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.

 

Economic Outlook

April 1st, 2014

Regional Analysis (March 28th 2014)

USA

Janet Yellen, Federal Reserve Chairman, explained that unless inflation were a significant concern the federal
funds rate target will be maintained, which could be six months after the end of the long-term security purchases,
that were again reduced by $10b to $55b per month. The Federal Reserve Board consensus lowered both future
growth and unemployment expectations whilst increasing expectations of the federal funds rate along with a
slight uptick in inflation expectations

Eurozone

Mario Dhragi, ECB president, expects to leave interest rates at present or lower levels for an extended period of
time, with further monetary accommodation if required, and noted how the exchange rate influenced his price
stability objective. The ongoing recovery was also expected 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, not taking into account the direct effect of the consumption tax hike.  Immigration controls need to
be drastically relaxed to aid growth so taxes can reduce Government borrowing.

China

The Peoples Bank of China expects continued momentum of stable and higher-quality economic growth. Whilst
concerns remain about the growing reliance on investment and borrowing , risks in the financial sector and
structural reforms of increased consumer domina
nce.  In a move to market principles the currency was allowed
to fluctuate by 2% against the dollar fix.

UK

The Bank of England comprehends that the UK’s favourable prospects could maintain a gradual appreciation of
Sterling, thereby restraining inflation.
Interest rate increases will be considered when unemployment falls below
7% and inflation is above 2 1/2%
, although there is no immediate prospect of a markedly different monetary
stance.

Economic Outlook

January 13th, 2014

Regional Analysis (December 30th, 2013)

USA

Janet Yellen, incoming Federal Reserve Chairman, fully supports the expected termination of asset purchases by
late 2014. Several members of the FOMC expect unemployment to fall below 6 .5% by the end of 2014, but will
maintain interest rates at near zero whilst inflation remains below 2%. The economy has been expanding at a
moderate pace and is expected to pick up further.

Eurozone

The ECB expect a prolonged period of low inflation allowing them to leave interest rates at present or lower levels
for an extended period of time. It is ready and able to act with forward guidance, any further funding will be targeted
at the economy and not the banking system.
Low fertility rates and high bureaucracy continue to act as a headwind.

Japan

The Bank of Japan sees a continued moderate recovery and inflation rising gradually to the target of 2%, enabled
by purchasing Government and corporate bonds, exchange traded funds and real estate trusts.
Housing investment
and industrial production have increased.
Immigration controls need to be drastically relaxed to aid growth so taxes
can reduce Government borrowing. Publicised structural reform awaits.

China

The Peoples Bank of China saw an improved economy, whist leverage and excess capacity, real estate and local
government obligations remain problematic. They noted that a basis for stable consumer prices has not yet
consolidated. Credit resources are guided towards agriculture, rural areas, farmers and micro and small
enterprises.

UK

The Bank of England saw a burgeoning recovery, counterbalanced by softness in consumer data and appreciating
sterling
. Interest rate increases will be considered when unemployment falls below 7% and inflation is above 2
1/2%.
Inflation in expect to decrease to 2% in the first quarter of 2014.

Captial Market Outlook

January 13th, 2014

Country                         Outlook
Asset Class

  • USA
  • Equities – Mid-single digit annual gains, on growing confidence indicated by reduction of monetary stimulus.
  • Govt Bonds – Continued fall in bond prices balanced by increasing 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 – Falling back 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 - Poor growth and high unemployment provide ceiling against support from trade balance and risk outlook.


  • Japan
  • Equities – Policy of inflation alone cannot provide long-term support.
  • Govt Bonds – Caught between low interest rates and unreal government borrowing, look to exit.
  • Currency – Loose money and potential 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.

Economic Outlook

September 25th, 2013

Regional Analysis (September 23rd, 2013)

USA

The US Federal Reserve Committee, after lowering growth projections, require more evidence of a sustained
recovery before reducing asset purchases and, confirmed a 6.5% unemployment rate as trigger of higher
short-term interest rates; Janet Yellen remains the front runner as the new Chairperson. Government wrangling over
the new Budget deficit levels further expire the Presidents political capital. Normalisation in long term interest rates
indicate perceived lower deflation risks.

Eurozone

Whilst the ECB see green shoots and recovery at a slow pace, they are particularly attentive and remain ready to
act to provide further liquidity. Low fertility rates and high bureaucracy continue to act as a headwind.

Japan

The Bank of Japan sees a continued moderate recovery and inflation rising gradually to the target of 2%, enabled
by purchasing Government and corporate bonds, exchange traded funds and real estate trusts. Immigration
controls need to be drastically relaxed to aid growth so taxes can reduce Government borrowing. Publicised
structural reform awaits.

China

The Peoples Bank of China further seeks to develop small enterprises, rural areas, consumer financing and
broaden funding for the finance sector. Excessive indebtedness, leverage, excess capacity in manufacturing and
limited natural resources are problematic. Credit restrictions were relaxed.

UK

The Bank of England saw promising data. Interest rate increases will be considered when unemployment falls
below 7% and inflation is above 2 1/2 %. Government policy continues to promote house prices at unrealistic levels
for the majority of citizens and indicates that Labour will win the next election unless unemployment falls sharply.