Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Property

Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Archive | November, 2016

Tokyo’s Hotel Okura says polite goodbye

Posted on 31 August 2015 by

Violinist Ryosuke Suho plays the violin during a "Finale Concert" at the main lobby of Hotel Okura in Tokyo, Monday, Aug. 31, 2015. The Hotel Okura, a favored Tokyo lodging for U.S. presidents, movie stars and other celebrities, is closing the doors of its iconic, half-century-old main building after the concert to make way for a pair of glass towers ahead of the 2020 Olympics. (AP Photo/Shizuo Kambayashi)©AP

Violinist Ryosuke Suho plays the violin during a finale concert in the lobby of Hotel Okura in Tokyo on Monday

Even with the end in sight, its future measured in minutes and its lobby swarming with nostalgia junkies, the noise volume in the Tokyo’s iconic Hotel Okura barely rose above a murmur.

    For more than five decades, the low-lit, low-rise hotel in the heart of the Japanese capital has had this effect on visitors: normalising the sotto-voce exchange, discreetly imposing discretion, draining brashness from the world outside with dun carpets, thick whisky tumblers and wood panelling and seducing with its aura of the 1960s.

    But none of this has ensured the Okura’s survival in its current form. Earthquake-proofing standards have been tightened, cheap Y3,000-a-night business hotels and high-end competitors dominate the Tokyo market and Japan’s relentless tradition of demolish and rebuild is claiming another citadel.

    At midnight on Monday, the lights of the lobby went dark and Okura staff, with unflinching politeness, asked the last of the visitors to leave. Outside, a ripple of applause followed the extinguishing of the front lights as the concierge strung rope across the revolving front doors for the last time and bowed.

    Petitions, mostly signed by non-Japanese, had attempted to save the hotel from the bulldozers — it has long been a favourite with diplomats from the US embassy just around the corner.

    “Japan renews everything all the time, but it would be good if just a few things could remain in place forever,” said Tatsuko Fujii, a Tokyo resident who had previously written to the Okura management to demand a stay of execution. “They may preserve some of the furniture and put it in the new place, but it can never be the same.”

    But most locals, despite a last heave of sentiment on its final night, appear to accept that the Okura must follow the rest of Tokyo down a path that has built higher and stronger with every passing year.

    Japan renews everything all the time, but it would be good if just a few things could remain in place forever

    – Tatsuko Fujii, Tokyo resident

    Constructed two years ahead of Tokyo’s 1964 Olympics and designed by Yoshiro Taniguchi, the Okura was a prominent symbol of the city’s post war revitalisation.

    For foreigners — a historic guest list that includes seven US presidents, film stars and blue-chip corporate leaders — it has been the epitome of a Japan imagined from afar: impeccably mannered, obsessively aesthetic and stubbornly eccentric.

    For Japanese, it was a place where the best of Japan continued to be done better than anywhere — an irresistible relic from a moment in history when the country put wartime defeat in its past and regained the old conviction that it was world class.

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    The Fast Lane

    Let’s save a masterpiece

    This picture taken on August 29, 2015 shows the main building of Japan's iconic Hotel Okura in Tokyo. Tokyo's sixties-era modernist masterpiece Hotel Okura, host to US presidents, royalty, celebrities and spy James Bond, turns off the lights of the main building on August 31, more than a half century after its opening heralded Japan's post-war coming out party. Despite an outcry from architectural preservationists, the fabled property shuts its doors for a four-year makeover that will give way to a gleaming high-rise hotel, the latest heritage building to see the wrecking ball in the ultra-modern Japanese megalopolis. AFP PHOTO / Yoshikazu TSUNO (Photo credit should read YOSHIKAZU TSUNO/AFP/Getty Images)

    The Okura in Tokyo — the last great 1960s original in that city  and one of the most loved modernist hotels in the world — is to be ripped down

    On Monday night, in the hours before the pentagon-leafed chandeliers of the Okura’s main wing were finally dimmed to black, hundreds of Japanese came for a final glimpse.

    Some were close to tears. Some recalled breakfast visits taken as children to the café. A former hostess had come to relish the memory of drinks with clients in the thick air of the Orchid Bar in its 1980s bubble heyday. Two brothers, now in their late 50s, recalled the day that their father sold the family textile business with a handshake over a table in the hotel’s sushi restaurant.

    The demise of the Okura’s main building, along with its modernist lobby, its retro corridors and now badly outdated guest rooms, will make way for a $1bn modernisation project, timed for completion ahead of Tokyo’s 2020 Olympics and masterminded by Yoshio Taniguchi, the original architect’s son.

    Crunch time for insurers on capital rules

    Posted on 31 August 2015 by

    (Photo by Carlo Allegri/Getty Images)©Getty

    It is crunch time for Europe’s insurers. A long-awaited overhaul of financial safety standards is within sight, with far-reaching implications for the €8.4tn industry.

    Investors would be forgiven for assuming that only minor details need to be finalised before the new regime takes effect in four months. After all, regulators have spent more than a decade planning it.

      No such luck. Shares in Delta Lloyd have plunged 43 per cent after the Amsterdam-listed insurer said this month that its financial headroom under the new rules would be tighter than previously disclosed.

      Its larger rival Aegon, which owns the US insurer Transamerica, also said that its capital surplus would be lower than expected. Aegon’s shares have lost 23 per cent this month.

      The warnings have investors in other European insurance companies wondering whether they too are in for nasty surprises before the reforms, known as Solvency II, kick in at the start of January.

      Igotz Aubin, head of prudential regulation at the trade body Insurance Europe, says many executives “are extremely concerned about the pressure which insurers face due to additional last minute requirements”.

      Allianz, Axa and Aviva are among hundreds of companies that need to comply with the shake-up.

      Executives at several big insurers have said that the new rules, designed in the wake of the financial crisis to ensure companies have strong financial buffers so they can meet claims, should be manageable. Yet behind the scenes, the industry is on tenterhooks. “They’re all absolutely petrified,” says a Solvency II consultant at a big four firm.

      Brussels policymakers agreed the basis of the regulations months ago. But they set a tight implementation timetable. National supervisors still need to specify the capital requirements for each big insurer by taking into account the particular risks they run.

      Regulators need to approve each company’s “internal model”, which amounts to sifting through gigabytes of arcane detail about their risk exposures. Without being able to use the bespoke version, companies must fall back on the cruder “standard formula” laid down by regulators, which may oblige them to hold more capital.

      Watchdogs also need to grant insurers permission to use other crucial mechanisms that give them further relief from the most onerous regulatory demands.

