Carney: UK is ‘investment banker for Europe’

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

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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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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

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

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Financial system more vulnerable after Trump victory, says BoE

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

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China stock market unfazed by falling renminbi

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

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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.


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.


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.

Trump rally cools at end of game-changing week for global markets

Posted on 11 November 2016 by

The post-election rally that has reshaped global financial markets cooled off Friday, at the end of a week in which investors quickly adjusted to a president-elect who has promised to step up government spending and slash business regulation.

The S&P 500 dipped 0.1 per cent on Friday in New York, while the Eurofirst 300 fell 0.6 per cent, paring back this week’s gains.

The rapid change in sentiment following Donald Trump’s election has led a shakeout across nearly all financial markets with old-school industrials rallying in anticipation of infrastructure spending; tech stocks selling off amid fears of trade wars hitting their Asian supply chains; and US Treasuries plummeting in anticipation of heightened government debt.

By the end of Thursday, the Bloomberg Barclays Multiverse index — one of the biggest bond market gauges with over $49tn of debt — had slumped 2.3 per cent, making this the worst week for global fixed income since the peak of the “taper tantrum” in June 2013. Even before Friday’s sell-off in Europe, $1.1tn had been sliced off global bond markets this week.

The US bond market was closed for Veterans Day on Friday, but the sovereign debt rout continued unabated in Europe and Asia; when the final toll is counted, the week as a whole could be the worst since February 1999.

“It’s a tectonic shift,” said Henry Kaufman, the former Salomon Brothers chief economist and the first analyst dubbed “Dr Doom” for correctly calling the last bond bear market in the 1970s.

Mr Kaufman now predicts the end of a three-decade bond bull market, given the likelihood of unfunded tax cuts, infrastructure spending and a radically reshaped Federal Reserve under the incoming president Trump.

“I would say the secular trend is going to be upwards now,” he told the FT. “Secular swings are hard to forecast, but the secular sweep downwards in interest rates is over, and we are about to have a gentle swing upwards.”

With investors starting to bet on accelerating inflation and surging federal deficits, the Federal Reserve signalled on Friday it is preparing to lift interest rates in December. Some analysts thought market volatility on election night might prompt the Fed to hold fire next month, but Stanley Fischer, the vice-chair of the Federal Reserve Board, said the case for gradual rate rises is “quite strong”.

Investors pumped more than $5bn into US equity funds over the past week, targeting healthcare and financial companies, while emerging market stock funds recorded their second consecutive weekly outflow, the first time that has happened since June.

“Expectations of decreased regulation, favourable tax reform, increased fiscal spending and less congressional gridlock should drive stronger revenue growth and higher net income margins,” said JPMorgan strategists Marko Kolanovic and Dubravko Lakos.

But the impact of Mr Trump’s election has been felt well beyond American shores, particularly in emerging markets that risk the fallout of Donald Trump pursuing a protectionist trade policy.

The peso plumbed another record low on Friday. JPMorgan’s emerging market currency index was set for its worst weekly losses in three years.

Protectionism risk is a big weight on emerging market currencies, said Steven Englander, head of FX strategy at Citigroup.

“To work well for EM FX, you need Trump to say, ‘We love everyone, we want to sit down and go over these trade treaties and make them beneficial for everybody involved’, then some of the pressures on EM will abate.’’

In a shift from the relationship in recent years between demand for raw materials and the prospects for developing nations, emerging markets have suffered at a time when commodity prices have risen. Iron ore traded at its highest price in more than two years on Friday.

Even if the president-elect did push his protectionist rhetoric to one side, he is more likely to pursue a Reagan-style policy mix of fiscal stimulus and monetary tightening, Mr Englander added, “and the impact on rates will be dollar-positive across the board”.

Also in the trade spotlight were US technology companies that rely on global supply chains, with the shares of leading tech giants notably lagging the rally in US equities that pushed the Dow Jones Industrial Average to a record high. US equities were set to open lower on Friday as European share markets were modestly weaker.

Expectations of a stronger US economy and higher inflationary pressures propelled Treasury bond yields sharply higher, with the 10-year yield climbing from a low of 1.71 per cent on Wednesday morning to end at 2.15 per cent on Thursday, with the market closed for Veterans Day on Friday.

Broadly the markets have taken the view that Trump’s win means fiscal stimulus and reflation, said Frederik Ducrozet, senior economist at Pictet Wealth Management. “But longer term, protectionism could have a huge impact on growth potential for US trade partners in the world, in particular emerging markets. Once Trump makes his first decisions on trade next year you can expect to see the impact start to really hit in 2018.”

Additional reporting by Sam Fleming in Washington DC and Eric Platt in New York.

