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Fri, 24th February 2017

Anirudh Sethi Report

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Archives of “Investment” Tag

Moody’s raises outlook on Russia rating to ‘stable’

Moody’s on Friday became the latest ratings agency to lift its outlook on Russia’s credit rating, upgrading it from ‘negative’ to ‘stable’, citing both a fiscal strategy — that is expected to lower the country’s dependence on energy and replenish its savings — and the gradual economic recovery.

The ratings agency had confirmed Russia’s Ba1 rating, which is one notch below investment grade, in April 2016, but assigned it a negative outlook at the time to reflect an erosion of the government’s fiscal savings amid a downturn in crude prices. But on Friday, it said the recovery in the country’s economy following a nearly two-year long recession, alongside the fiscal consolidation strategy, have eased the risks that it had identified last year.

Russia’s deficit-to-GDP ratio is now forecast to narrow by roughly one percentage point per year between 2017 and 2019 and Moody’s said this new target was “achievable” because the government’s “oil price and revenue assumptions are sufficiently conservative”.

Moody’s now believes that the downside risks identified in April 2016 have diminished to a level consistent with a stable outlook. The stabilization of the rating outlook partly reflects external events, and in particular the increase in oil prices to a level consistent with the government’s budget assumptions. The stable outlook also reflects the plans the government has put in place to consolidate its finances over the medium term, and the slow recovery in the economy following almost two years of recession.

Rival raters S&P and Fitch have also boosted their outlook on the country in recent months, as external risks to the oil-producing nation ease.

Norway proposes major changes to $900bn sovereign wealth fund

Norway’s government has proposed making the biggest changes to the world’s largest sovereign wealth fund in decades, increasing its risk by investing about $90bn more in stock markets and cutting the amount of oil money it can use in the budget.

The $900bn oil fund should be able to invest 70 per cent of its assets in equities, up from the current 60 per cent, as the centre-right government backed proposals by both the fund itself and an expert group.

The shift, which needs parliamentary approval, would be significant for global markets as the oil fund on average already owns 1.3 per cent of every listed company. The increase in equities would come at the expense of bonds, as the oil fund, which has an investment horizon of a century or more, tries to increase its returns.

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

Overseas Chinese acquisitions worth $75bn cancelled last year

he456Chinese overseas deals worth almost $75bn were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through.

 The figures, which reveal a sevenfold rise in the value of cancelled deals from about $10bn in 2015, highlight a waning appetite for global dealmaking by the world’s second-largest economy. But despite more deals being abandoned, the analysis by law firm Baker McKenzie and researcher Rhodium shows that Chinese direct investment into the US and Europe still more than doubled to a record $94.2bn in 2016.

Sellers of assets in Europe and the US are becoming increasingly wary of large deals with Chinese buyers, according to people involved with several cross-border transactions involving China.

China notched up a record capital exodus last year, driven by expectations that the renminbi would continue to weaken against the dollar, and as slowing domestic growth diverted investment elsewhere.

Greece : Nine out of 10 firms are not creditworthy

Almost two in every three Greek companies (63 percent) are deemed to have a high credit risk, compared to just 6 percent in 2009, according to data compiled by ICAP, as the Greek production base is collapsing rapidly.

Most Greek firms now have serious or very serious problems in covering their obligations, along with weak financial results and particularly low competitiveness. This is a combination which generates major doubts about their sustainability.

Another 27 percent of enterprises are on the verge of entering the above category too, with an increased risk, as they show vulnerability to adverse financial conditions, low economic performance and low competitiveness.

In other words, 90 percent of enterprises in Greece find themselves in the zone of high or increased credit risk and according to bank rules should not be entitled to bank financing. Therefore the credit system is up against a huge problem, as in order to help the revitalization of the economy it will have to increase credit levels, but the companies that are actually creditworthy and fulfill the banks’ criteria are very few indeed.

World’s Largest Actively Managed-Bond Fund Dumps “Excessively Risky” Eurozone Bank Debt

Back in September, Tad Rivelle, Chief Investment Officer for fixed income at LA-based TCW, said in a note that “the time has come to leave the dance floor”, noting that “corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle.” Ominously, he added that “we’ve lived this story before.” Five months later, the FT reports that TCW, which is also the US asset manager that runs the world’s largest actively managed bond fund, has put its money where its bearish mouth is, and has eliminated its exposure to eurozone bank debt over fears these lenders are “excessively risky.”

In an interview with the FT, Rivelle said the company began to reduce its exposure to debt issued by eurozone lenders following the UK’s vote to leave the EU last June. In the first half of last year TCW, which oversees $160bn in fixed income strategies, had around $2bn invested in European bank debt. This has fallen to less than $500m since the Brexit vote, most of it in UK banks.

Rivelle, who previously was a bond fund manager at PIMCO, said his biggest concern was the number of toxic loans held by eurozone lenders, which amount to more than €1 trilion. Last month Andrea Enria, chairman of the European Banking Authority, said the scale of the region’s bad-debt problem had become “urgent and actionable”, and called for the creation of a “bad bank” to help lenders deal with the issue. Rivelle said: “The [eurozone] banking system [has] a bad combination of negative rates, slow growth and lots of problem non-performing loans. It is inherently prone to a potential crisis should global economic conditions, or European economic conditions, worsen. [These are] the preconditions of a potential banking crisis.”

