Currencies

Dollar rises as markets turn eyes to Opec

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members. Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in […]

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Banks

Basel Committe fail to sign off on latest bank reform measures

Banking regulators have failed to sign off the latest package of global industry reforms, leaving a question mark hanging over bankers who complain they have faced endlessly evolving regulation since the financial crisis. Policymakers had hoped to agree the contentious new measures at a crunch meeting held in Chile this week, but a senior official […]

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Financial

Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Archive | November, 2016

Exotic waves for the world economy

Posted on 31 January 2014 by

Since the start of the decade, in a latter-day gold rush, investors have flocked to fast-growing emerging markets. The likes of Brazil and Indonesia were a way to dodge the perils of the eurozone, and lock in some attractive returns. Like all such parties, this one was too good to last. What began with a wave of sudden retreats last summer has turned into a steady exodus. In the week to last Wednesday outflows from emerging market stocks jumped to $6.3bn, the largest weekly withdrawal in nearly three years.

From Mumbai to Pretoria, central banks have tried to halt this rush for the exit by raising interest rates. The most dramatic moment came in Turkey, where the monetary authorities more than doubled the weekly benchmark rate from 4.5 per cent to 10 per cent. Markets were unimpressed. After a few hours of euphoria, most emerging economy currencies resumed their slides.

    Nor does the outlook appear much brighter. Asia and Latin America are being pulled down by two powerful forces, neither of which is expected to weaken. One is the rebalancing of China’s economy away from investment, which will continue to hit exports among commodity producers. The other is the tightening of global liquidity, a consequence of the US Federal Reserve’s tapering of its quantitative easing programme. The more investors expect US yields to rise, the less appealing exotic emerging market assets appear.

    The question now is whether the turmoil in emerging markets will spread to mature economies. There are a few worrying straws in the wind. Global shares came close to registering their worst January since 2009. Safe assets such as US Treasuries and German Bunds are suddenly back in vogue. The appetite for risk that investors have shown since the summer appears to be waning.

    While worrying, this should not escalate into a full-blown contagion from emerging economies to rich countries. A note by Goldman Sachs, the investment bank, argues convincingly that the linkages between the two blocks are still too weak. Take, for example, trade. Turmoil in Latin America and Asia will weaken the demand for goods and services from the eurozone, US and Japan, threatening their incipient recovery. However, exports to emerging markets are still a tiny proportion of the combined national income in these countries. While a slowdown in emerging markets would undoubtedly hurt some companies, most should find it manageable.

    In theory, the risk of financial contagion is more severe. But while the exposure of banks from high-income countries to emerging markets is relatively high, it is not overly concentrated. It is also possible that the weakest economies in the west – for example in the eurozone periphery – could end up benefiting from the stampede out of the new world by offering a safer investment opportunity.

    One of the main lessons from the financial crisis, however, is that once market panics start it is hard to predict where they will stop. The brittleness of the recovery in developed countries reinforces the case for prudence. True, the US continues to hum along, after expanding at an annualised rate of 3.2 per cent in the final three months of last year. Britain and Japan also appear to be back on the march. But the eurozone is still stuck in low gear, as unemployment remains high amid growing fears of deflation.

    These vulnerabilities risk being exposed as the Fed continues to taper. This week the US central bank reduced its monthly asset purchases by another $10bn. The process towards the normalisation of interest rates has only started but its consequences will reverberate across the world. This is why Raghuram Rajan, governor of the Reserve Bank of India, was right to call for greater co-operation among the global monetary authorities.

    What exactly the US should do to appease the concerns of emerging economies is unclear. But Janet Yellen – who takes over from Ben Bernanke as the Fed’s chairwoman this weekend – should initiate a running dialogue with her colleagues from both the developing and the developed world to mitigate the negative consequences of tapering. To that end, she can call on the outstanding international experience of Stanley Fischer, her vice-chairman.

    Of course, this does not excuse the governments of emerging countries from their own responsibilities. The best way to ensure that foreign investors remain interested – and invested – in those countries is to implement the reforms needed to maintain economic dynamism.

    Salmond digs in on pound and Scottish taxes

    Posted on 31 January 2014 by

    Scotland's First Minister Alex Salmond answers questions after announcing the date for the Scottish independence referendum in the debating chamber of the Scottish Parliament in Edinburgh, Scotland...Scotland's First Minister Alex Scotlands First Minister Alex Salmond answers questions after announcing the date for the Scottish independence referendum©Reuters

    Scotland’s First Minister Alex Salmond has defied critics of his plans for a post-independence currency union with the rest of the UK, insisting such a pact would leave Edinburgh in full control of taxation.

