2017—China’s banks are increasingly exposed to policy and other risks, but a crisis is not imminent, S&P Global Ratings said in its report, “Is This The Year For A Chinese Banking Crisis?”
“A banking crisis is likely to be avoided yet again in 2017, in light of another year of GDP growth exceeding 6%, and a change in the credit mix to relieve asset quality. However, the current trajectory is not sustainable,” said S&P Global Ratings credit analyst Qiang Liao.
Credit growth in China has surpassed economic growth for several years running, a dynamic that is gradually depleting Chinese banks’ once-ample funding bases. While overall deposit levels still exceed outstanding credits, the banking sector’s funding and liquidity buffers are thinning.
In 2016, Chinese banks accelerated their lending to the public sector and households, as new loans to the riskier corporate sector slowed. This change in the debt mix has helped keep a lid on nonperforming loans as a proportion of the total. However overall economic leverage continues to rise, diminishing funding buffers and making banks more vulnerable to tail risks.
“Crisis or not, we maintain and re-emphasize our negative credit outlook on China’s banking sector,” said Liao.
“Tail risks for Chinese bank credit profiles include policy risks related to China’s exchange rate, shadow banking, local government debt and corporate bond defaults, a property market correction, and external shocks,” Liao added. There is wide divergence of credit quality within the banking sector.
“We believe public confidence in China’s smaller institutions is much lower than for the megabanks and national banks. It’s not yet apparent if the smaller banks could withstand a stress event, such as a run on deposits,” said Liao.
“Given that many of the smaller Chinese banks are still aggressively expanding credit, and may lack sophisticated risk management, they are more likely to be caught off guard if market conditions rapidly weaken,” Mr. Liao added.
The article notes that smaller Chinese banks are still aggressively expanding credit, but may lack the sophisticated risk management to cope should market conditions rapidly weaken.
We get a lot of questions on how gold will perform in 2017. While we have no crystal ball, we thought the tidbit below might be of interest to you as you evaluate whether adding a gold component might provide valuable diversification to your portfolio.
Since Nixon took the US dollar off the gold standard in 1971 there have been seven Presidential transition years, i.e., years when a new president was inaugurated. Those years were 1974, 1977, 1981, 1989, 1993, 2001, and 2009.
Looking at the data, gold achieved above average returns during those calendar years, +14.8% in Presidential transition years vs an overall average of +8.4%. Perhaps equally important is that those have been years when the S&P 500 greatly underperformed its average over that same time period, -0.9% in Presidential transition years vs an overall average of +9.0%.
The S&P 500 on average was negative for those seven calendar years of Presidential transition. The average return in Presidential transition years is +14.8% for gold and -0.9% for the S&P 500.
One possible theory as to why this might make sense is policy disappointment of a new incoming administration, the high hopes of the newly elected administration may be tougher to achieve in practice, leading to weakness in equity markets. In addition to policy disappointment may be a general sense of policy uncertainty as the rules of the game potentially change under a new administration, which might boost gold as a safe haven.
One caveat is that seven transitions is a small sample size; the reason we limit ourselves to transitions since 1971 is because before gold was pegged to the dollar in one form or another for much of US history.
Foto: Alexas_Fotos. Los inversores globales aumentaron sus posiciones en efectivo durante diciembre
The BofA Merrill Lynch January Fund Manager Survey shows investors geared up for stronger growth and inflation, but are still reluctant to slash cash.
“Ahead of the US presidential inauguration, investors are positioned for stronger growth and inflation, but are not willing to turn fully bullish with China-related risks on the horizon,” said Michael Hartnett, chief investment strategist.
Manish Kabra, European equity quantitative strategist, added that, “Fund managers have returned to Europe amid improvement in the macro outlook, but UK remains the most underweighted region.”
“USD/JPY and Japanese stocks have been bought as inflation assets,” noted Shusuke Yamada, chief Japan FX/equity strategist. “Whether the post-election market trend reaccelerates or unwinds, these two asset classes are likely to be among the most impacted.”
