Investors remain open to risk despite market jitters around crises such as China and Greece, according to the findings of the latest Risk Rotation Index by NN Investment Partners.
The research revealed that 28.3% of the panel of global institutional fund managers surveyed said that they had increased their appetite for risk over the previous six months compared to 18.3% who said that their appetite had decreased, leaving overall net risk appetite at +10%.
However, in spite of this confidence, investors have growing concerns over a potential Eurozone crisis, with 49% of respondents citing it as a ‘significant’ threat to their portfolios – up from 35% in the previous quarter – while one in eight (13%) view it as a ‘very significant’ threat.
Valentijn van Nieuwenhuijzen, Head of Strategy, Multi-Asset at NN Investment Partners, says: “A Eurozone crisis was viewed as significant threat by almost half (49%) of investors who appear to be approaching the current situation with both caution and confidence.
“Greece may have jolted markets but the Eurozone survived. The Chinese crisis – we think we can call it a crisis by now – is creating serious problems for the commodity exporters and the countries that sell the most capital goods to China.”
“Despite market jitters investors still have confidence in the market and retain some optimism with the recent pick-up in growth in the US and Japan. As we are back in calmer waters (at least temporarily), we upgraded equities from neutral to a small overweight which was our stance before Greece and China spoiled the party.”
Away from the Eurozone, other potential dangers such as a black swan event (24%) and a Chinese slowdown (21%) were also named by investors as events of which they were wary.
As well as indicating a preference for risk amongst investors, the research also hinted at growing stability within investors’ portfolios. Indeed, more than half (53%) of the panel stated that they had not adjusted their risk profile over previous six months – the highest proportion since the index was launched in 2013.
In order to mitigate potential risk over the coming months, investors appear to be most in favour of using multi-asset (74%) and equity strategies (56%). When broken down there is little difference in preference between balanced and total return multi-asset strategies – 37.3% vs. 36.3% – meaning that individually both strategies are more favoured amongst investors than illiquid assets such as private equity and mortgages (26%), hedge funds (22%) and high dividend (18%).
Van Nieuwenhuijzen continues: “In the current investment climate there are a great number of pockets of opportunity for investors – but also a great number of potential pitfalls. It is therefore important for investors to deploy the right strategy to ensure yield whilst simultaneously mitigating market turbulence. Indeed, our survey reveals that 46% of investors have diversified their portfolios to manage risk over the past year, and we believe that multi-asset strategies such as balanced or total return funds provide investors with the exposure to risk that provide them with a steady yield stream – even in an uncertain economic landscape.”
When looking at the asset classes most favoured in terms of risk versus return over the coming three months, investors stated a preference for equities (34%), followed by real estate (17%) and government bonds (14%). The most favourable geographical regions in terms of risk versus return were the US (46%), Japan (38%) and the Eurozone (29%).
Photo: Natesh Ramasamy
. Deutsche Bank Group Announces The Sale of Its India Asset Management Business
Deutsche Bank Group announced that it has entered into an agreement to sell its India asset management business to Pramerica Asset Managers Pvt. Ltd., subject to customary closing conditions and regulatory approvals.
Pramerica Asset Managers is the asset management business in India of Pramerica Investment Management (PIM), whose multi-manager asset management businesses collectively rank among the top 10 institutional money managers in the world, according to Pensions & Investments. The sale is a continuation of Deutsche Asset & Wealth Management’s global initiative to further focus its business on developing and strengthening its regional centres of investment excellence, with the ultimate aim of delivering consistently superior performance to clients across all asset classes and investment strategies.
Ravi Raju, Head of Deutsche Asset & Wealth Management, Asia Pacific, said: “Deutsche Bank Group’s asset management business was established in 2003, and is now the second largest foreign asset manager in India. We have built a strong brand with a well respected investment and coverage team. This solid foundation will be passed on to Pramerica, which is an internationally respected asset manager with broad product capabilities and expertise. We are confident that with Pramerica’s global footprint and track record of integrating and working with local partners in key markets, the business will continue to perform well following the integration. We are committed to working with Pramerica to ensure a smooth transition for clients, staff and other stakeholders.”