    In an interview with the Financial Times, Mr Salmond waved aside concerns about the working of such a currency union, which were highlighted this week by an unprecedented intervention in Scotland’s independence debate by Mark Carney, governor of the Bank of England.

      The first minister also reiterated his warning that an independent Scotland could walk away from its share of the UK’s £1.2tn national debt if Westminster continued to reject its plans to share the Bank of England.

      The currency question is one of the central battlefields in campaigning ahead of Scotland’s referendum in September on whether to leave the UK, a vote that would have far reaching consequences across the British Isles and beyond.

      Pro-union campaigners have seized on Mr Carney’s suggestion that a post-independence currency union would require “very significant” pooling of fiscal resources between an independent Scotland and the remaining UK.

      Alistair Darling, former UK chancellor and leader of the pro-union Better Together campaign, claims a currency deal would mean Scotland would have to seek approval from London for its tax policy.

      Mr Salmond said an independent Scotland would be happy to cede sovereignty on monetary policy but on fiscal policy it would only have to accept aggregate limits to state debt and borrowing.

      “That doesn’t cover the rates of taxation, I don’t think there’s any need for that,” the first minister said.

      Analysts say the currency issue is a vulnerability for the independence campaign, while some nationalists outside Mr Salmond’s Scottish National party are vocally worried about the limits that keeping the pound would mean for fiscal policy. At any rate, UK ministers say London would be unwilling to agree to such a pact.

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      Mr Salmond’s case for currency union is based on proposals laid out by a committee of economists that includes Nobel laureate Sir Jim Mirrlees – cited by Mr Carney in his Edinburgh speech as a former academic supervisor and a “great influence on the profession”.

      But Mr Carney’s talk of the possible need for fiscal pooling contrasts with the conclusions of Prof Jim Mirrlees and his colleagues, who argue a currency union would require only a joint “sustainability agreement’ between London and Edinburgh.

      Some in the SNP accept that currency union might involve much greater limits to fiscal policy freedom, but say it would still leave an independent Scotland with far more control over its economic destiny than possible as a devolved part of the UK.

      In the interview, Mr Salmond refused to consider a “Plan B” on the currency, warning that refusal by the remaining UK to accept shared use of the Bank of England would free Scotland of any responsibility for the UK debt.

      “You’ve got a negotiation where the UK government will want to persuade the Scottish representatives that they should take on a share of debt which is the legal liability of Her Majesty’s Treasury,” he said.

      Net retail fund sales break £20bn in 2013

      Posted on 31 January 2014 by

      Images of stock boards as Topix sinks most since August©Bloomberg

      Net investment in retail funds exceeded £20bn in 2013, with equity funds accounting for more than half of this growth.

      According to the Investment Management Association, which represents the UK open ended funds industry, net retail sales were £20.4bn last year, up 43 per cent on 2012.

        With net retail sales of £11.4bn, equity funds received their greatest net inflow since 2000. Fixed income, which was overtaken by equity as last year’s best-selling asset class, saw a net outflow of £17m.

        UK equity funds received an inflow of £2.9bn last year, the highest since 2001.

        Total retail funds under management reached £770bn, up 16 per cent compared to 2012.

        First crowdfunding fund launched

        Posted on 31 January 2014 by

        Commuters walk across London Bridge to the City of London©Reuters

        Crowdfunding website Crowdcube has launched an actively managed fund that will pick and choose early-stage businesses for investors.

        The platform, which was used by TV presenter Kevin McCloud, of Channel 4’s Grand Designs to raise money for his property business, said that the fund was designed for people who want to invest in start-up and early-stage businesses but who lack the time to research and review pitches made by new companies on the website. “Our aim is to provide everyday investors with choice,” said Darren Westlake, chief executive.

          Investors will need to put in a minimum of £2,500 in the fund, which has a “preferred rate of return” of 7 per cent and will be managed by Strathtay Ventures, part of Braveheart Investment Group, the listed Scottish SME specialist. The annual management fee is 2.5 per cent and investors will be charged an initial set-up fee of 1.5 per cent.

