal stimulus will only be heightened as the political landscape in Europe is changing. Greece will hold its parliamentary elections in May 6th and France will hold its second round presidential and parliamentary elections on May 6th and June 10th respectively. The Global Equity Fund (GEF) expects that a shift in focus from austerity measures only to include growth measures (e.g. fiscal spending). Hence, the GEF will position our portfolio conservatively for the Europe region and invest in undervalued companies meeting our criteria.
The U.S GDP rose at a 2.2% for the first quarter of 2012. While it is below the consensus of 2.6 %, the silver lining is that consumer spending is up by 2.9% in the first quarter, a good omen for continued recovery in the months forward. Also, the final reading for consumer confidence index in April rose to 76.4% as reported by University of Michigan/Thomson Reuters consumer surveys. The labor market continues to improve, adding only 115,000 jobs in April, with a slight decline in the unemployment rate to 8.1%. The Federal Reserve policymakers discussed when the first rate hike should occur. Thus far, the majority points to 2014 as the year when the first rate hike will occur. This low interest rate environment will continue to support the equity markets going forward. As for the first quarter 2012 earnings, S&P 500 had a positive earnings surprise of 78.4%, out of 153 reported in the S&P 500 list. Also, the S&P 500 has crossed 1,400 marks for first time since early April. So far the S&P 500 has been quite resilient brushing aside the negative news from Europe, however slightly down by 0.8% for the month of April. Looking forward, the GEF expects that the S&P 500 to decline by the end of May with a target of 1360 due to Europe and the mixed indicators from the US economy.
The Global Equity Fund continues to maintain a diversified investment strategy with a balanced portfolio of ETFs, indices and individual stocks forming about 60% of the portfolio and country & sector momentum strategies augmenting the rest of the portfolio. The GEF also maintained a diversified investment strategy in the sector-wise and global regions. As of end of April, the global telecom sector leads the portfolio with 15 % and the South America region lead the portfolio with 30 %. These momentum strategies have proven profitable, but we have maintained a relevant cash position to enable us to move in during selloff periods. The Global Equity Fund outperformed the MSCI All World ex-US benchmark by about 1.07 % in April.
The Global Equity Fund expects a turnaround in the global economy at the end of 2012 due to continued recovery in the United States and a shift in policy in Euro zone to include growth measures. The emerging markets will see upward trends as result of them.
Written by Abu Bhuiyan (Telecom Analyst)