Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Currencies, Equities

Scary movie sequel beckons for eurozone markets

Just as horror movies can spook fright nerds more than they expect, so political risk is sparking heightened levels of anxiety among seasoned investors. Investors caught out by Brexit and Donald Trump are making better preparations for political risk in Europe, plotting a route to the exit door if the unfolding story of French, German […]

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Currencies

Dollar rises as markets turn eyes to Opec

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

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Archive | Equities

The FT looks ahead to the week’s main events

Posted on 20 November 2016 by

Hammond delivers first Autumn Statement

Philip Hammond will present his first Autumn Statement on Wednesday in which he has promised to “reset” the government’s fiscal policy, which covers public spending, taxation and borrowing.

The chancellor wants to give himself more “headroom”, he has told colleagues, to deal with any slowdown from Britain’s decision to leave the EU, while there is mounting pressure on the Treasury to help what Whitehall officials are calling the “Jams” (just about managing families).

Inheriting a strong economy, but with weaknesses in tax revenues, Mr Hammond has indicated this is not the time for the government to lose its budgetary discipline. There will be no “splurge” on public spending, he said last month. This caution suggests a statement that is not as revolutionary as first appeared likely when Theresa May became prime minister.

The forecasts from the Office for Budget Responsibility will be weaker than in March in light of economists’ greater pessimism after the Brexit vote, with growth lower both in 2017 and in the medium term, requiring the government to borrow more than planned.

The deficit will not be eliminated by 2019-20 and Mr Hammond will set himself easier budgetary rules to hit. While there will be some new announcements of infrastructure projects in the low single billions of pounds, the overall fiscal stimulus will be small.

Crucially for the chancellor, he is expected to give himself the leeway to raise spending or lower taxes and hence borrow significantly more if the economy performs worse than expected on relatively upbeat projections.

But by the end of the official forecasts, the government will implicitly accept Brexit has a price, even with lower net EU contributions once Britain leaves and this will be counted in the tens of billions of pounds every year.

EU summit in Brussels

Ukrainian leader Petro Poroshenko is in Brussels for his first meeting with EU leaders on Thursday since the election of Donald Trump upended the future of US foreign policy in the region.

The US president-elect has triggered anxiety in Europe, with concern and confusion over how Washington’s policy towards Russia will change.

Mr Trump has given often contradictory answers on issues such as the future of Crimea, the Ukrainian region annexed by Russia in 2014.

Away from security, the future of the association agreement between the EU and Ukraine is still in doubt after Dutch citizens voted against the treaty in April. Diplomats from The Hague and Brussels are still working on a compromise, but with growing calls in the Netherlands to abide by the non-binding referendum time is running out.

Finally, the issue of visa-free travel for Ukrainians will also be raised. EU institutions are in the process of waiving restrictions on Ukrainian travellers, but MEPs from France and Germany, in particular, are dragging their feet.

Economics

Fed offers rates signal

The Federal Reserve will release minutes from its latest policy meeting on Wednesday.

The central bank’s latest statement hinted that it is getting closer to lifting short-term interest rates for the second time since its December 2015 increase, and the record of the meeting will give signals as to how soon the committee wants to see a move.

The Federal Open Market Committee has been divided over how urgent a second move is, but a significant share of Fed policymakers are anxious not to leave it too long given the US is close to full employment and wage growth is starting to pick up.

Stanley Fischer, vice-chair of the Federal Reserve Board, suggested last week that the case for an increase was looking quite strong. The Fed’s next rate-setting meeting is on December 13-14, and markets believe the chances of action at that gathering are more than 80 per cent.

South Africa issues Trump response

South Africa’s central bank will become one of the first in emerging markets to respond to Donald Trump becoming US president-elect on Wednesday after meeting to decide whether the prospect of a stronger US dollar merits raising interest rates.

The Reserve Bank held rates at 7 per cent at its last meeting in September after deciding that inflation from a weaker rand “appears to have moderated somewhat” — signalling an end to a recent series of rate increases.

With South Africa a big commodity exporter, the rand is seen by investors as an easily traded proxy for risk in EMs — where there was a sell-off on Mr Trump’s election because of fears of more US protectionism on trade.

Despite the rand’s exposure, some analysts believe that the Reserve Bank may take the risks of Mr Trump in its stride.

“Even if the post-Trump hit to EMs continues, does the real economy care if the rand weakens and bonds sell off with a threat of some US inflation,” analysts at Renaissance Capital recently asked.

It is “tough to imagine” the central bank will have to raise rates in 2017, while higher US spending on its infrastructure, an apparent priority of Mr Trump, may help South African commodity exports, they added.

Companies

Black Friday fever looms


Black Friday fever in the US last year © AFP

British retailers who have imported the tradition of “Black Friday” — a day of steep discounts tied to a holiday that only Americans mark — will this week try to generate excitement and draw consumers into shops, without giving much away.

“Black Friday is great, so long as you know how to play the smoke and mirrors,” says the finance director of one big retailer, who spoke on condition that neither he nor his employer were identified.

Strict government guidelines prevent shops from touting “discounts” unless the same item has been on sale at a higher price immediately before the promotion began.

They also require disclosures to make clear to consumers how pricing has changed. But that does not prevent retailers from displaying products in far more prominent positions while they are on sale, or from limiting discounts to lines that rarely sell at full price.

Retail executives are watching consumer behaviour for signs of nervousness after Britain’s decision to leave the EU, which has caused a sharp depreciation in sterling and triggered uncertainty over the future relationship between the country and important trading partners.

However, analysts say it will be some months before the expiration of hedging arrangements forces stores to raise their prices.

