Thu, 22nd June 2017

Anirudh Sethi Report


Archives of “capital” Tag

Here is a look at the biggest events on investors’ radar next week

Brexit discussions

On Monday, Brexit secretary David Davis is set to to meet in Brussels with Michel Barnier, the EU’s chief negotiator, to begin formal talks on the process of untangling the UK from the bloc. The EU will focus on issues of citizens’ rights and the Brexit bill for the next few months, a sequence to which the UK had previously objected.

But, following the surprise election results earlier this month that left the UK with a hung parliament, those objections may now take a back-seat to the other elements of uncertainty that have been injected into its own longer-term plans.

June’s EU summit will also get underway on June 22 with a broad agenda. After a short speech from Theresa May, the UK prime minister, her delegation will leave on June 23, and Mr Barnier is expected to update remaining members on the current status of negotiations.

Investors will be watching closely to see what reactions come from both camps, now that the British elections have thrown a wrench into an already complicated and unpredictable proceeding.

MSCI and China – fourth time the charm?

China’s growing acceptance into international capital markets faces a watershed moment on Monday with a decision on whether a first batch of stocks listed on its $7tn domestic equity markets will be included into the world’s dominant emerging markets stock index.

MSCI will announce after the market close whether it would finally include China’s domestic A-shares in its global indices.

The US index provider last June delayed for a third straight year the A-shares’ inclusion into its benchmark $1.5tn emerging markets stock index, citing regulation worries and accessibility for global investors.

Bill Gross: “All Markets Are Increasingly At Risk”

Picking up where he left off last week, when Bill Gross told Bloomberg that U.S. markets are at their highest risk levels since before the 2008 financial crisis “because investors are paying a high price for the chances they’re taking”, in his latest monthly investment outlook, the Janus Henderson bond manager says that investors should be wary as low interest rates, aging populations and global warming which inhibit real economic growth and intensify headwinds facing financial markets:

 Excessive debt/aging populations/trade-restrictive government policies and the increasing use of machines (robots) instead of people, create a counterforce to creative capitalism in the real economy, which worked quite well until the beginning of the 21st century. Investors in the real economy (not only large corporations but small businesses and startups) sense future headwinds that will thwart historic consumer demand and they therefore slow down investment.

Lamenting the onset of the new normal era, Gross says that “because of the secular headwinds facing global economies, currently labeled as the “New Normal” or “Secular Stagnation”, investors have resorted to “making money with money” as opposed to old-fashioned capitalism when money and profits were made with capital investment in the real economy”

Moody’s downgrades China’s rating to A1 from Aa3 and changes outlook to stable from negative -Full Text

Moody’s Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.

China’s local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.

China’s local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China’s short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1).



Investments in domestic capital markets via participatory notes (P-notes) have surprisingly surged to 4-month high of Rs 1.78 lakh crore at the end of March despite stringent norms put in place by Sebi to curb inflow of illicit funds. P-notes are issued by registered Foreign Portfolio Investors to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They however need to go through a proper due diligence process.

According to Sebi data, total value of P-note investments in Indian markets – equity, debt and derivatives -increased to 1,78,437 crore at March-end, from Rs 1,70,191 crore at the end of February. Prior to that, the total investment value through P-notes stood at Rs 1.75 lakh crore in January-end and Rs 1.57 lakh crore in December-end. In March, investments through the route had touched the highest level since November, when the cumulative value of such investments stood at Rs 1,79,648 crore.    

Upside to corporate profitability limited in FY18: CRISIL

Rating and research agency CRISIL said the upside to corporateprofitability will be limited in 2017-18 after the 100 basis point (bp) improvement it expects this financial year (FY17). It expects a gradual recovery in top line growth for India Inc, according to its India Outlook, Fiscal 2018 report released on Thursday.

With an estimated eight per cent growth in FY18 sales, Corporate India will miss the double-digit revenue growth mark once again. Therating agency said “single-digit revenue growth seems to be the new normal”. However, this would be the highest growth clocked by the 1,200 companies in its universe after FY2014. 

CRISIL doesn’t rule out the possibility of operating profit margins taking a knock because of increasing commodity prices.
The sectors that are expected to see a deterioration in the EBITDA margin are airline services, FMCG and tyres, with the fall pegged at about 100 bp each, even as the three sectors will see an acceleration in revenue growth to the tune of 400-900 bp. EBITDA is earnings before interest, tax, depreciation and amortisation.
Barring a few sectors, majority of them including the likes of organised retail, pharmaceuticals, IT services, auto and auto components, capital goods, cement and construction will see moderate increase in EBIDTA margin to the extent 0-50 bp. The ones where the margin is expected to rise the most include telecom services, aluminium and oil & gas, with improvement pegged at around 100 bp each, while power sector too should see margin rise by about 60 bp.

