Monday 26th January 2015
FRIDAY, JANUARY 23RD 2015: European markets regulator ESMA has added Athens Exchange Clearing House to its list of authorised CCPs under the European Market Infrastructure Regulation (EMIR). EMIR requires EU-based CCPs to be authorised and non-EU CCPs to be recognised in the European Union (EU). The updated list of authorised CCPs is available on ESMA's website - Driven by strengthening private domestic demand, economic growth in the US is expected to accelerate modestly this year and drag last year’s unspectacular housing activity upward, according to Fannie Mae’s Economic & Strategic Research (ESR) Group. Amid continued low gasoline prices, a firming labour market conditions, rising household net worth, improving consumer and business confidence, and reduced fiscal headwinds, the economy is expected to climb to 3.1% in 2015, up from the Group’s estimate of 2.7% in the prior forecast. The stronger economic backdrop should lead to improving income prospects, underpinning a higher rate of household formation in 2015. "Our theme for the year, Economy Drags Housing Upward, implies that both housing and the economy will pick up some speed in 2015, but that the economy will grow at a faster pace," says Fannie Mae chief economist Doug Duncan. "We have revised upward our full-year economic growth forecast to 3.1% for 2015, which is not yet robust but still an improvement over last year’s growth. Consumer spending should continue to strengthen due in large part to lower gas prices, giving further support to auto sales and manufacturing. We believe this will motivate the Federal Reserve to begin measures to normalize monetary policy in the third quarter of this year, continuing at a cautiously steady pace into 2016 and 2017, likely keeping interest rates relatively low for some time." - The Russian Central bank said yesterday that its gold reserves grew by a 600,000 ounces (18.7 tonnes) in December – the ninth successive month of gold reserve increases. Russia has now more than tripled its gold reserves in the past ten years. The ruble has fallen in value by almost 50% in the past 12 months which makes the nation’s gold reserves ever more important to its global economic status – According to LuxCSD the Taiwan Depository and Clearing Corporation (TDCC) has announced, effective Sunday (January 25th) the firm’s BIC will change from TDCCTWT1 to TDCCTWTP. Customers should quote the TDCC's new BIC in field 95P::PSET//TDCCTWTP of their settlement instructions – Moody's today upgraded the Corporate Family Rating (CFR) of Stabilus S.A. to B1 from B2 and the Probability of Default Rating (PDR) to B1-PD from B2-PD. At the same time the rating agency upgraded the instrument ratings assigned to the Senior Secured Notes issued by Servus Luxembourg Holding S.C.A. to B1 from B2. The outlook on all ratings remains positive – The US Federal Reserve Bank of New York says its daily Fed Funds effective rate is now 0.12% (Low 0.30%, High 0.3125%) with four basis points of standard deviation - Vanguard Group, already the biggest mutual fund company in the world, has risen to second place as a provider of exchange-traded funds, says ETF.com—based on the success of its low-cost index funds, including ETFs. Boston-based State Street Global Advisors, has dropped from second to third. Even so, SSGA still has the largest ETF in the world, the SPDR S&P 500 ETF (SPY | A-98) - The Straits Times Index (STI) ended +41.21 points higher or +1.22% to 3411.5, taking the year-to-date performance to +1.38%. The FTSE ST Mid Cap Index gained +0.97% while the FTSE ST Small Cap Index gained +0.23%. The top active stocks were CapitaLand (+4.09%), DBS (+0.80%), SingTel (+0.76%), UOB (+0.72%) and Noble (-0.47%). The outperforming sectors today were represented by the FTSE ST Real Estate Holding and Development Index (+2.31%). The two biggest stocks of the FTSE ST Real Estate Holding and Development Index are Hongkong Land Holdings (+1.18%) and Global Logistic Properties (+1.57%). The underperforming sector was the FTSE ST Oil & Gas Index, which gained +0.16% with Keppel Corp’s share price unchanged and Sembcorp Industries’s share price declining +0.93%. The three most active Exchange Traded Funds (ETFs) by value today were the SPDR Gold Shares (+0.77%), IS MSCI India (+1.89%), DBXT MSCI Asia Ex Japan ETF (+1.57%) –

Is asset allocation undergoing a paradigm shift?