Ravneet Gill, Chief Executive Officer, Deutsche Bank Group India said: “The divestment of our asset management business is in line with our strategy of focusing on our core businesses where we can achieve a leadership position. Deutsche Bank Group’s overall India franchise has posted strong financial results, and we remain absolutely committed to further investment and development of our business here given that India is strategically important to the bank’s global growth aspirations.”
Glen Baptist, Chief Executive Officer of Pramerica International Investments, said, “The strong track record of Deutsche Bank Group’s asset management business in India, its talented leadership team, and deep relationships with institutional clients and distribution partners, perfectly complement the sales, investment and product capabilities of our existing business. When the transaction is completed, we will have the scale and platform necessary to make our investment strategies available to clients across India and put us within sight of the top 10 asset management businesses. We are confident that the combined business, and our new joint venture with DHFL, will enable us to achieve our strategic priority of building an industry-leading India asset management business.”
Pramerica’s new JV with DHFL, which will benefit from DHFL’s 30 years of financial services experience in India when the transaction is completed, will be renamed DHFL Pramerica Asset Managers upon regulatory approval.
Deutsche Asset Management established its business in India in 2003 and today has INR 20,720 crore (EUR 2.9 billion) average assets under management (as of quarter Apr-Jun 2015), making it the second-largest 100% foreign-owned asset manager in India.
Over the last decade, the firm has built a strong investment performance track record. Its product portfolio spans debt and equity schemes; domestic and offshore funds.
Deutsche Asset Management (India) is the Mutual Fund business of Deutsche Asset & Wealth Management in India.
Photo: Mark Moz
. Citi Sales Alternative Investor Services Business for $425 million
Citigroup announced that it has reached a definitive agreement to sell itsAlternative Investor Services business, which comprises Hedge Fund Services and Private Equity Fund Services, to SS&C Technologies Holdings for $425 million.
The entire operations of this business, including approximately 1,500 employees, will be transferred to SS&C upon closing.
This transaction is a positive outcome for Alternative Investor Services, including its employees and clients. As a result of this deal, Alternative Investor Services will become part of a known leader in financial services with a demonstrated track record of delivering high-quality products and services to its clients.
The deal is expected to close in the first quarter of 2016, and is subject to regulatory approvals and other customary closing conditions.
Photo: Elliott Brown . Mediobanca to Acquire a Majority Stake in London-Based Credit Manager Cairn Capital
Mediobanca and Cairn Capital Group Ltd have agreed terms for a strategic partnership in which Mediobanca will acquire a majority interest in the London-based, credit asset management and advisory firm.
Cairn Capital was established in 2004 and provides a full range of credit asset management and advisory services, with a particular focus on European credit. As at 30 June 2015, Cairn Capital had $5.6bn of discretionary and legacy assets under management, with a further $9.1bn of assets under long term advice.
Under the terms of the transaction, Mediobanca will acquire 51 per cent. of the share capital of Cairn Capital on completion. The majority will be purchased from Cairn Capital’s institutional shareholders and following which The Royal Bank of Scotland will have no remaining interest. Mediobanca will have the ability to increase its interest in Cairn Capital after three years with an option to acquire some or all of the remaining 49 per cent., the majority of which is held by the management and staff of Cairn Capital.
As part of its overall strategy, Mediobanca is strongly committed to the development of an international Alternative Asset Management business, achieved through strategic partnerships with selected asset managers, having strong track records, high quality management teams, and scalable platforms. Cairn Capital will fulfill a central role within the MAAM credit platform and is well positioned to benefit from Mediobanca’s distribution channels, network of investor relationships and market access, as well as its institutional infrastructure and support.
Paul Campbell will continue to be CEO of the company and has agreed, together with the rest of Cairn Capital’s management team, to enter into new, longer term contracts in conjunction with the transaction, ensuring continued strength and stability to the business.
The transaction value does not have a material impact on CET1 of Mediobanca Group.
