Tuesday 31st March 2015
NEWS TICKER: TUESDAY MARCH 31st 2015 : Following a recent Morningstar Analyst Ratings Meeting, Morningstar has downgraded the Artemis UK Smaller Companies fund to a Morningstar Analyst Rating™ of Silver. The fund previously held a Gold rating. Morningstar continues to believe the experienced manager and robust process make this a strong choice for UK small-cap exposure, but Morningstar feels a Silver rating provides a better reflection of the fund’s relative merits within the sector. Indeed, given the manager’s focus on high-quality companies with resilient business models, Morningstar would have expected the fund to protect investors’ capital in 2014 to a greater extent than it did; an outcome which has slightly dented Morningstar’s conviction in the manager’s application of his process - President of the European Council Donald Tusk’s meeting with Prime Minister of Spain Mariano Rajoy today covered many points, but concern over a lack of government in Libya and the causes and consequences of instability and insecurity in the Southern Neighbourhood took up much of the discussion. “The Prime Minister and I had a very open discussion on both the causes and consequences of instability and insecurity in the Southern Neighbourhood. We had a good exchange on what the European Union is already doing - in terms of assistance, counter-terrorism and migration - and how we can better target our efforts to make a real difference,” notes Tusk in a briefing note issued today - Data published today by the Association of Investment Companies (AIC) using Matrix Financial Clarity suggests that investment company total purchases on platforms by advisers and wealth managers were 19% higher least year (with purchases worth £452.7m) and more than double the figure in 2012. In Q4 2014, platform purchases of investment companies were at £110.3m, 10% higher than purchases of £100.3m in Q4 2013 and 90% higher than purchases of £58.1m in Q4 2012. Investment company purchases at £110.3m in Q4 2014 were stable when compared to £110.6m in Q3 2014. Whilst 2014 was a strong year for purchases there was also a significant increase in sales, which rose 40% to £290.9m compared to £208.4m in 2013, suggesting some advisers and wealth managers are taking profits and rebalancing portfolios. Ian Sayers, Chief Executive, AIC, said: “Though sales have increased, we should remember that this trading activity all helps to improve liquidity. The AIC has trained over 3,000 advisers in response to RDR, and has recently increased its resource in this area, with the recruitment of Nick Britton, the AIC’s Head of Training. This will help us to increase awareness and understanding of investment companies with a refreshed training programme and the capability to meet and support more advisers.” The Global and UK Equity Income sectors were the most popular for advisers and wealth managers in 2014 overall, accounting for 18% and 13% of purchases respectively. The Infrastructure and Property Direct – UK were the third and fourth most popular sectors over 2014, accounting for 8% and 7% of purchases respectively. Transact and Ascentric continue to be the top platforms for investment company purchases, accounting for 49% and 20% of the market respectively in 2014. Alliance Trust Savings are increasing in popularity with financial advisers, their market share increasing to 18% in 2014 from 12% in 2013 - The Straits Times Index (STI) ended -7.25 points lower or -0.21% to 3447.01, taking the year-to-date performance to +2.43%. The FTSE ST Mid Cap Index declined -0.17% while the FTSE ST Small Cap Index declined -0.24%. The top active stocks were SingTel (+0.46%), DBS (-0.10%), UOB (-0.99%), Global Logistic (+0.38%) and OCBC Bank (-0.75%). The outperforming sectors today were represented by the FTSE ST Technology Index (+1.08%). The two biggest stocks of the FTSE ST Technology Index are Silverlake Axis (+1.86%) and STATS ChipPAC (unchanged). The underperforming sector was the FTSE ST Basic Materials Index, which declined -1.88% with Midas Holdings’ share price declining -3.23% and Geo Energy Resources’ share price declining -0.52%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+0.13%), DBXT MSCI China TRN ETF (+1.25%), DBXT FT China 25 ETF (+0.28%). The three most active Real Estate Investment Trusts (REITs) by value were CapitaMall Trust (+0.92%), Ascendas REIT (+1.17%), Suntec REIT (-1.07%). The most active index warrants by value today were HSI25000MBeCW150429 (+6.12%), HSI24800MBeCW150528 (+5.80%), HSI24000MBePW150528 (-7.32%) - Mississippi’s Rankin County School District has issued an online survey meant to gauge public opinion of a potential bond issue to build new classrooms. The bond issue would be used for construction of new instructional facilities, and school board officials have been discussing the possibility for a while. No specific details of the amount or number of facilities have been released, but school board Vice President Ann Sturdivant said district personnel are working to assess the needs. Rankin voters rejected a $169.5m bond issue in 2011 to upgrade and build new classrooms, but Sturdivant said she believes people see the need to remedy overcrowding issues, particularly in the Florence, Brandon and Northwest zones and that tapping the US debt capital markets will be a logical step -