Other highlights include:
Investor expectations of global growth improve to 2-year highs (net 62% from net 57% in December), while global inflation expectations remain elevated, with the fifth highest reading on record (net 83% from net 84% last month)
The percentage of investors expecting “above-trend” growth and inflation is at a 5.5-year high (17% from 12% in December)
Investors continue to identify Long USD as the most crowded trade (47%), while the highest percentage since April 2003 thinks that the Euro is undervalued (net 13%)
Big jump in percentage of investors expecting corporate earnings to rise 10% or more in the next 12 months (improved to net -22% from net -47% last month), the most bullish reading since June ‘14
However, cash levels rose to 5.1% from 4.8% in December, well above the 10-year average of 4.5%
The three most commonly cited tail risks are trade war/protectionism (29%), US policy error (24%), China FX devaluation (15%)
In January, investors said they were buying Eurozone, tech, equities and REITs, while selling industrials, EM equities and commodities
Allocations to Eurozone equities rose sharply to net 17% overweight from net 1% underweight last month
Allocation to Japanese equities remains unchanged from December at net 21% overweight, but optimism has room to grow
In closing a year of remarkable geopolitical events, there are still many unknowns that will only be revealed when the dust settles from the major elections and referendums across the globe. Natixis Global Asset Management and one of its leading affiliates focused on alternatives, AlphaSimplex Group, LLC. talk about volatility Ahead.
Downside risk is currently elevated at above average, appoints the firm, although not at extreme levels for international and emerging market stocks. For U.S. stocks, the measure is slightly below average. This may seem counter-intuitive given the modest gains delivered by stocks thus far in 2016 and the relatively positive market reaction to the U.S. presidential election results. But perhaps it isn’t all that surprising.
Recall the rollercoaster stock market of the first quarter of 2016, when investors became concerned about the slowdown in Chinese economic growth. Almost a year later, points out Natixis affliates, the health of the Chinese economy continues to be a global risk. Add to that the wildcard of the direction of U.S. and Chinese trade relations post-election. Other concerns weighing on global markets include rising interest rates in the U.S., a weak European recovery weighed down by immigration complexities and a refugee crisis. Mid-year, Brexit also added a pint of uncertainty to the world order.
“Against this backdrop, it appears the only certainty is persistent uncertainty. This uncertainty has contributed to a relatively wild ride in the U.S. stock markets over the year, where we have seen a trough to peak move in the S&P 500 Index of over 20%.2 While we do not view global equity risk at extreme levels, we do believe investors should proceed with caution”, conclude AlphaSimplex Group´s team.
The surprise election of Donald Trump has the potential to significantly reshape the United States’ domestic policy landscape and the country’s relationship with the world. In the latest edition of Global Outlook, Chief Economist Jeremy Lawson examines the trajectory of global growth and the possible economic implications of a Trump presidency.
The incoming president will inherit a supportive economic backdrop. Prior to the election, we saw increasing evidence that global activity had been improving. Stronger nominal growth also means a return to positive corporate profit growth and we are anticipating that this will continue to improve over the next 12 months.
Standard Life Investments believes there are a number of factors that will determine whether the first year of a Trump presidency amplifies the current trends or results in a change of direction. Significant factors would include an aggressive loosening of fiscal policy, a dismantling of President Obama’s domestic agenda and reorientation of American foreign and international trade policy.
Jeremy commented: “The near-term pro-growth aspects of the policy package promised by Donald Trump have been welcomed by investors after such a disappointing recovery from the financial crisis. The return of Republican majorities in the House and Senate should help to reduce the political stasis in Washington, particularly regarding fiscal stimulus where the President-elect and his party have the most common ground. A raw fiscal stimulus of more than 1% of GDP in 2018 is possible, which could lift growth a touch above 3%. This is almost a whole percentage point higher than our forecasts without stimulus. In turn, stronger US growth would have knock-on benefits for import demand from the rest of the world, though it would also be pulling future growth forward and probably bring higher Fed policy rates with it.”