          Crowdcube is part of a growing alternative finance sector hoping that their websites can supersede the role that banks traditionally play in funding individuals or small companies. Some websites, such as Crowdcube, allow investors to pick and choose who they want to give money to, in return for a share of the equity in that venture. Others, such as Zopa, faciliate loans.

          The sector, which is less than ten years old, has been making a serious effort in the past year to encourage “mainstream” investors to put in money.

          P2P group Zopa secures £15m investment from Arrowgrass Capital

          Zopa logo

          Zopa, Europe’s largest peer-to-peer loan platform, has secured £15m from London-based hedge fund Arrowgrass Capital Partners in the latest sign of investor interest in companies that use technology to cut banks out of the lending process

          Last year, Zopa, the UK’s largest peer-to-peer loan site, launched Safeguard, a fund held in trust that repays investors if borrowers are unable to pay back their loan.

          In April, the sector will be regulated for the first time, which some say will open crowdfunding and peer-to-peer websites up to more investors. Others worry it will limit access to only the wealthiest or most sophisticated.

          Dennis Hall, a chartered financial planner at Yellowtail Financial Planning, said that crowdfunding has yet to ignite the interest of most private investors. “For the amount of money they would be prepared to invest, the overall return to them is marginal,” he said. “The additional work required doesn’t really justify the return.”

          AudioEmerging market turmoil, investment platforms and renting luxury assets

          Are we seeing a re-run of the 1990s? Jonathan Eley discusses EM volatility with the FT’s Jonathan Wheatley. Plus, how to choose the right investment platform and whether luxury goods can pay their way

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          Eulogy to Bernanke’s turbulent Fed years

          Posted on 31 January 2014 by

          “We did what we did, we didn’t do what we didn’t do, and the result was what happened.” – Paul Volcker

          Ben Bernanke is entering history. The work of writing a eulogy to the eight years of turbulence that he oversaw from the Federal Reserve can now begin.

            Beware, however, that early judgments of Fed chairmen have even more of a tendency for revisions than economic forecasts. And they are bedevilled by our lack of knowledge of the counterfactual – we never know what would have happened if the Fed had done something else.

            Thus when Mr Volcker left, he was widely seen as an imperious technocrat who had unnecessarily inflicted a recession on the US in an aggressive crusade to beat inflation.

            He is now almost universally respected as a decent man who had the courage to break inflationary forces that had built up for decades, and created the conditions for the prosperity that the US enjoyed in the 1990s.

            Alan Greenspan, his successor, left office known as a “Maestro”, to cite the title of one book about him. But barely a year after he left office, in early 2006, his reputation was in shreds, as he was widely reviled for bailing out companies and encouraging risk-taking, while keeping rates far too low for far too long, and encouraging the growth of the credit and housing bubble.

            Where will Mr Bernanke rank? Judging by my email inbox, and the tenor of comments left on FT.com, he is truly hated by many in the financial markets.

            But it is too soon to judge his signature policy, the quantitative easing bond purchases with which he fought the risk of deflation. Many say this will eventually lead to hyperinflation (there is no evidence of this yet), and stoke deeper economic inequality (for which, alas, the evidence is already plentiful). Judgment must wait until the Fed finally tries to return to more normal monetary policy – an event that may still be several years away.

            Many suspect that growth will falter, and asset prices tumble, at that point. If this does not happen, the policy will probably be seen as a success. How to gauge the probabilities?

            Handily, prices in financial markets embody forecasts on this issue.

            The market verdict as Mr Bernanke exits is that he has done a great job. Markets are braced for growth, stable inflation, and no great stress in the financial system

            Over Mr Bernanke’s eight years, as the chart shows, equities narrowly beat Treasury bonds. House prices, as measured by the Case-Shiller index, were much lower at the end of his term than at the beginning. Miscalculating the housing market may have been the Bernanke Fed’s key error.

            For inflation, which has fallen slightly during the Bernanke term, break-even rates derived from the difference between fixed and inflation-linked bonds predict average inflation of 2.3 per cent over the next 30 years, and 2.15 per cent over the next decade – so the bet is on that both hyperinflation and deflation will be avoided.

            What about growth? Look at price/earnings ratios on stocks. The higher the p/e the higher the hopes for growth. At 16.6 the p/e on the S&P 500 is almost exactly where it was when Mr Bernanke took over.

