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ECB Extends its Stimulus Program but at a Slower Pace

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council decided to continue its purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. From April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If, in the meantime, the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP.

To ensure the continued smooth implementation of the Eurosystem’s asset purchases, the Governing Council decided to change some of the parameters of the APP. In addition to the extension of the programme, the following parameters will be adjusted on 2 January 2017:

The maturity range of the public sector purchase programme (PSPP) will be broadened by decreasing the minimum remaining maturity for eligible securities from two years to one year.
Purchases of securities under the APP with a yield to maturity below the interest rate on the ECB’s deposit facility will be permitted to the extent necessary. The implementation details will be worked out by the relevant committees.

CFA Institute: Latin America Investment Conference

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The risks, opportunities, and challenges facing the global investment profession are as complex as ever and as investment professionals, it’s imperative that you remain current. With this in mind, next February 2nd and 3rd, the CFA Institute and CFA Society Mexico will host its first Latin America Investment Conference at the Westin Resort and Spa Cancun in Cancun, Mexico.

The conference, which is a must-attend event for investors in Latin America, features globally-acclaimed speakers and a range of diverse topics and perspectives to shape investment strategies in Latin American markets.

A practitioner-oriented educational conference focused on Latin American economies and capital markets, as well as global issues relevant to investors worldwide. It is aimed at analysts, portfolio managers, and other senior investment professionals working in or interested in Latin American markets.

For further information, follow this link.

OppenheimerFunds Expands International Offering and Appoints Distribution Team

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OppenheimerFunds has announced the appointment of Doug Stewart as Head of European, Middle East and Africa Distribution, based in London. The appointment represents a further expansion of OppenheimerFunds’ International Distribution platform, which also includes the launch of a UCITS-Fund platform. Stewart will be responsible for marketing and distribution efforts throughout Europe, the Middle East and Africa. He will report to Steve Paddon, Head of Institutional & International at OFI Global Asset Management, Inc., a subsidiary of OppenheimerFunds serving institutional investors and consultants throughout the world.

Paul Eisenhardt, Head of International Distribution (ex EMEA), is responsible for the distribution of international solutions and developing client relationships in Canada, Latin America and the Asia-Pacific region. Eisenhardt also reports to Paddon.

The launch of OppenheimerFunds ICAV, an Ireland-domiciled UCITS platform and its sub-funds will focus on investment opportunities in global and developing markets equities, providing new choices to clients and deepening relationships with consultants and investment platform providers. The first of these strategies to become available is the company´s flagship global value, global equity and developing markets equity funds which launched last week.

“We are pleased to bring some of our most compelling investment strategies to an international audience, to help meet the needs of our evolving client base,” said Art Steinmetz, Chairman and CEO of OppenheimerFunds.

“Expansion to non-U.S. markets is a core element of our long term engagement with institutional investors,” said John McDonough, the firm´s Head of Distribution. “We’re delighted to welcome Doug to the team as we build our reach globally, and continue our focus on developing long-term client-centric solutions that differentiate us in the marketplace.”

Paddon added, “Doug and Paul’s appointments deepen the talent base of our dedicated institutional team, with their proven track records working across a variety of client segments. We look forward to increasing our engagement with institutional clients internationally by building access to our investment capabilities.”

ECB Preview: The Right Dose of QE

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According to Andrew Bosomworth, PIMCO’s head of portfolio management in Germany, the European Central Bank (ECB) faces a tricky challenge at its Governing Council meeting. On December 8th, it must decide on the minimum amount of quantitative easing (QE) needed to return inflation to target – and in what size doses it should be administered.

So far, the ECB has conducted two rounds of QE and committed to buy €1.74 trillion in assets, mostly government bonds. Phase one began in March 2015, spanned 13 months and saw €60 billion in asset purchases per month; phase two began in April of this year and is scheduled to run for 12 months at a rate of €80 billion per month.

The PIMCO specialist believes striking the right balance between the stock (of assets to purchase) and flow (the rate of purchases) will be key. “Both current inflation and projections for next year remain far below the ECB’s just-under-2% target, supporting the argument for more QE at a high monthly purchase rate. But monetary policy works with a lag, and because the ECB has already administered a lot of easing, further purchases risk creating asset bubbles and hurting savers – an argument for phasing out QE as soon as possible.”

In his opinion, there may appear to be little difference between purchasing €80 billion in assets per month for six months and purchasing €60 billion in assets for nine months (two options likely to be on the table). But while the ECB might be tempted to reduce the monthly purchase rate now, he thinks maintaining higher monthly purchases for a shorter period is more likely to square the stock-versus-flow circle, for three reasons.