      Executives are holding crunch talks with their regulators to get the green light. But so far, only Germany’s Hannover Re, has secured model approval.

      The disclosures by Delta Lloyd and Aegon underline the risks.

      In particular, the warning from Delta Lloyd, which wrote almost €4bn of policies last year, has sparked concerns that the insurer may need to tap shareholders for more cash even though it raised €340m in an equity issue in March.

      Soon after the fundraising, the company said it held at least 70 per cent more capital than the minimum required under Solvency II. But this month it warned the ratio had dropped to less than 40 per cent.

      Investors get nervous about low ratios, and most companies target surpluses of at least 60 per cent. Reduced headroom means regulators are more likely to question insurer business models — potentially constraining expansion and dividend payouts.

      Delta Lloyd blamed a more cautious stance by the Dutch regulator of its “operational risks”. The watchdog is requiring it to use the “standard formula” to cover such risks.

      Aegon, which had previously estimated its capital surplus under Solvency II to be 50-100 per cent above the minimum, cautioned that this had deteriorated to 40-70 per cent.

      Analysts say this is because regulators have made more conservative assumptions about Aegon’s operations in the US, the UK and the Netherlands.

      Aegon’s difficulties are not as acute as Delta Lloyd’s. Still, says Ashik Musaddi, analyst at JPMorgan Cazenove, the group’s ability to return capital to shareholders could be undermined.

      There are reasons to suspect the Netherlands is a special case. Although Solvency II is supposed to harmonise rules across the EU, the framework also gives considerable power to national authorities.

      Executives regard the Dutch regulator as particularly tough — partly a legacy of the financial crisis. As recently as 2013, the Dutch government had to nationalise SNS Reaal to safeguard the financial system.

      “The Netherlands are a tough insurance market — supervised by a tough regulator,” says Claudia Gaspari, analyst at Barclays.

      Despite the uncertainty surrounding the outcome of Solvency II, analysts do not expect many insurers to have to raise additional capital solely because of the new regime. Even so, not all are convinced the risks are confined to the Netherlands. “Be prepared for volatility,” warns Niccolò Dalla Palma at Exane BNP Paribas of the next few weeks.

      Share prices across the sector are vulnerable, says Gordon Aitken, analyst at RBC Capital Markets. “We see risk skewed to the downside from Solvency II,” he says. “Even in the best-case scenario of a benign result, we do not expect share prices to react positively.”

      The secret nature of the talks between insurers and regulators — supervisors have forbidden executives from discussing the approval process publicly — has made it difficult for investors to determine which companies are at particular risk.

      We see risk skewed to the downside from Solvency II. Even in the best-case scenario of a benign result, we do not expect share prices to react positively

      – Gordon Aitken, RBC Capital

      Yet there remain concerns about the UK, even though Sam Woods, the Prudential Regulation Authority’s director of insurance supervision, said in a speech last month that the watchdog had no plans to use the new rules to force the industry to raise capital.

      Mr Aitken says that annuity writers in the UK are most at risk from unfavourable regulatory rulings. Last week, advisers at PwC, the professional services firm, cautioned that prices of “bulk annuities” were set to jump because of Solvency II.

      The PRA, which is scrutinising the models of about 20 insurers, does not plan to say which have been approved until December — shortly before the regime begins to take effect.

      “This is a very important time for the companies,” says Hugh Savill, director of regulation at the trade body the Association of British Insurers. “It’s heads-down time to get the approvals through.”

      Jim Bichard, ‎partner at PwC, says: “Whatever happens, Solvency II has been and continues to be a huge distraction.

      “Regardless of the outcome, people have expended a huge amount of resources, effort and time on this.”

      Getting to grips with Solvency II

       

      The EU’s Solvency II reforms aim to improve protection for policyholders by bolstering insurers’ resilience against shocks — the kind of catastrophe or financial market crisis forecast to happen once every 200 years. The changes standardise a piecemeal approach to insurance regulation in different European countries.

      Similar in some respects to the Basel III rules for banks, the regime introduces a more sophisticated way of determining capital requirements for insurers. Under Solvency II, regulators consider the risks of all parts of insurance balance sheets. The highly-complex exercise involves estimating each company’s potential liabilities — how much they could be on the hook for policyholder claims — and the value of their financial assets in times of stress.

      The regime also shakes-up corporate governance and disclosure standards.

      Insurers have said they broadly support the principles but are concerned about how the system will work in practice.

      After intense industry lobbying, policymakers in Brussels made several concessions to address insurers’ biggest fears.

      Parts of the industry have been given 16 years to fully comply. This is particularly important for life insurers in Germany, some of which would become insolvent if they had to comply with all of the new rules immediately because of the nature of the policies they provide.

      Yet the industry has many gripes. These include red tape: the disclosure requirements mean insurers need to provide regulators with dozens times more information than at present.

      European insurers are also concerned that it will put their businesses in overseas markets, such as the US, at a disadvantage to local rivals.

      FCA looks into Aviva-Friends Life tie-up

      Posted on 30 August 2015 by

      A pedestrian passes a sign outside ''St Helen's'', the headquarters of Aviva Plc in London, U.K., on Tuesday, May 8, 2012. Aviva Plc, the U.K.'s second-biggest insurer, said Andrew Moss quit as chief executive officer after presiding over an almost 60 percent fall in the share price over the last five years and a row over pay.©Bloomberg

      The UK finance regulator is looking into leaks and abnormal share price rises before Aviva’s £5.6bn merger with Friends Life was announced in December and has asked advisers on the deal to hand over records.

      The Financial Conduct Authority is asking investment bankers on the deal to disclose whether they had any contact with anyone to discuss the merger ahead of its announcement, said people familiar with the case.

        Friends Life’s shares rose about 17 per cent in the month before the deal was leaked to the press in November last year, having fallen 14 per cent since the start of 2014. Its deal with Aviva was the largest takeover announced last year of a UK-listed company, and at the time, the biggest acquisition of an insurance company in the UK in 14 years.

        While insiders said that the FCA’s actions were common in large public takeovers, the development indicates that the regulator is still focusing on market abuse, despite devoting years to major investigations of foreign exchange markets and interest rate rigging.

        “It’s very doubtful that there wasn’t insider dealing in the period during the Libor and forex investigations,” noted Arun Srivastava, a regulatory lawyer at Baker & McKenzie in London.

        While not all price spikes before deal announcements are the result of market abuse, they do raise red flags for the watchdog. Typically, the FCA will track abnormal price movements before deals and review any spikes before information becomes public. It will also review who was on insider lists and the brokers who handled any suspicious trades, to see who their clients were. This process can take months.