Monday, 05 March 2012
Is asset allocation undergoing a paradigm shift? Portfolios continue to maintain historically high levels of cash, as managers seek extra protection in the face of ongoing global economic uncertainty. That has not stopped profit-hungry investors from considering plausible alternatives to equities, and to date many continue to mine potential opportunities in the vast commodities arena. From Boston, Dave Simons reports. http://www.ftseglobalmarkets.com/

Portfolios continue to maintain historically high levels of cash, as managers seek extra protection in the face of ongoing global economic uncertainty. That has not stopped profit-hungry investors from considering plausible alternatives to equities, and to date many continue to mine potential opportunities in the vast commodities arena. From Boston, Dave Simons reports.

It has been over three years since the onset of the credit crisis, yet the combination of market volatility and economic weakness continues to keep global investors guessing. Will there be a soft landing or another freefall? Can the global economy find workable solutions, or is sovereign-debt default just around the corner? These and other macro questions have done little to reassure participants; it no surprise, then, that many investors and corporate managers remain historically under-exposed to equities.

What are the alternatives though? Cash, typically little more than a short-term respite during bouts of extreme volatility, remains a zero-sum game (or even less than zero, once inflation is factored in). Similarly, paltry yields continue to offer income seekers little in the way of comfort, while a sudden economic rebound could spark a jump in interest rates and, in turn, a reduction in bond prices.



Given the circumstances, a realloc-ation into certain commodities assets appears to be a viable route. However, questions remain. How hazardous is the downside risk for commodities prices at this stage of the game? Will the un-certainty that has informed the markets fuel the trend toward commodities and other plausible alternatives, or, as recent movements within the US markets seem to suggest, will investors make a much stronger commitment to equities? Is there a case to be made for maintaining a much more balanced mix of assets within a portfolio at any given time?

A year-end poll by Reuters appeared to substantiate the notion that cash is still king. The survey of more than 50 global asset-management facilities found that portfolios were comprised of 6.6% cash on average—the highest such level in at least a year, according to the poll—as managers sought extra protection in the face of economic uncertainty stemming from the EU debt crisis and other macro concerns.
Meanwhile, corporations continued to raise cash largely for the purpose of funding M&A activity as well as buying back shares. Barring an unexpected economic tailwind, Christopher J Wolfe, managing director and chief investment officer for Merrill Lynch Wealth Management Private Banking and Investment Group, sees a continuation of this scenario, with businesses keeping costs in check while (at the same time) “accumulating cash and waiting for better days.”

Colin O SheaColin O'Shea, head of commodities for London-based Hermes Fund Managers. The mountain of cash that’s been sitting on the sidelines has been growing for the better part of a decade, remarks Nicholas Colas, chief market strategist for New York-based ConvergEx Group. “CFOs and boards of directors are well aware of the fragility of the financial system, and particularly since the start of the crisis there is this notion that as a large company you have to do everything you can to be your own bank. Unlike investors who can diversify portfolio risk and aren’t really concerned about the welfare of any single company, CFOs have their reputations at stake—and in an effort to protect the franchise during times of uncertainty, they tend to hold higher levels of cash.”

In the US, the situation has been exacerbated by years of low productivity and feeble economic growth. Accord-ingly, the ability for companies to invest capital has itself declined, says Colas. “Compared to the 1970s, 1980s and even the tech-boom1990s, we just haven’t seen the kind of incremental wealth creation that paves the way for bigger markets.” US-based chief financial off-icers have tended to look overseas for growth explains Colas, “or just haven’t made any moves at all.”

Andreas Utermann, global chief investment officer for global asset-management firm RCM, agrees that the precariousness of the European debt situation and the possible impact on the global financial system calls for a more defensive posture. Accordingly, RCM continues to underweight financials, but will be prepared to make adjustments, says Utermann, “should conditions improve and/or bond spreads in the EMU periphery decrease.”

