Sunday 29th May 2016
NEWS TICKER, FRIDAY MAY 27TH: BGEO Group plc, the London listed holding company of JSC Bank of Georgia, has this morning announced that Bank of Georgia, Georgia’s leading bank, and the European Bank for Reconstruction and Development (EBRD) have signed a GEL220m (approximately £70m) loan agreement with a maturity of five years. EBRD obtained the local currency funds through a private placement of GEL-dominated bonds arranged by Galt &Taggart, a wholly owned subsidiary of BGEO. This is the largest and the longest maturity local currency loan granted to a Georgian bank, which will allow Bank of Georgia to issue longer-term local currency loans, providing essential support for micro, small and medium sized enterprises to converge to DCFTA requirements, as well as underserved women entrepreneurs. “We are keen to develop financial products and lending practices, to service specifically women-led SMEs, which will ultimately increase their involvement in developing Georgia’s private sector”, says Irakli Gilauri, CEO of BGEO Group - The UK’s CBI has responded to analysis from the Treasury showing that a vote to leave the European Union could negatively impact UK pensions. Rain Newton-Smith, CBI Economics Director, says that: “All pension schemes benefit when funds can be invested across a stable, growing economy, to best support people in their retirement years. Any financial market turmoil caused by a Brexit is likely to have a negative effect on household wealth, the value of funds and damage pensions here at home, especially for those looking to retire within the next few years. The sheer weight of credible evidence points towards a serious economic shock if the UK were to leave the EU, meaning a hit to the value of our private pensions, jobs and prosperity.” - EPFR Global reports that Nine weeks into the second quarter mutual fund investors remain underwhelmed by their choices as they seek to navigate a global economy characterized by political uncertainty in Europe, lacklustre corporate profits and the prospect of another interest rate hike in the US, economic stress in major emerging markets and Japan's experiment with negative interest rates. During the week ending May 25 all nine of the major EPFR Global-tracked Emerging and Developed Markets Equity Fund groups posted outflows, as did Global, High Yield, Asia-Pacific and Emerging Markets Bond Funds, seven of the 11 major Sector Fund groups and three out of every five Country Equity Fund groups. Alternative Funds look to have taken in over $1bn for the fifth time in the past 14 weeks. Overall, EPFR Global-tracked Bond Funds added $2.6 billion to their year-to-date tally while another $9.1bn flowed out of Equity Funds. Some $12bn was absorbed by Money Market Funds with US funds attracting the bulk of the fresh money. EPFR Global-tracked Emerging Markets Equity Funds remained under pressure from many directions. China's economic data and policy shifts continue to paint a mixed picture for growth in the world's second largest economy, the US Federal Reserve is talking up the prospects of a second rate hike this summer, Europe's recovery appears to be running out of stream and the recent recovery in commodities prices is being viewed with scepticism in many quarters. All four of the major groups recorded outflows during the week ending May 25, with the diversified Global Emerging Markets (GEM) Equity Funds seeing the biggest outflows in cash terms and EMEA Equity Funds in flows as a percentage of AUM terms. Latin America Equity Funds extended their longest outflow streak since late 3Q15 as investors who bought into the prospect of political and economic change in Brazil confront the messy reality. However, year to date Brazil has been the top emerging market for all EPFR Global-tracked Equity Funds as managers bet that the impeachment proceedings against President Dilma Rousseff will open the door to more centrist economic policymaking says the funds data maven. Among the EMEA markets, the firm reports that GEM managers are showing more optimism than investors. EMEA Equity Funds have now posted outflows for five straight weeks and investors have pulled over $300m out of Russia and South Africa Equity Funds so far this month, though GEM allocations for both South Africa and Russia climbed coming into this month. The latest allocations data indicates less optimism about China despite is still impressive official numbers - annual GDP was running at 6.7% in 1Q16 - and the edge the recent slide in the renminbi should give Chinese exporters. GDP growth in Emerging Asia's second largest market, India, is even higher. Elsewhere, India Equity Funds