Economic Outlook

July 7th, 2015

Regional Analysis (June 26th, 2015)

USA

The US Federal Reserve recently reduced its expectations for both growth and employment for this year, but
expects stronger growth and inflation in the following two years. Chairman Yellen thinks that the economy is likely
to do well enough to likely call for some tightening later this year.

Eurozone

In March 2015 the ECB started to purchase euro-demonimated public sector securities in the secondary market,
in a policy of purchasing (together with private sector securities) €60bn monthly until September 2016. They
expect the economic recovery to broaden however there has been some loss of momentum. Product and labour
market reforms need to gain momentum in several countries. In September 2014 the ECB decreased rates on
refinancing to 0.05%, marginal lending to 0.3% and deposits to -0.2%, and will start to purchase non-financial
private sector assets. From July 2014 upto €1Tr. was made available to banks that lend to business. The ECB is
ready to support the Greek financial system once the political solution has been reached.

Japan

The Bank of Japan sees a continued moderate economic recovery aided by exports, corporate profits, business
fixed investment, housing, employment and income. While public investment has entered a moderate declining
trend. The Bank of Japan continues to purchase annually 80 trillion Yen of Government and corporate bonds,
exchange traded funds and real estate trusts, it also increased and extended The Stimulating Bank Lending
Facility. Immigration controls need to be drastically relaxed to aid growth so taxes can reduce Government
borrowing.

China

The People’s Bank of China sees mass entrepreneurship and innovation for the supply of public goods and
services are forming the engine for economic growth. Three members of the monetary policy committee were
replaced.

UK

The  Conservative formed an unexpected majority government. The Monetary Policy Committee of the Bank of
England, expects inflation to pick up notably by the year end. The interest rate required to keep the economy
operating at normal levels of capacity and inflation was likely to rise, which two members already consider is
finely balanced.

Captial Market Outlook

July 7th, 2015

Country                         Outlook (June 29th 2015)
Asset Class

  • USA
  • Equities –               Continued mild appreciation with pullbacks providing further entry points.  
  • Govt Bonds –         Mild fall in bond prices, but supported by yields.      

 

  • UK
  • Equities –               Similar to  USA.      
  • Govt Bonds –        Low yields offer no incentive to hold.
  • Currency –             Awaiting clearer direction on interest rates as growth and inflation slows.

 

  • Eurozone
  • Equities –               Currency fall and QE aid short term recovery.
  • Govt Bonds -         Some recovery following recent sell off for top grade.
  • Currency -              Move to monetary easing aid currency’s to fall to fair value.

 

  • Japan
  • Equities –               Continued appreciation on exporter sales expectations.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure.

 

  • Rest of the World
  • Equities –                China & India provide best opportunities.
  • Commodities -      Difficult to make headway on US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.

 

Capital Market Update

April 6th, 2015
Country                         Outlook (April 6th 2015)
Asset Class

  • USA
  • Equities –               Continued mild appreciation with pullbacks providing further entry points.  
  • Govt Bonds –         Mild fall in bond prices, but supported by yields.      


  • UK
  • Equities –               Similar to  USA.      
  • Govt Bonds –        Low yields offer no incentive to hold.
  • Currency –             Awaiting clearer direction on interest rates as growth and inflation slows.


  • Eurozone
  • Equities –                Currency fall and QE aid short term recovery.
  • Govt Bonds -         Fiscal discipline, supporting monetary policy and lack of inflation already baked in.
  • Currency -              Move to monetary easing aid currency’s to fall to fair value.


  • Japan
  • Equities –               Continued appreciation on exporter sales expectations.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure.


  • Rest of the World
  • Equities –                China, India & Indonesia provide best opportunities.
  • Commodities -      Difficult to make headway on US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.

Global Economic Update

April 6th, 2015

Regional Analysis (Apr 1st, 2015)

USA

The US Federal Reserve recently reduced its expectations for both growth and inflation but expects stronger
employment, in a not weak forecast. Chairman Yellen will not be impatient to reach the projected normal targeted
interest rate of 3.66% and will remain highly accommodative as some cyclical weakness persists. Noted was that
equity valuations are on the high side but not outside of historical ranges, with threats to financial stability
moderate.

