Tuesday 22nd July 2014
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MONDAY TICKER - JULY 21st - The value of assets managed by Islamic funds grew by 4.9% and reached $75.1bn in the first six months of 2014 (a record apparently). According to a report released by Kuwait Finance House (KFH) Islamic finance assets around the globe – including also those not managed by dedicated Islamic funds – reached $1.8trn by the end of 2013 and should surpass $2trn in the third quarter of this year. The number of Islamic funds grew from just over 800 in 2008 to 1.069 as of June 17th this year says KFH with Saudi Arabia and Malaysia holding more than 60%% of Islamic fund assets worldwide. The report says equities continue to dominate the portfolios of Islamic asset managers, accounting for 44% of the total; approximately 16% of the assets are invested in low-risk money market instruments. Investments in real estate, however, make up only a small portion of total and are made mostly by funds specialised in the Gulf Cooperation Council (GCC) and Malaysia real estate. The GCC is comprised of Saudi Arabia, Bahrain, Qatar, Emirates, Kuwait and Oman - Catella has secured the approval of the Swedish Financial Supervisory Authority (Finansinspektionen) and has taken up the shares in Informed Portfolio Management (IPM) in a deal originally agreed in January 2014 worth SEK25.7m and an additional consideration related to IPM’s performance. Catella’s ownership of IPM now amounts to approximately 51% (up from 25% previously) - Venture capital interest in payment industry start-ups appears to be on the wane. According to data from CrunchBase, the number of venture-backed payments companies has declined from a high of 59 start-ups in the third quarter of 2013 to just 41 in the second quarter of 2014. The reason? High start-up costs which make the going hard for new firms. Most of the big success stories in the sector come from companies that piggy-back off the existing firms and platforms, such as Square's mPOS dongle, or utilise new techniques in crowdfunding and P2P lending to gain an edge over established players. Even so, Square, with its multi-billion dollar valuation, has yet to make a profit - The Hong Kong Deposit Protection Board has published its Annual Report for 2013-2014. Total deposits covered by the DPS increased to HK$1,637bn, with 90% depositors fully covered by the DPS protection limit at HK$500,000. The agency says it has enhanced deposit information submission requirements for scheme members and strengthened contingency arrangements and early warning mechanisms for responding to different crisis scenarios – Oman’s non-oil exports (including re-exports) have grown to OMR3.81bn last year from OMR79m in 1991, according to the Export Credit Guarantee Agency of Oman (ECGA). The agency reports it has received approval from the Ministry of Finance to provide medium and long term cover, investment guarantee as well guarantee on bonds as such approved products are extended by many other ECAs in other countries.

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The European Review

By Patrick Artus, chief economist at Natixis

Why the ECB will need to purchase bonds again

Friday, 27 July 2012 Written by 
Why the ECB will need to purchase bonds again Even if the European Central Bank (ECB) does not particularly like the idea, it will soon have to return to buying government bonds from several eurozone countries. The reasoning behind this prediction lies in a chain of events already taking place. http://www.ftseglobalmarkets.com/

Even if the European Central Bank (ECB) does not particularly like the idea, it will soon have to return to buying government bonds from several eurozone countries. The reasoning behind this prediction lies in a chain of events already taking place.

Earlier this year the ECB froze its securities market programme (SMP), which, since its inception in 2010, has bought over €210bn worth of sovereign bonds. The responsibility of buying sovereign bonds from various eurozone countries, it said, would now shift to the European Financial Stability Fund (EFSF) and European Stability Mechanism (ESM).

Despite the high level of interest rates in Spain and Italy, the ECB has not resumed its purchases of government bonds, and shows no enthusiasm for doing so. As mentioned, its official stance is that government bond purchases should be carried out by the EFSF/ESM.

However, many analysts (us included) believe the EFSF/ESM will not be able to react sufficiently – mainly due to its size but also the fact it lacks access to monetary creation, which the lender of last resort for governments must have.

To see the chain of events taking place, we only need look at the economic position of Spain, Italy, France and Portugal – which are all deteriorating. This reinforces the risk that investors will refuse to finance these countries, which will push interest rates to the point where there is a threat of default.

In these countries (obviously to different extents):

  • the private sector continues to deleverage;
  • the fiscal policy is and will be restrictive;
  • there is a decline in real wages since labour's bargaining power is weakening;
  • household demand is deteriorating, which leads to companies reducing their investment rate;
  • sluggish activity is leading to job losses and preventing these countries from improving their public finances; and
  • despite the decline in domestic demand in Italy, Spain and Portugal, there remains a substantial external deficit; in France, on the other hand, domestic demand has not started to fall yet, but the external deficit is rising.

The improvement in competitiveness due to the fall in wages (in Spain, Italy and Portugal, but not yet in France) is unable to improve foreign trade, either because the industrial sector is too small as a proportion of the whole economy (Spain, Portugal, France), or because this improvement is insufficient (Italy).

So there is clearly a downward spiralling risk. The crisis spreads from one country to the next via foreign trade and, since the external deficits are only partially being reduced, the crisis may be exacerbated by the rise in interest rates.

Therefore, we can see a continuous weakening of the economy. If the countries’ economic situation deteriorates, it will be increasingly difficult to finance their debts. Investors will be concerned about the countries’ situation and their solvency – in fiscal and external terms. Interest rates will rise further, and this means that countries and governments will be threatened with default.

Realistically, if this occurs the ECB will have to intervene because the officially planned solution (bond purchases by the EFSF/ESM) will not be sufficient. Given the size of the countries’ debts, the need to buy bonds will exceed the capacity of a bond issuer such as the EFSF/ESM – especially in the event of a bond market crisis affecting several eurozone countries.

Given that the lender of last resort for governments must have access to monetary creation, the only institution capable of buying bonds at the volumes required will be the ECB.

We believe that at the end of this process the ECB will have to intervene via massive government bond purchases (similar to the action taken by Bank of England). This is legal, provided that it relates to purchases in the secondary market, irrespective of some countries’ reservations.

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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