Thomas Cook’s results

Investors in Thomas Cook will hope that holidaymakers’ fears of global terror attacks have dwindled, as the travel company reports full-year results on Wednesday.

Shares in the company have fallen by a third in the past year, as a spate of terrorist attacks deterred customers from jetting away.

It moved to adapt to the changing preferences of rattled tourists, shifting capacity from Turkey following the July coup, to destinations in Spain, the western Mediterranean and long-haul destinations such as the US, where bookings have risen.

Yet this was not enough to offset the loss of business in previously popular destinations, and summer bookings fell 4 per cent year-on-year.

Despite this, the 175-year-old company has remained bullish in its recent forecasts and, in a September update, it said it expects full-year earnings to be in line with expectations of about £300m.

Before a turbulent 2016, the package holiday company had been steering a turnround, returning to profit in 2015, the first time it recorded gains in five years following a near-collapse in 2011.

The group revealed last week that it is to open a further 14 hotels as part of its own-brand portfolio within the next two years.

ThyssenKrupp investors eye 2017 hint

When ThyssenKrupp publishes its full-year results on Thursday, investors are expected to take only a quick glance at the figures before scrutinising guidance for 2017, the restructuring of management, and any hints of progress in the talks with India’s Tata Steel about merging their European operations.

There is little room for a surprise this year as ThyssenKrupp already cut its outlook, in August, for operating income to a “minimum” of €1.4bn, from between €1.6bn and €1.9bn, following a steep fall in the price of steel that lasted longer than projected.

Analysts expect to see €1.44bn in operating income, reflecting a 12 per cent decline from the prior year, according to Bloomberg estimates.

Michael Shillaker, analyst at Credit Suisse, said the group’s guidance for 2017 is likely to reflect some caution as raw materials prices have been rising faster than steel prices. Analysts are projecting 2017 operating profit of €1.85bn.

He added the market will look closely at the industrial solutions business, which has been suffering a downturn amid what the group calls an “extremely challenging environment”.

United Utilities seeks focus shift

With its shares having been buffeted in recent months by regulatory uncertainty and the bond sell-off after the US election, United Utilities’ results on Wednesday will give the water supplier a chance to move the focus back to trading. Unfortunately, the headlines are unlikely to impress.

Analysts expect United Utilities to report a drop in net income on flat operating profit, as inflation pushes interest charges higher before it feeds through to revenue.

Deutsche Bank forecasts the group to post clean interim operating earnings of £312m, up 1 per cent year on year, and an 8 per cent fall in pre-exceptional profit before tax to £189m. Net debt — about half of which is index-linked — could rise about 6 per cent to £6.3bn.

Beyond the figures, investors will seek guidance on proposals by Ofwat, the water regulator, to adjust cost of debt allowances and encourage residential competition. The shares, however, are likely to remain a hostage to the bond market.

Passive fund managers poised to profit from the FCA’s proposals

Posted on 20 November 2016 by

The shake-up of the fund management industry proposed by the UK financial regulator has been classed as a deliberate attempt by the Financial Conduct Authority to push investors — both large and small — towards cheaper passive funds.

The FCA proposed on Friday that investment companies overhaul their charging structures to tackle what it sees as serious failings in the sector’s treatment of investors and pension funds. It unveiled a series of remedies, including an all-in fee, so investors can compare charges easily.

The regulator stopped short of introducing a cap on the fees asset managers charge, although the proposals dealt a blow to active managers, which have come under heavy criticism for charging investors high fees despite poor performance.

Justin Bates, an analyst at Liberum, the stockbroker, said: “The FCA clearly wants to drive the market more towards cheaper, passive investing. No question about it.”

In its 200-page report the watchdog estimated that, over 20 years, a £20,000 investment in a passively managed fund tracking the FTSE All-Share index could yield a return 44 per cent larger than that of an actively managed equivalent.

Mr Bates said: “The evidence it provides of the benefits of passive investment will make a lot of active manager chief executives very nervous.”

Owen Lysak, senior associate at Clifford Chance, the law firm, added: “This will mean investors looking more at passive [and] will mean investors watching much more closely what they are charged by active managers.

“Active managers will be under much more pressure as to how they market their funds to investors, and can expect many more questions on the real substance of their strategies.”

Assets managed in passive mutual funds have grown four times faster than traditional active products since 2007 and now stand at $6tn globally, according to Morningstar, the data provider. However, at $24tn, the assets held in active funds dwarfs that amount.

Aneel Keswani, director of the Centre for Asset Management Research at London’s Cass Business School, who helped the FCA compile its report, said: “Fees for passive funds have fallen over the past 10 years while the level of active fees has not fallen, suggesting that competitive pressures are not at work in the active funds arena.

“If funds that charge more did better, that would be fine, but their report also finds this is not the case.”

In Europe, four out of five active equity funds failed to beat their benchmark over the past five years, rising to almost 9 out of 10 over the past decade, according to analysis published last month by S&P, the index provider.

Gina Miller, co-founder of SCM Private, the investment boutique that has long campaigned on hidden charges and mis-selling in the industry, said: “The FCA paper is a truly comprehensive and well-founded analysis exposing the various dishonesties in the UK fund management industry. The FCA has rightly exposed the lack of price competition in active funds.”

Christopher Woolard, executive director of strategy and competition at the FCA, who presented the regulator’s findings at a briefing at its headquarters in Canary Wharf on Friday, added: “Fund charges, on average, in the active space have remained broadly the same for the past decade, whereas we have some evidence that the cost for passive funds has fallen. For actively managed funds there is also considerable price clustering.”

Active fund managers put a brave face on the FCA’s proposals, while the Investment Association, the lobby group for UK asset managers, said it “welcomed the spirit behind the FCA market study to improve confidence in the industry”.

