Broadgate: Weekly Briefing 15/11
15 November 2012
Italy – Italy sold three-year bonds at the lowest rate in more than two years on Wednesday and the Treasury took advantage of growing demand for the country’s debt to auction securities with a maturity longer than 15 years.
The Rome-based Treasury sold €3.5bn of its benchmark three-year bond to yield 2.64%, less than the 2.86% at the last auction of the same securities on Oct. 11. The Treasury also auctioned €1.5bn of debt due in 2023 and one in 2029, the first sale of a security with a maturity of more than 15 years since May 2011.
“The resilience of Italian debt to the recent deterioration in market sentiment is quite remarkable and stems entirely from the signaling effect of the ECB’s new bond-buying program,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “This is the longest period of relative calm in Italy’s bond market since the crisis erupted in July 2011.”
Europe – Workers across the European Union (E.U.) are staging a series of protests and strikes against rising unemployment and austerity measures this week.
Organisers of the strike are urging national leaders to abandon austerity measures and address growing social anxiety. Strikes are expected in Spain, Greece, Portugal and Italy, with other protests planned in Belgium, Germany, France and some eastern E.U. states.
Airlines across Europe have been cancelling and rescheduling flights. Spain and Portugal have been particularly hit, airlines are recommending passengers to check the schedules before travelling to airports.
China – Global fund managers’ confidence in the Chinese economy has reached a three-year high, according to the latest Bank of America Merrill Lynch fund manager survey.
A net 51% of investors polled across Asia Pacific, global emerging markets and Japan believe that China’s economy will strengthen in the coming year, the highest reading since July 2009 and the largest single month increase since February 2009.
European investment strategist at Bank of America Merill Lynch, John Bilton, commented: “While sentiment within Europe remains weak, rising allocations to global stocks tell us confidence in general is improving. The jump in China optimism shows how fast sentiment can turn around.”
The survey revealed a growing appetite for equities with exposure to emerging markets, especially China.
U.S./Commodities – The U.S. will overtake Saudi Arabia as the world’s biggest oil producer “by around 2020”, an International Energy Agency (IEA) report has said.
The IEA said the reason for this was the growth and development in the U.S. of extracting oil from shale rock, this has enabled the U.S. to gain significantly more extractable oil resources.
The IEA predicts that the U.S. will be producing 11.1 million barrels per day by 2020, compared with 10.6 million from Saudi Arabia.
It warns that the big growth in U.S. oil and gas production could have significant geopolitical implications, as it may make the U.S. less dependent on the Middle East.
Trends – Hong Kong ended New York’s 11-year reign as the home of the world’s most expensive district for retailers as luxury-brand companies competed for space to sell goods to mainland Chinese tourists.
Average annual rents at Causeway Bay on Hong Kong Island rose 35% to $2,630 per square foot at the end of June from a year ago, Cushman & Wakefield Inc. estimates. Hong Kong overtook Fifth Avenue in Manhattan, while Paris’s Avenue des Champs-Elysees rose to third in a global ranking of 326 prime shopping locations published by the real estate broker on Wednesday.
“New York and Hong Kong are slugging it out at the top,” Mark Burlton, a London-based partner at Cushman’s cross-border retail team, said in an interview. “The Chinese customer is helping float a lot of ships across the world,” prompting luxury stores in the main global shopping destinations to hire Chinese-speaking workers, he said.
Commodities – Gold will probably rally to a record above $2,000 an ounce next year as central banks ramp up stimulus to sustain the recovery, according to Raymond Key, London-based global head of metals trading at Deutsche Bank AG.
“We’ll take out $2,000, we’ll go higher,” Key said whilst attending the London Bullion Market Association’s annual conference. “That’s on the view that they’ll continue to print money.”
Spotlight on: Positive signs
The ‘great rotation’ out of bonds and into equities has started to get underway, the latest Bank of America Merrill Lynch (BofAML) Fund Manager Survey suggests.
The survey, which was carried out in early November, found asset allocators have increased their positions in equities over the past month while lowering their exposure to bonds. This is the fifth month running that this trend has been seen.
A net 35% of global fund managers are now overweight equities, compared with a net 25% reporting this in last month’s poll. Meanwhile, a net 35% are underweight bonds, up from 26% one month earlier.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research, said: “Momentum has gathered behind the idea that we are on the cusp of a ‘great rotation’ out of bonds and into equities. The only missing ingredient is a resolution to the U.S. fiscal cliff.”
The U.S. fiscal cliff – a $600bn series of tax rises and government spending cuts that threatens to send the world’s largest economy back into recession – remains the biggest tail risk for asset managers, cited by 54% of the survey’s panel. This is up from 42% a month ago.
But asset allocators’ optimism over the global economy outweighed the fear created by the fiscal cliff, with a 34% of respondents expecting the world economy to strengthen in the coming 12 months. After a monthly rise of 14%, this is the highest optimism in the global economy has been since February 2009.
However, asset classes outside of equities showed little sign of benefitting from higher levels of risk taking. Allocations to commodities fell over the month, remained flat for real estate and rose by just two percentage points for alternatives.
The BofAML Fund Manager Survey polled 248 panelists with $695bn of assets under management. It was carried out between 2 November and 8 November.
The findings of the survey were further supported by TheCityUK research group, reporting that the amount of money managed by the global fund management industry rose by 5% over the year so far, reaching a record high.
According to TheCityUK’s latest Fund Management Report, conventional assets under management (AUM) across the globe increased to $84.1trn by the end of September. They are now 13% above the pre-crisis record.
Raquel Hughes, strategy director at TheCityUK, said: “On the whole, the global fund management industry has recovered quickly from the sharp fall in assets under management that occurred at the outset of the credit crisis.”
The report, which is sponsored by Cannon Place, also predicted total funds will reach $85.2trn by the end of 2012. But looking at the gains for the year so far, Hughes said: “Most of this recovery has come from market performance rather than new inflows.”
The U.S. was found to be the large store of AUM, accounting for almost half of assets. The U.K. came in second place with 8% of the total, followed by Japan.
Pension assets were shown to account for almost 40% of global funds, with the remainder divided equally between mutual and insurance funds. When alternative assets and funds of wealthy individuals are included, total assets across the globe are around $120trn.
“We have found that the longer term effects of the economic slowdown include more cautious investment strategies and more diversification across asset classes and geographical regions,” Hughes added.
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