Foto: Affisch. GenSpring sigue creciendo en EE.UU. con nuevas contrataciones en la región sur
GenSpring Family Offices, a leading wealth management firm for ultra-high net worth families, is pleased to announce the addition of two Managing Directors of Client Development in the firm’s South Region. John Frazer joins GenSpring to lead client development efforts in Georgia, Tennessee, and the Carolinas. Dale Sands joins to lead client development efforts focused on business owners and executives.
These key additions follow recent announcements GenSpring has made of expansions in the firm’s Western Region, with a family office establishment in Los Angeles and a significant expansion in San Francisco.
In addition, GenSpring has named Chris Trokey as Managing Director of Client Service for the South Region. Trokey, a 10-year GenSpring veteran who previously served as Family Investment Officer, leads a team of more than 30 family office professionals and is responsible for overseeing all aspects of the client experience across the firm’s Atlanta, Charlotte and Nashville family offices.
“I am thrilled to promote Chris to lead our client service efforts in the South Region,” said Chief Executive Officer Thomas M. Carroll. “Over the last 10 years, he has contributed greatly to our firm and to the lives of the families that he advises. Chris’ leadership coupled with the experience and insight of John and Dale give me great confidence that we will continue to deliver on our purpose of sustaining and enhancing family wealth and helping to ensure it has a positive impact on those who receive it.”
Mr. Frazer brings extensive wealth management experience to his new position at GenSpring. Prior to joining the firm, he spent 25 years with SunTrust Bank, most recently as Executive Vice President, Private Wealth Management Division for all of Georgia and North Florida. During his tenure, Mr. Frazer served as President and Chief Executive Officer of SunTrust Bank, Memphis Region and as Executive Vice President and head of the Memphis Region’s Private Wealth Management Line of Business. He is a graduate of The Citadel and The Graduate School of Banking of the South at Louisiana State University.
Mr. Sands, an Atlanta native, joins GenSpring with more than 17 years of Investment Banking experience specializing in advising ultra-high net worth families, young entrepreneurs, closely-held businesses and corporations in a variety of corporate finance capacities. In this new role, he will work in close partnership with SunTrust Robinson Humphrey, the full service corporate and investment banking arm of SunTrust Banks, Inc. with more than 1000 public and private clients across the country ranging from emerging growth companies to the Fortune 500. Mr. Sands, who started his career with Salmon Smith Barney in New York, has advised clients on numerous public equity, private equity, merger and acquisition and corporate divestiture transactions totaling billions of dollars. Most recently, Mr. Sands served as a senior member of SunTrust Robinson Humphrey’s Merger and Acquisition Group. He holds an MBA from the University of North Carolina, Chapel Hill, and an undergraduate degree from Vanderbilt University.
Mr. Trokey joined GenSpring in 2004 as a Family Investment Officer in the Atlanta family office. Previously, he served as vice president of Tower Hill LLC. He also served in the Private Wealth Management division of Goldman, Sachs & Co., and began his career at KPMG LLP where he managed audit and consulting service teams. Mr. Trokey earned a Bachelor of Science degree in Accounting from Indiana University and a Masters of Business Administration in Finance from Washington University in St. Louis. He is a Chartered Financial Analyst, holds the Chartered Alternative Investment Analyst designation, and has also passed the Certified Public Accountancy examination.
Photo: Alvesgaspar. “We Have Decided to Halve our Overweight to Equities and Move to a Neutral Position in Cash”
Global equity markets experienced volatile trading but moved higher overall during March. Key influences included the crisis in the Ukraine and Russia’s annexation of Crimea, concern over China’s economic and financial prospects, and the outlook for monetary policy in the US. Tensions between Russia and the West over the Ukraine rose ahead of a referendum in which Crimea voted to re-join Russia, but subsequently eased. Disappointing economic figures from China included an unexpectedly large fall in exports of 18% in February, dashing hopes that foreign trade will drive the slowing economy. The first Chinese domestic bond default, which took place in early March, also hurt investor sentiment. However, sentiment toward China recovered late in the month when Premier Li Keqiang said that Beijing was ready to boost the economy.