Martin Gilbert, chief executive of Aberdeen Asset Management, the FTSE 250 fund house, added that the FCA’s interim report brought focus, and a sense of urgency, to confronting some important industry issues that affect customers.

“There is a need for increased transparency in relation to the services provided, the costs of such, and also for ensuring value for money,” he said.

Many others believe the FCA’s report will herald big changes for the £7tn industry and will challenge the fundamentals of the investment management model in a way not seen before.

Robert Steers, co-founder and chief executive of Cohen & Steers, the $50bn US-listed asset manager, said: “At some point, every industry faces a defining moment — a reckoning that fundamentally alters the market landscape. It is a way of purging stale business models to make room for the next generation.

“Those who anticipate and position themselves for the sea change have a chance to survive and even thrive. Those who do not are relegated to the dustbin of history alongside Eastman Kodak [the imaging company formerly known for photography] and Blockbuster [the video rental provider]. That moment has arrived for asset managers.”

The FCA will consult with the industry on the proposals until February 2017. Its final ruling on the asset management industry is expected in the first half of 2017.

The Trump factor: can infrastructure rebuild your investments?

Posted on 18 November 2016 by

Throughout his presidential campaign, Donald Trump promised Americans he would spend “double” that promised by his rival, Hillary Clinton, on rebuilding the country’s infrastructure.

This was the only campaign pledge he mentioned in his acceptance speech. “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” said Mr Trump. “We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”

His election, and his subsequent speech, finally persuaded markets that fiscal stimulus, or government spending, is now in vogue, while letting central banks do all the work is not. Infrastructure, as a spending project, makes sense. The US has chronically underspent on infrastructure over the years, but they are not the only ones. While the American Society of Civil Engineers has projected a $1.44tn funding investment gap between 2016 and 2025 on infrastructure, consultancy McKinsey estimates that $57tn is needed globally by 2030 to finance infrastructure projects.

Mr Trump is not the first politician in recent months to promise infrastructure spending. In the UK, Philip Hammond, the chancellor, is expected to announce a boost for infrastructure projects in his first Autumn Statement this month. Both UK and US governments expect and need the private sector to step in and help finance projects, potentially creating a large opportunity for retail investors. So what are the potential gains — and pitfalls — of putting your money into a different kind of bricks and mortar?

Broad church

Infrastructure covers the basic physical and organisational structures and facilities — buildings, roads, power supplies — needed for a society to operate, according to the dictionary definition. Investors, however, attach a few more elements to it.

“We have a set of tests where we’re looking for businesses with stable and predictable cash flows,” says New York-based Jorge Rodríguez, global head of infrastructure debt at Deutsche Asset Management. “Generally they’re monopolistic, they have high barriers to entry. Perhaps in London you can fly from half a dozen airports but you’re probably going to fly from the one closest to your house,” he said.

Beyond that, says Mr Rodriguez, subsectors include energy and utilities businesses such as those providing gas, water and waste disposal, alongside those involved in improving transport. This could be building or operating motorways, airports, seaports — “everything you can get paid for operating or making available”, said Mr Rodriguez.

But the term also includes “social” infrastructure, such as schools, hospitals and court rooms, as well as more specialised infrastructure that requires high levels of technological prowess. “That’s telecoms towers, and increasingly some folks are putting [broadband] fibre into that, also things like waste management systems, car parking and so on,” says Mr Rodriguez.

The issue for investors looking to the US for growth is that it’s impossible to tell which of these distinct asset classes Mr Trump will prioritise. “Until we know the specifics about what type of infrastructure [he] will focus on I think different stocks will be impacted,” says Dave Mazza, of US asset manager State Street.

Illiquid alternatives

At the moment, it is relatively difficult for retail investors to gain direct exposure to infrastructure, an illiquid asset class that should be held for the long term, and is better suited to pension funds, which have to meet long term liabilities.

In the UK, pension funds have piled into infrastructure following years of low bond yields, encouraged by hopes that the government reforms might make it easier for them to pool assets and invest in big projects. The problem, according to pensions consultancy Willis Towers Watson, has been a lack of clarity over the expected yield when financing large projects.

Pension funds are also reluctant to invest in projects that are yet to be built, which could face unforeseen problems during construction, pushing up costs and causing losses to investors. This leaves funds more keen on buying and selling existing infrastructure assets, rather than funding the building of new ones, says David Scott, partner at global consultancy firm Deloitte. “At the moment there is more capital pouring into the bucket of secondary investments,” he says.

An example of the fierce competition for ready-made infrastructure investments is London City Airport, which increased in value by just under £1.8bn between 1995 and 2016. While it was bought for £2bn by a Canadian-led consortium of pension funds earlier this year, Irish financier Dermot Desmond paid just £23.5m for it in 1995.

There are only really two routes for retail investors to get in on the action: through listed investment trusts, or through shares of companies focused on infrastructure. The shares can be bought directly, or held through an active or passive fund. There are a handful of equity funds holding shares in monopolistic companies that manage infrastructure, rather than build or own it, like rail operators or toll road managers.

Where to invest

To invest directly in infrastructure, rather than by buying shares in equity funds, there are seven UK-focused investment trusts. The largest is the UK-focused £2.1bn HICL infrastructure fund, managed by InfraRed Capital Partners. The fund has helped finance roads, schools and a high-speed rail line in the Netherlands. Its share price total return has been 46.3 per cent over three years, compared to a FTSE World share price return of 44 per cent.

