Investors

Investors are calling this risk “Lehman Squared”

As Eurozone turmoil resurfaces, Gemma Godfrey takes you through the under the radar risks and how to trade them.

The risk of Greece leaving the Euro is looming large over markets as a ‘snap’ election nears on Jan 25th. Threatening to reverse the austerity measures (spending cuts etc) required for bailout funds and remaining in the Eurozone, Syriza looks likely to lead any coalition government, if it does not win outright.

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Why Europe Is Doing The ‘Ice Bucket Challenge’ With A Glass Of Water

‘Grand’ gestures with minimal effects, Europe is doing the ‘Ice Bucket Challenge’ with a glass of water. Measures won’t measure up to much. Little movement in interest rates, not enough assets to buy and ultimately – you can put out as many cream cakes as you’d like, but if people aren’t hungry, they aren’t going to eat. The pressure is rising and more is needed. Europe has become a ‘binary trade’, and it is important to invest in those set to benefit regardless.

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cnbc FMHR Sept 2014

2 Measures That Won’t Measure Up To Much… (more…)

Your 5-a-day: 5 of The Biggest Misunderstandings Cleared Up

‘Wind down’ is not withdrawal but watch negative news flow in the US; treading water is not growth so keep the champagne on ice for Europe; price is not value so beware investor sentiment; falling unemployment is not rising employment so watch the participation rate; and a hiccup is not a correction so keep an eye on an exit…

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From A Dog To A Darling: 5 Ways To Profit From Japan That Most Have Missed

From a dog to a darling, Japanese stocks have finally found favour. After returning 52% for investors last year, there are still 5 reasons this market has further to go, with opportunities most have missed. There is the potential for a catch up within the stock market, mispricing, earning growth, restructuring and increased buying. Sectors to benefit from reflation and growing domestic demand within a still unloved part of the market may profit.

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Global Markets Are Not Prepared For The German Election

Top Story on Yahoo! Finance, published on the Front Page of Huffington Post Business, discussed on CNBC.

Investors are expecting an eventual reduction of support by the Fed, and Merkel winning the election this weekend. However, what stock markets have not priced in is the resurgence of Eurozone troubles into the headlines. So what are the options, why is this important and how will this effect markets?

[Click image below or this LINK to watch this as a TV Clip]

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Why Olympic Success Must Inspire Action in Europe

Central banks are running out of steam as their measures to bring calm back to markets are no longer as effective as they once were. Germany too seems unable to keep up. Like a marathon runner caught in a sprint, their reluctance to move forward stands in stark contrast to market moves focused on the end game. But the road isn’t clear. Europe has three remaining hurdles in their race to recovery: funds, fiscal unity and reform. With Greece approaching the final whistle, doubts over its ability to stay within Europe are growing louder. The worry is investors are watching the referee not the striker, more focused on the search for safety than the rising risk elsewhere in the markets. False starts continue to drive market volatility and while investors ask whether it’s time to back the ‘underdog’, European stocks may provide diamonds in rough, but things could get rougher.

Watch the debate in a quick CNBC clip:

How Europe’s Crisis is Like the Olympics & How to Trade These Markets

 

Central Banks: Running out of steam

The vital relationship between central banks implementing stimulus and Spanish yields falling has broken down since April of this year. No longer is central bank action able to reassure the market and instead Spain and Italy’s borrowing costs remain at elevated levels. Investors are demanding more. Structural change is needed but markets are concerned that leaders could choke under the pressure.

Germany: A marathon runner caught in a sprint

Germany wants to progress towards greater unity at its own pace but the markets move faster. Indeed a backbencher delivered his dissatisfaction with the European Central Bank’s plans to their Constitutional Court! It will be tackled in September but investors and the economy won’t wait. Weak consumer confidence and rating agency scepticism highlight the urgency for action.

Europe: 3 Hurdles in Race to Recovery

The three key obstacles to be tackled to progress towards stability are: enough funds to contain the crisis; fiscal consolidation (share budgets in order to share debt burdens and be able to offer ‘eurobonds’); and finally structural reform to regain competitiveness & growth. All are vital for the future of the region and this realisation is starting to build within the markets. Europe did manage to overcome their concern that a Fed-Style straight bond buying programme would reduce the pressure on countries to reform, with a Memorandum of Understanding putting these measures on paper. The use of ‘MOU’s in order to accept ‘IOU’s to lend to countries within Europe may be a step forward, but this remains only part of the full picture needed for longer-lasting results.

Greece: Approaching the Final Whistle

S&P ratings agency has questioned whether Greece will be able to secure the next tranche of bailout funds as it downgraded the outlook for its credit rating to negative. Without such funding, the ‘death knell’ for Greece’s euro membership will be sounded. With the IMFsignalling payments to Greece will stop, the lack of funding fuels fears that without drastic action, the end could be near. Even beyond Greece, the Italian Prime Minister dared to publicise the possibility of a Eurozone breakup if borrowing costs did not fall.

Investors: Watching the Referee not the Striker

The rush to safety has been overshadowing rising risksAs investors pile in to perceived ‘safe haven’ assets, the yield on German government bonds has been falling. However, in a different market, the cost of insuring these bonds has risen as these investors see risk on the rise. The snapback in bond markets to better reflect this sentiment could shake the equity market as well and is therefore a significant concern.

