Thursday 5th March 2015
NEWS TICKER – THURSDAY, MARCH 5TH 2015: Following a recent Morningstar Analyst Ratings meeting, Morningstar has moved the Henderson Horizon Japanese Equity fund and the Henderson Japan Capital Growth fund to a Morningstar Analyst Rating™ of Neutral. Both funds were previously Under Review due to a change in the lead portfolio manager. Prior to being placed Under Review, both funds were rated Bronze. The funds were solely managed by Michael Wood-Martin, who took over in 2005. However, in October 2014 Henderson decided to adopt a team-based approach. They are now run by the Japanese Equities team consisting of four investment professionals, including William Garnett, Michael Wood-Martin, Jeremy Hall, and Yun-Young Lee. Given this change to the investment process, Morningstar says it has less clarity around the likely shape of the portfolios and little evidence that the strategy can be implemented effectively. Morningstar believes a Neutral rating is appropriate at the current time —Moody's Investors Service has today republished a number of asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) rating methodology reports. The updated ABS and RMBS methodology reports consolidate the secondary rating methodology "Revising default/loss assumptions over the life of an EMEA ABS/RMBS transaction" and which the agency will now retire; for RMBS specifically sees updates to the surveillance section; and for Consumer Loan-Backed ABS specifically a new appendix describing how Moody's will tailor its approach to rating consumer loans for marketplace lending loans. The republications do not represent a change in methodology and will not result in any rating changes —BATS Chi-X Europe reports a 23.7% market share, with average notional value traded at €12.3bn up substantially from €8.9bn in February 2014. Market share rose in 14 of the 15 markets the firm covers. Its trade reporting facility, BXTR, had its second-most successful month ever with more than €369.3bn reported in total during the month; an average of €18.5bn each trading day. In total, BATS Chi-X systems touched €616.1bn of trades in February—The Straits Times Index (STI) ended -20.26 points lower or -0.59% to 3395.27, taking the year-to-date performance to +0.90%. The FTSE ST Mid Cap Index declined -0.18% while the FTSE ST Small Cap Index declined -0.17%. The top active stocks were SingTel (-1.20%), DBS (+0.05%), Keppel Land (-0.44%), OCBC Bank (-0.48%) and Global Logistic (unchanged). The outperforming sectors today were represented by the FTSE ST Utilities Index (+1.66%). The two biggest stocks of the FTSE ST Utilities Index are United Envirotech (unchanged) and Hyflux (+0.58%). The underperforming sector was the FTSE ST Consumer Goods Index, which declined -1.31% with Wilmar International’s share price declining -0.61% and Thai Beverage’s share price declining -2.06%.The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (-1.22%), SPDR Gold Shares (-0.31%), DBXT MSCI Thailand TRN ETF (-0.38%). The three most active Real Estate Investment Trusts (REITs) by value were CapitaMall Trust (+0.94%), Ascendas REIT (+2.02%), CapitaCom Trust (+0.28%).The most active index warrants by value today were HSI25000MBeCW150429 (-14.16%), HSI24200MBePW150429 (+10.53%), HSI23800MBePW150330 (+16.92%)—Commerz Real and RFR Holding have signed an agreement to purchase the real estate Atlas Plaza in Miami/Florida for its open-ended real estate fund hausInvest. The retail trade complex, located in the burgeoning Design District and in part on two storeys, comprises two existing buildings and a new construction, scheduled to be completed by May 2015. Upon the completion of the building work the leasable area will total approximately 1,600 square metres. The total investment volume for the acquisition and extension of “Atlas Plaza” amounts to around 68 million US dollars (approximately €60m)—Malaysia’s corporate sukuk sales will rebound from the worst start to a year since 2010 as a recovery in oil prices spurs issuance before the US raises interest rates, according to investment bank CIMB. Islamic bond offerings to date are down MYR9.7bn on a year on year basis. Kuala Lumpur-based AmInvestment Bank Bhd predicts sales could surpass last year’s MYR62bn as more projects come on stream under the government’s 10-year development programme. A 34% rally in Brent crude from January’s six-year low will shore up the country’s finances after Fitch Ratings warned the loss of revenue for oil-exporting Malaysia puts its credit ranking at risk. The average yield on AAA rated Malaysian corporate securities has dropped to a three-month low, cutting costs for issuers involved in Prime Minister Datuk Seri Najib Razak’s $444bn spending drive and those seeking to refinance debt—Bahrain’s BIBF has announced the launch of the region’s first Islamic Finance and Muslim Lifestyle Convergence Training programme, developed as part of the Waqf Fund’s initiatives to enhance Islamic Finance training in the region, in partnership with New York-based DinarStandard, at a press conference yesterday. The burgeoning Halal food and Muslim Lifestyle sectors is estimated to be worth $2trn in 2013, and is expected to reach $2.47trn by 2018, based on the State of the Global Islamic Economy 2014 report, produced by Thomson Reuters in collaboration with DinarStandard. This represents a huge opportunity for Islamic Finance, which has been for the most part, untapped—Kames Capital is to lower the annual management charge on the Kames Investment Grade Global Bond Fund following a review of the fund’s positioning in the European markets. The move will see the AMC on the Kames Investment Grade Global Bond Fund B share class fall to 0.65% from its current rate of 0.80%, while for the A share class the charge will drop to 1.15% from 1.30%. The changes will take effect from the 1st April 2015. As part of the review, Kames will also be changing the benchmark of the fund to the Barclays Global Aggregate Corporate Index from the Lipper Global Bond Global Corporate Median. The changes are intended to bring the fund into line with its peer group particularly in Continental Europe. Whilet there will be no change to the investment process of the fund, there will be a slight change to the fund’s duration. In order to maintain its index-neutral duration, the Fund will now be aligned to the Barclays Global Aggregate Corporate Index which has a duration of around 6.4 years. This compares to the existing Lipper peer group which has an estimated duration of 5 years.