The second-largest, the £1.7bn 3i Infrastructure fund, focuses on investing in greenfield private-public partnership projects in the UK and Europe. Its share price total return has been 64.1 per cent over three years, compared to 16.7 per cent on the FTSE Europe. That has decreased over one year to 16.5 per cent, as its share price has pushed upwards. The fund is also relatively expensive, with ongoing charges of 1.36 per cent, which is bumped up to 2.86 per cent if the performance fee is triggered.

Although the US holdings of these trusts are small at best, Simon Elliot, investment trust analyst at broker Winterflood, says US infrastructure projects “could be of interest” to some of their management boards — but warns that “any new projects are likely to be some years away from being mature enough for these funds to get involved.” The further downside is that these funds are trading on a premium to their net asset value, meaning investors will pay more for shares than the underlying assets are worth.

Steven Richards, associate director at Thesis Asset Management, says he is considering “taking profits” from the investment trusts he holds and investing the money in more globally focused open-ended funds and ETFs instead. “This will get us more global exposure,” he says. While investment trusts tend to invest directly in infrastructure projects, open-ended funds will hold equity in related companies.

The equity route

Lazard Global Listed Infrastructure Equity and Legg Mason RARE infrastructure are two such funds, both with around a third of their investments in the US. Lazard holds shares in US companies such as Norfolk Southern, and Italian company Atlantia, while Legg Mason’s fund has stakes in Sempra Energy and American Tower Corp. There is also First State Global Listed Infrastructure, the infrastructure equity fund with the highest US exposure with just under 50 per cent invested in the US.

However, wealth managers are torn on whether specialist infrastructure funds are a better bet than more general US or global equity funds. The latter may well also end up playing the infrastructure theme ahead of a hard-to-ignore “shift in economic management in the US,” says Jason Hollands, managing director at wealth manager Tilney Bestinvest.

By thinking about what might happen further down the supply chain, equity managers more broadly can still get some exposure to the asset class. “If you look at what Trump was actually talking about, it’s not necessarily going to benefit operating companies that are up and running,” says Mr Richards of Thesis. “He’s talking about building roads and bridges, so you want to look beyond ‘classic’ infrastructure and look at the supply chain.”

Energy, commodity and materials companies will all stand to receive a boost in business from any infrastructure spending. Simon Clinch, US equities fund manager at Invesco Perpetual, says he has been building up his exposure to these stocks through the year to capture an infrastructure theme. “Companies that will provide cement is an infrastructure theme, but also the sand that will be used to extract shale oil,” he says.

If Mr Trump carries through his plan to spend “double” what Mrs Clinton had promised on infrastructure, the US construction industry should see an uplift of around 30 per cent, says Mr Clinch. Even so, he warns that just as infrastructure is a long-term investment, the benefits may not show up on the balance sheets of construction companies for quite some time.

“The first time we’ll see this come through will be around 2018,” says Mr Clinch. “We’re going to take time out to understand what this means for the earnings of those companies, rather than jumping into machinery stocks or whatever.”

Even then, it’s not clear whether US stocks are the best ones to jump into. Dave Mazza of State Street points out that a company doesn’t only earn dollars just because it is a US brand — and gaining exposure to the US infrastructure game through equities is a difficult game. “There’s no perfect way,” said Mr Mazza of State Street. “If you look at [US] industrials, many of those companies have a large element of overseas exposure.”

On the other hand, non-US companies might be winning US construction contracts, and although Mr Trump is no fan of international trade deals, there’s nothing to say that this won’t continue. “I think a lot of what he’s saying is aimed at Asia and China,” says Mr Mazza. “We don’t have much information, but some of your larger European companies might benefit as well.”

What now?

For retail investors keen to invest in the UK, Mr Hammond may have something up his sleeve in his first Autumn Statement next Wednesday. The Treasury, which is keen to give retail investors access to infrastructure investing, is drawing up proposals for new “infrastructure bonds”.

Discussions have already mooted the idea of setting up a new “infrastructure bank”, modelled on the state-owned British Business Bank. Although experts told the Financial Times that the new bank would be more likely to invest in “operating assets” that had already been built and needed refinancing, it could also potentially help fund new projects. This would help both pension funds and retail investors, allowing the government to underwrite some of the risks in exchange for financing.

As for Mr Trump, questions remain about whether he will be able to pass the necessary bills by his fellow Republicans, many of whom, like Speaker of the House of Representatives Paul Ryan, are against the idea of borrowing too much money. “Is he going to get the infrastructure spend?” asks David Stubbs, global market strategist at JPMorgan Asset Management. “This is a politician that has promised everything to everyone.”

What is expected to put the wind in Mr Trump’s sails, however, is the consensus from both parties on the need to renew US infrastructure. The American Society of Civil Engineers has projected a $1.44tn infrastructure funding investment gap between 2016 and 2025.

“We’re still trying to sort through what this means,” says Mr Rodriguez of Deutsche. “I won’t make any predictions. Generally there are cautionary tales in other parts of the market but on the whole infrastructure is good news for us in the US.”

Investors looking for a cheaper alternative to an actively managed infrastructure funds could invest in a range of passive infrastructure funds on offer.

The funds, which are exchange traded funds tracking specialist indices, buy a range of infrastructure related equities according to a specially compiled index from one of S&P, MSCI, FTSE, Morningstar, or Macquarie.

S&P’s global index tracks 75 companies ranging across utilities and industrials, which make up 80 per cent of the fund, with energy stocks making up the remainder. All of the major ETF providers, including Deutsche’s x-trackers, BlackRock’s iShares and State Street’s SPDR offer funds tracking this index. Around 40 per cent of the companies held by these trackers are US companies, with the rest being European or Asian.

