Tag Archives: austerity measures

Mark Carney : The Next Governor of The Bank of England

1 Dec

It’s official from the middle of 2013, Mark Carney will become Governor of The Bank of England. Chancellor George Osborne has publicly announced that his selection was to choose the most suitable person for the job. Both George Osborne and Mervyn King (current BoE Govenor) have spoken openly about their opinions and his suitability.

His native country Canada has had a similar institution helping small and medium-sized businesses for 65 years, and this has been a critical launch pad for many Canadian firms. Mr Carney will need to work to strengthen the Treasury’s current efforts in this area, as a way of transforming the finance environment for new and growing British businesses over the long-term.

The difficulty he faces is the role of the Bank of England (BoE) will have an expanded brief, including overseeing the health of the country’s banks. Clearly, it will be a tough and very challenging job.

Many analysts have spoken about the many challenges that will face the new chancellor, the most common issues are :-

  • Mr Carney is taking over a BoE with greatly expanded responsibility, which is a big management challenge and means the governor will need to delegate more. The Bank’s deputy governors will need to be more involved in taking the lead in their particular areas.
  • The BoE will need to move away from the environment of very low-interest rates and quantitative easing policy. (It is not a healthy policy over the medium term, for example in terms of returns for savers.) Mr Carney will need to develop an exit strategy, communicate and implement it gradually. This may play to Mr Carney’s strengths as he has won praise in the past for his communication skills.
  • The BoE has a role as a key player in the financial services sector, to rebuild public confidence. Britain’s economy needs a banking sector that acts as servant, not master of the economy.
  • Mr Carney has said that the problem is not the failure of banks to supply credit, but demand for it. It would be alarming to think that he doesn’t essentially understand the challenges currently facing the UK economy. If this is the case this appointment could become a grave failure.
  • The BoE needs to help grow the British economy, leading to a growth in job creation. Employment is no longer the prime mission of the BoE, but creating more and better jobs needs to be a priority.
  • Mr Carney needs to increase effective and planned lending to the real economy, focussing on development areas and creative environments where job creation and development of the economy would be potential and sustaineable. The experience has been, in many cases, quantitative easing doesn’t guarantee that loans go where they are most needed.

We wish him every success in this role. If he is successful, this will help lead to prosperity for all. On paper I agree with the comments made and believe he has the right qualifications, background and experience. There are clearly some failings in his understanding but let’s hope he is a fast learner. I believe those who are truly successful are not those who always have the right answer but more-so realise when they have made the wrong decision and correct it quickly. Time will tell.

Investor Snapshot

29 Sep

We are in a volatile market, the news and information is conflicting (good and bad) and relevant institutions are stepping in to save the day.

Personally, I believe the current climate is the “new normal” and the data will remain weak – requiring brave and effective strategy from the ECB, IMF, US Federal Reserve, etc. I believe and expect this will happen – and my thoughts are the only solution to the debt scenario on a macro scale is time and inflation (eroding the value, if not the size, of the debt). This is not a quick solution but in time I believe will be effective.

chart provided by forextv.com

Ben Bernanke, chairman of the US Federal Reserve has announced on Thursday 13.09.2012 extending the Quantative Easing Programmes and launches QE3 – the buyback of mortgage related securities – a further $40 Billion each month. This is in addition to the $45 Billion Twist Programme already in existence. This is hoped to bolster buying by the American people as they see signs of prosperity through house valuations and a better environment. This coupled with low-interest rates and accepting higher inflation – a loose monetary policy beyond 2014 into 2015 – he plans will lead to improving prospects in 2013 & 2014.

Growth in the US economy between April and June has been revised downwards. Gross domestic product (GDP) in the second quarter grew at an annual rate of 1.3% in the second quarter, down from the previous estimate of 1.7%.

Most of the UK’s major banks sign up to the new Funding for Lending scheme, which aims to stimulate the economy by making cheaper loans available. 

The UK economy shrank by less than thought in the second quarter (0.4% in the April-to-June period), the Office for National Statistics (ONS) said in its  third estimate of gross domestic product (GDP). The ONS had initially estimated a contraction of 0.7%, before revising that to 0.5% last month. 

