Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Archive | November, 2016

Insurers give safe drivers pizza

Posted on 22 February 2016 by

Security Iris Scanner on Intense Blue Human Eye©Alamy

Looking ahead: Legal & General is using retina scanning to speed up life insurance applications in India

Pizza, films and music downloads are just some of the rewards that Carrot, a car insurer, offers to responsible drivers.

Insurers have been using telematics to assess customers’ driving for some time but Carrot, along with a number of rivals, is taking this a stage further by using mobile phones rather than “black boxes” in cars to compile data. It also uses mobiles to deliver both immediate feedback on the customer’s driving and — if warranted — the rewards.

Insurers are increasingly under pressure to embrace new technologies, says François Robinet, chairman of Axa Strategic Ventures, as the main components of the industry — capital, dealing with customers and data — are all candidates for disruption. A poll by PwC, the professional services firm, found that 69 per cent of insurance chief executives are concerned about the speed of technological change.


of insurance CEOs concerned about speed of change in technology

Tech initiatives under way in the industry vary. Legal & General is using retina scanning in India to speed up the process of applying for life insurance products. The retina scan immediately brings up personal data that can be used to fill in online forms. Elsewhere, insurers are using information on Facebook and social media when assessing claims. In China, Zhong An (a joint venture between Alibaba, Tencent and Ping An) sells insurance covering individual ecommerce transactions.

Insurers are also using their own data better to price new policies. Aviva has discovered that its pensions customers tend to be safer drivers, so it offers them motor insurance discounts.


committed by insurers to venture capital start-up funds

Many initiatives are developed internally, often in company “labs” devoted to new products and services. But insurers are also looking externally. Some of them, including XL Catlin, Axa, Aviva, MassMutual and Allianz, have set up dedicated venture capital funds to invest in start-ups. Globally, insurers have committed more than $1bn to such funds. This month, Axa Strategic Ventures helped to lead a $55m funding round for Blockstream, which is developing blockchain, or shared ledger, technology.

For many, the real prize technology offers is the opportunity to reduce claims costs. Telematics in motor insurance is one example. If customers have incentives to drive more slowly, there should be fewer accidents. Similarly Discovery, a South African health insurer, offers incentives to customers who work out, tracking their activity via wearable devices. In the US, Beam has extended the principle to dental insurance with bluetooth-connected toothbrushes and an app that tells customers how well they are brushing.

Pharma companies looking at using video games for healthcare

mobile tablet being touched

Neurological conditions such as autism, ADHD and depression may respond to ‘digital therapies’

Technological change has also created a new line of business — cyber insurance. According to Verizon’s data breach investigations report, there were almost 80,000 security incidents affecting companies’ data last year. High-profile attacks on businesses such as Target in the US and TalkTalk in the UK have created concern among executives — and an opportunity for insurers.

In the US, where companies have an obligation to report data breaches to the authorities and customers, insurers often cover the costs but they are still nervous of cyber risks. “[They] are not quite sure of what their exposure might be to a cyber attack,” says Andrew Coburn, of risk analysis specialist RMS.

Nevertheless, the market is expected to grow strongly. “Globally, gross written premium for cyber liability is about $2.5-$3bn,” says Glyn Thoms, of brokers Willis Towers Watson. “But that could be $25bn by 2025.”

More from this report


Telecoms networks are ‘maxed out’


What to expect at MWC


The media sector is worried as ad blocking moves to mobile phones

 RIO DE JANEIRO, BRAZIL- JANUARY 22: Mist hovers around transmission towers on January 22, 2016 in Rio de Janeiro, Brazil. (Photo by Mario Tama/Getty Images)©Getty    
A radical change will be needed to create the internet of things Commodification of smartphones may be the biggest story at telecoms trade show Software companies are accused of running an ‘extortion racket’

Why are millennials property mad?

Posted on 19 February 2016 by

FT Staff Bylines, Jonathan Eley, Editor of FT Money.©Charlie Bibby

The FT captured the millennial zeitgeist with last week’s feature on the spending habits of 20-somethings, but the theme of financial change also resonated in the Eley household.

My children were born just after Y2K, but they have all the millennial traits. I spent my paper round money in Our Price record shops. To the iPad generation, the thought of a paper round seems absurd. They are more likely to spend their pocket money at Nandos, and who buys CDs or DVDs when you’ve got Spotify and Netflix?

    But there is a great anomaly amid all this living for the moment. Millennials may prefer to experience rather than accumulate, but there is one piece of “stuff” they all want to own, even though it costs a fortune and ties them down for decades: a house.

    One reader’s response to last week’s feature summed it up: “My biggest wish is to own my own home and everyone around me says the same . . . Our appetite for pension saving is much lower than owning a property.”

    This is in contrast to past generations, who dutifully put their money into endowment policies and pensions week after week, but had little expectation of home ownership. My dad happened to be visiting last week, and informed us all that he and my mum were only able to buy a house in 1966 because his uncle worked for a building society, which swung their mortgage application.

    Their next home, bought in 1971 during the “Barber boom”, stretched them to the limit. Generations before that had little hope of ownership; my grandmother lived in rented accommodation for all of her 89 years. At my age (mid-forties), my great-grandfather and his family had only just moved out of rented rooms.

    Renting in those days was pretty grim. By and large, it still is; the quality of housing is patchy and decline of social housing has left tenants facing arbitrary rent rises and insecure tenancies. At the same time, credit has become much more widely available — and cheaper.

    During my dad’s 31 years as a mortgagee, the Bank of England’s base rate varied between 5 per cent and 17 per cent. Today it is 0.5 per cent and interest rate futures suggest it could stay there until 2019. Disposable incomes are higher, too; the starting rate of income tax was 30 per cent or more until the late 1980s, and women did not have their own personal allowance until 1990.