            As for America’s position in the world, the S&P 500 has outperformed FTSE’s index of the rest of the world by 23.4 percentage points in the Bernanke era. Has that been achieved at the expense of other countries, as some now allege? Possibly. It looks like the US has effectively exported inflation to the emerging world. Against that, remember that the Fed leapt in to offer cheap dollars to a number of emerging markets in 2008. Mr Bernanke took political heat for this at home, but it was vital in averting an all-out emerging market collapse; he did not ignore the rest of the world.

            Ten-year bond yields were just under 5 per cent eight years ago, and are now under 3 per cent – so faith in the credit of the US government remains intact, despite some interesting political adventures along the way.

            Are people nervous about the future? The TED spread, measuring the gap between overnight bank rates and T-bill rates, a core measure of financial stress, is also almost exactly where it was eight years ago at 22 basis points (having been as high as 463bp in 2008). There is little worry about the banking system’s health.

            So, are markets really confident that the Fed under Janet Yellen will be able to exit from QE without incident? No. Banks’ share prices are far lower than they were when the Bernanke era started, while the gold price remains far higher. On both measures, confidence is returning, but plainly distrust in the US financial system remains.

            With that important caveat, the market verdict as Mr Bernanke exits is that he has done a great job. Markets are braced for growth, stable inflation, and no great stress in the financial system.

            If equities today are proved in the fullness of time to be correctly priced, then Mr Bernanke will go down in history as a great Fed chairman. But then, as he entered, these measures also showed confidence that Mr Greenspan had done a great job. Fed chairmen can make mistakes. So can markets.

            GE moves closer to US retail finance IPO

            Posted on 31 January 2014 by

            General Electric has hired bankers to push ahead with an initial public offering of its North American retail finance business in what is likely to be the largest US IPO since Facebook, according to people familiar with its plans.

            The company has hired Goldman Sachs and JPMorgan Chase to lead the IPO process and a filing is expected in the next two months, these people said, amid resurgent interest in businesses that lend money to US consumers.

              The unit of GE Capital, which offers private-label credit cards and other retail payment services, could be valued at more than $20bn and GE has said it would look to float up to 20 per cent of the business this year.

              People familiar with the plans declined to comment on valuations but a roughly $4bn listing would be the largest on the US market since Facebook raised $16.1bn in May 2012.

              GE intends to split off the remainder of the unit through a share distribution to investors in 2015.

              The proposed exit, which would see GE exit consumer finance in the US, would be the group’s last large-scale disposal under a restructuring plan to return its focus to its manufacturing roots.

              A listing would make the GE unit the latest to take advantage of a more favourable US economic outlook, which is also driving new capital to the consumer lending sector. This month, Santander Consumer, which makes car loans to subprime borrowers, raised $1.8bn from an IPO that was upsized due to investor interest. Shares in Santander Consumer have climbed 7.1 per cent since it listed even as the broader market for US equities has weakened.

              Meanwhile, shares in Springleaf, the former subprime consumer lending arm of the bailed-out insurer AIG, have climbed 41 per cent since raising $411m from an October IPO.

              “The healthier funding environment for consumer finance firms reflects investors’ interest in increasing exposure to subprime lending,” analysts at Fitch said this week. The rating agency said improvements in credit fundamentals and investors chasing higher yielding loans were driving the demand, but warned that the sector was vulnerable to volatility should macroeconomic trends weaken.

              GE suffered large losses at GE Capital during 2008-09, costing the group its triple A credit rating. Jeff Immelt, the group’s chief executive, has said he wants to cut its reliance on financial services to about 30 per cent of earnings.

              GE Capital, Goldman Sachs and JPMorgan declined to comment.

              At the end of December 2013, GE Capital’s US instalment and revolving credit business had total receivables of $55.9bn, according to its fourth-quarter earnings release.

              At GE Capital’s investor meeting in November, the company said the US retail unit had $53bn in receivables. Its latest available financial figures showed it earned $2.2bn in 2012.

              Keith Sherin, chief executive of GE Capital said at its investor day that it was “a good time to exit this [US retail] business”. He added: “The capital markets are pretty strong.”

              Regulator maps out European stress tests

              Posted on 31 January 2014 by

              European regulators will subject banks to a capital hurdle of 5.5 per cent in forthcoming stress tests that are meant to help end the protracted malaise clouding the sector.

              The European Banking Authority announced the barrier as it set out preliminary details of the exercise, which will assess 124 EU banks across 22 countries, with results expected to be published at the end of October.