Rival index provider MSCI has created a World Infrastructure Index, but unlike S&P’s, is more weighted towards telecommunications. Just over 42 per cent of its constituent stocks are in telecommunications companies, with its top three holdings being AT&T, Verizon and Vodafone. For investors, this might be a less helpful play on the infrastructure theme; Mr Trump has previously committed to blocking AT&T’s $85bn bid for Time Warner, while many of the European telecoms companies in this index may suffer from the dollar exchange rate.

Morningstar has a newer and slightly different index — it is still built around an infrastructure theme, but is multi-asset and buys both stocks and debt in equal measure. Like S&P’s index, the majority of its investments are in utilities and industrials.

European bank stocks sliding

Posted on 17 November 2016 by

Bank stocks are suffering on an otherwise relatively subdued morning for European equity markets.

Royal Bank of Scotland started the morning second from bottom of the FTSE 100, falling as much as 2.5 per cent. Yesterday, James Leigh-Pemberton, head of the vehicle that looks after the UK government’s investments in taxpayer-backed banks, told a committee of MPs that RBS could be hit with a fine as high as $12bn from US authorities. RBS is under investigation by the US Department of Justice over the way it sold mortgage-backed securities in the run-up to the 2008 financial crisis.

The eurozone-wide Euro Stoxx Banks Index opened down 1.4 per cent with every constituent in the red, its worst day since the election.

At publication time:

  • RBS: -1.3 per cent, 205p
  • Lloyds Banking Group: -0.8 per cent, 60p
  • ABN Amro: -2.3 per cent, €20.42
  • Bank of Ireland: -2.8 per cent, €0.21
  • Banco Popular: -2.3 per cent, €0.87
  • Mediobanca: -1 per cent, €6.89

Financial stocks were some of the biggest beneficiaries in the immediate aftermath of Donald Trump’s election victory, encouraged by rising long-term bond yields that help increase margins for lenders.

Bond yields rose to multi-year highs in expectation of higher inflation caused by Donald Trump’s planned fiscal stimulus, but the sell-off has lost some of its momentum this week, with the Bank of Japan’s announcement that it will stick to its yield curve target helping to push yields back down again this morning.

Global sales of coco bonds fall by almost a third in 2016 – Moody’s report

Posted on 14 November 2016 by

Global sales of the riskiest bank bonds have fallen by almost a third in 2016, according to a new report from Moody’s.

New issuance fell to $58.7bn to the end of September, down from $84.4bn over the same period in 2015, writes Thomas Hale.

Coco, or “contingent convertible”, bonds are part of a post-financial crisis kaleidoscope of bank debt designed to make the system safer. They force losses on investors when a bank’s capital position – an indication of balance sheet strength – falls below a certain level.

Moody’s, the rating agency, suggested that the fall in new sales was related to concerns over the risk of missed coupons on the bonds – another way in which losses can be imposed on investors.

Fears of missed coupons hit the radar at the start of 2016, with complicated regulatory rules exacerbating a sudden loss of confidence in the instruments as bank shares tumbled.

Those fears re-emerged in light of Deutsche Bank’s volatile market performance in September, after the German bank announced it was negotiating with the US Department of Justice over claims for the mis-selling of mortgage-backed securities.

In its report, Moody’s said that it does not expect Deutsche’s management to settle for an amount that would “jeopardize” its ability to make coupon payments on the bonds.

Issuance was particularly weak in Europe, where only $21.4bn of bonds were sold by the banking sector, compared to $40bn in the first three quarters of 2015.

To compensate for their higher risks, coco bonds pay investors higher yields than most other fixed-income products. They often move closely in tandem with bank shares, which have moved sharply this year due to fears over low interest rates and their impact on bank profitability.

Global investors dump bonds as post-Trump sovereign debt sell-off quickens

Posted on 14 November 2016 by

Global investors are dumping sovereign bonds, cutting their exposure to one of the best-performing asset classes of 2016, as the conviction that a Donald Trump presidency will deliver higher inflation dominates markets.

Yields on Treasuries shot higher in Asian trading, a move that has been sustained in early London trading on Monday and rippled out across the eurozone bond market. In Europe, yields on Germany’s 10-year debt are back at levels not seen since the summer, with those on Spanish, Portuguese and Italian bonds also higher. Yields move in the opposite direction to prices, writes Michael Hunter.

With Mr Trump pledging a major infrastrucure programme, tax cuts and protectionist policies, investors have rapidly concluded that will mean higher growth — and inflation — for the US economy over the next couple of years. The absence of inflation in the US since the financial crisis has helped fuel the great rally in bonds, allowing the Federal Reserve to keep interest rates near record lows.

“The prospect of US fiscal stimulus under the new government has increased our conviction that the US 10-year yield will reach 2.5 per cent in 2017, possibly faster than we earlier assumed,” said Francesco Garzarelli, co-head of European macro research at Goldman Sachs. “Whether Mr Trump’s presidency brings fiscal spending or protectionism, we think either scenario would boost inflation.”

In early London trading on Monday, the yield on the benchmark 10-year Treasury bond rose 12 basis points to 2.24 per cent, its highest level since January. The yield on 30-year government paper also jumped 12 basis points to 3.03 per cent, while five-year notes were yielding 1.66 per cent, up 13 basis points.

That, in turn, sent the dollar index up 0.5 per cent to 99.52, moving nearer the 100-point mark it last hit in December.

European bond yields also rose, with the yield on 10-year Bunds up 5 basis points to 0.35 per cent, the highest since early May. Spain’s 10-year debt yield is up 6 basis points at 1.55 per cent, with Portugal’s up 3 basis points at 3.53 per cent.

