Thursday, November 29, 2012

Economic Summary for the week ended 29th Nov 2012

Trends - Equities were the highest-selling asset class for the second month in a row in October, according to U.K. Investment Management Association (IMA) figures, suggesting that risk appetite among investors is increasing on the back of the recent market upswing.
The month saw net retail sales of £924m, compared with just £655m in October last year.
Equities drew in the most, with £550m, the asset class's highest inflows since April. Equities have experienced average monthly outflows of £9m over the last 12 months.
Fixed income remained the second best-selling asset class, with inflows of £336m, up from September. Global Emerging Markets helped to drive equity inflows, becoming the top-selling sector for the first time on record, followed by UK Equity Income.
China - The U.S. has decided not to declare China as having manipulated its currency to gain an unfair trade advantage.
But the Treasury did say that China's currency, the yuan, remains "significantly undervalued" and urged China to make further progress.
In its semi-annual report, it said Beijing did not meet the criteria to be termed a 'currency manipulator', which could have sparked U.S. trade sanctions.
"The Chinese authorities have substantially reduced the level of official intervention in exchange markets since the third quarter of 2011, and China has taken a series of steps to liberalise controls on capital movements, as part of a broader plan to move to a more flexible exchange rate regime," the U.S. Treasury said.
Global - Decisive policy action is needed to ensure the world is not "plunged back into recession", according to the OECD.
The Organisation for Economic Co-operation and Development, which represents the world's richest nations, also lowered its growth forecasts.
The group's economies will grow by 1.4% next year, rather than the 2.2% forecast in May, it said. "The U.S. fiscal cliff, if it materialises, could tip an already weak economy into recession, while failure to solve the euro area debt crisis could lead to a major financial shock and global downturn."
U.S. - Meanwhile, three out of four global investors expect President Barack Obama and congressional leaders to reach a short-term agreement to avert more than $600bn in spending cuts and tax increases scheduled to begin on Jan. 1.
Only 6% of investors anticipate a political impasse that would send the U.S. economy over the so-called fiscal cliff and into a recession, according to a Bloomberg Global Poll.
“Both sides understand the importance of striking a deal, increasing taxes and cutting entitlements,” says Richard Salerno, director of fixed income for Kovitz Management Corp. in Chicago. “The market just wants to know the rules going forward so they can move on and begin to lift us out of our fiscal mess.”
Brazil - Brazil's economy is expected to have grown at an annualized rate of 4% or higher in the third quarter and is on track to maintain this pace though next year and into 2014, said Brazil Finance Minister Guido Mantega, on Wednesday.
Mr. Mantega said the economy was likely to have grown between 1% and 1.3% during the third quarter from the second, and is likely to expand at a similar pace in the fourth quarter, the report said. "We will close 2012 with an economy in recovery and growth mode," Mr. Mantega was quoted as saying in the report. "We will enter 2013 with a growth rate of 4% and we will maintain this through 2013 and 2014."
Greece - Eurozone finance ministers and the IMF reached a deal on an urgently needed bailout for debt-laden Greece on Tuesday.
They have agreed to cut debts by €40bn and have paved the way for releasing the next tranche of bailout loans, some €44bn.
The breakthrough came after more than 10 hours of talks in Brussels. It was the eurozone's third meeting in two weeks on Greece. The deal opens the way for support for Greece's teetering banks and will allow the government to pay wages and pensions in December.
Greece's international lenders have agreed to take steps to reduce the country's debts, from an estimated 144%, to 124% of its gross domestic product by 2020.
Commodities - Gold rebounded from the biggest drop in more than three weeks on Thursday, as investor holdings expanded to a record high and optimism returned that the so-called fiscal cliff in the U.S. will be avoided, hurting the dollar.
Treasury Secretary Timothy Geithner meets with congressional leaders on Thursday to discuss how to head off the combination of tax increases and spending cuts that may be implemented in January.
“The whole environment around the fiscal cliff is very uncertain,” said Bjarne Schieldrop, the Oslo-based head of commodity research at SEB AB. “The fiscal cliff will be on and off every other day. Most likely it won’t be resolved before the first quarter, but I think that the general direction for gold will be up. Record ETP holdings and central bank buying are giving good support to the sentiment.”
Gold for immediate delivery rose 0.2 percent to $1,723.16 an ounce on Thursday.
Spotlight on: Wealth managers poised to buy Japan on post-election hopes
The election of Shinz┼Ź Abe as Japanese prime minister could be the catalyst for the region to outperform after years of flagging returns, prompting asset allocators to review their underweight exposure to the country.
Liberal Democratic Party of Japan (LDP) leader Abe has voiced his intention to force the Bank of Japan into a more aggressive monetary policy and target an inflation rate of 3% if elected in snap elections in December.
Markets have responded well with the Nikkei 225 up 3.95% over the past month, compared to the FTSE 100’s loss of 1.84% and the S&P 500 down 2.94%.
The leadership contest, as well as other factors, has caused Jim O’Neill, chairman of Goldman Sachs Asset Management, to say Japan’s “moment is here”.
“The 3% inflation target is the sort of thing many were advising Japan in the mid to late 1990s when so many people mistakenly lost a lot of money betting against the yen,” he said.
“Go get all those guys out of retirement as the time has probably come. The outlook for the yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there.”
Wealth managers and multi-managers have also said developments in Japan are “interesting” and have prompted them to review their positions.
Guy Foster, senior fund analyst at Brewin Dolphin, said a 3% inflation target would be one of the highest targets in the world.
“The yen has been selling off and Japanese equities are up month-to-date,” he said.
“On the whole we are more positive. We have nothing in Japan at the moment but we are looking at adding to this.”
Robert Burdett, co-multi-manager head at Thames River Capital, said he is revisiting his neutral position.
“Our next direction is more likely to add rather than to take away from our holdings. If the LDP get back in and achieve aggressive monetary policy we would be bullish. The valuations have been compelling and on most measures the market is the cheapest it has ever been” he said.
Aberdeen Asset Management’s Aidan Kearney said the multi-manager range he co-runs is already slightly overweight Japan, relative to the peer group.
“We hold around 2% in our Cautious Managed fund and 6% in Equity Managed. We recognise Japanese equities are cheap and it has world market leaders in some sectors.
“It looks like the LDP will come back into power. It gives more fuel to the fire for more policy support and the expectation of this has led to strength in the market.”
Adding to Japanese exposure is also favoured by managers as a form of downside protection. Brewins’ Foster said Japanese equities are “becoming an uncorrelated asset in the right way” as they are moving in the opposite direction to most other markets.