Dario Epstein, Director at Research for Traders and member of the Advisory Board of Biscayne Capital - Courtesy Photo. "Just as in Life, in the Markets, it’s: Nothing Ventured, Nothing Gained"
“This crisis is new. Many of the large fund management companies talk about the “new normal” and, unfortunately, it is very difficult to extrapolate past experience and project it in order to resolve the current situation. Looking in retrospect no longer helps. We are charting a new path along the way, and the prudence partly stems from there: that the path is new”. That’s how Dario Epstein summarizes the current environment and the wait-and-see attitude of investors, with cash at the ready. But, just as in life, in the markets, it’s nothing ventured, nothing gained, he reflects. Epstein is Director at Research for Traders and recently joined the Advisory Board which Biscayne Capital created earlier this year.
When asked about the purpose for his joining the company, Epstein explains that private banking is currently going through a very dynamic phase driven by several factors, the most important of which is the regulatory factor. As a result, in recent months, the compliance department of the institutions has been strengthened significantly. Secondly, there’s the fiscal or tax issue, which has caused the United States, through FATCA, as well as other countries, to focus on trying to eliminate the loop holes, or tax havens, which facilitate tax evasion. In this context, the commercial development of wealth management networks poses a challenge to which the industry is responding. His experience as a former regulator, as well as in market analysis, allows the organization to be focused in these new aspects, and he contributes both his own personal input, as well as that of his company, in order to work more efficiently in the management of portfolios and investment recommendation.
Which products are the most interesting for the Biscayne Capital type of client in the current market environment?
Against this backdrop (China slowing, high probability of rising rates in the US, falling commodity prices, devaluation by China), we are currently adding coverage and protection for long positions and maintaining liquid reserves, although each profile, objectives, and risk appetite has its specific recommendation.
Indeed, in the past few days we have awakened to several consecutive devaluations of the renminbi, and commodity prices at historic lows, how far could this go?
China upset the apple cart and surprised everyone. While devaluation is not important, the impact it later had on all the variables was, deepening the crisis in the currency and equity markets of emerging countries in particular, which are currently less competitive at exporting to China. Even the People’s Bank of China could not stop the trend, indicating on the third day that there is no basis for further depreciation of the yuan (at around 6.40 USDCNY) due to the strong economic fundamentals of the country. That is precisely what is being questioned in the markets. Thursday’s close saw three straight days of devaluation. It is true that the strong fiscal and international reserves position provide good support for the exchange rate, but the slowdown is greater than expected and devaluation was a last resort.
I worry that China may abandon the development of the domestic market, which is its point of inflection in order to grow internally, and devalue its currency for the purpose of increasing competitiveness of its external sector and exports. There are two references (yen and euro)which have devalued strongly in recent years, and with the currencies of emerging countries in sharp depreciation against the dollar, it was to be expected that China take some compensatory measures.
With regard to the prices of commodities, they are very low, my opinion is that they are finding their footing and we expect some insignificant technical rebound. What we do see is that the shares of emerging countries, net exporters of commodities, still have a wide margin of decline, measured in terms of multiples, and may yet fall another 15% -20%.
The Shangay Composite has lost 3.4 trillion dollars and received injections of 900 billion renminbi, according to Goldman Sachs, who says that the regulator still has more than 160 billion dollars: will they have to use them?
It Depends. China is investing money in the market to avoid losses through purchases or provisions to short selling. Obviously the Chinese market has been impacted by two factors: firstly, the monthly addition of millions of new accounts of the country’s residents and, secondly, some slippage in the margin lending which led stock prices to a bubble, contrary to what was going on in the real economy. According to some Chinese market experts this market is extremely trend follower. In this case, the losses were not greater because many companies have suspended their stock exchange and it is now in the hands of the regulator to calm the markets. As I published a few days ago, the Chinese have discovered that capitalism is not easy.
Goldman analysts also believe that the index will range between 3,000 and 4,000 in the short term. Is that possible?
Yes it is, but only if the regulator continues to participate in the process. If it breaks 3,400 there is no significant resistance until 2,800. If the regulator is not involved, the 3,000 barrier will be broken. Although there may be an abrupt change following a more aggressive devaluation; if the currency starts to devalue, the market trend may change.
What does the supposed beginning of rate hikes by the FED add to this situation?
