SWF CONCERNS: Americans fear impact of foreign funds on economy

Voters do not want them to buy stakes in high-tech firms, key sectors: poll

(BOSTON) The majority of Americans fear that the US economy and national security could be hurt if sovereign wealth funds, the investment arms of foreign governments, put more money into US companies, new data show.

US voters do not want these funds, which manage between US$1.9 trillion and US$2.9 trillion, to buy stakes in high-tech firms, banks, oil and gas companies and ports, a study by the business advisory group Public Strategies said.

The opinion poll, released on Thursday, found that 55 per cent feel the funds would hurt national security and 49 per cent said the funds would have a negative impact on an already slowing US economy.

While Americans know little about these types of funds, their gut reaction is negative, said Dan Bartlett, a senior strategist at Public Strategies.

The public’s fear stands in sharp contrast with Washington and Wall Street’s more positive views as government officials and company executives agree that foreign investments can help American companies compete better. Financial giant Citigroup, for example, raised US$12.5 billion from foreign funds this year alone after posting heavy losses last year.

Roughly 68 per cent of the 1,000 registered US voters who were surveyed last week worry that foreign governments would gain too much control over the market if they kept making more investments here. The survey had a margin of error of plus-or-minus 3.1 percentage points.

‘Americans are becoming increasingly isolationist in their thinking in these issues,’ Mr Bartlett, a former counsellor to President George W Bush, said, adding: ‘The more they learn about sovereign wealth funds, they worse they feel.’

Nearly three in four voters of the respondents said they think that the foreign governments are too secretive with their investments and do not say enough about their strategies or portfolios, the survey found.

State-run investment funds, in which governments invest windfall revenue abroad, will quadruple in size to US$7.9 trillion by 2011, Merrill Lynch has predicted.

Critics in the US and Western Europe are concerned that secretive management under government sponsorship might allow funds to target strategic industries or roil markets with unexpected gluts of cash.

More than 60 per cent of those polled oppose investments from China, Russia, Saudi Arabia or Abu Dhabi. Saudi Arabia garnered the most negative response, with 68 per cent saying they opposed any purchases of US companies by that country.

The unease about government investment comes amid a larger sense of protectionism and isolationist feelings among voters, Mr Bartlett said.

Source: Reuters, Bloomberg (Business Times 23 Feb 08)

MAS fears Asia will hurt if US engine seizes

A negative spiral can take hold, affecting even the real economy

(SINGAPORE) A sharp and deep recession in the United States will hit Asian economies, warned Heng Swee Kiat, managing director, Monetary Authority of Singapore (MAS), yesterday.

And in his first public comment on the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Wading into the debate on whether Asia has de-coupled from the US, Mr Heng said the region has significant links with the world’s biggest economy through trade, investment and finance. Only if these linkages are significantly weakened can Asia be said to have de-coupled from the US, he said yesterday at a fund management conference.

Still, the short-term outlook for Asia remains generally positive barring any sharp deterioration in the global economy, he noted. The current forecast is for Asia ex-Japan to grow at a fairly healthy pace of around 7.8 per cent in 2008, one percentage point lower compared to last year.

Structural changes have taken place in Asian economies over the last 10 years, he pointed out. ‘Certainly, the fundamentals of the economies and financial markets in Asia have improved significantly since the Asian financial crisis,’ he said.

Most Asian economies have large foreign reserves and current account surpluses. There is a sizable educated and skilful labour force, and a growing middle class that forms a broad consumer base, he said.

Asian corporates and households are doing well after four years of robust growth. Asian capital markets are better developed. Asian banks are better capitalised, have less bad loans, and are better supervised and managed.

‘These are significant changes. However, a long-term or structural de-coupling of Asia from the US is possible only when the economic linkages through trade, investment and finance are significantly weaker,’ said Mr Heng.

Studies by MAS, and other economists, show that this is not the case at this stage, he pointed out.

What we are likely to see, however, is the weaker synchronisation of business cycles, he said.

‘The underlying momentum in the Asian economies will allow Asia to ride out the slowdown in the US if it is mild and short-lived. But a sharp and deep contraction will trigger the threshold where all economies will be affected, albeit in different degrees depending on their reliance on external demand,’ said Mr Heng.

On the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Policy makers are facing the challenge of how to contain the spread of the credit crisis to the real economy, he noted.

‘What is striking is that the securitisation of loans was meant to be a mechanism for risk transfer. Instead, it became a channel through which shocks are amplified and transmitted throughout the system in unpredictable ways. These shocks have now started to have an impact on the real economy,’ he said.

In the US, the housing-sector correction is leading the slowdown in the economy. Consumer spending is constrained by high debt levels. Financial institutions have sustained large losses. And this is driving the turn of the credit cycle, which means restraint on both consumer spending and corporate investments.

Indeed, at this point there is a risk of being caught in a negative spiral involving tighter credit standards, reduced credit availability and slowing down of the macro economy.

‘The extent to which this spiral takes hold determines the extent of the US slowdown, and the extent to which the rest of the world will be affected,’ said Mr Heng.

‘Hence, the immediate challenge for policy makers is to contain the spread of the credit crisis to the real economy, to prevent this spiral.’

The full extent of the exposures is not yet known and central banks face different degrees of slowdown and inflationary pressures in their economies, he explained.

According to Mr Heng, a multi-pronged approach coordinated across jurisdictions, where necessary, was needed to tackle these challenges. ‘The situation is fluid, and we need to remain vigilant.’

 

Source: Business Times 20 Feb 08

2008 not necessarily like 2007: UBS

(ZURICH) UBS AG does not expect 2008 to be a year like 2007, when the Swiss bank wrote down US $18 billion in bad credits and posted the first loss since its creation, its chief executive was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the US economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ UBS chief executive Marcel Rohner told newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime writedowns.

Mr Rohner said UBS’s investment banking business would concentrate in 2008 on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks,’ he said.

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of 2007, including US$27.5 billion in sub-prime debt.

But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks. ‘The quality of our investment in leveraged buyouts, for example, is much better than in complex securities based on mortgages with poor debtor quality,’ he noted.

Mr Rohner said it was not currently possible to sell intact structured products. But where a collateralised debt obligation structure had become insolvent, UBS had been able to reduce its risks by selling the underlying securities at prices in line with their current valuation by the bank.

UBS’s private banking business has not been affected by the blow to the bank’s reputation, Mr Rohner said. Private banking recorded net inflows of more than 30 billion Swiss francs (S$38.8 billion) in the fourth quarter of 2007, and net inflows continued in January.

Mr Rohner defended the continuing payment of bonuses amid the losses, as the losses arose from real estate loans handled by a small part of the bank. Other areas of the bank had worked well and it was important to continue to motivate staff producing these results by treating them fairly.

 

Source: Reuters (Business Times 18 Feb 08)

IMPROVING OUTLOOK: UBS expects this year to be a better one

ZURICH – UBS does not expect this year to be like the last, when the Swiss bank wrote down US$18 billion (S$25.5 billion) in bad credits and posted the first loss since its creation, its chief executive officer (CEO) was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the United States economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ CEO Marcel Rohner told Swiss daily newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime write-downs.

Mr Rohner said UBS’ investment banking business would this year concentrate on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks.’

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of last year, including US$27.5 billion in sub-prime debt. But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks.

Last December, the Government of Singapore Investment Corp bought a 9 per cent stake in UBS for 11 billion Swiss francs (S$14.2 billion).

On Jan 30, UBS announced a 12.5 billion Swiss franc loss for the final three months of last year and a full-year loss of 4.4 billion Swiss francs, a record for the bank. This was due to a higher-than-expected US$14 billion write-down on assets connected to sub-prime mortgages in the US.

UBS was formed in 1998 after the Union Bank of Switzerland took over local rival Swiss Banking Corp.

 

Source: REUTERS (The Straits Times 18 Feb 08)

British home repossessions at 8-year high

(LONDON) British home repossessions last year hit their highest level since 1999 and are likely to increase, the Council of Mortgage Lenders (CML) said last Friday.

The trade group said that more than 27,000 homes were repossessed in 2007 and forecast that repossessions would rise to a total 45,000 in 2008 – still far fewer than the 75,000 homes that were repossessed in 1991 at the height of the last recession.

Economists expected a sharp rise this year as the global credit crunch bites.

‘The financial pressure on many home owners is increasing,’ said Howard Archer from Global Insight. ‘It seems certain that repossessions will trend up significantly during 2008, particularly if the economy suffers an extended marked slowdown and unemployment starts rising.’

Separate figures from the government showed that mortgage repossessions in England and Wales rose an annual 6 per cent in the last three months of 2007.

The mortgage lenders said that 13,500 homes were repossessed in the second half of 2007, marginally below the 13,600 in the first half and 10 per cent lower than they had forecast.

But the global economy now appears to be entering the slowdown presaged by the soaring rate of repossessions in the US that led to the dismantling of complicated credit derivatives underwritten by mortgages.

Britain’s economy grew by around 3 per cent last year but is expected to expand by less than 2 per cent this year.

‘The number of repossessions is likely to be higher in 2008 as a result of wider issues in the economy and the mortgage funding markets,’ said Michael Coogan, CML director-general.

 

Source: Reuters (Business Times 12 Feb 08)

Soros warns of worst financial crisis since WWII

(VIENNA) Billionaire investor George Soros said the world was facing the worst financial crisis since World War II and the United States was threatened with recession, according to an interview by the Austrian daily Standard.

‘The situation is much more serious than any other financial crisis since the end of World War II,’ Mr Soros was quoted as saying.

He said that, over the past few years, politics had been guided by some basic misunderstandings stemming from something which he called ‘market fundamentalism’ – the belief financial markets tended to act as a balance.

‘This is the wrong idea,’ he said. ‘We really do have a serious financial crisis now.’

Asked whether he thought the US was headed for a recession, he said: ‘Yes, this is a threat in the United States.’

He added that he was surprised how little understanding there had been on how recession was also a threat to Europe.

European shares fell nearly 6 per cent on Monday, their biggest one-day slide since the Sept 11 attacks of 2001, as fears of a US recession and more writedowns in the financial sector sparked a broad-based selloff.

In Washington, US Treasury Secretary Henry Paulson said that the US economy remained resilient and has healthy long-term fundamentals, but has slowed ‘materially’ in recent weeks.

Warning that, in the short term, risks were clearly to the downside, he said that Congress and the administration need to agree quickly on a package of tax cuts and other measures to boost the economy.

‘Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible,’ Mr Paulson said in remarks to the US Chamber of Commerce as House Speaker Nancy Pelosi and leaders in both parties prepared to meet President George W Bush at the White House to discuss a stimulus bill.

Such legislation presumably would involve tax rebates, business tax cuts and funding for a Democraticled call for additional food stamp and employment aid.

 

Source: AP, Reuters (Business Times 23 Jan 08)

Governments urge calm in face of market turmoil

Ministers in Asia and Europe advise investors to stay rational and not overreact

HONG KONG – GOVERNMENTS urged calm yesterday while calling for international cooperation to cope with a global slide in stock markets sparked by fears of a United States recession.

Asian markets experienced a day of heavy losses, with Hong Kong share prices suffering their biggest ever one-day slide, closing down 8.7 per cent, while bourses in Europe also opened in negative territory.

French Finance Minister Christine Lagarde said US President George W. Bush’s US$140 billion (S$201.9 billion) stimulus package for the American economy was a ‘bit vague’ and called on him to spell out his plans more fully.

‘I think he must go further to explain precisely how these billions of dollars are going to be injected into the economy,’ Ms Lagarde told French radio, as French share prices shed 2.57 per cent at the start of the day’s trading.

In Japan, Economics Minister Hiroko Ota told a news conference that the government saw no need for the time being to intervene to halt the rout.

‘Stock markets across the world are falling, and it basically stems from the US,’ she told reporters, before Japanese share prices tumbled 5.65 per cent to a 28-month low.

‘It is difficult at the moment to mull over action by Japan alone. Instead, we should cooperate globally,’ she said.

Mr Bush announced his economic stimulus package of tax cuts and other measures last Friday, but the proposal has failed to allay concerns about the health of the world’s No.1 economy.

Indian Finance Minister Palaniappan Chidambaram, whose country’s shares lost more than 7 per cent in early afternoon trade, urged investors to ignore the financial woes in the West.

‘My advice to investors is to stay calm,’ he said. ‘Corporate profits are high, corporate income tax is at an alltime high in terms of growth. There’s no reason at all to allow the worries of the Western world to overwhelm us.’

Australian share prices plunged by 7.1 per cent yesterday in the biggest one-day fall since October 1997, but the government said the country was likely to be able to weather the storm.

‘We are well-placed to ride out the turbulence that flows from events in the US, even though we are not immune to it,’ said Treasurer Wayne Swan.

‘The prospects for ongoing growth in Asia and the developing markets are assisting us to withstand the fallout occurring elsewhere.’

Meanwhile, European finance ministers said a global stock market slump and an economic slowdown in the US threaten to slow growth in Europe more than forecast.

‘The economic situation and financial markets are highly volatile and uncertain, a good deal more uncertain than usual,’ Luxembourg Finance Minister Jean-Claude Juncker said on Monday in Brussels after presiding over a meeting of counterparts from the euro region.

‘If there is a real slowdown in the US, obviously that would be felt in the euro zone.’

Stock market volatility has heightened uncertainty on the outlook for economic growth in the 15 nations that use the euro, according to a European Union briefing document obtained by Bloomberg News.

The draft document was discussed at Monday’s meeting of finance ministers.

Still, ‘it would be a mistake to fall victim to excessive pessimism’, Mr Juncker told a press conference after the meeting. ‘We shouldn’t overreact to events on the stock exchange.’

AGENCE FRANCE-PRESSE, BLOOMBERG NEWS

DON’T BE OVERWHELMED

‘My advice to investors is to stay calm. Corporate profits are high, corporate income tax is at an all-time high… There’s no reason to allow the worries of the Western world to overwhelm us.’

MR CHIDAMBARAM, India’s finance minister

Source: The Straits Times 23 Jan 08

Recession in US, Europe could shake Asia, S’pore

Region still relies heavily on world’s biggest markets, say economists

A RECESSION in the United States and Europe would badly hurt Asian economies, including Singapore’s, which still rely heavily on these two export markets for growth, according to economists.

Indeed, analysts at Lehman Brothers believe economic growth in Singapore could slump to as low as 2.5 per cent this year, if the worst-case scenario of a recession occurs. The official forecast is for growth of 4.5 per cent to 6.5 per cent.

Economists said yesterday that while the region’s economies have managed to stand on their own feet in recent years, their fortunes are still closely tied to external conditions.

Most economists are maintaining forecasts for a more benign slowdown, but they concede that risks of a severe downturn are on the rise.

‘We are probably only one shock away from the US economy tipping into a recession,’ said Lehman chief global economist Paul Sheard. ‘One thing that we will be thinking about the next week or so: Are we seeing that one shock now hitting the US economy in the form of this equity market meltdown that is unfolding this week?’

Global share prices have crashed since the start of the year and are accelerating their declines amid rising fears that a US recession may send the world economy into a tailspin.

Earlier theories that Asia’s booming economies are plotting their own destinies and escaping this plight are dissipating fast.

‘We don’t really buy the decoupling idea in its strong form,’ said Dr Sheard, adding that it is very unlikely that demand from Asia and other emerging markets can offset a slowdown in the US and Europe.

Singapore is especially vulnerable, given its small and open economy, said Mr Robert Subbaraman, who heads Lehman’s economic research for Asia, excluding Japan.

He believes overall Asian growth this year could fall by 4.5 percentage points from last year’s 8.7 per cent, if the rest of the world goes into recession. Singapore’s growth could come down to between 2.5 per cent and 3 per cent, he said.

For the moment, Mr Subbaraman is still hoping that aggressive US interest rate cuts will avert a recession to support a 5.3 per cent growth in Singapore and a 7.6 per cent expansion in the region.

This scenario, however, brings risks of an overheating economy, as foreign capital inflows drive up inflation to form possible asset bubbles in the region, he warned.

United Overseas Bank economist Ho Woei Chen said a US recession would hit Singapore’s export sector very hard.

‘Although exports to China have increased, enddemand is largely still in the US,’ he said.

Citigroup economist Chua Hak Bin said a 1-percentage-point reduction in US growth would cut Singapore growth by 1.7 percentage points.

He said a contraction in the US and Europe could lower Singapore growth from his current forecast of 5.6 per cent to between 3 per cent and 4 per cent. ‘Ultimately, manufacturing will be hit, as well as trade-related services such as wholesale and transport.’

Barclays economist Leong Wai Ho, though, is much more sanguine.

He tips Singapore growth at 6.5 per cent this year, purely on the strength of the domestic economy.

‘We already expect exports to contribute very little to growth,’ he said, pointing out that last year’s strong growth came amid a weak export performance.

Instead, private consumption, fuelled by record tourist arrivals and investments in the construction sector, should provide a buffer.

Projects, like the integrated resorts, are highly unlikely to be disrupted, while the record new manufacturing investments that Singapore won last year will provide support, Mr Leong said.

‘We have never entered a US recession from such a strong position. We are going into this with good quality, broad-based growth.’