UK service sector bounced back in July, raising hopes of an economic recovery in the third quarter of this year. The ONS said services output, covering a range of sectors from retail to finance, rose 1.1% on the month. However, this followed a decline of 1.5% in June which was affected by the extra Diamond Jubilee bank holiday. The service sector accounts for about 75% of UK economic output (GDP). Its performance is an important guide to the direction of the overall economy. All the main areas registered increases in activity in July, with the category covering retail, hotels and restaurants showing the biggest rise of 1.8%. Business services and finance output was up 1.2%.

French unemployment has topped three million for first time since June 1999, as the economy continues to struggle. 

France has unveiled its budget for 2013, avoiding big austerity spending cuts in favour of higher taxes on the wealthy and big businesses. French Prime Minister Jean-Marc Ayrault confirmed that there is to be a new 75% tax rate for people earning more than 1m euros (£800,000; $1.3m) a year. But he insisted that nine out of 10 citizens will not see their income taxes rise in the new budget. The government plans to raise 20 Billion Euros in extra revenue. That compares to 10 Billion Euros in spending cuts. The emphasis on tax rises is a policy of the new French President Francois Hollande that is against the prevailing mood of Europe where countries from Ireland to Greece are slashing spending to try to placate investors and lower borrowing costs.

Spain has set out its austerity budget for 2013, with new spending cuts but protection for pensions, amid a shrinking economy and 25% unemployment. There are expectations that the country will soon seek a bailout from its Eurozone partners. 

Spanish police ringing parliament in Madrid fire rubber bullets at protesters taking part in a mass rally against austerity. 

Spain’s banks will need an injection of 59.3bn euros ($76.3bn; £47.3bn) to survive a serious downturn, an independent audit has calculated. The amount is broadly in line with market expectations of 60 Billion Euros, and follows so-called stress tests of 14 Spanish lenders. Much of the money is expected to come from the Eurozone rescue funds, the current EFSF and the future ESM. Spain said in July that it would request Eurozone support for its banks. The Spanish banking sector has been in difficulty since the global financial crisis of 2008, and the subsequent bursting of the country’s property bubble and deep recession.

Greek police fire tear gas to disperse anarchists throwing petrol bombs near Athens’ parliament during a day-long strike against austerity measures. Greek finance minister Yannis Stournaras says the three parties in the country’s governing coalition have reached a “basic agreement” on the austerity package for 2013-14.

International Monetary Fund head Christine Lagarde has warned Argentina it could face sanctions unless it produces reliable growth and inflation data. 

The International Monetary Fund looks likely to cut its forecast for global growth next month when it updates its projections for the world economy.

Japan’s industrial output fell more than expected in August, as cars and electronics suffer from weak global demand. 

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Investment/Pension Portfolios – we are well positioned for this volatility and expect this to lead to profitability. I am in the process of a client by client investment audit and in some cases we are adding additional asset classes to diversify the investment risk. To all my clients, either thank you for your involvement and help; and to all of those I will see shortly – I will explain my thoughts to you in our meeting.

Market Trouble?

6 Sep

I am pleased with the positioning of the portfolios I manage and believe we are well placed for the current volatility. We have made healthy profits over the last three months and during the previous market declines were well insulated against and retained our position well relative to the investment markets.

The recent dip is expected to lead to the third losing week in a row, following six straight weeks of gains.  While that may have bled off some of the over-bought pressure, the bears may not be done yet.  We’re headed into one of the weakest periods of the year, and the floors the bulls are hoping will hold up are going to be tested soon.

First things first though – last week’s and this week’s major economic data.

 

US Economic Data

Most of last week’s economic numbers were bigger-picture items

On the consumer sentiment front, the Conference Board’s confidence score fell drastically in August. The Michigan Sentiment Index, rose to a three-month high.  It does make you question how two seemingly – so similar measures can end up with wildly different results.

Real estate continues to look stronger.  The Case-Shiller home price index was up and July’s pending home sales are expected higher.

