Brian Bollen's Blog

Another Year Of Sell In May? Schroders

In this month's Economic and Strategy viewpoint from Schroders, Keith Wade, Chief Economist and Strategist, Azad Zangana, European Economist and James Bilson, Economist give their views on the following key news points

Another year of "sell in May?" (page 2) 

Evidence is building of a slowdown in global growth, repeating the pattern seen in recent years where a strong start to the year fades in the spring. We would see the current downshift as a consequence of the inventory cycle and tighter fiscal policy in the US against an on-going backdrop of fiscal austerity and bank de-leveraging in Europe.  

Buy.Buy.Buy.

Mint – Blain’s Morning Porridge  - April 30 2013

Never let a crisis go to waste, it’s an opportunity dressed up as difficulty

End of the month and time to be thinking about how to make money in May. Got some great ideas. But first… yesterday. all the usual stuff. Lowest inflation rate in Germany, and low yields. Italy noise – lots of it. Cyprus vote later today might be “interesting”, but of no real long-term consequence. Peripheral bonds rally and rally and rally. What next we wonder. We are in new markets.

So, my big question for the market this fine morning: are European bonds on the edge of a precipice or poised for another massive leg-up rally? Surprisingly, given my usually miserable bearish outlook, we think the latter is eminently possible. The Italy 10-year is now through 4% at 3.91% and it looks like Spain is heading same way (4.14% since you ask.)

For reasons I will try to explain below, this may be the moment to get over your doubts and fears about the European project and put your Italian and Spanish buying boots back on. Lace 'em up tight..

No guarantees, but the ongoing deleveraging of the European banking system, the need to invest rising bank deposits, the increasing domestication of the peripheral bond markets and the quantum of new funding being absorbed by the domestic markets, all hint at further gains to come.

There are clearly doubts and risks with any buy Europe strategy. Sustainability of a non-political currency union being one, divergence between France and Germany being another. But get over it. Great minds think alike and fools seldom differ. For once, I got some very interesting yet divergent opinions about Italy from research dudes yesterday:

·         In the anti-Italy camp, Letta's political bargaining with Berlusconi, undoing Monti reforms (like the property tax), his anti-austerity calls last night, collision course with Angela, and the likely credibility issues he will face are all quoted as terminal problems for Italy.

·         On the pro-Italy side: a coalition government of "Italian talents" is a good thing, the current 3% GDP/deficit is sustainable, there is no immediate financial crisis (like property getting worse across rest of Europe), and Germany will be forced to be pragmatic and realistic about rising anti-austerity rhetoric and calls for growth.

All very good points worthy of debate, but none of them are based on numbers.

Surprisingly, let’s start with Cyprus. According to the euro bears, the EC raid on Cyprus deposits should have triggered runs across the whole of the European banking underbelly. Did not happen! In fact Spain, Italian and French banks saw deposits increase by €44bn in March! Guess what, Italian and Spain banks then used their share of the deposit increase to buy €27bn of government bonds.

There are two very important things going on here: Deleveraging and Domestication.

Deleveraging: At the moment the whole of the European olive-oil belt, from France across Iberia and Italy, is slashing loan books and lending, and putting their liquidity into government bonds. (Cynics could say they are going from the frying pan of risky household (mortgage and loans) and corporate lending into the fire of even riskier sovereign investments. but at least these have the (as yet) untested OMT backstop.)

Domestication: the bulk of the Italian market, and most of Spanish bonds, are now held  domestically. That process will continue as deleveraging continues, further bidding up prices. With no chance of growth, banks will continue to focus on sovereigns. Domestic markets are far less vulnerable.

My colleague Martin Malone, one of the market's top analysts who called the Japan story first, says these countries are closer to containing their bond market volatility than they know. European rules say they can't buy their own bonds (that would be QE), but what’s to stop them selling state assets from specially established sovereign wealth funds that then do nothing but buy their government bonds. Or to insist their domestic insurance companies buy only BTPs or Bonos?

How do these two factors of Deleveraging and Domestication impact pricing? Clearly if demand exceeds supply then prices tighten. That is happening across all asset classes globally as a result of the rush by informed central banks to ease - the US, and now Japan via Abenomics. It will spread to Europe. But, European prices also look more sustainable just on simple supply.

France, Spain and Italy have around €340bn to raise through 2013, one third of which is already completed. However, with €44bn in deposit growth in March alone, the banks are more than able to absorb that gross new funding number (remember, there are also significant bond redemptions underway).

The bottom line is that even in Italy, the gross deposits taken in by banks are greater than the gross issuance of the state - therefore it should be sustainable. And prices will be driven even tighter as international investors perceive the opportunity that Italy bonds could well stage a fairly swift rally from 3.8% to 3%!     