If the FED starts to eliminate all incentives, there will be a negative impact on global growth and the strength of the dollar will increase. The impact of a rise of a quarter point will be liquefied in the first two months. If the market goes up, you run the risk that more investors follow the trend and that we enter into a period of more complex markets in mid-2016.
How will this affect the stock markets in the American continent?
The effect will spread. Brazil is being very badly affected. Its neighbors (Colombia, Peru) will notice the impact on the region, and in Venezuela, where oil is the strong point, it will have great effect. It is very difficult to find countries in the region that are isolated. In terms of currencies and commodity prices we have seen the worst. While there is room for depreciation, we will stabilize in this situation. Some currencies have already devalued; we could be finding a point of balance of the Real at around 3.50. Same with commodities. Not so with the shares, they could still fall.
Which LatAm markets and sectors offer the lowest risk?
Right now our position is more conservative in Latin America.
Brazil is in a very complicated process, entering a recession with negative growth projected in 2015 and 2016. Venezuela is being hit hard, Ecuador going through a difficult process. Basically, after 10 years of very favorable terms for the region, the countries which had the vision to invest in infrastructure and to generate twin surplus (balance of payments and foreign trade), and those who managed to create reserves and countercyclical funds to weather this situation will mark the difference. Brazil has 300 billion dollars in reserves; Peru, Colombia, and Chile also have good reserves.
With respect to Argentina, the markets discern that any of the presidential candidates will have a much more pro-market and international integration rationale. In this backdrop, Argentine assets, which have been underweight in the past, may have an interesting evolution, as so far as other emerging markets do not derail.
Then, where should one be right now?
Cash. The wealthiest families have a high dose of cash and are very expectant. There is much awareness that part of the growth of real estate prices, stocks, and bonds are a result of monetary stimulus, and not of market fundamentals. And at certain prices investors prefer to continue in cash, AAA short-term bonds, banks … the scenario can change within 10 days. In this environment, the strategy is very short-term, waiting on opportunities that may result from the FOMC meeting of the FED, from an acceleration of devaluation in China, or from other macro scenarios.
Is Greece a closed issue?
Today it’s a closed issue, within a year we will have to discuss Greece again because with the current austerity plan, Greece cannot grow. Spain, Italy, and Portugal are facing similar situations: high youth unemployment and austerity. While it is true that a country can’t live in permanent deficit, there are times that countercyclical policies are necessary, and the orthodox prescription of the IMF and Germany is not helping the peripheral economies in Europe to takeoff.
This year we have elections in Spain, Portugal and Ireland. The poor performance by the political left in Greece has weakened the chances for similar groups to gain power in other countries where there is a social demand which must be addressed. Let’s say that the Greek issue is now concealed for a while.
Photo: Dan Nguyen
. S&P Dow Jones Indices Launches Spin-Off, IPO and Activist Interest Indices
S&P Dow Jones Indices (S&P DJI) has announced the launch of the S&P U.S. Spin-Off index, the S&P U.S IPO and Spin-Off index and the S&P U.S. Activist Interest index. These three new indices broaden S&P DJI’s event driven index family which includes merger arbitrage indices.
The S&P U.S. Spin-Off index is designed to measure the performance of U.S. companies that have been spun-off from a parent company within the last four years. It is based on the S&P U.S. Broad Market Index (BMI). At each monthly rebalancing, spin-offs that are added to the U.S. BMI and have a float-adjusted market capitalization of at least $1 billion are added to the Index and remain in the Index for up to four years.
The S&P U.S. IPO and Spin-Off index calculates the performance of U.S. companies with in the S&P U.S. BMI that have had initial public offerings (IPOs) or have been spun-off from a parent company within the last five years. The spin-offs should have a float-adjusted market capitalization of at least $1 billion as of the rebalancing reference date while the IPOs are subject to the same criteria but as of the close of their first day of trading.
The S&P U.S. Activist Interest index measures the performance of U.S. domiciled companies that have been targeted by activist investors within the last 24 months. It is an equal-weighted index based on the S&P U.S. BMI. Companies subjected to an activist investor campaign as determined by SEC Form 13D filings are added to the Index, at each monthly balancing, and remain in the Index for a maximum of 24 months.