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The European Review

By Patrick Artus, chief economist at Natixis

ECB bond purchases: the case for Spain and Italy

Monday, 13 August 2012 Written by 
ECB bond purchases: the case for Spain and Italy The European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved? If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis. http://www.ftseglobalmarkets.com/

The European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved?

If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis.

Strong pressure on the ECB

The high level of long-term interest rates in Spain and Italy is stifling their economies. Strong pressure is therefore being put on the ECB to buy large quantities of government bonds issued by these countries, in the hope it will sharply reduce their long-term interest rates. This could be done directly or indirectly, perhaps by transforming the European Stability Mechanism (ESM) into a bank with funding provided by the ECB.



Massive purchases of government bonds by the ECB: Would the eurozone crisis be ended?

If massive purchases of government bonds by the ECB were to resolve the debt situation in Spain and Italy, the consequential fall in interest rates would need to restore fiscal solvency, restore external solvency and bring back acceptable growth.

Let’s look at these three points now:

1. Fiscal solvency

Fiscal solvency is ensured if the primary budget surplus is greater than the public debt multiplied by the differential between the long-term interest rate and nominal long-run growth.

If long-term interest rates were lowered by ECB interventions to close to the eurozone average, a primary surplus of 4.2 percentage points of GDP would be needed in Italy and 2.8 percentage points of GDP in Spain to ensure fiscal solvency. Italy’s primary surplus is forecast to meet 4% of GDP next year, while Spain’s primary deficit is due to exceed 3%.With lower interest rates Italy would be fiscally solvent in 2013, but by no means would Spain be.

2. External solvency

External solvency is ensured if the primary surplus (excluding interest on external debt) of the current-account balance is greater than the external debt multiplied by the differential between the long-term interest rate and nominal growth.

If the ECB moved long-term interest rates closer to the eurozone average, a primary current-account surplus of 0.8 percentage point of GDP would be needed in Italy, and 3.1 percentage points of GDP in Spain. At present, Italy has a deficit of 1.8 percentage points of GDP, and Spain has a deficit of 2.5 percentage points. As such, with lower interest rates, external solvency would not be guaranteed in Italy, while in Spain, again, the situation is far worse – external solvency would be very far from guaranteed.

3. Growth

The growth prospects are dramatic for Spain and Italy. A fall in long-term interest rates would significantly impact growth in a positive way, but only if the contraction in activity was predominately due to the high level of long-term interest rates. This would be the case if the contraction itself occurred because there was a decline in investment, rather than anything else such as job losses or deleveraging.

While consumption is declining in both countries, the decline in investment is far more dramatic in Spain than in Italy. The sharp decline in investment in Spain can be attributed to the collapse of the construction sector and the need for deleveraging, a problem which is far more acute in Spain than in Italy. As a result, a fall in interest rates would not be sufficient to revive growth in Spain, but would help in Italy.

Conclusion: Would massive purchases of Spanish and Italian government bonds by the ECB stop the eurozone crisis?

In conclusion, if the ECB were to purchase massive amounts of government bonds issued by struggling eurozone countries, a sharp fall in long-term interest rates in Spain and Italy would:

  • restore fiscal solvency in Italy but not in Spain;
  • restore external solvency in neither of the two countries, though the problem is far more serious in Spain than in Italy;
  • revive growth in Italy, but not in Spain where the decline in activity does not stem mostly from high interest rates.

Massive intervention by the ECB in government bond markets would therefore be decisive for Italy, but much less so for Spain.

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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