Eurozone

In March 2015 the ECB started to purchase euro-demonimated public sector securities in the secondary market,
in a policy of purchasing (together with private sector securities) €60bn monthly until September 2016. They
expect the economic recovery to broaden and strengthen gradually, with closely monitored inflation to pick-up
gradually later in 2015. Product and labour market reforms need to gain momentum in several countries. In
September 2014 the ECB decreased rates on refinancing to 0.05%, marginal lending to 0.3% and deposits to
-0.2%, and will start to purchase non-financial private sector assets. From July 2014 upto €1Tr. was made
available to banks that lend to business. The ECB is ready to support the Greek financial system once the political
solution has been reached.

Japan

The Bank of Japan increased growth expectations but reduced slightly those for inflation, as the moderate
recovery trend continued aided by exports, corporate profits and business fixed investment. The Bank of Japan
continues to purchase annually 80 trillion Yen of Government and corporate bonds, exchange traded funds and
real estate trusts, it also increased and extended The Stimulating Bank Lending Facility. Public and housing
investments have leveled out. Immigration controls need to be drastically relaxed to aid growth so taxes can
reduce Government borrowing.

China

The People’s Bank of China one year benchmark deposit rate was lowered to 2.5% and the loan rate to 5.35%, as
the economy entered a new normal. A medium term lending facility was created to keep aggregate liquidity at an
adequate volume and reduce the cost of finance for the real economy. The floating range against the US dollar was
expanded to 2%. Indebtedness in the economy grew and resource and environmental constraints remain. The
money transmission mechanism will be regulated and competition in the financial sector will be encouraged to
serve the real sector better.

UK

A General Election will be held on May 7th, 2015, expected to result in either a Labour or Conservative minority
government. The Monetary Policy Committee of the Bank of England, saw domestic activity continuing to expand
at a solid pace and, all agreed that more likely than not the Bank Rate would increase over the next three years.
Interest rate stress tests on mortgagors and 15% limit on loans by large mortgagees to borrowers with loan to
income ratios above 4.5 were introduced.

The Swiss God of Money

January 19th, 2015

Last Thursday the Swiss National Bank (SNB) suspended it’s support for a Euro floor against it’s currency of 1.20, the Euro promptly fell 45% against the Franc. i.e. Swiss investors lost 45% in value of their European assets. Eventually the Euro recovered for a loss on the day of 17% to settle near levels of the August 2011 Franc crisis. The Swiss stock market also fell 15% in two days, implying the only safe haven were Swiss Franc denominated bonds and cash accounts. However the SNB also lowed the target deposit rate to negative 0.75% per annum, whilst holders of 10 year Swiss government bonds have to pay 0.13% per annum (pa) for that pleasure.

Whilst the timing of the decision was a surprise the market reaction was supreme shock, only days before a member of the SNB publicly supported the previous policy. The previous policy was also beneficial to growth and price stability in the Swiss economy. After the announcement investors, traders and global companies scrambled to hedge their exposure, supplemented by any future SNB commitment to foreign exchange stability already losing credence. In sympathy with the SNB the Swiss economy at only the 20th largest economy in the world, inhibits the risk tolerance for limiting external influence.

The Swiss Banking industry has a long history in lacking moral discrimination of deposit ownership. Swiss regulators also condone misrepresentation by financial intermediaries (when referring suspect money drug traffickers or terrorists to them). All-in Swiss financial system participants are the most rational in the world. Some may therefore not be surprised in a conflict between Swiss words and deeds.

Investors with Swiss liabilities, long investment horizons and generating non-investment income in Swiss Francs: should continue to seek growth in the equities of high growth areas and value companies (the US stock-market has outperformed the Swiss currency by 5% pa over the last 30 years); maintaining fixed income in the major trading block currencies with potential for recovery back to fundamental levels before increasing allocation to Swiss fixed income. Those with short investment horizons and not generating non-investment income in Swiss Francs, continue to be inhibited by negative domestic interest rates and domestic equities that are presently penalised by an uncompetitive exchange rate.

