Monday 5th October 2015
NEWS TICKER, OCTOBER 2ND 2015: Asian stock markets were mixed in trading today. The Straits Times Index (STI) ended 8.7 points or 0.31% lower to 2793.15, taking the year-to-date performance to -17.00%. The top active stocks today were DBS, which declined0.86%, Sinarmas Land, which gained 0.89%, SingTel, which declined 1.11%, CapitaLand, which gained 3.69% and UOB, with a1.72% fall. The FTSE ST Mid Cap Index declined 0.35%, while the FTSE ST Small Cap Index declined 0.35%. Australia's S&P/ASX 200 ended 1.2% lower at 5052.02, following a patchy performance overnight in US markets, while South Korea’s Kospi index fell 0.5% over the day. The Nikkei 225 ended flat. Hong Kong's Hang Seng Index, which reopened after a holiday Thursday, was a rare bright spot for the region, up 3.2%, helped by slightly stronger-than-expected Chinese manufacturing data reported yesterday. However, analysts continue to warn against reading too much into any short term data, the long term outlook for Asia is still strong, though short term, while everyone hangs on the outcome of US jobs and economic data, investors are tending towards extreme caution - The amount of outstanding Euro commercial paper (CP) and certificates of deposit (CD) has decreased by $880m in the latest week according to the CMDPortal. Corporate sector outstanding, decreased by $5.1bn during the week, while sovereign, supranational and agency outstandings increased by $3.9bn to $242. Financial outstandings have fallen by $30.3bn in the last eight weeks while outstanding of asset backed securities has increased by $652m. Commercial paper (CP) consists of short-term, promissory notes issued primarily by corporations. Maturities range up to 270 days but average about 30 days. Many companies use CP to raise cash needed for current transactions, and many find it to be a lower-cost alternative to bank loans - Moody's has downgraded the corporate family rating (CFR) and the probability of default rating (PDR) of Eurasian Resources Group Sarl (ERG) to Caa1and Caa1-PD, respectively, both with negative outlook. The rating downgrade is associated with the agency's decision to lower the Baseline Credit Assessment ('BCA') of ERG to caa2, from caa1 previously. The lowering of the BCA to caa2 reflects the deteriorated fundamental credit profile of ERG, due to its increased financial and liquidity risks, which the rating agency considers are not sufficiently mitigated by the company on a stand-alone basis. The BCA is a key factor behind the CFR, as defined according to the Government-Related Issuer ('GRI') rating methodology, which Moody's applies to ERG, given the Government of Kazakhstan (Baa2 stable) is a main shareholder with a 40% stake. Moody's assessment on the other main factors behind the CFR according to the GRI methodology remained unchanged. In particular, Default Dependence is still considered as high and Government Support as moderate. These assessments drive the one notch uplift on the BCA.

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The European Review

By Patrick Artus, chief economist at Natixis

Avoid investing in German financial assets

Wednesday, 09 May 2012 Written by 
Avoid investing in German financial assets It may seem tempting to invest in German financial or property assets: Germany's economic and financial situation is at present far better than that of the other euro-zone countries, and German assets have outperformed those of the other euro-zone countries.

It may seem tempting to invest in German financial or property assets: Germany's economic and financial situation is at present far better than that of the other euro-zone countries, and German assets have outperformed those of the other euro-zone countries.

But it should be realised that: German assets are overvalued because the euro zone's monetary policy is too expansionary for Germany and because German investors have a very significant domestic bias while the supply of assets is small and Germany risks economic and financial overheating which could lead to a correction in asset prices in the medium term.

German financial assets might seem attractive
German financial and property assets might seem attractive for two reasons. First, because the present economic and financial situation in Germany is far better than in other euro-zone countries. This is reflected in its public finances, current-account balance, the size of its industry and export capacity, its cost-competitiveness, corporate profitability and investment drive, and in its labour market - which is now experiencing rises in real wages, compared to falling real wages in the rest of the euro zone. All in all, given that Germany does not need to reduce its fiscal deficit, and given the rise in real wages, better export performance, increasing business investment and job creation, the growth outlook is at present far better in Germany than in the other euro-zone countries.

The second reason why German assets could seem attractive is that their recent performance has been strong. This is true for government bonds, equities, corporate bonds, bank debts and residential real estate (but not commercial real estate), since 2008.

But in reality, investment in German assets should be avoided, because they are too expensive and Germany could start overheating

German assets are too expensive
Since 2006, Germany has witnessed and will continue to maintain stronger growth than the euro zone as a whole. This means that the euro zone's current monetary policy is too expansionary for Germany, as it was for the rest of the euro zone from 2002 to 2007. This of course tends to cause a rise in asset prices.

Also, Germany has excess savings (by households and companies, as shown by its external surplus) with an increasing bias for investing domestically, while at the same time the supply of assets is small: meaning the fiscal deficit has almost disappeared, companies are self-financed and issue few bonds and residential construction is at a low level. There is therefore ex ante excess demand for German assets, which has driven up asset prices, especially for safe-haven government bonds.

Germany could start overheating in the medium term
Germany is practically in a situation of full employment, and since its companies are very profitable, wage growth is accelerating. In 2012-2013 an increase in the unit wage cost approaching 3% can be expected, with productivity gains that are fairly low. This will probably lead to a rise in underlying inflation towards 2%, and hence to even more abnormally low long-term interest rates, which will continue to push up the prices of other assets.

It is well known that such a situation of overheating (full employment and interest rates that are too low relative to growth) is potentially unstable and can lead to a downward correction in asset prices (as it occurred in Spain, Ireland and the United States, for example).

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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