In fixed income markets, the yield on the 10-year treasury ended March at 2.72% compared to the 2.67% level seen at the end of February. However, yields experienced considerable volatility over the period, reflecting the crisis in the Ukraine, concerns over China’s economic outlook and jitters over US monetary policy. The latter followed remarks by Janet Yellen, the new head of the Federal Reserve, indicating that US interest rates would rise sooner than expected. However, markets subsequently regained their composure. On the other side of the Atlantic, Portugal’s 10-year yields slipped below the 4% mark for the first time in four years towards the end of March. Spanish and Italian bond yields also touched multi-year lows after investors interpreted remarks by a European Central Bank official as indicating that the bank would consider adopting quantitative easing to relieve the eurozone’s problems. Spanish 10-year bonds fell to 3.23% on the final day of trading in March, while the yield on comparable Italian bonds declined to 3.29%.
Meanwhile sentiment towards emerging markets in general has improved. The J.P. Morgan EMBI+ Index (on a total-return basis) delivered a positive return of 1.37% over the month and 3.45% over the quarter, while emerging market equities have also rebounded. The MSCI Emerging Markets Index (total return, local currency) gained nearly 2% in March, although it remains slightly down over the quarter. However, we are concerned about the outlook for China. In the past few years the country has seen an explosion in credit, facilitated by the shadow banking system as retail investors have been enticed into an array of savings products, where the underlying investments are often opaque, promising heady returns. It is clear that the authorities are now concerned about this situation and investors are surely going to see an increasing number of these funds being declared bankrupt. The growth in credit in China has been very rapid and it is difficult to find examples of such occurrences ending well. At best we are likely to see a material reduction in China’s growth rate, but the outcome could be far worse. Clearly the prolonged underperformance in Chinese equities has discounted some of these concerns, and valuations are low relative to other markets. However, the unwinding of the Chinese credit bubble could severely test China’s financial system, and unnerve investors more generally.
Consequently we have decided to halve our overweight to equities and move to a neutral position in cash. We will remain overweight in equities as valuations are largely reasonable, although less compelling than was once the case. We have also decided to increase our underweight to Asian equities on the concerns over China, and increase our overweightto Japan in the belief that the impact of the consumption tax will be less damaging than is feared. Although we remain overweight in equities, it would be fair to say we are less optimistic than we have been. Within fixed income, core yields are going to grind higher, and there is much less value in credit given how far spreads have tightened. Only emerging markets appear to offer any real value, but given the risks in terms of China, geopolitics and the macroeconomy, we are wary of increasing our weighting at present. The good news is that this environment is likely to continue to provide opportunities for stock pickers, which we should be able to exploit.
Monthly investment comment by Mark Burgess, CIO at Threadneedle
Activity in the Spanish real estate market over the last few months has shone an increasingly bright light on the opportunities for international private equity players searching for yield, with deals involving Apollo and Santander, Kennedy Wilson-Värde Partners and Popular, TPG Capital and Caixa, HIG Capital and Sareb, Intu and CPPIB, Cerberus and Bankia and a host of others. Investor appetite –Blackstone, Centerbridge, Fortress, Goldman Sachs, KKR, Lone Star, Northwood, Pimco, Soros, Starwood, WL Ross, etc. are also actively seeking and/ or executing deals – is undoubtedly ramping up, as is the industry’s penchant for innovation, as evidenced in recent moves to transpose successful single-family rental home strategies from the United States to the Spanish market.
Information Management Network and Planner Exhibitions present the inaugural Private Equity Fund Forum on Spanish Real Estate taking place this May 28-29 in Madrid. The Forum brings together local financial institutions, developers, workout and restructuring specialists, legal experts, regional and national government authorities as well as leading international investments funds to analyze all of the opportunities presented by Spain’s nascent real estate recovery, while frankly assessing the challenges that lay ahead for a full-blown recovery to take shape. As ever, there will also be plenty of networking events, al- lowing participants from both sides of deal teams to make connections and develop relationships.