    Why millennials go on holiday instead of saving for a pension

    20-somethings feel financially doomed so do not save

    Should millennials save £800 a month into pension? Readers respond
    Thousands join the debate after FT Money story causes Twitter storm

    The fact that buying has become cheaper, easier and more attractive than renting is not the only factor. To many millennials, housing is seen as the key to their long-term financial security. Perception is not reality, of course; for the 47 million Britons who don’t live in south-east England, long-term house price performance has been acceptable rather than spectacular.

    Take my own parents’ house, which is valued at about 4.5 times what they paid for it in 1987. That might sound impressive, but it equates to compound annual growth of 5.3 per cent before inflation. If it were sold now and converted to an annuity, it would generate £15,700 per year (with no inflation uplift). And my dad would still need somewhere to live.

    Yet the siren song of home ownership still seduces young and old. Behavioural economics helps explain why. House prices have risen substantially in recent years. Every lurch higher is faithfully reported by national newspapers and television stations. They are overwhelmingly based in and around London, ground zero for house price inflation and rentier economics.

    By contrast, shares, the main vehicle for modern pension saving, have been volatile. When the stock market makes the evening news or the front pages, it is usually because it has tanked. The FTSE has recovered most its recent losses, but no newsreader has popped up to announce that “billions were wiped back on to markets today as share prices recovered”. You will hear all about Tesco’s accounting scandal, but not that shares in Ashtead, a FTSE 100 plant hire group, have risen 2,000 per cent in seven years.

    Even more significant than the propaganda is the policy. Property has long been tax advantaged: primary residences are exempt from capital gains tax and most of them will soon be exempt from inheritance tax too. Increasing ownership rates has long been a government objective. The sale of council homes reinforced the message that only losers rent. On top of that, Whitehall has a direct vested interest in rising house prices through Help to Buy, since it receives a percentage of a home’s value when it is sold on.

    Millennials may or may not be “annoying”. But their desperation to own property at any cost is more rational than it looks. They don’t need a financial adviser to tell them that they can borrow stacks of money cheaply to juice the returns from an asset whose price has been rising for much of their adult lives.

    They know that the government is so wedded to rising house prices that it will never withdraw the fiscal punch bowl. Choosing between property and pensions — complicated, inflexible products that politicians just cannot stop fiddling about with — is like choosing between fine wine and sour milk. I mean, WTF would you do?

    Jonathan Eley is deputy editor of the FT’s Lex column;

    Lancashire reveals a drop in full-year profits

    Posted on 18 February 2016 by


    Peter Clarke is to join Lancashire as chairman

    Lancashire Holdings reported a drop in full-year profits as premium income fell a third, highlighting the challenges facing specialist insurers in the Lloyd’s of London market and elsewhere.

    Alex Maloney, Lancashire chief executive, on Thursday described the year as “one of the most difficult trading environments during the last 20 years.”

      “Everything’s difficult at the moment,” he added. “The last time it was this difficult was in the late 1990s.”

      The insurer also announced that Martin Thomas, who has been chairman since 2007 will step down at the annual meeting in May. He will be replaced by Peter Clarke, the former chief executive of Man Group, the hedge fund manager, who has been on the board since 2014.

      Lancashire, like other insurers, has had a difficult year as insurance prices have been falling for some time. A relatively low number of large claims, and an influx of fresh capital into the sector via sources such as insurance linked securities, have pushed rates down across the board.

      The insurer, which writes a significant amount of insurance for the energy sector, has also been hit by the falling oil price. It said that renewal prices for offshore energy business fell by a tenth in 2015. Its energy premiums more than halved during the year, partly because some large contracts signed the previous year were not up for renewal.

      However Mr Maloney was hopeful of an improvement. “We believe in the cycle,” he said, adding that the re-emergence of higher claims would force some new entrants to reconsider their positions. “There’s more opportunity when there is dislocation, so our strategy is one of patience and capital preservation.” He said he was already seeing signs that some people were “starting to pull back a bit.”

      The tough environment may continue for a while yet though. In a report released on Thursday, broker Marsh noted that 2016 was likely to be good for buyers of insurance. “Capacity remains plentiful in many markets across Europe, the Middle East and Africa amid continuing competition among insurers. This is presenting those organisations with attractive portfolios and good loss histories with the opportunity to secure premium rate reductions at renewal,” the report said.

      Overall Lancashire’s net premiums written fell from $743m to $482m last year as the company held back top-line growth in the soft market. But the rate of decline in profits was helped by the low claims environment. Pre-tax profits fell by 24 per cent to $172m while the return on equity came in at 10.9 per cent.

      Lancashire returned cash to shareholders over the year. It declared a special dividend of 95c at the end of the third quarter, as well as 15c of ordinary dividends in total. There was no additional special dividend with the fourth-quarter results — analysts at Macquarie had forecast that the company might be able to pay another 60c. In 2014 it paid total dividends of 185c per share.

      Shares in Lancashire closed down almost 2 per cent.

      Should millennials save £800 a month?

      Posted on 18 February 2016 by

      ©Joe Waldron

      Last weekend, FT Money published a piece examining the worsening finances of 20-somethings — Why millennials go on holiday instead of paying into their pension. The response has been phenomenal, sparking fierce debate among readers and generating thousands of comments, tweets, Reddit threads and even follow-up articles raging at the FT’s portrayal of millennials as Uber-loving holiday-taking thrill seekers.

      Within hours of publishing the article online, it probably generated more Twitter sass and cat memes than any piece in the history of the FT. It began with a tongue-in-cheek tweet from the main @FT account, revealing one of the most startling facts in the article:

      More than 10,000 people clicked through that tweet alone to read the article and the 20-somethings the piece was aimed at reacted swiftly on Twitter. Some accused the FT of being “patronising” and “out-of-touch” for not realising how difficult it is to save money when — as our piece pointed out — salaries are low and rents are high.

      Others assumed the piece was chastising them for not saving enough, portraying millennials as profligate idiots rather than genuinely hard-up.

      But the most controversial element of the article proved to be pensions. Readers reacted with horror to a calculation made by Rebecca Taylor, director at the Chartered Institute for Securities and Investment, that 25-year-olds would need to save £800 a month on average, for 40 years, to secure a £30,000 per year income in retirement.

