Brian Bollen's Blog

More Sovereign Restructuring, Risk Off Wins; Schroders on 2012

Schroders' latest economic & strategy Viewpoint by Keith Wade, chief economist, and Azad Zangana, European economist

Global: Themes for 2012

For the macro cycle to turn more deflationary, with both growth and inflation expectations undershooting current expectations.

More sovereign debt restructuring in the eurozone; and

For political risk to increase.

Meanwhile, with no change in interest rates and more quantitative easing expected from the search for yield will remain as strong as ever.

Markets: Risk off Wins

Our themes for 2012 suggest that government bond yields will remain low in the early part of the year with risk off. Lower inflation and slower growth should underpin government bond yields, whilst political risk could well keep risk assets on the sidelines.

Peripheral eurozone bond spreads are likely to remain elevated. Our view that the crisis needs to deteriorate further before decisive action takes place suggests that investors are willing to tolerate negative real yields in the short-run, so that they can preserve their capital for better opportunities further out.

As the year progresses and the macro picture deteriorates we would expect investors to increasingly focus on the likelihood of policy response from the central banks. Consequently we could see rallies in risk assets on hints of easier money.

The pressure to find yield combined with attractive risk premiums should draw investors into both equities, credit and carry trades. However, a sustainable rally will need evidence of stronger recovery in the US and a turn in Europe along with signs that policymakers have got to grips with the euro crisis.

 

 

 

 

Return Of The Sub!

I've just worked out exactly what a payday loan is. The term has been niggling away at me ever since it started to creep into everyday language.

In the process of explaining to Mrs Bollen just what Wonga (a provider of payday loans) is and what it does, it hit me. There used to be a perfectly good word for it when I joined the adult workforce for the first time in the early 1970s: the sub.

The payday loan, a form of short-term loan to tide the borrower over till next payday, used to be known as a sub, an advance provided by one's employer and deducted from the next wage.

We are witnessing the return of the sub!

Jungfrau Marathon Entry Confirmed

I've just been told that I can have a press place in the 20th Jungfrau Marathon on September 8 2012. Not sure whether to laugh or cry!

I'm already covering 16 miles in training in Milton Keynes, but I'll need to start being serious about it. Not until around February, though, when alcohol and tobacco consumption will be cut, probably after the Schroders' Retox function early that month.

I'll keep readers updated on training, and will be looking to write a series of articles based on the race day experience. If you haven't already read the story I wrote for the Financial Times based on my participation in the race training under its organiser, and the former Swiss marathon record-holder Richi Umberg, you can read it here: http://www.brianbollen.com/bbb_brian_bollens_blog/2008/09/jungfrau-marath.html.

European Debt Issuance Down: Dealogic

European debt capital markets (DCM) issuance reached $2.13 trillion in 2011, down 2% on the $2.18 trillion raised in 2010, according to preliminary full year figures from Dealogic. This continues an annual decline in deal volume since the record $2.73 trillion issued in 2009. Deal activity was down to 7,259 deals from 8,560 in 2010.

Bond issuance in the second half of 2011 ($617.8bn) was the lowest half year volume since $459.7bn in the same period in 2002, and at 29% is the lowest half year proportion of annual deal volume on record.

Three Big Questions To Decide Fate Of The World: Invesco

John Greenwood, Chief Economist, Invesco Ltd gives his

Annual Economic Outlook for 2012

The Eurozone debt crisis will persist through 2012 and even beyond

2012 will be another year of balance sheet repair by the private sector, austerity by governments, and slow growth in most advanced economies

Three Big Questions

The fate of the world economy and the prospects for financial markets in 2012 and 2013 depend primarily on the answers to three big questions: Will the Eurozone crisis be resolved in a timely and effective manner? Will the US economy maintain its recent better performance? And will the Chinese economy avoid a hard landing in 2012?

The answers to these questions are not all favourable. The outcome of the Eurozone debt crisis remains very unclear, even after the Brussels summit of December 8-9, implying that the crisis is likely to continue and possibly even rise to another crescendo during 2012. In the US the improvement in performance has been only partial – limited to certain sectors of the economy – and while some of these improvements should be sustained, the overall economy is likely to be held back in 2012 by many of the same headwinds that eroded performance in 2011.

Finally, the Chinese economy remains excessively dependent on external demand and hence acutely vulnerable to the deepening downturn in Europe. Thus even though domestic monetary and fiscal stimulus will almost certainly be employed in 2012, China’s overall growth rate seems likely to be lower than in 2010 or early 2011.

The Taming Of The Queue

Global private equity firm The Riverside Company and queue management provider Tensator report the completion of Portuguese customer journey management specialist Newvision.