        Five years ago, the FCA’s predecessor, the Financial Services Authority, announced a clampdown on conversations between bankers and reporters. It said that contacts should be screened, and press inquiries sent to media relations personnel to prevent insider information from leaking out. That move coincided with a crackdown on market abuse by the regulator, which found abnormal price movements before more than 30 per cent of all deal announcements in 2009.

        Suspicious trading before deals have been announced are now at a historic low in the UK, with abnormal price movements detected before 13.9 per cent of announced transactions in 2014, according to the FCA. That compares with 15.1 per cent of transactions in 2013.

        However, the FCA is also now pursuing fewer insider trading cases partly because the regulator’s enforcement team has been focused on the long-running investigations into the manipulation of Libor, forex and other benchmark rates.

        Friends Life was advised by Barclays, Goldman Sachs and Linklaters, while Aviva used JPMorgan, Morgan Stanley and Allen & Overy. All declined to comment.

        With reporting by Caroline Binham, Arash Massoudi and Jim Brunsden

        Strong sales power Smith & Wesson

        Posted on 28 August 2015 by

        Shares of Smith & Wesson advanced on Friday after it lifted its full-year forecast and reported better than expected first-quarter results.

        The gun manufacturer expects full-year fiscal 2016 earnings in the range of $1.14 to $1.19 a share, compared with its previous projection of $1.02-$1.07 and topping estimates for $1.06 a share.

          Smith & Wesson lifted its sales forecast to $610m-$620m, against estimates for $612.6m.

          Profits for the three months to the end of July were $14.4m, or 26 cents a share, compared with $14.6m, also on 26 cents a share, in the same period a year ago. Sales rose 12 per cent to $147.8m.

          Analysts had forecast earnings of 15 cents on sales of $143m. Adjusting for one-off items, earnings of 32 cents a share beat expectations.

          “The combined results of our firearms and accessories divisions indicate to us that consumer demand and the preference for our products was stronger than anticipated,” said James Debney, chief executive.

          Shares of Smith & Wesson, which have advanced more than 86 per cent this year, jumped 11.2 per cent to $18.03 by the close.

          GameStop, a video game retailer, fell more than 8 per cent to $42.49 after analysts at Benchmark downgraded the stock from “hold” to “sell” with a price target of $29.76.

          “We believe the company’s core business model, the physical distribution of hardware, software and used product through a traditional retail network, will be increasingly displaced from growing consumer adoption of digital, streaming and subscription content service channels and the competitive pressure from mobile platforms, an ecosystem we anticipate will extend to the living room,” said Mike Hickey, analyst.

          The downgrade arrived after second-quarter profits came in at $25.3m, or 24 cents a share, on sales of $1.76bn — in line with analysts’ expectations. Same-store sales rose 8.1 per cent, ahead of forecasts for a 1.7 per cent gain.

          Amgen nudged up to close at $155.89 after the US Food and Drug Administration approved Repatha, its cholesterol drug.

          Shares of United Continental enjoyed a tailwind from the S&P 500, after S&P Dow Jones Indices said the airline group would replace Hospira on the benchmark index after the market close on September 2.

          Hospira, a maker of injectable drugs, is being acquired by Pfizer in a transaction that is expected to be completed on or about that date.

          United Continental, whose shares climbed more than 7 per cent to $57.12, will join American Airlines, Delta and Southwest in the S&P 500.

          After two days of gains US stocks were mixed on Friday following a lacklustre trading session in Europe. The S&P 500 energy index was the best-performing sector, rising 2 per cent on the back of a rally in oil prices.

          The S&P 500 ended the day almost flat at 1,988.87, the Dow Jones Industrial Average nudged down to 16,643.01, and the Nasdaq Composite was up 0.3 per cent to 4,828.33.

          mamta.badkar@ft.com

          Twitter: @mamtabadkar

          Volatile markets: Questions every investor needs to ask

          Posted on 28 August 2015 by

          The turnover figures and a graph showing the movement of the Hang Seng Index is displayed on a screen at a securities brokerage in Hong Kong, China, on Monday, Aug. 24, 2015. Hong Kong's snowballing stock losses are, by one measure, the most extreme since the crash of 1987. Photographer: Jerome Favre/Bloomberg©Bloomberg

          Billed as the “Great Fall of China”, stock markets around the world plunged on Monday in response to fears that China’s economic growth was running out of steam — only to bounce back and recover their weekly losses by Friday.

          In a rollercoaster week for investors, the FTSE 100, S&P 500 and FTSE Eurofirst 300 all briefly went into correction territory — a fall of more than 10 per cent — but stock markets in Germany and emerging markets witnessed falls of 20 per cent or more from their peaks due to their greater exposure to China.

            See-sawing stock markets were accompanied by better than expected economic data from the US, underlying the dilemma facing central banks over whether to raise interest rates.

            Some economists argue that this backdrop has increased levels of skittishness in the markets, pointing to the potential impact of a rate rise on global liquidity. While this week’s events are being described as a correction, rather than a crash, the global outlook from economic forecasters can best be summed up as “fear, but not panic”.

            For private investors taking stock of their portfolios, here are the questions you need to ask as you prepare to navigate future volatility:

            How worried should investors be about events this week?

            China was the catalyst for this week’s sell off. The Shanghai Composite Index slumped on “Black Monday” after Beijing enacted a surprise currency devaluation, followed on Tuesday by cutting interest rates.

            AudioGlobal stock market volatility and private banks’ digital push

            Claer Barrett and guests discuss the aftermath of ‘Black Monday’ in Chinese markets for private investors, and how the digital revolution is finally reaching the world of private banking

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            While markets elsewhere have largely rebounded, the Shanghai index finished 8 per cent lower on the week.

            Traders can play the short-term markets, but investors need to think long term. This week, advisers urged investors not to panic, to take any actions in stages, and consider how to diversify their holdings.

            Data from trading platforms show that private investors used the volatility to buy into some of the UK’s biggest listed companies.

            The Share Centre reported three times the usual amount of trading activity on Monday, with 42 per cent of trades being FTSE 100 listed stocks. Lloyds, GlaxoSmithKline, BP and Royal Dutch Shell were its most popular traded stocks on that day, but overall 45 per cent of orders were buys, and 55 per cent were sells.