 

Source: The Straits Times 23 Jan 08

UK property shares set for 20% rise: Morgan Stanley

But over longer run, rally could ebb as economic downturn forces rentals to fall

IN LONDON

UK property shares may surge at least 20 per cent in the first half of 2008 as the Bank of England cuts interest rates, predicts Morgan Stanley.

On a longer two year view however, Morgan Stanley is concerned that a downturn in the British economy will force struggling businesses to vacate properties and cause rentals to decline. In that event the rally will peter out and property shares will decline again.

Indeed following Morgan Stanley’s forecast and Singapore GIC’s purchase of a 3 per cent stake in British Land, UK commercial property shares have begun to rally. British Land, Europe’s largest property company in terms of assets jumped by 15 per cent from recent 12 month lows to 943 pence.

Segro, the UK’s largest owner of office parks, has rallied by 30 per cent to 499 pence, Brixton plc, the country’s largest industrial landlord, by 25 per cent to 323 pence, Hamerson, another leading UK property share by 16 per cent to 1,054 pence and Liberty International, the UK’s largest shopping mall owner by 10 per cent to 1,005 pence.

Despite the rally, British Land is still 45 per cent below its early 2007 high of 1,711 pence, while the other UK property shares are currently trading between 26 per cent and 42 per cent below their 12 month peaks.

The vast majority of UK property analysts and real estate stock analysts are still bearish. According to IPD, the main index provider for commercial property, prices have fallen by nearly 10 per cent since their peak in the middle of last year.

Prices had soared in the preceding five years. Commercial property optimism has fallen to its lowest level since 1990. A recent ING Real Estate Investment Management Investment Survey 2007, conducted late 2007, revealed that only 8 per cent of the respondents were optimistic.

This represented a dramatic fall from the previous year’s figure of 64 per cent.

Real estate firm Jones Lang LaSalle estimated in December that deal volumes were down by 60 per cent in the fourth quarter. The gloom has worsened as poor retail sales and a downturn in Marks & Spencer results have accentuated fears of a UK recession.

In such conditions, however, bargains can be found. UK property shares have been dumped by investors and short term traders such as hedge funds – so much so that their share prices have fallen well below the underlying value of their property assets. In other words they are discounting a further price decline.

British Land’s share price, for example, is trading at an estimated discount of around 45 per cent to the balance sheet value of its net assets.

Anthony Bolton, a veteran and top performing London fund manager at £pounds;400 million Fidelity Special Values fund said that the fund had bought several established UK property stocks in recent months.

Mr Bolton took the view that the property share slump ‘discounts a big drop in property values, and in some areas it over-discounts that’.

 

Source: Business Times 22 Jan 08

MARKET TUMBLE: Bank stocks hit by US recession, sub-prime fears

Sell-off symptomatic of broader sell-down, slowing in S’pore’s economy: analysts

BANK stocks were clobbered yesterday on continuing concerns of a possible recession in the United States, subprime lending woes and a general slowing down of the Singapore economy.

This comes on the back of the news that Citigroup reported its biggest loss in its 196-year history due to US$18 billion worth of write-downs from the sub-prime crisis. The fall also came on a day when the broad market came under selling pressure.

Shares of DBS Bank, South-east Asia’s largest lender, were among the top losers yesterday, shedding 62 cents or 3.3 per cent to end at $18.20, the lowest in a year.

Shares of United Overseas Bank (UOB), Singapore’s second-largest bank by market capitalisation, also featured among the top losers. They ended yesterday 48 cents or 2.7 per cent lower at $17.08, their lowest price in a year.

OCBC Bank shares dropped seven cents or 0.9 per cent to end at $7.61, their lowest in 11 months.

This mirrors the fate of bank stocks in the Asian region, where Japanese bank shares fell on worries about the persisting US sub-prime crisis. Shares of Mizuho Financial Group and Mitsubishi UFJ – Japan’s largest bank – plummeted after suffering losses related to US sub-prime lending.

Shares of Bank of China, the country’s third-biggest bank, also dropped, as did those of Kookmin Bank, South Korea’s largest lender by market value.

In Australia, shares of Commonwealth Bank of Australia, Macquarie Group and National Australia Bank also declined.

Analysts said the sell-off in shares of Singapore banks was symptomatic of a broader sell-down in the markets, and a slowing in Singapore’s economy due to recession fears in the US.

‘Bank stocks are taking the lead from the US, which appears to be going into recession,’ said Matthew Wilson, a banking analyst at Morgan Stanley. ‘This will be bad for Singapore, given its small and open economy.’

David Lum, an analyst at the Daiwa Institute of Research, said a recession in the US would have a knock-on effect on Singapore bank stocks as these are the bellwether for the economy.

‘GDP growth has slowed in Singapore,’ he said. ‘If financial markets are weak, there will be a spillover effect on banks since they are closely tied to the economy.’

Mr Wilson noted that underlying pressure from sub-prime problems in the US remains and the prospect of collateralised debt obligation (CDO) write-downs still looms. ‘Financial stocks globally are under pressure.’

But Mr Lum was of the view that the prices of local bank stocks were hit by factors other than the US sub-prime lending crisis. ‘The sell-down should not be due to sub-prime problems,’ he said. ‘Singapore banks don’t need capital, and their capital ratio looks strong.’

Operationally too, banks are falling victim to low interest rates, possibly depressing their share prices. ‘The Singapore interbank offered rate (Sibor) is falling, and is likely to stay low as the US cuts its interest rates,’ Mr Wilson noted. ‘This is negative for banks’ net interest margins.’

He also said mortgage loan growth, although strong, generates low earnings for banks with narrow spreads.

The local banks are due to report full-year earnings next month. Analysts are expecting to see more write-downs relating to the CDO exposure. ‘There will be more write-downs though not as much as in the third quarter,’ said Pauline Lee, an analyst at Kim Eng Securities. ‘We won’t see as much write-downs at UOB and OCBC, compared to DBS.’

 

Source: Business Times 17 Jan 08

Markets brace for news of big losses by banks

Citigroup could write off US$24b, lay off 20,000 staff

(LONDON) Major American banks are expected to unveil substantial losses and secure more cash from abroad in what is shaping up to be a pivotal week for the global credit crisis.

Citigroup could write off as much as US$24 billion and lay off 20,000 workers in a drive to cut costs and boost capital, CNBC said on its website in a report dated Sunday.

CNBC said the plans will be unveiled today when Citi, the largest US bank by assets, reports its fourth-quarter results.

Investment bank Merrill Lynch is just as troubled.

The Financial Times said yesterday that Merrill was seeking about US$4 billion in a second capital raising, and the Kuwait Investment Authority was expected to be a significant investor. A deal could be announced as soon as midweek, the newspaper said, citing people familiar with the matter.

The New York Times on Friday said that Merrill was expected to suffer US$15 billion in losses stemming from bad mortgage investments, almost twice the company’s original estimate, when it releases its results later this week.

FT also reported on Saturday that Citigroup was putting the final touches to its second big fund-raising, seeking up to US$14 billion from Chinese, Kuwaiti and other investors.

The US$200 billion Kuwait Investment Authority had no immediate comment yesterday on the reports that it may buy into the two damaged American banks.

Banks, wrestling with huge losses stemming from mortgages lent to people ill-equipped to repay them, have been seeking cash from sovereign wealth funds.

In December, Merrill secured as much as US$7.5 billion by selling a stake to Temasek Holdings and New York based money manager Davis Selected Advisors.

The month before, Citi agreed to sell up to a 4.9 per cent stake to Abu Dhabi for the same amount.

As well as Merrill and Citi, other big names such as State Street and JP Morgan report results this week.

Wall Street analysts have turned increasingly wary over US financial results for the fourth quarter as well as the first two quarters of 2008, according to a weekly survey by Reuters Estimates yesterday.

The survey showed that analysts expect S&P 500 companies’ fourth-quarter earnings to fall 9.1 per cent from a year earlier.

That was gloomier than the 8.4 per cent decline forecast a week earlier, and the 11.5 per cent growth forecast in an Oct 1 survey.

The Federal Reserve was to auction US$30 billion later yesterday and the European Central Bank and Swiss National Bank will continue their unprecedented US dollar lending to banks as part of coordinated central bank efforts to help calm credit market tensions. The Bank of England will also weigh in.

Results of the latest ‘term auctions’, a plan agreed in December and one which has helped money market rates ease, will come today.

One to three-month Euribor interbank interest rates fell yesterday amid central banks’ moves to inject liquidity into markets.

Most analysts say the threat of further losses at major banks from investments tied to US sub-prime mortgages means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

The Fed is forecast to use its other policy lever – interest rates – before the month is out. It is seen slashing rates by a half-point at its two-day meeting ending on Jan 30 after Fed chairman Ben Bernanke gave a downbeat assessment of the US economy last week and said the central bank was ready to take ’substantive additional action’.

Swiss banking giant UBS appealed to shareholders last week to back a capital injection by Singapore’s Temasek and a Middle East investor and warned it still could not predict how the sub-prime crisis would play out.

And shares in Northern Rock fell as much as 7 per cent early yesterday on fresh concerns that the bank is facing imminent nationalisation. Northern Rock is Britain’s biggest casualty of the credit crunch and has borrowed around 26 billion pounds (S$72.8 billion) from the Bank of England since it requested emergency funds in September.

 

Source: Reuters (Business Times 15 Jan 08)

EU seeking partnership with China in Africa

Proposal comes as Chinese presence is eroding Europe’s influence in region

LONDON – THE European Union has announced that it is seeking Chinese cooperation in Africa.

EU Development Commissioner Louis Michel has pledged to present Beijing with an ‘African partnership’ when he visits China in March.

But Mr Michel, a former Belgian foreign minister known for his promotion of human rights, risks running afoul of Europe’s non-governmental organisations, most of which view China as a hindrance in Africa.

And, judging by the initial reactions from Beijing, the Chinese are not impressed by his concept either.

European governments are used to dealing with Africa on their own. After all, the overwhelming majority of African states are former European colonies.

Commercial links remain strong. In 2006 – the last year for which complete figures are available – Europe was still Africa’s top economic partner, accounting for S$425 billion worth of trade.

But the Europeans have watched with incomprehension and subsequent fury as China has made deep inroads into Africa.

The Chinese interest was initially in oil, gas and other raw materials. However, it has evolved into a far broader political and economic engagement that, while transforming the African continent, is also marginalising the Europeans.

According to Chris Alden, the author of a new book on Beijing’s African involvement, the Chinese are attractive to local governments because they finance infrastructure projects at a speed that the Europeans simply cannot match.

‘They have a very light touch when it comes to bureaucracy, while the EU is the master of bureaucracy,’ he points out.

And, while the Europeans anguish over the human rights implications of their investments, ‘China does not suffer from such concerns’, he adds.

Since the start of this decade, China’s trade with the world’s poorest continent has risen from virtually nothing to a total of S$71 billion in 2006. Beijing’s Export-Import Bank recently earmarked another S$30 billion specifically for African investments.

The Europeans are feeling the pinch from all directions. Their companies, which used to mine most of Africa’s raw materials, are now regularly trounced by the Chinese.

And, more importantly, African leaders – who now have China for financial and political support – are rejecting Europe’s traditional lectures about good governance and human rights.

Portugal, itself a former African colonial power, tried to reassert Europe’s voice by holding an Africa-EU summit last December. It was a total fiasco: African leaders refused to sign a new trade agreement which the EU offered, mainly because it imposed a demand to open local markets.

The Europeans have now decided that, if they cannot beat the Chinese, they had better join them. And the EU thinks it has something to offer.

Mr Michel believes that if China does not buy into Europe’s agenda, which concentrates on improving African governance, sooner or later the Chinese will repeat Europe’s old colonial experience: African governments will not repay their loans, and may repudiate their raw materials deals.

So, the EU leader hopes that, by making China an offer of partnership, the two trading blocks could agree on a common African agenda.

Unfortunately for Mr Michel, the Chinese are not interested.

‘We are happy to discuss African questions,’ said Mr Jiang Yu, a spokesman for China’s Foreign Ministry. But, he added, this can only take place by ‘respecting and listening to the opinions of the Africans’.

The EU may well be right in its prediction that China will ultimately be disappointed in Africa.

Yet the Chinese remain determined to find this out for themselves, without Europe’s help.

 

Source: The Straits Times 15 Jan 08

Developing nations to lift world economy amid US slowdown

They will be the biggest drivers of global growth as pace slows to 3.3% this year: World Bank

DEVELOPING nations will be key in helping the global economy mitigate the drag from a slowing United States.

With their domestic economies coming into their own, poor countries will be the world’s biggest growth driver this year, the World Bank said in a report yesterday.

And Singapore is especially well-poised to take advantage of this as it is located amid the hottest of the world’s emerging economies.

‘I do believe that there is an impact from whatever happens in the US economy on the developing regions,’ World Bank lead economist Hans Timmer said at a press conference to present the bank’s outlook for the world economy.

‘But the result is not that the world economy will be on its knees.’

The bank is predicting global economic growth will moderate to 3.3 per cent this year, due mainly to a slowdown in the US, the world’s biggest economy.

The US, mired in a severe housing market downturn that has caused much financial turmoil worldwide, is widely expected to decelerate further this year.

While the World Bank has estimated that the US should manage a modest 1.9 per cent expansion this year, fears of a recession appear to be rising, prompted by recent economic data.

‘We can certainly smell a US recession although we can’t taste one yet,’ said United Overseas Bank economist Thomas Lam.

Against this ominous backdrop, developing economies are emerging as a bright spot for the year. They are expected to grow 7.1 per cent this year, with East Asia’s growth stars clocking in at an average of 9.7 per cent.

‘Singapore benefits from its location in Asia, which has shown the strongest dynamism in the world,’ said Mr Timmers, who cited the region’s red-hot economies of China and Vietnam. He pointed out that developing nations have become much more resilient to external demand shocks in the past few years.

The US housing slowdown, for instance, began two years ago and has been hurting US imports of goods made in poorer countries.

But that has not derailed the developing world from its growth path as its robust domestic economies – bolstered by better economic policies, open borders and stronger supply-side structures – have been picking up the slack.

Many emerging economies have also been largely unscathed by financial problems caused by the US subprime crisis as their direct exposure to the crisis has been limited.

‘With that resilience, with their strong performance, developing countries are now mitigating the slowdown that is occurring in the US,’ said Mr Timmers.

He noted that the developing economies together equal the US economy in size.

‘But they are growing more than three times as fast. That means their contribution to global demand is more than three times as important as the contribution of the United States.’

Still, a sharp and drastic slowdown in the US remains a key risk to the developing world and the global economy.

Also, an overreaction by policymakers might result in bigger problems down the road.

The World bank warned that if central banks overstimulate the economy with over-aggressive rate cuts, asset bubbles could be created.

‘Commodity markets could tighten further, inflationary pressures would mount and financial imbalances would increase rather than recede.

‘Such a scenario could sow the seeds of a much sharper downturn in the medium term.’

 

Source: The Straits Times 10 Jan 08

Bombs, security fears mar revelry as world greets 2008

(NEW YORK) Millions staged midnight parties at iconic landmarks around the world to ring in 2008, but bomb attacks and security fears quickly darkened New Year festivities in places.

In New York, hundreds of thousands of revellers crowded the fabled Times Square, braving cold temperatures and stringent security measures to see Mayor Michael Bloomberg release the New Year’s Eve ball on its 100th lowering, with a dazzling display of new environmentally-friendly lights.

But it was Sydney that got the global party going as more than a million people lined the harbour for fireworks. The giant steel archway of the Sydney Harbour Bridge was again the centrepiece of the traditional display in Australia’s main city, with a giant neon hourglass illustrating the theme of time passing.

An estimated 700,000 people were out on the damp London streets and crammed on riverbanks to watch the 10-minute fireworks display on the Thames, which focused on the giant London Eye observation wheel, police said.

However, bombs planted by suspected separatist rebels at discos and other entertainment centres rocked Thailand’s troubled south as revelry was at its peak. In Pakistan’s biggest city, Karachi, police stopped thousands from attending a traditional gathering on a beach overlooking the Arabian Sea amid security fears after the assassination of Opposition leader Benazir Bhutto.

Belgian authorities cancelled a traditional fireworks show in Brussels as the country went on maximum alert over possible terror threats. French authorities put 13,000 police on the streets of Paris and its troubled suburbs to deter any repeat of riots last month. But an estimated 400,000 French and foreign visitors still turned the Champs Elysees into a mass of car-honking festivities. Even more people – around one million according to police – packed streets around the Brandenburg Gate in what German media billed as the world’s biggest New Year’s party.

In China – set to host the 2008 Olympics in Beijing – President Hu Jintao called for world peace and development in his New Year address. ‘We sincerely hope people of all nations live under the same blue sky freely, equally, harmoniously and happily, and enjoy the achievements in peace and development of the humankind,’ he said. Thousands in Hong Kong ignored unusually low temperatures to see the fireworks in Victoria Harbour. In the northern Chinese city of Harbin, tourists strolled through a display of ice structures and some toasted the New Year in a bar made from ice blocks.

As tens of thousands of people flocked to Moscow’s Red Square, Russia’s President Vladimir Putin used his final New Year address as president to congratulate Russians on a ‘national renaissance’ driven by ‘colossal resources’, in a pre-recorded broadcast.