Week in Review, November 12

Posted on 11 November 2016 by

A round up of some of the week’s most significant corporate events and news stories.

Yahoo admits staff knowledge of hacking in 2014


Whether the timing was by accident or design, Silicon Valley technology companies released bad news this week that was easy to miss in the hullabaloo around the US election, writes Hannah Kuchler.

In a filing with the US Securities and Exchange Commission, Yahoo said some of its staff had known about a massive hack close to when it happened in late 2014.

It had previously maintained that no one internally knew of the state-sponsored attack until this August.

The timing is important because Verizon signed a deal to buy the internet company for $4.8bn in July.

Since the announcement of the attack, as a result of which the information of at least 500m Yahoo users was stolen, Verizon has said it might like a discount if there is a material impact on the business.

In the same filing Yahoo said forensic experts were investigating evidence that an intruder had created a way to access account information without passwords, using cookies.

It added that law-enforcement agencies were sharing data provided by a hacker, though it was unclear whether this information derived from the same attack or a different one.

At almost the same time on the day after the election, Adam Bain, the chief operating officer of Twitter, announced that he was stepping down after six years at the company. He did not say where he was going.

He will be replaced in the role, which oversees advertising revenue, by Anthony Noto, Twitter’s chief financial officer.

Mr Bain is the most senior Twitter executive to leave since Jack Dorsey, co-founder, returned to take charge of the faltering messaging platform last year.

As the first election results were rolling in, GoPro said it was recalling its Karma drone after some units had lost power mid-air.

The news came less than a week after the maker of action cameras had warned investors about production problems.

Karma had been considered a flagship product launch for the holidays.

French authorities examine Renault emissions file

A car’s emissions are tested © PA

Renault’s diesel emissions scandal deepened this week as French state prosecutors were called in, raising the prospect of a conviction for the company, writes Peter Campbell.

A government investigation has been assessing the legality of Renault’s engine management system, which switches off emissions controls when the temperature is below 17C.

This system meant Renault cars passed official laboratory emissions tests, but gave off far higher levels of poisonous nitrogen oxide gases when driving in real world conditions that were colder than 17C.

Questions have been raised over similar systems used by Fiat and General Motors’ Opel unit, but Renault is the first company to face the prospect of prosecution over it.

Its system is different to that used by Volkswagen, which specifically detected lab conditions and then turned off an emissions control function.

On Wednesday, the carmaker said France’s independent technical commission and fraud agency had passed the case on to public prosecutors.

Renault shares fell from €75.43 to €72.41 on Thursday morning, but recovered to €74.04 yesterday.

Earlier in the year, Renault set aside €50m to cover the cost of a software fix for 900,000 affected vehicles. But Stuart Pearson, an analyst at Exane BNP Paribas, said the 4 per cent share price fall on Thursday morning indicated investors were expecting costs of up to €900m, or the equivalent of €1,000 per vehicle.

Disney takes a hit on falling ad revenues

© Bloomberg

Walt Disney reported a sixth consecutive year of record results this week, but earnings per share slipped 10 cents to $1.10 and below analyst estimates of $1.15 in the final quarter to October 1, writes Matthew Garrahan.

The media company took a hit on lower advertising revenues and affiliate fees from its ESPN sports cable network, related to a “decline in subscribers”, a theme that continues to spook investors, given that the network generates about half of Disney’s profits.

But Bob Iger, the chairman and chief executive, was bullish about its prospects, with new channel bundles being launched by digital providers such as YouTube and Hulu.

“ESPN has the richest collection of sports rights in the business,” he said, pointing to a new NBA contract, which will run to the end of the 2024-2025 season. “I feel really good about the programming [and] I feel really good about [ESPN’s] ability to drive solid advertising.”

Operating income in the quarter fell at each of Disney’s main divisions. Movie studio profits slid 28 per cent on a weaker slate of films, particularly the summer releases of Pete’s Dragon and Queen of Katwe. Disney did release two hits, with Finding Dory and Captain America: Civil War generating big box office returns.

For the full year, Disney broke box office records across the board with four movies crossing $1bn in global box office and a fifth, Jungle Book, making more than $900m. “Disney [Animation], Pixar, Marvel and Lucasfilm all contributed to this remarkable achievement,” Mr Iger said.

Rio board to meet over consultancy payments

The Simandou iron ore project in Guinea

The board of Rio Tinto will convene on Monday to discuss company payments made to a consultant for work on a controversial iron ore project in Guinea, writes Neil Hume.

At the meeting, directors are expected to consider the future of Alan Davies, the head of its energy and minerals business, according to people with knowledge of the matter.

Mr Davis was suspended following an internal inquiry into Rio’s payments to François Polge de Combret, who served as a consultant to the company on its Simandou iron ore project in Guinea. Mr de Combret is a former classmate of Alpha Condé, Guinea’s president.