Markets: False Starts

Markets have rallied in the face of disappointing data. Eurozone stocks reached a 4 monthhigh as manufacturing dropped to a 3 year low suggesting the slump is extending into Q3. This discrepancy has driven market volatility, exacerbated by the low volume of shares traded over the summer months. Greater clarity is required to see a more sustained upward momentum which will have to wait until leaders are back from their hols!

Investments: When to Back the Underdog?

European stocks may provide diamonds in rough, but things could get rougher. The overweight US / underweight EU trade is starting to look stretched, as the divergence in performance between the two regions continues to increase. This has been quite understandable, but there will come a time when this is overdone. Within Europe, there are international companies, with geographically diversified revenue streams so not dependent solely on domestic demand for their products or services. Furthermore, with effective management teams and strong fiscal positions, some may be starting to look cheap. However, cheap could get cheaper. Damage to sentiment could lead to market punishment regardless of fundamentals. Therefore waiting for decisive developments & clarity on road to recovery may be prudent.

Bank Scandals: Is This Just The Tip Of The Iceberg?

From accusations of interest rate manipulation, to charges of illegally hiding transactions with Iran, the spotlight is well and truly on the banking industry. Institutions appear to have been operating right at the edge of what’s reasonable where the line between right and wrong can become blurred. Crucially, it highlights how issues can occur outside ‘investment banking’, and therefore attempts to classify one part of the industry as bad and one part good is flawed. Nevertheless, public opinion is against the banks and it’s up to them to earn back respect. We’re entering a tough new paradigm of tighter regulation, greater demands for transparency and less incentive to lend. Vindication, conviction and takeovers are all possible but one thing we can be more certain of, the regulator is watching closely and further turmoil is likely.

Working On The Border Between What’s Right And Wrong

Standard Chartered has been accused of illegally hiding transactions with Iran. The aggressive attack of money laundering charges came as a shock to investors, who punished the bank’s shares with a sell-off of more than 16%, wiping $6bn from its market value. So what can we take away from this latest scandal? Is this a one-off or an indication of an industry wide shortfall?

The complication seems to arise from the claim that the bank was already working openly with US agencies and 99.9% of this business complied with legislation.

However therein lies the shortfall, the opaqueness. Investors maintain these discussions should have been better highlighted in their last annual results. The confusion surrounding whether they did or did not do wrong may signal that they could have been operating right at the edge of what’s reasonable.

With a focus on profits and market share, the line between right and wrong can become blurred. Indeed previous fines have merely moved not mitigated risk. As other banks closed their doors on these types of transactions, Standard Chartered, it has been argued, may have instead welcomed the new business. Changing this culture may prove prudent.

Issues Aren’t Black & White But Murkier ‘Shades Of Grey’

An interesting aspect of this investigation is the type of bank business it is targeting. This is not an investment banking scandal. Instead commercial banking dealings are under attack. Could this have been avoided by having investment banking and retail banking separated? Arguably no.  It is not as binary as one part good, one part bad and not all banks overall are the same as each other either.

Indeed, investment banking can help subsidise the cost for running other banking operations and although transgressions may have been made, not all who work in the industry can be tarred with the same brush.

A New Paradigm

There is huge political capital in ‘bank bashing’, finding a common ‘enemy’ to engender sympathy and support.  But the pressure is on the banks to earn back trust. Likewise, whilst banks have to get used to tougher regulation, we must accept that fines could erode their reserves and reduce their incentive to lend. A tougher ‘new paradigm’. Furthermore, whilst financial institutions must accept greater demand for transparency, both banks and regulators must improve the way they communicate with the public to avoid unnecessary panic.

What’s Next?

Vindication? Conviction? Takeover? Next Wednesday we’ll hear Standard Charter’s response to these accusations. Analysts admit that at this stage it’s hard to know which way the case will go. An unintended consequence could be a potential takeover, with JP Morgan already mentioned as a possible buyer (source: John Kirk at Redburn). As some hope to split banks up so they are easier to control, this would not be a welcomed outcome. Meanwhile the LIBOR scandal continues as additional institutions are investigated. Further turmoil is likely. And the regulator is watching…

Banks Slash Jobs but Severe Headwinds Remain

As banks all over the world slash jobs, we ask ourselves – will this produce more streamline firms ready to generate significant profits, or a sign of the poor outlook for the sector? Unfortunately, stifling regulation repressive and a false bubble has driven this move and severe headwinds remain through exposure to struggling economies and substantial funding needs.

The 50 largest banks around the world have announced almost 60,000 job cuts. UBS are laying off 5.3% of their workforce, blaming stricter capital requirements and slowdown in client trading activity; Credit Suisse cutting jobs by 4% to save SFr1bn and Lloyds a whopping 14%.

Restrictive regulation make banks more stable but less profitable

Stricter capital requirements were just the type of new regulatory measures the Chief Executive of Standard Chartered feared at Davos back in January, would “stifle growth”. At this time we saw banks such as Credit Suisse missing earnings targets and downgrade their expectations severely going forward (from above 18% return on equity to 15%, which turned out to still be too high).