The event will take place inthe South Convention Center of Feria de Madrid (Recinto Ferial Juan Carlos I, Madrid, Spain). For the most up-to-date list of speakers please visit http://www.imn.org/spain.
The economic overview: Why is the Spanish Economy Attractive to Foreign Real Estate Investors?; Becoming Familiar With Government Incentives Designed to Facilitate Investment in the Spanish Real Estate Sector; Understanding the SAREB Asset Mix and Deal Making Process; Opportunities on the Open Market by Asset Class, Sector, and Geography; Examining the Lender Landscape: Interest Rates, Risk Factors, and Major Credit Providers… are some of the topics to be discussed. For the most up-to-date agenda please visit http://www.imn.org/spain or the attached document.
To register, use the following phones: + 1 212 224 3428 (US) or + 44 (0) 207 779 8999 2 (UK); or hotline@imn.org 3.
Wikimedia CommonsPhoto: Rabensteiner - Bearbeitet von Rainer Z. Asset Growth vs Alpha Generation: the Capacity Management Conundrum
Success in asset management leads to a well-known conundrum: how to best manage increases in assets under management (AUM) while continuing to generate value-added alpha for clients.
A growth in AUM may make it more difficult to implement a strategy by imposing certain costs and impediments, such as liquidity constraints, potentially higher transaction costs and client-servicing requirements, as well as the need to ensure adherence to the strategy. Business diversification across multiple strategies and investment teams is another important consideration when evaluating the capacity of individual investment strategies. According to a new research published by MFS, this is key to ensuring a sustainable business model, which in turn impacts individual product performance.
Capacity can be managed in various ways, including with the implementation of product closures, which are designed to protect the interests of existing clients by limiting further inflows. In this case, MFS refers to both clients in the strategy of interest as well as clients more broadly in strategies that may overlap with the product in question. Preserving alpha-generating capability for existing clients is paramount in their view, and is at the heart of capacity management. It is in this context that capacity management is viewed as an integral component of risk management at MFS.
While there is general agreement among asset managers and their clients that products need to be closed for capacity reasons, there is little consensus on how capacity should be measured. Various academic and industry studies have offered a number of quantitative tools to help determine product capacity; however, these approaches are sensitive to the underlying assumptions made and none is definitive. Not only is capacity hard to measure, it is also a function of current market conditions and the characteristics of a given strategy.
Certain asset classes are inherently more capacity constrained than others. Portfolios invested in large-cap US equities have significantly more capacity than portfolios invested in either small-cap or emerging market equities. Highly concentrated portfolios (e.g., 20-stock portfolios) generally have less capacity than more diversified portfolios, depending on the liquidity of stocks included in the portfolio. Portfolios with high turnover require greater market liquidity and therefore have less capacity than portfolios with lower turnover that can patiently trade over longer holding periods. According to the whitepaper, one should bear in mind that all these parameters interact with one another and market conditions change over time, so portfolio characteristics must be fully examined before applying generalizations about capacity.
In this white paper, MFS outlines its approach to managing capacity in equity portfolios in some detail to illustrate the firm’s philosophy and considered methodology. They also provide information on the product restriction decisions made with regards to the Global Equity strategy as a case study. The way capacity is considered from a fixed-income portfolio perspective is also addressed.
BNY Mellon Investment Management announced today that Ryland Pruett has been named national sales manager for The Dreyfus Corporation and its mutual fund complex, with responsibility for leading the sales effort through broker dealers. Ryland brings over 22 years of field sales and leadership experience to the Dreyfus organization and is charged with building out the newly expanded sales force and to create efficiencies in total distribution.
In this newly created position, Pruett reports to Andrew Provencher, BNY Mellon executive vice president and head of U.S. retail sales.