First, maintaining €80 billion in monthly purchases minimizes the risk of tightening financial conditions, even if it involves purchasing a smaller total stock of assets. Financial markets are sensitive and might interpret a smaller purchase rate as a signal that QE will stop soon.
Second, committing to a shorter-term policy gives the ECB more flexibility to change course. If it turns out that nominal economic growth recovers strongly and durably – say, above 3.5% – the ECB could slow purchases during the final quarter next year and stop altogether by mid-2018. If growth remains weak, it could opt to extend QE into 2018. We see little cost to postponing the decision.
Third, interest rates and the euro are likely to rise for fundamental reasons independent of QE once growth recovers. Winding down QE under those circumstances would reduce the risk of tighter financial conditions that could push the economy back into recession. From a risk management perspective, we think it’s better to delay reducing monthly purchases until there is a high degree of confidence in economic forecasts.

Owing to the scarcity of eligible Bunds, Bosomworth believes any extension of QE will likely require relaxing some of the ECB’s rules for purchasing government bonds, and so the ECB may change its rules so that it can buy bonds at yields below the deposit facility rate and in quantities that deviate from its capital key. “With so much government debt on its balance sheet and peripheral banking systems (especially Italy’s) dependent on ECB liquidity as never before (see chart), a sovereign debt restructuring would be a crisis for the ECB. We therefore think relaxing the 33% cap on purchases for any one bond or issuer is less likely, and may be left in the toolkit for the next recession. Let’s hope that’s a long way away.” He concludes.

ABN AMRO Sells its Private Banking Operations in Asia and the Middle East

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In line with the strategic update as announced on 16 November 2016, ABN AMRO has decided to sell its private banking operations in Asia and the Middle East to LGT, a leading international private banking and asset management group.

Jeroen Rijpkema, CEO of ABN AMRO Private Banking International said: ‘Private banking is a core activity of ABN AMRO. After a strategic review, we have decided to focus on further strengthening and growing our private banking activities in Northwest Europe. The transfer of our private banking business in Asia and the Middle East is the logical next step in implementing this strategy. We are happy to have found in LGT a strong and solid partner to ensure continuity of service in the best interest of our clients and staff involved’.

ABN AMRO Private Banking manages around USD 20 billion (EUR 18.5 billion) of client assets in Singapore, Hong Kong and Dubai, representing about 10% of ABN AMRO Private Banking client assets worldwide. The transaction is subject to approvals from the relevant authorities and closing is expected in Q2 2017. ABN AMRO expects to realise a substantial book gain.

In the region, ABN AMRO will continue to offer financial services to its Corporate Banking clients active in amongst others Energy, Commodities & Transportation, the Diamond & Jewellery sector and Clearing.

Most Banks Don’t Need More Capital, But More Flexibility To Use It

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Despite having much stronger capital bases than before the financial crisis, banks around the world remain exposed to capital-related confidence shocks, according to S&P Global Ratings‘ Most Banks Don’t Need More Capital, But The Flexibility To Use It In Times Of Stress.

“This apparent paradox reflects the effectiveness of the significant increase in minimum regulatory capital requirements in ensuring that systemically important financial institutions (SIFIs) have enough bail-in-able resources to absorb stress losses in a resolution,” said S&P Global Ratings credit analyst Bernard De Longevialle. “However, at the same time, the higher requirements have also lead to a parallel shift in what the market believes are the minimum capital levels banks should permanently respect to keep its confidence.”

As a result, in period of stress, banks might react with many of the same procyclical behaviors that we’ve seen in the past. Current considerations by Europe’s Single Supervisory Mechanism to split Tier 1 Pillar II requirements into a hard “requirement” and a softer “guidance” component may give welcome additional flexibility to Europe’s large banks to absorb unexpected shocks without triggering confidence-sensitive coupon suspension.

Regulators have been successful in forcing the banking system to build a much stronger capital base than before the crisis.

This achievement should not, however, hide the fact that most of these capital resources would be available only as part of a resolution. Over the past six years, new forms of concurrent regulatory requirements have emerged in addition to going-concern risk-sensitive metrics. In assessing where large banks in Europe and the U.S. stand according to these metrics, we observe that their effective loss-absorbing margins above regulatory requirements have not improved on average since before the crisis.

International standard setters didn’t intend for these regulatory buffers to be viewed as establishing new minimum capital requirements. However, as seen earlier this year, the perceived risk of restrictions on distributions to shareholders or hybrid instrument holders can spread to the wider credit markets.