            A week of turmoil

            How the FT reported the crisis

            Turbulent markets frazzle investor nerves


            China sets tone for latest stomach-churning day in global markets

            China-led market distress echoes taper tantrum


            China-led market distress echoes taper tantrum

            ‘Summer stock sale’ lures managers after market rout


            Buying opportunities emerge from ‘Black Monday’ slump

            Investors urged to avoid panic moves as markets plunge


            Investors urged to avoid panic moves as markets plunge

            China stocks sink lower as rout intensifies


            Asian markets start to decouple, undeterred by falls overseas

            It was a similar story at direct-to-consumer investment platforms including Barclays Stockbrokers and TD Direct — though a survey of more than 8,000 clients of Interactive Investor carried out for FT Money showed that 78 per cent had not been tempted to buy stocks, bonds or funds as the markets fell.

            Mike McCudden, head of derivatives at Interactive Investor, says: “The panic button has not been pushed by ‘have and hold’ investors.”

            Looking forward, equity markets — and “bond proxies” in particular — still look overpriced. Commodities are cheap for a reason, as prices have been driven down by declining demand from China, though brave contrarians may now be sizing up the sector. Many investors may choose to sit on cash, and wait for bigger falls to bring more attractive buying opportunities.

            Which areas suffered the most?

            The FTSE 100 was hit harder than many other developed market indices because of its overseas-facing companies, many of which are exposed to China and other emerging markets. Its largest names include miners and oil companies, categories that have suffered far more than companies focused on UK consumers.

            While the index has bounced back, this week’s events were a wake-up call for those invested in passive funds that track the market.

            “You may be happy that over the long term it will even out, but investors need to be aware that passive funds are large-cap dominated and will hold many companies that have already risen in value,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.

            “There is a real risk of a hard landing for China and therefore we think there is scope for further losses on commodity funds and emerging market investments despite the already significant declines,” says Jason Hollands, managing director at Tilney Bestinvest.

            Which investments provided the best insulation?

            Active managers of UK equity funds shielded investors from the worst of this year’s market turmoil, with almost seven in 10 performing better than the falling FTSE 100 and FTSE All-Share indices.

            FT poll: Investors show caution

            The turnover figures and a graph showing the movement of the Hang Seng Index is displayed on a screen at a securities brokerage in Hong Kong, China, on Monday, Aug. 24, 2015. Hong Kong's snowballing stock losses are, by one measure, the most extreme since the crash of 1987. Photographer: Jerome Favre/Bloomberg

            ● 78% Say they have not been tempted to buy stocks, bonds or funds as the markets fell

            ● 51% Believe this week’s volatility is a “temporary correction”

            ● 15% Believe it signals “the start of the next crash”

            Source: Interactive Investor.
            Poll of over 8,000 Interactive Investor clients — typically UK-based self-directed investors — was carried out this week on behalf of FT Money

            A focus on the UK domestic economy has saved many funds from a battering at the hands of international markets. Before this week’s volatility, funds such as Standard Life’s UK Opportunities and UK Ethical funds each shed about one per cent over the past month, according to figures from FE Analytics, even as the FTSE 100 dropped 7.2 per cent.

            Two Miton funds, UK Value Opportunities and Undervalued Assets, each declined by less than four per cent over the same period. All four of these funds made returns of at least 10 per cent over the past year, even as the FTSE 100 was down 10.9 per cent. The Miton Undervalued Assets fund has a particularly strong record over three years, returning 80 per cent to investors over that period and placing it in the top 1 per cent of funds.

            “We’ve seen wages growing ahead of inflation and now consumers can make the decision to spend that on things like TVs and cars. We are overweight companies that benefit from that,” says Henry Flockhart, investment director at Standard Life.

            Similar patterns are evident across UK actively managed equity funds, according to statistics from Hargreaves Lansdown and Lipper. A focus on domestic-facing stocks rather than FTSE 100 mega-caps has helped 60 per cent of active funds to beat the highest-performing tracker over six months, and almost 70 per cent over the past three months, according to Lipper.

            Jake Moeller, head of UK and Ireland research at Lipper, notes that UK equity income funds had fared well thanks to their naturally defensive positioning, while utility stocks have also helped many of the better-performing funds.

            “Some fund managers have eschewed utilities because of the level of state ownership but anything which has exposure to inelastic demand is going to be much more buoyant at the moment,” he says.

            Where do fund managers sense buying opportunities?

            Mr Flockhart at Standard Life Investments says he was looking this week to add to his existing holdings in FTSE 100-listed Burberry, the luxury fashion retailer, which has seen its shares slide by almost 28 per cent since its peak in February thanks to its exposure to Asian markets.

            “That’s obviously been hit by the slowdown but it’s the kind of long-term story that we’d still be happy to add to. It’s about the middle classes in emerging markets and it’s away from the infrastructure-driven growth that we’ve seen,” Mr Flockhart says.

            Georgina Hamilton, co-manager of the Miton UK Value Opportunities and Miton Undervalued Assets funds, says lower stock prices had enabled her to top-up holdings in domestically focused UK companies with strong balance sheets.

            The Miton managers have favoured companies in areas such as home maintenance and improvement, and retailers such as JD Sports. They also hold housebuilders such as Bellway and Barratt. This is a sector that the Standard Life managers also view positively, holding stocks such as Galliford Try and Crest Nicholson. They have been using the market turbulence to top up their holdings.

            “Our large overweight in the housebuilding sector has worked very well for us, particularly since the general election [in May],” says Lesley Duncan, investment director at Standard Life.

            However, it is hard to find a fund manager who thinks that oil or mining stocks are cheap.

            “A number of oil companies and miners have looked overly leveraged to us, with too little cash flow in the context of their leverage,” adds Ms Hamilton. “They need not only to be cheap, but have a strong balance sheet.”

            Further afield, global asset managers say European equities look more attractive.

            “For investors, one key takeaway is that selling has restored value in some areas of the market, particularly in Europe,” says Russ Koesterich, global chief investment strategist at BlackRock, the world’s largest asset manager.

            Companies exposed to global trade, especially in Germany, have been particularly punished, he says, leading to German stocks now trading at less than 12 times forward earnings and 1.5 times book value — about 45 per cent lower than the US market.

            Deutsche Asset & Wealth Management says it also saw value in European equities, but was more cautious about emerging markets, which have been most directly affected by China’s turmoil.

            Some managers were even more cautious, however. F&C’s multi-manager team, headed by Rob Burdett and Gary Potter, says the current “heightened volatility . . . does create opportunities for investors, but for the moment we are staying patient and not significantly adding to positions”.

            Should I panic about my pension?

            Savers who do not have to access their pension for a number of years have been advised to sit tight as losses should be recouped over the longer term, but those who have entered drawdown have more to fear.

            Pension provider Hargreaves Lansdown has put together an action plan for retirement savers in drawdown plans. The first thing it suggests is for pensioners to keep at least one year’s income in cash in their pension plan, to serve as a buffer during extreme markets.