Newvision, they say, offers a range of products including dispersed queue management systems, self-service and multimedia information kiosks, and digital displays. Having visited Lisbon just the once, I'd be interested to hear if any readers came across locals familiar with the concept, let alone the civilised practice, of queuing.

Somehow in the fevered atmosphere that is everyday life in Portugal, Newvision finds the time to develop integrated products through five product lines that provide virtual queue management, people counting, self-service, multimedia kiosks and corporate television.

New December Low For Hedge Fund Forward Redemption Indicator

The GlobeOp hedge fund forward redemption indicator touched a new low for December, the fund administrator reports.

“December 2011 is the lowest December since the indicator began, just a fraction less than in 2010,” said Hans Hufschmid, chief executive officer, GlobeOp Financial Services. “The month-on-month increase is within the normal range of a seasonal pattern, as investors prepare to rebalance their portfolios at year end.”

Infrastructure Investment Outlook Darkens: AMP Capital

The global economic outlook has deteriorated significantly since AMP Capital’s previous annual review. A year ago, AMP questioned whether the ‘debt mountain’ would hobble growth in developed economies. It says today that this now looks more likely than ever, with growth in the eurozone particularly at risk.

In its 2011 review, AMP notes that stimulus spending injected into developed economies in response to the 2008 crisis has now largely passed through the system, with little evidence of a sustained impact.

The major emerging economies of India and China continue to grow, it observes, but questions have been raised about China’s ability to sustain growth in the face of worsening international trade conditions and internal structural issues.

Infrastructure investment has traditionally been considered as a defensive strategy in difficult times. In the current environment where we expect governments to be forced to consider privatisations in order to reduce debt burdens, attractive opportunities for private investment in this sector should emerge. This paper considers where these opportunities may emerge over the medium-term.

Download Infrastructure investment research report - Dec 2011 - FINAL

 

Faber Scales Citi Peaks

 

Citi has appointed Reto Faber as head of direct custody and clearing (DCC) in Europe Middle East and Africa (EMEA).

He boasts over 20 years of experience in banking and securities services. He joined Citi in 1989 as a relationship manager in the US and held various senior client facing and product roles including product manager for worldwide securities services, and business development for the global clearing business. More recently, he was the head of the EMEA broker-dealer segment and became EMEA head of financial intermediaries in 2009.

Reporting jointly to Andrew Gelb, EMEA head of securities and fund services and Lee Waite, global head of DCC, Faber will be responsible for the management and development of Citi’s proprietary DCC network in 34 markets across EMEA.

 

Markit, Euroclear Bank To Build SynLoan Platform

Markit and Euroclear Bank report the signing of a memorandum of understanding to jointly create an operational infrastructure to support the use of loans as collateral in financing transactions. In parallel, Markit and Euroclear Bank say they intend to collaborate on introducing a series of other services to enhance transparency, automation and trade settlement for the European leveraged loan market.

Markit, we learn, will provide loan pricing and other market data to make it possible for Euroclear Bank to extend its pool of collateral to include loans in tri-party collateral management transactions. Scheduled to be deployed in 2012, the joint service will increase refinancing possibilities for loan portfolios and diversify bank funding sources.

Growth Rebounding, And Falling Short: AllianceBernstein

The latest AllianceBernstein economic weekly reports are now available, highlighting expectations of a rebound in US growth, deepening concern about the eurozone, a shortfall in Thailand's recovery, buttressed by a special report on Europe's imperfect union:-

US Perspective by Joseph G. Carson, US economist and director, global economic research:

US Growth Expected to Rebound in 2012 After Uneven and Weak Year.

European Perspectives by Darren Williams, senior European economist, global economic research:

The Euro Area in 2012: Deep Concern Replaces Cautious Optimism.

Asian Perspectives by Anthony Chan, Asian sovereign strategist, global economic research:

Thailand’s Recovery Will Fall Short of Official Forecasts and Prompt More Rate Cuts.

Special Report by Lars Pedersen, senior economist, global economic research:

Europe’s Imperfect Union.

 

 

Jungfrau Marathon Training Advances

I ran a total of about 16 miles this morning, I estimate, in a time of around 2h 39m. I calculate that that, repeated pretty much on a weekly basis over several months, would enable me to carry out the Interlaken-Wilderswil-Stechelberg-Lauterbrunnen component of the Jungfrau Marathon pretty comfortably.

Mass participation means that from Lauterbrunnen to the finish at Kleine Scheidegg it's a hike rather than a run, and with a total of around 10 miles completed on foot between yesterday afternoon and this evening, I will have covered the total distance within a 24-hour period, demonstrating that I have the latent stamina, if I can piece the different exercise periods together.

