Thursday 26th November 2015
NEWS TICKER, THURSDAY, NOVEMBER 26TH: In the last six months River and Mercantile Group (R&M) says has been appointed to design, execute and provide ongoing management of over £1.7bn of structured equity options mandates for pension clients, including the Royal Mail Pension Plan and another FTSE 100 company’s pension scheme. James Barham, global head of Distribution at R&M, says, "With increased volatility in equity markets, we have seen a growing number of clients that are taking advantage of our market leading derivative capabilities to manage the downside exposure in their equity portfolios. The derivatives team at R&M has an exceptional long term track record in designing and managing structured equity solutions for clients over the last ten years. We continue to see significant demand from pensions and institutional clients for structured equity to actively manage the profile of their equity investment returns while maintaining their allocation to equities. The design and execution of these mandate demonstrates R&M’s ability to design innovative, outcome oriented solutions for our clients, which are delivered to meet their governance requirements.” - Demand to borrow Asian stocks surged in the wake of the recent market volatility reports Markit. While short sellers have since pulled back slightly, the current demand to borrow shares across the region is still up by a fifth since the start of the year. Short interest across Asia is up by 18% year to date, reaching 2.7% of free float. However, says Markit, Japanese short selling has been relatively flat since the start of the year. The firm adds that consumer sectors have made Australia the most shorted country in the region - Trayport, a provider of energy trading solutions to traders and exchanges, says Power Solutions Enerji Ticaret ve Danışmanlık Anonim Şirketi has chosen Trayport’s GlobalVision Broker Trading SystemSM (BTS) for trading in the Turkish power market. Power Solutions, founded in Turkey in 2015, provides OTC Brokerage services in the Turkish electricity market.. The Trayport BTS offers brokers access to a growing network of traders using Trayport’s trading technology - The Dutch residential mortgage-backed securities (RMBS) market remained strong during the three-month period ended September 2015, according to the latest indices published by Moody's The 60+ day delinquencies of Dutch RMBS, including Dutch mortgage loans benefitting from a Nationale Hypotheek Garantie, continued to decrease to 0.73% in September 2015 from 0.81% in June 2015. The 90+ day delinquencies also continued to decrease to 0.56% in September 2015 from 0.64% in June 2015. Cumulative defaults increased to 0.78% of the original balance, plus additions (in the case of master issuers) and replenishments, in September 2015 from 0.70% in June 2015. This compares to cumulative defaults of 0.49% in September 2014. Cumulative losses increased to 0.15% in September 2015 from 0.14% in June 2015. Moody's has assigned definitive credit ratings to two new transactions since the last publication of the Index on September 9th, including five classes of notes issued by STORM 2015-II BV. and two classed of notes issued by Hypenn RMBS IV BV. As of the end of September, the 107 Moody's-rated Dutch RMBS transactions had an outstanding pool balance of €217.9bn, representing a year-over-year decrease of 4.8% - Thanksgiving holidays in the US has coloured trading today. In the Asia-Pac, low commodities prices are weighing on the Australian economy. Australia's S&P/ASX 200 gained 0.3% in thin trading volumes across the whole Asia-Pac region. With the exception of the Australian dollar, trading volumes were ridiculously small EUR/USD traded within a 10 pips range between 1.0615 and 1.0625. Similarly, GBP/USD traded sideways between 1.5115 and 1.5131. According to Yann Quelenn, market analyst at Swissquote: “When commodities price lower, there is a transfer of wealth between exporters (producers) and importers of commodities. The decline favours industries that need commodities as primary source for manufacturing products. Australia is on the exporters’ side. Indeed, an important part of the Australian’s revenues accounts for the revenues on the extraction of gold, silver, platinum and other metals. Materials shares fell 1.3%, and are down 4.6% so far this week, with commodities like copper and nickel having tumbled to multiyear lows. In Japan, The Nikkei Stock Average ended the day up 0.5% at 19944.41, while and South Korea's Kospi rose 1.1%. The Shanghai Composite Index fell 0.3% and Hong Kong's Hang Seng Index closed flat. Japan shares have posted one of the strongest rebounds in the region since September. The Nikkei is the second-best performing market in Asia year to date with a gain of 14%. China's Shenzhen Composite Index is up 65% year to date. The Straits Times Index (STI) ended 6.89 points or 0.24% lower to 2884.69, taking the year-to-date performance to -14.28%. The top active stocks today were OCBC Bank, which declined 0.91%, SingTel, which gained 0.26%, UOB, which declined 1.79%, DBS, which declined 0.36% and Global Logistic, with a 1.91% fall. The FTSE ST Mid Cap Index declined 0.05%, while the FTSE ST Small Cap Index declined0.84%.In Brazil, the BCB left rates unchanged at 14.25% yesterday in spite of rampant inflation. The latest economic survey by the central bank showed that inflation expectations are not anchored yet as it is expected to reach 10.33% by year-end and 6.64% by the end of 2016. Broadly, expectations the U.S. Federal Reserve will raise interest rates in December has pushed the yen weaker. The currency has weakened 3.1% against the U.S. dollar in the past three months. Japan shares nevertheless remain vulnerable to global central bank moves and geopolitical tensions - The London Metal Exchange's three-month copper contract closed down 1.3% at $4,549 a metric ton on Wednesday. Copper last traded at $4,692.50 a metric ton, up from the opening price of $4,538 a ton on Thursday. Overnight, the latest U.S. report on jobless claims pointed to a strengthening employment picture, pushing the dollar higher. U.S. stocks ended mostly unchanged as consumer discretionary and health-care shares offset losses in other sectors on the last full trading day of the week before the Thanksgiving holiday. Brent oil futures fell 0.2% to $46.06 a barrel. US crude-oil futures rose 0.2% to $43.13 a barrel. Gold prices were up 0.3% at $1,073.50 a troy ounce.

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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.

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.


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.


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