                Holdings of sovereign bonds will be involved in the test, but national supervisors will still have the discretion to filter out some of the adverse effects on banks’ finances – a source of criticism in past assessments.

                The EBA exercise forms part of a high-stakes “comprehensive assessment” being carried out in the euro area with the hopes of tackling entrenched weaknesses in the sector before the European Central Bank takes over supervisory functions in November.

                Stress tests are playing an increasing role in the regulatory armoury on both sides of the Atlantic. Under the exercises banks’ finances are subject to a series of shocks – for example lurches in unemployment and growth setbacks – to ensure they have sufficient capital to withstand adverse conditions.

                Shortly after Friday’s announcement from the EBA, the Bank of England said it would plough ahead this year with its own stress tests of eight UK banks and building societies. This will run “alongside” the EBA checks, which cover four big British lenders.

                Daniel Davies, an analyst at EXANE BNP Paribas said the prospect of multiple tests was causing “frustration” among investors given hopes for a simpler process in the region.

                The EBA has been criticised over its treatment of sovereign bonds in past stress tests, with analysts saying the assessments have been too soft. This time banks will still be able to apply a zero risk-weight to government bonds in their held-to-maturity books if their models allow it.

                And where bonds held as available for sale – about a third of the total – the regulators will be permitted to use “prudential filters” to ease the impact of losses. The use of such filters will be clearly disclosed, the EBA said. Government bonds held in banks’ trading books will be subject to stresses.

                The 5.5 per cent tier one capital trigger is lower than previous media speculation centring on a figure of 6 per cent.

                FT In depth

                European banking union

                The EU’s banking union plans seek to place eurozone banks under the overarching supervision of the ECB

                The hurdle is, however, higher than the one previously used by the EBA and above the 5 per cent level used in US tests. The capital standard will be the transitional one being phased in during the 2014-2016 period covered.

                The EBA gave no details of the actual stress scenarios that will hit the banks, saying this was subject to further discussion between regulators and that individual national authorities could superimpose tougher requirements if they wished.

                As well as credit risk, market risk and sovereign risk the EBA will stress the cost of funding of banks. However, the tests are not likely to anticipate prospective changes in monetary policy.

                The tests will be based on a so-called static balance sheet, meaning no account is taken of the possibility that banks’ managements would alter their strategy in a big crisis.

                Analysts say banks have also been tidying up their balance sheets by selling sovereign debt and taking extra provisions for bad debts in their fourth-quarter results – the last chance to do so before a snapshot is taken of their end of year balance sheet on which to base the stress tests.

                Several banks that risk failing the stress tests have started raising capital pre-emptively. In Italy, Banco Popolare last week announced a rights issue of at least €1.5bn and Banca Monte dei Paschi di Siena plans to raise €3bn later this year. Austria’s Raiffeisen raised €2.78bn in a rights issue this month.

                EM turmoil raises fears of contagion

                Posted on 31 January 2014 by

                This was not how US and European equity markets were supposed to start 2014. New Year optimism about a recovering global economy and the smooth unwinding of the US Federal Reserve stimulus measures has been dashed by emerging market turmoil.

                After currencies plummeted in countries such as Argentina, Turkey and South Africa, the US S&P 500 was on track to end the month down almost 4 per cent from the start of the year. The Vix index of stock market volatility – known as the Wall Street “fear gauge” – neared peaks seen last October, when Washington flirted with a debt default.

                Market movements

                Market movements

                  The danger seemed obvious: while US and European equities largely shrugged off the 1997 Asian market crisis, global economic and capital market links have since become much closer, increasing potential spillover, or “contagion” effects. “Weakness has much more scope to feed back to developed world growth and then back to emerging markets,” warns Alan Ruskin, strategist at Deutsche Bank.

                  A more upbeat, counter argument was that the European recovery and US growth stories remain in tact and we are still a long way from 1997, when the Spice Girls roiled the pop world and a collapse in the Thai baht triggered contagion across Asia.

                  “We had a serious situation last year and we’re in a serious situation now, but it is still a world apart from a crisis as bad as 1997-98,” says Andrew Milligan, head of global strategy at Standard Life Investments. “As long as the problems remain with the dozen or so countries that everyone is worrying about – and China’s economy holds up – then the worries for developed markets should be seen in that context.”

                  Contagion to US or European financial markets could spread through several channels. Most obvious are trade links.

