Friday 6th May 2016
NEWS TICKER: NEWS TICKER: INFRASTRUCTURE INVESTMENT - Infracapital, the infrastructure investment arm of M&G Investments, has made an agreement to acquire an 80% stake in a Private Public Partnership (PPP) portfolio from Società' Italiana Per Condotte d'Acqua SpA (Condotte), the third largest construction company in Italy. The portfolio comprises both operational and greenfield assets that will provide core public services in the health, transport and security sectors. The portfolio, with a total capital value of over €700m, has an attractive risk-return profile, providing institutional investors with predictable cash flows for over 20 years. Italy is one of the largest PPP markets in Europe and offers numerous opportunities in the social infrastructure space. Andy Matthews, greenfield director, Infracapital, says: “This transaction provides Infracapital with a high-quality platform of PPP projects in Italy, a country which has successfully embraced the PPP model and offers numerous opportunities in the social infrastructure space —TURKEY After a generally benign April, when it looked as if emerging markets had turned a corner May has come in like a lion and once again (in aggregate) the segment has fallen in six straight sessions. Turkey is on the brink of a constitutional battle, which no doubt will be won by President Tayyip Erdogan, who wants to create a lifelong executive presidency. Investors are not crazy about the idea, the upshot being that S&P will likely cut Turkey's rating at least one notch deeper into junk later on Friday. The lira is set to end the week around 4.3% weaker against the dollar. The stock market was down 0.9% today and is on course for the biggest weekly drop since June 2013, with losses of over 8%. Local 10-year bond yields remain at one-month highs while Turkish five-year credit default swaps (CDS) are at 269 basis points (bps), hovering near a two-month high according to Markit. It is also unlikely that Europe will look upon Erdogan’s insistence on dominating all parts of Turkish economic and political decision making. Certainly it has proved too much for Turkey’s moderate prime minister Ahmet Davutoglu, who says he now wants to stand down at the upcoming AK Party congress later this month; though it is likely he was pushed into the decision as the president stripped the premiership of much of its power and authority. The resignation means Erdogan has tightened his control of Turkey and is likely to install a more obedient prime minister. It will weigh heavily on European legislators who are already ambivalent about bringing the country closer into the European fold. Erdogan has timed his move to dominate Turkish polity well: the country is dealing with a number of rising problems, including a resurgent conflict with the Kurdistan Workers’ Party (PKK), bombings by extreme Islamic groups and the influx of more than two and half million migrants and refugees. Davutoglu had led talks with Europe to limit the number of refugees flowing across its border in return for accelerated EU accession talks and financial aid. That stance reportedly did not gel with the president who wants a more fluid relationship with Europe; so it will be interesting to see what happens now. —EM TRADING SESSION – Australia’s ASX All Ordinaries was up a marginal 0.26% today, the only index that did not take a hammering today. The Shanghai Composite fell 2.82%, its biggest one-day fall in more than two months as investors began to worry about the country’s growth prospects again. The Hang Seng fell 1.66%, while India’s Sensex was down 0.13%. The Japanese market fell 0.25%, not great, but not the hammering the market has taken in recent days. The Taiwan TSEC50 was also down 0.26%. Russian dollar-denominated stocks slipped 1.3% and South African stocks lost 0.7%. Russian rouble and Kazakh tenge losing 0.5% and the South African rand down 0.3%. Kazakhstan's central bank cut its main policy rate to 15% (FROM 17%) yesterday explaining the move as easing pressure on the tenge and lower inflation risks. Emerging markets FX and index losses are attributed to weak commodity markets, with copper set for its largest weekly loss since early 2015, and a plunge in steel and ore prices. The reality is though that while investors keep pushing for ever looser central bank policy on interest rates it is not actually helping growth anywhere, nor is it encouraging inflation. A change in thinking is needed, but investors haven’t locked on to that yet and it is difficult to see how much further they can reasonably expect central banks to move to accommodate investor preferences, particularly as it is clear that asset allocation strategies are undergoing systemic change, but that argument’s for another day– ENERGY - Oil prices have also lost almost 7% this week, falling 1% today as Brent took its first weekly loss for just over a month. Prices are now back below $45 a barrel as investors reported took profits against the recent rise in prices (up 20% on a month basis). Reuters reports Brent futures LCOc1 were down 24 cents at $44.77 a barrel at 0848 GMT. WTI futures CLc1 traded at $44.07, down 25 cents day on day – USA – Of course everyone is looking towards today’s non-farm payroll data. Based on yesterday’s insurance claim data, there won’t be much change, but investors will be looking for a marginal improvement. However, they might be missing the mainline story which is that 59 US oil and gas companies have now declared bankruptcy this year, the latest candidates to file being Midstates Petroleum and Ultra Petroleum as oil prices have plummeted by over 60% since the summer of 2014. These are big numbers and ratings firms look to expect the overall number to double by year end. To put this in context, 68 firms filed for bankruptcy at the height of the dot.com bust back in 2002/2003. Significantly, the bankruptcies are not set against a backdrop of consolidation in the sector with M&A activity in energy at an all-time low. Moreover, many US energy firms are debt laden, with investors exposed to high yield bonds in the segment facing the risk that they will lose money.