In Iraq, crowds surged into the streets of strife-torn Baghdad, setting off firecrackers and firing weapons and dancing in a rare moment of freedom from the daily violence that has recently eased.

 

Source: AFP (Busines Times 2 Jan 08)

Global economy facing threat of stagflation

Growth may slow to 4-year low and inflation could hit 10-year high

WASHINGTON – THE world economy is facing the risk of stagflation – the double whammy of suffering both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase.

The worst United States housing slump in 16 years, coupled with a tightening of credit by banks, have brought the world’s largest economy ‘close to stall speed’, according to former US Federal Reserve chairman Alan Greenspan.

At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

‘What lies ahead is a period of stagflation – slow or no growth combined with rising inflation – in the advanced economies,’ says Morgan Stanley co-chief global economist Joachim Fels.

Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a tenfold increase in oil prices drove both unemployment and inflation above 10 per cent.

Mr Feldstein, who heads the national bureau that serves as the arbiter of when US recessions begin and end, said the combination of a stalled economy and rising inflation could be seen as a form of stagflation.

‘It depends on how you want to define it,’ he said. ‘If you say an inflation rate of 3.5 per cent and a recession is stagflation, then we could have stagflation.’

Mr David Hensley, director of global economic coordination at JPMorgan, sees global growth of 2.4 per cent this quarter and next, and inflation at 3.5 per cent.

That is a far cry from the bad old days more than a generation ago, when world growth slowed to just 0.7 per cent in 1982 while inflation ran at an annual rate of 13.7 per cent, according to data compiled by the International Monetary Fund.

Even so, no less an authority than Mr Greenspan himself expressed concerns.

Speaking on ABC’s This Week programme aired last Sunday, he said a period of ‘remarkable disinflation’ is ending.

‘We are beginning to get not stagflation, but the early symptoms of it,’ he said.

The situation poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first. How they respond will go a long way in determining which danger proves to be bigger: a slumping global economy or rising prices worldwide.

For now, traders in futures markets are betting the Fed will remain focused on supporting growth, even after the latest government inflation reading last week showed consumer prices rose last month at the fastest pace in more than two years.

As of last Friday, investors put a 74 per cent probability on another quarter percentage-point cut in the Fed’s benchmark overnight rate next month, down from 100 per cent the day before.

If the global economy faced only the risk of faster inflation, the policy prescription would be clear: higher interest rates.

Yet, with growth slowing in the US and Europe, central banks remain under pressure to cut rates

 

Source: BLOOMBERG NEWS (The Straits Times 18 Dec 07)

IMF expects to lower global growth outlook

(ZURICH) The International Monetary Fund will lower its growth outlook as the continued credit crisis hurts the US and European economies, while global imbalances also weigh on growth, its top economist was quoted as saying.

‘Given this background, the numbers will indeed be weaker than in our latest World Economic Outlook,’ IMF chief economist Simon Johnson told Switzerland’s Finanz und Wirtschaft business newspaper in an interview on Saturday.

The IMF already lowered the forecasts from its July World Economic Outlook in October. But the numbers would in all likelihood have to be revised down again at the Fund’s next update in January, when it gives a preview of its April official forecasts. ‘We will not be able to stick to 1.9 per cent 2008 gross domestic product growth for the United States, nor to 2.1 per cent for Europe,’ Mr Johnson said. ‘By how much we will have to lower our GDP forecasts, we will know in January.’

The Fund already warned in November that the global economic growth outlook had dimmed, because of a troublesome mix of tighter credit terms and rising energy prices. The US dollar remained overvalued despite its continued drop since 2002, Mr Johnson said, which could be an obstacle for the US trade deficit to gradually diminish. Too high oil prices and the undervalued Chinese currency boosting exports in US trading partners formed the other side of the trade imbalance equation, he added.

The IMF did not have a foreign exchange target in mind for the greenback, but it should fall even further despite its persistent decline, to help diminish the US trade deficit and the chance of disorderly currency movements.

 

Source: Reuters (Business Times 17 Dec 07)

Bank of England cuts interest rates to 5.5%

ECB keeps rates unchanged, lowers next year’s forecast from 2.3% to 2%

(LONDON) The Bank of England cut interest rates yesterday as a global credit crunch threatened wider economic damage.

But the European Central Bank (ECB) left interest rates unchanged. While it has raised its eurozone growth forecast for 2007 to 2.6 per cent from 2.5 per cent previously, it lowered its forecast for next year to 2 per cent from an initial estimate of 2.3 per cent.

Growth in 2009 was expected to edge up to 2.1 per cent, ECB president Jean-Claude Trichet said.

The ECB kept the benchmark refinancing rate at 4 per cent yesterday, as predicted by economists.

Britain’s central bank cut interest rates for the first time in more than two years, by a quarter point to 5.5 per cent.

‘Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation,’ the Bank of England said in a statement.

Economists expected the ECB to raise its 2008 inflation forecast yesterday and cut its prediction for growth, illustrating the difficulty policy makers face in deciding what to do with interest rates.

‘The ECB is trapped in a policy void right now,’ said David Brown, chief European economist at Bear Stearns International here.

‘It is hemmed in by rising inflation risks in the short term and mounting downside risks to growth in the longer term.’

The ECB shelved a planned rate increase in September and has since kept rates on hold after the US housing recession made banks reluctant to lend, driving up the cost of credit.

While the ECB has offered banks extra cash to encourage lending, the cost of borrowing in euros for three months jumped to a seven-year high this week.

The US Federal Reserve on Oct 31 cut its benchmark rate by a quarter point to 4.5 per cent, the second reduction in as many months, to shore up growth in the world’s largest economy.

The Bank of England loaned £10 billion (S$29.3 billion) for five weeks as it provided commercial banks with extra cash to help fund them until January.

The UK central bank allocated 16.1 per cent of the total £62.2 billion in bids that it received, it said in a statement here yesterday.

The loans are at the benchmark interest rate.

Money-market rates rose to a two-month high on Wednesday as banks became reluctant to lend to each other on concern about US sub-prime losses and year-end funding.

‘The credit squeeze has intensified,’ said Philip Shaw, an economist at Investec Securities here.

‘It’s going to take longer for the money markets to return to normal than people thought a month ago,’ Mr Shaw said.

Top banks including Citigroup, Merrill Lynch and UBS have announced hefty losses and writedowns in recent weeks on assets tied to the crippled US sub-prime housing market.

 

Source: Reuters, Bloomberg, AFP (Business Times 7 Dec 07)

Bank of England cuts benchmark rate to 5.5%

LONDON – THE Bank of England has cut its benchmark interest rate for the first time in two years, saying inflation is likely to slow as higher credit costs hurt economic growth.

However, the European Central Bank in Frankfurt left interest rates unchanged at 4 per cent, as policymakers weighed the risks of accelerating inflation against signs of slowing economic growth.

In London, the Bank of England’s nine-member Monetary Policy Committee, led by governor Mervyn King, reduced the bank rate by a quarter-point to 5.5 per cent.

‘Conditions in financial markets have deteriorated, and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead,’ the bank said in a statement accompanying its decision in London yesterday.

The slowest services growth in four years and surging money market rates led Bank of England policymakers to set aside concerns about faster inflation expressed just last week by Mr King.

With consumer confidence at its lowest since 2004, banks, including Morgan Stanley, say house prices may decline next year.

‘This is likely to be the first of several rate cuts,’ said Mr James Knightley, an economist at ING Financial Markets, who changed his forecast yesterday and predicted a reduction.

Britain’s benchmark is still the highest among the Group of Seven industrialised nations.

Mr King signalled the bank was planning rate reductions last month when he forecast the economy would slow ’sharply’ next year after expanding more than 3 per cent this year.

Yesterday’s decision followed rate cuts by the United States Federal Reserve, as policymakers tried to shield the economy from the fallout of the collapse of the US sub-prime mortgage market.

‘Although upside risks to inflation remain, which the committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term,’ the bank said in its statement.

 

Source: BLOOMBERG NEWS (The Straits Times 7 Dec 07)

UK funds shore up defences

Moves in response to slowing property returns, rising redemption requests

(LONDON) Britain’s multi-billion- pound property fund industry shored up some of its defences and eyed contingency plans on Tuesday in the face of a weakening domestic market and growing demands from investors to withdraw funds.

Aviva-owned Morley Fund Management said institutional investors in its pooled pensions property fund could have to wait a year to withdraw cash, while UBS and Deutsche Bank’s RREEF invoked similar clauses on their main UK property funds, according to market sources.

The moves were in response to slowing property returns and rising redemption requests. Although precise data on a fund-by-fund basis is unavailable, the Association of Real Estate Funds (AREF) last month reported the first quarterly net outflow across its membership since early 2003 in the three months to end-September.

Britain’s once red-hot commercial property market has gone into reverse since the summer as fallout from the US subprime mortgage crisis has ratcheted up the pain of higher interest rates, just as the country’s housing market has soured after an extended boom.

According to benchmark data from Investment Property Databank (IPD), which collates information directly from real estate valuers, British commercial property in October posted its biggest monthly drop in average capital values since May 1990, during the country’s last full-blown property recession.

 

Source: Reuters (Business Times 6 Dec 07)

Oil price falls below US$90

(LONDON) The price of oil fell back below US$90 yesterday as the market speculated about the chances of an increase in Opec output at the cartel’s meeting next week, dealers said.

They said prices also fell after it appeared more likely that an explosion on a key pipeline from Canada into the United States would have only a limited impact on supply.

Yesterday, New York’s main contract, light sweet crude for January delivery, was down US$1.75 to US $89.35 per barrel, after earlier striking a one-month low of US$88.52. Brent North Sea crude for January tumbled US$1.32 to US$88.93.

The Organization of the Petroleum Exporting Countries (Opec) meets in Abu Dhabi on Wednesday with many participants expecting the group to boost output to help counter record- breaking prices.

‘All eyes will be on Opec now ahead of the group’s meeting on Dec 5,’ said Nimit Khamar, analyst at the Sucden brokerage here. ‘Many expect the group to hike supplies in order to cool off prices.’

The oil producers’ group is a key player in the energy market because it produces about 40 per cent of the world’s crude.

Opec last decided to raise production in September when it agreed to provide an extra 500,000 barrels a day to the market from Nov 1. ‘The forthcoming Opec conference now looms large over the oil market,’ the Commonwealth Bank of Australia (CBA) said in a report to clients.

‘It appears that oil markets are considering the possibility that there will be an increase in Opec production ceilings of at least 0.5 million barrels per day.’

Earlier this week, Saudi Oil Minister Ali Al-Nuaimi said the market was well supplied and that high prices did not properly reflect supply and demand. Asked whether Saudi Arabia, the world’s biggest oil exporter, would push for an increase in production at next Wednesday’s meeting, Mr Nuaimi said the cartel would first need to see market data.

Since striking record peaks just under US$100 last week, prices have slumped by about US$10 in New York and almost US$8 here.

 

Source: AFP (Business Times 1 Dec 07)

Sub-prime crisis takes its toll on European markets

But stability can be expected if the US avoids recession: DTZ

(SINGAPORE) Shockwaves from the US sub-prime mortgage crisis a few months ago are reverberating through the real estate markets of the UK and Europe, with deals shelved or abandoned.

In its European Quarterly 2007 report, DTZ says the volume of transactions could fall at least 15-20 per cent in the third and fourth quarters this year, from record volumes of 48 billion euros (S$102.7 billion) and 53 billion euros in the first and second quarters respectively.

However, if the US avoids recession, stability can be expected.

DTZ group chief executive Mark Struckett says that in the UK other than central London, a price correction in commercial estate market has been underway since the second half of 2006, so the sub-prime fallout is less of a shock.

The current situation is also being ‘accepted by vendors’, he says.

DTZ says the effect so far is not so much the delaying of deals but renegotiation of price with the re-pricing of risk as providers of debt capital become much more risk-averse.

Given upward pressure on yields in many locations, DTZ believes property returns will be heavily dependent on sound occupier fundamentals and effective asset management.

Making a comparison between current market conditions and the period following the Sept 11, 2001 terrorist attacks in the United States, Mr Struckett says that unlike five years ago, ‘occupational demand still looks good’.

In general, DTZ does not expect rental prospects to be substantially undermined by recent developments, though there may be increased downside risk for areas such as London’s West End, where hedge funds and private equity firms are important players.

There could be wider adverse repercussions in the City of London and in Canary Wharf if reduced profitability affects the expansion plans of some banking sector firms.

Even so, Mr Struckett says a slowdown in new developments could lead to a supply shortage in 2010-2011, possibly curtailing any prolonged crisis.

So while debt-driven investors will find it more difficult to make deals add up, DTZ believes a correction in yields in some markets could present attractive opportunities for equity buyers such as life insurance and pension funds which to some extent may have been priced out of the market by highly leverage investors.

Quality assets in prime locations could benefit in a generally more risk-averse market.

DTZ believes a flight to quality is likely to put deals involving secondary locations or older stock most at risk, with investors increasingly willing to pay a premium for covenant strength and reliable rental income.

 

Source: Business Times 27 Nov 07

US credit woes hurt foreign funds to Asia

While inflow is fast slowing for HK, China and India, S’pore is experiencing outflow

THE flood of foreign funds surging into Asian bourses over the past four weeks has been reversed by the ongoing credit woes in the United States.

Singapore has started experiencing an outflow, with a net sale of US$2.1 million (S$3 million) last week by funds investing exclusively in Asian equities, according to Citigroup Investment Research.

This is a striking contrast to the situation in end-September, when US$110.4 million flowed into local equities in the space of a week.

And in other bullish regional markets such as Hong Kong, China and India, the inflow of foreign funds into equities has slowed down considerably.

Only US$84.3 million was invested in H-shares – shares of China firms listed in Hong Kong – between Nov 1 and Nov 7, compared with US$576.5 million between Sept 27 and Oct 3.

Over the same period, foreign funds spent just US$29.9 million on Hong Kong stocks, excluding H-shares, an 86 per cent plunge from the US$216.5 million they spent in the week of Sept 27 to Oct 3.

The slowdown in fresh investments in Asian equities coincided with the bearish mood in the US, where banks have been writing down billions of dollars in their pool of debts.

That has been coupled with the greenback plunging against regional currencies following two US interest rate cuts.

It raises fears of an unravelling in the carry trade – hedge funds taking out huge yen loans because of Japan’s low interest rates to invest in higher-yielding assets.

Sentiment has also been spooked by perception that H-shares have shot up too fast, fuelled by foreign investors entering Hong Kong and Singapore in anticipation of China allowing domestic funds to invest in overseas equities.

Fund managers’ appetite for risk has also weakened considerably. Merrill Lynch’s latest survey of Pacific Rim fund managers showed that defensive sectors – insurance, retail and consumer products – are now preferred over sexy growth stocks.

And despite oil soaring close to US$100 a barrel, fund managers have started to pare down positions in the energy sector.

Despite the falls in regional markets, the Merrill Lynch report noted that fund managers are still ‘overweight’ on shares, having reduced cash holdings to 2.8 per cent from 3.7 per cent last month.

And even as Hong Kong’s Hang Seng Index has dropped by more than 10 per cent from its record high in September, Merrill Lynch said fund managers continue to favour Hong Kong and ’sharply increase their enthusiasm for frontier markets’.

‘Fund managers have also returned to Singapore and reduced their exposure in other Asean markets,’ it added.

But Morgan Stanley’s head of global emerging markets equity strategy, Mr Jonathan Garner, said that next year may be more difficult than this year.

While the focus is on the impact any slowdown in the US economy could have on emerging markets, Europe is a much bigger export market for developing countries. ‘Weakness in the US economy could spill over to the euro zone. Emerging markets may survive a slowdown in the US, but not the US and Europe combined,’ said Mr Garner.

He expressed particular concern over a possible ‘contraction in valuations’ in China and India, after their exceptional stock market performances this year. ‘H-shares valuations are back at the 1997 and 2000 peak levels.’

Morgan Stanley has adopted a defensive posture, adding Telekom Malaysia and removing China Mobile and Hyundai Heavy from its focus list last week.

 

Source: The Straits Times 17 Nov 07

Credit crisis, inflation threaten world growth, says Fukui

GLOBAL economic growth is under increasing threat from two fronts – the United States sub-prime crisis and soaring commodities prices that may push up inflation.

The warning came from Bank of Japan governor Toshihiko Fukui at a function in Singapore last night. He said the sub-prime turmoil could severely disrupt financial markets, which could then have a ripple effect on economic growth. The risk of inflation is just as potent, presenting a challenge to central bankers who will need to use monetary policy to maintain price stability amid strong growth, added Mr Fukui, who spoke as part of the Monetary Authority of Singapore Lecture series.

 

Inflation expectations have been ‘generally contained’ in many markets. But rising oil prices, driven by high economic growth worldwide, especially in oil-hungry emerging markets, have increased the ‘risk of a rise in inflation expectations in the longer term’, Mr Fukui said.

 

Rising commodity prices will also ‘inevitably impair terms of trade for oil-consuming countries’, he added. Mr Fukui acknowledged that ‘downside risks for the US economy’ persisted, but the risk of stagflation – stagnant growth accompanied by high inflation – in the US and other economies was ‘muted compared to the 1990s’.