It's impossible to replicate the Swiss mountain terrain, especially its steepness and narrowness, in Milton Keynes, but my UK training partners and I are already working on how we might introduce some long climbs into our runs.

I might be mad, but if I'm ever going to attempt a marathon this is the one to have a go at. If I find I'm incapable when we prepare for the ascent from Lauterbrunnen, I just jump on a train to Wengen, and head for the sauna at Chalet Margaux. I feel certain though, barring injury, that personal pride won't let me take that easy way out.

The Taminco Code

The sale of Belgian chemical producer Taminco by private equity house CVC to Apollo Capital Management is heralded in one of the oddest press releases I've seen this year. It's written almost entirely back to front, and doesn't actually say that CVC has sold the company, let alone to Apollo, letting itself down at the most basic level.

But a central function of an editor is to edit, and make the incomprehensible comprehensible, even if at times the job is like solving a particularly cryptic cryptic crossword.

So this is the result of my efforts, taking it as read that readers have absorbed the central fact that funds advised by CVC Capital Partners have agreed to sell their majority stake in Taminco to affiliates of Apollo Global Management.

Stuff the turkey’s *um with holly, tra-la-la-la-la-la-la.. Bah Humbug!

This is likely to be the last Porridge of 2011. If anything outrageous happens twixt now and New Year, I’ll throw a comment into the mix, but otherwise, have a great holiday. I shall use the time to sleep, perchance to dream.. aye there’s the rub...

Yesterday was an intriguing day. A massive rally on the back of a successful Spain auction. Draghi was saying lots of positive things that could be read as an unsubtle inducement for European banks to load up on Sov Debt to repo at next week’s three-year LTRO.

Last Friday I wrote in the Porridge: “Last night's abject failure of European politics matters not one jot. The key thing is the ECB is providing three-year long term repos. So, if I were a cynical bank treasurer, I'd be filling my boots with 6-7% yields from Italy bonds, and telling my management committee what a great job I was doing.”

And a host of analyst notes and press comment yesterday more politely said the same thing – painting it as an unmissable carry trade for Europe’s zombie banks. You could have read it here a week ago – and bought the trade early!

Morgan Stanley made the point that a 3% increase in Spanish bank holdings of Spain Govies would translate into an additional €45bn of demand – so the Draghi three-year bribe could yet save the euro!  

As this trying year wends to its weary close it’s been difficult for most of us. A succession of no-see-ems, left-field tsumani waves and other flying mallets have whapped even the top fixed-income strategists. Hedge funds are down over 3.8% according to Bloomberg.

If you are finishing 2011 nursing a bruised portfolio, you are not alone. Soundbites from the last few days include:

“Trendless markets fixated by Europe makes it irrelevant where interest rates, demand and inflation are going...” said one stategist.

Funds are being liquidated on the back of “fustrating performance”.

“Markets are driven more by the latest news out of Europe than a company’s earnings prospect,” commented one hedge fund manager who admitted: “We have not weathered the ensuing volatility well”.

“The risk-on, risk off environment has been frustrating,” says another manager noting what he wins on the roundabouts one week, he loses on the swings the next!

Even financial gods like John Paulson have been spanked – even his gold investments are now heading south. (That said, his piece in yesterday’s FT on solving the crisis “Europe needs a firewall to stabilise markets” is worth a read. He suggests the ECB simply guarantees European sovereigns...yeah…thanks for the suggestion mate, but it won’t fly.)

The message is – if 2011 has left you battered and bruised, you aren’t the only one.

Some extraordinary comments out of Paris yesterday as Bank of France boss Christian Noyer said UK should be downgraded before France as it's got more debt, more inflation, and lower growth. Ouch. Can you imagine the outcry if the BoE said that, yet Noyer is not only head of the Bank of France, he’s also an ECB member. Outrageous!  [Might we Brits take some satisfaction, though, from knowing that his name means 'to drown'? Ed]

We, of course, are completely neutral. Everyone is entitled to an opinion so M Noyer's contribution to the debate and his thoughts on defenestrating ratings agencies are listened to with close attention. However, he is utterly and completely wrong of course. The UK clearly has its economic problems and, yep, the quantum of debt is higher.

However, on the other side the structure of UK government debt is long-term, isn’t front loaded and is easy to fund long-term… oh, and the UK isn’t tied into a suicidal currency union and has the ability to press go on the printing presses if a crisis arises – which is why France, not the UK, will be junked first.