“Ryland has a strong track record in building momentum for mutual fund strategies through broker dealers,” said Provencher. “He has led programs that significantly grew fund sales while diversifying distribution channels and products. He also has demonstrated an ability to identify new business opportunities and take advantage of them.”
Provencher added, “Ryland has an acute sense for driving better client interactions and promoting sales efficiencies through the extensive use of data, customer segmentation, predictive analytics, and other ‘intelligent distribution’ tools and techniques.”
Pruett joins BNY Mellon from Neuberger Berman, where he was national sales manager for the wire house channel. While at Neuberger, he played a key role in building the sales force through two major expansions as well as raising and diversifying revenues within broker dealer distribution. Prior to joining Neuberger Berman, he held field sales and leadership roles at Invesco.
Pruett received his bachelor’s degree in finance from Georgia State University.
Wikimedia CommonsErnesto Leme, the partner responsible for Claritas Investments’ Wealth Management division.. Brazilian Investors Beginning to Whet their Appetites for Diversifying Abroad
This year marks Claritas’ fifteenth anniversary in Brazil. What started as a hedge fund firm, evolved into one of Brazil’s pioneer independent management companies, as well as becoming one of the pioneers of the country’s alternative industry; a path which the company has consolidated into a multi strategy approach offering multi-asset products, long/short and equity funds. In 2001, two years after its founding, the firm launched its equity strategy to then leap into the fund of funds industry in 2004, and then in 2007 as asset managers in private equity. It was in 2008 when the company embarked onto the development of the wealth management business, and in 2012 joined Principal, as was explained to Fund Society by Ernesto Leme, the partner responsible for Claritas Investments’ Wealth Management division.
As regards Claritas Wealth Management, Leme explained that the company mainly targets the ultra-high-net-worth (UHNW) Brazilian clients. In order to protect and grow these clients’ wealth, the best approach is to offer diversification, remembering that “we are not here to make them rich. Our job is to keep them rich for generations, but not make them rich,” he added.
International diversification is not a strong trend in Brazilian investors, as safeguarded as they are by the country’s extremely high interest rates and its stability derived from a consistent growth in recent years, they have not leaped into exterior markets. However, Leme has found that in the last 12 months an appetite for international diversification has developed, and it is aimed primarily at the U.S. and Europe. “Diversification is no longer exclusively targeted towards emerging markets, although there is still interest in some countries within the region such as Chile, Peru and Mexico, it is no longer concentrated only in those markets,” he added.
As for the asset class trend among Claritas clients, Leme said that the investor currently tends more toward equities, followed by fixed income, where there is also substantial interest.
The executive explained that, in response to the Brazilian investor’s growing appetite for international diversification, the firm has recently launched three strategies: a global equities fund, with 60% positioning in the United States, and which is also its first global shares’ fund, a high yield American fund, and a preferred securities fund, which invests in large international companies such as banks, insurance and reinsurance companies, telecommunications, energy and transportation, among others. The team of this last fund is in the United States and consists of 14 people. These new products are made in Brazil, but they have all been allowed to invest abroad. The three funds are: Claritas Global Equity, Claritas Preferred Securities and Claritas Global High Yield.
Finally, when asked about his participation in the upcoming Private Wealth Brazil Forum, to be held in Brazil next May 13 th, Leme, who will participate in the panel discussion on current trends and expected returns in the hedge fund space, said his commitment to hedge funds was placed in the macro space because the achievements are measured independently of traditional markets.
Private Wealth Brazil Forum, organized by Latin Markets, is a meeting point for private bankers, UHNWI, asset managers, family businesses and family offices. The forum brings together more than 300 professionals and industry leaders of Brazilian wealth management for a day of lectures, in which strategies to protect, preserve and grow wealth are addressed.
Photo: Henrickson . RBC Wealth Management Closes Down in Chile after Six Years in the Market
RBC Wealth Management has decided to close down its office in Santiago de Chile after six years in the country “as part of a strategic review of our business in Latin America.” As RBC Wealth Management confirmed to Funds Society, the closure will take place later this year.