 

The credit market turmoil, linked to high-risk sub-prime home loans, was actually the result of many years of favourable growth and benign conditions in the world economy.

 

‘The crux of the problem, as I understand it, is that risk evaluation had become too lax under those benign conditions, and this has led to a correction through market forces,’ said Mr Fukui.

 Financial imbalances were allowed to accumulate that, in turn, triggered corrections and posed a risk to economic stability.

Central bankers, like goalkeepers in football teams, must, therefore, defend against turbulence arising from the increasing complexity in the international flow of funds, he said. They must accurately read the risks of the global economy and financial markets to ’stabilise the market when it is under pressure’. Source: The Straits Times 16 Nov 07

High oil price demands good policies

IT would be a fallacy to imagine that the prospect of a US$100 price tag for a barrel of oil will lead to a push for renewable fuels any time soon. Simply put, there is nothing definitive yet on the horizon offering a reliable, continuous and cheap alternative in the face of mounting energy demand.

Oil prices have remained resilient in their upward trajectory. Producers remain steadfast about the adequacy of supply in the system even as large consumers clamour for more.

Traders focus on the thin inventories to push the price up. When oil was at half the current price level, it was seen as compelling enough for the big competitive initiatives. Yet there is no excited talk of renewable sources of energy or even theories that high prices would yield new oil supplies, driving prices down. Instead we have ever higher-priced oil.

Yes, consumers are in a fix, for which they should share the blame. Have they been willing to make the necessary sacrifices and use pressure to accelerate the shift? In countries that matter to oil consumption, people have not been pushy enough.

Politicians may make noises but will act only if they are convinced that a change – putting at risk trillions of dollars of infrastructure investment and millions of jobs – is politically worth their effort.

Then subsidies and legislation will follow for a meaningful change of direction. Until then, some countries will do their bit but no cohesive global policy or focus on the next big thing will emerge. Big energy companies spend scant sums on research and development on renewable fuels. Independent R&D betting on the new future have surged but their budgets are small beer.

Unless the existing big players like car, energy and power companies as well as governments line up behind a change and consumers show a determination to support the drive, we will continue to grope for good answers for years, if not decades. Not convinced? ExxonMobil has forecast energy demand will grow 1.3 per cent a year, a tad lower than at the current rate, requiring a third more energy by 2030.

It says hydrocarbons would still meet 80 per cent of demand then, though renewable energy supply will grow at a faster clip of 9 per cent a year from now.

Rich nations’ energy adviser, the International Energy Agency, is also equally bleak. Unless governments embark on low-carbon policies, it sees the unprecedented rise in energy demand accelerating climate change, threatening global energy security and possibly creating a supply crunch. By 2030, the world will have to find an additional 30 million barrels per day, equivalent to Opec’s current total daily production.

Such an enormous challenge demands good policies and determined execution. Global R&D cooperation and conservation, not bitter recrimination by rich polluters, should be the way forward.

 

Source: Business Times 15 Nov 07

HIGH OIL PRICES – A bubble that’s hard to prick

OIL prices are testing US$100 (S$144) a barrel, a key psychological threshold. Once over that hump, how much higher will the price go? Of course, given oil’s limited supply and the world’s expanding appetite, lowpriced oil will never come again.

That, however, is different from another consideration: Whether current high prices are truly reflective of supply and demand, or are prices being pushed up to a significant extent by speculation? And if the latter, is there an ‘oil bubble’?

The answer to that is wrapped up in arcane terms such as ‘backwardation’ and ‘contango’, which affect the prices of commodities, as well as in developments in the American prairie town of Cushing, Oklahoma. But more on this later.

In fact, an oil bubble may not necessarily be bad news. For if current prices reflect a bubble, there is the hope that the market will eventually readjust to equilibrium and there is the possibility of relief; it means the time for US$100 oil has not yet truly arrived. The oil bubble would be one whose pricking would benefit far more people than it would hurt.

The bad news is that if there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

That’s because, unlike equities, oil is a much more complex trading class. Buyers and sellers are users and producers, but also large trading houses, hedge funds and institutional investors like pension funds. Although exchange- traded funds now allow retail investors to diversify into oil, the big moves depend far more on the large players than on the collective calculations of small investors. If this is a bubble, it’s also one with more discipline.

Indeed, over the past three years, any number of analysts and economists have said that oil should be in the US$50 range, the US$60-plus level and so on. Yet it’s remained stubbornly stuck on a steeper trajectory. In fact, here we are today, knocking on US$100.

Those who say oil is priced correctly point to China’s increasing hunger for energy, India’s demand for power and the US dollar’s steep decline. Others might cite the correlation between oil and gold, which in recent periods has seen oil priced at 7.5-8 barrels to an ounce of gold. With oil just under US$100 and gold comfortably above US$800, you might well reckon that oil has legs yet.

But is Chinese and Indian demand, coupled with the weakness of the US dollar, enough to explain a more than threefold rise in oil’s price since 2001? Is this justified under the calculus of demand and value? The week before the Sept 11, 2001, attacks in New York and Washington, oil was trading at US$28.

Terrorism, wars, civil unrest and weather uncertainties – all have been kneaded into prices as well. Yet have these resulted in enough of a consistent constriction in supply to justify prices of nearly US$100?

India’s petroleum secretary, Mr M.S. Srinivasan, isn’t likely to think so. He was reported by the International Herald Tribune last Friday as saying there are ‘no supply constraints right now, and demand has not escalated out of control’. Mr Srinivasan has a suggestion for cooling the market: stop trading crude oil on commodity exchanges, which he believes contributes greatly to high prices. Do this much, and we’d see a ‘drastic reduction’ in the price of oil, Mr Srinivasan said.

His suggestion is unlikely to gain traction. For however much exchange trading contributes to speculative positions, it also provides price transparency. Without this, we’d have backroom brokering instead, which would more likely exacerbate the situation than help.

Yet Mr Srinivasan’s frustration is understandable. And this can be seen in how prices have been bubbling up lately.

Yes, demand is strong. No arguing. But the recent surge is also connected to how the premium in prices has shifted from later to earlier delivery.

Because of a complicated series of events, oil prices in the past several months are in a situation called backwardation. This means prices are higher for oil about to be delivered than for oil for later delivery. The opposite is contango, when prices are higher for future delivery than for supply sooner – reflecting the expense of storage and other carrying costs.

Until the middle of this year, conditions in the market were such that it was more profitable to buy lots of oil and hold it in storage tanks until later. But suddenly, it became more profitable to sell than to hold. The subprime mortgage crisis in the US, for one thing, has also made financing for holding oil more expensive.

So in backwardation, those who hold oil have an incentive to drain their tanks – kept in places like Cushing.

This Oklahoma prairie town is one of the biggest storage sites for oil, with capacity possibly as high as 35 million barrels. Since 1983, Cushing has been the New York Mercantile Exchange’s official delivery point for futures contracts in light, sweet crude, the global benchmark. So the market pays close attention to what happens in Cushing.

Maybe too much.

What the market has noticed is that the tanks in Cushing are down to perhaps 15 million barrels. Attention drawn to this decline in inventory is helping push up prices.

Yet, as Opec’s head of petroleum market analysis, Mr Mohammad Alipour-Jeddi, has said: ‘There is enough crude in the markets.’

Thus, it isn’t a huge mismatch between supply and demand that’s yanking up prices. Instead, backwardation is causing a draw-down of inventory, starting what’s called a ‘backwardation vortex’. By focusing on places like Cushing, the market has worked itself into a frenzy – whatever the real ability at the moment of producers to supply users.

Prices can be high in contango and oil investments profitable; but in backwardation there is an incentive to sell existing stocks, resulting in lowered inventories that spark market anxieties. As a result, some investors are reaping big profits and setting up conditions for even more gains.

Does speculation in oil amount to a bubble, then? Look again at the correlation between oil and gold.

Over a longer period of a half century, oil has been priced at 15 barrels to an ounce of gold. At gold’s current price, that means oil should be in the mid-US$50 level. Sure, there’s some wiggle room on the up side. But even then, there’s going to be enough of a gap between the implied and actual price to suspect that oil’s frothier than natural.

The question, in turn, is how do you prick this bubble?

LOGIC OF ITS OWN

If there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

 

Source: The Straits Times 12 Nov 07

Sub-prime crisis: New push to review rating firms’ role

IN TOKYO

US Securities and Exchange Commission (SEC) chairman Christopher Cox promised yesterday that regulators would ‘aggressively’ pursue the new mandate they have been given to review the role that rating agencies played in the sub-prime mortgage loan crisis.

He was speaking at a briefing in Tokyo as new evidence emerged that the fallout from the crisis is continuing to spread to Japanese financial institutions.

In Tokyo for a meeting of the International Organisation of Securities Commissions (IOSCO), Mr Cox stressed the need to restore faith in ‘honest markets’ following the debacle caused by the collapse of the sub-prime mortgage sector and associated financial derivative products.

He said: ‘I hope that in two or three years’ time we will be able to look back on lessons we have learned’ from the crisis.

This week IOSCO set up a special task force to examine issues facing securities regulators following recent events in the global credit markets. One of its jobs will be to examine the role of credit-rating agencies and how they relate to the sub-prime crisis.

Mr Cox said the task force hopes to produce a report by February as part of wider crisis analysis being conducted by the Financial Stability Forum.

Credit-rating agencies have claimed they have only limited responsibility for the crisis that has resulted in massive losses at leading Wall Street financial institutions. Being responsible only for default risk and not for liquidity risk or other forms of market failure, the agencies cannot be held to account more widely, they have claimed.

Mr Cox said yesterday that he hoped in future it would not be possible to ‘draw distinctions’ which allow certain institutions to minimise blame for the crisis. He suggested that the role of ’structured finance mechanisms’ which have been at the heart of the current financial system crisis and in whose formation rating agencies have played a part would be ‘redefined’ in future.

The ‘transparency’ of these structured finance vehicles, which has enabled banks and others to keep their exposure to sub-prime-related mortgage products off their balance sheets and therefore out of the view of investors and regulators, needs to be improved, Michael Prada, chairman of IOSCO’s technical committee, suggested in a speech to the Tokyo conference. The ‘role of rating agencies with regard to structured products’ needs to be examined, he said.

Meanwhile, reports emerged in Tokyo that Mizuho Securities, the unlisted brokerage arm of Mizuho Financial Group, may post a sub-prime-related loss of over 100 billion yen (S$1.3 billion) and delay a planned merger.

The report in the Nikkei business daily raised fears that more such losses may lie ahead and dragged financial stocks, such as Mizuho Financial, sharply lower. The Nikkei 225 stock average hit a three-month closing low of 15,583.42.

 

Source: Business Times 10 Nov 07

Markets shudder as Citigroup’s profit engine stalls, writedowns rise

CEO steps down; bank’s sub-prime hit may reach US$11b

(NEW YORK) Citigroup Inc, the profit engine built by Sanford ‘Sandy’ Weill, has seized up.

The biggest US bank by assets said yesterday that sub-prime mortgages and related securities lost as much as US $11 billion of their value in the past month, a decline that may wipe out half of the company’s profit so far this year.

The New York-based company also said in a statement that Charles Prince, Mr Weill’s hand-picked successor, has stepped down. Former Treasury Secretary Robert Rubin will become chairman and Citigroup’s most senior executive in Europe, Win Bischoff, will be interim CEO.

Citigroup’s woes left international banks and stock markets reeling yesterday, feeding fears that more banks will have to confess to major losses. British banks Barclays and Royal Bank of Scotland saw their stock shed about 3.0 per cent in value. In Tokyo, Mitsubishi UFJ Financial, Sumitomo Financial and Mizuho Financial fell by a similar amount.

The Morgan Stanley Capital International Asia Pacific Index lost 1.9 per cent to 165.43 as of 5:33 pm in Tokyo, having on Nov 2 slipped 2.2 per cent from a record close. Financial shares were the biggest drag among the benchmark’s 10 industry groups yesterday.

Japan’s Nikkei 225 Stock Average slid 1.5 per cent to 16,268.92 while Hong Kong’s Hang Seng Index slumped 5 per cent. Most South-east Asian stock markets also extended losses on credit fears. The Straits Times Index fell 45.14 points to close at 3,670.18.

Citigroup said that credit-market upheaval in October impaired by as much as a fifth its US$55 billion book of subprime mortgages and related bonds. The writedown costs, which will be recorded in the fourth quarter if markets do not recover, add to the almost US$7 billion of costs for bad debt, bond and loan losses recorded in the third quarter.

The fourth-quarter charges may leave the company with a loss of 26 cents a share, Punk Ziegel & Co analyst Dick Bove wrote in a Nov 5 report. It would be Citigroup’s first quarterly loss since at least 1998.

Before the announcement, the company was expected to report US$5.32 billion of profit in the fourth quarter, the average estimate of six analysts surveyed by Bloomberg.

‘Significant uncertainty continues to prevail in financial markets,’ Citigroup said in the statement. The company said that its capital ratios ‘will return within the range of targeted levels by the end of the second quarter of 2008′, allowing it to maintain the current dividend, the company said.

Citigroup is participating in a US$80 billion fund being set up by banks to draw investors back into the market for short-term debt. The fund, also backed by Bank of America and JPMorgan, was announced last month with the encouragement of Treasury Secretary and former Goldman Sachs CEO Henry Paulson.

The performance of remaining sub-prime investments, which totalled US$55 billion as of Sept 30, is partly dependent on ‘the underlying performance of the economy’, chief financial officer Gary Crittenden said in an interview.

Analysts at CIBC World Markets and Morgan Stanley told clients last week to get rid of Citigroup shares. CIBC’s Meredith Whitney said that Citigroup may have to sell assets because it needs to raise US$30 billion of capital.

The combination of US$25 billion of acquisitions in the past 19 months and the lowest cushion for losses ‘in decades’ increases the risk of owning the stock, she said.

Mr Prince, 57, is the third banking chief ousted amid a credit contraction that has saddled the world’s biggest lenders and securities firms with more than US$40 billion of writedowns during the past four months. The worst housing slump in 16 years has led to record US foreclosures and losses in the market for home loans to borrowers with poor credit histories or heavy debts.

Merrill Lynch & Co, the world’s biggest brokerage, ousted Stan O’Neal last week, after the New York-based firm disclosed US$8.4 billion of writedowns. UBS AG, the largest Swiss bank, fired CEO Peter Wuffli in July.

While the writedowns at Citigroup finally brought Mr Prince down, he had been under pressure for years because Citigroup’s performance under his leadership did not match what investors came to expect from Mr Weill, who demanded 15 per cent annual profit increases during his 17 years as CEO of Citigroup, Travelers Group and their predecessors. Powered by a series of blockbuster deals, climaxing with Travelers’ US$36 billion acquisition of Citicorp in 1998, Mr Weill delivered a 160 per cent stock gain during his last five years as CEO.

Mr Prince spent most of his career as Mr Weill’s top lawyer, advising on acquisitions. It was he who untangled Citigroup and Mr Weill from the federal and state probes of analysts who had allegedly talked up stocks to win underwriting business.

Mr Prince’s own stint has been hobbled by the sub-prime crisis. This year, he vowed to eliminate or reassign more than 26,500 jobs. Citigroup’s quarterly profit meanwhile has sunk to its lowest level in three years and the stock has plunged 32 per cent in 2007, twice as much as Bank of America and JPMorgan Chase.

‘I don’t think that all of a sudden, because of the credit crisis, the Citigroup model is broken,’ said Tim Ghriskey, cofounder of Solaris Asset Management in New York. ‘This isn’t a broken machine at all. It just needs some leadership that really understands the business.’

 

Bloomberg, Reuters, AFP (Business Times 6 Nov 07)

US rate cuts won’t defuse sub-prime mess: ‘Mr Yen’

Asia, though not much affected so far, must be vigilant

(SINGAPORE) Interest rate cuts by the US Federal Reserve – which have amounted to 75 basis points since Sept 18 – are unlikely to defuse the US sub-prime mortgage crisis, according to the influential economist Eisuke Sakakibara.

Mr Sakakibara, formerly Japan’s vice-minister for finance and international affairs and now a professor at Tokyo’s Waseda University, also warned that global financial markets are likely to face further bouts of volatility. What we have seen thus far ‘is only the tip of the iceberg’, he said, adding that the problem will probably linger for 6-18 months.

Speaking at a lunchtime forum organised by newly listed Uni-Asia Finance Corporation, Mr Sakakibara pointed out that interest rate cuts by the Fed were likely to be ineffective in addressing the problems emanating from the US sub-prime mortgage sector because the cost of funding is not the key issue; rather it is the uncertainty surrounding the valuations of sub-prime assets and other structured products held by many financial institutions.

He indicated, however, that the ’superfund’ proposed by some major American banks (including Citigroup, Bank of America and JPMorgan) to buy sub-prime assets could be helpful, as might a move to provide government financial support to distressed borrowers, which is being discussed in the US Congress. But such initiatives would take time to work.

Mr Sakakibara, who was Japan’s vice-minister for finance during the Asian crisis of 1997/98, cautioned that although Asia has been relatively unaffected by the US sub-prime woes thus far, it needs to be vigilant. He recalled that during the Asian crisis, US policymakers thought that the American economy would be relatively insulated – until they were shocked by the Russian bond default of 1998 and the ensuing collapse of a large hedge fund.