      Alice Tew©@BuckinghamAlice

      In fact, the piece hit such a large nerve — even generating a follow up on BuzzFeed — we thought we should do a little more explaining of how the CISI arrived at that £800 a month figure.

      Firstly, it represents the average monthly pension contribution you would need to spread across 40 years to secure an annual retirement income of £30,000 per year upon retirement. It is possible to save for the same sized pension pot by paying in less than £800 in the early years; but you would need to pay in more than £800 in later years, when your wages are likely to be higher. Another option would be to work for longer.

      Many millennials reacted along the lines of “what’s the point of a pension” as they couldn’t save even a fraction of that amount:

      Kezia Newsom©@KeziaRose

      But even small, regular payments will help. Those early payments you make when you are young will attract compound interest over time, and contribute most strongly towards the growth of the pot as a whole.

      And while the £800 target was a shock to many readers (regardless of their age) a substantial proportion of your pension contributions could come from your employer, and will be boosted further by tax relief.


      Workers on a full-time contract who opt into a company pension scheme will typically find that their employer will match or double their monthly pension contribution. For example, you could put in 5 per cent of your annual salary, spread across 12 monthly payments, and your employer could contribute the equivalent of 10 per cent. This is essentially “free money”.

      You are also entitled to tax relief on your pension contributions. If you’re a millennial earning less than £42,385 a year, this will boost your contribution by 20 per cent. So you pay in £80 but tax relief makes this worth £100. If you’re earning more than that, you get tax relief at 40 per cent. So you pay in £60 and tax relief makes this worth £100. You would only have given this to chancellor George Osborne in tax if you hadn’t put it in your pension pot.

      Unfortunately, online comments on the FT article showed that millennials are much more likely to be precariously employed members of the gig economy than have a full-time job with a good pension scheme.

      24, living in London, has just quit a job on 35k/yr which just about pays the rent, but involved 60+ hours /week. Will now be doing freelance gigs at twice the hourly pay, working only half the hours . . . We have a very different rationale behind working. We can work flexible hours, we can freelance, we can start our own businesses. We can work when we want, to get what we want. For many of us, saving is not a goal worth working extra hours for. — anonymousmillennial

      The self-employed can still save into a pension, and benefit from tax relief, but you won’t get the valuable employer contributions. Clearly, this is not ideal.

      Eleanor Margolis©@EleanorMargolis

      Millennial readers expressed frustration with how hard it is to reach a point where they’ve cleared enough debts to be able to save.

      Even as someone who is earning slightly above average wages, this article hits home in a big way . . . I shouldn’t complain, and usually don’t — I’ve scrapped on below-minimum wage income throughout the recession for several years, borrowing up to my eyeballs just to get a job that will allow me to pay off my debts. Any kind of a life is good when all you’ve been preoccupied with for so long is basic survival. — Hartiganh

      Some baby boomers congratulated millennials for choosing a different path.

      But pensions were not the only bone of contention — FT readers complained about the impossibility of home ownership while rents and debt levels run so high.

      I would love nothing more than to own my own home, but this is absolutely impossible since I pay more in student loans every month than the average mortgage payment in my area. — Ara vonPaar

      It strikes me that we’re faced with the illusion of choice . . .  Why not save to get on the housing ladder rather than spend 50% of my earnings on rent? They aren’t real choices in my eyes. — embarrassed pedant

      Save for 6 and a half years to get 5% deposit on a 450k house in London? Who’s going to give a single 35 year old a 427k mortgage? — CountryJon

      One reader, who had managed to get on the property ladder, reacted to the line in the piece that said: “Millennials are never going to put a picture of their new dining room furniture on Instagram. They probably don’t even have a dining room.”

      Student debt also proved a huge talking point in the comments field, with even higher-earners feeling disheartened by their debt.

      [I’m a] millennial working in financial services with a student loan. According to my P60, last year I had deductions of over £3,000 for student loans and that was at the lower rate of tuition fees. Whilst that may not sound too bad, I see my Student Loan Company statement balance is still north of £27,000 — with that in mind, it’s not difficult to empathise with why millennials like myself feel like the deck is stacked . . . I do despair at how the success of my parent’s generation comes at the cost of mine. — Theophany

      So what to do about this? The piece generated a tongue-in-cheek follow-up piece from the New Statesman
      advising millennials on ways to generate extra cash. Eleanor Margolis, a columnist at the magazine, came up with a satirical list of ways hard-up young people can earn money — including “marrying a Kardashian”. Her point was that millennials aren’t just frivolous and stupid, but genuinely unable to save.

      Others pointed out that the decline in young people voting has led politicians to ignore their plight.

      For our part, the FT will continue to highlight the financial pressures facing the younger generation and we will be launching a new monthly column in FT Money called Millennial Money next week.

      Finally, for all the cat memes and pointed comments, our goal of getting young people to think more about their pensions has been a worthwhile result, as one young personal finance journalist tweeted:

      Hedge funds face loss of ‘secret sauce’

      Posted on 18 February 2016 by

      ©Philip Wolmuth

      Hedge fund managers are arguably the celebrity chefs of the money management industry. They are best able to whip up returns that make investors drool. But financial engineers are unpicking their secret sauce and finding new ways to sell it by the bottle.

      The biggest trend in the money management industry is the shift towards passive investment.

      About $3tn is now in index-tracking and exchange traded funds that only seek to replicate the returns of a broad market, such as the S&P 500, the Barclays Aggregate bond index or the FTSE 100. The basic return of a market is known as “beta” in financial jargon.

      In contrast, hedge fund managers attempt to deliver “alpha”, the returns over and above the market itself, through a staggering array and diversity of strategies, ranging from betting on global currency movements to surfing on the corporate acquisitions boom.

      The promise of this alpha is what induces investors to pay extra for the services of the alternative asset management industry.