The surprise positive last week was Quarter 2 GDP growth rate – up above estimates; and, if July’s Factory Orders are any indication, then the trend may actually be improving rather than decelerating.

 

Some potential market-movers:

Construction Spending – this number has been generally healthy of late. 

Auto Sales –  Car sales have been relatively firm of late

Job Cuts and ADP Employment Change – this is the prelim before Friday’s unemployment rate figure and official jobs-created figure.  

Nonfarm Payrolls and Unemployment Rate – economists are looking for 145,000 new private payrolls; and most expect the unemployment rate is not going to move from last month’s 8.3% figure. 

If these figures fail to achieve estimates – this would create uncertainty and an expected decline in the markets – although the expectations are low and that may not inspire a positive move either.

 

Market Movements

After everything is said and done, the imminent path of least resistance is still downward-pointing. I am not anticipating a major correction but rather some sell trades, most likely just enough to fully burn off the overbought condition.

 

 

South Korea

The South Korean economy is starting to lose steam as the European debt crisis remains unresolved and export markets remain weak.

The latest figures show the country’s economy grew by 0.3% between April and June, down from 0.9% growth in the previous quarter.

The government is therefore looking at ways of boosting domestic demand to compensate for weakening exports.

 

UK Rises in Competitive Rankings

Leaders from 2008 World Economic Forum

The UK has risen to eighth from 10th place in an annual study of global competitiveness.

The World Economic Forum’s (WEF) Survey said the UK had benefited from a more efficient labour market compared with more “rigid” European economies.

The US economy fell from fifth to seventh place, although WEF said it remained the top innovator.

Switzerland topped the table, followed by Singapore and then Finland in the survey of 144 economies.

The ratings are compiled using public data as well as executive opinion.

The survey placed China as the most competitive major emerging economy.

 

‘Innovative businesses’

The WEF said the UK had benefited from “clear strengths such as the efficiency of its labour market” and praised the UK’s “sophisticated and innovative businesses”. However, the UK’s macroeconomic economic environment – ranked 110th, down from 85th last year – was hindering competitiveness.

The Treasury said it “welcomed” the report, saying the UK’s improvement was down to the government’s reforms.

 

Europe’s north-south divide

The WEF survey showed a clear divide between Europe’s northern countries and the troubled periphery economies which are suffering from recessions.

In total, six European economies are in the top 10 – Switzerland (1st), Finland (3rd), Sweden (4th), the Netherlands (5th), Germany (6th) and the United Kingdom (8th).

But the southern Eurozone economies are ranked much lower, with Spain in 36th place, Italy 42nd, Portugal 49th and Greece 96th.

The southern economies, which are at the heart of the Eurozone sovereign debt crisis, have suffered a chronic lack of competitiveness and low levels of productivity that led to unsustainable imbalances in the economy, followed by rising unemployment.

The WEF urged an overhaul of labour regulations “sooner than later” as one of the necessary reforms to restore growth.

Switzerland maintained its top position thanks to its scientific institutions, a strong collaboration between academia and business sectors, high spending on research and development as well as its high rate of patenting per capita, the WEF said.

 

US political gridlock

The US ranking has continued to fall due to weakness in the overall economy as well as worries among businesses towards what they perceive as government meddling in the private sector and distrust towards politicians.

The WEF warned that in the US, despite being the world’s top innovator with the likes of Google and Facebook, political gridlock over fiscal tightening could dampen growth prospects.

The survey cited an inefficient government bureaucracy and tax rates as the two biggest impediments to doing business in the US.

Is QE3 Imminent?