Rio said on Tuesday it had become aware of company emails from 2011 “relating to contractual payments totalling $10.5m made to a consultant providing advisory services” on Simandou, regarded as one of the best undeveloped deposits of iron ore. It subsequently notified regulators in Australia, the UK and US about the payments to Mr de Combret.

Emails from May 2011 seen by the Financial Times show former Rio executives and Mr Davies debating the payments to Mr de Combret. A month earlier, Rio paid $700m to the then new Condé government to secure its claims over half of Simandou.

Last month Rio said it had agreed to sell its 46.6 per cent stake in Simandou to China’s Chinalco for up to $1.3bn. Analysts say Chinalco could now seek to renegotiate the price.

Rio declined to comment. Mr Davies could not be immediately reached for comment.

M&S in broad retreat from foreign markets


Marks and Spencer announced a far-reaching store closure programme affecting one in 10 of its clothing stores in the UK and many more overseas, as the company battles to turn itself round after years of market share losses, writes Mark Vandevelde.

The chain will stop selling clothes at a further 45 UK outlets, replacing existing full-line outlets with smaller Simply Food stores, refocusing the 132-year-old retailer on its successful upmarket grocery business. The overhaul to the company’s retail estate will take five years and cost £350m.

M&S will maintain its brand presence in locations including India and the Middle East via a profitable franchise business. But UK retailer will pull back from all but three of the overseas markets in which it runs its own stores. Only stores in Ireland, the Czech Republic and Hong Kong will be spared.

Among the store locations due to close is the chain’s flagship store on the Champs Elysées in Paris. The outlet opened in 2011 to loud fanfare, a decade after the British chain first retreated from western Europe.

Also due to close is a prominent branch in Shanghai, which M&S opened in a building that many local people believed to be cursed.

Steve Rowe, who started as chief executive in April, announced the changes as he unveiled half-year results that showed flat revenues and shrinking profits.

The store closures are “a step in the right direction”, said Jamie Merriman, an analyst at Bernstein. “But we won’t know for four years whether it’s worked.”

Ashmore slips amid rising inflation expectations

Posted on 11 November 2016 by

Ashmore hit a four-month low on Friday as emerging markets bore the brunt of rising inflation expectations in the wake of Donald Trump’s US election victory.

Ashmore, a debt-fund specialist and dollar earner, dropped 9 per cent to 298.8p as investors moved to price in a US-led infrastructure spending spree and an end to low global growth and inflation. Peers also slumped with Aberdeen Asset Management down 7 per cent to 288.4p.

Sterling’s rebound and a falling oil price combined to sink the wider market with the FTSE 100 dropping 1.4 per cent, or 97.55 points, at 6,730.43.

Packaging maker Mondi, which counts on emerging markets for about half its sales, slid 4.7 per cent to £15.17. Deutsche Bank questioned whether this reaction was logical, given Mondi is largely reliant on eastern Europe and domestic Russian sales.

Among the gold miners, Polymetal fell 4.9 per cent to 836.5p following a report in the Russian media that PPF Group, its 13 per cent shareholder, has been looking to sell the stake.

Building materials companies faded following a profit warning from roofing and insulation supplier SIG, which tumbled 21.8 per cent to 90.5p.

SIG blamed UK demand, saying September and October had been disappointing and that “one major competitor” had cut prices aggressively. Travis Perkins, of SIG’s biggest UK competitors, slipped 0.9 per cent to £14.01.

“With SIG still trading below peers and key management now in a state of transition, investors are likely to question whether SIG has a future as an ongoing listed entity in its current form,” said Deutsche Bank.

High street retailers were helped both by sterling’s rally and by BDO weekly data that showed apparel sales boosted by the recent cold snap.

Marks and Spencer gained 3.3 per cent to 327.2p, also helped by revived bid speculation, while Next was up 3 per cent to £50.40.

EasyJet rose 1.6 per cent to £10.55 and British Airways owner IAG took on 1.4 per cent to 440.6p. Berenberg started coverage of both stocks with “buy” ratings.

Next year looks tough for the airlines sector as the benefits of cheaper fuel give way to worries about capacity growth and the implications of Brexit, said Berenberg.

But EasyJet’s valuation already prices in these concerns while IAG can damp the effects by delivering “large, sustainable cost cuts, particularly at British Airways”, it said.

BAE Systems slipped from a record high, down 3.5 per cent to 590.5p. Business development director Alan Garwood sold shares for £200,000.

Drugmaker Shire lost 1.7 per cent to £49.98 after US data showed prescriptions for its Xiidra eye treatment, launched in August, were flat against the previous week.