Similarly, RBC Wealth Management pointed out during a brief statement that “more than 95% of our Latin American customers are now served through our highly experienced offices in the Caribbean, Europe and North America. We will continue to grow through this successful business model.” Richard Diego is at the helm of RBC Wealth Management business for Latin America.
The Chilean newspaper “Pulso” was the first to report the news, informing that RBC WM clients in Chile have already begun to be notified of the office closure via email.
RBC Wealth Management arrived in Santiago in early April 2008, setting up office in Nueva Las Condes, the financial heart of the Chilean capital. At that time, RBC’s objective for Chile was to provide financial advisory services with a global vision for high net worth individuals (HNWIs), which as the firm explained at the time, was an activity which supplemented “the strong presence in Latin America through the continued expansion of the company in the region.”A week earlier, RBC WM also opened offices in Mexico.
Two months prior to RBC notifying its departure from Uruguay, its premises were raided by Argentine Judge Norberto Oyarbide, amid an enquiry into alleged tax crimes for a “Mega Cause” investigation into asset laundering maneuvers through million dollar transfers of dozens of football players. At the time, however, RBC denied that this fact was related to the closure of its business in the country.
Photo: Ed Schipul from Houston, TX, US (running with the seagulls) . Brave New World
The major themes driving markets in Q1 were all negative: disappointing economic and corporate data, recurrent problems in emerging markets, and the political crisis in Crimea. Still, the resilience of markets (global equities +1.4%; emerging markets -0.4%[1]) against such a challenging backdrop suggests underlying market strength and the promise of better returns in the months ahead if the news flow does improve.
While we have some sympathy for this theme, we’d be wary of getting carried away with it. One reason is that market resilience in recent months seems partly due to the fact that our positive outlook for growth in the major economies has now become a consensus view. Investors have probably disregarded weak data because they expect a rebound in the next few months. If that’s right, then risk assets might need good data just to validate current expectations. Also, it’s possible that any positive growth news in the UK and the US will shift investors to a more bearish view on monetary policy.
Monetary policy really matters – it has been the key driver of financial markets in the post-crisis era. Q2 2013 was a high point for investor confidence in central bank liquidity provision. Since then, markets have begun to accept that US quantitative easing is ending and have begun to focus on the timing of the first interest rate hike. The imprint of this theme on markets is clear. While global equities and high-yield bonds have recently made new highs, every other asset class is still trading below its 2013 peak.
The broader theme here is that markets are in the midst of a transition away from a world in which central bank liquidity boosted all assets, to a world of more limited policy support. In the major economies, the expansion of central bank balance sheets has peaked. In China, policymakers are now focused on restraining the credit boom. In other emerging markets there has been more policy tightening than easing. As markets confront the limits to policy support, the growth outlook becomes increasingly important. In gloomy emerging markets, positive growth surprises would be unambiguously welcomed. In the UK and the US, market reaction to positive growth surprises will be somewhat tempered by concerns about the impact on monetary policy.
Liquidity-driven markets are powerful and straightforward: everything goes up. We are now in transition to a more complex environment in which market reaction to news will be more nuanced and less predictable. That’s a world in which we’d expect asset performance to remain quite widely dispersed. A world with more volatility, more challenges and more opportunities.
Fernando Borges, Managing Director and Co-head of Carlyle Group operations in Brazil has just been elected new president of the Brazilian Association of Private Equity & Venture Capital (ABVCAP) for the period of two years (2014-2016). The voting of the new president by the members of the ABVCAP boards occurred before the opening of “ABVCAP Conference 2014”, hold last week in Rio de Janeiro. The new vice presidents are elected Clovis Meurer, Partner and Superintendent Executive at CRP, and Luiz Eugenio Figueiredo of ABVCAP.
“The perspective for the industry to participate in the country is promising and positive, as we believe the resumption of economic growth, the recovery of the capital market and the strength of the Brazilian productive sector,” said Borges , during the press conference.