The world economy is highly integrated now, he said, and it is highly possible that the US – still its primary engine – will slow down sharply or even go into recession. In such an event, Asia cannot be unaffected.

While Asian economies are doing well and will account for an increasing share of the global economy, right now, Asian asset markets are ’somewhat bubbly’, Mr Sakakibara said. ‘The situation in Asia seems too good, and usually a ‘too good’ situation doesn’t last.’

When it does turn, the decline could happen ‘very abruptly’.

Of all the Asian markets, China is ‘the biggest bubble’, Mr Sakakibara added, with both investment and GDP growth expanding at breakneck speed.

Chinese policymakers know they have to tighten monetary policies sooner or later, and a major adjustment in China’s asset markets is inevitable, perhaps in 2008, after the Olympics. If China’s economy slows down in tandem with the US, that would exacerbate the problems for the global economy, Mr Sakakibara warned.

The economist – who was known as ‘Mr Yen’ when he was a policymaker because his statements were viewed as affecting currency markets – said that as long as the Bank of Japan is unable to raise interest rates, the Japanese yen will remain undervalued. The bank actually did want to raise rates in September, he added, but refrained from doing so on account of the US sub-prime mortgage problem.

With near-zero interest rates at home, Japanese investors are continuing to seek higher-yielding investments overseas, and while this trend persists the yen will probably continue to trade within the range of 110-115 to the US dollar, he said. But if, owing to some trigger such as a dramatic US slowdown, the outflows from Japan dry up or reverse, the yen would rebound sharply from its ‘really cheap’ current level, he said.

 

Source: Business Times 2 Nov 07

Sovereign funds pose little risk to the world

UK Chancellor Alistair Darling doesn’t like them.

Italian Prime Minister Romano Prodi and European Union Trade Commissioner Peter Mandelson don’t either.

Sovereign wealth funds, the huge pools of capital built up by a small group of mainly oil-rich nations to invest their assets around the world, are becoming very unpopular. As the funds grow in power and wealth, the clamour for more regulation of their investments will only get louder.

It’s all nonsense. The funds don’t pose a threat to anyone. There is no coherent case to be made against them. And any cure is likely to be worse than the problem it is trying to fix.

That won’t stop the politicians from trying. Mr Darling said in October the UK government would protect strategic industries from takeovers by foreign state-controlled investment funds, such as those run by Kuwait, Saudi Arabia and China. ‘Sovereign wealth funds or companies owned by governments need to play by the rules,’ he said.

Juergen Stark, a board member of the European Central Bank, has called for a code of conduct for the funds. And in July, Mr Mandelson said the EU may need to take a golden share in strategic industries to prevent companies falling into the hands of the funds, according to the Italian newspaper Il Sole 24 Ore.

In fairness, you can see why there is a debate. Sovereign wealth funds, which invest currency reserves in foreign assets, control an estimated US$2.5 trillion, more than all the world’s hedge funds combined. With high commodity prices translating into surging reserves in emerging economies, their stockpiles of cash will only get bigger. Russia said this month it may get in on the act by investing some of the US$141.1 billion in its Stabilisation Fund in major foreign companies. If Putin Inc starts buying German airports or French motorways, watch the sparks fly.

‘There has been much political angst about SWFs,’ Morgan Stanley economist Stephen Jen said in an analysis, referring to the funds. ‘It does not seem to make sense for regulatory authorities and politicians to single out SWFs.’

It is hypocritical to attack the funds. Nobody minded when emerging economies recycled all those dollars, pounds and euros by putting cash on deposit in our banks, or buying bonds issued by our governments. So why should we mind when they start buying companies? They are just diversifying their holdings, like any prudent investor would. If we don’t like them purchasing our equities, shouldn’t we tell them to stop buying our bonds and currencies as well?

In a global economy, few companies are owned domestically. Stocks are traded across frontiers. It doesn’t make much difference whether your local supermarket or service station is owned by a hedge-fund manager in Zurich, a pension fund in California or an investment firm in Dubai. What counts is whether there is enough competition to make sure it offers good service and fair prices. So long as it does, there is no problem.

Lastly, the only way to protect against the funds, as Mr Mandelson realises, would be through some kind of golden share held by the government.

Businesses would then be shielded from takeovers that their governments don’t want. But what kind of impact would that have? Management would become idle and inept as they realise they couldn’t be challenged or kicked out. The damage that would do to the performance of your economy would far outweigh any danger posed by the funds.

The funds are no more of a threat than any other investment vehicle. They aren’t making the economy more volatile. By buying whole companies, they are committing themselves to long-term investment.

They are no more secretive than many hedge or private-equity funds, or big private companies. Nor does their ownership by foreign governments override the laws applicable in the countries where they are investing. If they break UK or German laws, they will be in trouble, just like anyone else.

There may be some limits. You might not want a defence manufacturer owned by a foreign power. But there are very few of those companies. In reality, all the evidence suggests the more open your economy is, the better you do – and sovereign wealth funds are no exception to that rule.

 

Source: Bloomberg (Business Times 1 Nov 07)

Won, pound latest stars of US$ slide

IT WAS the turn of the British pound and the Korean won to stand out in Asian currency trading yesterday, as the US dollar continued its slide to new multi-year lows in anticipation of another US interest rate cut. After the sharper-than-expected fall in US consumer confidence for October reported overnight, traders are fearful that more weak US data this week will further damage the already weak greenback. US jobs data for October are due out tomorrow evening.

The US currency eventually ended the day close to the day’s fresh post-depeg low of just above 7.46 yuan.

According to reports, this obliged the Hong Kong Monetary Authority to buy at least half a billion US dollars yesterday to stop the greenback from falling through the base of its allowed HK$7.75 to HK$7.85 range. Closer to home, meanwhile, the greenback was forced to fresh 10-year lows of S$1.4477 and 3.3375 Malaysian ringgit.

It was the Korean won which recorded the day’s largest 0.7 per cent gain versus the falling US dollar. It ended the day at 900.7 won per US dollar despite warning grumbles from the Korean central bank – just about recovering all of the losses it has suffered versus the latter since the 1997-98 Asian crisis.

More sharp gains could now be in store for the won, suggested DBS researchers yesterday, citing its tendency to make periodic spurts to the upside, and other supporting statistics by way of strong surpluses, a red-hot stock market, and interest rates higher than that for the US dollar. ‘Taking a conservative stance, we estimate the present period of won appreciation (which began with the US dollar at 950 won on Aug 17) could amount to 10 per cent or more, still less than the 13-15 per cent gains seen in previous episodes,’ they said. ‘This would put the won at around 850 per dollar by end-08.’

On our charts, that forecast is supported by the breakdown of what chartists would call a double-top formation, formed by the US dollar’s two 752 won peaks in March and August this year. For as long as the US currency is capped below the 912 to 913 won area, this opens up an eventual downside objective of at least 870 won.

Elsewhere in Asian trading, a trio of European favourites also probed fresh highs. A stronger-thanexpected spurt in October house prices in the UK propelled the pound to a 23-year high of US$2.0743 yesterday. Likewise, hawkish remarks from the European front overnight boosted the euro to a fresh postlaunch high of US$1.4467 yesterday, and pressed the greenback half a per cent lower even against the lowyield Swiss franc, to end at 1.1598 francs – its weakest showing since March 2005.

Down Under, traders reported fresh interest to sell the yen versus the Australian dollar in preference to the higher-yielding New Zealand dollar – citing more strong housing and credit data out of Australia, and the possibility of a larger than expected US interest rate cut overnight.

By the Asian close, the Australian dollar had advanced a further 0.2, 0.3 and 0.6 per cent to finish at S $1.3363, 92.27 US cents and 106.25 yen respectively.

 

Source: Business Times 1 Nov 07

An age of market resilience?

BIOLOGISTS believe that diversity increases stability and resilience in an ecosystem – a complex system where participants go about looking out for their own interest with the ultimate goal of surviving and thriving. What is true of a biological ecosystem may also hold good for the financial system, which, too, is complex. In which case, there are grounds to believe that the financial system of today is more stable and resilient than before.

The stock market crash of 1987, while its real cause is still being debated, can be said to have been exacerbated by the widespread use of portfolio insurance at that time. In theory, portfolio insurance sounded like a superb idea. Just by giving up a bit of the upside – premium for buying the insurance – a portfolio can be protected on the downside. The simplest form of insurance is to buy a put option which gives a portfolio manager the right to sell stocks or an index at a fixed price. So the floor that the portfolio value can fall to is that fixed price on its put option. Other forms of portfolio insurance involve the use of index futures or dynamic trading. A dynamic portfolio trading strategy, also called program trading, allows investors to replicate the payoff from derivatives. It basically triggers sell orders as stock prices fall, so that the portfolio value does not fall below the floor. By 1987, about US$60 billion – a significant sum at that time – in equity assets were covered by different varieties of portfolio insurance. What happened was, in the three days prior to Oct 19, Wall Street had corrected by some 10 per cent as investors became more risk averse. That fall triggered the sell programs in the numerous insured portfolios. Everybody rushed for the exit at the same time, and there was nary a buy order.

As the story goes, some professional traders who were not portfolio insurers had anticipated this pent-up selling demand and sold in advance. As the day unwound, other investors who had never heard of portfolio insurance may have misinterpreted the price changes as conveying something fundamental about the market and may have sold in a mistaken response. So, at a time when all participants were making similar kinds of bets, the market could not be trusted to provide diversification and liquidity.

How have things changed today? For one thing, there are a lot more players with more diverse views of the markets. And many have the liberty to act on those views. A hedge fund which thinks a market or a stock is overvalued has the option to short sell it, in a way keeping a check on the price. The securitisation of risks – a much vilified practice in the current sub-prime mortgage crisis – has the effect of spreading the risks to many players. This reduces the systemic risk to the global markets.

Meanwhile, the emergence of sovereign funds with typically very long investment horizons, in contrast to most commercial funds, adds another level of diversity.

The fact that markets globally have repeatedly been able to find their feet, despite numerous bouts of ‘risk aversion’ attacks in the last two years, is perhaps testament to what may be a new age of resilience – or at least greater resilience than before – that we are now entering.

 

Source: Business Times 31 Oct 07

Sub-prime crisis negligible: Infosys CEO

The challenge to the company was the sudden appreciation of the rupee

(NEW YORK) India’s No 2 software services exporter, Infosys Technologies Ltd, has felt a ‘negligible’ impact on its business from the US sub-prime mortgage crisis, its chief executive said on Monday. ‘Given our size, impact has been negligible,’ S Gopalakrishnan said in an interview.

US clients, who account for more than half of the company’s business, have not pulled back on information technology (IT) spending or cancelled projects with it, Mr Gopalakrishnan said, despite the sub-prime mortgage crisis that has sparked fears of an economic downturn in the US.

Adding to those worries is the rupee’s steep appreciation – it has gained up to 12.5 per cent against the US dollar this year. ‘What challenged Infosys was this sudden appreciation,’ Mr Gopalakrishnan said. He added that he expects the rupee, which has hit 91/2-year highs against the US dollar, to be very volatile in the short term.

Infosys, which has about 80,000 employees, has previously said that margins may fall by 50 to 100 basis points in the fiscal year that ends in March.

The company has also said that it will lose about 20 billion rupees (S$734 million) in revenue in the year, given the rupee’s strength against the US dollar.

But Infosys, whose clients include ABN AMRO, Goldman Sachs and Royal Philips Electronics, would be able to cope if the rupee appreciates gradually in the medium to long-term, Mr Gopalakrishnan said.

‘If the appreciation is gradual, we are able to grow our business, sustaining margins,’ he said.

The company was in deal talks with 14 to 15 companies in Europe and the US at any given time, for an aggregate value of about US$1 billion, he said, but declined to elaborate.

 

Source: Reuters (Business Times 24 Oct 07)

Sub-prime rescue bid will do more harm than good

By PAUL KRUGMAN

IT pains me to say this, but this time former Federal Reserve chairman Alan Greenspan is right about US housing. Mr Greenspan was wrong in 2004, when he sang the praises of adjustable-rate mortgages. He was wrong in 2005, when he dismissed the idea that there was a national housing bubble, suggesting that at most there was some ‘froth’ in the market. He was wrong last autumn, when he suggested that the worst of the housing slump was behind us. (Housing starts have fallen 30 per cent since then.) But his latest pronouncement – that the market rescue plan being pushed by US Treasury Secretary Henry Paulson is likely to make things worse rather than better – looks all too accurate.

To understand why, we need to talk about the nature of the mess. First of all, there was indeed a huge national housing bubble. What even those of us who realised that there was a bubble didn’t appreciate, however, was how much of a threat the bursting of that bubble would pose to financial markets. Today, when a bank makes a home loan, it doesn’t hold on to it. Instead, it quickly sells the mortgage off to financial engineers, who chop up, repackage and resell home loans pretty much the way supermarkets chop up, repackage and resell meat. It’s a business model that depends on trust. You don’t know anything about the cows that contributed body parts to your package of ground beef, so you have to trust the supermarket when it assures you that the beef is USDA prime.

You don’t know anything about the sub-prime mortgage loans that were sliced, diced and pureed to produce that mortgage-backed security, so you have to trust the seller – and the rating agency – when they assure you that it’s an AAA investment. But in the case of housing-related investments, investors’ trust was betrayed. Supposedly safe investments suddenly turned into junk bonds when the housing bubble burst. High profits reported by hedge funds – profits that were reflected in huge payments to the fund managers – turn out to have been based on wishful thinking.

Thus, when two hedge funds run by Ralph Cioffi of Bear Stearns imploded last summer, it came as a huge shock to many investors, and helped trigger a market panic. But a recent BusinessWeek report shows that the funds were a disaster waiting to happen. The funds borrowed huge amounts, and invested the proceeds in questionable mortgage-backed securities. Even worse, ‘more than 60 per cent of their net worth was tied up in exotic securities whose reported value was estimated by Cioffi’s own team’. We’re profitable because we say we are – just trust us.

That hasn’t ever caused problems, has it? Stories like this have led to a crisis of confidence. The current yield on one-month US government bills is only 3.41 per cent, an amazingly low number, and a sign that people are parking their money in government debt because they don’t trust private borrowers. And the result is a shortage of liquidity that is greatly damaging the economy.

Which brings us to the rescue plan proposed by a group of large banks, with Mr Paulson’s backing. Right now, the bleeding edge of the crisis in confidence involves worries that there may be large losses hidden inside so-called ’structured investment vehicles’ – basically hedge funds that borrow from the public and invest the proceeds in mortgage-backed securities.

The new plan would create a ’super-fund’, the Master Liquidity Enhancement Conduit, which would seek to restore confidence by, um, borrowing from the public and investing the proceeds in mortgage-backed securities. The plan, in other words, looks like an attempt to solve the problem with smoke and mirrors.

That might work if there was no good reason for investors to be worried. But in this case, investors have very good reasons to worry: the bursting of the housing bubble means that someone, somewhere, has to accept several trillion dollars in losses. A significant part of these losses will fall on mortgage-backed securities. And given this reality, the ‘conduit’ looks like a really bad idea.

I’d put it like this: Investors aren’t putting their money to work because they don’t know where the bad debts are. And when investors need clarity, the last thing you want to be doing is pumping out more smoke. Mr Greenspan’s take, expressed in an interview with the magazine Emerging Markets, seems broadly similar. ‘If you believe some form of artificial non-market force is propping up the market,’ he said, ‘you don’t believe the market price has exhausted itself.’ Translated: This rescue scheme could be seen as an attempt to hide the bad debts everyone knows are out there, and as a result could delay any return of trust to the markets.

Alan Greenspan is making sense.

The writer is a professor of economics at Princeton University

 

Source: Business Times 23 Oct 07

Credit crunch puts global growth at risk: IMF chief

Champions of super fund to rescue mortgage market seen losing case

(WASHINGTON/ZURICH) World credit markets ‘have lived through an earthquake’ and the question is now whether the global economy has reached a turning point after five years of strong growth, the head of the International Monetary Fund said yesterday.

Addressing the IMF’s 185 member countries, IMF managing director Rodrigo Rato warned of aftershocks in markets, saying the full effects of the credit crunch, which began in the US sub-prime mortgage market, were still not fully understood.

‘We already know that we should not try to regulate crises out of existence: that would be like trying to ban earthquakes,’ he said. ‘But the weaknesses in our infrastructure that have been exposed need to be addressed.’ Mr Rato added: ‘The question is now whether the global economy is at an inflection point.’

The outgoing IMF chief noted that in developed countries, corporate balance sheets were strong and labour markets generally healthy.

‘For these reasons, we expect a slowdown in growth but not a recession in the United States, and a smaller slowdown in other advanced countries,’ Mr Rato said, adding that emerging economies had become a source of stability in the global economy.

Mr Rato said risks to global growth were higher than just six months ago and the market turmoil was a warning that good times may not last forever.

Further disruption in financial markets and falls in housing prices could lead to a steeper global downturn, he warned.

So far, movements in exchange rates have been orderly and in line with fundamentals, Mr Rato said, further warning that if the dollar should abruptly fall, it could provoke a loss of confidence in dollar assets.