            Pensions — which way now?

            Arrows

            George Osborne’s pensions revolution has given millions of retirement savers more choice than ever over how they gain access to their savings — but the chancellor might not stop there. Following the introduction in April of new pension freedoms for the over-55s, Mr Osborne has turned his attention to the billions of pounds in tax incentives given each year to encourage retirement saving.

            Continue reading

            Hargreaves also recommends limiting withdrawals from a drawdown plan. “Falling markets could have a significant impact on those drawing too much from their pension plans,” says Danny Cox, head of financial planning at Hargreaves. “Spend too much and the drawdown plan can suffer irreparable damage.”

            The third piece of advice is for savers to draw income from the underlying assets in the plan not the capital, to avoid exacerbating losses. “Investors who stick to a natural yield strategy should be better placed to navigate choppy waters,” says Mr Cox.

            The fourth point is a rudimentary one: ensure your portfolio is diverse and balanced with a mixture of assets including cash, fixed interest products and shares to protect it during market falls.

            What about bonds?

            Bonds tend to do well during times of market volatility, particularly those in perceived “havens” such as UK and German government bonds. Prices in both markets rise when investors are worried about the rest of the market.

            Yields on ten-year UK gilts, the market benchmark, fell below 1.7 per cent this week, although they have since climbed back to 1.9 per cent as the situation calmed.

            If wider market volatility continues and investors push back their expectations for interest rate rises in the US and UK, then money could keep pouring into gilts, meaning that yields will keep tracking down.

            Investors who have taken more risks with their money, putting it into, say, emerging market bonds, will have experienced a difficult week. According to JPMorgan, total returns on emerging market bonds denominated in local currencies are now down by 12 per cent in the year to date.

            Nevertheless, it is notable that bonds have not experienced the same drama as equities, commodities and currencies. Where prices go from here will depend on what China and the US do next.

            Merryn Somerset Webb

            Low interest rates are the problem, not the solution

            Merryn Somerset Webb, byline picture

            Regular readers will know that this is the time of year when I get back from holiday and head for the Edinburgh Festival. There I sit through a large number of shows, some good, some utterly awful and wait for somebody on some stage or the other to say something interesting I can tell you about. This year I got lucky. I didn’t have to wait long at all. The first show on my list was a collaborative theatre project by Theatre Uncut. It contained various rants against capitalism, austerity, bankers and the bank bailouts of the financial crisis (all standard festival themes since 2009).

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            Will volatility delay an interest rate rise?

            Regulators in the US and UK have dropped hints that the turmoil is likely to push back a rise in interest rates. Predictions that Federal Reserve would raise US interest rates in September are looking shaky: William Dudley, a top Fed official, told a conference this week that the case for tightening monetary policy as early as September “seem[s] less compelling to me than it was a few weeks ago,” though his comments were followed by stronger-than-expected economic data.

            The speed of a UK rate rise had already been a matter of debate after only one member of the Bank of England’s Monetary Policy Committee voted for a rise this month. The volatility on stock markets is likely to reinforce such a view.

            Another reason to think rates may stay at their record lows is the recent drop in the oil price. Placing aside Thursday’s “short squeeze”, falling commodities prices mean economists are reviewing their earlier expectations of inflation rises towards the end of the year. For now, consumer price indices may well remain flat or even retreat into deflation territory, discouraging a rate boost.

            What could this mean for the property market?

            Mortgage lenders have been showing little consensus in recent days over the direction of the market. Ray Boulger, technical director at broker John Charcol, says: “Some lenders have been putting rates up a bit; some have been putting them down; some have been putting some up and some down.”

            But in the medium term, the longer the wait for a Bank of England rate rise, the longer borrowers have to take advantage of record low interest rates on fixed-term mortgages.

            Chart that tells a story — the rush to remortgage

            Chart: UK mortage lending

            The chart shows the latest data up to July from the British Bankers’ Association on lending for house purchases, remortgaging and other secured lending. It reinforces the picture of a strongly rising mortgage market, with particularly lively activity in the remortgaging segment.

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            “It does seem to me that the first rise in the bank rate has got to be put back, so from a cost point of view that has to be an advantage,” Mr Boulger says.

            Property observers have speculated on the impact of Asian turmoil on the demand for top London property among overseas buyers, traditionally a key part of the capital’s prime market. But rather than constraining demand, some believe the events of the past week will stoke it, much as the eurozone crisis of 2010 brought an influx of Italian, French and Greek buyers to London.

            Grainne Gilmore, Knight Frank head of UK residential research, says there had been an intensification of interest from Chinese buyers. “The extra volatility has enhanced London’s reputation as a safe haven property market.”

            Yolande Barnes, head of Savills World Research, agrees that wealthy overseas buyers looking to diversify their portfolios could give a boost to the top end of the London market. But the effect would be small and balanced by slower wealth creation and lower levels of investment. “Ultimately, the net effect is likely to be neutral.”

            Reporting by Judith Evans, Claer Barrett, James Pickford, Lucy Warwick Ching and Elaine Moore.

            RBS to scrap ‘teasers’ on home insurance

            Posted on 28 August 2015 by

            Les Matheson, head of retail banking at RBS.©FT

            Les Matheson, head of retail banking at RBS

            Royal Bank of Scotland is scrapping “teaser” rates on home insurance in another move to stamp out unfair charges, as part of a plan to simplify the lender and retain customers.

            The state-backed bank is to implement a strategy of offering its best price on home insurance to customers, fixed for three years.

              The changes mark a departure from the industry practice of providing an attractive price in the first year, then introducing a sharp rise on renewal.

              The move by RBS follows seven successive net annual losses and the threat from “challenger” banks that have emerged since the financial crisis, such as TSB and Virgin Money.

              Les Matheson, head of the retail bank, is calling on the regulator to take action. He told the Financial Times: “I think regulators should be doing more to make it easier for customers to do the right thing for them.

              “There are so many promotional prices that it can be confusing for customers and hard for them to understand.”

              RBS said 70 per cent of insurance customers did not shop around for a policy, leaving them exposed to a jump in policy costs when renewing after the first year.

              The bank’s new policy on insurance comes into force across both RBS and NatWest from September 9 and could prompt insurance companies to take similar action, Mr Matheson said.

              Scrapping introductory insurance fees that lure customers to change banks comes after Ross McEwan, chief executive of RBS, banned so-called teaser rates on savings products and zero per cent balance transfers on credit cards last year.