“Boards of American companies have become more active in pursuing spinoff opportunities and merger activity,” says Vinit Srivastava, Senior Director of Strategy Indices at S&P Dow Jones Indices. “Historically, spin-offs, IPOs and firms targeted by activist investors have generally outperformed the broad market as they uncover value and increase efficiencies. These three new indices, in addition to our existing S&P Merger Arbitrage Index, provide investors sophisticated and transparent benchmarks that reflect how these significant events impact a company’s performance.”
CC-BY-SA-2.0, FlickrPhoto: Wilson Hui. Global Divergence
No one talks about decoupling anymore. It is one of those pieces of vocabulary associated with 2008 and the hope that emerging market fundamentals would insulate those economies from what turned out to be the greatest recession since the Great Depression. That hope was not entirely misplaced, of course, says Alex Johnson, Head of Absolute Return Fixed Income at BNP Paribas IP.
Exhibit 1 below shows, first, Chinese GDP on a year-on-year basis (the green line). While during the Great Financial Crisis in 2008 -2009 Chinese GDP was nearly halved—and Chinese equities performed dismally—there was a sharp rebound on the back of enormous fiscal stimulus. Now BNP Paribas IP may be seeing its inverse, and that is best illustrated by the other line (the blue line) on the chart, the Shanghai Stock Exchange Composite Index, down 8.5% on Monday, July 27, alone.
Some commentators have suggested that this does not really matter. Exhibit 1 illustrates the rationale to their thinking: year-to-date, the index has gained 15.18% (to July 27), and the one-year gain is over 75%. While the highs were higher, the averages are looking good.
“There is a degree of merit to this argument. The Shanghai Composite has never been a bellwether of the Chinese economy in the sense that the S&P 500 might be said to be for the US. It exhibits no meaningful correlation with GDP, and it has not been a vehicle for significant retirement planning”, poin out Johnson. The A-share market is not easily available to overseas investors, and the price movements are driven almost entirely by domestic flows, limiting contagion.
Johnson believes there are serious flaws in this view. First, he says, the composition of the investor base has changed even this year, with more and more small retail investors participating in the market ‑ and thus suffering losses. Many of these investors blame the central government, which they have accused of encouraging them to invest in the first place. There is some truth to this, unfortunately. To pick one example, Bloomberg Business cited the Xinhua News Agency in September 2014, which ran eight articles in that week alone advocating buying equities, and the futures exchange cut margin requirements in that same week. Buying shares on margin is common: such financing exceeds CNY2 trillion (US$322 billion).
Recognising this, Chinese authorities have already put in place controls, including preventing shareholders holding more than 5% of a stock from selling for six months, and they have begun purchasing stock outright. The track record for controls such as this is unedifying. There are broader issues, too. The Chinese government maintains its legitimacy on the basis of improving living standards and good custodianship of the economy, and the suggestion that there are developments beyond its control could be damaging and lead to unpredictable outcomes. There is also a wealth effect, and we can expect a reduction in consumption commensurate with the shock.
“We are seeing some effects already. Oil has sunk to new recent lows of under US$48 per barrel. While that will be at least partly related to the lifting of Iranian sanctions, other commodities are reacting similarly. This puts direct pressure on many emerging market commodity exporters ‑ and some not-so-emerging-markets, such as Australia and Canada, and their currencies”, explains BNP Paribas IP expert.
However, says Johnson, in Europe and the US, the picture seems different. Germany released its monthly Ifo survey, with all three components—business climate, current assessment, and expectations—beating expectations. That is in line with the ZEW survey released two weeks ago and a raft of other data, including the stock market up over 13% year-to-date; France’s has gained almost 16%, and Spain’s 21%. Now that Greece is, temporarily at least, behind us, the world’s largest and wealthiest trade grouping has defied all of last year’s gloomy prognostications.
The US picture is less positive. The earnings season in particular has not hit the high notes of previous quarters, with IBM notably pointing to China. Data is generally strong: initial jobless claims were the lowest for 42 years, and housing data has also been particularly robust. “What remains elusive is evidence beyond the merely anecdotal of wage growth. In addition, a leak of confidential staff forecasts used during the June 17 Federal Open Market Committee (FOMC) meeting showed staffers had lower expectations for the path of federal funds than the Committee does itself. At the margin, this may lengthen the odds of a hike in September – and events in China are not helping either”, sumamarizes.