There was also a risk that the rise of other currencies, such as the euro, could hurt those regions’ growth prospects, he added.

Furthermore, there was a risk that emerging economies that have relied on external financing to fund large current account deficits could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions.

Meanwhile, whether a US$75 billion fund to rescue the battered mortgage-backed securities market takes off or not, its sponsor US Treasury Secretary Henry Paulson seems to be losing the argument over its merits, strategists and economists said.

The fund, announced recently by Citigroup, Bank of America and JP Morgan with Mr Paulson’s support, aims to prevent structured investment vehicles (SIVs) from making panic sales of bonds linked to US sub-prime mortgages.

Many of the SIVs – off-balance sheet vehicles holding some US$370 billion in assets that rely on short-term financing to make a return – are struggling to stay afloat as investors shy away from buying their commercial paper.

The plan has faced a rising tide of criticism, not least from former Federal Reserve chairman Alan Greenspan, who said last Friday the super fund may do more harm than good.

Financial strategists contacted by Reuters said time is running out for the plan’s champions to regain the initiative and the fund risks being still-born.

‘I think they are losing the intellectual argument,’ Ian Harnett, a director at financial consultancy Absolute Strategy in London said yesterday.

The fund was nevertheless more likely than not to go ahead because of the potential embarrassment for the three US banks and for Mr Paulson himself if the idea is scrapped, said Mr Harnett.

‘I would still put it at 70 to 30 that it does happen because of the reputational risk,’ he said.

A global credit crunch, originating from huge losses in US sub-prime mortgage lending, has put acute pressure on SIVs, as demand dried up among investors for the short-term paper SIVs issue to fund investments in high-yielding asset-backed securities with longer maturities.

A fire-sale of assets by the SIVs, set up mainly by banks, would force banks into a fresh round of writedowns of securities held on their balance sheets and result in them granting fewer of the loans that are the life-blood of the global economy.

 

Source: Reuters (Business Times 23 Oct 07)

Widen moves to calm markets: global finance chiefs

Steps include tighter IMF scrutiny of state investment funds

(WASHINGTON) Global finance chiefs on Saturday called for a more broad-based effort to calm financial markets, including tighter scrutiny by the International Monetary Fund and other institutions of increasingly powerful state-owned investment funds.

This year’s fall meetings of the International Monetary Fund and World Bank come amid a slowing pace of global growth and heightened risk from recent turbulence in world credit markets and soaring oil prices.

That has particularly affected Group of Seven rich nations whose finance ministers and central bankers met on Friday and concluded that their growth will suffer because of ongoing turmoil in markets.

By contrast, developing countries that are well represented among IMF members have been emboldened at these meetings by the fact that their growth rates are thriving and have used the opportunity to flex their economic muscle.

‘The irony of this situation: countries that were references of good governance, of standards and codes for the financial system, these are the very countries that are facing serious problems of financial fragility putting at risk the prosperity of the world economy,’ said Brazilian Finance Minister Guido Mantega.

After years of hearing from developed countries about the importance of prudent economic policies, developing nations felt they clearly had the upper hand, with China and India leading world growth and rich countries’ economies slowing.

Meanwhile, developed countries called on the IMF to increase its monitoring of growing state-backed wealth funds that hold surplus reserves mainly from oil exporters and China.

Those funds are investing amounts which cause some nervousness among rich members of the Group of Seven industrial nations, which want to ensure the investments are for profit-making reasons only and are not politically motivated.

US Treasury Secretary Henry Paulson said he considered the IMF ‘uniquely positioned’ to identify model behaviour for these Sovereign Wealth Funds.

His point man for international matters, Under Secretary David McCormick, told Reuters there was general agreement that some code of principles was needed to ensure the funds did not rouse such resentment that countries put up barriers to stop the funds from investing.

Belgian Finance Minister Didier Reynders said it was too early to know how the financial sector difficulties would affect economies in the end, saying central banks should stand ready to lower interest rates, or to postpone rate increases, without damaging inflation.

Developing countries also took the opportunity to push for a greater say in the voting power of institutions like the IMF.

Brazil warned bluntly that under-represented countries were likely to ‘go their own way’ unless they get a greater stake. ‘Developing countries, or many among them, would go their own way, were the perception to arise that reform will not happen or that we will be left with a purely cosmetic form,’ Brazil’s Mr Mantega said.

Some countries saw signs of progress in negotiations among IMF members on how to increase the voting powers of the developing world but others were far from optimistic.

German Finance Minister Peer Steinbrueck said no progress had been made by countries trying to agree on a formula that would rebalance the voting system to reflect the rise of countries like China or India.

Intense political sensitivities are involved in trying to divvy up voting power more frequently. Some old powers like Britain and France potentially could see China move past them in voting status if an intensely negotiated formula truly acknowledges China’s fast-growing economic might.

Also, developing countries insist any overhaul in votes must be large enough to transfer significant additional power to them and to make clear they are not simply being given a pat on the head.

 

Source: Reuters (Business Times 22 Oct 07)

A confused message from the G-7?

WHAT are we to make of it when spokesmen for the world’s most powerful economies and financial institutions begin to contradict each other in public – or make remarks which appear less than consistent with reality?

Today, the finance ministers and central bankers of the G-7 – namely the countries of the US, Britain, Canada, France, Germany, Italy and Japan – hold their semi-annual get-together in Washington, in the runup to this weekend’s International Monetary Fund and World Bank meetings.

Very public attempts to influence today’s agenda were already taking place early last week, with the leaders of France and Italy appearing to have become particularly vociferous this time. Grumbling that a too-strong euro hurts Europe’s growth and exports, they have tried to lead joint European demands for the US to reiterate its ’strong’ US dollar policy.

In short, the Europeans are getting annoyed that the euro has once again scaled fresh post-launch highs versus the US dollar over the past week, but the yen and yuan have not been contributing their fair share of upside adjustment in response to the fast-falling greenback.

They do have a point. Since the end of last year, the euro has risen some 17 per cent versus the US dollar, while the yuan has only strengthened 7 per cent, and the yen has actually weakened by 5 per cent. Yet, even within Europe, not all appear as flustered on this currency issue. North Europeans like the Germans and the Dutch, for example, have been far less vocal or upset, at least in public, on the subject.

To be sure, it does get a little surreal when the US is asked to reiterate a strong US dollar policy at a time when the US dollar is sliding across a broad front in the real world – and when economic logic suggests that more US dollar downside is needed to correct its record current account deficit with the rest of the world. Over the past fortnight, we have in fact seen the US currency slide to lows not seen in 10, 23 and 31 years versus currencies like the Singapore, Australian and Canadian dollars – on top of recording fresh post-launch lows versus the euro.

To calm jittery financial markets, US Treasury Secretary Henry Paulson has deemed it necessary to come out and help out the Europeans by reiterating – both last week and this – that a strong US dollar is indeed in his country’s interest.

Yet, even as he tried to carry that message across, the International Monetary Fund’s managing director Rodrigo Rato decided to warn this week that the US dollar is in fact still overvalued – despite trading at near record lows. And that it needs to fall even further.

The key message here is that all involved stand to lose out if the US dollar should suddenly collapse; there is a need to manage its fall. When you stop to think about it, isn’t that exactly what Asian countries like China have been trying to do in terms of the US dollar’s slide against their own currencies over the course of 2007?

 

Source: Business Times 19 Oct 07

Greenspan: No $ plunge if China offloads Treasuries

Markets are clever enough not to over- react, he says

(SEOUL) Alan Greenspan doesn’t expect a rapid decline in the dollar should China sell more of its holdings of US Treasuries, according to people attending a forum here yesterday.

‘When asked whether there will be a plunge in the dollar in case China offloads its US Treasury holdings, Mr Greenspan said it’s already-known information that won’t trigger any rapid drop in the US dollar,’ according to Kong Dong Rak, an analyst with Hana Daetoo Securities. ‘His view is that markets are clever enough not to overreact.’

The former Federal Reserve chairman was speaking via satellite from Washington and media were excluded from his presentation. The conference was hosted by Maeil Business Newspaper.

Japan, China and Taiwan sold US Treasuries at the fastest pace in at least five years in August as losses linked to US sub-prime mortgages sparked a slump in the dollar.

Japan cut its holdings by 4 per cent in August to US$586 billion, Treasury Department figures showed. China’s holdings fell by 2.2 per cent to US$400 billion and Taiwan’s slid 8.9 per cent to US$52 billion.

Kim Gyung Rok of Mirae Asset Investment Management, confirmed Mr Greenspan’s remarks on the dollar.

‘Foreign exchange markets have already priced in bit by bit’ the possibility of an unloading of US Treasuries, he said.

Mr Greenspan is ‘of the opinion that holdings of foreign exchange reserves tend not to be moved easily’, Mr Kim said.

The dollar has fallen 7.5 per cent against the euro this year after the Fed cut interest rates last month to support the housing market, reducing the yield advantage of US fixed-income assets.

The US currency slumped to a record low against the euro on speculation that the growth outlook in the US will push the Fed to make another reduction at the end of the month.

The dollar declined 0.6 per cent to US$1.4294 per euro, after earlier reaching an all-time low of US$1.4305 in early New York trading. It fell one per cent to 115.46 yen. It earlier reached 115.29, the lowest since Oct 2.

The New York Board of Trade’s dollar index touched 77.5, the weakest since the index began in 1973.

Eisuke Sakakibara, Japan’s former top currency official, said that the US currency may ‘plunge’ in 2008 should US economic growth ‘fall below one per cent’. He spoke in an interview yesterday in Tokyo.

On Wednesday, the International Monetary Fund cut its forecast for US growth next year to 1.9 per cent. IMF officials said the dollar is overvalued compared with its medium-term fundamentals. According to the Financial Times, Simon Johnson, chief economist of the Fund, said the weakening dollar was part of a normal process of economic rebalancing and was positive for the global economy provided that other currencies also adjust.

However, Mr Greenspan said the slowdown is unlikely to lead to a US recession, though it will still have a negative effect on Asia’s economies, according to Maeng Young Jae of Samsung Securities. ‘Greenspan seems more optimistic about the US economy than pessimistic.’

Mr Greenspan said China’s policy on the yuan ‘could cause long-term instability in the Chinese economy’, according to Ben Arber, head of global payments and cash management at HSBC Holdings in Seoul.

 

Source: Bloomberg (Business Times 19 Oct 07)

Possible 2008 recession in US will hit Asia: Stephen Roach

Asia needs to take events in US more seriously, he says

IN SEOUL

THE United States could face a consumer-induced recession next year, which will also hit Asian economies, said Morgan Stanley’s chairman for Asia, Stephen Roach.

Speaking at the World Knowledge Forum in Seoul, Mr Roach – well known for his bearish views – presented what he called a ‘decidedly sub-prime outlook’ for the US economy.

The so-called sub-prime mortgage crisis is ‘the tip of a much bigger iceberg’, he said. It has started to hit the American consumer.

Mr Roach, who has long predicted a US economic slowdown, pointed out that the US consumer is facing the toughest times in 30 years, and the impact on the economy could be acute.

He noted that in the first half of this year, US consumption accounted for a record 72 per cent of GDP, or about US $9.5 trillion.

‘The US consumer is about to take a long rest,’ he said, ‘and if the US consumer goes, there’s nobody on the demand side who can fill the void.’ Even China’s total consumption is only about one-ninth that of the US, he noted.

Mr Roach suggested that the US consumer is at risk because the consumption binge of the last seven years has been underpinned, not so much by rising incomes but by a wealth effect which has, in turn, been driven by ‘an extraordinary property market’.

In short, ‘the US consumer has turned his home into an ATM machine’, he added.

But now, with the US property bubble deflating, the wealth effect, based on rising home values, ‘is over, is done, is finished’.

In fact, next year, home prices for the whole of the US could decline for the first time in history, he predicted, which would severely diminish US consumers’ ability to extract equity from their homes.

In the face of this, Mr Roach said that the risk of recession ‘is quite high’.

Although sub-prime mortgage assets account for only 14 per cent of all securitised assets, the sub-prime crisis has already spread.

Moreover, ‘the big story gets written in the real economy, not in the financial markets’, he said.

And worth noting here, he added, is that US consumption is about five times the size of US capital spending, which triggered the US recession of 2001.

Mr Roach, who is based in Hong Kong, said that Asia needs to take developments in the US more seriously.

‘What’s worrying is a complacency in Asian markets, based on a belief that Asia has ‘decoupled’ from the US,’ he pointed out.

But the decoupling thesis is fanciful, he said, noting that the US absorbs 21 per cent of China’s exports, 22.5 per cent of Japan’s and about 14 per cent of Asean’s. ‘If the US consumer goes down, Asia will feel it,’ he said.

 

Source: Business Times 18 Oct 07

Foreigners sell record US financial assets in Aug

(WASHINGTON) International investors sold a record amount of US financial assets in August as tightening access to credit threatened economic growth and spurred an exodus from American equities.

Total holdings of equities, notes and bonds fell a net US$69.3 billion after an increase of US$19.2 billion in July, the Treasury Department said on Tuesday in Washington. Including short-term securities such as Treasury bills and non-market trades such as stock swaps, foreigners sold a net US$163 billion, compared with a gain of US$94.3 billion a month earlier.

Demand for US stocks overseas declined as the deepening housing recession and credit market turmoil threatened investment and hiring, slowing the economy.

‘There is acute uncertainty in the market,’ said Gabriel De Kock, chief currency economist at Citigroup Global Markets Inc in New York, before the report. ‘There are lots of people who are reducing their risk and taking money off the table.’

Economists predicted that international investors would buy a net US$60 billion of long-term securities in August, based on the median estimate in a Bloomberg News survey.

The Treasury’s reporting on long-term securities captures international purchases of US government notes and bonds, stocks, corporate debt and securities issued by US agencies such as Fannie Mae and Freddie Mac, which buy mortgages.

International holdings of US stocks fell a net US$40.6 billion, compared with net purchases of US$21.2 billion in July. The Standard & Poor’s 500 Index rose 1.3 per cent in August, while the Dow Jones Industrial Average gained 1.1 per cent.

International demand for Treasuries decreased by US$2.6 billion, compared with a loss of US$9.4 billion the previous month. The yield on the benchmark 10-year note in August averaged 4.73 per cent, compared with 5.04 per cent in July.

Holdings of agency debt increased a net US$9.6 billion after a US$8.7 billion net gain the month before.

US investors bought a net US$34.5 billion of overseas assets in August, after buying US$5.5 billion in July.

Private investors sold a net US$10.6 billion, compared with a net US$20.6 billion in purchases a month earlier. Official purchases, including those by central banks, fell by US$24.2 billion after an increase of US$4.4 billion in July.

Foreigners sold a net US$1.2 billion of corporate bonds, compared with a US$4.5 billion increase in July.

Some economists said that the difference between the US trade gap and securities purchased by foreigners is an indicator of how easily the nation can finance its external obligations. The trade deficit in August shrank 2.4 per cent to US$57.6 billion, the smallest since January, as exports climbed to a record, the Commerce Department said on Oct 11.

The US current account deficit, a broader measure of trade that includes investment income and transfers, narrowed to US$190.8 billion in the second quarter.

 

Source: Bloomberg (Business Times 18 Oct 07)

CEO survey finds 37% chance of US recession

(WASHINGTON) Leading Wall Street chief executives predicted a 37 per cent chance of a US economic recession in the next 12 months, according to a Financial Services Forum survey released yesterday.

The forum is a policy group made up of the chief executives of 20 of the world’s largest financial institutions, including Citigroup Inc, Morgan Stanley, Goldman Sachs and MetLife.

The executives said they expect slower US economic growth over the next year due to the housing slowdown, credit market turmoil and higher energy prices, according to the survey.

In predicting a 37 per cent chance of a US recession in the coming 12 months, the executives also cut their expectations of economic growth.

The forum’s US economic growth index fell from 2.03 in April, when the last bi-annual survey was taken, to 1.27 in October. The growth survey represents sentiment on a scale ranging from -5 for strongly negative growth to 0 being no growth and 5 being robust growth.

Former Federal Reserve chairman Alan Greenspan this month put the odds of a recession at less than 50 per cent. A Reuters survey of 56 private economists earlier this week found the majority saw the chance of a US recession at somewhere between 21 per cent and 30 per cent.

The Financial Services Forum executives also indicated that the credit market problems are not finished.

On a scale of 1 to 5, with 5 being significant turmoil still to come, the chief executives on average answered 2.9, according to the survey.

The survey found the executives expect a Federal Reserve interest rate cut of 25 basis points before the end of the year.

In September, the Fed cut benchmark rates by a hefty half-percentage point to 4.75 per cent amid concerns about increasing mortgage delinquencies and financial market disarray.

In assessing the stock market, the executives predicted the Dow Jones Industrial Average (DJIA) would finish the year at 14,137, according to the survey. On Tuesday, the DJIA closed at 13,912.9.

 

Source: Reuters (Business Times 18 Oct 07)

Investors’ short memory is worrying

Granted, the sub-prime crisis has passed. But the US economy has other major problems. So it’s advisable to be prudent

By WONG SUI JAU

WHAT a difference two months makes. In mid-August, the sub-prime loans scare had just rocked markets around the world, causing them to fall for two weeks. The air was heavy with gloom. But now, it seems as if the sub-prime problem never happened. Many markets are back to their pre-crash levels and, indeed, some – including the US market as represented by the S&P 500 index – have recently hit record highs. As the accompanying table shows, many Asian markets have done very well from the start of the year up to end-September. There is reason for much cheer among investors.

