Wednesday 23rd July 2014
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TUESDAY TICKER: JULY 22nd 2014 - The Zimbabwe Stock Exchange (ZSE) has been transformed into a company from a mutual society, opening the way for a public listing on the bourse it operates. The ZSE has been owned and run by stock brokers since 1946, but after demutualisation the brokers now hold 68% while the government owns the remaining shares. The Dubai Financial Services Authority (DFSA) alerts the financial services community and members of the public to misuse of the DFSA's name. It has come to the DFSA's attention that a fraudulent email purporting to be from the DFSA has been sent to a number of firms both inside and outside the Dubai International Financial Centre (DIFC). The false email: purports to be about a "DFSA Anti-Money Laundering Violation"; appears to come from "Amina Alshehi" from "Audit & Compliance"; attaches a "non-compliance notice"; and uses legitimate DFSA contact details. The email is fake, warns the DFSA. - Surecomp, the provider of trade finance solutions for banks and corporations, says Nordea has gone live in Frankfurt and London with the stand-alone version of allNETT, Surecomp's Web-based trade finance front-end solution – Saudi’s Kingdom Holding Company announced a net income for the second quarter this year of SAR211.7m up 16.8% on the previous quarter. The gross operating profit was SAR420.3m up 26.2% on the same quarter in 2013. Mohammed Fahmy CFO, says: “The second payment of dividends has been deposited in shareholders’ accounts. The outlook for the company’s profitability remains strong.” - Northern Trust has reported a 20 percent rise in assets under custody and a 15% rise in assets under management for Q2 2014 compared to Q2 2013.The Corporate and Institutional Services (C&IS) and wealth management businesses also report a 9% rise in custody and fund administration services, investment management and securities lending. Frederick Waddell, the bank’s chief executive officer, says, “Our business continued to expand in the second quarter as trust, investment and other servicing fees, which represent 65% of revenue, increased 8% compared to last year and assets under custody and under management increased 20% and 15%, respectively.” - In the latest Investment Quarterly for Q3 2014, Renee Chen, Macro and Investment Strategist at HSBC Global Asset Management, looks at the investment prospects throughout the Asia region. Chen identifies macro trends that are likely to shape investment themes in Asian markets, such as economic policy reforms, economic rebalancing and regional cooperation and integration that will provide a wide diversity of investment opportunities in relevant sectors. Financial deepening, in terms of financial system reform and deregulation and capital market developments, is another macro theme. HSBC continues to see opportunities in various sectors that could potentially benefit from structural reforms in several Asian countries. In particular, effective implementation of reforms could lead to a sustainable improvement in economic fundamentals and the growth prospects of China and India, prompting a reform-led re-rating of Chinese and Indian stocks. The continued search for yield resulted in decent H1 performance in Asian credit markets and there has been continued investor appetite for emerging Asian bonds, but Chen cautions that valuations could become a constraint, with limited room for further spread compression in some sectors and markets. However, the still-low default rates and overall healthy level of leverage among Asian companies on the back of overall sound Asian economic fundamentals provide a solid base for Asian credit market in the medium-to-long term.

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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