According to Clovis Meurer, former president of ABVCAP, the market for private equity funds and venture capital in Brazil is experiencing an extraordinary moment with immense opportunities in various fields like education, infrastructure, consumer and retail.
“Increasingly, the private equity industry sees Brazil as a country with endless possibilities, with increasingly high wages, natural resources and a wonderful industrial park. Brazil is a natural destination in world affairs,” he says.
ABVCAP Conference is the largest gathering of industry interests in Latin America, bringing together major players of the national and international scene. The event has featured names like David Rubenstein, co-founder of The Carlyle Group; Gustavo Franco, a founding partner of Bravo Investments; Clovis Meurer, vice-president of ABVCAP and superintendent of CRP – Companhia de Participações, among other industry experts, local and international managers. The Congress of ABVCAP is sponsored by the BNDES, FINEP, KPMG, BM&FBovespa, Guernsey, Thomson Reuters, Bradesco BBI, Merril Datasite, RR Donnelley, CAF, Deloitte, PWC, IBM and UOL Diveo, beyond institutional partnership ABDI, Apex-Brasil and the IDB / MIF.
See the members of the deliberative council elected for 2014-2016:
François Gobron, gestor del fondo Generali IS European Recovery Equity, lanzado recientemente. "El tema de la recuperación es más acusado en Portugal y Grecia que en España e Italia"
François Gobron, fund manager of the recently launched Generali IS European Recovery Equity Fund, expains in this interview with Funds Society that there is a lot to earn in Greece and Portugal as these markets were the most impacted by the financial crisis.
Although the fund intended to play the current economic recovery, is it a good idea in the long term, although countries may not always be in “recovery” mode? Why?
The recovery theme we are managing with our fund is focused on Southern Europe, on the peripheral countries, that is Italy, Spain, Portugal and Greece. Indeed, we see lots of opportunities in Southern Europe, mainly in companies with a large domestic exposure.
We are taking into account three major drivers which will have a strong positive impact on South European companies. These are: firstly, the economic recovery itself of these countries, with a focus on leading private companies focused on their domestic markets; secondly, the re-rating by major rating agencies, which will reduce the cost of these companies’ debt and facilitate their access to the debt markets; and thirdly the ongoing restructuring of many public or para-public companies and new regulations, in many cases imposed by the Troika (IMF, ECB and EC), especially in Greece.
We are convinced there is a lot to earn in Greece and Portugal as these markets were the most impacted by the financial crisis. We have thus a stronger focus on these two countries. It is also a bit unfair, from my point of view, to put Italy and Spain in the same bag of Portugal and Greece. Although it is true that some of these countries will not always be in “recovery” mode, there are always good opportunities and special situations that can make good investment cases, especially by capable stock-pickers with a clear focus on strategic analysis.
It is true that the peripheral economies’ recovery it is not priced in their respective stock markets? How do you see the current valuations? Is it currently a good entry point?
If you only look to P/E 2014, it is correct that valuations in Southern Europe do not look particularly attractive: at around 15x they are on line with the rest of Europe. But if you do a strategic analysis, trying to understand what could be normalized margins once volumes are going back to normal (or even just increasing a bit), you will see that you have a lot of opportunities in some companies with a large, underutilized asset base.
On top of that, there’s a huge variance in stocks performance and valuation, so there’s a need to be particularly selective and cautious on stocks we include in our portfolio. As an example, we are not exposed to the Spanish media market as the media stocks (TVs…) look too expensive to us given the kind of recovery we can expect in the short to medium term in this industry. For this fund, we avoid companies not enough focused on their home markets, meaning we prefer to not invest in companies with a strong international presence (large blue chips); we also avoid regulated business when regulation can be at risk, like energy in Spain; and finally we try to stay away from value traps like companies with overvalued assets, such as the Spanish real estate sector, in our opinion.
What kind of opportunities in the periphery still have an interesting potential?