28 Aug
So this year has seen the typical post Recession 2008 cycle – a climb, dip and then a climb so far – with last week seeing the first decline since the rally started beginning of June.
With all the issues coming to a head (maybe) in September – what is next for the markets?
If the Fed decides next week not to implement another round of QE it could turn the tables on investors, with emerging markets in the doldrums and UK, European and US equities once again leading the charge.
While some believe the minutes from the latest Federal Reserve policy meeting imply that a large-scale asset-purchasing programme could be on the horizon, the markets are still in the dark about the likelihood of such an event. I personally doubt a QE3 asset purchasing programme is on the cusp of the horizon – but then who ever said governments, treasury functions, etc. had to act rationally?
If the Federal Reserve rejects the ‘printing money’ option and the dollar stabilises, it will create an environment that is not conducive to things like emerging markets and commodities, but it could be hugely bullish for everything else that hasn’t worked well in the last few years. It is plausible that, if these assumptions are correct, European and Japanese equities could stand to benefit. 

Looking at relative valuations, they are trading at extremely low prices relative to US equities in historical terms. You could argue the same thing about European equities which are trading back to where they were in March 2009 and US equities are expensive in relative terms. 

Government bonds are also out because they are so expensive (some with actual negative yields), and emerging markets – controversially given their heavily tipped status in recent years – could be out in the cold with them. 

In the UK, I believe some of the cyclical companies such as house builders and unloved sectors such as media stand to benefit the most from this new environment, as they are priced at huge discounts to the market. Whereas, defensive investments, which last year did their job, and are now at a record premium.

So I am in the process of planning to reposition my clients portfolios for a change. I believe there is a risk currently of reversion here, with some of the areas people really love reverting and de-rating to the downside.
The major issue seen – is QE3 and if Ben Bernanke sanctions an asset buying/money expansion programme – I personally do not think this is necessary, desirable or suitable timing and could well be counterproductive. 
Does this mean it won’t happen? Who knows!!!

ECB Meeting – Plans To Solve Eurozone Countries Borrowing Costs?

2 Aug

Today in Frankfurt the European Central Bank (ECB) will hold its latest meeting. The “word” is the focus will be to bring down Spain’s cost of borrowing.

Mario Draghi-euro

We know ECB president Mario Draghi is ready to do “whatever it takes” to support the Euro and if Spain needs a bailout, it is expected the ECB will take unprecedented steps to help.

It is clear that although past measures have helped, but weren’t fully effective and did not achieve the end goal (at least so far). We would expect that if nothing is done to lower and stabilise the borrowing costs of countries like Spain and Italy then their future within the euro will be in question.

Mr Draghi has confirmed he will hold a news conference later on Thursday.

 

US Federal Reserve Wednesday – 1 August 2012

The US Federal Reserve took no further steps to boost the economy but said that it “will provide additional accommodation as needed to promote a stronger economic recovery”. This is following confirmation that the growth in the US Economy (as measured by GDP) in the first 6 months of 2012 had slowed.

 

ECB Resume Bond-Buying?

At a conference in London last week marking the start of the Olympics, Mr Draghi said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

 

What’s Happening To The Global Growth Story?

17 Jul

The International Monetary Fund states the global economic recovery is still at risk, and Eurozone economies remain in a “precarious” situation.

Indian economic recovery1 Finance Friday : India To Lead Global Recovery

With the backdrop of the financial crisis, issues around the world including China, US and especially the Eurozone – the figures are relatively good, as at least they’re positive. Yes, compared with forecasts in April 2012 the figures are worse but is that due to a decline or the previous figures being overly optimistic. Personally, I believe the latter to be the case but that doesn’t mean all is well – rather the results are within the expected range – not bad news, not great but rather feared and anticipated.

A major concern as current is  a delayed or insufficient response from European leaders to the crisis would further derail the recovery. This looks unlikely when one reviews the decisions and actions so far – but nothing is impossible.

The IMF has downgraded its forecast for global growth for 2013 to 3.9% (from the 4.1%).

One of the biggest downward revisions was to the UK, now expected to grow by 1.4% in 2013. In April it predicted 2%. The forecast for growth in 2012 was also reduced for the UK, down to 0.2% from the 0.8% cited in April. These are now more in-line with my personal expectations – in my speak I would say these figures now look realistic rather than the previous forecasts were significantly more optimistic.

The IMF’s prediction for world output this year – as measured by gross domestic product – was little changed at 3.5%.

In its updated World Economic Outlook, which is published twice each year, the Washington-based lender said: “Downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action.”