. Global Dividends Fall in Q2 as The US Dollar Soars In Value, But Underlying Growth Is Strong
Global dividends fell 6.7% year on year in the second quarter to $404.9bn, a decline of $29.1bn according to the latest Henderson Global Dividend Index. This is the third consecutive quarter of declines, mainly owing to the strength of the US dollar against major world currencies.
The euro, yen and Australian dollar were all a fifth weaker year on year and sterling was down a tenth. The rising dollar knocked a record $52.2bn off the value of dividends paid during the quarter. The HGDI ended the second quarter at 155.1, down 4% from the 161.5 peak in September last year.
Underlying growth, however, which strips out exchange rate movements, special dividends, index changes and changes in the timing of payments, was an encouraging 8.9%.
Q2 is dominated by Europe ex-UK, so trends in that region characterise the global results this quarter, and largely explain the weak headline global growth figure. Two thirds of Europe’s dividends are paid in the period and these fell 14.3% on a headline basis (to $133.7bn), a drop of $22.3bn, with most countries seeing double digit declines. This was almost entirely due to the sharply lower euro against the US dollar. The negative exchange rate effect was a record $29.5bn in the quarter.
Underlying growth was 8.6%, an impressive result for the region with Italy, the Netherlands and Belgium enjoying the highest underlying growth, boosted by a strong performance from financials. Indeed, the region’s financials as a whole significantly increased their payouts, led by Allianz in Germany, which is raising its payout ratio.
This encouraging performance from the sector is part of a growing trend around the world. Danish shipping conglomerate Moller Maersk paid a very large special dividend, while France, the region’s largest payer, saw a slowdown (underlying growth was 2.3%, headline was -20.2%), with weakness at Orange and GDF Suez affecting growth there. German dividends fell 16.0% to $29.9bn, but were 6.6% higher on an underlying basis, with a similar result in Spain (-24.4% headline, +6.0% underlying). In Switzerland, headline dividends fell 2.4% to $17.0bn, owing to a weaker Swiss franc. They rose 5.9% on an underlying basis, with a large increase at UBS contributing to the improvement in European financial dividends.
Once again, US companies grew their dividends rapidly, with almost every sector increasing payouts. Here too, financials showed rapid growth, with Bank of America and Citigroup quintupling their distribution. Overall headline growth was 10.0%, taking the total to $98.6bn, and the US HGDI to a record 186.0. This strong performance marked the sixth consecutive quarter of double digit increases. Underlying growth was a similarly strong 9.3%.
Q2 is also an important quarter for Japan, accounting for almost half the annual total. Headline dividends fell 7.1%, but underlying growth was very impressive, up 16.8% to $23.4bn, as rising profits combined with higher payout ratios to drive dividends higher. Japanese companies are responding to calls from investors and the government to increase the proportion of their profits they return to shareholders (from a very low base compared to other developed markets). South Korea is among other countries seeing the same pressures, and that helped push South Korean dividends higher by 37.4% on an underlying basis year on year, with large increases from Samsung Electronics among others.
Though technology dividends rose fastest, in line with a long running trend, financial dividends grew 0.3% at a headline level year on year, far outperforming the 6.7% global headline decline, and indicating rapid underlying growth. Financials account for roughly a quarter of annual global dividends, so improvements to dividend payments in this industry can make a real difference to income investors.
With underlying growth so encouraging, Henderson has upgraded its forecast for 2015 by $29bn. It now expects global dividends of $1.16 trillion this year, which is down 1.2% at a headline level, but up 7.8% on an underlying basis. The strength of the US dollar against all major currencies explains the marginal headline decline.
Alex Crooke, Head of Global Equity Income at Henderson Global Investors said: “Though the headline decline seems disappointing, it is concealing very positive underlying increases in dividends. The strength of the US dollar had a significant impact again this quarter but our research shows that the effect of currency movements even out over time and investors adopting a longer term approach should largely disregard them. At the sector level, it is encouraging to see increases from financial companies as they start to slowly move towards higher payout levels. But this is less about a renewed boom to financial payouts and more about a gradual return to normality.