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The European Review

By Patrick Artus, chief economist at Natixis

Are there available instruments to stimulate euro zone growth, and are they likely to be used?

Friday, 15 June 2012 Written by 
Are there available instruments to stimulate euro zone growth, and are they likely to be used? A consensus is emerging that euro zone growth must be boosted to prevent several countries from slipping into a depressive cycle where production declines and unemployment increases without the fiscal deficit or the external debt correcting. We have drawn up a list of available instruments to boost euro zone growth (wage increases, fiscal deficits, European investments, a range of actions by the ECB, weakening of the euro) and seek to determine which measures are most likely to be implemented. The risk is that agreement between European countries is only reached on policies that do not provide a substantial boost to growth in the euro zone – faster (spontaneous) wage increases in Germany, increase in investments by the EIB and structural funds, a third VLTRO, a cut in the euro repo rate – and not on policies that would have a much greater impact, such as fiscal stimulus in Germany, purchases of government bonds by the ECB, massive currency purchases (dollars) by the ECB. http://www.ftseglobalmarkets.com/

A consensus is emerging that euro zone growth must be boosted to prevent several countries from slipping into a depressive cycle where production declines and unemployment increases without the fiscal deficit or the external debt correcting.

We have drawn up a list of available instruments to boost euro zone growth (wage increases, fiscal deficits, European investments, a range of actions by the ECB, weakening of the euro) and seek to determine which measures are most likely to be implemented.

The risk is that agreement between European countries is only reached on policies that do not provide a substantial boost to growth in the euro zone – faster (spontaneous) wage increases in Germany, increase in investments by the EIB and structural funds, a third VLTRO, a cut in the euro repo rate – and not on policies that would have a much greater impact, such as fiscal stimulus in Germany, purchases of government bonds by the ECB, massive currency purchases (dollars) by the ECB.

There is a consensus over growth stimulus in the euro zone

There is a growing consensus that growth in the euro zone needs to be boosted. The recession is leading to a situation in an increasing number of countries where the fiscal deficit is no longer being reduced (Spain, Italy, Portugal, and Greece).



Meanwhile, despite the slowdown in domestic demand, the external deficit remains substantial in Portugal and is no longer being reduced in Spain, Greece and France due to the weakening of activity and exports in the euro zone. Indeed, rising unemployment is pushing down real wages in Italy, Spain, Greece and Portugal while companies everywhere remain cautious and are investing little.

So a depressive dynamic is emerging: declining activity and falling wages without any improvement in fiscal or external deficits. This has given rise to a growing view that action needs to be taken to boost growth in the euro zone. We will therefore draw up a list of policies that could stimulate growth in this region and gauge the likelihood of these being introduced.