        But analysts at banks and investment houses have over the years examined the returns of money managers, crunching them with computers and unpicking various “factors” that drive returns. Now some say they have reverse engineered many popular high-octane hedge fund strategies, and can replicate them more cheaply.

        “We are now realising that a lot of what we thought was alpha is actually an alternative form of beta,” says Yazann Romahi, the head of JPMorgan Asset Management’s quantitative investment arm. “This will transform the hedge fund industry.”

        JPMorgan Asset Management estimates that the “alternative beta” industry’s assets have grown from about $2bn in 2010 to roughly $50bn today.

        M&A arbitrage is a good example of a highly specialised hedge fund strategy that the “quants” now say they can mimic. “Arbs” place bets on whether corporate acquisitions will fail or succeed. When a company makes an offer for a rival, it will typically offer a premium price — but there is always a danger that the deal collapses, so the shares typically trade slightly below the offer price.

        Skilled arb funds — typically stuffed with corporate lawyers, antitrust experts and former investment bankers — buy the shares of targets when they think the deal will go through, and short the ones where they think the deal will fizzle. The risk is in practice binary, and the better the fund, the more accurate its predictions.

        Enough deals go through that even average M&A arbitrageurs should make money over time, as they capture what Mr Romahi calls the “deal failure risk premium”.

        But quants now think they can do even better than simply systematically buying acquisition targets, by studying history for what deals go through and which fail, and automatically weighing their bets accordingly.

        For instance, Yin Luo, the chief quant at Deutsche Bank, says the single biggest determinant of whether a deal completed is its age. In other words, the longer it drags on the less likely it is to go through.

        But he has identified a multitude of factors that affect the M&A strategy’s success rate, using the same statistical techniques that doctors use to determine how long a cancer patient has to live.

        I have very little regard for these hedge fund replicators. They all fail miserably when the market regime shifts

        – Robert Frey, FQS

        As is often the case with quants, they are confident that their mathematical approach produces better results than human intuition. The traditional M&A arbitrageurs are “good but often not very accurate. Our model has actually proven more accurate than the arbitrage funds”, Mr Luo says.

        M&A arbitrage is just one of many popular hedge fund strategies whose secrets quants say they are now deciphering. Others include global macro — betting on the ebb and flow of international interest rates and currencies — and even activist strategies pursued by the likes of Dan Loeb’s Third Point, Bill Ackman’s Pershing Square and Carl Icahn.

        The implication for the industry could be significant. Mr Romahi says the data show that some hedge fund managers only generate “enough alpha to pay themselves”, and expects the growth of cheaper to run exchange traded funds to beat down fees in the hedge fund industry over the coming years. “The hedge fund industry is bifurcating, between the ones that are truly active and those that merely generate alternative beta,” he says.

        Of course, there is always a danger that even with the right recipe, an inferior chef will struggle to replicate the dish of a master.

        While the quants have crunched their numbers through supercomputers their models for what works are based virtually entirely on “backtesting” against historical data. The financial crisis showed how a slavish adherence to modelling can spectacularly blow up in real-life markets, either immediately or eventually.

        “I have very little regard for these hedge fund replicators,” says Robert Frey, chief investment officer at FQS, a fund-of-hedge funds and a quantitative finance professor at Stony Brook University. “They all fail miserably when the market regime shifts.”

        Nonetheless, the view that the epochal shift from active to passive investment will also shake up the hedge fund industry is gaining adherents.

        “We’re at the very early stages, but you can see how the active versus passive story will have a separate arc into alternatives,” says Jeffrey Knight, head of asset allocation at Columbia Threadneedle.

        Central banks: Negative thinking

        Posted on 17 February 2016 by

        Japanese yen notes and Euro notes are arranged for a photograph at the World Currency Shop in Tokyo, Japan, on Tuesday, Oct. 30, 2007.
Photographer: Haruyoshi Yamaguchi/ Bloomberg News©Bloomberg

        As the restaurants of Tokyo’s Okachimachi neighbourhood prepare for the evening dinner rush, Kane and Atsuko stand at a pedestrian cross-section surrounded by precious metal shops, anxiously wondering what to do about the gold price.

        The two elderly sisters arrived by train from the suburbs just hours after the Bank of Japan’s negative interest rate policy officially came into force. They have little idea what it means for them, but have a vague sense that it will make things worse. They came to Okachimachi to buy gold, but an overnight price tumble has spooked them. “We don’t want to take a risk, but I don’t think anything in Japan is going to make money now,” says Kane.


        Stopgap measure? The ECB introduced a fee for holding bank deposits in June 2014

        Systemic pressure The fragile banking industry faces even more challenges with subzero rates

        Running out of ideas Officials have stumbled over how to boost growth and dispel the spectre of deflation

        Online, the mood has turned to rage. Forums have seen a flood of commentary from Japan’s retirees decrying negative rates and the “torture” that the BoJ’s policy is already inflicting. “Raising commodity prices to overcome deflation, raising consumption taxes, lowering interest rates . . . they are all policies that make us suffer,” wrote one.

        No one has far to look for signals of turmoil. Over the past two weeks, the screens in the windows of Japanese brokerages have relayed a grim tale of plunging shares, a soaring yen and the benchmark 10-year Japanese government bond yielding a minus value for the first time.

        The Japanese can be conservative at the best of times, and few think these are the best of times.

        But Japan is not the only country affected. A concept once only subject to small-talk among economists is now an uncomfortable reality. With quantitative easing seemingly losing its power to dazzle markets, and many governments either unable or unwilling to countenance raising spending, central banks have felt compelled to try new tools.


        Sweden, Switzerland, Denmark, the eurozone and most recently Japan — adding up to almost a quarter of the global economy — have all introduced some form of negative interest rate policy in an attempt to fight deflationary forces, weaken their currencies and stimulate growth. Some analysts believe the Federal Reserve will have to follow suit despite its move to raise rates in December for the first time since 2006. Janet Yellen, the US central bank’s chair, has admitted that policymakers have at least considered the possibility.