He added that “other than tighter monetary policy and a stronger dollar, the biggest macro and market downside risks from a Trump presidency arguably derive from his trade agenda – such as his pledges to withdraw from the Trans-pacific Partnership, declare China a currency manipulator and lift tariffs. A new era of protectionism would be negative for the global economy. Hence the importance of identifying Trump’s real intentions as President. We believe the most likely scenario is that heightened rhetoric is ultimate used to secure better access to foreign markets for US companies and incentives to keep production at home. However, the views of Trump’s nominees for key trade policy roles in his administration shows that there is a significant risk that Trump means what he says.”
“Ultimately, America is not the only source of political risk for the global economy; Europe also faces a number of political challenges. Destabilising outcomes would likely reinforce the peripheral European spread widening that has already taken place recently amid speculation that the ECB backstop has become more equivocal, though we doubt policymakers would stand still in the face of movements that threatened to undermine four years of policy and economic repair.” Lawson concludes.
The European Fund and Asset Management Association (EFAMA), in cooperation with SWIFT, published a new report about the evolution of automation and standardisation rates of fund orders received by transfer agents (TAs) in the cross-border fund centres of Luxembourg and Ireland during the first half of 2016.
The report is an on-going campaign by EFAMA and SWIFT to highlight the advancement of automation and standardisation rates of orders of cross-border funds. 29 TAs from Ireland and Luxembourg participated in this survey. The report also provides data on standardisation levels in Italy and Germany.
According to the report, the total volume processed by the 29 survey participants reached 16.6 million orders by end of June 2016. The total automation rate of processed orders of cross-border funds reached 84.4% in the second quarter of 2016, compared to 85.4% in the fourth quarter of 2015. The use of ISO messaging standards decreased from 51.2% in Q4 2015 to 50% in Q2 2016, while the use of manual processes rose to 15.6% in Q2 2016 compared to 14.6% in Q4 2015.
The total automation rate of orders processed by Luxembourg TAs reached 81.7% in the second quarter of 2016 compared to 82.9% in the last quarter of 2015. The ISO automation rate decreased from 65% in Q4 2015 to 63.8% in Q2 2016, while the use of proprietary ftp remains stable at 17.9%.
The total automation rate of orders processed by Luxembourg TAs reached 81.7% in the second quarter of 2016 compared to 82.9% in the last quarter of 2015.
Peter De Proft, EFAMA Director General, notes: “The report confirms that further increases in automation rate levels for fund orders and switches towards the ISO 20022 standard will depend on the efforts made not only by fund managers to adapt their technology and operational structures, but also by the fund distributors sending the fund orders.”
Fabian Vandenreydt, Global Head of Securities, Innotribe and the SWIFT Institute, SWIFT, adds: “With funds order volumes stabilising across Luxemburg and Ireland, it is not surprising to see the automation rates level off as well. Over the years we have seen a consistent increase with automation and adoption of ISO 20022 compared to proprietary formats. The industry has made great progress and with near 85 percent of the market fully automated, the funds industry is in a good place to continue driving efficiency in the market.”
CC-BY-SA-2.0, FlickrFoto: Travis Wise. La victoria de Trump es una noticia positiva para la deuda high yield
Since Donald Trump won the presidency and the Republicans, a majority in Congress, the bond markets have priced in a steep rise in fiscal deficits. While it is more or less clear that the new administration will cut taxes drastically, a question mark hovers over the extent of infrastructure spending and, indeed, if such spending will even be approved.
“Congressional Republicans are traditionally opposed to deficits and the issue of public debt has led to political (more than economic) crises in recent years with renegotiations of the debt ceiling (in 2011 and 2013). The issues of US debt and fiscal manoeuvring room will be key to the coming years, and this is therefore a good time to look more deeply into their many facets”, explains Bastien Drut, Strategy and Economic Research at Amundi.
