The Word From Hansard – 4th November 2008

Emerging markets have seen record gains in the last week, as central banks in India, China and South Korea have taken measures to stem the damage to their financial systems. The MSCI Emerging Markets Index advanced 2.1% (Monday), adding to a record 20% rise last week. The International Monetary Fund almost doubled its limit on loans to developing nations last week and the US Federal Reserve provided USD 90 billion in currency swap agreements to Mexico, Brazil and South Korea. In addition, the South Korean government has just announced an economic stimulus package worth USD 11 billion aimed at public projects and tax cuts to encourage spending in an effort to avert a recession. It is keen to avoid a repeat of the 1997-98 Asian economic crisis and last week cut interest rates to 4.25% from 5%. Such measures, and the IMF’s emergency loans to Hungary and Ukraine, with a possible loan to Pakistan to cover its balance of payments deficit for the next two years, have acted to restore a degree of investor confidence.

The manufacturing sectors in the US and UK have seen continued weakness in October. The US Institute for Supply Management’s factory Index dropped to 38.9 from 43.5 in September. In the UK the CIPD/Markit manufacturing index stood at 41.5 in October, slightly up on September but the sixth month in a row of contraction. A reading of 50 in each index is the dividing line between expansion and contraction.

The cost of borrowing has fallen following the moves by European policymakers to join their counterparts in Asia in reducing borrowing costs. LIBOR rates for 3 month loans in US dollars fell to 2.86% earlier this week, the lowest level since the failure of Lehman Brothers on 15 September. The European Central Bank and Bank of England are expected to cut interest base rates later this week. Australia’s central bank has just cut its base rate 75 basis points to 5.25%.

The yen rose against the Australian dollar and British pound as falling interest rates make it less attractive to buy overseas assets using funds from Japan. A market expert commented, "The yen is being supported by the narrowing differential with other markets." The yen rose to 66.73 per Australian dollar, 156.22 against the pound but remained more stable against the euro and US dollar (125.14 against the euro and 98.94 against the US dollar).

Crude oil for December delivery stands at USD 63.03 on the New York Mercantile Exchange, suppressed by slowing demand in the USA, the world’s largest consumer of oil. US oil consumption during October was 7.8% lower than the same month last year. This is reflected in the price for crude oil which is 33% down from this time last year.

The European Commission will on 12 November present a proposal to amend the Savings Tax Directive in order to close possible loopholes and to limit the administrative burden on paying agents. The Savings Tax Directive applies in 42 jurisdictions: 27 member states, 5 non-EU countries and 10 dependent and associated non-EU territories. The European Commission have now started discussions with selected Asian financial centres, namely, Hong Kong, Singapore and Macao. Negotiations will also start with Norway and possibly Bermuda and Iceland.

An embryonic commodity market has experienced growth of 5.4% through 2008 so far. It is carbon finance. Its primary purpose is to curb global warming by stimulating the trade of a new commodity known as a carbon-emissions reduction credit. When the EU began regulating greenhouse gas emissions in 2005, the credits became valuable. Instead of curbing their own emissions, companies were permitted to purchase credits. A coal-burning utility in Germany, for example, could buy credits to comply with the regulations if doing so was cheaper than switching from burning coal to natural gas. Experts suggest that carbon finance is "obviously an enormous market", but "It’s a very, very risky market and one that few people understand well". On the other hand, if Europe, Japan and the US are serious about controlling emissions, and if China and India go along, the price of controlling emissions will rise, and carbon-credit indices could become attractive to investors. With little correlation to the equity markets, it could prove an interesting area for portfolio diversification.

The number of expatriate employees on international assignments has doubled over the last three years due to globalisation trends, according to international consultancy firm Mercer in their 2008/9 Benefits survey for Expatriates and Globally Mobile Employees. They have reported a 47% rise in traditional expatriates (employees on 1 to 5 year assignments) and a 38% increase in global nomads (employees who continuously move from country to country on global assignments). Mercers say that the growth has been driven by companies desire to be globally competitive. Nearly 70% of companies consider expat employee benefit provision a medium or high business priority. However, nearly a quarter of companies have no overall policy for providing expat benefits. The research also found that a third of companies offer international retirement plans, an increase from 23% in 2005. Nearly three-quarters of companies with an international plan restrict eligibility to certain expatriates who cannot be kept in the home or host plan.

In a new section for The Word starting this week Spotlight looks at a different world region each week in a little more detail. This week it is Latin America.

Banco Itau has agreed to acquire Uniao de Banco Brasileiros in a stock transaction, creating Brazil’s largest bank and overtaking Banco do Brasil as Brazil’s largest bank. The combination will create a bank with 575 billion reais (USD 261 billion) in assets. The transaction may signal further consolidation among Brazilian financial institutions. Brazil’s central bank has injected more than 100m billion reais (USD 46 billion) in the banking system since 24 September to stimulate lending and prevent smaller institutions from failing.

The Unibanco deal acquisition may signal more consolidation ahead among Brazilian banks after local credit markets dried up. Sao Paulo based Nossa Caixa bank, is in talks to be acquired by Banco do Brasil.

Brazil has announced that it has removed its financial transaction tax (referred to as "IOF") in an attempt to improve the financial situation. The tax was levied at 1.5% on currency exchange for inflows of foreign capital, and at 0.38% for foreign currency loans.

Yesterday, Mexico’s peso was the second biggest gainer among Latin American currencies after Chile’s peso, and has risen 5% since touching a record low on 23 October. The peso traded at 12.78 per US dollar. A leading currency strategist in Mexico City commented that, "There is greater optimism that liquidity has made a comeback. This is making investors confidence flow back toward emerging markets."

With the turbulence of current markets, the tendency to step back and do nothing is understandable. Therefore, with the need for advice becoming more apparent by the day, this is the time to position your clients to take advantage of the opportunities that will present themselves in due course. Your Hansard account executive will be pleased to illustrate how this can be done by using our regular premium structures and fund links in combination.

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.