Saturday, November 17, 2012

Economic Summary for the week ended 15th Nov 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.

Sunday, November 11, 2012

Economic Summary for the week ended 9th Nov 2012

China - China has reported encouraging economic data this week, indicating that growth in the world's second-largest economy may be rebounding. Industrial production, retail sales and fixed-asset investment all rose more than expected in October, from a year earlier.
Meanwhile, the inflation rate fell, giving room to policymakers to employ stimulus measures to support growth. The numbers come as China's growth rate has hit a three-year low.
Factory output rose 9.6%, while retail sales jumped 14.5%, indicating that domestic demand was holding up.
China - China's President Hu Jintao has said the country will deepen its economic reforms and boost domestic demand to spur a new wave of growth. Opening the Communist Party congress, Mr Hu added that China needed to work towards a more "market-based" exchange rate for the yuan.
"We should step up efforts to transform to a new growth model and work hard to improve the quality and efficiency of the economy," Mr Hu said. "We will continue to deepen our economic system reform and stick to the policy of expanding domestic demand."
U.S. - The U.S. trade deficit has fallen to its lowest level in almost two years, as exports reached an all-time high, official figures have shown. The deficit in goods and services narrowed to $41.5bn in September, raising hopes of increased strength in the U.S. economy.
The figure was 5.1% lower than August's $43.8bn deficit and the lowest since December 2010. Exports rose 3.1% to $187bn, driven by sales of aircraft and heavy machinery. Imports also increased in September, rising 1.5% to $228.5bn, led by consumer goods, clothing and toys.
U.S./Greece – U.S. markets posted heavy losses for the second successive day of trading on Friday, amid fears Greece is set to default on a EUR5bn debt payment due next week. According to the Financial Times, Greece, which was granted a EUR174bn bailout by the European Central Bank, is struggling to meet the EUR5bn debt obligation.
With Greece stalling, eurozone leaders now face a new round of negotiations on how to reduce Greece's high debt levels.
As well as worries in Europe, U.S. lawmakers warned growth in the world's largest economy would drop by 3% next year if the Bush-era tax cuts are not maintained or extended.
Europe - The European Commission has sharply cut its growth forecast for the eurozone, warning that the "difficult process of rebalancing will last for some time".
It now projects the bloc will narrowly avoid recession next year, growing by 0.1%, compared with its previous estimate of 1% growth, and thinks the EU economy will shrink this year. Unemployment would also continue to rise next year, the Commission said.
"Having been fixated on the U.S. election and the preferred market outcome of an Obama victory, the initial morning feel good bounce (has fizzled out), as markets quickly moved on to the next potential banana skin," said Michael Hewson at CMC Markets.
Companies - Sony Corp, the Japanese electronics maker reeling from four straight annual losses, had its credit rating cut to the lowest investment grade by Moody’s Investors Serviceb this week, citing falling demand for its televisions and cameras.
The long-term credit rating was cut one level to Baa3 from Baa2, Moody’s said in a statement on Friday, assigning a negative outlook. Sony, which unexpectedly reported a seventh straight quarterly loss earlier this month, had its short-term rating cut to Prime-3, also the lowest investment grade, from Prime-2.
“Overall earnings will stay weak due largely to prolonged operating losses in TVs and mobile phones, as well as significant declines in earnings from digital imaging products and games,” Moody’s said in a statement. “The company is not expected to reduce debt significantly without resorting to cuts in capital expenditure or the sale of non-core assets.”
Commodities - Gold traders are the most bullish in 11 weeks and investors accumulated record bullion holdings on speculation U.S. policy makers will add to stimulus following President Barack Obama’s re-election.
Twenty-five of 33 analysts surveyed by Bloomberg expect prices to rise next week and three were bearish. A further five were neutral, making the proportion of bulls the highest since Aug. 24. Investors boosted assets in gold-backed exchange-traded products to an all-time high of 2,596 metric tons on Thursday, valued at $144.9bn, data compiled by Bloomberg show.