        Markets have generally applauded every central bank move to ease monetary policy since the financial crisis, but have grown anxious over the negative interest rate experiment. Some investors and analysts fear the moves are an alarming reflection of dwindling central banking firepower, and that the new weapon could even be dangerous.

        “Policymakers may have significantly underestimated the economic risks,” Scott Mather, one of Pimco’s chief investment officers, said last week. “It seems that financial markets increasingly view these experimental moves as desperate and consequently damaging to financial and economic stability.”

        Stopgap measure?

        Sweden’s Riksbank was the first central bank to experiment with NIRP, as it has been labelled, briefly moving the rate it pays on commercial bank deposits to minus 0.25 per cent in 2009. The experiment raised eyebrows, but the economy recovered and the Riksbank swiftly began to lift rates.

        Chart: Government bonds with negative yields

        In June 2014 the European Central Bank drew inspiration from its northern neighbour and reintroduced the world to negative rates, slapping a fee on the deposits banks hold at the eurozone’s monetary guardian. It was seen as a stopgap measure to buy time and help fight deflation while Mario Draghi, the ECB’s president, built support for a quantitative easing programme.

        The Swiss National Bank followed suit later that year in a doomed attempt to defend its currency ceiling versus the euro. Denmark’s central bank, which already had a narrowly negative deposit rate to maintain its currency peg to the euro, was by early 2015 forced to push the rate as low as minus 0.75 per cent. The Riksbank had to reintroduce the policy last February, after inflation remained stubbornly below zero.

        In January, the Bank of Japan, seeing its supersized quantitative easing programme — a cornerstone of Abenomics — fail to shake the economy out of its torpor, adopted the same measures.

        Broadly speaking, the economic theory is that negative rates encourage banks to lend money more cheaply and savers to spend more freely, while discouraging overseas money from flowing in and pushing currencies lower.

        Economists had assumed that people would rather hold physical cash than see it slowly winnowed by charges. But the initial experiments have shown that banks are reluctant to actually impose negative rates on their depositors. As a result, policymakers seem increasingly taken with this novel monetary lever to lower borrowing costs, despite fears about the impact on the banking sector.

        “I see negative nominal interest rates as a potentially powerful tool for central banks,” Naranya Kocherlakota, the former head of the Minnesota Fed, said this month.

        Pressure on the system

        The policy can lead to some odd phenomena. Eva Christiansen, a Danish sex therapist, last year signed a three-year business loan with a negative interest rate, which in practice meant the lender had to pay her about DKr7 ($1) a month — vividly underscoring how the experiment can hurt banks. The concern is that the business model of the better-capitalised but still-fragile banking industry will become even more challenging with sub-zero interest rates.

        Martin Wolf

        Banks are still the weak links in the economic chain

        A slowdown is more likely than a crisis but the sector is exposed

        Just how negative could they go? JPMorgan suggests that central banks now have the theoretical capacity to lower interest rates to minus 1.3 per cent in the US, minus 2.7 per cent in the UK, minus 3.45 per cent in Japan and as low as minus 4.5 per cent in the eurozone, highlighting that there was no evidence of the initial experiments triggering a rush for physical cash.

        “This experience suggests that NIRP could open up a powerful new tool for monetary policy,” wrote Malcolm Barr, David Mackie and Bruce Kasman, JPMorgan’s economists, in a report this month. “A strong signal from policymakers that they are willing to actively use NIRP could produce significant reductions in market interest rates.”

        That may be true, with safer government bond yields plumbing new lows in the wake of the BoJ’s move. The Japanese 10-year government bond yield fell below zero last week, the first time ever for a G7 country, while yields on German Bunds and US Treasuries have plunged to near record lows.

        Other markets have fared poorly, with the brunt of the sell-off hitting financial stocks. Japanese banking shares have crashed more than 20 per cent since the BoJ introduced negative rate policies on January 29. Already this year, European banking shares have slumped by more than 20 per cent, and US banks have dropped 15 per cent.

        Insurers, pension groups and money market funds, already struggling with a dearth of safe fixed income assets offering decent returns, have also been hit, as negative rates have taken a chainsaw to government bond yields. There is now more than $5.7tn of sovereign debt with sub-zero yields, according to JPMorgan.

        “Negative rates have become part of the furniture,” says Andrew Milligan, head of global strategy at Standard Life. “This experiment began many months ago and financial systems have not collapsed. But the scale of negative-yielding bonds in markets causes considerable difficulty for investors who cannot or will not hold negative rates.”

        The fear is that the situation could get worse if money starts trickling out of banks. Money stored “under the bed” is unproductive. It stops circulating and cannot be borrowed, thereby undermining the programmes of bond-buying, central to ECB and BoJ policy, that are designed to encourage investors to lend money to individuals and business.

        Chart: Increased implied probability of negative rates

        Some analysts argue that negative rates do not stimulate economies beyond lowering currencies. Deutsche Bank strategists have compared the policy to weapons of mass destruction, escalating a currency war that will only bring “mutually assured destruction”, and said central banks need to find a “better bazooka”.

        Running out of ideas

        Yet some investors and analysts say the most insidious aspect of negative interest rates is what it signals: that central banks are at their wits’ end over how to invigorate growth and dispel the spectre of deflation. The concern is that the US is poised to join in. Its latest stress test scenarios asked banks to model the impact of negative short-term Treasury yields. Markets indicate that there is as much as a 30 per cent probability of negative rates in the US by the end of 2017, according to calculations by Bank of America Merrill Lynch.

        Ms Yellen said in her testimony to US lawmakers this month that she was “not aware of anything that would prevent us from doing it”, but stressed that the Fed would still need to grapple with legal hurdles and assess the potential impact on the US financial system. Michael Cloherty, a strategist at the Canadian bank RBC, says speculation about negative rates is “wildly overdone”, triggered by the stress tests and exacerbated by the Wall Street “echo chamber”.