We see a lot of opportunities in companies listed in Southern Europe, as all these countries will benefit from re-rating from the major rating agencies. We usually prefer companies having a strong footprint on their local market, that will benefit the most from the local recovery; still having a potential to restructure (para-public companies pushed to make strong cost cutting by the Troika); in the near future, we believe there will be interesting opportunities in the Italian financial sector.
Which recovering country could provide more benefits to investors? Spain / Italy / Portugal / Greece?
The recovery theme is more present in Portugal and Greece than in Spain and Italy. We chose not to include Ireland in our fund because the Irish stock market has already more than doubled since the 2009 lows.
In which sectors can there be the greatest recovery? What about the financial sector?
Heavy industries (cement metal), infrastructures (water, energy, telecom). The financial sector has a huge leverage on activity, with ROTE that could go as high as 15% in the long run in Greece and Portugal (on a normalized 9% CT1). In Italy ROTE could normalize from 7% today to 10% in a few years and we expect some sort of consolidation in the coming quarters/years in the Italian banking sector.
Is the recovery fully on the way? What risks do you see that could affect economic recovery in southern Europe ? How could these risks impact your portfolio?
Recovery is now a reality, at least we can now see that the worst is behind us, but it is still a very early phase of economic recovery in South European markets. The main risk I would like to underline is not an exit of Greece from the eurozone. Instead it is more a slower recovery than expected that could take 5 years instead of 3 to materialize.
Do you believe that deflation will occur ?
We think we are not in a deflation mode and that political institutions will take measures to avoid it. We are quite immune from deflation coming from emerging countries, as stocks included in the European Recovery Equity Fund are not exposed to anything else then their domestic market. For instance, the crisis of emerging currencies back in January had no specific impact on our fund.
It is true that with the euro area headline inflation marking a new cyclical low of 0.5% yoy in March and Spain even recording falling prices by -0.2% yoy, deflation concerns have heightened recently. However, deflation is a situation in which prices fall on a broad scale and consumers as well as firms believe that this situation will continue. This is to be distinguished from disinflation where price increases come down but there is no wide-spread expectation regarding falling prices on a sustained basis. In the euro area disinflation is the name of the game. Looking ahead, we do not expect the euro area falling into deflation for the following reasons: First, the latest data were strongly influenced by technical factors. Base effects from energy prices and an early Easter compared to this year turned to be substantially disinflationary. Second, the economic recovery is on track. Output has started to expand in most of the Southern countries. This should at least stabilize price increases. Moreover, also in these economies the price pressure excluding volatile goods and government effects (tax hikes, administered prices etc.) has stabilized. Third, inflation expectations have come down over the last months but are still at reasonably high levels.
All in all, while low inflation rates will persist for the time being, we do not see the euro area falling into deflation. That said, deflation is a risk that has to be closely watched. For instance, a geopolitically induced negative supply shock has the potential to initiate a process that in the end pushes the euro area into a deflationary environment.
Should the ECB do more … or is it enough?
The ECB has brought down its policy rate close to zero already and implemented a number of unconventional policy options in order to stimulate activity and cushion risks. Most importantly, the OMT program and the forward guidance to “leave interest rates at present or lower levels for an extended period of time” is a clear signal that monetary policy will continue to support activity. However, the major problem of the current recovery is missing credit growth. For instance, loans to the private sector continued to shrink at an unabated pace of slightly above two percent year-on-year. Here, tailored measures to facilitate credit creation especially in the peripheral economies are likely to be adopted. The acceptance of Asset Backed Securities based on credit given to small and medium sized firms or the creation of a Funding for Lending Scheme à la Bank of England are promising possibilities in our view. We do not expect the euro area to fall into deflation. However, a clear and credible emergency plan would help to stabilize expectations. In this respect, it helps that the chorus of policy makers are loudly thinking about quantitative easing, including the President of the Bundesbank. Moreover, should the euro continue to strengthen and become a threat to the recovery we think the ECB will not hesitate to introduce a negative deposit rate.