While I was one of those urging calm at the time the sub-prime issue blew up, I find the short memory of many investors worrying. Before the sub-prime issue flared in the US, there was hardly anything to worry about; Asian economies were growing strongly and the rest of the world was doing decently too.

But in the aftermath of the sub-prime crash, some things are now different. Investors need to pay close attention to these developments – not just focus on the happy reality of rising markets. The most significant thing is that the US economy has turned. As recently as the second quarter, US GDP was still accelerating in terms of growth, growing at an annualised rate of 3.8 per cent in Q2, compared with an annualised 0.6 per cent in Q1.

However, the sub-prime issue has exposed weaknesses in the US economy that are not going to go away, rising markets notwithstanding. First, the US property cycle is on a clear downward trend – and this is accelerating rather than slowing. The supply of homes has almost doubled since end-December 2005. A large number of unsold homes will put further downward pressure on prices. The sub-prime fright has also made investors much more cautious about entering an already falling market. After all, if home prices are dropping, there is no hurry to buy, because it is better to wait for prices to fall further. Thus, we may see an even steeper decline in US home prices going forward (see chart).

Second, the woes in the US property market will affect many American consumers. Americans have been consuming ever more each year, and accordingly, their debt levels have risen. The ratio of household debt to disposable income was at a high of 2.29 in March 2007, compared with 0.82 in December 1990. This means that for every dollar of income earned, the average US household has $2.30 of debt.

Previously, the rising housing market enabled Americans to take out reverse mortgages and get money from the houses they stayed in. But with prices now falling, this will dry up. Some households may even run into problems paying off their home loans. Certainly, this will affect household spending going forward. Any weakness in consumer spending – which underpins so much of what drives the US economy – will put a question mark over growth next year.

Continued volatility

Third, the US continues to do things like reduce interest rates and deflate the dollar. This may work in the short term. But over the long term, it does not solve the fundamental problem that the US economy faces – which is that it spends far more than what it generates in income, resulting in its huge twin deficits. For now, since it is the sole superpower and with the US dollar still the most important and most used currency in the world, cutting interest rates and allowing the dollar to weaken may work in the short term. But eventually the US will have to face up to its problems – and when it does, its economy is likely to be affected. A recession is quite possible.

So while the recent recovery in markets has brought much cheer and relief to investors. I would urge people not to get too greedy and overexpose themselves to risk. While we believe that, ultimately, Asian economies with their many drivers will continue to grow even amid a US recession, their growth will ultimately be affected to some extent. And certainly, markets will continue to be volatile.

As data is released in the coming months, we expect that some of it relating to the US economy will not be rosy.

Companies at the epicentre of the sub-prime loans issue have had to close down entire divisions, and many banks are expected to report large provisions for loans made, which will certainly affect their earnings. For example, just recently, Bank of America, JP Morgan Chase & Co and Wachovia Corp posted profit declines as they wrote down more than US$3.4 billion. They will not be the last to report earnings hits.

In the midst of record-breaking markets, investors may have forgotten just how bleak the situation seemed just a couple of months ago. But they must be conscious of the risks they are taking in their portfolios. Try to stay diversified and not overly exposed to any particular sector or area, no matter how attractive it seems. With many investors already sitting on profits this year, it would be advisable to be prudent at this stage. Don’t let short memories and greed lead to overly aggressive risk-taking.

 

Source: Business Times 17 Oct 07

Making that next crash insignificant

Shield your money to ensure that you won’t be devastated by what markets do in any particular time period

WHAT were you doing and feeling during the 1987 stockmarket crash, which will be 20 years ago this week?

Having married just two weeks before the crash, I was about a year into a great new job. When I saw the biggest one-day percentage loss in the Dow Jones Industrial Average on Oct 19 and near-meltdown that followed, I froze. I didn’t call my mutual-fund companies or broker. I stayed in stocks, where almost all of my meagre wealth  was invested.

It turns out my passivity was the best course. I didn’t need that money for a while and knew the economy was basically solid. Yet I’m not confusing mettle with foresight. I had no idea what was going to happen after the Dow took a 508-point free-fall and about US$1 trillion evaporated in a single day.

Various malefactors have been blamed from a ballooning trade deficit to program trading. To understand the lessons of 1987, you need to dispense with the mountains of studies that have been done over the past two decades.

What’s most important is how focusing on building personal prosperity will keep you in the eye of any market storm. To get an idea of how to survive a panic, you need to know what didn’t happen.

While the end of October 1987 was a stunning glimpse into the abyss of fear, the Standard & Poor’s 500 Index was up 2 per cent for the year.

Did a long-term bear market ensue? The following year, the S&P rose more than 16 per cent, if you include reinvested dividends. From the end of 1987 through 1993, the index more than doubled in value.

The blip of Black Monday did little to slow down the US economy. Banks didn’t close. No depression followed.

Businesses invested in new technologies that would increase productivity and create jobs. The cyber-tech age was in full bloom.

That was then

The difference between 1987 and today is that many institutional safeguards are in place that will curb market freefalls and ensure liquidity. Yet it’s never enough with little-monitored hedge funds playing a large part in trading.

There also still needs to be a single agency policing securities, futures and options markets.

No regulator will be able to prevent crashes or prolonged declines. Yet there’s much you can do to shield your money.

When noting the role of the individual investor in market sell-offs, William Brodsky, the chief executive officer of the Chicago Board Options Exchange, said individuals may think: ‘I’m in for five to 10 years and I’m not going to sell my index mutual funds or IRAs.’

Mr Brodsky described my mindset 20 years ago – and today. As president of the Chicago Mercantile Exchange at the time of the 1987 meltdown, he said the week following Black Monday was ‘analogous to a tornado. We saw it coming.’ Mr Brodsky was speaking at a symposium on Oct 9 in Chicago.

There will be more crashes and bear markets. That’s the nature of capitalism. The question is: How do you keep your cool? When do you stay in and when do you bail?

Whatever happens, the chances are good that you will time any exit or entrance poorly. What if you stayed out of the market in 1988 or the half-decade following the crash? Look at the returns you would have missed.

Personal time-horizon planning is critical. If you can afford to take a 20 per cent loss, how much time would you have to make up the shortfall?

Fear of loss is a powerful motivator in investing, although investors often focus too much on returns and don’t pay enough attention to managing risk.

Let’s say you learned well from the crash of 1987 and decided to invest across three different asset classes that typically don’t move in lockstep with each other.

When the dot-com bubble burst, for example, you would have fared better if you followed this strategy. From March 24, 2000, to Oct 9, 2002, your big-stock stake would have been down about 47 per cent in the Vanguard 500 Index Fund, which tracks the S&P index.

Had you diversified, your stock losses would have been offset by a 26 per cent return from US bonds, using the Vanguard Total Bond Market Index Fund as a proxy.

Adding icing to the cake would be a 32 per cent gain in real estate investment trusts (Reits), as represented by the Vanguard Reit Index Fund. I use these funds because they are low-cost, diversified ways of investing in these asset classes. I own the Reit and bond funds in my retirement accounts.

Even if you put all of your money on large companies – and stayed invested from the beginning of the Internet crash in March 2000 through Oct 5 this year – your holdings would have grown 12 per cent over that period in the Vanguard 500 fund.

You can torture yourself trying to explain why markets rise and fall every day. Don’t trouble yourself. It’s mostly noise.

Instead concentrate on your life plan. Are you saving for a home downpayment? Do you need money for college?

Will a parent need your financial support? Are you planning to leave the workforce part-time or permanently soon?

What if you are disabled and can’t work?

You need to weigh your own life needs to ensure that you won’t be devastated by what markets do in any particular time period. That means protecting against inflation, loss of future income and the ravages of bear markets.

Where are you now and how do you get to where you want to be? It may not matter where you were or what you did 20 years ago. The past is always prologue, yet you need to create your own portfolio insurance to make that next crash insignificant.

 

Source: Bloomberg (Business Times 17 Oct 07)

Expected volatility may hit investors: Principal Global CEO

They should diversify portfolios in this period of increased volatility, he says

JIM McCaughan, chief executive of US asset manager Principal Global, has turned cautious on the market, warning that expected volatility could cause worried investors to exit at a loss.

His broad market outlook, however, is for a number of interest rate cuts which could boost equity markets.

Still, poor economic data, pressure on US consumer spending and continued uncertainty over credit markets will dog investors.

‘The housing market in the US is in a bit of a mess,’ he says. ‘There is excess inventory quite apart from the fact that the mortgage market has seen a much tighter supply of mortgages . . . The situation is bad enough to put continued pressure on consumer spending for the next year or two.’

A weak US dollar, however, has begun to spur exports.

‘We’re in a period of increased volatility. There will be some pretty bad days that will frighten people, but I don’t expect a big setback in the US market,’ Mr McCaughan says.

He urges investors to diversify their portfolios. ‘Volatility is not necessarily a bad thing. It allows you to get in at good prices from time to time. The main strategy should be to diversify and take a long-term view.

‘Those are the ways to protect the investor against the short-term vagaries of the market. The investor who panics and sells low is the one whose return is hurt.’

Principal Global itself manages a diversified range of assets – equities, fixed income and real estate. It currently manages some US$220 billion in assets, compared to US$80 billion in 1999.

According to an article on its website, the group is gunning for US$500 billion in assets under management, and headcount is expected to rise by 25 per cent over the next few years. Singapore is its base for the Asia ex-Japan region.

The group has a partnership with China Construction Bank to market mutual funds in China. Over a period of about two years, assets have grown to between US$5 billion and US$6 billion. It also has a partnership in Malaysia.

Mr McCaughan says concern over inflation is overdone. ‘In the US, companies’ pricing power is limited; real inflation is limited. We’re not fearful of inflation . . . We think there are more rate cuts to come. That will create a fairly good backdrop for markets.

‘We think there may be 50 to 75 basis points in cuts over the next six to nine months. We think that’s probably about right. Fed funds rate at 4 per cent may well be the case in six to 12 months.’

The group sees opportunities in global real estate. It manages some US$40 billion in real estate assets, making it the fourth-largest institutional real estate manager in the United States as at 2006.

‘There are opportunities particularly in US Reits that have been held back by changes in the credit market . . . The fundamentals of commercial real estate are encouraging.’

 

Souce: Business Times 17 Oct 07

US credit crunch may test global economic growth

Broader slowdown cannot be ruled out after sub-prime fallout: IMF

(WASHINGTON) The recent global credit squeeze caused by the meltdown of risky US mortgage loans may test the ability of the world’s economy to keep expanding as it has over the past several years, the International Monetary Fund (IMF) said on Wednesday.

The IMF also said government policymakers would be confronted with new problems from the continuing process of globalisation and warned against overconfidence that economic stability would continue indefinitely.

In the analytical chapters of its World Economic Outlook released in advance of the Oct 17 publication of the forecast, the IMF said the durability of the global economic expansion is likely to persist.

‘Nevertheless, with financial markets around the world now being affected by the fallout from the US sub-prime mortgage difficulties, a broader economic slowdown cannot be ruled out,’ the IMF said.

Commenting on the released chapters, Simon Johnson, the IMF’s chief economist, said at a news conference that financial globalisation ‘is beginning to enter territory we have not seen before’.

He said the rapidity with which the credit crunch in the US spread to other countries demonstrates that ‘the interconnections between different kinds of financial institutions and between countries are becoming more complex and when sparks fly, they fly quite a long way and they jump over firebreaks’.

The IMF report is issued in advance of meetings of the Group of Seven major industrialised nations and the annual meetings of the IMF and its sister organisation, the World Bank, on Oct 20-22. The IMF warned against overstating prospects for future stability.

‘The process of globalisation continues to present policymakers with new challenges as reflected in the difficulties in managing volatile capital flows, increasing exposure of investors to developments in overseas financial markets and the uncertainties associated with large current account imbalances.’ The IMF said interest rates had returned to more neutral levels in most major advanced economies.

But the 185-nation lending organisation said, ‘The correction of asset prices in some countries and the current rise in risk premiums and tightening credit market conditions may also test the strength of the current expansion.’

 

Source: AP (Business Times 12 Oct 07)

IMF cuts growth forecasts, warns of downside risks

World growth seen at 4.8% next year, driven mainly by emerging economies

ROME – THE International Monetary Fund (IMF) has slashed its forecast for growth in the United States next year and made more modest downward revisions to its outlook for the euro zone and Japan, Italian news agency Ansa reported yesterday.

Citing a draft version of the IMF’s World Economic Outlook to be issued next week, Ansa said the IMF now sees US growth next year at 1.9 per cent, compared with a 2.8 per cent projection made by the fund on July 25.

The IMF has cut its forecast for world growth next year to 4.8 per cent from 5.2 per cent, with emerging economies, rather than developed countries, being the main driver, Ansa said.

The fund only marginally trimmed its forecast for next year’s growth in China to 10 per cent from 10.5 per cent, Ansa reported, and left its forecast for the Indian economy unchanged at 8.4 per cent.

The IMF’s forecast for euro zone growth was cut to 2.1 per cent from 2.5 per cent, while the outlook for Japan was lowered to 1.7 per cent from 2 per cent, Ansa reported.

‘The risks are firmly on the downside, based on the fear that the tensions on financial markets could increase and cause an even more marked global slowdown,’ Ansa quoted the IMF as saying.

The European Central Bank ‘can keep rates on hold in the short term as a result of the downside risks to growth and inflation stemming from the turbulence on markets’, Ansa reported the IMF as saying.

‘However, when these risks subside, further monetary tightening may be necessary,’ the IMF said.

Source: REUTERS (The Straits Times 10 Oct 07)

Is the sub-prime crisis really behind us?

TOKYO CORRESPONDENT

THE fact that the world – its richer countries at least – has been living through a bubble economy period financed by junk (sub-prime) mortgages and funny money (carry trade) borrowing should be obvious enough to anyone observing events over the past few weeks.

But anyone who doubts it need only consider the startling fact that the number of millionaire families in the world grew by no less than 14 per cent to 9.6 million in the space of last year alone. These super-rich individuals now control one third of the estimated US$100 trillion in global financial wealth, according to the Boston Consulting Group in a new study on the subject this week. This is obviously a massive indictment of the failure to distribute wealth more evenly. But the way in which the stunning jump in the number of millionaire families came about is also something that should set alarm bells ringing.

Most of the new wealth came about through increases in the value of stocks, bonds and other financial instruments as global stock markets rose in value on average by 20 per cent, with the strongest wealth gains accruing in America where the equity cult is most entrenched. Not only the super-rich but also the merely ‘better off’ had a ball in 2006, as total assets held by households with US$100,000 or more leapt from US$51 trillion to near US$85 trillion.

If all this isn’t evidence of a bubble, then it is hard to know just what is. But what goes up must come down, and bubbles burst as surely as they form. Or have we discovered some new form of gravity-defying wealth creation mechanism now – an infinitely inflatable bubble?

Looking at the behaviour of markets this week, it appears that the more credulous among investors are being lulled into believing that we have. In this promised land of milk and honey there is no such thing as a financial burst or bust. Descending bubbles simply float down to earth, bounce lightly off the ground and soar skywards again like hot-air balloons being given a fresh charge from the gas jet. Only in this case, the hot air is replaced by financial liquidity supplied in abundant quantity by kindly central bankers who never want to see a hard landing.

Markets are climbing again, as though the sub- prime mortgage market crisis and all its attendant horrors – in the shape of seized- up money markets, runs on banks or other financial institutions, massive markdowns of un-tradeable financial assets and balance sheet damage all round – had suddenly become a thing of the past. Central banks have taken care of things by covering the ugly debris in a sea of fresh liquidity.

Time to party again.

Amidst this new euphoria, an odd and rather worrying thing happened the other day when no fewer that three Japanese government ministers all warned at the same time that fallout from the sub-prime mortgage market debacle might not be over yet. It was not so much what they said as the fact that they said it. Such people usually see it as their job to utter bland, confidence-boosting statements, so when they do say what others of a sane turn of mind already suspect, something clearly is afoot.

It seems likely that the trio – Finance Minister Fukushiro Nukaga, Financial Services Minister Yoshimi Watanabe and Economics Minister Hiroko Ota – were flagging concerns that there may be more nasties yet to come for Japanese banks and other financial institutions, in the shape of write-downs from the subprime fiasco.

If there is one thing more risky, or plain daft, for investors to do than to pile back into equities as if there were no yesterday and no tomorrow, it is to build fresh speculative positions by shorting the yen against other currencies (the carry trades). The yen has nowhere to go but up in the medium term, while the US dollar is already on the skids and the Australian and New Zealand dollars favoured by carry trade enthusiasts will slide again against the yen.

Meanwhile, back in the never-never land of sub-prime mortgages, things are not looking good. Sales of second-hand homes dropped by a surprisingly large (to some) 6.5 per cent in August. Morgan Stanley has announced that it will cut 600 jobs in its residential mortgage division, a quarter of the workforce. Anyone who thinks that is a detail should note that two million of the seven million new US jobs created in recent years were connected with real estate.

