Sunday 1st February 2015
NEWS TICKER FRIDAY, JANUARY 30TH: Morningstar has moved the Morningstar Analyst Rating™ of the Fidelity Japan fund to Neutral. The fund was previously Under Review due to a change in management. Prior to being placed Under Review, the fund was rated Neutral. Management of the fund has passed to Hiroyuki Ito - a proven Japanese equity manager, says Morningstar. Ito recently joined Fidelity from Goldman Sachs, where he successfully ran a Japanese equity fund which was positively rated by Morningstar. “At Fidelity, the manager is backed by a large and reasonably experienced analyst team, who enjoy excellent access to senior company management. While we value Mr Ito’s long experience, we are mindful that he may need some further time to establish effective working relationships with the large team of analysts and develop a suitable way of utilising this valuable resource,” says the Morningstar release - The Federal Deposit Insurance Corporation (FDIC) today released a list of orders of administrative enforcement actions taken against banks and individuals in December. No administrative hearings are scheduled for February 2015. The FDIC issued a total of 53 orders and one notice. The orders included: five consent orders; 13 removal and prohibition orders; 11 section 19 orders; 15 civil money penalty; nine orders terminating consent orders and cease and desist orders; and one notice. More details are available on its website - Moody's Investors Service has completed a performance review of the UK non-conforming Residential Mortgage Backed Securities (RMBS) portfolio. The review shows that the performance of the portfolio has improved as a result of domestic recovery, increasing house prices and continued low interest-rates. Post-2009, the low interest rate environment has benefitted non-conforming borrowers, a market segment resilient to the moderate interest rate rise. Moody's also notes that UK non-conforming RMBS exposure to interest-only (IO) loans has recently diminished as the majority of such loans repaid or refinanced ahead of their maturity date - The London office of Deutsche Bank is being investigated by the Financial Conduct Authority (FCA), according to The Times newspaper. Allegedly, the bank has been placed under ‘enhanced supervision’ by the FCA amid concerns about governance and regulatory controls at the bank. The enhanced supervision order was taken out some months ago, says the report, however it has only just been made public - According to Reuters, London Stock Exchange Group will put Russell Investments on the block next month, after purchasing it last year. LSE reportedly wants $1.4bn - Legg Mason, Inc. has reported net income of $77m for Q3 fiscal 2014, compared with $4.9m in the previous quarter, and net income of $81.7m over the period. In the prior quarter, Legg Mason completed a debt refinancing that resulted in a $107.1m pre-tax charge. Adjusted income for Q3 fiscal was $113.1m compared to $40.6m in the previous quarter and $124.6m in Q3 fiscal. For the current quarter, operating revenues were $719.0m, up 2% from $703.9m in the prior quarter, and were relatively flat compared to $720.1m in Q3 fiscal. Operating expenses were $599.6m, up 5% from $573.5m in the prior quarter, and were relatively flat compared to $598.4min Q3 of fiscal 2014. Assets under management were $709.1bn as the end of December, up 4% from $679.5bn as of December 31, 2013. The Legg Mason board of directors says it has approved a new share repurchase authorisation for up to $1bn of common stock and declared a quarterly cash dividend on its common stock in the amount of $0.16 per share. - The EUR faces a couple of major releases today, says Clear Treasury LLP, and while the single currency has traded higher through the week, the prospect of €60bn per month in QE will likely keep the euro at a low ebb. The bigger picture hasn’t changed, yesterday’s run of German data was worse than expected with year on year inflation declining to -.5% (EU harmonised level). Despite the weak reading the EUR was unperturbed - The Singapore Exchange (SGX) is providing more information to companies and investors in a new comprehensive disclosure guide. Companies wanting clarity on specific principles and guidelines on corporate governance can look to the guide, which has been laid out in a question-and-answer format. SGX said listed companies are encouraged to include the new disclosure guide in their annual reports and comply with the 2012 Code of Corporate Governance, and will have to explain any deviations in their reporting collateral. - Cordea Savills on behalf of its European Commercial Fund has sold Camomile Court, 23 Camomile Street, London for £47.97mto a French pension fund, which has entrusted a real estate mandate to AXA Real Estate. The European Commercial Fund completed its initial investment phase in 2014 at total investment volume of more than €750m invested in 20 properties. Active Asset Management in order to secure a stable distribution of circa 5% a year. which has been achieved since inception of the fund is the main focus of the Fund Management now. Gerhard Lehner, head of portfolio management, Germany, at Cordea Savills says “With the sale of this property the fund is realising a value gain of more than 40%. This is the fruit of active Asset Management but does also anticipate future rental growth perspectives. For the reinvestment of the returned equity we have already identified suitable core office properties.” Meantime, Kiran Patel, chief investment officer at Cordea Savills adds: “The sale of Camomile Court adds to the £370m portfolio disposal early in the year. Together with a number of other asset sales, our total UK transaction activity since January stands at £450m. At this stage of the cycle, we believe there is merit in banking performance and taking advantage of some of the strong demand for assets in the market.” - US bourses closed higher last night thanks to much stronger Jobless Claims data (14yr low) which outweighed mixed earnings results. Overnight, Asian bourses taken positive lead from US, even as Bank of Japan data shows that inflation is still falling, consumption in shrinking and manufacturing output is just under expectations. According to Michael van Dulken at Accendo Markets, “Japan’s Nikkei [has been] helped by existing stimulus and weaker JPY. In Australia, the ASX higher as the AUD weakened following producer price inflation adding to expectations of an interest rate cut by the RBA, following other central banks recently reacting to low inflation. Chinese shares down again ahead of a manufacturing report.” - Natixis has just announced the closing of the debt financing for Seabras-1, a new subsea fiber optic cable system between the commercial and financial centers of Brazil and the United States. The global amount of debt at approximately $270m was provided on a fully-underwritten basis by Natixis -