Commodities alternative
Continuing market uncertainty hasn’t stopped profit-hungry investors from seeking plausible alternatives to equities, and to date many continue to look for opportunities within the vast reaches of the commodities sector. With good reason: relative to equities, commodities have generally offered historically competitive returns, while serving as an inflationary hedge as well.

Federal Reserve Bank chairman Ben Bernanke’s pledge to leave interest rates alone for the better part of two years was music to the ears of gold mavens, who have watched gold prices recently rebound as real rates remained in negative territory. Gold has been the commodity of choice for the likes of Goldman Sachs and Morgan Stanley, while UBS analyst Edel Tully called for a price target of $2,500/oz before year’s end.
“Commodities continue to be attractive proposition for those seeking a properly diversified portfolio mix,” offers Colin O'Shea, head of commodities for London-based Hermes Fund Managers. “Another consideration is the historically low correlation between commodities and bonds as well as other fixed-income assets.” Particularly over the last several years, commodities have yielded a positive risk premium over equities, and have also exceeded the risk premiums of many pension-plan liabilities during the same period, says O’Shea.

Though it maintains reduced materials exposures, RCM is currently overweight energy commodities. “Longer-term, we remain positively orientated on commodities, given the significant pent-up demand in developing nations, supply constraints and the negative real interest environment created by many central banks globally,” says Utermann.

Perhaps more importantly, com-modities serve as a safeguard against event risk, proving invaluable to investors particularly in the perpetually volatile energy sector. At present, conditions in the Middle East and other regions are such that, even in the face of relatively soft demand, a significant spike in the price of oil remains a very real possibility.  “A major oil-price shock resulting from these geopolitical elements would not bode well for equities,” concurs O’Shea. “Given this scenario, it certainly makes a lot of sense for investors to look for viable opportunities to achieve ade-quate portfolio protection.”

The downside is that the perceived supply risk is overblown, prices begin to fall and, with risk premia lowered, investors suddenly go on an extended equities shopping spree.

“The floor is likely no lower than $90,” says O’Shea, “which is largely due to these regions having to re-set their minimum pricing requirements based on the political events of the past year.”

Nicholas ColasNicholas Colas, chief market strategist for New York-based ConvergEx Group. Even if the current cash stash winds up being re-directed into equities, commodities will likely be none the worse for wear, says O’Shea. “There may be some short-term impact in response to equity investment flows, should that occur,” he says. “However, the underlying supply-demand drivers are what ultimately dictate price, and they remain solid. So yes, I think volume would fluctuate and we could see some price movement as well, but a correction would likely be limited to re-adjusted market fundamentals.”

Because of their historically low correlation to financials, commodities have been attractive to asset owners. However, within the last year or so non-correlative strategies have been harder to come by, notes Colas, com-modities included.

“Over a three, five, and ten year perspective, those low correlations are still intact,” says Colas, “but as more people use commodities as an asset class that has begun to change.” Even gold, which typically moves at opp-osing angles from any financial asset, has recently shown monthly cor-relations in the 50% to 60% range versus US stock. So while commodities will likely continue to gain traction, some of their inherent appeal has been diminished as correlations increase.  “Lack of correlation really has been the raison d'etre for keeping commodities in one’s portfolio,” says Colas. “I mean, why else would you want to own a warehouse full of copper?”

Having said that, there are less-obvious reasons for maintaining one’s commodities connection.  “While it is somewhat more nuanced, the fact that commodities cannot be manufactured by a central bank is in and of itself a compelling enough argument for some investors,” explains Colas.

In a complex world where most other investments are inexorably linked to central bank policymaking, theo-retically a warehouse full of copper should appreciate at or beyond the going inflation rate. “For all the things the Fed can control, the fact is they can’t produce an ounce of copper. It’s like an old master painting—it doesn’t matter how much money the Fed pumps into the financial system, there are still a fixed number of old masters. In reality, there is an increasingly vocal branch of the investment world that thinks you should just be long anything the central banks can’t make.”

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