              Mr McEwan said at the time that while such teasers might encourage people to switch banks, they “send a terrible message to loyal customers” and that the move to ban such unfair charges was aimed at rebuilding trust.

              Many other banks are becoming more aggressive in offering teaser rates in an attempt to win customers. Figures from Moneyfacts show there were 96 credit card balance transfer deals in August 2009, which has now increased to 133.

              Mr Matheson said zero per cent balance transfers were often a “misnomer” because of the fees that were frequently bolted on.

              There are so many promotional prices that it can be confusing for customers and hard for them to understand

              – Les Matheson, head of the retail bank

              But mortgages are now coming under scrutiny, he added, because it is hard for borrowers to compare the best deals when rates and fees are presented separately.

              Mr Matheson said the bank was working with the Council of Mortgage Lenders to launch an industry standard. “We need to try and find a way for customers to make a comparison. Often best-buy mortgage rates are shown, but not the fees.”

              RBS’s share of the total mortgage market sits at 8.3 per cent, rising towards its 12 per cent target.

              Mr Matheson is also taking aim at the payday lending sector, to provide options for customers who might otherwise turn to short-term, high-cost loans, as the sector comes under pressure from stringent regulations.

              The bank has offered 650,000 customers an overdraft charging a standard annual percentage rate of 18-20 per cent, as an alternative to taking out a fast loan.

              70%

              Portion of customers who do not shop around for an insurance policy

              It comes as the number of payday lenders is expected to diminish from 400 to only a handful, after the financial watchdog set a cap on the amount of interest that can be charged at the start of this year.

              Digital innovation is another area of focus for the bank, with mobile phone “exploding” in popularity as a banking channel, Mr Matheson said.

              However, the bank came under scrutiny after its IT systems failed in June, which led to delays to 600,000 customer payments and direct debits. On Friday, rival bank HSBC suffered a technical problem that hit 275,000 customer payments ahead of the bank holiday weekend.

              “There are thousands of different underlying systems and processes, and we are upgrading them,” Mr Matheson said. Following a similar meltdown in 2012, RBS has separated its systems and created a back-up for the most critical functions.

              “For any industry underpinned by technology, we are constantly upgrading and improving the systems we have,” he added.

              Chart that tells a story — the rush to remortgage

              Posted on 28 August 2015 by

              Chart: UK mortage lending

              What does this show?

              The chart shows the latest data up to July from the British Bankers’ Association on lending for house purchases, remortgaging and other secured lending. It reinforces the picture of a strongly rising mortgage market, with particularly lively activity in the remortgaging segment.

                How fast is the rise?

                Mortgage approvals overall were 15 per cent higher than in July a year ago. Loans for house purchase were up 11 per cent and remortgaging was up by 29 per cent — the highest level for four years.

                The trend was backed by regional data published this week from the Council of Mortgage Lenders (CML). Remortgaging grew across all UK regions: in London it was 13 per cent higher on the month and 12 per cent over a year earlier; in Wales it was 16 per cent up on 2014, while loans to first-time buyers and house purchasers had dropped.

                What’s behind the surge?

                Richard Woolhouse, BBA chief economist, said record low mortgage rates were one reason for the rise in remortgage activity. Ultra low bank rates since 2009 have seen interest rates on fixed rate deals plumb new depths in recent years. Moneyfacts, the comparison site, said average two-year fixed rates are at 2.82 per cent, and rates on five-year deals at 3.29 per cent.

                Some offers are far lower. Chelsea Building Society is offering a two-year tracker mortgage at 0.98 per cent, with a £1,675 fee and minimum 35 per cent deposit. HSBC has a two-year discounted mortgage at 0.99 per cent, with a £1,499 fee on a deposit of at least 40 per cent.

                High street lenders have also been competing on the fees that accompany mortgages and loan-to-value ratios, which have grown steadily since the financial crisis.

                Haven’t rates been low for a year or so?

                Yes — and many in the industry have expressed surprise that remortgaging has not picked up before now, given the range of attractive deals on offer. But borrowers have been recalcitrant: figures from the CML show remortgaging was broadly flat following the financial crisis.

                Explaining this sluggishness, brokers said tighter regulation had been a factor, making it harder for people to pass mortgage affordability tests applied by lenders. Borrowers were happy to hold back when they saw no imminent prospect of an interest rate rise and lenders continued to trim their fixed rate deals.

                And that’s changed?

                Are you ready for a rate rise?

                It is no longer a question of if, but when.  This autumn will mark the beginning of the end of the low interest rate era. Soon – potentially as early as next month – the US Federal Reserve is expected to raise its benchmark lending rate for the first time since 2006.

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                Expectations of an earlier rate rise have been building for some time, with hints in the spring that the Bank of England was ready to consider a rise earlier than the markets had expected. The change in mood prompted some lenders to push up rates, though the picture remains mixed and deals are still highly competitive in historical terms.

                “Some lenders are raising their rates and then lowering them again a few weeks later,” said Aaron Strutt, product director at broker Trinity Financial. “Lending targets play a big part in pricing and if the banks and building societies want to attract more borrowers they tend to keep their rates as low as possible.” One big bank warned the broker it would withdraw its lowest rates a few weeks ago, he added, but they remain available.

                Will the remortgage growth continue?

                The figures published by the CML cover the month before the collapse of share prices in China and the global stock market turmoil that this triggered. If one of the knock-on effects of this volatile period is that central bankers put off raising interest rates until things settle down — as some regulators have already hinted — borrowers may feel less urgency about locking in good rates. In that case, the remortgaging renaissance may turn out to be shortlived.

                Two-speed UK housing market returns

                Posted on 28 August 2015 by

                LONDON, ENGLAND - JANUARY 23: Houses are seen on January 23, 2015 in an affluent area of west London, England. The Labour Party has proposed a Mansion Tax under which properties over a market value of 2 million GBP would be subject to a levy. (Photo by Carl Court/Getty Images)©Getty

                A two-speed housing market in the UK is re-emerging, with prices in London, south-east and east England rising at close to double the rate of the country as a whole.

                Official Land Registry data for July show overall prices in England and Wales were 4.6 per cent higher than last year. But this headline figure, which sits right in the middle of the range of private sector indices, conceals substantial regional variations.

                  Prices in the east were up 8.9 per cent on the year, followed by London at 8.3 per cent and the south-east at 8.2 per cent.

                  Prices in the capital are about 40 per cent above their pre-crisis peak, with the cost of an average property at £488,782, according to the Land Registry.

                  Elsewhere price increases remain muted. In the north-east, prices rose just 0.4 per cent year on year, and 1.4 per cent in the north-west. Average prices in the north-east are the lowest in the country, at £100,670.