Continuing his bearish bent, Rivelle added that there is a 50% likelihood of another global recession within the next two years, removing any incentive to invest in the eurozone banking sector within that timeframe. The forthcoming French presidential elections in April, which could see Eurosceptic candidate Marine Le Pen come to power, and the problems facing the Italian banking system, are additional risks for eurozone banks this year.

The Future of Globalization

The cross-border movement of goods, services, and capital increased markedly for the thirty years up to the Great Financial Crisis.  Although the recovery has given way to a new economic expansion in the major economies, global trade and capital flows remain well below pre-crisis levels.  It gives a sense globalization is ending. 

The election of Donald Trump as the 45th US President has underscored these fears.   His first few weeks in office clearly mark a new era not just for America, but given its central role in late-20th-century globalization, for the world as well.   Trump is a bit of a Rorschach test.  He did not win a plurality, let alone a majority of the popular vote, but that does not stop pundits from claiming that Trump won because of this or that issue. 

There are some campaign promises which Trump has backed away such as citing China as a currency manipulator on his first day as President or pursuing legal charges against Hillary Clinton.  His priorities have been repealing the national health insurance, formally withdrawing from the Trans-Pacific Partnership, and signaled an intention to re-open the North American Free Trade Agreement.

Trump and his closest advisers seem intent to unwind not just his predecessor’s initiatives, but the general thrust of America’s grand strategy since the end of WWII.  His rhetoric of America First harkens back to Warren Harding, who succeeded Woodrow Wilson after the US Senate rejected the League of Nations.  Some historians refer to that period as ‘isolationism, ’ but in practice it was unilateralist.

Deutsche Bank posts €1.9bn loss in Q4

Image result for deutsche bankDeutsche Bank posted a €1.9bn net loss for the fourth quarter, as its performance was weighed down by the cost of its $7.2bn mortgage mis-selling settlement with the US Department of Justice.

Germany’s biggest bank took €1.6bn of litigation charges in the final three months of the year, the bulk of which related to the DoJ settlement, which chief executive John Cryan had made one of his priorities.

The fourth quarter loss, which was slightly better than the €2.1bn net loss that Deutsche posted in the same period a year earlier took Deutsche to a €1.4bn net loss for the year, down from a loss of €6.8bn a year earlier.

However, he said that the bank had “proved our resilience in a particularly tough year,” pointing out that Deutsche’s capital and liquidity ratios had improved.

Deutsche’s common equity tier one ratio, a closely-watched measure of financial strength, finished the year at 11.9 per cent, up from 11.1 per cent at the end of the third quarter, as Deutsche cut back risk-weighted assets.

“China’s Carl Icahn” Hedge Fund Billionaire Sentenced To Five And A Half Years In Prison

Back in late 2015, when the Chinese stock bubble had violently burst and was suffering daily moves of 10% in either direction as retail traders scrambled to get out of what until recently was a “sure thing”, Beijing did what it does best, and found a convenient scapegoat on which to blame the market crash – which was function of the country’s relentless debt bubble and lack of trading regulations – in late 2015 it arrested one of the most prominent hedge fund traders, Xu Xiang, also known as “hedge fund brother No. 1” and “China’s Carl Icahn” for his phenomenal, and rigged, winning record in the stock market, who ran the Shanghai-based Zexi Investment.

 Which is not to say that Xu wasn’t engaged in shady activites: while the country’s stock prices plummeted in 2015, Zexi’s investments earned an average 218%, far more than the second-most profitable player, Shen Zhou Mu Fund, which reported a 94% yield, according to market analysis website Licai.com.

10 takeaways from Xi’s Davos speech

Chinese President Xi Jinping delivered a keynote speech on Tuesday at the opening plenary of the 2017 annual meeting of the World Economic Forum in the Swiss town of Davos.

Here are 10 quick takeaways from the 50-minute address, which touched upon globalization, protectionism, world economy and China’s development among other subjects.

1. Many of the problems troubling the world are not caused by economic globalization. Just blaming economic globalization for the world’s problems is inconsistent with reality, and it will not help solve the problems.

2. Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks is simply not possible. Indeed, it runs counter to the historical trend.

3. At present, the most pressing task before us is to steer the global economy out of difficulty.

4. Lack of robust driving forces for global growth makes it difficult to sustain the steady growth of the global economy; inadequate global economic governance makes it difficult to adapt to new developments in the global economy; uneven global development makes it difficult to meet people’s expectations for better lives.

5. The world should develop a dynamic, innovation-driven growth model; pursue a well-coordinated and inter-connected approach to develop a model of open and win-win cooperation; develop a model of fair and equitable governance in keeping with the trend of the times; and develop a balanced, equitable and inclusive development model.

6. Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war.

7. The Paris Agreement is a hard-won achievement which is in keeping with the underlying trend of global development. All signatories should stick to it instead of walking away from it as this is a responsibility we must assume for future generations.