Friday 6th 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

The Calculation for Spain

Tuesday, 31 July 2012 Written by 
The Calculation for Spain To alleviate its debt and escape its state of crisis, we think Spain has two strategies to choose from. The first one, already in place since 2009, involves a reduction in the fiscal and external deficits while accepting aid from other eurozone countries. If Spain were to continue with this strategy, it would need to incorporate regular debt purchases by the ECB and possibly the ESM, and provide assistance to recapitalise its banks. The second strategy would be to leave the euro, which would mean a default on its gross external debt and a sharp devaluation of its currency. Both of these strategies contain negatives that need to be considered: the question is, which one would be the least detrimental to the country’s economic future? http://www.ftseglobalmarkets.com/

To alleviate its debt and escape its state of crisis, we think Spain has two strategies to choose from. The first one, already in place since 2009, involves a reduction in the fiscal and external deficits while accepting aid from other eurozone countries. If Spain were to continue with this strategy, it would need to incorporate regular debt purchases by the ECB and possibly the ESM, and provide assistance to recapitalise its banks.

The second strategy would be to leave the euro, which would mean a default on its gross external debt and a sharp devaluation of its currency.

Both of these strategies contain negatives that need to be considered: the question is, which one would be the least detrimental to the country’s economic future?

Strategy One: Spain's present strategy of adjustment...A Catch-22 situation?

Spain’s high levels of external debt mean it cannot increase its external borrowing (except for emergency borrowing from the EU or the ECB). Therefore, it must balance its current account.



Its present strategy of adjustment is clear: a restrictive fiscal policy; an improvement in cost-competitiveness to rebalance foreign trade; and the acceptance of European aid to recapitalise banks in distress. The last action hinges on purchases of government bonds to push down long-term interest rates. However, this strategy is risky.

A scenario may help us better understand this strategy: a fall in real wages due to price-stickiness discourages household demand, which has a knock-on effect to make business investment decline. Hence, there is a major decline in domestic demand and activity, making it very difficult to reduce fiscal deficit. In early 2012 we saw this in action when Spain’s fiscal deficit widened considerably, due both to tax revenue short-falls and higher-than-expected government spending. A continuation of this strategy therefore may lead to a further increase in unemployment and a decline in activity.

There could also be a reduction in the external deficit due to the decline in purchasing power. That said, imports would have to be reduced by a further 20% for Spain's current account deficit to disappear, which would mean a decline of at least 12% in domestic demand and real income.

The only hope for this strategy is that improvements in cost-competitiveness could increase Spain's exports and market share, and improved profits could eventually increase business investment.

Strategy Two: Exit from the euro, default and devaluation...A possible solution or suicide?

The other strategy would be for Spain to leave the euro, sharply devalue its currency, and inevitably default on its gross external public and private debt. This would obviously be a big problem for Spanish multinational companies, given the size of debt and the impossibility of servicing it following devaluation.

But what would the likely consequences of this strategy be?

For a start, it requires an immediate rebalancing of foreign trade. The country could no longer borrow, which would result in a much weaker economic situation in the short term.

Our econometric estimate shows elasticity to the real exchange rate of 0.73 for Spain's exports and 0 for imports, in volume terms. If we assume 30% devaluation, the foreign trade gain in volume terms would be 7.7 percentage points of GDP, which is very substantial.

Devaluation would increase the price of imports and therefore reduce real income by about 5.9 percentage points, which would leave a net gain of approximately 2 percentage points of GDP.

When the Spanish peseta was devalued in the early 1990s (twice in 1992, once in 1993), the current account deficit disappeared in 18 months, exports accelerated strongly, while domestic inflation reacted only slightly to the rise in import prices. The decline in GDP only lasted one year, and from that point growth was strong because of falling interest rates.

In today’s instance, devaluation would also increase the competitiveness of tourism and increase the surplus for these services in local currency, though perhaps not in foreign currencies such as the euro.

As financing becomes completely domestic, it is not impossible that there could be a reduction in the sovereign risk premium.

Devaluation could subsequently attract direct investment by businesses. With 30% devaluation, for example, labour costs in Spain would fall to EUR 14 per hour, 60% less than in Germany. However, since the size of Spanish industry is relatively small, new activities need to be considered for it to generate a large surplus.

Conclusion: What strategy to choose for Spain?

If the improvement in Spain's cost-competitiveness and profitability does not produce quick results, the present strategy will fail: wages would have to be reduced on a greater scale to eliminate the external deficit, and the fiscal deficit would remain very high.

The other strategy (leaving the euro, devaluation and default) could be successful if the devaluation attracted new activities, but it involves a lot of uncertainties – such as the impacts on Spanish multinationals, interest rates and foreign trade.

As stated earlier, both strategies are rather bleak, but positive aspects are still evident. Considering all of the factors, we believe that the strategy of devaluation and default could be the most efficient, particularly due to the high price elasticity of exports and the fact that Spain's entire current account deficit is accounted for by the interest on its external debt. As in 1992, it could also be effective due to the domestic financing of fiscal deficits, which will prevent a rise in interest rates.

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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