Credit Suisse Announces Another 6,500 Layoffs After Reporting 2016 Loss

After Credit Suisse reported yet another significant loss for the full year 2016, amounting to 2.35 billion Swiss francs, more than the CHF2.07bn expected, the Swiss banking giant said it was looking to lay off up to 6,500 workers and said it was examining alternatives to a planned stock market listing of its Swiss business.

“We’re setting a target now of between 5,500 and 6,500 for 2017,” Chief Financial Officer David Mathers said in a call with analysts on Tuesday after the bank published earnings. The bank did not specify where the extra cuts would come but said this would include contractors, consultants and staff, Reuters reported.

For the fourth quarter, Credit Suisse reported a 2.35 billion franc net loss, largely on the back of a roughly $2 billion charge to settle U.S. claims the bank misled investors in the sale of residential mortgage-backed securities.  Despite the loss, Credit Suisse proposed an unchanged dividend of 0.70 francs per share, in line with market expectations.

CEO Tidjane Thiam, who took over at Switzerland’s second biggest bank just over 18 months ago, is shifting the group more toward wealth management and putting less emphasis on investment banking. As part of his turnaround plans, the bank is looking to cut billions of dollars in costs and cut a net 7,250 jobs in 2016 with more to follow this year.

China’s 2016 capital outflows estimated at over $700bn

A new report from Standard Chartered estimates capital flows out of China totalled almost $730bn in 2016, a near-record level.

Analysts Shuang Ding and Lan Shen estimated outflows had moderated in December to $66bn, down from November’s $75bn.

Beneath the headline figure foreign direct investment flows turned positive for the first time in eight months with a $3bn inflow, while non-FDI outflows remained unchanged from the previous month at $69bn.

They also estimated China’s foreign exchange reserves had fallen $41bn last month to end the year at $3.01tn as depreciation of the euro, yen and pound against the greenback. That reduced the dollar value of China’s holdings in those currencies by about $13bn.

Japan: Nov Machine Orders -5.1% m/m (expected -1.4%) & Dec PPI -1.2% y/y (expected -1.4%)

Japanese data for machinery orders and PPI

November Machine orders
 -5.1% m/m
  • expected -1.4%, prior +4.1%
  • largest decline since April 2016
  • Not a positive sign for capex intentions (its regarded as an indicator of capital expenditure in the coming six to nine months)
 +10.4% y/y
  • expected % +8.1%, prior -5.6%
And PPI for December
 0.6% m/m
  • expected 0.4%, prior 0.4%
-1.2% y/y
  • expected -1.4%, prior -2.2%

Fitch says Chinese banks may need $246bn to cushion off-balance sheet risks

Chinese banks reported declining a nonperforming loan ratio over the first three quarters of 2016. But beneath the veneer of stabilizing asset quality looms a far greater hazard brought by fast-growing off-balance sheet lending and investment activities through channels such as so-called wealth management products (WMPs), according to ratings agency Fitch Ratings.

As a buffer against this risk, the agency estimates that mainland banks may need about 1.7 trillion yuan ($246 billion) in additional capital.

 “In the past few years, we’ve seen WMPs carried off balance sheets continue to increase,” Jack Yuan, associate director at Fitch, said in a conference call on Thursday. He found that more than three-quarters of outstanding wealth management products, totaling 20 trillion yuan, resided outside banks’ loan books as of June.
 Wealth management products were particularly prominent at midtier banks such as China Merchant Bank, China Everbright Bank, and Ping An Bank. Their wealth management products represented over 30% of their total assets, and more than half of their deposits.  

State-owned commercial banks, with the exception of the Bank of Communications, are relatively less exposed. However, their issuance is considerable in absolute terms. Industrial and Commercial Bank of China(ICBC) is the single-largest issuer of wealth management products, with around 2.6 trillion yuan in outstanding issuance, according to Fitch.

Deutsche Bank on a ‘Once in a century event’

Deutsche Bank strategist George Saravelos says to stop whining about globalisation   

  • Its not irreversible
  • Globalization ebbs and flows over long cycles
  • And right now it is ebbing, and Trump’s election win will see an acceleration of this shift: “the peak and potential unwind of globalization.”
Saravelos  writes in his note: “Deglobalization Is Here: What It Means for Global Macro:”
  • The weakness in global trade, the rise of anti-globalization politics and the decrease in capital mobility all point towards a reversal of the neo-liberal word order constructed since World War II. In this note we introduce a framework to think about the impact of de-globalization on global macro
  • First, we argue de-globalization will shrink international trade imbalances. Because these are mirror images of international capital flows, de-globalization should also shrink the pool of global savings. Surplus nations such as Germany and Japan will have to spend more while deficit nations such as the US will have to pay more to borrow, which means Treasury yields will rise