Steven J Cohen CFA, BSc (Econ) Hons Lond. 19th January 2015.

Captial Market Outlook

January 8th, 2015

Country                         Outlook (January 5th 2015)
Asset Class

  • USA
  • Equities –               Continued appreciation with mild pullbacks providing further entry points.  
  • Govt Bonds –         Mild fall in bond prices, with mild increase in Federal Funds Rate.      

 

  • UK
  • Equities –               Similar to  USA.      
  • Govt Bonds –        Caught between Euro bond price increases and USD price falls.
  • Currency –             Continued appreciation on end of QE and expected interest rate increase.

 

  • Eurozone
  • Equities –                Currency fall and QE aid short term recovery.
  • Govt Bonds -         Fiscal discipline, supporting monetary policy and lack of inflation maintain German preference.
  • Currency -              Move to monetary easing aid currency’s to fall to fair value.

 

  • Japan
  • Equities –               Continued appreciation on exporter sales expectations.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure.

 

  • Rest of the World
  • Equities –                Preference for Chinese, India, Spanish and Korean stocks.
  • Commodities -      Difficult to make headway on US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.

 

Economic Update

January 8th, 2015

Regional Analysis (Jan 2nd, 2015)

USA

The US Federal Reserve will be patient in normalising monetary policy, but have indicated it will start after two
more meetings. For the Fed normal implies a 3.75% federal fund rates which is a long way from the present
0.125%. The change in stance has occurred as underutilisation of labor resources continue to diminish, although
economic conditions will continue to influence the decision.

Eurozone

In September the ECB decreased rates on refinancing to 0.05%, marginal lending to 0.3% and deposits to -0.2%,
and will start to purchase non-financial private sector assets. From July upto €1Tr. will be made available to banks
that lend to business. The ECB will early next year asses monetary policy and will not tolerate prolonged
deviations from price stability, indicating a Quantitative Easing policy would include purchasing sovereign bonds.
Low fertility rates and high bureaucracy continue to act as a headwind.

Japan

The Bank of Japan will purchase annually 80 trillion Yen of Government and corporate bonds, exchange traded
funds and real estate trusts, it also increased and extended The Stimulating Bank Lending Facility. Inflation was
expected to remain at 1.25% for some time. Exports and industrial production were showing some weakness
compounding continued weakness in housing investment. Immigration controls need to be drastically relaxed to
aid growth so taxes can reduce Government borrowing.

China

The People’s Bank of China established a medium term lending facility was created to keep aggregate liquidity at
an adequate volume and reduce the cost of finance for the real economy. The floating range against the US dollar
was expanded to 2%. Indebtedness in the economy grew and resource and environmental constraints remain.
The money transmission mechanism will be regulated and competition in the financial sector will be encouraged
to serve the real sector better.

UK

The Monetary Policy Committee of the Bank of England, noted the continued sharp decline in the price of crude oil
and market interest rates. Two members voted for an immediate rise in interest rates. Interest rate stress tests on
mortgagors and 15% limit on loans by large mortgagees to borrowers with loan to income ratios above 4.5 were
introduced.

Economic Outlook

January 5th, 2015

Regional Analysis (Sept 27th 2014)

USA

Janet Yellen, Federal Reserve Chairperson, expects to end net purchasing Treasury, agency and MSB debt in
November, although the Fed balance sheet may not return to normal even by the end of the decade. The Federal
Reserve Board lowered both future growth and unemployment but nudged up inflation consensus expectations.
They also expect to have interest rates up from 1/8th to 1 and 1/4 percent by the end of next year and at 2 3/4
percent at the end of the year after.