Obama won the Nov. 6 election against Mitt Romney, who had criticized the Federal Reserve’s policies and said he’d replace Chairman Ben S. Bernanke, whose second term expires in January 2014.
Spotlight on: What Obama’s re-election means for markets
Barack Obama led the Democrats to victory in the U.S. elections this week, being appointed for a second four-year term as President, defeating his Republican opponent Mitt Romney.
Despite a close contest that saw many predict Obama would lose out - thanks to the high unemployment, sluggish economy and polls suggesting a lack of confidence in his leadership - he managed to edge out the Republican nominee.
Winning votes in Ohio and other industrial states in America were thought to have clinched the final vote for Obama, after the President announced he would bail out the Detroit car industry, to demonstrate economic fairness.
Even though Florida's electoral vote are still undecided, Obama won by a comfortable margin with 303 votes to Romney's 206.,
Asian markets barely responded to the news overnight as concerns over whether Obama and Republican-dominated Congress will be able to avoid a fiscal cliff, which will see nearly £375bn of tax increases and spending cuts his the U.S. economy in January.
The Nikkei 225 index ended the day flat, down 0.03% to 8,973 points, the Shangahi index was flat and the Hang Seng made a gain of 0.28% to 22,006.
President Obama's second successive election win is a positive for both bond and equity investors, industry commentators have said.
Cormac Weldon, manager of the £2bn Threadneedle American fund, said: "President Obama has emerged victorious from one of the most polarised presidential campaigns of recent years.
"But despite the electoral rhetoric, Obama knows his scope for manoeuvre in the face of the 'fiscal cliff' and the budget deficit is limited. He has little choice but to address these challenges (as would a President Romney) by raising taxes and cutting spending.
"While markets may be volatile post-election, we believe over the longer term, U.S. equities will gain support from the fundamental strengths of the economy. America is benefiting from a revival in the housing market and an industrial renaissance based on relatively cheap energy supplies.
"Mitt Romney had pledged to remove Ben Bernanke as chairman of the Federal Reserve and was opposed to quantitative easing, which has proven supportive of both equities and the housing market."
Tim Drayson, an economist for Legal & General Investments, said the election result matched his expectation, even if it was a bit more conclusive than he had anticipated.
"Attention now turns to the fiscal cliff, where a decision is really needed before Christmas. What we need is co-operation, but the political wrangling could get ugly.
"We still expect fiscal tightening of around 2%, which will materially effect the economy," he said. Co-manager of the Henderson Horizon American Equity fund, Nick Cowley, said Americans have voted for the status quo.
"Obama's victory does provide stability, particularly with respect to the Federal Reserve, and thus the risk of Romney meddling with Ben Bernanke's loose monetary policy can now be eliminated.
"The recent quarterly earnings reports from U.S. companies have highlighted that the fiscal cliff is freezing the decision making process and thus holding back capital spending and new job creation. This runs the risk of derailing the positive progress that the U.S. economy is making, with notable signs of recovery in both the housing and auto sectors. Avoiding the fiscal cliff would allow this progress to continue and result in a compelling outlook for U.S. and global markets."
Richard Lewis, head of global equities at Fidelity Worldwide Investment, said we will see some very intense negotiations pre-Christmas around the budget deficit and the negotiating stance of the two parties will start off poles apart.
"After a lot of wailing and gnashing of teeth, we are hopeful of a budget agreement along the lines of the Bowles-Simpson proposal which is based on a ratio of 3-1 spending cuts versus tax increases. Q4 activity levels will be low as a result and this will be exacerbated by the impact of Hurricane Sandy.
"On the basis that there will be a resolution before the first of January, we can expect a decent bounce-back in both economic activity and confidence early in the new year," he added.