Now even without new ideas like SWFs to do back door QE, or passing new laws like peripheral insurance companies can only invest in their sovereign bonds, the track for peripheral bonds looks more sustainable. Problem long-term will be what Martin calls the Japanisation of Europe: sure the debt may be sustainable, but deleveraging and lack of loan growth potentially creates a long-term economic desert. Get over it. That's good for bonds. (Until the people revolt that is....)

SO…

Recommendations: Buy Italy. Buy Spain. Buy France.

We are in a new market..

Out of time..

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

Equities: Sell in May. . . Again?

Ad van Tiggelen, Senior Investment Specialist at ING Investment Management, discusses how in equity markets “Sell in May” is one of those rare rules of thumb which actually seems to work

In equity markets, “Sell in May” is one of those rare rules of thumb which actually seems to work. For example, between 2010 and 2012 the US equity market rose on average 8% in the first four months, then declined 7% during the summer, only to jump again by 8% in the last four months. Within this timeframe, the summer weakness coincided with a dip in global growth and unrest in the eurozone. With economic data recently worsening again we therefore have to ask ourselves: is it indeed time to leave on an extended market holiday, only to return in September?

I’d like to come back as the bond market

Mint – Blain’s Morning Porridge  - April 29 2013

I’d like to come back as the bond market – so I can intimidate everyone!

What’s the outlook for this week? If there is a theme it will remain: "No Inflation and Global Easing". On that basis, we’d expect buyers to outnumber sellers… whether it happens or not is another thing!  This morning peripheral European paper is opening tighter reversing much of last week’s wobble, shrugging off recent concerns about ECB and Bundesbank hostility to OMT. 

Expect more anti-austerity rhetoric - the global opinion barometer has swung to "spend more money". After last week’s +2.5% US GDP number – weaker than consensus - no doubt the US will keep QE easing. Markets are wondering when the wall of Japan money is going to hit - according to the FT this morning, it won’t!

Instead, they write about Japanese investors putting cash into the domestic property market and the Nikkei. Our informed view remains that large insurance companies and banks will make significant allocation shifts into dollar and other assets in search of yield. Get ready for new markets.

In Yoorp

Don't Sell In May: Coutts

By James Butterfill, global equity strategist, Coutts. 

Don’t “sell in May”; keep your horse in the race 
It’s one of the oldest stock market adages and every year share analysts float the "sell in May, go way until St Leger Day'' line. The theory goes that markets perform poorly from May to September, so savvy people can sell high as summer approaches and buy low in the autumn as the last of the annual British classics horse races takes place.

There appear to be a few furlongs in the “sell in May” strategy. Investors who sold in May and bought back in September would have outperformed the annual return of the FTSE100 by 1.4% since 1989 and from 2010 this outperformance has actually increased to 1.7%, though we are cautious about using these types of statistics to make investment decisions.

What’s the secret of - TIMING! - good comedy?

Mint – Blain’s Morning Porridge  - April 26 2013

How much longer can bad news be construed as good? If you think the lack of positive momentum this week presages a self-defeating "sell in May and go away" scenario.... think again. While I've been calling bonds higher, they have resolutely gone the other way last few days. Oops! I still think I'm right... except for Europe. Elsewhere, the rally is going to happen for all the technical reasons I've been chuntering on about this week. Global QE and the lack of inflation.

This morning the German news the Bundesbank has rejected OMT in a submission the German constitutional court is not improving the mood. Germany’s Central Bank says OMT would undermine central bank independence, doubts there be sufficient conditionality, breaches the rules, and leaves open the door for more Greek style fudges. Well come on.. we always knew the Bundesbank is not keen on OMT, anything that’s not in its original manuals and anything that’s not German...but its comment are hardly solidarity with the rest of Europe.

In the meantime...

Back To Vallejo: The Future For Spain?

I read a fascinating extended piece in this morning's Financial Times, considering the future for Spain in the face of 27% unemployment and 55% youth unemployment.

I was forced to read certain literature as part of my Hispanic Studies degree course at the University of Glasgow in the mid-1970s, and I found myself thinking as I read the article that I can see a potential future. And dear lord, it looks bleak.

It's back to the time of Buero Vallejo, in which the only hope for most poor people is to win El Gordo, or at least a tiny share in it. I honestly think that we will come to see as a blip the industrialisation of Spain, that brought hope and some prosperity to unskilled Spaniards.

Cue the disabled begging on the streets of Madrid, their prosthetic limbs ostentatiously detached, lottery ticket sellers flogging decimos on the corners, rabid-looking dogs sniffing round people's private parts, and a surge in popularity of the fado-style music beloved by their Iberian neighbours to the west.

The odd thing is, I suspect they will be happier going back to the future. For further reading: Historia de una Escalera.

