Brian Bollen's Blog

UK CPI Down Again, But Less Than Expected

Azad Zangana, European Economist at Schroders

The UK's annual consumer price inflation (CPI) rate fell from 3.6% in January to 3.4% in February – the lowest annual rate of inflation since November 2010 (3.3%). However, the consensus amongst Economists was for a fall to 3.3%; the increase in prices between the two months 0.6%, was higher than expected.

Inflation has been on a sharp down-trend for since the peak in CPI of 5.2% in September, after the sharp increases in home energy prices. With the VAT increase effect now falling out of the annual rate, we expect inflation to fall below back to the Bank of England’s 2% inflation target by the summer of this year.

The biggest downward contribution to the annual rate in February was from domestic electricity and gas prices, thanks to most of the large home energy providers cutting prices. The largest upward contribution came from alcohol prices and the rising price of vegetables.

Whilst the latest inflation estimates are slightly higher than expected, we do not expect the Bank of England to be phased. Inflation is on a clear downwards trend and given the weakness of the economy, we believe the Bank of England is likely to increase the size of its quantitative easing programme in the near future, with a rise in interest rates still some way beyond the horizon.

 

Finally Found Out What Tail Risk Is...

In an interview this morning for a piece I'm writing for FTfm about hedging against a possible eurozone break-up, the term 'tail risk' kept putting in an appearance. It's a phrase with which I've become familiar but never properly understood before, so butted in and asked for an explanation.

“It's a remote event, not something you expect to happen, but which is hugely significant if it does,” replied my interviewee.

Then I understood. It's like Kilmarnock scoring a goal six minutes from time to go 1-0 up in a cup final against Glasgow Celtic at Hampden Park...

Top 10 Tips for European Real Estate Investing: Schroders

Neil Turner, Head of Property Fund Management and Mark Callender, Head of Property Research, Schroders share their Top 10 Tips for European Real Estate in 2012 and beyond

1)  We will see a slow and volatile economic recovery – but it will be recovery - our investment strategies across portfolios are predicated on low GDP growth, low interest rates and modest returns, for Europe as a whole.

2)  Beware “income secure” real estate - this is often weak real estate but has a reasonably long lease to a reasonable covenant. Some investors are ignoring other risk factors that will reassert themselves as the recovery takes hold. Yields in this space have fallen too far.

3)  A period of low economic growth should mean above average income returns at the portfolio level will be a great starting point for a fund manager - construct portfolios accordingly.

4)  Invest in global facing economies and locations - given widespread government austerity and household de-leveraging,

I can’t complain, but sometimes I still do.. Life’s been good to me so far…

Bill Blain’s Morning Porridge – March 19 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

Apologies for delay, but trains were crap this morning! Sitting on my desk this morning is a One Hundred Trillion Dollar banknote - a gift from my mate Jem... unfortunately it also has Reserve Bank of Zimbabwe stamped across it...

Back to the markets and there are a number of themes apparent:

Rising US bond yields confirm US economic growth looks dialled-in. A number of "strategy notes" lead with comments like "end of the 4-year bond bull market" or time for the big "allocation shift into equity". On the other hand - recovery in a rising gas price environment could be interesting!

Bank paper: in the wake of last week's US stress test will the rally extend into European bank bonds? Sober reassessment of certain names could see great differentiation across bank paper, with UK and some Northern European names benefiting.  

European political risks should figure more prominently. Although last week's French opinion poll put Sarkozy in first ballot lead, Hollande will still win on the second. His intent to renegotiate the fiscal stability pact and call for the ECB to be given a growth mandate has barely registered on markets - perhaps confirming how little credence markets give to bland political gestures such as the stability pact. Such posturings are for domestic political consumption. Meanwhile, what about the Irish referendum?

Portugal figures in the press as PIMCO declare a second crisis approaching.

Partnoy's Complaint

Brian Bollen's Snap, Crackle and Pop

I've just been reading the piece on Goldman Sachs in this morning's Financial Times by Frank Partnoy, professor of law at the University of San Diego. It compelled me to start thinking about my own possible contribution to the debate, if only because it inspired the punning headline above.