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Are there rational causes for “home bias”?

Wednesday, 02 May 2012 Written by 
Are there rational causes for “home bias”? Savers and investors in every country hold an excessive quantity of domestic securities relative to foreign securities, so-called “home bias”. In the euro-zone, home bias has been growing sharply of late. http://www.ftseglobalmarkets.com/

Savers and investors in every country hold an excessive quantity of domestic securities relative to foreign securities, so-called “home bias”. In the euro-zone, home bias has been growing sharply of late.

Suggested causes for home bias include:

  • holding domestic assets can protect domestic investors against domestic risks such as inflation or exchange-rate depreciation;
  • the benefits of international diversification are small relative to the transaction costs involved in buying foreign assets;
  • and information on domestic assets is of better quality than that on foreign assets.

The scale of the home bias
“Home bias” characterises an excessively high weight of domestic assets in portfolios, relative to what would be optimal, and therefore results in an excessively low weight of foreign assets.



Using Germany and France as examples, 65% of French and German institutional investors’ stock portfolio is in domestic equities while German institutional investors have 53% of their bond portfolio in German bonds. Indeed, French savers as a whole hold three times more French equities than foreign equities while German savers hold almost four times more German equities than they do foreign equities and more German bonds than foreign bonds. And in September 2011, German and French banks held respectively 75% and 42% of their own government’s securities.

Is it possible to find rational explanations of home bias?
There may be irrational explanations for home bias i.e. investors are not penalised by losses on domestic assets as much as by losses on foreign assets and they have a "patriotic" attitude etc. But there may also be rational explanations for home bias such as hedging domestic risks, small benefits of international diversification, and quality of information.

1. Hedging of domestic risks

Investors will hold large portfolios of domestic assets if these assets provide a better hedge against specific domestic risks than foreign assets do.

Exchange rates

Holding euro-zone equities is unlikely to protect investors in the euro-zone against a depreciation of the euro. Indeed, this much is evident when comparing the European stock market with the US stock market. Over the period 2008 to 2012, the European stock market declined relative to the US stock market and the euro depreciated.

Inflation

Certainly, this argument cannot apply to bonds since countries that experience an unexpected increase in inflation normally experience a rise in long-term interest rates, which generates losses for domestic investors – meaning that an internationally diversified bond portfolio would actually be preferable.

In the case of equities, one could think that this is an asset indexed to prices, which therefore provides a hedge against domestic inflation. However, in the case of France and Germany it is quite the opposite as the Price Earnings Ratio is negatively correlated to inflation. Indeed, equities do not provide any protection against domestic inflation, and the reverse is in fact true.

2. Small benefits from international diversification

The idea is that if the benefits of international diversification are smaller than the adjustment costs (transaction costs) incurred when buying foreign assets, investors will abstain from international diversification. If we take the example of euro-zone bond portfolios, one would see that diversification to the euro-zone as a whole in the period 1999-2012 reduces the return and the risk slightly, but in a very limited way.

3. Advantage in terms of information

It is an often-heard argument that the information available for investors is better for domestic assets than for foreign assets – largely because investors have better contacts with company management and their own government.

If this is true, this bias is likely to be far larger for small and mid-sized companies than for large companies that have better information resources. As a result, we should expect larger unexpected (news) shocks for small and mid-caps than for large-caps, and subsequently higher volatility in small and mid-cap indices. Indeed, this appears to be the case. The volatility of large-cap indices has been lower since 2003 than that of small and mid-cap indices.

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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