Sunday 14th February 2016
NEWS TICKER: FRIDAY, JANUARY 12TH: Morningstar has moved the Morningstar Analyst Rating™ for the Fidelity Global Inflation Linked Bond fund to Neutral. The fund previously held a Bronze rating. Ashis Dash, manager research analyst at Morningstar, says, “The fund’s rating was placed Under Review following the news that co-manager Jeremy Church was leaving Fidelity. Lead manager, Andrew Weir, who has managed the fund since launch in May 2008, remains in charge and is further supported by the new co-manager, Tim Foster. While we acknowledge Weir’s considerable experience in the inflation-linked space, some recent stumbles and below-benchmark returns over time have led us to lower our conviction in the fund. This is currently reflected by our Neutral rating.” - Italian GDP growth looks to have stalled to 0.1pc in the last quarter of 2015, falling below analyst expectations of 0.3% growth. The Italian economy grew by just 0.6% last year having come out of its worst slump since before the pyramids were built. The slowdown will put further pressure on reforming Italian prime minister Matteo Renzi, who has been battling to save a banking system lumbering under €201bn (£156bn) of bad debt, equivalent to as much as 12% of GDP. It is a serious situation and one which threatens Italy’s traditionally benign relationship with the European Union. The EU’s bail in rules for bank defaults seeks to force creditors to take the brunt of any banking failures. Italy suffered four bank closures last year, which meant losses of something near €800m on junior bond holders (with much of the exposure held by Italian retail investors). No surprise perhaps, Italian bank stocks have taken a beating this year, Unicredit shares are currently €3.06, compared with a price of €6.41 in April last year. In aggregate Italian banking shares are down by more than 20% over the last twelve months. Italian economy minister Pier Carlo Padoan told Reuters at the beginning of February that there isn’t any connection between the sharp fall in European banking stocks, as he called on Brussels for a gradual introduction of the legislation. He stressed that he did not want legislation changed, just deferred - Is current market volatility encouraging issuers to table deals? Oman Telecommunications Co OTL.OM (Omantel) has reportedly scrapped plans to issue a $130m five-year dual-currency sukuk, reports the Muscat bourse. Last month, the state-run company priced the sukuk at a profit rate of 5.3%, having received commitments worth $82.16m in the dollar tranche and OMR18.4m ($47.86m) in the rial tranche. Meantime, Saudi Arabia's Bank Albilad says it plans to issue SAR1bn-SAR2bn ($267m-$533m) of sukuk by the end of the second quarter of 2016 to finance expansion, chief executive Khaled al-Jasser told CNBC Arabia - The US Commodity Futures Trading Commission (Commission) announces that the Energy and Environmental Markets Advisory Committee (EEMAC) will hold a public meeting at the Commission’s Washington, DC headquarters located at 1155 21st Street, NW, Washington, DC 20581. The meeting will take place on February 25th from 10:00 am to 1:30 pm – Local press reports say the UAE central bank will roll out new banking regulations covering board and management responsibilities and accountability – Following yesterday’s Eurogroup meeting, Jeroen Dijsselbloem, says that “Overall, the economic recovery in the eurozone continues and is expected to strengthen this year and next. At the same time, there are increasing downside risks and there is volatility in the markets all around the world. The euro area is structurally in a much better position now than some years ago. And this is true also for European banks. With Banking Union, we have developed mechanisms in the euro area to bring stability to the financial sector and to reduce the sovereign-banking nexus. Capital buffers have been raised, supervision has been strengthened, and we have clear and common rules for resolution. So overall, structurally we are now in a better position and we need to continue a gradual recovery”. Speaking at the press conference that followed the conclusion of the February 11th Eurogroup, Dijsselbloem also acknowledged that “good progress” has been made in official discussions between Greece and its officials creditors in the context of the 1st programme review. Yet, he noted that more work is needed for reaching a staff level agreement on the required conditionality, mostly on the social security pension reform, fiscal issues and the operation of the new privatization fund. On the data front, according to national account statistics for the fourth quarter of 2016 (flash estimate), Greece’s real GDP, in seasonally and calendar adjusted terms, decreased by 0.6%QoQ compared to -1.4%QoQ in Q3. The NBS Executive Board decided in its meeting today to cut the key policy rate by 0.25 pp, to 4.25%. - Today’s early European session saw an uptick in energy stocks, banking shares and US futures. Brent and WTI crude oil futures both jumped over 4% to $31.28 a barrel and $27.36 respectively before paring gains slightly; all this came on the back of promised output cuts by OPEC. That improving sentiment did not extend to Asia where the Nikkei fell to a one-year low. Japan's main index fell to its lowest level in more than a year after falling 4.8% in trading today, bringing losses for the week to over 11%. Yet again though the yen strengthened against the US dollar, which was down 0.1% ¥112.17. Swissquote analysts says, “We believe there is still some downside potential for the pair; however traders are still trying to understand what happened yesterday - when USD/JPY spiked two figures in less than 5 minutes - and will likely remain sidelined before the weekend break.” Japanese market turbulence is beginning to shake the government and may spur further easing measures if not this month, then next. Trevor Greetham, head of multi asset at Royal London Asset Management, says “When policy makers start to panic, markets can stop panicking. We are seeing the first signs of policy maker panic in Japan with Prime Minister Abe holding an emergency meeting with Bank of Japan Governor Kuroda. We are going to get a lot of new stimulus over the next few weeks and not just in Japan. I expect negative interest rates to be used more in Japan and in Europe and I expect this policy to increase bank lending and weaken currencies for the countries that pursue it”. Greetham agrees that both the yen and euro have strengthened despite negative rates. “Some of this is due to the pricing out of Fed rate hike expectations; some is temporary and to do with risk aversion. In a market sell off money tends to flow away from high yielding carry currencies to low yielding funding currencies and this effect is dominating in the short term”. Australia's S&P ASX 200 closed down 1.2%. In Hong Kong, the Hang Seng settled down 1.01. in New Zealand the NZX was down 0.89%, while in South Korea the Kospi slid 1.41%. The Straits Times Index (STI) ended 1.25 points or 0.05% higher to 2539.53, taking the year-to-date performance to -11.91%. The top active stocks today were DBS, which declined 0.91%, SingTel, which gained 1.13%, JMH USD, which declined 1.39%, OCBC Bank, which gained 0.13% and UOB, with a0.34% advance. The FTSE ST Mid Cap Index declined 0.50%, while the FTSE ST Small Cap Index declined0.31%. Thai equities were down 0.38%, the Indian Sensex slip 0.71%, while Indonesian equities were down another 1.16%. The euro was down 0.3% against the dollar at $1.1285, even after data showed Germany's economy remained on a steady yet modest growth path at the end of last year. Gold fell 0.7% to $1238.80 an ounce, after gold gained 4.5% Thursday to its highest level in a year. Greetham summarises: “Like a lot of people, we went into this year's sell off moderately overweight equities and it has been painful. What we have seen has been a highly technical market with many forced sellers among oil-producing sovereign wealth funds and financial institutions protecting regulatory capital buffers. However, economic fundamentals in the large developed economies remain positive, unemployment rates are falling and consumers will benefit hugely from lower energy prices and loose monetary policy.”