                  There were also further signs price acceleration was being driven by a property shortage. The number of transactions in May — the latest month for which the Land Registry has transaction figures — continued to slide, down 15.3 per cent year on year.

                  Transactions at the top end of the London market have been hit hard by the increase in stamp duty, but prices have been increasing in previously less fashionable areas.

                  Andrew Bridges, managing director of estate agent Stirling Ackroyd, said it was important to remember that London was a microcosm of the whole country, with its own hotspots, adding that the strongest demand was in the east of the capital.

                  “Here London’s start-up hubs are driving local industry to global heights. And this is reflected in an eastward shift in property prices. Hackney, for example, has seen annual house price growth five times faster than Kensington and Chelsea,” he said.

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                  US funds compare notes on torrid August

                  Posted on 27 August 2015 by

                  Investors gather to check share prices in Shanghai©AFP

                  Investors gather to check share prices in Shanghai

                  The US mutual fund industry’s most famous emerging markets specialists have suffered an August Horribilis, as wild currency swings wiped billions of dollars off the value of their funds.

                  Michael Hasenstab, manager of the $65bn Templeton Global Bond Fund, is down 6 per cent since the start of August, as the tumbling peso hit the value of Mexican government debt, his largest single holding, and other currency bets also faltered.

                    Meanwhile, widely owned EM equity mutual funds from OppenheimerFunds and Lazard have posted losses of more than 12 per cent this month. Managers are urging their investors to look through the current turmoil and telling them they see opportunities to pick up new emerging markets securities at lower prices.

                    “There were clear forced sellers, panic sellers, and fear on Monday,” says Justin Leverenz, manager of the $30bn Oppenheimer Developing Markets fund, arguing that created buying opportunities. “I got very excited.”

                    The moves in emerging markets have been fierce. The FTSE Emerging Equity index has lost more than 10 per cent so far in August, its worst monthly performance since May 2012. JPMorgan’s EM currency index has dropped 3.6 per cent to its lowest level on record, led by tumbles by the Russian rouble, Malaysian ringgit and Colombian peso.

                    Local currency-denominated bonds in the developing world have also suffered as a result, with the Barclays index measuring the performance of these securities sliding more than 6 per cent since the start of the month.

                    With global markets rebounding yesterday, there has been some relief in recent days, but fund managers are still working hard to reassure investors, fearing they could pull some of their money. Mr Hasenstab has produced both a video and a blog post for his investors, telling them he sees a “once in a decade” opportunity in currencies such as the Mexican peso.

                    A deal to restructure Ukrainian government debt, which was more favourable to bondholders than feared, helped his fund. It had 2.2 per cent of its assets invested in Ukraine as of the end of June, and bond prices there soared by one quarter yesterday.

                    As of Wednesday night, Mr Hasenstab’s fund was 96th out of 100 among global bond funds, in terms of performance over the previous month, according to Morningstar data, reflecting his bias towards less developed markets.

                    As well as exposure to the Mexican peso and Brazilian real, the fund has also placed bets for the euro and the Japanese yen to weaken against the dollar, a winning trade that reversed this month.

                    Karin Anderson, analyst at Morningstar, says the Templeton fund is operated more like a global macro hedge fund than a traditional global bond fund. “It is able to make dramatic currency bets, and these will always be a pretty big swing factor,” she says.

                    Losses at stock funds have been even more dramatic. The $11bn Lazard Emerging Markets Equity fund run by James Donald was down 12 per cent at the close of business on Wednesday.

                    According to Morningstar, all the top performing large mutual funds this month are conservative bond funds, mostly those that focus only on the US and are not exposed to currency swings.

                    Doubleline’s $48bn Total Return Fund, run by Jeffrey Gundlach, has notched up a 0.2 per cent gain this month, taking its year-to-date returns to 2.1 per cent. That is only bettered by a handful of equity vehicles that target the healthcare sector, and this month by a few US municipal bond funds.

                    “August has been a differentiator,” Mr Gundlach says. “We weren’t very optimistic on the bond market at the start of the year and January was very strong so we underperformed. But our defensiveness turned out to be the right decision.”

                    Doubleline’s Total Return Fund benefited in particular from avoiding riskier junk bonds that have been beaten up this summer, and from bets on US Treasuries and mortgage-backed securities. The latter have benefited from oil’s slide as it has improved the finances of households, Mr Gundlach points out. “It’s been a safe haven in credit.”

                    The $30bn JPMorgan Core Bond Select fund, managed by Douglas Swanson since 1991, has also held up well in the turmoil and gained 0.9 per cent this year, thanks to avoiding corporate bonds and favouring structured debt and Treasuries. “We don’t want to take large macro risks,” Mr Swanson says. “We’re still going to have a lot of volatility.”

                    Mr Leverenz says he topped up holdings of his favourite stocks during Monday’s market maelstrom, but has kept about 5 per cent of the fund in cash and is prepared for further volatility. While global investors may have suddenly woken up to weakness in parts of the Chinese economy, the larger story remains unchanged. “The Chinese economy is the single largest growth story the world has,” says Mr Leverenz, “and it will persist in being so.”

                    Top 10 actively-managed overall mutual funds, with $10bn or more in AUM, by MTD return

                    Name Type of fund MTD return (%) YTD return (%) Current fund size ($)
                    Nuveen High Yield Municipal Bond High yield municipal debt 0.23 1.39 10,575,617,651
                    American Funds Tax-Exempt Bond US municipal debt 0.23 0.95 10,235,617,509
                    Franklin CA Tax-Free Income Californian municipal debt 0.20 0.63 13,649,148,275
                    Vanguard Interm-Term Tx-Ex Inv US municipal debt 0.19 0.76 43,610,756,277
                    DoubleLine Total Return Bond Broad bond fund 0.18 2.12 48,098,515,397
                    Franklin Federal Tax-Free Income A US municipal debt 0.15 0.55 11,216,686,212
                    Vanguard Ltd-Term Tx-Ex US municipal debt 0.10 0.62 20,912,691,547
                    DFA Five-Year Global Fixed-Income Broad bond fund 0.09 1.42 10,976,841,801
                    Vanguard Short-Term Tx-Ex US municipal debt 0.05 0.27 12,505,863,763
                    JPMorgan Core Bond Select Broad bond fund 0 0.85 29,821,260,876
                    Bottom 10 actively managed US equity funds, with $10bn or more in AUM, by MTD return