        The focus is therefore likely to remain on Europe, where the ECB is expected to unveil a new raft of monetary easing measures on March 10 — including lowering its deposit rate deeper into negative territory.

        Any decision will highlight the bind that the ECB finds itself in as not only the eurozone’s monetary policymaker, but also its banking supervisor. Officials see negative rates as a successful tool for weakening the euro, but the ECB’s banking supervisor has warned of the possible impact on banks’ profitability. The recent bank equity rout has raised the chances of the ECB following the BoJ’s lead and only applying negative rates to a select portion of bank reserves.

        Underscoring the bout of nerves around negative rates, the fact that the eurozone is considering the withdrawal of the €500 note has been seen by some as a sign that policymakers are concerned about hoarding of cash, rather than the official reason that high-denomination bills are used by criminals.


        “If you are being charged 50 basis points, why not take it out in €500 [notes] and put it in a safe?” says Charlie Diebel, head of rates for Aviva Investors. “It becomes viable to store cash under the mattress, so to speak.”

        Back on the Japanese forums, one man in Yokohama with a following among elderly users, frets: “I am scared and I think a lot of people who are living on investments and savings are scared. These investments were presented to us in normal times, but the times we are living in are not normal.”

        Additional reporting by Elaine Moore and Claire Jones

        Implementation: Banks reluctant to impose rates on depositors


        A crucial aspect of whether the sub-zero interest rate experiment succeeds is to what extent banks push the cost on to ordinary savers, and how they might respond to such an unwelcome development.

        A small Swiss bank, Alternative Bank Schweiz, has now imposed a modest charge on depositors. But in general retail banks have been loath to impose the negative interest rates — slapped on their reserves with central banks — on to ordinary depositors.

        If more banks attempt to do so then many savers will react negatively, according to a survey of 13,000 people in Europe, the US and Australia, conducted by Ipsos on behalf of ING, the Dutch bank.

        More than three-quarters of respondents said they would take money out of their savings account if the interest rate was negative. Only 12 per cent said they would spend more — the main objective of the central banks; some said they would save even more; and most said they would either switch to riskier investments or hoard cash in a “safe place”.

        Even allowing for the fact that inertia may be more powerful than indicated by a survey, this suggests a move to negative interest rates “is a major psychological barrier for savers”, says Mark Cliffe, ING’s chief economist. “Better news, then, for safe-makers than for banks and central banks.”

        Commercial banks would then need to make a choice between running the risk of deposit outflows, seeing their profit margins squeezed further, or raising fees or mortgage costs, as some Swiss banks have done.

        Tables turned in Argentine holdouts saga

        Posted on 17 February 2016 by

        Mauricio Macri, opposition presidential candidate and mayor of Buenos Aires, speaks during a debate with ruling party candidate Daniel Scioli in Buenos Aires, Argentina, on Sunday, Nov. 15, 2015. Macri, the mayor of Buenos Aires, leads Scioli 49 percent to 42 percent ahead of the November 22 runoff election, according to poll results published by Giacobbe & Asociados. Photographer: Diego Levy/Bloomberg *** Local Caption *** Mauricio Macri©Bloomberg

        Mauricio Macri, Argentina’s president

        There is confidence in Buenos Aires that the tables are turning in its quest to regain access to international capital markets as Argentina’s decade-long legal battle with hard-nosed US hedge funds reaches a showdown.

        The “holdout” creditors that successfully sued the country after its $100bn debt default in 2001 must persuade a judge on Thursday that a financial blockade against Argentina should remain in place after the government this month offered to pay them about $6.5bn for claims of around $9bn. 

          “It feels like we’re pretty close to the finish line,” said Alejo Costa, chief strategist at Puente, an investment bank in Buenos Aires, after Argentina demanded last week that the holdouts justify why an injunction preventing the country from paying other creditors should not be lifted. “If Argentina decided to do that, it must be because they had a good signal from [the court-appointed mediator] or the judge himself that it would lead to a good conclusion,” he added. 

          But the holdouts, who are led by US billionaire Paul Singer’s Elliott Management, are showing no sign of backing down from a legal dispute that pushed Argentina into default for the eighth time in its history in 2014. 

          “There is little incentive for the holdouts to stop playing hardball — it’s a no-lose situation. Even if the injunction is lifted they can still get the same deal as those that have already accepted. So why not push for more?” said Marco Schnabl, a partner at Skadden, Arps, Slate, Meagher & Flom, a US law firm. 

          Although two out of the six biggest holdouts have accepted Argentina’s offer, which represents a haircut of 25-30 per cent, others complain that creditors are being treated differently depending on their legal claims. 

          Never use the words surprise or inconceivable when it comes to this case

          – Charles Blitzer, former IMF official

          Charles Blitzer, a former IMF official, criticised Argentina’s “unilateralism”, which is “what got them into trouble in the first place”, referring to the original debt restructuring in 2005 that was first refused by the holdouts. 

          One person familiar with the negotiations argued that Argentina’s decision to effectively cut short negotiations just four days after they started and then request the lifting of the injunction has only complicated matters, forcing the holdouts to follow Argentina into litigation against their wishes. 

          “The talks were still constructive and the two sides were not far apart on economic terms. It’s only going to engender animosity and make it a much longer dispute than Argentina seems to want to have,” said the person, arguing that Argentina had “dramatically underestimated” the challenges of litigating against the holdouts. 

          Certainly, a resumption of an already protracted legal dispute would undermine new market-friendly president Mauricio Macri’s plans to present Argentina as a country that is open to business again after 12 years of populist governments that scared off investors. 

          But Mr Costa argues that it makes no sense for the holdouts to embark on a new legal process given that Argentina has made an offer that will yield returns for investors that represent as much as 10 times their initial investment. 

          He said that many of the bonds owned by the holdouts were bought for around 30 cents on the dollar in the aftermath of the 2001 default when Argentina’s bond prices collapsed, while the government’s offer this month amounts to almost 300 cents on the dollar owing to accrued interest at punitive rates over the past decade. 