Eurozone

In September the ECB decreased rates on refinancing to 0.05%, marginal lending to 0.3% and deposits to -0.2%,
and will start to purchase non-financial private sector assets. From July upto €1Tr. will be made available to banks
that lend to business. Mario Dhragi, ECB president, expects the ongoing recovery to slowly proceed along with
domestic demand. Low fertility rates and high bureaucracy continue to act as a headwind.

Japan

The Bank of Japan is purchasing Government and corporate bonds, exchange traded funds and real estate trusts,
it also increased and extended The Stimulating Bank Lending Facility. Inflation was expected to remain at 1.25%
for some time. Exports and industrial production were showing some weakness compounding continued
weakness in housing investment. Immigration controls need to be drastically relaxed to aid growth so taxes can
reduce Government borrowing.

China

The People’s Bank of China has actively taken measures to respond to downward pressures and moderated
growth in price levels. Twice lowering the deposit reserve requirement ratio for individual banks in the last
quarter. The floating range against the US dollar was expanded to 2%. Indebtedness in the economy grew and
resource and environmental constraints remain. The money transmission mechanism will be regulated and
competition in the financial sector will be encouraged to serve the real sector better.

UK

Most members of the Monetary Policy Committee of the Bank of England, saw little inflationary pressure and
lower growth prospects due to a knock on effect from the euro area. Two members voted for an immediate rise in
interest rates. Interest rate stress tests on mortgagors and 15% limit on loans by large mortgagees to borrowers
with loan to income ratios above 4.5 were introduced. The Bank of England was also concerned that markets were
underestimating a return to a normal economy.

Capital Markets Outlook

January 5th, 2015

Country                         Outlook (Sept 29th 2014)
Asset Class

  • USA
  • Equities – Continued appreciation with mild pullbacks providing further entry points.
  • Govt Bonds – Mild fall in bond prices.


  • UK
  • Equities – Similar to USA.
  • Govt Bonds – Expected interest rate increases put pressure on.
  • Currency – Continued appreciation on expected interest rate increases.


  • Eurozone
  • Equities – Short term out-performance from depressed levels will give way to long term structural issues.
  • Govt Bonds - Fiscal discipline, supporting monetary policy and lack of inflation maintain German preference.
  • Currency - Move to monetary easing aid currency’s to fall to fair value.


  • Japan
  • Equities – Continued appreciation on exporter sales expectations.
  • Govt Bonds – Declared inflation target scares marginal government bond traders.
  • Currency – Loose money, low growth and debt downgrades maintain pressure.


  • Rest of the World
  • Equities – Preference for Chinese, Swiss, Swedish, Danish and Korean stocks.
  • Commodities - Difficult to make headway on US dollar appreciation but supported as move into mid cycle.


Uncertainties

  • Chinese military developments.
  • Iran.
  • Regulation of financial institutions and products.
  • Religious extremism.

Capital Market Outlook

April 1st, 2014

Country                         Outlook (March 31st 2014)
Asset Class

  • USA
  • Equities – Low single digit annual gains, constrained by reduction of fiscal and monetary stimulus and high valuations.
  • Govt Bonds – Mild fall in bond prices increasingly compensated with yield.


  • UK
  • Equities – Not quite as good as the USA.
  • Govt Bonds – With higher inflation and government budget imbalance than US continued poor performance.
  • Currency – Stable on decreasing inflation expectations.


  • Eurozone
  • Equities – Short term out-performance from depressed levels will give way to long term structural issues.
  • Govt Bonds - Fiscal discipline, supporting monetary policy and lack of inflation maintain Italian and German preference.
  • Currency - Improving growth prospects and subdued inflation prospects maintains over-valuation.


  • Japan
  • Equities – Stagflation fears.
  • Govt Bonds – Declared inflation target scares marginal government bond traders.
  • Currency – Loose money, low growth and debt downgrades maintain pressure.


  • Rest of the World
  • Equities – Africa, Mid-East and smaller Asian and Latin American countries provide selective best opportunities.
  • Commodities - Perceived US monetary tightening weigh till move into mid cycle.


Uncertainties

  • Chinese military developments.
  • Iran.
  • Regulation of financial institutions and products.
  • Religious extremism.