Sunday, November 4, 2012

Economic Summary for the week ended 3rd November 2012

U.S. - The U.S. economy grew by 2% during the third quarter, the U.S. Bureau of Economic Analysis has revealed in its first estimate.
The growth in the economy was an improvement on the 1.3% GDP growth reported during the second quarter of the year.
According to the Bureau of Economic Analysis, the economy benefited from positive contribution from personal consumption expenditure (PCE), federal government spending and residential fixed investment.
Capital Economics chief U.S. economist Paul Ashworth says: "With less than two weeks to go before the election, the conspiracy theorists will be up in arms about the reported 9.6% surge in Federal spending, which contributed as much as 0.7% to overall GDP growth.
U.S. - In addition to the unfortunate growing number of human lives claimed, the economic toll on the U.S. of Hurricane Sandy is still uncertain. Figures supplied to Citywire Global by Wells Fargo estimate that damage following the storm is likely to exceed $30bn, with only around $10-20bn of this figure likely to be insured.
The actual economic activity through closer of businesses and Wall Street could amount to a further $50bn in loss.
Brazil - Brazil is to grant a tax exemption to foreigners who buy mortgage-backed securities or invest in funds that purchase them, after sales of new debt supported by real estate loans fell almost 50% this year.
The tax break only applies if proceeds of the debt are used on "investment projects" and the bonds have an average maturity of at least four years, Pablo Fonseca Pereira dos Santos, deputy secretary of economic policy at the Ministry of Finance, said in an interview from Brazil.
The tax incentives are designed to develop local debt markets and help raise about 1tn reais ($493bn) for roads, factories and airports. Local long-term funding is provided mainly by the nation's development bank, known as BNDES. The government is seeking to develop the real estate and construction industries to boost employment as economic growth slows.
India - India's central bank has kept interest rates unchanged, despite signs that the country's economy is being hit by a global slowdown. However, in an effort to boost lending, it cut the amount of money that banks need to keep in reserve.
It said cutting the cash reserve ratio to 4.25% from 4.5% would inject 175bn rupees ($3.2bn) into the market.
Critics have called for more stimulus measures, and the Indian rupee and stocks fell on the news on Tuesday.
"There was definitely lot of expectations in the markets for a rate cut, but people will have to wait for some more time," said Srividhya Rajesh, fund manager at Sundaram Mutual Fund.
South Korea - South Korean exports have risen for the first time in four months, raising hope that the economy could be starting to recover. Overseas shipments rose 1.2% in October from a year earlier, the Ministry of Knowledge Economy said on Thursday.
South Korea, an export-led economy, has seen global demand for its cars, electronics and ships slump in recent months. Analysts, however, were cautious that the numbers heralded a recovery while the global economy was still struggling.
"Until the U.S. overcomes the risk of a possible fiscal cliff [higher taxes coupled with spending cuts] and China decides to partake in more easing policy, trade will tread water," said Park Hyung-jung from Meritz Securities.
Commentary - Bill Gross, who runs the world's largest mutual fund (a link to which is available via CO3 in both Hansard International & Hansard Europe) at Pacific Investment Management Co., said there is no evidence that investment is being spurred by the Federal Reserve's quantitative easing program.
"All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production," Gross wrote in a monthly investment outlook. Furthermore, lower interest rates are being used "to consume as opposed to invest," he said.
Commodities - Slumping energy and metal prices sent commodities to their biggest monthly loss since May, lagging behind stocks, bonds and the dollar, as the global economy grew at the slowest pace since the 2009 recession.
The Standard & Poor's GSCI Total Return Index (MXAP) of 24 raw materials fell 4.1%, erasing gains for the year. The MSCI All-Country World Index of stocks slid 0.6%, including dividends, while the U.S. Dollar Index slid 0.02%. Bonds of all types gave positive returns, according to Bank of America Merrill Lynch's Global Broad Market Index.
