The Word from Hansard, 2nd Dec 2009

The Word from Hansard

Much of the last week’s financial news has been centred around Wednesday’s announcement that the Dubai government-owned investment company, Dubai World, had requested a suspension on the repayments of USD3.5bn of its total USD59bn debt. The repercussions of the news are potentially far-reaching, given the heavy investment in Dubai from many companies around the world, lending banks such as HSBC, Barclays and RBS are reported to be the most exposed. Local markets around the world reacted negatively to the announcement. Since the initial announcement concentration has been focussed on how markets would react to daily updates from Dubai, the most recent being Tuesday’s news that the actual amount of debt that requires re-structuring is more in the region of USD26bn.

"Now that they’re saying USD26bn, it reduces some of the panic that built up in the last few days," said Nick Chamie, an analyst at RBC Capital Markets in Toronto." This is positive. The market was feeding on its own concern and there were talks of USD60bn debt that would need to be restructured. "This view was further confirmed by Heino Ruland, strategist at Ruland Research, in Frankfurt "The market is now acknowledging that the Dubai crisis is contained to the region itself." Reports suggest that Dubai’s neighbour, Abu Dhabi, will provide the main source of assistance in easing the debt burden in a bid to protecting the UAE banking sector.

U.K. manufacturing expanded less than economists forecast in November as the economy struggled to shake off the recession. A gauge based on a survey of companies fell to 51.8 from 53.4 in October, the Chartered Institute of Purchasing and Supply and Market Economics said in a statement on Tuesday. The U.K. economy shrank 0.3% in the third quarter, less than previously estimated, as the contraction in manufacturing and services were smaller than initial figures showed. Bank of England policy maker Andrew Sentance said last week it is "premature" to discuss tightening monetary policy.

Asia continues to lead the recovery from the global economic slump, with China firmly at the forefront. The purchasing managers’ index released on Tuesday by HSBC Holdings rose to a seasonally adjusted 55.7 from 55.4. The government’s Purchasing Managers Index, also released today, held at an 18-month high. "China’s at the centre of Asia’s outperformance and that will continue to be the case at least through the first half of 2010" said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. "Without China’s aggressive policy response to the crisis, the region wouldn’t be where it is now."

Meanwhile, The Bank of Japan said it will provide short-term loans to commercial banks amid pressure from Prime Minister Yukio Hatoyama’s administration to address falling prices and the yen’s surge to a 14-year high. The central bank will set aside 10 trillion yen (USD115bn) to make three-month loans at interest of 0.1%, it said on Tuesday after the policy board held an emergency meeting in Tokyo. Eligible collateral will include Japanese government bonds, commercial paper and corporate bonds, the bank said.

Brazil will keep the world’s best-performing major currency near 1.7 reals per dollar through year-end by signalling it may step up measures to slow foreign investment, said RBC Capital Markets and BNP Paribas. Investors are "cautious" after the government imposed a 2% tax on foreigners’ stock and bond purchases on Oct. 19 to stem the capital flows that helped send the real to a 32% gain this year, said Nick Chamie, head of emerging-market research at RBC. The real has dropped 2% since then to 1.7519 per dollar as of Tuesday, the second-worst performance among the six most-traded Latin American currencies, in part on concern the government will try more measures.

The report confirming China’s rapid growth in manufacturing prompted a rise in crude oil for a second consecutive day on Tuesday, spurring hopes that the world’s second-biggest oil user will buoy consumption of the fuel. "Chinese oil demand should increase by 5% this year, 4% next year," said Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterreich in Vienna . "While the rate of growth is slowing down a bit, it means there is still growth there in one of the most important regions." The report also had a positive direct impact on the price of copper, on the basis that China is the world’s biggest user of the metal.

Easing concerns over a potential default in Dubai prompted the dollar to fall against higher-yielding currencies, bolstering the investment appeal of commodities, including gold. The U.S. currency was little changed against the euro after slipping to USD1.5005 on Monday. The dollar dropped for a fifth month in November, the longest losing streak since December 2004. "The dollar remains an influence on the oil price," said Commonwealth Bank’s David Moore. "If the dollar’s moving about, then we can still see a bit of interest in the oil market."

Spotlight on Managed Currency funds

The last two years have been exceptionally difficult for long-term equity investors who have struggled with the aftermath of the deepest global recession since World War II. Although this has clearly been a favourable environment for government bonds, the recent massive injections of liquidity by the US Federal Reserve and other central banks, together with ballooning government budget deficits, have raised the spectre of a return to rising bond yields in the medium-term.

In this environment of low interest rates, it is more important than ever to ensure that any cash element to an investment portfolio is working hard. One increasingly viable way to do this is through a managed currency fund. The strength of such funds lies in the fact that because they are able to select from a broad range of currencies, they provide both a money market related income from the underlying assets as well as the opportunity for capital gains from exchange rate movements.

Many of the biggest Managed Currency funds are operated as open-ended collective schemes, the combined contributions of many investors enabling the manager to take advantage of wholesale rates of interest and finer exchange rates, utilising buying power that could not be afforded to a local stockbroker.

The theory behind such funds lies in the premise that currencies behave like other classes of financial assets (such as bonds and equities) in that they experience cyclical deviations from ‘fair value’. These ‘bull’ and ‘bear’ market cycles can result in significant over or under valuation, which tends to be self-reversing. They differ from other classes of financial assets in that currency pricing is relative. Therefore, one currency’s ‘bull’ market is another currency’s ‘bear’ market. Indeed, currency movements can often be inversely correlated with underlying bond and equity market movements. Consequently, a managed currency fund can provide valuable diversification benefits for a balanced portfolio.

Mark James, Director of Investec Fund Managers, the managers of the Hansard Investec Managed Currency fund (MC30, available in HIL) commented "with the immediate future looking like interest rates will remain low, returns on cash deposits could well remain disappointing for investors for some time yet."

Hansard has a variety of fund links across a diverse range of asset classes, whether your clients have a conservative, balanced or adventurous outlook. To find out more about any of our fund links please contact your Hansard Account executive who will be able to assist you further.

With kind regards

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Hansard can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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