Why, one might ask, is there so much discussion about the publication of Mr Greg Smith's resignation letter in the New York Times? After all, 'Former employee disses former employer' ranks somewhere around the same shock level as the 'Rugby player drinks beer' headline imagined by former England rugby union 'manager' Martin Johnson during the most recent (and extremely tedious) Rugby Union World Cup.

Who amongst us, if we haven't said it ourselves, doesn't have a close friend who vowed, on resigning from a job, to tell the employer what s/he really thinks? How many of us cringe at the thought of how, if we had truly burnt our bridges in such a fashion, we would not have been able to go scurrying back to said employer and in effect beg for our old job back?

I have a jaw-dropping announcement or two to make. One, working in a bank as an ordinary human being is boring. Mind-numbingly, life-drainingly, tediously boring. Maybe at the very top it's exciting, but I'm not sure. I spent my latter years at Midland Bank International in the early 1980s in a department whose job was partly to prepare board-level briefings for assistant general managers and above, and it never occurred to me that they were having much more fun than I was, watching the photocopier spew out page after page (and I was on the graduate trainee programme, for pete's sake).

Having been seduced by the apparent glamour and the sparkling eyes of Hannah Gordon in Telford's Change on BBC1 in the late 1970s,

100 years of debt

by John Redwood, Chairman of Evercore Pan-Asset's Investment committee

This week the UK’s announcement that the government is considering issuing 100-year bonds grabbed the headlines. The story was designed to highlight the favourable low rates of interest the UK government still enjoys when raising new funds. It also underwrote the helpful fact that UK government debt is already on average longer term than many EU countries, reducing the pressures on government as it needs less frequent refinancing. Less UK debt needs replacing each year than in comparable countries. If they do sell a decent amount of 100-year bonds,

Those who have not experienced the past are doomed to repeat it…that’s what make us Oldies valuable...

Bill Blain’s Morning Porridge – March 16 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

 I’m afraid it’s going to be a short porridge this morning. A client has just challenged me to sell a very interesting bond position (seriously – it’s a really good one), and despite the fact they think I’m a complete muppet, I’ve got to demonstrate we’re worthy of their trust. (I’m only joking – the client does think we’re muppets, but in the sense of cute, cuddly and mostly harmless, rather than Vampyresque Squid-like monsters… yes.. trust us… look into the eyes, the eyes… trust us… snap.)

Markets still feel in something of a wait and see phase. We’ve got the ongoing concerns about China, more signals the US is going to post economic growth, but lots of wibbles about oil prices and commodities. Got a feeling next will provide more directional signals.

Which may prove interesting for the EFSF which has announced its plans to tap six- month, five-year and 20-30 year bonds next week. Although the market is clearly better than when the EFSF encountered utter investor lack of interest a few months ago when it last tried a long bond, I’m intrigued to see how these deals will go. I’m trying to think what has fundamentally changed about Italy and Spain debt positions since then that could turn around sentiment so much.. DING DING DING. of course…three-year LTRO Cash-for-Trash money now available…

A Brighter Outlook For Russian Post-Trade Infrastructure

by Alexei Fedotov, Director, Securities and Funds Service Head, Russia & CIS ZAO Citibank, Moscow

Access to Russia’s markets has long been among the most liberal and straightforward of the BRIC countries. Despite this, its securities post-trading infrastructure was renowned for its inefficiency, high costs and complexity, especially for international investors. On December 7, 2011, President Dmitry Medvedev signed Federal Laws No. 414-FZ (Law on Central Securities Depository) and No. 415-FZ (Law on Amendments to Law on Securities Market) and Russia took a leap into the future. When the laws come into full effect at the end of 2012, the market infrastructure changes they mandate will revolutionise how stocks are settled, giving international investors easier access to Russia and enhancing liquidity.

To understand the scale of the historic breakthrough achieved by the new laws, it is important to understand how Russia’s market infrastructure came into being. Unlike in most countries where the advent of the stock exchange — and the infrastructure to support it — was a natural consequence of companies’ need to raise capital, in Russia the creation of a stock market was concurrent with the mass privatisation of state-owned companies in the early 1990s following the collapse of communism.

Following advice from consultants employed by US and European development agencies to help the Russian government open up the economy, a voucher system was adopted for privatisation. These vouchers (issued as bearer certificates), were given to all citizens and could be exchanged into shares in any of the companies due to be sold or — as was more usually the case — exchanged for cash at a significant discount. The Russia market therefore started with a system that placed little importance on the real value of assets and was therefore largely unconcerned with cost.