          Argentina on the cusp of peace with creditors

          Argentina's three-masted navy training tall ship ARA Libertad, which was seized on Oct. 2 as collateral for unpaid bonds dating from Argentina's economic crisis a decade ago, sits docked at the port in Tema, outside Accra, in Ghana Friday, Dec. 14, 2012. A U.N. court is expected on Saturday to deliver its order on whether the Argentine navy ship being held at the Ghanaian port should be released. (AP Photo/Gabriela Barnuevo)

          One of the longest, most contentious sovereign debt sagas in history looks like drawing to a close

          “You would have to give a pretty good answer to your investors as to why you want to go through a legal process that could take at least another year after an offer that is going to make you a lot of money. As a portfolio manager, I’m not sure I would do that,” said Mr Costa. 

          Many observers also say that Thomas Griesa, the 85-year-old New York judge in charge of what has been called the “trial of the century” for sovereign debt, is fed up with the case. He has publicly declared he wants to retire once the case has been closed. 

          If Judge Griesa does lift the injunction, the holdouts would lose much of their leverage in the negotiations, even though Argentina would still be vulnerable to asset seizures and interference with its debt payments. 

          “If the judge rules in favour of Argentina and lifts the injunction, this may play out sooner rather than later,” said Mr Schnabl, who argued that the holdouts would be unlikely to go back to trying to seize sovereign assets “that may or may not exist”, after years of scouring the globe for assets to embargo caused little more than a nuisance for Argentina. 

          Even so, veteran observers of this legal battle whose twists and turns have been widely followed for its potential impact on future sovereign debt restructurings long ago learned to expect the unexpected. Mr Blitzer said: “Never use the words surprise or inconceivable when it comes to this case.”

          European loan sales passed €100bn in 2015

          Posted on 16 February 2016 by


          Loan sales in Europe surpassed the €100bn mark last year, as investors continue to chip away at the debt that has hamstrung the continent’s banking system since the crisis.

          A total of €104bn of loans was sold across 30 European countries in 2015, according to data from KPMG — the highest level since the financial crisis struck. The report pointed to significant activity over the next two years, with €32bn of transactions ongoing.

            The financial and eurozone debt crises left Europe’s banks saddled with billions of euros of non-performing loans. Sales have been driven by the need for European banks to shrink their balance sheets, creating opportunities for non-bank investors.

            “The fact is it’s nowhere near as easy as it was for banks eight years ago. That’s leaving gaps in the market, which are being taken up by other interests, such as private equity and insurers,” said Andrew Jenke, a partner at KPMG and an author of the report.

            So-called “bad banks”, which were created to hold distressed assets in countries such as Ireland and Spain, have also helped drive sales of loan portfolios — seen as a crucial step in restoring European banks to health.

            The legacy of pre-crisis debt continues to haunt the continent. Concerns over non-performing loans rattled markets for bank shares and debt in Italy earlier this year on news of a European Central Bank task force to tackle the problem.

            Rating agencies, analysts and governments are now focusing on securitisation — where loans are gathered up and transformed into easily tradable bonds — as an important element of debt transactions in future. The European securitisation market has struggled since the crisis, but the technique could be used by investors to sell on the loans they buy.

            The Italian government plans to use government-guaranteed securitisation to boost sales of NPLs. Late last year, Moody’s, the rating agency, said the securitisation of “re-performing” loans would rise over 2016, with issuance potentially coming from non-bank players.

            The role of non-bank securitisation is growing in the UK, where the largest securitised last year was a private equity-owned platform, Kensington Mortgages. In November, the UK government sold a £13bn portfolio of Northern Rock mortgages to Cerberus, the private equity fund.

            In Europe, €73bn of the €104bn in debt sales came from the UK, Ireland and Spain — countries that drew on state money as part of post-crisis bailouts. Sales comprised performing and non-performing loans.

            “NPL disposal on the whole has been done in the stronger economies, and they’re moving into performing loan disposals,” said Gary McKenzie-Smith, a managing partner at Venn Partners.

            Mr Jenke linked the expansion of private equity in such markets — especially the UK — with securitisation.

            “All three of these markets have returned to GDP growth, with the UK notably seeing lenders able to access securitisation financing, which has proven critical in allowing private equity to expand both their acquisition and origination platforms,” he said. “The question is whether that model can be adapted to weaker markets, notably in southern Europe.”

            The broader deleveraging process across European banks has reduced the need for financial institutions to fund themselves. Sales of senior bonds, which banks use to fund loans, are forecast to stagnate over 2016.

            European banks face array of challenges

            Posted on 15 February 2016 by

            The stars of the European Union (EU) sit on banners flying outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, on Thursday, Dec. 3, 2015. European stocks extended losses, following their biggest slide since August yesterday after European Central Bank President Mario Draghi unveiled stimulus measures that fell short of market expectations. Photographer: Jasper Juinen/Bloomberg©Bloomberg

            The demise of European bank share prices and debt is a wake-up call.

            Economic growth and financial stability is threatened by a grim combination of low bank return on equity, negative interest rate policy, a more rigid bank resolution structure and regulatory uncertainty.

              Most European banks now trade at or below tangible book value. But there is differentiation. A first group of well-capitalised banks trade at discounts to book value because, like utilities, ROE is capped. A second group deemed as undercapitalised or bereft of viable business models trades on discounts as large as we saw during the peak of the sovereign debt crisis.

              As a result, a negative feedback loop between bail-in instruments and equity has developed, leading to a loss of confidence. Recent developments in Italy and Portugal have awoken investors to these new risks.

              Negative interest rate policy is the latest threat to bank profitability.

              Rates cannot fall fast enough to combat declining inflation. This blunts the impact on loan demand, compresses interest margins and further compromises bank earnings. So meagre are bank earnings that the potential percentage hit to what little earnings they have is large.

              As result, the number of banks deemed as viable is shrinking and the number deemed in run off, or “gone concerns”, is growing.