                  Emerging market and developing countries account for nearly 40 per cent of the global economy – double their share in 1997, according to Mr Ruskin. Emerging markets contribute 15 per cent of the earnings of US global orientated companies, five times more than similar estimates for 1995.

                  But the emerging market turmoil so far has been confined to a relatively small number of countries. The global impact will depend crucially on China. Adding to market nerves this week were weak Chinese manufacturing purchasing mangers’ indices – and fears of a high-profile default at a Chinese trust fund, which was only averted at the last minute. Another route for rapid contagion would be through banks. Again the dangers may be less than feared. A Goldman Sachs report this week noted that lower US and European bank leverage “provides more of a cushion against shocks than at times in the past”. The report’s title summed up its conclusions: “What happens in emerging markets (mostly) stays in emerging markets.”

                  Paradoxically, Europe could be a beneficiary from the emerging market rout. Many investors are rotating out of emerging markets and into Europe

                  – Alberto Gallo, RBS

                  Other links could even prove positive. Strong outflows from emerging market equity funds this year meant inflows in other markets. “Capital outflows have been strong – and that is partly because investors are more confident about developed countries, which is why they are putting their money into Europe, Japan, the US and UK,” says Mr Milligan.

                  As emerging markets fell out of favour last year, US investors last year bought European equities at the fastest pace since the run-up to the euro’s launch in 1999, the Financial Times reported this week. So far, emerging market troubles have not reversed this year’s powerful rally in eurozone periphery bond markets, which has sent government borrowing costs tumbling to multiyear lows.

                  “Paradoxically, Europe could be a beneficiary from the emerging market rout,” argues Alberto Gallo, strategist at RBS. “Many investors are rotating out of emerging markets and into Europe.”

                  While periphery eurozone countries are relying on exports to pull themselves out of crises, their biggest trading partners are European neighbours, Mr Gallo adds. Germany could prove more “emerging market sensitive”, given its reliance on top quality exports to fast growing economies in Asia. But if Europe’s largest economy were hit there might be beneficial side effects. “Germany will realise that it needs to spend more, to do some kind of stimulus,” says Mr Gallo.

                  The important link that many investors overlook is between an emerging market slowdown and US monetary policy, argues Trevor Greetham, director of asset allocation at Fidelity. “The fact that emerging markets are weak and commodity prices falling means that US monetary policy normalisation is going to be very gradual and supportive.”

                  The Fed this week decided to scale back asset purchases under its quantitative easing programmes by another $10bn a month without acknowledging the volatility in emerging markets. If external troubles affected the US economy, however, policies could be calibrated accordingly. “Beyond the domestic impact of Fed policy on the economy and interest rates, the central bank could well be influenced by dynamics outside the borders of the US in the months ahead,” says Rick Rieder, chief investment officer for fixed income at BlackRock.

                  But as this week showed, even in the best case it will be a bumpy ride.

                  Bond offers ‘one-way’ housing bet

                  Posted on 31 January 2014 by

                  A mortgage company is offering investors a one-way bet on UK house prices, with a bond that will track a residential property index but return capital if property values fall.

                  In a sign of the growing confidence that house prices will continue to rise, Castle Trust is now offering 100 per cent capital protection on investments in its latest ‘Growth Housa’ bonds.

                    These bonds, which were first launched in October 2012, offer returns in line with the Halifax house price index.

                    Early versions, which had terms of three, five or 10 years, gave investors exposure to the upside or downside in the index.

                    However, the new bonds – set to launch in February – will pay a return in line with house price inflation over those same periods, or return all original capital if prices do not rise.

                    Castle Trust’s move comes as economists and politicians have warned of a UK housing bubble – fuelled by the government’s Help to Buy scheme and increased mortgage lending.

                    But Danny Dorling, a professor at Oxford university, said that while the Castle Trust bonds represented a “punt” on rising house prices, this was not necessarily an irrational strategy in the current climate. “People are aware of how politically hard it is not to maintain high house prices,” he said.

                    House prices rose 7.5 per cent in 2013, according to the Halifax house price index that the new bonds will aim to track. According to Halifax housing economist Martin Ellis, prices across the UK are forecast to rise “at a broadly similar pace” this year. “Overall, prices nationally are forecast to increase in a range of between 4 per cent and 8 per cent,” he said.

                    Apart from Castle Trust’s bonds, the only other way to track the UK housing market has been through spread bets – although these offer no protection from price falls. Many providers withdrew them during the financial crisis, but IG Index is still promoting them to its clients.