Although some aspects of the birth of Russian stock trading were far-sighted — there have never been paper share certificates in the country; they were electronic from the outset — there was no consideration of the market infrastructure requirements of Russia when share trading began and no establishment

If I had a pound for every time a client called me a muppet, I’d be a very rich man…

Bill Blain’s Morning Porridge – March 15 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

Something is changing. Look at the price action on the benchmark 10-year US Treasury this month. Bond yields never lie: they show a fundamental shift from flatline US economy to growth expectations. Do rising prospects for the US economy herald the end of the low rate QE/twist-driven phoney bond market? Lots of trader notes about how rising yields have now crossed back into bear moving averages for first time in years!

Rising economic performance.. doubts as to the longevity of low rates.. US banks looking set to rally further… All sounds like time to be thinking of the big Bonds into Stocks allocation shift.  

But it also shows how the US and European economies are rapidly diverging. While the US is improving, and even yesterday’s UK employment data could be read in a marginally positive light.. the prospects for Europe continue to darken.  

Look at the latest news from Spain..

No Magic, Evergreen Appeal

Neil Dwane of Allianz Global Investors comments as the FTSE-100 Index approaches 6000

Over the last 17 years (since 1995) the FTSE-100 has traded within a range of 3400 to 6800 points. As the FTSE-100 once again edges closer to 6000, Neil Dwane, CIO Europe at Allianz Global Investors, assesses what this could mean for investors and if there is any magic behind the current attempt?  

“Equities around the world have rallied from the disastrous aftermath of the global financial crisis in 2008/9 as we have seen extreme Government fiscal policy and extraordinary Central Bank intervention with the Bank of England alone printing enough sterling to buy £325bn worth of gilts and corporate credit. With inflation remaining, and likely to remain, above the Governor’s targets as financial repression succeeds in creating negative real interest rates in the UK economy, real assets from property to commodities and ultimately equities will prosper. This is the key point of Quantitative Easing – to ‘force’ investors to move out of cash and return-less bonds into riskier asset classes in the hope of generating economic growth.

“UK equities remain attractively valued with a current price/earnings ratio of around 11 times and a yield of nearly 4%.  This compares to a managed 10 year gilt yielding 2.25 % and perhaps more interestingly a 50-year gilt yielding 3.28%. With monetary easing in the UK and globally showing no signs of abating and investors still hunting for income, equities become, even after the rise of the last three years, a safer and safer place to invest as the UK Government and its Central Bank will inflate all of our public debts (and future obligations of pensions and welfare) away through a further dose of inflation and currency debasement.

“So where is the magic? There is none but the evergreen appeal of protecting the real purchasing power of your wealth.”

 

Colle Strategy Sticks For BNP Paribas Securities Services

The opening of new offices in Colombia and Chile was just one of the items on the agenda at the annual London press reception hosted by BNP Paribas Securities Services at The Walbrook Club on Monday (March 12).

Others included financial performance for 2011, in which revenue was up 11% and gross profit up 20%, according to CEO Patrick Colle, visibly growing into the role, and a brief refresher of the unit's overarching strategy in this niche. Rather comfortingly for those who like a bit of stability in their lives, the strategy remains pretty much similar, if not identical, to that outlined just over 12 months earlier in the same location.

In February 2011, Colle outlined an expansion strategy that included a strong focus on Latin America. The first phase consisted of the launch of its local custody and clearing solutions in Brazil in 2010 while the latest developments in Colombia and Chile mark the second milestone in that strategy.

The plan, we learn, already

Systemic Risk, Multiple Equilibria and Market Dynamics: PIMCO

PIMCO is publicising the latest Viewpoints by Mohamed El-Erian and A. Michael Spence which focuson  Systemic Risk, Multiple Equilibria and Market Dynamics – What You Need to Know and Why.

This is a world in which expectations can and do play a major role in determining economic and market outcomes.

In assessing the possibility, duration and impact of systemic risk factors, we need to analyse the interaction of expectations with market (endogenous) and policy (exogenous) circuit breakers.

