Monday 4th May 2015
NEWS TICKER: FRIDAY, MAY IST: MYOB will return on Monday next to the ASX, selling 228.3mshares at $3.65 in the company’s IPO. The company raised AUD833.1m, giving it an implied market capitalisation of AUD2.13bn. Bain Capital will retain 58% of the firm’s stock. “We saw a significant level of participation from eligible retail noteholders in the offer, with approximately 57% of holders exchanging their notes into shares. We see this wide range of investor interest as a strong vote of confidence in MYOB.” MYOB chairman Justin Milne says. ASX trading in MYOB shares is set to begin on 4 May under the code MYO. MYOB was listed on exchange from 1999 to 2009 – The volume of US municipal bonds soared by 42.1% in April, according to Thomson Reuters’ data; the ninth straight monthly gain. Issuers brought $37.76bn to market in 1,210 issues, up from $26.58bn in 939 issues in April 2014. Low interest rates, and the reluctance of the US Federal Reserve to raise rates over the near term has resulted in a dash by municipal issuers anxious to secure low cost funding as many refinance their debts. Other than refinancing, new issuance per se looks to be tailing off. New money transactions declined by 5.6% to $12.68bn from $13.43bn, while combined refunding and new money transactions increased 42.5% to $7.17bn from $5.03bn in April last year. Negotiated bond sales increased 62.4% to $28.97bn from $17.84bn, competitive deals rose 15.4% to $8.62bn from $7.47 billion and private placements plunged 87.2% to $162mn from $1.26bn. Sales of revenue bonds increased 49.9% to $22.84bn in 421 deals from $15.24bn in 306 deals. General obligation bond volume jumped 29.9% to $14.73bn in 788 issues from $11.34bn in 633 issues. Tax-exempt deals were up 42.4% to $33.88bn, while taxable deals were 24% higher to $3.30bn.Fixed-rate issues increased to $36.75bn in 1,167 issues from $24.85bn in 891 issues the previous year. The volume of deals with bond insurance more than doubled in par amount wrapped to $2.54bn in 161 deals from $1.06bn in 104 transactions. California claimed the top spot among states with $21.47bn of issuance thus far in 2015, up from its No. 2 ranking in the same period of last year with $12.03bn. Texas dropped from first to second with $17.85bn, an increase from $12.31bn the year before. New York remained in third place with $11.91bn so far this year, up from $10.29bn year to date - This morning Lloyds Banking Group said that in Q1 it had made a net profit of £913m and underlying profit was up 21% on the same period last year, to £2.2bn. Moreover, the group said that it was raising its net interest income target above the original target of 2.55%. Graham Spooner, investment research analyst at The Share Centre, says: “These results are good news for investors as they are ahead of forecasts and demonstrate a continued improvement in the company’s performance. The part UK government owned bank additionally reported that it has been benefitting from a resurgent British economy which has led to reduced bad loans and fuelled demand for mortgages. Lloyds announced its first dividend in February since being bailed out and investors should acknowledge that the increasing signs of recovery will boost hopes for a significant dividend growth in the near future. Analysts have become a little more positive on the group and its long term restructuring plans, which appear to be happening faster than expectations. However … the sector [remains] under pressure, as a result of regulatory issues and ahead of the next government sale.” - The Straits Times Index (STI) ended 0.24 points or 0.01% higher to 3487.39, taking the year-to-date performance to +3.63%. The top active stocks today were SingTel, which declined 0.23%, OCBC Bank, which declined 1.84%, DBS, which gained 0.19%, UOB, which gained 0.29% and Keppel Corp, with a 1.02% fall. The FTSE ST Mid Cap Index gained 0.47%, while the FTSE ST Small Cap Index rose 0.18%. The outperforming sectors today were represented by the FTSE ST Real Estate Holding and Development Index, which rose 1.00%. The two biggest stocks of the Index - Hongkong Land Holdings and Global Logistic Properties – ended 2.02% higher and 2.23% higher respectively. The underperforming sector was the FTSE ST Consumer Goods Index, which slipped 1.04%. Wilmar International shares remained unchanged and Thai Beverage declined 3.38%.

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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