The post-US election equities rally is holding in Europe, even after a mixed showing in Asia. London’s FTSE 100 is up 1 per cent, with the Xetra Dax 30 up 0.8 per cent. The region-wide Euro Stoxx 600 is up 1 per cent.

Wall Street finished a strong week on a mixed note on Friday, as the S&P 500 slipped but the Dow Jones Industrial Average closed at a record high.

$200bn drained from equity funds since start of 2016

Posted on 13 November 2016 by

Investors have pulled more than $200bn from equity funds since the start of 2016, with asset managers blaming the retreat on mounting concerns about political upheaval in developed economies and rocketing company valuations.

This year’s outflows are the worst for equity managers since 2011, when investors pulled $148bn from funds exposed to global stock markets.

Almost all types of equity mutual funds have been hit with redemptions this year, with $100bn being withdrawn in the latest quarter alone, according to figures exclusively compiled for FTfm by Morningstar, the data provider.

The sell-off comes at a time of seismic political change. The unexpected victory of Donald Trump in the US election last week and the UK’s vote to leave the EU in June took markets by surprise.

Jim McDonald, chief investment strategist at Northern Trust Asset Management, which oversees $946bn, said the outflows came on the back of investor “concerns over global growth and the deteriorating political environment”.

Helena Morrissey, former chief executive of Newton, the London-based investment manager, said that with some markets reaching record highs this year, including all three of the big US indices, investors are worried that stocks are overvalued.

The S&P 500 reached a record high in August and continued to climb after Mr Trump’s victory was announced. The FTSE All-Share index of UK stocks is up 16 per cent since the start of the year.

“There is a sense of [equity valuations] having defied gravity for a long time and the fundamentals don’t look so great. It doesn’t surprise me that people have taken money off the table,” she said.

The biggest outflows during the latest quarter were from US and European equity funds focused on large and midsized companies.

Investors are increasingly concerned about the political landscape in Europe, where a referendum in Italy in December and elections in France and Germany next year could yield unexpected results that dent confidence in stock markets.

There are also fears about the impact of Mr Trump’s proposed economic agenda on the US stock market, in particular the president-elect’s calls for tariffs on imports.

James Swanson, chief investment strategist at MFS Investment Management, the US fund company that oversees $439bn of assets, said: “The addition of tariffs is probably a negative for S&P 500 companies, since roughly 40 per cent of their revenues are generated outside the US.

“Lower revenues and profits should be expected if deglobalisation becomes a centrepiece of the Trump agenda, and we think it will.”

According to an index compiled by Hargreaves Lansdown, the British wealth manager, investor confidence in the UK stock market hit a record low this month, despite the FTSE 100 index reaching a 12-month high in October.

Laith Khalaf, senior analyst at Hargreaves, said: “The conundrum is that the stock market and confidence seem to be moving in opposite directions.

“There is some sense in this because as stock prices rise, investors become more wary of a subsequent fall.”

Darius McDermott, managing director of Chelsea Financial Services, a UK-based investment adviser, added: “We have been saying for the past year that the outlook for equities was uncertain, and that was before Brexit and [the election of Donald] Trump. People are struggling with [where to invest].”

Investor redemptions in the first nine months of the year represent about 6 per cent of total assets in equity funds, the Morningstar data showed. Despite the outflows, equity fund assets have risen 4 per cent this year, to $11.7tn, due to market appreciation and currency gains.

Investors globally have pulled another $11.4bn from equity funds between the start of October and the day of the US election, according to separate figures from EPFR, a data provider.

In contrast, bond funds and money market funds have attracted $276bn and $150bn respectively since the start of the year, according to Morningstar.

Vanessa Robert, an analyst at Moody’s, the rating agency, said there has been a “flight to safety” this year.

“Investors are looking to park their cash in what they consider to be safe investment options,” she said.

According to Moody’s, the assets in prime-rated money market funds that use either the euro or sterling as their base currency hit a 12-month high in September. This is despite many money market funds currently offering low or negative yields.

Mr McDermott said it has been a “very difficult year” for equity-focused asset managers. Several fund houses, including Henderson and Old Mutual Asset Management, have reported redemptions in 2016.

“If you are not doing really badly, you are probably happy,” he said.

Investors Chronicle: WPP, Plexus, SSE

Posted on 11 November 2016 by

Buy: WPP (WPP)

WPP intends to earn 40 to 45 per cent of turnover in fast-growing markets and new media over the next four to five years, writes Theron Mohamed. Following the EU referendum, it also plans to deepen its foothold in continental Europe.

Geographical expansion and technology investments underpinned like-for-like net sales growth across all regions and three out of four divisions of WPP in the third quarter to September 30. Despite the Brexit vote, the advertising giant still expects full-year net sales to grow by over 3 per cent, and the constant-currency net sales margin to widen by 0.3 percentage points to 16.8 per cent.

New business grew by 8 per cent to about £3.47bn in the nine months to 30 September. However, acquisitions and share buybacks meant average net debt swelled 12 per cent to £4.21bn. Broker Macquarie expects earnings per share of 114p in 2016, up from 94p in 2015.

The advertising group has warned that a softening in like-for-like revenue growth in the UK, its home market, was “perhaps reflecting the first impact of Brexit uncertainties”.

“It’s tough sledging,” said Sir Martin Sorrell, chief executive, who campaigned for Britain to remain in the EU. “Slow growth is the new normal and we don’t see any reason to think that will change in 2017.”

WPP’s shares are up 13 per cent on our buy tip in March 2015 but still trade at 15 times forecast earnings, undervaluing an industry leader with a stellar record and compelling growth strategy.