The (possible/likely) policies to stimulate euro-zone growth

1. Faster wage growth in Germany

Rather than an explicit economic policy, this is more the effect that full employment and high corporate profitability have on wage growth in Germany. Indeed, wage agreements reached in Germany mean an annual four per cent rise in nominal wages in 2012, or around two per cent in real terms, is conceivable. Our research suggests that every percentage point annual increase in wages in Germany results in a EUR 14 bn income injection.

2. Fiscal stimulus in Germany

Whereas other euro zone countries are having difficulty reducing their fiscal deficits, Germany has virtually eliminated its deficit. A coordinated fiscal policy in the euro zone, therefore, could involve a more expansionary fiscal policy in Germany. Indeed, a one percentage point of GDP rise in Germany’s fiscal deficit would amount to an income injection of around EUR 30 bn – a bigger boost to euro zone growth.

3. European investments

It is often suggested that, since euro zone countries have no more leeway to boost their economy, stimulus needs to be carried out at the European level, either in the form of additional investments by the EIB or in the form of additional investments by European structural funds. A 10 per cent increase in investments both by the EIB and European structural funds (excluding agricultural policy) would mean an additional EUR 14 bn of investment per year.

4. Driving down long-term interest rates through ECB government bond purchases

Spain and Italy are faced with considerably higher long-term interest rates than their growth rates, which is crippling their economies. Direct purchases of Spanish and Italian government bonds by the ECB would help to drive down their interest rates, so the Securities Markets Programme (SMP) should be reactivated for substantial amounts. Indeed, this has proved successful in the United Kingdom where massive purchases of Gilts by the Bank of England have kept long-term interest rates very low despite the magnitude of the country’s fiscal deficit. Central banks can control long-term interest rates if they are willing to buy the necessary quantity of government bonds.

5. A third VLTRO

The three-year repos in December 2011 and February 2012 enabled Spanish and Italian banks to obtain cheap funding at one per cent and finance massive purchases of domestic government bonds, which resulted in a temporary fall in interest rates on these bonds.

A fresh long-term repo would have two positive effects. It would help to finance the external deficits of Spain and Italy (and also those of other countries) as well as contribute to the financing of the fiscal deficits in Spain and Italy.

6. A cut in the euro repo rate

There is still some room for manoeuvre for a cut in the euro repo rate while maintaining a big enough margin between the repo rate and the deposit rate at the ECB. A 25 or 50 basis point cut in the repo rate would be justified in light of the euro zone’s growth outlook and the muted rise in unit wage costs. The cut would likely lead to a depreciation of the euro and bolster growth. We have projected that a 100 basis point cut in the repo rate would increase euro zone growth by 0.2 percentage point per year for two years with a 50 basis point cut by 0.1 percentage point per year.

7. Sharp depreciation of the euro

Even after its recent fall, the euro is still overvalued by around 10 per cent.

Despite the lack of buyers, the euro is depreciating only slightly because the euro zone has no external borrowing requirement. In order to obtain a sharp depreciation of the euro, the ECB would have to accumulate substantial foreign exchange reserves (mainly in dollars) without sterilising these reserves, i.e. adopting the same policy as emerging countries, Japan and Switzerland.

While a depreciation of the euro would increase activity in the euro zone as a whole, it would do little to benefit the least industrialised euro zone countries (Greece, Spain, and even France).

So which measures are likely to be implemented?

Faster wage growth in Germany is already taking place and an increase in European investments is very likely. Moreover, considering the growth outlook and the rise in long-term interest rates, a third very-long-term repo (VLTRO 3) and a cut (25 to 50 bp) in the refi rate are also likely.

However, we do not believe Germany will introduce a fiscal stimulus package (due to the refusal by the Germans to “pay for the others”), nor will there be a reactivation of the SMP (the monetisation of public debts jars with the ECB and Germany), nor foreign-exchange interventions to drive down the euro (due to the resulting monetary creation, since it would not be sterilised).

Meanwhile, the effectiveness of a VLTRO 3 is questionable: do the banks want to buy more government bonds at a time when interest-rate risk is still high and there will be other stress tests on government bond portfolios in the future?

We are therefore  left with a stimulus consisting in EUR 14 bn in wages in Germany, EUR 14 bn in European investments and a 25 to 50 bp cut in the repo rate, which could add 0.2 percentage points per year to euro zone growth at best.

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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