have struggled to attract fresh money as investors wait to for domestic business investment and the government's reform agenda to kick into higher gears says EPFR Global – According to New Zealand press reports, stock exchange operator, NZX, will initiate confidential enquiries into listed companies that experience large, unexplained share price movements, to determine whether they may be holding undisclosed "material" information even while remaining in compliance with the market's Listing Rules that require disclosure of material information at certain trigger points. In an announcement this morning, NZX also warned investors not to assume that a listed entity's Listing Rules compliance statements meant they did not have material information in their possession which would potentially require eventual disclosure - Asian stocks were modestly higher today, largely on the back of increasingly softening sentiment from the US Federal Reserve. Most people think there will be one rate hike this year, but likely it will be in July rather than June. Either way, it will be one and not two or three. Fed chair Janet Yellen is scheduled to talk about interest rates at an event at Harvard University today and the expectation is that a softer approach for the rest of this year will be writ large; a good signal of intent will follow today’s quarterly growth stats. The presidential election will encourage caution; continued market volatility will encourage caution and mixed manufacturing data will encourage caution. Japan’s benchmark Nikkei 225 index added 0.4% to touch 16,834.84 and Hong Kong’s Hang Seng rose 0.9% to 20,576.52. The Shanghai Composite Index gained 0.3% to 2,829.67. The Straits Times Index (STI) ended 6.65 points or 0.24% higher to 2773.31, taking the year-to-date performance to -3.80%. The top active stocks today were SingTel, which gained 1.05%, DBS, which gained 0.07%, UOB, which gained0.11%, Keppel Corp, which gained2.47% and Ascendas REIT, which closed unchanged. The FTSE ST Mid Cap Index gained 0.27%, while the FTSE ST Small Cap Index rose 0.30% - The European Bank for Reconstruction and Development (EBRD) says it is taking the first step towards developing a green financial system in Kazakhstan in partnership with the Astana International Financial Centre (AIFC) Authority. EBRD President Sir Suma Chakrabarti and AIFC Governor Kairat Kelimbetov signed an agreement today on the sidelines of the Foreign Investors Council’s plenary session to commission a scoping study for the development of a green financing system in Kazakhstan. The study, scheduled to be completed in 2017, will assess the demand for green investments, identify gaps in current regulations, and make recommendations for the introduction of green financing standards and for the development of the green bonds market and carbon market services. The development of a green financing system would be consistent with the COP21 Paris Agreement, aligning financing flows with a pathway towards low greenhouse gas emissions and climate resilient development. The AIFC Authority was put in place earlier this year and is tasked with developing an international financial centre in Astana. In March, the AIFC Authority, TheCityUK and the EBRD signed a Memorandum of Understanding to support the establishment of the financial centre and to encourage and improve opportunities for the financial and related professional services industries – Turkey’s Yuksel has issued notice to holders of $200m senior notes due 2015 (ISIN XS0558618384), and filed with the Luxembourg Stock Exchange, that the company has agreed a term sheet with the ad-hoc committee of noteholders and its advisors to implement a restructuring of the notes and is currently finalising the required scheme documentation with the Committee. Once agreed, the Company will apply to the English High Court for leave to convene a meeting of note creditors to vote on the scheme proposals as soon as reasonably practicable when the High Court reconvenes after vacation in June 2016 - Following the agreement in principle of the May 24th Eurogroup for the release of the next loan tranche to Greece, domestic authorities have intensified their efforts for the completion of all pending issues reports EFG Eurobank in Athens. According to Greece’s Minister of Finance Euclid Tsakalotos, on the fulfilment of all pending issues, €7.5bn will be disbursed in mid-June, of which €1.8bn will be channeled to clear state arrears – This weekend is the second UK May Bank Holiday. FTSE Global Markets will reopen on Tuesday, May 31st at 9.00 am. We wish our readers and clients a sunny, restful, safe and exceedingly happy holiday.