Buy: Plexus (POS)

In a very tough market, Plexus’s ability to manage costs is impressive and its decision to suspend its dividend was inevitable, writes Megan Boxall. Cenkos thinks the low point in exploration activity will come next year, and this company will be ready when the cycle turns.

The strong position of wellhead services supplier Plexus on the North Sea continental shelf has caused it some considerable heartache in the past year. With global oil prices falling to a 13-year low in January, exploration drilling activity in the North Sea dropped to the lowest level ever recorded. The subsequent diminished demand for the group’s POS-GRIP wellhead equipment saw the company swing to an adjusted net loss of £5.8m from a £5.4m profit in the prior year.

Responding to the downturn, the group has taken considerable steps to reduce its cost base. In the reported period, almost half of annualised personnel costs and general overheads were stripped out and research and development expenditure dropped from £4.1m to £2m. This has helped protect the balance sheet through the current turbulence.

But the cyclical low point has clearly exposed the group’s narrow geographical exposure and limited number of products. Management is actively searching for new contracts away from the North Sea, and secured two such purchase orders in the reported period. It is also expanding the number of its friction-grip products through collaborations with big drilling companies.

Nevertheless, broker Cenkos expects losses to endure in the year to June 2017 and has forecast a pre-tax loss of £5.9m and a loss per share of 5.6p (losses of £6.2m and 5.6p in full-year 2016).

Hold: SSE (SSE)

One of the biggest challenges for SSE is maintaining its pledge to keep increasing its dividend at least in line with RPI inflation, while preserving adjusted earnings coverage of 1.2-1.4 times over the three years to 2019, writes Emma Powell.

Management says it is on course to achieve this for the full year, but this is still below its longer-term target of close to 1.5 times. The income is good for now.

Energy giant SSE (SSE) is preparing for record annual investment and capital expenditure of around £1.85bn next year. Following its sale of a 16.7 per cent stake in Scotia Gas Networks in October, management has announced plans to direct £100m towards construction of the 225 megawatt Stronelairg wind farm. The remaining proceeds will finance a share buyback of about £500m.

Favourable mark-to-market movements in the group’s forward purchase contracts for power, gas and other commodities boosted reported pre-tax profits. However, a fall in wholesale and retail revenue left adjusted operating profits down 9 per cent at £637m.

The wholesale business suffered a decline in adjusted operating profits of just under a quarter, largely as a result of a 21 per cent decrease in electricity output from renewables. On the retail side, customer account numbers fell from 8.41m to 8.13m. As a result, average household electricity supplied declined to 1,544 kilowatt hours.

The networks business — which includes gas and electricity distribution and electricity transmission — put in a better performance during the period. It reported a marginal uplift in adjusted operating profits to £456m, due primarily to the gas distribution business.

Chris Dillow: Equities after Trump

Shares fell sharply on the day after the UK voted to leave the EU only to recover nicely. Might not we see the same pattern in response to Donald Trump’s victory in the US presidential election? The answer is: yes, but.

The reason to expect a bounce is that uncertainty is bad for stock markets and as uncertainty diminishes shares should recover.

As Mr Trump’s policy agenda becomes clearer, uncertainty should fall, thus raising prices. As the old saying goes, “better the devil you know.”

And Mr Trump might not be the devil. Barclays’ Will Hobbs says: “Little of President Trump’s campaign trail rhetoric will make it to actionable policy.” And Brian Davidson at Fathom Consulting believes we’re more likely to see “Trump lite” than “Donald Dark”. The old clichés about checks and balances and campaigning in poetry but governing in prose are clichés because they are true.

Shares might get further support from monetary policy. Philip Shaw at Investec says “a December Fed hike is less likely” because the Fed would be loath to raise rates at a time of uncertainty.

So much for the good news. There are, however, reasons to worry.

One is that low interest rates won’t last long. Ian Kernohan at Royal London Asset Management says that in the longer run a looser fiscal policy, immigration controls and higher tariffs would all raise inflation and interest rates, which would be bad for bonds.

Also, it’s possible that long-term dividend growth might be lower — something that would justify permanently lower equity prices. Even if Mr Trump cannot implement his more flamboyant campaign rhetoric, tougher immigration controls and some kinds of trade barriers look likely. Both would hurt long-term growth. Mr Shaw says: “There is a tangible risk that a Trump presidency could fuel anti-globalisation momentum and spark a wave of protectionist policies around the globe.” This, he says, “would almost certainly knock not just US, but world growth prospects”.

Yes, a weaker US dollar and easier fiscal policy might well boost growth. These, though, are short-term cyclical positives. The blows to growth from immigration controls and tariff barriers might be longer-lasting — sufficiently so perhaps to offset Mr Trump’s promised cuts in corporation tax.

This is not to say they’ll be catastrophic. Developed economies are resilient to policy shocks, and history tells us there is little governments can do greatly to change long-run growth. Nevertheless, even 0.1 percentage point lower dividend growth should mean a 0.1 percentage point lower dividend yield – which would wipe 4 per cent off prices.

Insofar as Mr Trump’s victory is an assertion of the power of Main Street against “elites”, it calls into question the shareholder-friendly policies investors have enjoyed since the 1980s.

This raises the question: will we see a shift in incomes away from profits towards wages? Here, the signals from Mr Trump have been ambiguous. On the one hand, his calls for corporate tax cuts augur well for investors. But his protectionism doesn’t. Mr Davidson warns that this would be “a disaster for capitalists the world over”.

But there might be something else. Uncertainty of the sort that can be quantified by Mr Bloom and colleagues is only part of the story. Mr Trump’s victory has increased uncertainty in two other ways, which might be longer-lasting.