As the housing sector turns down, along with consumption-financing equity withdrawal by US home owners, the danger of a US recession will grow and with it a slowdown in the world economy and in global capital flows. Irrational exuberance will evaporate in stock markets around the world and liquidity will drain away like so much milk and honey. The only consolation is that a lot of those new paper millionaires will find themselves joining the world or ordinary mortals once more at the new dawn of reality.

 

Source: Business Times 4 Oct 07

US spending slowdown won’t hit Asia hard

But risk from China equity correction is a threat: economist

THE threat to Asian economic growth from a slowdown in US consumer spending may not be as great as widely feared, said a senior HSBC economist last week.

Economic growth in Asia is increasingly driven by domestic demand, while the historical relationship between US consumer spending and Asian export growth is quite weak, said Robert Prior-Wandesforde, senior Asian economist at HSBC.

‘We think generally growth in Asia will hold up very well,’ he said. He was speaking to members of the British Chamber of Commerce at the Raffles Hotel.

Overall US economic growth has already been slowing in recent months, but Asian economies have survived this ‘incredibly well’, he said.

And in the last two years, consensus forecasts of Asian economic growth a year ahead have shown an ‘unprecedented divergence’ from similar forecasts for US growth, as economists downgraded their outlook for the US while simultaneously becoming more optimistic about Asia.

He noted that in Malaysia, overall exports have not slowed as much as exports to the US alone, which suggested its exports were increasingly fuelled by demand from Europe, China, India, and other Asian countries.

In Singapore, overall economic growth accelerated in the first six months of the year even as export growth has been slowing, he noted. ‘The domestic economy has managed to shake off the downturn in exports.’

‘There are good chances that it will continue.’ HSBC now predicts 8.5 per cent growth for Singapore this year, higher than the 7 to 8 per cent official growth forecast.

The other main fear – that a slowdown in US consumer spending triggered by falling house prices there would hobble Asian growth – may not be fully justified either, he said.

An analysis of nine major Asian economies including Singapore suggested that total export growth since 1995 was more closely linked to the amount of investment on equipment and software in the US than with American consumer spending.

‘The point is that US tech spending has already slowed pretty dramatically. I think the worst is either close at hand or we may even be past the worst in the US tech cycle, and that is the more important driver of what happens to Asian exports.’

But there remained other risks to his relatively rosy outlook for Asia, including the risk of a correction in the Chinese equity market, where share indices have soared to five times what they were two years ago, he said.

‘The danger is we focus too much on the US and forget about the bigger picture.’

‘There are vulnerabilities in a lot of housing markets around the world, not just in Europe or the US,’ he said.

 

Source: Business Times 3 Oct 07

Is the worst over?

Investors and analysts clash over whether the global sub-prime mortgage crisis has turned the corner

Yes, say investors

POSITIVE OUTLOOK

• Banking giants disclose sub-prime related losses on Monday but investors take the disclosures as a sign that the worst may be over.

DOW’S RECORD CLOSE

• Investors push US stocks to its highest-ever close on optimism that the sub-prime crisis is nearing its end.

• Key index ends Monday up 1.4 per cent at 14,087.55.

• Stocks recover all of the nearly US$2 trillion (S$2.98 trillion) lost in July-August rout.

CITIGROUP AND UBS DISCLOSURES BRING RELIEF

• Bad news from two banking giants but investors choose to focus on the positives.

• Citigroup to write off US$5.9 billion (S$8.8 billion) in third quarter. Profit to drop 60 per cent. Citi chief executive Charles Prince says profits will return to normal in fourth quarter. Investors choose to focus on this healthy forecast.

• UBS to write off US$3.4 billion and suffer a loss in the same quarter. But it indicated that the current period might see a return to normal earnings levels.

GREENSPAN UPBEAT

• ‘Is this August-September credit crisis about to be over? Possibly,’ says former US Federal Reserve chairman Alan Greenspan. He cites signs that lenders are seeking to buy longer-term assets of lower quality.

ANOTHER RATE CUT

• Investors still expect another rate cut from the Fed to boost the US economy.

Maybe not, say analysts

NOT ENOUGH ASSURANCE

• Conditions in the credit market are still fragile. Many problems remain for the United States economy, especially in the housing sector.

• ‘The question really is, ‘Is this the end of it or not?” Mr Axel Merk, portfolio manager of the Merk Hard Currency Fund told the Washington Post. ‘For whatever reason, the market wants to see the glass as half full. I just think we need to see more,’ he said.

MORE PAIN FOR BANKS

• Banks cleaning up their balance sheets only solves half the problem. Going ahead, they are likely to generate less income as the buyout boom slows.

• Banks must find ways to replace the income from sub-prime mortgages, a market that could take years to recover.

HOUSING RECESSION NOT OVER

• The US consumer spending is being hit by falling home prices, higher mortgage rates and foreclosures. Thus lower spending will adversely affect the economy in the long run.

• Most US adjustable-rate home loans will reset over the next several years at higher rates. This could lead to more foreclosures and a fall in home prices.

FALSE RALLY?

• Analysts caution: Do not read too much into the Dow’s rally.

• This is because the rally was achieved on low trading volumes.

• Shares of large companies recovered because of investments in strong economies overseas and a weak US dollar.

• Many mortgage companies, banks and home builders are still trading far below their highs.

 

Source: The Straits Times 3 Oct 07

Fresh sub-prime concerns in Europe?

Local session turns more sober with ST Index down 41.9 points and a weak broad market

IT’S possible to argue that since the Straits Times Index had rocketed by almost 117 points on Wednesday, it would be reasonable to expect some kind of pullback yesterday. This, indeed, was the case, with the index dropping 41.9 points to 3,552.46.

On the other hand, it must have been troubling on some level to some observers that activity yesterday was very heavily concentrated in penny stocks and warrants, and that the focus as far as blue chips were concerned was narrow – support for the index came almost exclusively from DBS, while the main drag was exerted by SingTel.

For those who subscribe to the first point of view, which is that Tuesday’s 50-basis-point US interest rate cut is sufficient to kickstart the bull market, then yesterday’s dip would best be described as the market ‘taking a breather’.

This is the phrase most commonly used to describe a fall in prices, a seemingly innocuous term but one actually laden with meaning, since it implies that once the breather is over, the upward push will resume.

However, those who were troubled by the lack of breadth, depth and follow-through would undoubtedly have found grounds to fret over the fall, since it came despite a follow-through rise in Hong Kong and Japan.

Instead of the former British colony setting the pace as it traditionally does, the local market most probably drew its inspiration – or lack of it – from a fall in the US futures market and a soft opening for Europe.

One possible reason for Europe’s slip was a plunge in the shares of the UK’s embattled mortgage lender Northern Rock and a warning by Deutsche Bank that its Q3 profit has been adversely affected by the recent market turmoil, both serving as reminders that the US sub-prime crisis may not have fully played out yet.

All told, it was a much more sober session than that which preceded it, resulting in the broad market recording 145 rises versus 341 falls excluding warrants.

Meanwhile, DBS Vickers (DBSV) recommended an ‘overweight’ on the banks, mainly because it expects topline growth to remain robust.

On the ongoing and controversial subject of the local banks’ exposure to US collateralised debt obligations (CDOs), DBSV said that ‘as CDO investments are generally held as available-for-sale and/or held-to-maturity securities, mark-to-market losses would be recorded in reserves rather than the profit-and-loss account unless it is deemed permanently impaired’.

‘Nevertheless, the upcoming release of Q3 results will clearly reveal how banks treat their respective CDO investments, and we believe this would ultimately seal back investor confidence over time.’

Morgan Stanley, on the other hand, reminded investors that good times don’t last forever.

‘Singapore banks have enjoyed very low loan loss charges for the last four years. Current earnings and ratings don’t capture underlying risk tendency in our view,’ said Morgan Stanley. It called an ‘underweight’ on OCBC and an ‘equal weight’ on DBS and UOB.

In a preview of its upcoming global investment strategy to be released today, BCA Research said it recommends staying positive on equities since policy reflation will lift prices. In addition, BCA recommends overweighting emerging markets, raising the weighting of US stocks to ‘neutral’, and that investors stick to larger caps instead of small caps.

 

Source: Business Times 21 Sept 07

Fed’s aggressive rate cut sparks global markets

A BIGGER-THAN-EXPECTED interest rate cut by the United States central bank sent global bourses sprinting ahead yesterday.

The half-percentage point cut by the US Federal Reserve was double the quarter-percentage point cut that most analysts expected – and immediately caused a surge in US stocks.

Last night, the optimism continued on Wall Street, with the Dow Jones Industrial Average up 97.30 points, or 0.71 per cent, to 13,836.69 at press time.

Asian markets were equally thrilled at the Fed’s move to restore confidence in global financial markets and head off the risk of a US recession after weeks of market volatility.

It was the Fed’s first cut of the benchmark Fed Funds rate in four years, and is set to relieve a credit crunch in the global financial system, sparked by a US mortgage market crisis, by flooding it with cheaper funds.

In a statement, the Fed said the ‘action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time’.

At home, the benchmark Straits Times Index registered its second biggest one-day gain in history when it soared 116.61 points to 3,594.36 yesterday – just 70.77 points shy of the record high of 3,665.13 hit on July 24.

Tokyo’s Nikkei-225 Index shot up 3.67 per cent, and Hong Kong’s Hang Seng Index soared 3.98 per cent to a record high.

Across Asia, lower interest rates are expected to give a fillip to the housing market and stimulate spending in big-ticket items such as cars.

This gave a big boost to real estate developers and banks, which were among the biggest gainers in the various regional bourses yesterday.

Analysts said the Fed’s move should also help to restore confidence in the troubled global credit markets, where international banks have been hoarding cash and refusing to lend to each other.

But they warned that the surge on Wall Street and other global bourses was fuelled by hopes of further interest rates cuts later on.

These cuts would, how- ever, depend on US economic data to be released over the next month, they said.

They warn that, going by the wording in the statement issued, the Fed might have been uneasy cutting interest rates with crude oil prices hitting record highs, fuelling fresh inflation fears.

The cut in the widely watched Fed Funds rate – which sets the pace for US interest rates – to 4.75 per cent came early yesterday morning Singapore time.

Wall Street immediately notched up its best one-day gain in four years as the Dow Jones shot up 335.97 points, or 2.51 per cent.

The size of the cut was a major surprise. It was correctly forecast by only 23 of 134 economists surveyed by Bloomberg News, while 105 predicted a quarter-percentage point cut; six forecast no change.

 

Source: The Straits Times 20 Sept 07

Your money is safe, bank customers told

France and Spain reassure them after run on a British bank

(PARIS) French and Spanish authorities reassured bank customers their money was safe yesterday amid a run on Northern Rock, a British bank suffering from the US sub-prime credit crisis.

France’s major banks are ’solid’, Economy and Finance Minister Christine Lagarde told a press conference yesterday as international worries mounted over European institutions.

‘French banks, particularly in relation to German banks, are in a very good position,’ Ms Lagarde said after talks with US Treasury Secretary Henry Paulson.

She said French banks were safe ‘quite simply because of their structure, their results and the controls carried out by the banking commission’.

In Madrid, the Spanish central bank issued a statement saying: ‘Spanish institutions, like almost all those in the euro zone, have received liquidity operations from the European Central Bank, but that does not mean that they are experiencing any difficulty.’ It stressed that ‘no Spanish institution has started any sort of emergency financing procedure’.

Mr Paulson said financial market turbulence could continue for a while.

‘It will take a while to work through the turbulence in capital markets,’ he said. However, he added: ‘We’re doing so against a backdrop of a strong global economy.’

Meanwhile, thousands of customers queued to withdraw savings from the embattled British bank and its shares plunged again, heightening pressure for a sale of the business or its assets.

The bank, rescued by emergency Bank of England funding, said there was no need for investors or customers to panic and it remained solvent.

Nevertheless, customers appeared set to continue pulling out savings, and by early yesterday the bank’s shares had more than halved in value since Thursday’s close.

Fears have mounted that a run of withdrawals will exacerbate the lender’s funding problems and force a fire sale of the business.

The problems were triggered by the global credit crunch as banks, worried about exposure to dodgy US mortgage debt, jacked up the price of lending to each other.

As the fallout threatened to have wider economic and political impact, British finance minister Alistair Darling said the authorities would consider every option to solve the crisis.

By 1000 GMT, shares in the bank were down 32 per cent at 296 pence, following a 31 per cent tumble on Friday to cut the bank’s market value to under £pounds;1.3 billion ($3.94 billion). The shares fell as low as 290 pence and have lost 70 per cent this year.

The Newcastle-based bank provides one in 13 British home loans. The Bank of England, as lender of last resort, stepped in on Friday to offer emergency funding to ease its funding problems after it struggled to borrow in money markets.

The bank had not drawn on the emergency facility by Sunday, the government said.

News of the emergency funding line sent thousands of Northern Rock’s 1.4 million savings customers rushing to branches and to the Internet for their money. Customers were estimated to have withdrawn about £pounds;1.5 billion on Friday and Saturday.

Some reports said as much as £2 billion pounds has been withdrawn, which would represent about 8 per cent of its deposits.

Government, banking and regulatory officials are monitoring the situation closely, trying to halt the run on withdrawals.

Northern Rock chief executive Adam Applegarth sought to reassure customers that their savings were secure via a message posted on the company’s website.

‘Your money is safe with us and if you want some, or all of it back, then you are perfectly entitled to it. Whilst you may have to wait a little longer than usual to receive it, you will get it,’ Mr Applegarth said in the message posted on Sunday.

Northern Rock has hoisted a ‘for sale’ sign up and banks including Lloyds TSB have considered deals, according to industry sources, but suitors have been put off by difficult credit markets and uncertainty about the true valuation.

Analysts said the bank, approaching its 10th anniversary as a listed company, is unlikely to survive in its present form.

Moody’s Investors Service affirmed its short-term Prime-1 rating on the bank but placed its long-term investment grade Aa3 rating on review ‘direction uncertain’.

Moody’s said the agreement with the central bank to raise liquidity as necessary meant that Northern Rock will be able to meet obligations as they fall due. But it said Northern Rock would find it difficult to reduce its reliance on the wholesale market.

In an interview published yesterday in The Daily Telegraph, former US Federal Reserve chairman Alan Greenspan also warned of difficulties ahead.

Britain is more vulnerable to a credit crunch than the United States, Mr Greenspan said.

‘Britain is more exposed than we are – in the sense that you have a good deal more adjustable-rate mortgages,’ he said.

 

Source: AFP, Reuters, AP (Business Times 18 Sept 07)

Pound plunges on UK lender worries

THE British pound unexpectedly stole the show as the heaviest loser in Asia yesterday, ahead of a key US interest rate decision later this evening.

Traders reported that the pound fell back below US$2 for the first time in more than a fortnight, tumbled to a fresh 14-month low versus the euro, and slid to its weakest in a month versus the Singapore dollar – punished by news late last week that a British mortgage lender called Northern Rock had to seek Bank of England assistance for longer-term funding.

The currency’s woes accelerated at the European open yesterday on news that Northern Rock’s share price had fallen by more than a third. By the Asian close, the British unit was one per cent worse off at US $1.9975, 0.9 per cent weaker at 69.4 pence per euro and 0.7 per cent softer at S$3.0286.

The most conspicuous feature of the British mortgage lender’s funding problems has become an all too familiar one these days.

While, according to British regulators, Northern Rock is still solvent, the bank had been over-reliant on short-term inter-bank funding for its longer term loan assets. When access to such funds dried up in recent weeks, it was forced to secure funding directly from the Bank of England.

British investment bank Barclays Capital researchers cited a BBC report that Northern Rock had rapidly expanded its share of the UK mortgage market over the past year. It reportedly has total assets in excess of £100 billion (S$302 billion), against retail deposits of something like £24 billion.

The upshot was that the pound finished the day worst-hit versus the US dollar despite a widespread belief that the US Federal Reserve’s interest rate committee will trim its official short term interest rate later tonight.

Fed-watchers have forecast that it may trim its 5.25 per cent Fed funds interest rate by a quarter to half a per cent in response to an unhappy combination of worries traceable to the troubled US housing sector and the unexpected news of US job losses last month – not to mention the weaker than expected August retail sales number reported last Friday evening.

Elsewhere in Asia, Wall Street’s indifferent performance last Friday combined with news of weaker European stocks yesterday to punish selected Asian bourses – and in turn their currencies – yesterday. This notwithstanding a heroic bounce in Chinese stocks which blithely brushed aside news late last week of a fifth Chinese interest rate hike this year.

Conspicuous stock market-related losers yesterday included the Singapore and Taiwan dollars. By the Asian close, the greenback was between 0.2 and 0.3 per cent firmer at S$1.5162 and NT$33.12.

Further north, in contrast, Japan’s Nikkei stock index recorded a gain of almost 2 per cent as the US dollar attempted to push its way back above 115 yen for a third consecutive session.

Down Under, carry trades in favour of the Australian dollar and New Zealand dollar were also trimmed as the pound lost ground, traders suggested – leaving them 0.2 and 0.5 per cent worse off at 83.84 US cents and 70.94 US cents respectively.

 

Source: Business Times 18 Sept 07