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20-20: Prime broking - balance sheet, funding strength now key

Thursday, 15 December 2011
20-20: Prime broking - balance sheet, funding strength now key Expanding Bank of America Merrill Lynch’s hedge-fund business ranks high on global head of prime brokerage Stuart Hendel’s agenda. “Clients want to do business with us in this area, and so that has been a key focus during these past few months,” he says. Stock prices in the banking sector have been pummelled of late, forcing players such as BofA (whose own shares are off two-thirds since the start of 2011) to address operational redundancies and affect changes where needed. Hendel, however, remains resolute. “At the end of the day, firms need to have a solid return on the assets they use to support these types of businesses. We believe our business is differentiated by the size and strength of our balance sheet—and how we can put it to work for our clients.”

Expanding Bank of America Merrill Lynch’s hedge-fund business ranks high on global head of prime brokerage Stuart Hendel’s agenda. “Clients want to do business with us in this area, and so that has been a key focus during these past few months,” he says. Stock prices in the banking sector have been pummelled of late, forcing players such as BofA (whose own shares are off two-thirds since the start of 2011) to address operational redundancies and affect changes where needed. Hendel, however, remains resolute. “At the end of the day, firms need to have a solid return on the assets they use to support these types of businesses. We believe our business is differentiated by the size and strength of our balance sheet—and how we can put it to work for our clients.”

Rapid response a keystone of Stuart Hendel, global head of Bank of America Merrill Lynch’s (BoA’s) prime brokerage unit. When he signed on for the job, early in 2011, from two years as head of UBS AG’s prime brokerage division, he was certain that “anytime you join a new organisation, and particularly when it’s a global business and platform, you start by learning the landscape internally”. He adds: “You also want to ensure that you have the right people in the right seats and that they are supportive of the direction you want to take.” Most of all, says Hendel, you need to act quickly, as you don’t always have the luxury of time once you’ve taken the reins. “This is especially true on the sell side—I made a number of key decisions within the first 60 days.”

The ability to think on your feet in a highly-volatile market is a business imperative and a lifeline of sorts to clients under duress. Whether the news is good or bad is almost irrelevant, says Hendel, as there is only so much market turbulence that hedge fund managers can tolerate. “One day the news out of Europe is positive and the markets move accordingly, then the next it is negative and all bets are off. Therefore, the instinct is to just deleverage. Even funds focused on the macroenvironment can’t always handle being whipsawed like that.”

A cool head is equally vital; particularly as the constant need for hedge fund managers to address counterparty risk, though positive for the industry as a whole, has ultimately kept the sell side from focusing on the job at hand—that is, making money. “This is a sector that continues to deleverage, performance is down and prime brokers are fighting for market share,” says Hendel. “We have some considerable headwinds to contend with.”

Ambiguity surrounding political and regulatory solution—rather than the outcome of regulations themselves—only exacerbates the trend. Even then, there is some upside. “As strange as it may sound, hedge funds react better to negative news than uncertain news,” says Hendel.  “As long as this kind of climate persists, deleveraging will likely continue. In fact, market fundamentals appear to be the least important aspect in determining the health of companies, sectors or valuations.”

One downside of the current environment and inherent lack of investing conviction is the effect on market liquidity. Once clarity returns to the political, regulatory and economic landscape, the market should become more liquid, which will in turn benefit everyone. “Therefore, this is something that needs to be addressed in order to preserve the well-being of both the alternative space and the prime-brokerage industry over the long haul. We believe that once Europe gets its house in order and there is more clarity, that should help markets achieve some kind of foundation,” he says.

From his vantage point, Hendel sees a much greater likelihood of consolidation within the sell side than the buy side. “No matter what happens in Europe or with governments in general, we believe there is going to be a real need for the best and brightest to achieve superior returns on behalf of their clients,” he avers. “Certain investors are questioning the actively-managed, long-only business, but we are still bullish on the hedge fund space.”

Even then, Hendel says he is “flummoxed” by the perpetually thinning margins on banks’ leveraged-based book of business. “Pricing eventually has to go in the other direction,” says Hendel. “If it doesn’t, sell side firms may re-examine the returns being generated by the prime-brokerage business. In an environment where resources are scarce, all balance-sheet businesses may be vulnerable, not just prime brokerage.”

Hendel believes that market-exacerbated balance sheet weakness could ultimately threaten the existence of certain prime brokerage businesses over the near term. “Balance sheet and funding strength are areas that we believe will continue to be distinguishing factors for BofA—having a tremendous deposit base and excellent funding resources will allow us to properly service our clients going forward.”

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