UBS has seen costs in their investment banking division soar to 77% of income and net profit fall almost 50% from a year earlier. Stricter capital requirements mean banks have to hold a higher amount of capital in order to honour withdrawals if hit with operating losses. Furthermore, restrictions on bonuses led to increases in fixed salaries and an inflexible cost base.

Backtracking on a false bubble

Job cuts should also be set within the context of occurring after a ‘false bubble’. Post the 2008 financial crisis and bank bankruptcies and proprietary trading layoffs, the fixed income, currency and commodity business of the remaining players boomed as competition dropped. Banks began expanding. UBS’s proposed cuts of 3,500 jobs comes after an expansion of 1,700 to the workforce and incomparable to the 18,500 job losses experienced during the crisis.

Exposure to struggling economies is a key threat

Crucially, these cuts do nothing to solve the biggest problem these banks are struggling with. They have substantial exposure to struggling EU economies. In Germany, bank exposure to the PIIGS (Portugal, Italy, Ireland and Spain) amounts to more than 18% of the countries GDP. Just last month Commerzbank suffered a €760m write-down from holding debt that is unlikely to be repaid, which all but wiped out their entire earnings for the second quarter of the year. Further fuelling fear of the spread of the crisis from periphery to core is that French banks are among the largest holders of Greek debt.

Here in the UK we’re by no means immune. Our banks have £100bn connected to the fate of these periphery economies. RBS, 83% owned by the British taxpayer is so heavily exposed to Greek debt that it has written off £733m so far this year.

Severe funding needs and fear of lending exacerbate the problem

90 EU banks need to roll €5.4tn over the next 24 months. This will be funded at higher rates and with disappearing demand as investors become more wary, exacerbating the problem. In addition these banks need to raise an extra $100bn by the end of the year. An inability to borrow to satisfy current obligations, not withstanding any expansive moves, is a serious obstacle to profit generation. 

Moreover, job cuts do nothing to boost confidence to encourage banks to lend. Just two weeks ago, EU banks deposited €107bn with the European Central Bank overnight than lend to each other. If banks are not even lending to each other, losing out on a valuable opportunity to make money, then how encouraged are we as investors to get involved?


Hedge Funds – to be Feared or Favoured?

As the biggest hedge fund insider trading case comes to a close, we are reminded of the risks of investing in the asset class. Ever since generating losses in 2008, the reputation of these ‘absolute return’ vehicles has been damaged. The Madoff scandal which topped off the year did not help. Nevertheless, whilst clarity in the markets remains illusive and with a wider range of tools to exploit opportunities, are they a form of investment to be feared or favoured?

A Tainted Asset Class

Disappointed and disillusioned, many investors are reluctant to revisit the asset class run by managers once hailed as the new “masters of the universe”. Sold on the promise of generating positive performance in any market environment or at the very least preserving capital in times of stress, losses generated in 2008 came as a shock. With the Madoff scandal came the realization that even funds that did consistently generate steady returns were not immune to trouble. There is even an aptly named “Hedge Fund Implode-o-Meter” website tracking the number of major funds which have “imploded” since late 2006 (out of interest the number at last look stands at 117, although this includes all funds suffering any form of “permanent adverse change”, not just total shutdown).

But Not All Are Created Equal

Not all hedge funds should be tarred with the same brush and although grouped within the same category, they can differ tremendously. From the investment vehicles in which they invest to the stringency of their risk management, not all are created equal. The Hedge Fund Association summed the situation up succinctly with the assertion that “investment returns, volatility, and risk vary enormously among the different hedge fund strategies. Some strategies which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds.”

Losses Were Often Greater Elsewhere

Putting aside the often misleading ‘absolute return’ banner, the average hedge fund was better able to preserve capital through the market downturn than a regular ‘long-only’ mutual fund. Whilst the MSCI World Index fell 42% in 2008, the Credit/Suisse Tremont Hedge Fund Index fell 19%, More impressive still were the 21% of funds which posted positive returns for the year (the majority of which were up double digits). Crucially, over a more appropriate investment horizon of 3 years, according to figures by EDHEC Business School, “The majority of hedge funds delivered better returns than the S&P 500 index”. Hedge Funds have shown themselves able of generating highly attractive returns.

The Tide Has Changed

Investors have demanded more. In 2008 they ‘spoke with their feet’ and the hedge fund industry suffered $782bn of redemptions. The Hedge Funds had to listen. What was requested, according to a report by Scorpio Partnership, was “transparency, simplicity and liquidity”. Likewise, the Hedge Fund Scandals were a wake up call to investors and much more focus is being placed on operational due diligence, to avoid investing in any future hedge fund failures.

Investment Insight: Well-Positioned to Exploit Opportunities

With the risk of future macro shocks clouding the horizon (read: Japan, Middle East, EU Sovereign Debt), the direction of the markets is somewhat hard to predict. Therefore investing with flexible managers able to react to the quickly changing environment and nimble enough to exploit opportunities when they present themselves seems an attractive move. Not all investments are created equal, some are more equal than others.