              Will more regulation help? The push forever higher capital requirements in theory makes banks safer but in practice makes them uninvestable. Creditors increasingly understand that if a bank cannot earn back its cost of equity, then the cost of bail-in debt should be higher. This, in turn, erodes the return on equity and pushes up the cost of equity further — the opposite of what is desired.

              The risks of such a negative feedback loop are particularly acute for banks with legacy non-performing loans. The stock of NPLs on European banks’ balance sheets is still about €900bn.

              Now a thin slice of the capital stack — AT1 debt — has become an excessively crucial barometer of bank health. Fears that weakly profitable banks cannot afford to pay coupons on AT1s has led to a repricing of senior bank debt, which in turn reinforces the fear of declining bank ROEs.

              This cocktail of woes is particularly hazardous for several idiosyncratic reasons.

              First, the failure to address legacy NPLs has left the system structurally weaker. Restrictive state aid rules have become a binding constraint in some cases on efforts to carve out bad loan portfolios.

              Second, banking union is designed around an integrated European banking system assumption that seems impossible given the way that regulation penalises scale and cross border activity.

              Third, as the politics of Europe turns its back on austerity and the efficacy of monetary policy becomes stretched, there is a growing risk that the ECB’s conditional commitment to act as a lender of last resort comes into question again.

              Prescriptions for this cocktail of woe can only be palliative in nature, given deeper problems associated with excessive debt and political fragmentation. But at a minimum, they should aim to ensure that banks are no longer accelerators of the next big shock.

              Once the minimum capital threshold is met, European regulators should be willing to allow banks to run closer to those thresholds while they undertake restructuring to restore profitability. This has happened in the US and the UK, but not in continental Europe. Forcing banks to raise expensive capital because future profitability is unclear increases the probability of future non-viability.

              European regulators should use stress tests as a means to force banks to accelerate NPL disposals. Bad debts remain a bottleneck to successful monetary policy transmission and, in the event of a recession, become a potential noose around some banks’ necks given the risk of bail-in.

              Banks incapable of making profits are not safe, regardless of their capitalisation levels. Sectoral consolidation appears inevitable. But barriers to consolidation and NPL carveouts remain high in Europe. If this situation is allowed to persist, ROEs will continue to deteriorate and, in cyclical downturns, sector rationalisation will occur via banks runs.

              Gene Frieda is a global strategist for Moore Europe Capital Management

              Garrett-Cox to leave Alliance Trust

              Posted on 15 February 2016 by

              Katherine Garrett-Cox, chief executive officer of Alliance Trust Plc, speaks during a session on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Friday, Jan. 23, 2015. World leaders, influential executives, bankers and policy makers attend the 45th annual meeting of the World Economic Forum in Davos from Jan. 21-24. Photographer: Chris Ratcliffe/Bloomberg *** Local Caption *** Katherine Garrett-Cox©Bloomberg

              Katherine Garrett-Cox will remain as chief executive of the fund management arm, Alliance Trust Investments

              Katherine Garrett-Cox is to leave Alliance Trust less than a year after the chief executive lost a drawn out battle with rebel investor Elliott Advisors over the performance of the 128-year-old investment trust.

              The Dundee-based investment company said it had been “mutually agreed” that Ms Garrett-Cox would depart Alliance Trust Investments on March 11 and that her duties would be “reassigned”.

                Ms Garrett-Cox leaving follows the departure of chairman Karin Forseke, who stepped down from the UK’s oldest investment trust in November and was later replaced by industry veteran Robert Smith, Lord Smith of Kelvin.

                Both Ms Garrett-Cox and Ms Forseke had resisted attempts by Elliott, the US hedge fund company, to appoint three non-executive directors to the board of Alliance Trust at its annual meeting in April last year, saying it would “threaten the very existence of the company”.

                Under Ms Forseke and Ms Garrett-Cox, the company spent £3m on a failed campaign to defend itself against Elliott. However, in an eleventh-hour compromise ahead of an April shareholder meeting, Alliance Trust said it would appoint two of the three independent directors nominated by Elliott to the board.

                Jason Hollands, managing director of investment adviser Tilney Bestinvest, said: “I think this was inevitable, given Katherine’s close association with the ancien regime at Alliance Trust and her vocal stance resisting the calls for change from key shareholders.”

                Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: “It looks to me like last year’s intervention by Elliott is still shaking the foundations of Alliance Trust. The issues that have affected the trust in terms of performance and rising costs are well documented, and it seems the newly constituted board is seeking to cut ties with the past in an effort to reinvigorate the trust.”

                Ms Garrett-Cox became chief executive of Alliance Trust in 2008 following a number of other high-profile roles in the City, including chief investment officer of Aberdeen Asset Management and chief information officer of Morley Fund Management, after which she gained the nickname “Katherine the Great”. She was paid £1.4m last year.

                Peter Michaelis, who joined Alliance Trust Investments in 2012 and has been managing its equities portfolio since October 2014, will take over investment responsibilities at the fund management division.

                Ms Garrett-Cox said in a statement: “I am very proud of the significant achievements that my team has delivered over the past nine years at Alliance Trust. I leave Alliance Trust Investments with a strong team who are already delivering improved investment returns and driving down costs.”

                Up until last year’s April shareholder meeting, Alliance Trust had delivered a below-average return of 52 per cent over a five-year period, while other trusts investing in global equities had produced returns of more than 100 per cent. Over the same five-year period Ms Garrett-Cox had doubled her pay.

                Lord Smith said: “Alliance Trust is undergoing significant change to improve both its operating performance and investment returns. It has always had investment expertise at its heart and Katherine has done much, over the past nine years, to refocus the investment portfolio on its traditional strengths in global equities.

                “Alliance Trust is now moving swiftly to implement the changes announced last year which are designed to enhance shareholder returns. This process is well under way and it is clear to us all that the role of chief executive of Alliance Trust Investments has changed significantly.”

                Elliott, which owns a 14 per cent stake in Alliance Trust, declined to comment.