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The European Review

By Patrick Artus, chief economist at Natixis

The eurozone crisis may last 20 years

Friday, 24 August 2012 Written by 
The eurozone crisis may last 20 years Financial markets should not be complacent when considering the timeframe of the eurozone’s recovery. Indeed, there are many conditions that need to be met before the region can officially exit the crisis. For instance, a complete reindustrialisation of countries with a deficit is needed, as well as the implementation of long-term developments, including rebalancing countries’ balance sheets, eliminating fiscal deficits, ensuring structural external deficits disappear, and creating jobs to replace those lost at the beginning of the credit crisis. http://www.ftseglobalmarkets.com/

Financial markets should not be complacent when considering the timeframe of the eurozone’s recovery. Indeed, there are many conditions that need to be met before the region can officially exit the crisis.

For instance, a complete reindustrialisation of countries with a deficit is needed, as well as the implementation of long-term developments, including rebalancing countries’ balance sheets, eliminating fiscal deficits, ensuring structural external deficits disappear, and creating jobs to replace those lost at the beginning of the credit crisis.

A further option, largely rejected across the region, would be to apply elements of federalism to the region in place of wiping external deficits, where the eurozone will act as a ‘transfer union’ that allows for monetary transfers from surplus countries to deficit countries.

During the lengthy process of ensuring all of these conditions are met, there will be a risk of major and long-lasting economic, financial, social and political instability. For the financial markets, this points to a depressed level for asset prices due to the high levels of risk volatility.



The financial markets sometimes believe that the eurozone crisis will be solved rapidly

Admittedly, there has been progress – albeit rather limited – towards solving the eurozone crisis. For instance, the European Central Bank implemented Very Long-Term Refinancing Operations (VLTRO) in late 2011, and the European summit in June 2012 resulted in positive decisions for banking supervision and recapitalisation. There is promise too with the likely implementation of the European Security Mechanism.

These actions have all led to a major, although temporary, improvement in financial markets. However, financial market participants should understand that the eurozone crisis will be very long, given the developments that are needed to end it:

The long-term developments required to end the eurozone crisis

1. Rebalancing of balance sheets

In the eurozone as a whole - and especially in some countries such as Spain, Greece, Ireland, and The Netherlands - an imbalance has appeared in the balance sheets of private economic agents between liabilities (due to a very high private-sector debt ratio) and assets (due to the bursting of the real estate bubble and the fall in real estate prices).

As long as this balance sheet mismatch lasts, the private sector has to deleverage and therefore reduce its spending, which leads to sluggish growth. Also, private borrowers’ solvency will remain poor, which means that there is no end in sight for the banks’ problems. 

2. Restoration of full employment

In the aftermath of the Lehman bankruptcy in 2009, there were heavy factory job losses due to the fall in global trade. Afterwards, the bursting of the real estate bubble triggered a decline in construction employment too.

Currently, many countries (e.g. France, Italy, Spain, Greece, Ireland, and Portugal) have a very high level of unemployment. This has generated a depressive cycle, because high unemployment leads to a decline in labour's bargaining power and a fall in real wages.

The crisis will not end before economies have pulled out of this depressive cycle, i.e. when job losses have been offset by new jobs. But this process has not yet even started, and would require several measures to be adopted in order to do so. These would include attracting new activities to these countries and reindustrialising them. This is not happening, however, and is reflected in the on-going decline of industrial production capacity.

3. Elimination of fiscal deficits

The sovereign debt crisis has occurred because of excessive fiscal deficits in many countries. Governments obviously need to eliminate these fiscal deficits in order to permanently drive down long-term interest rates.

But today we can see a very worrying development: the fiscal deficits are not shrinking – on the contrary, they are increasing because of  sluggish activity.

4. If there is no federalism, the structural external deficits must disappear

Some countries (e.g. Spain, Greece, Portugal, and France) have structural external deficits because of the small size of their exporting sectors, especially in industry. This situation is not sustainable, since these countries are accumulating a continuously growing external debt, and will end up becoming insolvent.

There are then only two solutions to this unsustainable situation, both of which will take a very long time: federalism, or reindustrialisation of countries with a deficit.

We should not expect a rapid end to the crisis in the eurozone

For the time-being, we are seeing major problems when it comes to implementing these long-term developments, and federalism is still off the table.

But for the eurozone crisis to end, all of the mentioned conditions must be met.

The economic, financial, social and political uncertainty will therefore be pronounced in the eurozone for a long time to come – we would estimate about 20 years. 

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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