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Sovereign wealth funds investing locally

Wednesday, 23 May 2012
Sovereign wealth funds investing locally Sovereign governments and sovereign wealth funds (SWFs) are investing less internationally than they have done at any point in the last three years, according to the third annual Invesco Middle East Asset Management Study. Gulf Cooperation Council (GCC) sovereign states have deployed wealth into local economies throughout the Arab Spring and SWFs show signs of diverting away from international trophy assets and other global investments. The findings come as something of a surprise given the current penchant for some of the GCC’s most high profile SWFs to continue to invest in strategic companies abroad. However, says the study, sovereign wealth fund surpluses may reduce despite oil price rises as local investment continues. http://www.ftseglobalmarkets.com/

Sovereign governments and sovereign wealth funds (SWFs) are investing less internationally than they have done at any point in the last three years, according to the third annual Invesco Middle East Asset Management Study. Gulf Cooperation Council (GCC) sovereign states have deployed wealth into local economies throughout the Arab Spring and SWFs show signs of diverting away from international trophy assets and other global investments. The findings come as something of a surprise given the current penchant for some of the GCC’s most high profile SWFs to continue to invest in strategic companies abroad. However, says the study, sovereign wealth fund surpluses may reduce despite oil price rises as local investment continues.

Invesco’s study has analysed sovereign revenues and defined the investment behaviours of major SWFs in the GCC region. These SWFs account for 35% of global SWF flows, representing $1.6 trn, a huge market which major global economies, including the UK, rely on for investment. This is Invesco’s third asset management study of the GCC region (comprising the United Arab Emirates, Saudi Arabia, Qatar, Bahrain, Kuwait and Oman). 

Invesco worked with independent strategy consultants NMG to conduct an in-depth market study based on over 100 face-to-face interviews on retail and institutional investor preferences across the GCC. The study shows the international flow of money directly from GCC sovereign governments and from SWFs has changed considerably in light of the current unrest, with large commodity-linked surpluses in these regions increasingly being put to use locally. (Please refer to Figure 1)



Even so, and despite stable and high oil prices, the available surplus, or investable assets, of governments in the GCC region is forecast to reduce by 9% in 2012 (compared to 2011) and surplus forecasts have been revised downwards since the Arab Spring, says the study. This is illustrated by the fact that forecast funding rates for the recipient SWFs have declined this year.

The findings of the survey look to undermine some of the latest news to emerge from the mega SWFs of the GCC. The Qatar Investment Authority, one of the largest and most diversified sovereign wealth funds in the GCC for example continues to veer from the norm. The latest news from the Gulf is that the SWF is about to increase its allocation to Shell, which will add to a growing roster of western investments by the fund. The Anglo-Dutch company declined to say what the size of the QIA holding is, but stock exchange rules in the United Kingdom meant that any stake over 3% will automatically trigger a public statement. Other reports suggest that the Qataris are in the middle of negotiations to buy a stake in Italian oil major ENI. It already holds a minority stake in Total, the French energy group. The QIA has also recently bought into Xstrata, as well as Barclays Bank.         