                    Castle Trust is offering its bonds to help fund its mortgage products, which allow borrowers to give up a slice of the future appreciation in their property’s value.

                    In depth

                    UK house prices

                    For sale signs uk

                    Price indices have presented wildly contrasting pictures of the health of the housing market – according to some the boom is back, while to others the slump staggers on

                    It advances secondary mortgages – of up to 20 per cent of a property’s value – to buy-to let borrowers or existing owners who want to release equity from their homes.

                    But instead of demanding interest and capital repayments during the term of the loan, Castle Trust instead takes up to 40 per cent of the property’s appreciation when the loan period ends, and a repayment of the original capital. At this point, borrowers may have to refinance or sell their property to pay Castle Trust back.

                    Loan terms are up to 10 years for buy-to-let borrowers and up to 30 for owner-occupier borrowers.

                    Henry Pryor, an independent buying agent, said Castle Trust’s offering was reminiscent of innovative approaches to lending during the last housing boom. “This may reflect a return to the days of imaginative financing last seen in 2007,” he said.

                    Matthew Wyles, senior adviser at Castle Trust, said its interest-free secondary mortgages were intended to meet demand from buy-to-let investors, and from parents needing to release equity to help their children with deposits for their first homes.

                    “Setting aside buy-to-let, our single largest line in the owner-occupier space is the bank of mum and dad,” Mr Wyles said. “In many cases, those people do not want to have to go back to the burden of a monthly mortgage expense.“

                    According to Hometrack, there is £3.4tn of equity in the UK housing market, compared with just £1.2tn of debt secured on dwellings. However, existing equity release schemes are typically targeted at elderly homeowners needing cash for at-home care.

                    Richard Donnell, director of research at Hometrack, suggested that the demand for alternative ways to borrow against property reflected the increased level of equity tied up in UK housing.

                    “Society needs to find new ways of recycling equity,” he said. “There are some issues as we move towards pension provision – a lot of people see their houses as being their pensions, which they hand down to their children. But households are increasingly going to have to use their equity themselves.”

                    Optimistic BBVA posts rise in net profits

                    Posted on 31 January 2014 by

                    Spain's Leading Banks As Economy Struggles©Bloomberg

                    Banco Bilbao Vizcaya Argentaria on Friday posted a €677m net loss for the fourth quarter because of a €2.6bn pre-tax loss on the sale of its stake in a Chinese bank, but Francisco González, executive chairman, said the outlook for 2014 had “improved significantly”.

                    BBVA’s results for the full-year were also much stronger. Spain’s second-largest banking group by assets revealed a 33 per cent jump in net profits for the full year 2013, helped by a drop in impairment losses and better earnings in core emerging markets such as Mexico and Turkey.

                      Net profits rose from €1.68bn in 2012 to €2.23bn last year. Net interest income – the profit a bank earns as a result of its core lending business – dropped 3.4 per cent to €14.61bn over the same period. Without exchange rate fluctuations net interest income would have grown slightly.

                      One potential concern for BBVA investors, however, is the bank’s heavy exposure to emerging markets. BBVA said on Friday that 60 per cent of last year’s gross income came from Turkey, Asia and Latin America – suggesting it will be more vulnerable than many of its peers to the current turmoil sweeping emerging markets and their currencies.

                      In recent weeks, market concern has centred in particular on BBVA’s exposure to Turkey, where it owns 24.9 per cent of Garanti Bank, one of the country’s largest lenders.

                      Although BBVA swung to a loss in the fourth quarter from a €160m profit in the third quarter, net interest income rose from €3.55bn to €3.76bn over the same period.

                      Widely seen as one of the best-capitalised banks in the Spanish market, BBVA said it had lifted its core capital ratio from 10.8 per cent at the end of 2012 to 11.6 per cent at close of 2013. Under the tougher definitions from the new Basel III regime, core capital equalled 9.8 per cent of assets, adjusted for risk, the bank said, noting that this was “well above the regulatory minimum requirements”.

                      Mexico again accounted for the biggest share of BBVA’s earnings, after net annual profits there rose from €1.69bn to €1.81bn.

                      Spain, in contrast, saw net profits drop from €1.16bn in 2012 to €583m. The bank said earnings in its home market had been “strongly affected” by a court decision to ban interest rate floor clauses on mortgages, and by provisions related to the reclassification of the bank’s restructured loan portfolio.