In the current environment, the prevalence of some subjective bimodal expectation distributions (e.g. Europe related) speaks to the multiple equilibrium features of sovereign debt markets.

Multiple equilibria give rise to a range of scenarios, each quite different and each with its own distribution of returns, risks, correlations, and market functioning.

In today's global context, investors (as well as policy makers, researchers and opinion leaders) need to supplement their analyses of fundamentals, historic risk premia, correlations and relative value with a clearer delineation of the expectation formation process itself.

 

Euroclear Bank and BNP Paribas Securities Services In Menage A Tri-

Euroclear Bank and BNP Paribas Securities Services today announced an agreement at Euroclear’s annual Collateral Management Conference that will enable their mutual clients to benefit from access to a larger pool of collateral for tri-party transactions.

The agreement, we are told, will enable the two organisations’ mutual clients to use fixed-income and equity assets held with BNP Paribas Securities Services as collateral in tri-party managed transactions at Euroclear Bank.

Client securities to be used as collateral will flow freely between the two organisations, while BNP Paribas Securities Services always remains the local custodian of the assets. When client securities are no longer needed as collateral by Euroclear Bank, they will be reinstated into the main client account held at BNP Paribas Securities Services.

The initiative consists of a multi-market collateral programme to be rolled-out in the next few months, delivering much-needed collateral flexibility and optimisation.

Wanna Buy A Property In Switzerland? Window Closing!

For the urgent attention of anyone considering buying a property in Switzerland…the window is closing.

As the owner of a very modest studio apartment in the Swiss Alps I keep a close eye on developments affecting the property market there. As the author of a number of articles on the subject I can't stop myself communicating at least some of those developments, and there is one just entered the pipeline which will have a significant impact.

Investors in Property, a Swiss Alps specialist whose representative in the small town of Wengen (Clare Regez) helped my wife and I buy realise a lifelong dream to buy a place there, reports that a referendum was held in Switzerland last Sunday (March 11) and that the people voted to prohibit the construction of new second homes.

“There will be no more second homes built in all the 650 communes (local councils) of Switzerland where the number of second homes is already more than 20% of the total housing stock,” says IIP. “This means in effect that in there will be no new properties built in future in any of the ski resorts in Switzerland!

“This is the last chance to have your dream chalet or apartment built to order.
You still have an opportunity to invest in a second home in Switzerland this year as the prohibition does not come into force until January 1 2013. If you buy now your property will have both a foreign purchase permit and a rare second home status so it will appreciate in value.

“We have prepared a special brochure showing some fabulous new chalets in Switzerland’s best resorts. To see our personal selection please click this link:

http://www.investorsinproperty.com/public/scripts/tiny_mce/plugins/filemanager/files/WeveGotTheAlpsCovered-SwissWeb.pdf

For further information contact: Simon Malster, Investors in Property,

www.investorsinproperty.com; T: +44 (0)20 8905 5511.

[email protected] 

 

BNP Paribas: Europe’s Top Corporate Bank

From Stamford, CT USA comes the news that BNP Paribas is the most widely-used bank among large European corporations.

According to new research from Greenwich Associates, across Europe, 61% of large companies use BNP Paribas for corporate banking, including two-thirds of large companies within the Eurozone. On a pan-European basis, Deutsche Bank ranks second with a market penetration of 53% of large companies, followed by HSBC and The Royal Bank of Scotland, which are tied with market penetration scores of 50-51%.

Rounding out the top five is

Ignore the noise and focus on the fundamentals… back judgment with conviction…

Bill Blain’s Morning Porridge – March 14 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

Thank the Lord! I’ve finally got something interesting to write about this morning: US Bank Stress Test and UK Century bonds. Even She-who-will-be-Mrs-Blain says I’ve become a euro-bore in recent months.

Bank stress tests:

Shenanigans in US market where JP Morgan precipitated the Fed into releasing the US bank capital stress tests two days early. Four banks failed – Citi, MetLife, SunTrust and Ally – but the rest passed and US bank stocks soared higher on rising dividend and stock buyback expectations. Citi failed the 5% US capital test because it was 'too aggressive' in trying to return cash to shareholders via a bigger dividend. US regulators told them to build up capital first. Result – a bank trying to pay shareholders takes a shoeing...