Moreover, Abu Dhabi’s normally secretive SWF opened up last October with the release of an official report which showed that the sovereign wealth fund remains diversified across all major global markets. Although over a year old, according to the report, ADIA’s assets are largely allocated to developed equity investments. With an estimated $350bn in assets, the fund allocates 60% of its total portfolio to externally-managed indexed funds. Overall, roughly 80% of the fund’s assets are invested by external fund managers. Allocations to developed equity markets constitute 35% to 45% of the fund’s portfolio. Emerging market equities make up 10% to 20%. Government bonds make up 10% to 20% of the portfolio.

In terms of geographic prevalence, ADIA allocates 35% to 50% in North America, 25% to 35% in Europe, 10% to 20% in developed Asia, and 15% to 25% in emerging markets, according to the report. However, Invesco’s latest study may point to a sea change. The Invesco study did not elucidate the detailed investment strategies of individual funds.        

There are other deals in train. Most recently new banking venture NBNK has  reportedly held talks with Middle Eastern SWFs to bolster its bid for 632 Lloyds branches that are up for sale, according to a recent Reuters news item; NBNK refused to com­ment. The venture was set up in 2010 by former Lloyd’s of London insurance head Peter Levene, aiming to bring com­petition to a market dominated by four lenders. It is run by former Barclays and Northern Rock executive Gary Hoffman. Separately, the UK’s Sunday Telegraph reported that NBNK had held discussions with Qatar Holdings and Abu Dhabi's Mubadala fund.

One of the fund’s subsidiaries, Mubadala Healthcare (a business unit of Mubadala Development Company) and Dubai Health Authority (DHA) have signed a memorandum of under­standing to discuss several key collab­or­ation areas that will facilitate knowledge-sharing, partnership initi­atives and improved access to care for patients in Dubai. The initial areas for collaboration outlined in the MOU relate specifically to three of Mubadala Healthcare’s facilities—Wooridul Spine Centre, Tawam Molecular Imaging Centre and National Reference Laboratory—and focus on the facili­tation of patient and laboratory test referrals, knowledge exchange and the inclusion of these facilities in the Gov­ernment of Dubai’s Enaya network.

While the investment approaches of the GCC SWFs remain mixed, one thing looks certain. According to Invesco’s study, in 2011 funding rates grew at 13% compared to an increase in GCC government revenue of 25%, this year funding rates rose just 8%, despite GCC government revenue increasing by 31%. Funding for sovereign pension funds on the other hand rose from 8% growth in 2011 to 13% growth in 2012. There is an expectation that spending will continue to increase over time potentially outstripping commodity prices and shrinking surpluses further.

Of the sovereign surplus that is available for SWFs, those with local objectives are expected to benefit. Invesco forecasts SWF assets invested in benchmark driven SWFs who prioritise international asset manager products or ETFs have fallen by 1% since the beginning of the ‘Arab Spring’ in 2011. At the same time sovereign wealth fund assets allocated to SWFs investing locally, in infrastructure for example, have risen by 10%7, which illustrates a major shift (see Figure 2).

Nick Tolchard, head of Invesco Middle East commented: “It’s clear that sovereign states are redirecting revenues and SWF assets from international investments back into the Middle East. The most common change across the region is money into local wage inflation, with healthcare and education a real focus for Saudi Arabia and Oman. Major infrastructure is a focus for Qatar due to the World Cup, and there are significant developments taking place in Abu Dhabi as it seeks to grow and set up as a major financial centre.”

Tolchard continues: “Western governments, including the UK, have approached SWFs from the Middle East to help with economic recovery, but many will fight a losing battle. There is certainly less money to invest internationally so the stakes are higher. Those courting GCC money from outside the region will only win with a deep understanding of what is driving the thinking of SWFs, and a long term commitment to building ­bi-lateral relationships which add value to their investment policy.”

Last year, Invesco created the first ever framework that categorises the core objectives of SWFs and revealed the drivers behind the investment strategy and preferences of these huge investment funds.

Last year, the study revealed that traditional investment SWFs (diversification vehicles and asset managers) appeared to be favouring developed markets, with around 54% of GCC SWF assets held in this region with the highest exposure to North America (29%) and to Western Europe (19%). Investment in North America is now down this year at 14% and Western Europe down at 6%, as a result of the Eurozone crisis. The clear shift in terms of geographic allocation of investment money has been towards the local region. Investment in assets related to the GCC moved up from 33% to 56%, with local bonds seeing a rise from 6% of SWF investable assets to 14%. Property and infrastructure have also take a large proportion of the investable assets from these SWFs, 13% and 14% respectively.

 “The story this year is that it is no longer a given that large sovereign governments are going to direct their oil revenue surpluses around the globe, pumping cash into other global economies. There will be high profile, strategic investments like the proposed RBS deal, or indeed other large trophy assets, but it’s a changed market. There will be contestable assets for fund managers in core relevant markets but with more money being deployed into the local economies it is likely to be a much more competitive landscape as long as the unrest continues,” says Tolchard.

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