“This means a dividend paying culture is extending into new markets, beyond those where paying an income to equity investors is already deeply entrenched, highlighting the increasing income opportunities available to investors who adopt a global approach”, said.
CC-BY-SA-2.0, FlickrPhoto: Travis Simon. Legg Mason to Acquire Australian Infrastructure Firm
US asset manager Legg Mason announced that it has agreed to acquire a majority equity interest in Rare Infrastructure, Ltd., (Rare) a global infrastructure asset manager headquartered in Sydney, Australia.
Rare has offices in Sydney, Melbourne, London and Chicago and specialises in global listed infrastructure investments, managing $7.6bn (€6.8bn) for institutional and retail clients.
Under the terms of the transaction, Legg Mason will acquire a 75% ownership stake, the Rare’s management team will retain a 15% equity stake and The Treasury Group, a previous minority owner, will retain 10%.
Joseph Sullivan, chairman and CEO of Legg Mason, said, “Rare’s investment expertise has strong relevance for many clients today, meeting important investment objectives including income, growth, diversification and capital preservation. The market for infrastructure investing has grown significantly over the past few years and RARE has participated in this growth, particularly in early adopter markets like Australia and Canada.”
Rare will operate as a core independent investment affiliate along with Brandywine Global, ClearBridge Investments, Martin Currie, the Permal Group, QS Investors, Royce and Associates, and Western Asset Management.
CC-BY-SA-2.0, FlickrPhoto: Shizhao. A Quick Look at Possible Implications of China’s Record Weakening of the Renminbi
The People’s Bank of China (PBoC) has announced yesterday that it is improving the pricing mechanism of the daily fixing rate of the renminbi. It will do this by referencing the previous day’s closing rate and by taking into account “demand and supply conditions in the foreign exchange markets” as well as exchange rate movements of other major currencies. As a result, the USDCNY (US dollar to Chinese Yuan Renminbi rate) was fixed higher by 1.9% as a one-off adjustment and represents a record weakening of the Chinese currency. It is the first weakening in the exchange rate by the PBoC since 1994.
The announcement of the PBoC that it will increase yuan flexibility suggests the daily fixing of the currency will be much more dependent on the market. As a result, it is unlikely that the yuan will continue to exhibit relatively low volatility and may continue to depreciate over the medium term as the authorities grapple with a slowdown in economic growth.
For Anthony Doyle, investment director within the M&G Fixed Interest team, there are a number of implications of a weakening yuan over the medium term:
Firstly, any move to weaken the yuan against the USD is likely to be bullish for US treasuries at the margin, resulting in lower yields. If the yuan depreciates in value, then China will have more USD to invest in US treasuries through foreign reserve accumulation, suggesting a strengthening in demand. However, unless we see a sustained weakening in the yuan in the weeks ahead then this move is unlikely to have a large impact in the demand for US treasuries in the short-term.
Secondly, this move will put downward pressure on already low inflation rates in the developed economies. Import prices for developed economies are likely to fall, suggesting lower producer and consumer prices. A substantial amount of Chinese manufactured goods consumed in the developed world are now cheaper and could cheapen further, resulting in lower costs for inputs which could lead to lower consumer prices.
Thirdly, the fall in the yuan will mean the purchasing power of Chinese businesses and households will deteriorate. It will also make raw material prices, which are largely denominated in USD, more expensive. The suggests further downward pressure on commodity prices and further pressure on commodity-rich export nations like Australia, New Zealand and Brazil. A weakening yuan suggests weakening demand and could result in lower growth for economies that export to China and weaker growth for the Asian region.
Any move to liberalise the determination of exchange rates should be viewed positively for the global economy. Given China’s level of importance as a key manufacturer of goods and its huge cache of foreign reserves, it is unsurprising that large moves in the exchange rate can have significant spillover effects for other economies and financial assets. Any further evolution of the determination of the daily fixing rate of the renminbi will continue to be closely watched, especially in an environment where the Chinese economic growth profile continues to be questioned.