Investor optimism dimmed as the International Monetary Fund cut its global growth forecast and the Federal Reserve said strains on the world economy present "significant downside risks." China reported the seventh straight quarter of slowing growth, while services and manufacturing in the 17-nation euro area last month contracted more than economists forecast.
Spotlight on: Why investors cannot ignore political risk
Investors who base asset choices simply on economic data could be making faulty decisions over the balance of risk and reward, according to one fund group, which views the global political outlook as increasingly unstable. Potential sources of risk include regime changes and even, some fear, a major war.
Economic data is too shallow of an analysis of market trends and geographic risk/rewards, according to Hermes Fund Managers (a U.K. fund manager with GBP24.8bn of assets under management). Today's world is heavily influenced by the political stage - in both developed and emerging nations - and understanding the implications of political actions, is key to assessing value in asset classes and markets, the group asserts.
In a paper published this autumn, Hermes chief executive officer and head of investment, Saker Nusseibeh, notes it has been at least two generations since investors actively looked at the problem of political risk in the context of developed markets."They need to start."
"Today, growing unrest brought on by anger over austerity, worries about resource scarcity and threats of increased taxation has refocused attention on national problems as opposed to international concerns. In such an environment politics can have as much impact on the attractiveness of different markets as GDP figures,"he says.
Keith Wade, chief economist at Schroders, says the long period of political stability in the West has perhaps made investors complacent as to the risks it can pose and that the situation today is merely a return to normality.
Nusseibeh says it is, noting that in the history of developed markets political risk was once quite prevalent but faded as an investment consideration post World War II. He and Wade agree the presence of the Cold War played a part in creating such stability as it polarized developed nations and allowed them to focus their attention on common threats. Since its end and the subsequent onset of the global financial crisis, more nationalistic interests have arisen.
Andrew Parry, Hermes Sourcecap, observes:"Economic strife can and does bring, historically, a whole legion of tensions. Recovery requires a long period and political intervention is necessary. Unfortunately, the steps needed do not necessarily sit comfortably with election cycles. Welcome to the political economy."
The European crisis may be a prime example of a step up in national interests and tension, but it is not the only political field managers have to watch, nor is sovereign debt the only asset class that is affected. Political events in China, the US as well as those in the Africa and the Middle East are all front-page news these days, impacting a range of asset classes to varying degrees.
Commodity prices are the obvious fall-out from Middle Eastern conflicts but there is also the rise of gold owing to the uncertain climate; downtrodden financials are being affected by stiffer regulations; real estate investments are focused on safe haven regions; and Capital expenditure spending of companies in some countries is hampered by uncertainty over the prevailing and potentially changing tax climate. Consumers, worried over the state of unemployment and disgruntled over respective home politics, remain unconvinced of market opportunities and reluctant to invest.
James Bateman, the head of manager selection at Fidelity Investments, says investors remain inherently nervous, with the scars from the events of 2008 a long way from healing. This has led to a greater emphasis on the analysis of risks, including geopolitical ones.
Nusseibeh adds:"Some may argue the much heralded era of globalisation minimises political influence on a stock or securities selection basis. Not necessarily. As national interests and protectionism increase, this will have significant impact on companies and corporate interests.
"Also, consider the debt levels of many countries compared to the strength of corporate balance sheets. How long will indebted nations allow companies to reap such profits without taking more of the pie for themselves? Will they tax the companies or the shareholders? What if political change affects the way companies pay dividends?"