A further increase in regulatory minimum capital requirements could have unintended consequences, but flexibility to use capital buffers when needed would in our opinion benefit the resilience of the world’s banking system.

Taking Stock of the U.S.

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Stronger GDP growth is the key to sustaining U.S. equity momentum.

As we enter December, the market continues to chew over the implications of a Donald Trump presidency. Last week, my colleague, Erik Knutzen, CIO of Multi-Asset Class, examined the outlook for emerging markets debt and equities. This week, we take a look at the prospects for U.S. equities.

There’s been a lot of noise and excitement about the so-called “Trump Bounce” in equities, but I want to dig a little deeper and look at some of the factors that are likely to sustain it. The most important element in equities’ continued recovery is a pickup in expectations for stronger GDP growth. Indeed, this may already be in the works.

The most recent figures, for example, show an upwards revision in Q3 GDP—up from 2.4% to 2.9%1, largely driven by consumer spending. This was better than anticipated, and although estimates tend to fluctuate throughout a quarter, the Atlanta Fed is projecting Q4 GDP to be over 3%. So, if this plays out, it represents a 2.25% increase in GDP for the whole year. That’s a pretty decent tick up from the 1.5% the U.S. economy experienced throughout 2015 and much of 2016.

Fiscal Boost?

Next, you need to factor in the new administration’s plans for meaningful fiscal stimulus. Indeed, Steven Mnuchin, the Treasury secretary designate, made a case for greater fiscal policy intervention only last week. This included much talk about tax cuts, both corporate and personal, together with the long-heralded increase in infrastructure spend. Taken together, and if implemented, these initiatives should provide the tailwind that will drive U.S. GDP growth above the levels we’ve seen in recent years.

With a stronger level of growth, earnings should improve. Back in the spring, this was an area of concern for us. Accelerating earnings growth would be the strong foundation for further improvement in U.S. equity markets and support the higher P/E multiples that, for the first half of 2016, were driven by lower bond yields.

Industry Sectors a Mixed Bag

So, which areas of the U.S. stock market are most likely to benefit under this new environment and which ones will be left out in the cold? On the positive side of the ledger, financials should do well because of the expectation of interest rate increases and less rigorous bank regulation. Domestic cyclicals and energy companies should also be among the beneficiaries of faster domestic growth.

The small-cap space is also enjoying a strong rally. Since its November 3 low point, the Russell 2000 Index is up nearly 15% through the end of November. In contrast, the S&P 500 has posted a return of around 6%.

Health care, however, is a mixed bag. Tom Price, the proposed Secretary of Health and Human Services, is a vocal critic of the Affordable Care Act. In fact, he’s likely to try to do away with “Obamacare” altogether and replace it with a more market-based system. As a result, investors are struggling to figure out who’ll be the winners and losers if the current system begins to unravel.
Risks?

Trade and the Dollar

So what are the risks to this more optimistic scenario? One is that trade becomes an issue. There was a lot of anti-trade rhetoric during the recent U.S. election, although things have quieted down a bit since then. But tensions could reignite next year when Trump takes office. A trade “war” of sorts could be a meaningful drag on global GDP growth. Trade has in fact already been slowing over the past three years due, in part, to protectionist measures implemented in many countries.

The stronger U.S. dollar is making life increasingly uncomfortable for many large-cap exporters. Growing dollar strength has major implications for large international companies and, by association, their earnings growth. Since the U.S. election, the greenback has already risen by 4% and looks set to rise higher. And there’s near-universal agreement that the Fed will increase rates later this month, which will put additional upward pressure on the currency and, therefore, on big global exporters.

Net-Net, We have a Positive Outlook

But despite these concerns, the prospects for U.S. equities look far healthier than they did a month ago. So the decision of our Asset Allocation Committee just over a week ago to raise our 12-month outlook for U.S. equities to slightly above normal has, so far, proved to be the right one. Stay tuned to see whether this remains the case.

Neuberger Berman’s CIO insight by Joseph V. Amato

Safra National Bank of New York Acquires Bank Hapoalim’s Private Banking Business in Miami

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Safra National Bankof New York announced that it has signed an agreement to acquire Bank Hapoalim’s private banking business in Miami. The agreement covers qualifying clients and their relationship management teams who are focused on high net worth clients across Latin America.

This acquisition is a logical extension of Safra National Bank of New York’s private banking business for Latin America, where it has been providing premier private banking and financial services to high net worth clients for more than 30 years. With this transaction, Safra National Bank of New York and its subsidiary, Safra Securities, LLC, further strengthen their private banking business and the global wealth management capabilities of the J. Safra Group.