Swiss Economy In Momentum Struggle

By Norman Villamin, Chief Investment Officer, Europe, Coutts

The Swiss economy remains stronger than the rest of Europe, but is still struggling to regain broad-based momentum. Recent business sentiment indicators in Switzerland, as in Europe in general, suggest a reversal of the positive momentum established in the final quarter of last year following news of stimulus from the European Central Bank’s (ECB’s) Outright Monetary Transactions (OMT).

Disappointing growth prospects across the rest of Europe over the first three months of this year have contributed to the falloff in the Swiss purchasing managers’ index (PMI) back below 50 (figures above 50 denote expansion in activity).

However, the recent depreciation of the Swiss franc versus the euro should help offset some of the downward pressure on the Swiss economy stemming from weaker demand from its key trading partner – the eurozone. Indeed, with our analysis suggesting that it typically takes about two years for exports to benefit from currency depreciation and the Swiss National Bank’s (SNB’s) floor in the euro-Swiss franc exchange rate having been established in late-2011, we expect exports to the eurozone to be less of a drag on growth momentum in the months ahead.

Meanwhile,

Euroclear Bank/Standard Chartered Broaden Collateral

Euroclear Bank reports that assets for mutual clients held at Standard Chartered will now be available for use as collateral - via Euroclear’s global Collateral Highway - to meet collateral requirements in tri-party deals managed by Euroclear Bank.  

Standard Chartered, it adds, is the first Asia-based agent bank to join the Collateral Highway.

As a result, all equity and fixed-income securities held within the Standard Chartered custody network can potentially become eligible assets to be used as collateral when Euroclear Bank serves as the tri-party agent. Clients will be able to broaden the pools of collateral available to secure exposures arising from various types of transactions, while enjoying greater interoperability and choice as to how they can finance their assets.

UK GDP Swings And Roundabouts

By Alan Higgins, Chief Investment Officer UK, Coutts


Good news for sterling this morning as GDP figures confirmed that the UK economy technically averted a triple dip. But it’s all swings and roundabouts for UK gross domestic product (GDP), which has been bobbing up and down on either side of zero for several years now. We prefer to focus on the much more stable, and steadily climbing, UK employment numbers.

As I discussed in a previous blog Lies, damned lies and UK GDP, a fairly unexplored issue in financial circles is what some consider the fundamental unreliability of economic data. In particular, single-point data like GDP is subject to serial revisions.

Pleasant Surprise On UK GDP

Early reaction to the UK's just-issued GDP data and its impact on sterling comes from Richard Drivers, Caxton FX Analyst, out of the traps with his observations like a slavering greyhound which has been having its engine massaged for half an hour.

''This figure really did surprise us; I don’t think we were the only ones thinking that the risks of a surprise were skewed to the downside.

The services sector remains the UK’s key growth engine but it was encouraging to see the production industries offer some upside as well.

With the eurozone recession deepening and the global climate looking gloomy in general, I don’t think many people are expecting UK growth to kick on from here. However, it was crucial for confidence that the UK avoided a triple-dip and it makes a QE response from the BoE considerably less likely in May.

It will be a huge relief to George Osborne and puts him in a stronger position to defend his austerity programme. Major risks still hang over the UK economy but this certainly brightens the outlook for sterling a little.''

Schroders Strengthens London LDI

Schroders has just emailed to tell us that is strengthening its London liability-driven investment (LDI) team.

Daniel Morris joins as LDI Solutions Manager; part of his role will be to work closely with new and existing clients and their advisers to understand their requirements and objectives and translate these into effective portfolios and strategies. He joins Schroders with over a decade of actuarial and investment consultancy experience at Towers Watson and AON Hewitt.

Lef Sigalos joins Schroders Independent Group Risk team as Investment Risk Manager. He will focus on multi-asset investment and portfolio solutions, including LDI.  He joins from F&C Asset Management where he undertook a number of senior positions over the past ten years, all with a specific focus on derivative investment risk and LDI.  Most recently Sigalos was head of investment risk for F&C.

Posoining Pigeons In The Park

Mint – Blain’s Morning Porridge  - April 25 2013

All the world is in tune on a Spring afternoon while we’re poisoning pigeons in the park..

So… I confidently predicted a Grab-a-thon in markets yesterday… and nobody showed up. Instead of frenetic buying, investors stood back in shock over the previous day’s dramatic gains in peripherals.

Give me a break. It’s just my timing that’s a tad wrong! I’m still confident we’ll see further global easing boost the hunt for yield and therefore tighter spreads. In fact, I’ll go as far as to say yesterday was a buying window – and most folk missed it.

Factors I consider really really significant include:

Bank Funding, Preparations for Basel III and Impacts for Securities Finance

Finadium has released a "State of the Nation" review of bank preparations for Basel III in the US, Europe and Asia, and observed and projected impacts for securities finance.