US public debt can be split into two categories, said Drut:
Marketable debt, which is raised on the markets. This is the debt that is traded on the markets each day, including T-bills, T-notes, T-bonds, floating-rate notes, and inflation-linked debt. As of November2016, marketable debt amounted to $13,921bn, or 74.6% of GDP.
Non-marketable debt, which is raised from US governmental bodies. For instance, US law provides that tax receipts levied to fund the Social Security Trust Fund and the Medicare HI Trust Fund must be invested in US Treasuries, most of the time non-marketable US Treasuries. As of November 2016, non-marketable debt came to $5,481bn, or 29.3% of GDP.
The debt ceiling applies – more or less – to the sum of the marketable and non-marketable debts, when the debt ceiling is not suspended (see below).
Marketable debt consists of:
T-bills, of an initial maturity of 4 weeks, 3 months, 6 months or 12 months
T-notes, of an initial maturity of 2, 3, 5, 7 or 10 years
T-bonds, of an initial maturity of 30 years
Floating-rate notes, of an initial maturity of 2 years (these were first issued in 2014)
TIPS, of an initial maturity of 5, 10 or 30 years.
More than 60% of marketable debt is T-notes. After falling precipitously in recent years (after peaking at 34% of marketable debt in 2008), the proportion of T-Bills is being driven back up by the reform of the US money markets (from 10% at and-2015 to 13% today). The expansion of the T-Bill market in 2017 will limit long-dated issuance.
“The average maturity of the US marketable is approximately 5.2 years. It has been rising since 2014. The future Treasury Secretary, Steven Mnuchin, indicated in a recent interview that the new administration would “look at potentially extending the maturity of the debt because eventually, [the US] will have higher interest rates and that this is something that this country is going to need to deal with.” He mentioned the possibility to issue 50 or 100 yr bonds”, concludes Drut.
Ever since the Conservative government came to power in 2010, one of its key policy goals has been reducing the annual government deficit to achieve fiscal balance. However, with the change of the Chancellor of the Exchequer in July, a change in fiscal policy could be expected, according to Mike Amey, Head of Sterling Portfolio Management at PIMCO. “The Autumn Statement on 23 November was Chancellor Philip Hammond’s first opportunity to “reset” fiscal policy ‒ and reset he did”.
“Quite correctly, the government recognized that with the deficit at 3%‒4% of GDP, the most important deficit reduction is now behind the UK, and fiscal policy no longer needs to be all about relentless austerity. This seems sensible”.
According to Amey, the reset of policy is most evident in the projections for the deficit in the Autumn Statement compared to the forecasts in the March 2016 budget. “As the graph shows, there is no aspiration to achieve fiscal balance by 2020, the date of the next general election. More broadly, there is a recognition that even a deficit reduction to 2%‒3%, assuming growth remains at or close to current levels, will be enough to put total debt-to-GDP on a stable footing. Given the uncertainties ahead as the UK goes through the Brexit negotiations, significant further tightening of fiscal policy probably seemed unnecessary, and this is the bet the chancellor has made”.
Investors immediately responded to the Autumn Statement by selling gilts, although interestingly, the British pound was little changed against the U.S. dollar. “Our sense is that UK gilts can fall further given that UK growth has already returned to pre-Brexit levels, the supply of UK government bonds is going to be higher than expected and the likelihood of further monetary easing has fallen. However, after a sharp rise in yields already, our preference is to reflect caution on gilts relative to other high quality government bonds rather than by selling outright. All of this also suggests that the yield curve may steepen as the term premium rises on a more balanced outlook for growth and inflation”.
The outlook for the British pound is a little more nuanced, the expert says. “The combination of a high current account deficit and more persistent fiscal deficits may well keep pressure on the pound, although that may turn out to be as much about U.S. dollar strength as pound weakness”.
Eleven French financial associations, including the French asset management association AFG, have issued a statement regarding the evolution of Priips’ draft regulatory technical standards (RTS).