Jacob J. Safra, Vice-Chairman of Safra National Bank, commented:
“We are determined to play a leading role in the consolidation of the private banking market. Our capital strength, family ownership and 175 years of experience give us great flexibility to do such transactions.”

Simoni Morato, CEO of Safra National Bank of New York, said:
“We look forward to welcoming the clients and employees of Bank Hapoalim in Miami to our organization. Bank Hapoalim’s private banking business in Miami fits perfectly with the strategic vision of the J. Safra Group and Safra National Bank of New York, and we are confident we will add immeasurable value to clients.”

The acquisition is expected to be completed during the course of the first quarter of 2017, subject to regulatory clearance. Financial terms are not disclosed.

Pérez Art Museum Miami Receives $15 Million Gift from Philanthropist and Patron of the Arts Jorge M. Pérez

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Pérez Art Museum Miami (PAMM) has announced that business leader and long-time museum supporter Jorge M. Pérez will continue his patronage of the museum with a new $15 million donation. The contribution, which will be gifted over the next 10 years, will consist of $5 million in funds for the acquisition of works by Latin American artists, $5 million in endowed funds for procurement of additional works and an immediate bestowment of over 200 pieces from Pérez’s personal collection of Cuban artworks. The donated works will be featured in a new exhibition celebrating this momentous donation in the fall of 2017.

“This tremendous gift is another affirmation of Jorge and Darlene Pérez’s commitment to Miami’s museum,” said PAMM Director Franklin Sirmans. “This gift significantly improves upon the museum’s holdings and adds depth to a vitally important area of the collection that Pérez has always championed since coming on as a board member more than 20 years ago.”

Pérez has been one of the city’s leading advocates for contemporary art. This new gift will make PAMM home to one of the largest collections of contemporary Cuban art in any American museum. Earlier gifts by Pérez have included work by Cuban modernists Amelia Peláez, Wifredo Lam and Mario Carreño along with works of other Latin American modernists.

As Miami’s flagship contemporary art museum, collecting the work of Cuban artists and documenting the Cuban Diaspora fits with PAMM’s mission to represent its place in the world—geographically, conceptually and intellectually. Cuba, equally a part of Latin America and the Caribbean, has been an area of sustained interest at PAMM going back to its beginnings as a presenting institution. Over the years, the museum has presented solo exhibitions and projects by many Cuban artists such as Amelia Peláez, Wifredo Lam, Ana Mendieta, Glexis Novoa, Enrique Martinez Celaya, José Bedia and Quisqueya Henriquez.

In addition to the Cuban art collection, which will be supplemented by the first million dollars to augment the gift with new acquisitions of Cuban art, PAMM will spend $1 million a year in the four successive years to acquire works by Latin American artists to further buttress that aspect of the collection.

As an international museum of modern and contemporary art, which seeks to be the leader in archive for the study of art from Latin America and the Caribbean, the PAMM collection embodies much of the museum’s philosophy to lead the discussion of contemporary art outward from its home in Miami. To complement this philosophy, the first half of the gift will focus on collecting the works of regional artists, and the remainder of the gift will be used to acquire international contemporary art in perpetuity.

UBS Wealth Management Merges its Subsidiaries in Germany, Italy, Luxembourg, the Netherlands and Spain

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UBS has combined most of its Wealth Management businesses in Europe into one legal entity, UBS Europe SE. The new European subsidiary is headquartered in Frankfurt, Germany and will operate in European markets through a network of branches.

According to a press release, the choice of a societas Europaea as the corporate structure for the entity provides UBS with strategic flexibility.

By merging its subsidiaries in Germany, Italy, Luxembourg (which already includes the branches in Austria, Denmark and Sweden), the Netherlands and Spain into one legal entity, UBS has taken an important step to simplify its governance structure and increase operational efficiency across its European operations. This move allows UBS to more effectively invest in its European wealth management business and enhance the offerings and services it provides to clients in these important markets.

UBS Europe SE will be led by a management board whose members are: Birgit Dietl-Benzin, Chief Risk Officer, Fabio Innocenzi, Market Representative (Wealth Management), René Mottas, Market Representative (Wealth Management), Andreas Przewloka, Chief Operating Officer, Thomas Rodermann, Market Representative (Wealth Management), Stefan Winter, Market Representative (Investment Bank). Thomas Rodermann, who has headed UBS’s German business for the past two years, will assume the role of spokesman of the UBS Europe SE Management Board. The UBS Europe SE Supervisory Board will be chaired by Roland Koch, who has been Chairman of UBS Deutschland AG since 2011. The Market Representatives will lead the branches in their respective country.