And, that’s what the market thinks as well. Look where Indonesia, Thailand, and Phillippines CDS are trading this morning – yep…all of them tighter than France. With French CDS at 230 yesterday, France should go see the dentist. (Think about it… “tooth hurty”… 230!)

Finally, I’d like to wish you all a Happy Holiday (Apparently you can’t say have a Merry Christmas and a Prosperous New Year anymore). It's an absolute pleasure to write the porridge each morning, and I appreciate all the comments – especially the ones telling me I’m an idiot...seriously! Keep the comments coming and have a great break.

A guid and prosperous New Year to each and every one of us…

Bill Blain

Out of time...again

 

European Banks Need Tons Of Money

Dr. Rich Mattione, GMO's portfolio manager responsible for macroeconomic research and active equity investments in Latin America and Japan, has distributed a white paper addressing European banks in relation to the sovereign debt crisis.

The piece continues his earlier study (Et tu, Berlusconi?) on the sovereign debt crisis, with a particular focus on the capital strength of banks in Europe.

He writes: “The amount of capital needed by European banks is substantial, even assuming that economic recovery and sovereign debt resolution proceeded so as not to generate substantial new losses."

BNP Paribas Securities Services Appoints Japan Head

BNP Paribas Securities Services (BNP Paribas) reports the appointment of Nobuya Shida as head of securities services in Japan.

Shida, a business veteran with 26 years’ experience in the Japanese financial industry, has been appointed to grow BNP Paribas’ securities services business in Japan. The business will provide services to institutional investors and financial intermediaries. These include global custody and clearing, specific financial operations outsourcing, and other global products subject to the foreign bank agency business license to be granted by the Financial Services Agency of Japan.

Private Equity Exits in the Doldrums: Preqin

Private equity exits are very much in the doldrums, according to private equity intelligence house Prequin. Exit flow has slumped for the second consecutive quarter; conditions are likely to remain difficult as the sovereign debt crisis impacts the buyout deals and fundraising market.

Q4 2011 exit activity to date is below the level achieved in Q3 2011, suggesting that private equity-backed exit flow is back in recession following a fleeting, record-breaking renaissance in the first half of the year. According to Preqin data, 170 exits have been completed so far this quarter with a total value of $28.4bn, the lowest quarterly total since Q1 2010.

Preqin data show:

Ventures Outlook 2012: MMC Ventures

MMC Ventures, investors in early stage UK businesses, on the outlook for the venture capital market in 2012

·      Outlook for venture capital and EIS

There are two counter themes that will affect the UK venture capital and early stage investment outlook for 2012. On the downside a number of the established venture funds are coming to the end of their investment period and the fundraising market is not easy. On the upside the changes to EIS will likely bring more private investment into the sector alongside corporate venturing from relatively cash rich corporates. On balance we believe the improvements in EIS and the emergence of a strong London entrepreneurial scene should point towards a positive outlook for 2012.

·      Exits

In terms of acquisitions, the primary motivators for investors are growth and profitability, and correspondingly there is a strong correlation between valuation and revenue growth rate.  Product and non-financial growth metrics alone will not attract the right buyers in this market.   

E-commerce continues to fuel the M&A market, with consolidation of established online sectors, expansion into new product retail and the evolution of business models driving activity.

·      Opportunities

EM To Remain Global Growth Driver: F&C

Last week, a selection of F&C Thames River fund managers presented their views to clients on events in 2011 and predictions for 2012. Some of the key messages included –

- Marcus Phayre-Mudge, head of property at Thames River, highlighted ways in which he believes that real estate can perhaps weather the economic storm better than other assets as another challenging year begins.

- Thames River GEM Absolute Return Fund manager Kristof Bulkai explained his bearish stance on base metals and why he is particularly positive on the Asian consumer and telecom sectors.

- Anja Eijking, manager of the F&C Global Convertible Bond fund, outlined why she believes volatile market conditions will be supportive for convertible bonds in 2012.

EMs And Currencies In An Uncertain World: PIMCO

The latest issue of PIMCO’s Viewpoints, by Ignacio Sosa, is Emerging Markets Bonds and Currencies in an Uncertain World.

Key points include the following.

Even if the global risk environment deteriorates significantly, emerging markets may continue to offer compelling risk-adjusted return characteristics.

Emerging markets external sovereign debt, along with receiving interest rates in higher-quality EM countries, could be the best relative performers in a deteriorating risk scenario.

EM currencies would likely sell off sharply in risk-off periods but would also tend to rebound robustly when risk appetite returns. We believe several Asian currencies are likely to be the best relative performers.

Emerging markets assets remain a risk asset class and will not be immune to waves of global jitters.