Compare and contrast US banks versus Europe and it's no contest. For so many reasons like asset quality, LTRO addiction, etc I wouldn’t trust the capital plans of most European banks if my pension depended on it. (Which, unfortunately, is probably the case.) Enough to say European bank stress tests don’t have a good name.  

Regular readers will know I have reserved a particular circle of bond hell for the regulatory community. I can’t help thinking it would be better for banks to submit themselves to the market’s judgment on what their capital levels and distribution plans should be. If Citibank decides it can pay higher dividends – let the market judge if that leaves it a strong enough capital base…that’s what stock prices tell us!

Regulators argue banks are still too important and too big to fail…Lehman Lehman Lehman...they scream at us every time financiers try to let markets decide!

Oh...please…get over it. Regulatory oversight has become intrusive, the financial equivalent of health and safety Rules that mean you can’t change a light bulb without having a helicopter on standby.

Put Cash Hoards To Work!

Turner Investments paper: Companies should put their record cash hoards to work

With corporate cash levels at a record $1.7 trillion, income-hungry investors are beseeching companies to use that cash to pay dividends. 

But according to the latest position paper from Turner Investments, shareholders also can benefit when companies reinvest cash in their businesses through capital spending, mergers and acquisitions, stock buybacks, and paying down debt.

The paper is available from Turner's site at:

http://www.turnerinvestments.com/resources/Turner/images/upload/documents/CashHoards_1Q2012.pdf

Background on Turner Investments:
http://www.turnerinvestments.com/our-firm/

 

Invesco Perpetual Takes A Random Walk

Luke Stellini, European/Global product director at Invesco Perpetual, provides his latest outlook for European markets      

·         Current market rally similar to early 2009 – a look at the lessons for 2012  

·         Healthy, dividend paying stocks expected to hold in a challenging market backdrop

·         Oil price is at an all time high, with negative implications for economic activity

·         Possible wage inflation in Germany could boost consumption in the future

Swearing in print is rightly frowned upon, however this week marks the three year anniversary of a market move that may still elicit a chorus of expletives in the fund management industry.

In early 2009, the pendulum swing from a mindset of systemic collapse to one of cyclical recovery drove a violent rally in markets. The rally, which quickly became known as the ‘dash to trash’, was led by the architects of the crisis, highly levered businesses, with banks at the forefront.

Fast forwarding three years, a three years of almost constant systemic crisis, sees markets in a not too dissimilar mood to 2009, with a risk on mentality driving the shape of market leadership. In this piece we will look at the way market performance evolved post the initial euphoria of Q2 2009 to see if we can draw out any lessons for 2012. In addition we will look to some of the current issues, like the oil price, as possible drivers of market direction.

The emergency provision of huge amounts of central bank liquidity over the lifetime of this crisis has been the main trigger of market rallies. Markets have forced the hand of policymakers as bank funding has been withdrawn, threatening the ultimate survival of the financial system. When faced with this choice, policy makers have stepped up. By the time this intervention has occurred however, markets have moved to discount a bearish outcome.

Newedge's Multi-Asset Swap Shop

Newedge, a global provider of multi-asset brokerage and clearing services, says it plans to develop its clearing facilities for interest rate swaps (IRS), thus extending its leading position in central clearing. Newedge says that its entrance into this space significantly expands its existing activities and complements its leadership in global exchange-traded and cleared derivatives (ETDs).

Newedge says its IRS Clearing initiative is supported by a partnership with SG CIB and CACIB. SG CIB and CACIB will serve as Newedge’s cleared IRS contingent default managers.  In addition, Newedge’s OTC IRS clearing platform will be accessible to SG CIB and CACIB’s customers seeking an OTC IRS clearing solution. 

Saxo Heads For South Africa

Saxo Capital Markets South Africa reports it has launched in the region. Saxo Capital Markets SA will be managed by joint country managers, Brett McLaren and Richard North who have had a long relationship with Saxo Bank.

McLaren said: “Saxo Capital Markets SA will meet the growing trading demands in South Africa for multi-asset online trading as the needs of investors in South Africa continue to diversify in tandem with the changing market dynamics in the region. Never before has it been easier for South African investors to access global liquidity in a wide variety of asset classes and markets than it is now.