                    Name Type of fund MTD return (%) YTD return (%) Current fund size ($)
                    Oppenheimer Developing Markets A Emerging market equity fund -13.08 -17.68 30,694,299,662
                    DFA Emerging Markets Value Emerging market equity fund -12.23 -18.06 14,081,901,900
                    Lazard Emerging Markets Equity Instl Emerging market equity fund -12.06 -17.58 11,226,532,228
                    Vanguard Emerging Mkts Stock Idx Inv Emerging market equity fund -12.05 -14.95 61,177,183,757
                    Fidelity® Select Biotechnology Portfolio US healthcare stock fund -11.62 14.03 17,392,581,242
                    DFA Emerging Markets Core Equity I Emerging market equity fund -11.28 -15.29 13,674,870,527
                    Fidelity® Series Emerging Markets Emerging market equity fund -10.49 -13.93 11,407,707,360
                    Dodge & Cox International Stock Global equities fund -10.13 -8.17 68,597,293,891
                    Invesco Comstock A US equity fund -10.06 -9.04 12,127,276,706
                    Artisan International Investor Global equities fund -9.3 -6.54 20,161,482,049
                    Bottom 10 actively managed US fixed-income funds, with $10bn or more in AUM, by MTD return

                    Name Type of fund MTD return (%) YTD return (%) Current fund size ($)
                    Templeton Global Bond A Broad bond fund -5.62 -6.63 65,311,680,115
                    Loomis Sayles Strategic Income A Broad bond fund -3.64 -6.62 15,688,501,406
                    Fidelity® Capital & Income High yield bond fund -3.1 0.93 11,138,465,414
                    T Rowe Price High Yield High yield bond fund -3.03 -0.23 10,161,697,976
                    American Funds American Hi-Inc Tr A High yield bond fund -3.01 -2.13 17,722,923,789
                    BlackRock High Yield Bond Inv A High yield bond fund -2.47 -0.31 17,200,255,085
                    PIMCO Real Return A Inflation-linked bond fund -2.35 1.92 13,008,128,617
                    Loomis Sayles Bond Instl Broad bond fund -2.25 -5.38 20,448,941,793
                    Vanguard High-Yield Corporate Inv High yield bond fund -1.67 0.44 18,114,169,276
                    Vanguard Inflation-Protected Secs Inv Inflation-linked bond fund -1.51 -1.11 24,423,404,704

                    Ukraine secures debt restructuring deal

                    Posted on 27 August 2015 by

                    Ukrainian President Petro Porochenko (L) and Belgian Prime Minister Charles Michel shake hands as they arrive for a bilateral meeting, on August 27, 2015, in Brussels. AFP PHOTO / BELGA / JASPER JACOBS **Belgium Out**JASPER JACOBS/AFP/Getty Images©AFP

                    President Petro Poroshenko of Ukraine (left) and Charles Michel, Belgian premier, arrive for talks in Brussels on Thursday

                    Ukraine has secured an agreement to avert default and restructure billions of dollars of government debt as the country seeks to repair the damage caused by the loss of Crimea and the continuing war with Russian-backed separatists.

                    A group of the country’s largest creditors, including the US asset manager Franklin Templeton, has accepted an immediate 20 per cent write-off on $18bn of the embattled country’s bonds, at a time when market turmoil triggered by fears for China’s economy has already wiped billions of dollars from emerging markets funds.

                      The deal, hammered out after five months of intense negotiations, includes a freeze on debt repayments for four years.

                      Natalie Jaresko, Ukraine’s finance minister, said she was delighted with the terms, adding that the country had endured a “long and difficult road” to reach the accord with creditors.

                      For Kiev, restructuring private creditor debt is a vital condition for the International Monetary Fund to press ahead with a four-year financial support programme, totalling about $40bn.

                      The agreement comes at a crucial time, with tentative signs that the economy could be starting to stabilise.

                      Although output is still falling, the national currency, the hryvnia, has stopped its steep decline, while inflation — which spiralled above 60 per cent earlier this year due largely to utility price rises demanded by the IMF — is moderating.

                      The deal may also help to shore up waning support for the government in advance of regional elections in October.

                      “The resolution of Ukraine’s debt saga looks like a great success for all parties involved,” said Anders Aslund, an expert on Ukraine’s economy at the Atlantic Council think-tank in Washington. “The IMF has changed the rules of the game as it desired. The bondholders will still do well. Ukraine got the necessary debt relief.”

                      Creditors BTG Pactual, Franklin Advisers, TCW and T Rowe Price, said the restructuring would “allow Ukraine to maintain its access to capital markets and provide the stable economic platform that will help the country to restore growth”, and urged the country’s other bondholders to support it.

                      However, Russia, which owns a $3bn bond due to mature in December, signalled it would not participate in the restructuring deal, creating potential problems later this year.

                      Credit analysts also questioned whether the hard-won proposal would result in solvency.

                      Prices for Ukraine’s bonds jumped in the wake of the announcement, with the price of a $2.6bn bond due in July 2017 rising from 57 cents in the euro to 66 cents. The restructuring provided some relief to Franklin Templeton’s Michael Hasenstab, Ukraine’s biggest private sector creditor.

                      His Templeton Global Bond Fund is down 6 per cent this month, but the value of his biggest Ukrainian holdings surged by 25 per cent because the restructuring was less severe than expected.

                      “This deal is favourable to bondholders,” said Timothy Ash at Nomura.

                      Kiev had originally sought a 40 per cent haircut on creditors’ holdings and the 20 per cent haircut agreed puts it at the lower end of recent sovereign debt restructuring deals, according to academics Christoph Trebesch and Juan Cruces. They calculate that the average sovereign haircut in debt restructuring deals since 1970 has been 37 per cent.

                      The inclusion of a gross domestic product-linked instrument in the deal could also mean creditors gain in the long term despite the immediate write-off.

                      Between 2021 and 2040 investors will receive up to 40 per cent of the value of Ukraine’s annual economic growth above 4 per cent, although total payments will be capped at 1 per cent for the first four years.

                      Christine Lagarde, the IMF’s managing director, welcomed the deal, saying it would restore Ukraine’s debt sustainability, and “substantively” meet the objectives under the IMF-supported aid programme.

                      Donald Tusk, president of the European Council, also backed the deal after a meeting in Brussels with Petro Poroshenko, Ukraine’s president. Mr Tusk added that negotiators had agreed on a new ceasefire in the east — where fighting has escalated recently — to begin next Tuesday.

                      Once plans are submitted to Ukraine’s parliament, a prospectus will be published in mid-September, and bondholders will vote on the restructuring proposal. The timing means that repayment of a $500m bond due on September 23 will be suspended.

                      Additional reporting by Stephen Foley