JEDDAH – The global economy will continue its weak trajectory, driven by the prolonged recession in the eurozone, Alkhabeer Capital said Sunday on its perspective about Global Markets for H2 2013. “This weakness will continue to hamper international growth and will weigh in on the recovery of European equities which are at elevated valuation levels,” the report said. European equities show no sign of a recovery taking effect in the first half of 2013, driven by the overall weakness in the region's economy and the hit it took following the austerity measures announced last year. The European Central Bank has been exerting major efforts to support the economy by slashing benchmark interest rates, which reached record lows in May 2013 and which could go into negative territory if the weak economic environment continues through the second half of the year. Alkhabeer is conservative about the near-term outlook for European equities as well, but cautiously positive on the peripheral eurozone debt instruments. The successful completion of the Irish and Portugal bond auctions during 2013 highlighted the appetite for peripheral European debt instruments which have yielded stellar returns this year and is likely to continue. Moreover, the report said that despite the strong run that the US equities witnessed in the first half of 2013, there seems to be a deceleration in equities activity, suggesting a market correction. However, Alkhabeer's long-term outlook for US equities is positive as markets are still below long-term valuation parameters and corporate earnings growth is expected to remain stable. As for US Treasuries, Alkhabeer sees a stabilization for the US 10 year yields at current levels as the modest recovery in the labor market prompts the US Federal Reserve to maintain current asset purchasing scheme. In Asia, China's contraction in its manufacturing activity is in line with analysts' expectations, the report said. The recent weak economic data has triggered speculation that the Chinese economy's growth could be sliding further to about 7 percent in the near future, sparking investors' concerns. In the wider BRICs area, the World Bank has forecasted slower growth rates in 2013 with India's growth steadying to its slowest pace in a decade, supported by weak economic data from Brazil and Russia. Japanese equity markets have witnessed wild swings in 2013, driven by monetary easing measures that were adopted by the Bank of Japan in April 2013. Alkhabeer expects that the growing uncertainty around the monetary policy will continue to exert pressure and cause volatility in the Japanese markets, but the aggressiveness of the Japanese Central Bank's approach should support the equity market and positively impact its performance. Actions taken by major central banks around the world, namely the Fed, ECB and Bank of Japan who continue to inject masses of liquidity into the global financial system has yielded a strong performance of developed equity markets. Quantitative Easing 3, adopted by the Fed in September 2012 has played a major role in driving equity markets by providing liquidity and keeping interest rates low. Additionally, upbeat Q1 2013 corporate earning proved a major driver for the rally in the US market, the report further said. Fading concerns about the eurozone peripheral debt market supported the consistent drop of borrowing costs in Spain which achieved more than 60 percent of its funding target, and helped dramatically compress the spreads between the AAA rated German benchmark yields and Italian yields, Alkhabeer report added. — SG