French consumers’ protection and professional associations call the European institutions to improve the quality of the information in the Key Information Document (KID).
“We believe the PRIIPs Regulation, which intends to enhance the transparency of investment products for retail investors, is a key tool to rebuild confidence in financial markets and to channel more retail savings towards investment solutions,” the eleven associations said.
They have recognised positive changes have been proposed by the European Commission in the latest draft amended RTS such as the extension of the exemption for Ucits in the context of PRIIPs offering a range of investment options (MOPs) in conformity with level 1, and the removal of the historical bias into the performance scenario calculation methodology.
But the French financial industry is “still very worried” regarding the rules defining the content of Priips’ key information document.
The associations considers that the current rules set for the redaction of Priips’ KID will not achieve to give to investors meaningful, comprehensible and comparable information.
“The recent absence of consensus at the ESAs level on the RTS in progress demonstrates how key aspects of Priips RTS are still unsolved and that alternative solutions should be explored before any implementation. Moreover, other key practical aspects for stakeholders are still ambiguous or pending in the proposed RTS, such as the application scope of the Regulation (stocks issues, the treatment of derivatives in particular those used for commercial hedging only), the absence of definition of an investment option underlying a MOP (e.g. mandates issue), …,” they stated.
The eleven French financial associations said Priips KID methodologies remain highly questionable, quoting as an example the calculation method for the performance scenarios and “in particular for the “moderate” one, which might not truly reflect what the investors could expect as returns and would not discriminate between different asset classes.”
Another question mark for them is that of the absence of past performance mentioned in the KID. The associations argued past performance of a fund is still an “extremely valuable piece of factual information for investors in their investment decision.”
“Indeed, investors want to know whether the product they intend to invest in has made any money or not before buying it. It is therefore very difficult to understand why investors should be deprived from such information in the Priips KID,” they added.
The French financial associations called for a simplification of the treatment of MOPs, by allowing the MOP manufacturer to draft one generic KID for the MOP, describing the overall PRIIP, and to refer to specific information, on the underlying investment options, that relates to these underlying options only.
“We also believe that the proposed transaction costs calculation methodology, including market movement in the transaction cost and mixing transaction costs with best execution duties, will generate purely fictitious figures and even negative costs.
“This information will make the investor believe he will make money, when he actually needs to pay for the brokerage fee for instance. A simple way to avoid displaying such negative and misleading figures, would be to apply to all Priips the current methodology imposed by the draft level 2 RTS for new Priips,” the associations pointed out.
After 10 years at AXA, Véronique Weill, CEO of AXA Global Asset Management, Group Chief Customer Officer and a Member of the Management Committee of the AXA Group, has decided to leave the Group.
Thomas Burberl, CEO of AXA Group said “I would like to very warmly thank Véronique for her many contributions to the Group since she joined in 2006, including her energy and leadership to strengthen AXA’s position as a leading global brand. I am personally grateful to have benefitted from her support during the leadership transition through 2016 and, with the other members of the Management Committee, I wish her the best in her future professional endeavors.”
Weill commented “It is now time for me to focus on new professional challenges. I know I will be inspired by 10 fantastic years with AXA, and I feel proud of what we have built together with my teams. I wish them all the best.”
Véronique Weill joined AXA in 2006, as Chief Executive Officer of AXA Business Services and Group Executive Vice President of Operational Excellence. In 2009, she became Group Chief Operating Officer, in charge of Group Marketing, Distribution, Data Innovation Lab, IT, Operational Excellence and Procurement. In 2013, she joined the Management Committee of the AXA Group. As of July 2016, she was appointed Group Chief Customer Officer, in charge of Customer, Brand and Digital and CEO of AXA Global Asset Management.
Véronique Weill executive responsibilities are reassigned to other members of the Management Committee, including Customer, Marketing and Digital teams, who will report directly to Thomas Buberl, and AXA Global Asset Management, which will now report to Paul Evans, CEO of AXA Global Life & Savings and Health.