For one thing, the simple fact that markets weren’t expecting a Trump win — just as they weren’t expecting Brexit — should remind investors that they know less about the future than they think. If this lesson is learned (which given the power and ubiquity of overconfidence it might not be) then risk premia should stay higher than they have been in the past.

Also, Mr Trump’s victory might change outsiders’ perceptions of the US. For decades, the US has enjoyed what Valery Giscard d’Estaing called “exorbitant privilege”: demand for US assets has been higher than the US’s large overseas debt and suspect economic fundamentals would warrant, which has allowed the country to borrow cheaply. In part, this has been because the US has been regarded as a low-ambiguity economy. Thanks in part to the country’s cultural hegemony, foreigners feel a familiarity with it which they don’t feel towards (say) Japan or Germany.

However, Mr Trump’s surprise victory has taught us that we perhaps know less about the US than we think: there’s much more to it than Hollywood and New York, some of which isn’t pretty: it is Beverly Hillbillies more than the West Wing. This poses the danger that the US will lose its exorbitant privilege, its safe haven status and ability to borrow cheaply. This won’t happen overnight, but over years. If Mr Trump’s victory is a watershed moment — and that is for now an if — it is perhaps one in this sense.

Chris Dillow is an economics commentator for Investors Chronicle

The Financial Times and its journalism, including Investors Chronicle content, are subject to a self-regulation regime under the FT Editorial Code of Practice: FT.com/editorialcode

Quick View: EU’s extra time raises LSE-DB deal temperature

Posted on 11 November 2016 by

The London Stock Exchange Group and Deutsche Börse are entitled to feel that the extra time Brussels will have to assess their deal is a positive sign.

In extending their deadline by 15 days to March 6, European antitrust authorities will be able to test the market impact of the LSE selling off the French clearing arm of LCH, as it proposes. Interested parties will offer their thoughts when a second round of questionnaires arrives in coming days.

The asset — also known by its old brand name Clearnet — is really only available if Brussels approves the megamerger — and the deal is completed. Divesting the asset has always been likely for deal approval. But is it enough?

The EU’s initial investigation flagged up several areas of concern. The deal could hit competing trading venues that depend on LCH for clearing, such as Paris-based Euronext.

Another concern for the commission is the repo market. It is used for secured short-term funding, and is where banks and corporations can price and source collateral to meet margin requirements for derivatives trades.

The cleared repo market also helped preserve market access for banks for funding from some peripheral Eurozone countries during the financial crisis.

An LSE-DB combination would create an entity with a dominant European position in cleared repo and fixed income trades. One segment, the general collateral triparty cleared repo market, would be particularly affected. Deutsche Börse’s GC Pooling product, backed by the Bundesbank, is really the only available rival to LCH’s €GCPlus, which gives access to the Banque de France.

In theory the merged company could also force its counterparties to settle all cleared repo transactions in Deutsche Börse’s Clearstream settlement house. 

Selling LCH France has always been part of the exchanges’ antitrust tactics — the LSE has long had frustrations that it cannot make some of the cost savings it has wanted to. The LSE’s banker JPMorgan is assessing interest. Likely potential bidders will discover if they are through to the next round in coming weeks. 

Even so, Euronext remains the obvious buyer of an asset it divested in 2003; for growth; to rebuild Paris as a financial hub; and to get a toehold in derivatives clearing.

Analysts at Bank of America Merrill Lynch summed up their third-quarter results this week that: “There’s little to transform the market view on Euronext. Longer term, the company’s success in deploying its M&A potential will be key.”

But more concessions from the LSE and Deutsche Börse may come. For example, the EU flagged up concerns of “a significant loss of competition” in German equities. Deutsche Börse’s Xetra has a 60 per cent market share and the LSE-controlled Turquoise has about 13 per cent. Prising Turquoise away might be painful for the LSE but it is unlikely to be a deal-breaker. There are also rumours that CurveGlobal, the LSE’s new fixed income trading venue, could be up for discussion.

CurveGlobal, Clearnet and Turquoise are all assets from the LSE stable. This is supposed to be a merger of equals. What is Deutsche Börse prepared to part with, and whose deal is this? 

The biggest hurdle is still likely to be in derivatives clearing. Like the repo market, in theory the collateral and margin placed at SwapClear, LCH’s interest rate swaps business, could be diverted to Clearstream. Rules on derivatives mean clearing houses have to leave the margin and collateral they hold for traders at a settlement house.

An offer to sell the minor Eurex OTC clearing business is unlikely to sway the commission. If Brussels decides a link between Eurex’s futures and the LCH’s swaps clearing can crimp competition — or that markets for sourcing and the flow of collateral can be cornered — then it may demand that LCH’s SwapClear or Eurex Clearing be hived off too. And for the exchanges, that will almost certainly be a concession too far.

European stocks join FTSE in negative territory

Posted on 11 November 2016 by

The Europe-wide Stoxx 600 index has swung into negative territory after starting the day positively, while the FTSE 100 has extended its losses as the post-election stock market rally comes to an end.

The Stoxx 600 is down 0.03 per cent at publication time, having climbed more than 0.6 per cent in early trading.

Gold miners and companies exposed to emerging markets are among the biggest fallers, but financial groups have also lost some of their earlier gains, with the Euro Stoxx Banks Index down 0.6 per cent at publication time, having risen 1.4 per cent at the open.

Shares in Aberdeen Asset Management are on track for their worst day since June, down 5.6 per cent, while Standard Chartered shares are down 4.7 per cent. The two stocks are often treated as a proxy for exposure to emerging markets, where fears are growing about Donald Trump’s proposals for more protectionist trade policies.

The FTSE 100, which opened with a slight rise, is now down 1.2 per cent, encouraged by a rally in the pound.