This report presents multiple sources of government documentation as well as data from selected major banks to look at bank risk-weighted averages, capital ratios and thoughts about future planning. We conclude with our analysis of how banks are addressing funding considerations for securities lending and repo activities, often creatively, and how businesses will manage most effectively in the Basel III regulatory environment.

For more information on the report visit the Finadium website.

 

Jupiter Promotes Gunn And Watt

 

Jupiter Asset Management says it is to extend the responsibilities of two of its talented equity income managers, Alastair Gunn and Chris Watt.

From May 1 2013, Watt will take over as manager of the Jupiter Growth & Income Fund and the Jupiter UK Alpha Fund from Philip Matthews, while Gunn will take on the management of the Jupiter High Income Fund from Anthony Nutt on July 1 2013. Both will continue to work closely with other members of the team to support the investment process across all UK equity strategies.

Europe’s TARP Moment Is Approaching

By Norman Villamin, Chief Investment Officer Europe, Coutts

Global equity markets rallied sharply yesterday on the “encouraging” news that growth is disappointing in the US, Europe, and even China – evidence of investors’ confidence that central banks will ride to the rescue to prevent a recurrence of the summer swoons of 2010-2012.

The strength of the euro is a new headwind for the beleaguered eurozone, particularly against the dramatic weakness of the Japanese yen, suggesting that the European Central Bank (ECB) may pull the trigger on a rate cut at their next meeting on May 2. But the challenge is that cutting rates alone is unlikely to be sufficient to turn the tide in Europe. Non-functioning banking systems are the issue rather than an absence of liquidity. So, for ECB action to be truly effective, we think it needs to include direct lending by either the ECB itself or some supra-national agency (eg the European Investment Bank), bypassing the dysfunctional banks.

Europe’s Sovereign Debt Problem: A Call for a Clear Destination

Europe’s Sovereign Debt Problem: A Call for a Clear Destination

By Andrew Bosomworth and Henning Fock, PIMCO

With developments in the eurozone continuing to escalate, a lack of clear political decisions has driven government bond yields of various eurozone members, notably in Southern Europe, to extreme levels, signaling that the status quo in place since the introduction of the euro in January 1999 is no longer tenable.

In the absence of a credible destination and roadmap to point the way, we believe the European Central Bank’s (ECB) current policies and its acceptance as a lender of last resort can only serve as a bridge to a more sustainable and lasting solution that ultimately restores investor confidence in the eurozone.

iShares and Euroclear Bank Boost ETF Access

In a triple-datelined missive out of Amsterdam, Brussels and London, Euroclear and BlackRock team up to tell us that investor access to exchange-traded funds (ETFs to their friends, GTFs to the suspicious) has improved following the inclusion of 50 products from iShares on the FundSettle fund processing platform. iShares is the ETF business of BlackRock while FundSettle is part of Euroclear Bank, the international central securities depository.

iShares products, we learn, are the first ETFs on the platform, which hosts over 65,000 mutual funds, linking fund managers with third-party distributors such as private banks and wealth managers. BlackRock and Euroclear, singing lustily from the same hymn sheet, will initially make the service available in the Netherlands, but are exploring ways of offering ETFs in this way to other European markets.

The Salmond Of Doubt

Mint – Blain’s Morning Porridge  - April 24 2013

You can go into a revolving door ahead of Alex Salmond, but you always come out behind him...

We are on the cusp of a massive market change. This is going to become an asset GRABATHON. Put your buying boots on. Take a look at global inflation expectations. They have vanished. Everyone’s been watching Japan, and is waking up and smelling the coffee. Don’t be in the least bit surprised to see everyone else jump on the bandwagon – if there is no inflation, watch the rest of the World’s Central Banks pull the stops out to kick start borrowing.

ECB ease this week? This would be a good time. This morning, UK’s discredited Funding for Lending scheme is relaunched specifically to pump-prime SMEs and thus the economy. (Oh, and by the way...Obama lives…)

Where's The Next Japan?

By Gary Dugan, chief investment officer Asia and Middle East, Coutts

Policymakers remain the main drivers of the financial markets, but never has policymaking been in such a state of flux. Japan is just ‘going for it’ on a number of fronts. The US is going full blast on monetary policy but tightening fiscal policy. Europe effectively has tight policies everywhere, but with slippage. The International Monetary Fund (IMF), after initially telling countries to get their houses in order by cutting deficits, is now chastising the UK for running too tight a fiscal regime. Throw in the embarrassment of a research paper (Reinhart-Rogoff “This Time is Different”) that has frequently been cited as key academic support for fiscal prudence but has now been suggested to contain flawed maths - and you come to the conclusion that the world still has its problems.

Where is the next Japan?