 
The Eurozone

The fear over Europe and the Eurozone is the sovereign debt crisis and the need for its’ leaders to :-

  • take further action to avoid an escalation in the debt problem 
  • prevent a market meltdown
  • there must be the utmost priority to resolve the crisis in the euro area

 

The 17-member Eurozone economy is expected to contract by 0.3% this year before rebounding by 0.7% next year.

The IMF, the European Central Bank (ECB) and the European Union, has demanded austerity measures in the struggling economies of Greece, Spain and Portugal in return for bailouts.

The crisis has led millions of people to lose their jobs and benefits. There were also concerns that runs on bank deposits would trigger a Eurozone-wide bank run and banking crisis.

Recently, Eurozone leaders agreed to bail out Spanish banks directly and unveiled a plan to implement a fiscal and banking unification. But the proposals for such a decision will not become concrete until later this year, and it is not yet known how long it will take for such a union to take shape.

The ECB last week cut its benchmark lending rate below 1% to 0.75%. In addition, the IMF has called on the ECB to use less orthodox monetary tools – possibly providing the region’s banks with additional unlimited loans, or long-term refinancing operations (LTROs) – but there are risks associated with such actions.

 

United States

The IMF also urged US lawmakers to solve their “fiscal cliff”. This refers to a set of fiscal deadlines at the end of the year, including deciding whether to extend tax cuts for the wealthiest Americans.

If policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the US structural fiscal deficit could decline significantly – IMF suggests possibly 4% of GDP in 2013. Whatever the actual figure, the risk is if this is resolved, US growth could stall next year, with significant spillover into the rest of the world.

 

Emerging Markets

Growth in emerging economies was also revised downwards. The IMF has forecast growth slow down to 5.6% in 2012 before picking up to 5.9% in 2013.

Growth momentum dropped particularly in Brazil, China and India, considered to be the drivers of a global recovery.

That was aggravated by risk aversion among investors who pulled out their money out of these economies, causing domestic share prices to drop.

 

My Outlook

I believe we are on track for weak growth but at least there is growth. With the back-drop of the economic and fiscal world we now find – I don’t believe we could expect for more.

As for the markets – the concern being are we trading in a range? Or will there be actual headline growth?

I am defensive in my general outlook and feel that to manage portfolios with the plan of positive returns. My chosen overall strategy is to focus on diversity, strong dividend and income growth, global and niche exposure, take advantage of opportunities as and when they exist and be realistic.

The Greek Election

18 Jun

 

 

Greek Election Dilemma

Greek political parties supporting a bailout for the country have won a slim parliamentary majority in Sunday’s elections. Any coalition’s majority is set to be narrow and may lack the stability needed to push through painful reforms.

Whatever the outcome, Europe’s problems are far from over as the debt crisis threatens to further engulf the larger economies of Spain and Italy.

The markets are expected to gain from this calming (huge relief) of the markets – understandable given the massive fallout that could have happened had the (pro-bailout) New Democracy Party lost.

The Greek conservative New Democracy party and Socialist PASOK, who broadly back an EU/IMF bailout package keeping Greece from bankruptcy, looked set to jointly secure a slim majority. SYRIZA, the leading leftist party that pledged to tear up the terms of the bailout package, conceded defeat.

If there is any sign of market stress on Monday morning, investors will look for action from the world’s central banks who, according to officials, stand ready to intervene if trading becomes turbulent.

Official results released by the interior ministry, with 97% of ballots counted, showed New Democracy taking 29.7%, SYRIZA 26.9% and the PASOK Socialists were set to take 12.3% of the vote.

The Greek election system awards a 50-seat bonus to the party which comes first, that would give New Democracy and PASOK 162 seats in the 300-seat parliament.

Supporters of New Democracy.

 

What Next ?

G20 leaders kick off a two-day summit in Mexico on Monday and the rest of the week is not likely to be any quieter.

The Federal Reserve is due to release a policy statement on Wednesday at the end of its two-day meeting, and the steady flow of sovereign debt warnings and downgrades is likely to continue.