Global investors wary of UK markets as Brexit fog thickens

IMF Managing Director Christine Lagarde, People’s Bank of China Deputy Gov. Yi Gang, Bank of England Gov. Mark Carney and Germany’s Finance Minister Wolfgang Schauble, speak at CNN Debate on the Global Economy at IMF headquarters in Washington recently. (AP)
Updated 12 October 2016

Global investors wary of UK markets as Brexit fog thickens

LONDON: Money managers charged with investing trillions of dollars of global savings haven’t abandoned Britain just yet, but the uncertainty created by Brexit has made them extremely wary about investing in UK Plc.

Portfolio managers, strategists and investment officers at 13 asset or wealth management firms controlling more than $7 trillion of assets have told Reuters that their broadly negative view on Britain hasn’t changed since the June 23 referendum that paved the way for its exit from the European Union.
Many of these money managers currently hold UK stocks and bonds and have no fixed plan to cut and run yet. Some say they will consider adding to their holdings once the Brexit fog of uncertainty lifts.
But right now, most say the situation is very fluid, they are nervous about developments and are ready to review holdings at any stage.
“We are losing visibility on the UK,” said Eric Brard, head of fixed income and debt asset management at Amundi, a global asset manager with more than $1.1 trillion worth of assets under management.
For a country that relies on overseas investors to balance its books by funding its current account deficit — “the kindness of strangers,” in the words of Bank of England governor Mark Carney — even the hint that capital inflows might dry up could have serious consequences.
With one of the biggest balance of payments deficits in the developed world of around 6 percent of annual economic output, Britain needs that capital to keep coming in. If it’s not forthcoming, sterling’s value — the shop window price for all UK assets to the rest of the world — must drop far enough to make it attractive enough to return.
“For a period of time the UK was an attractive place to put capital. But that has certainly changed for us and a number of other people that I speak to,” said Ryan Myerberg, portfolio manager at Janus Capital, a US firm with $195 billion of assets under management.

THE PENNY DROPS

The post-Brexit volatility across UK markets has been best captured by the wild swings in the pound, which have been more akin to an emerging market currency than the fourth biggest and most traded currency on the planet.
Sterling has fallen 18 percent since the referendum and five percent in the last five days. It’s at a 31-year low against the dollar, its lowest on a trade-weighted basis since the 1970s, and the BoE is investigating last Friday’s “flash crash” which saw it plunge 10 percent in a matter of hours before recovering.
“Sterling should eventually go lower. How much lower though?” said Brian Tomlinson, senior fixed income portfolio manager at Allianz Global Investors, a firm with $520 billion of assets under overall management.
As long as the Bank continues with super-easy monetary policy the currency will remain on the defensive, though UK stocks and bonds will retain some allure. But any indication that a spiraling sterling collapse would force the Bank to shift to a tighter stance could quickly change that.
For now, the politics surrounding the details of Brexit and its effect on the economy and financial industry is driving sentiment.
Prime Minister Theresa May effectively fired the Brexit starting gun on Oct. 2 by saying negotiations would start next March. Worryingly for investors, it appears a ‘hard Brexit’ may be on the cards, where control of immigration takes priority over Britain’s tariff-free access to the European single market.

TOXIC MIX

If investors doubted the UK government’s ability to negotiate a successful Brexit strategy, they are aware that elections in France and Germany next year will only stiffen the resolve of the rest of the EU in these negotiations.
“For some investors in the UK the way politicians are heading the discussion is a concern, because of the uncertainty around the negotiations,” said David Zahn, head of European Fixed Income, Franklin Templeton Fixed Income Group.
The growing sense that Brexit’s political process will be chaotic has sent UK markets into a spin. UK government bonds have started to tumble, pushing yields sharply higher, albeit from historically low levels.
The benchmark 10-year gilt yield this week rose above 1 percent for the first time since June and is up 30 basis points so far this month, on course for the biggest monthly spike since February last year.
This is a potentially toxic mix: a tumbling currency, rising bond yields, accelerating inflation and a sluggish economy.
“I don’t see where the additional portfolio flows are going to come into a currency that has long held a reserve currency status but now looks vulnerable,” said Mark Dowding, co-head of investment grade, BlueBay Asset Management, a firm with $58 billion of assets under management.
But some investors point out that the dance between a weaker pound and stronger stock market may continue a while longer yet.
“We have been relatively positive on the equity market because of the multi-national exposure around the currency and the rebound in oil markets,” said Thushka Maharaj at JP Morgan Asset Management’s Global Multi-Asset Solutions team.
“It has some more room to go but it’s not clear how much. It depends where the currency stabilizes,” she said.
JP Morgan Asset Management has a total of $1.6 trillion of assets under management.
Sterling is the third largest currency in central banks’ foreign exchange reserves holdings, the equivalent of more than $350 billion, although it is still a long way behind the US dollar and euro.
More than half of UK stocks are held by overseas investors, up sharply from less than 10 percent as late as the 1980s and around 35 percent at the turn of the century.
Overseas investors hold just over a quarter of outstanding British government bonds, or around 500 billion pounds’ worth.


Trade truce boosts China’s hopes after weakest growth in 29 years

Updated 18 January 2020

Trade truce boosts China’s hopes after weakest growth in 29 years

  • US deal revives business confidence with latest data showing surprise acceleration in industrial output and investment

BEIJING: China’s economic growth cooled to its weakest in nearly 30 years in 2019 amid a bruising trade war with the US, and more stimulus is expected this year as Beijing tries to boost sluggish investment and demand.

But data on Friday also showed the world’s second-largest economy ended the rough year on a somewhat firmer note as a trade truce revived business confidence and earlier growth boosting measures finally appeared to be taking hold.

As expected, China’s growth slowed to 6.1 percent last year, from 6.6 percent in 2018, data from the National Bureau of Statistics showed. Though still strong by global standards, and within the government’s target range, it was the weakest expansion since 1990.

This year is crucial for the ruling Communist Party to fulfill its goal of doubling gross domestic product (GDP) and incomes in the decade to 2020, and turning China into a “moderately prosperous” nation.

Analysts believe that long-term target would need growth this year to remain around 6 percent, though top officials have warned the economy may face even greater pressure than in 2019.

More recent data, along with optimism over a Phase 1 US-China trade deal signed on Wednesday, have raised hopes that the economy may be bottoming out.

Fourth-quarter GDP rose 6 percent from a year earlier, steadying from the third quarter, though still the weakest in nearly three decades. And December industrial output, investment and retail sales all rose more than expected after an improved showing in November.

Policy sources have told Reuters that Beijing plans to set a lower growth target of around 6 percent this year from last year’s 6-6.5 percent, relying on increased infrastructure spending to ward off a sharper slowdown. Key targets are due to be announced in March.

On a quarterly basis, the economy grew 1.5 percent in October-December, also the same pace as the previous three months.

“We expect China’s growth rate will come further down to below 6 percent” in the coming year, said Masaaki Kanno, chief economist at Sony Financial Holdings in Tokyo.

“The Chinese economy is unlikely to fall abruptly because of ... government policies, but at the same time the trend of a further slowdown of the economy will remain unchanged.”

December data released along with GDP showed a surprising acceleration in industrial output and a more modest pick-up in investment growth, while retail sales were solid.

Industrial output grew by 6.9 percent from a year earlier, the strongest pace in nine months, while retail sales rose 8 percent. Fixed-asset investment rose
5.4 percent for the full year, but growth had plumbed record lows in autumn.

Easing trade tensions have made manufacturers more optimistic about the business outlook, analysts said, though many of the tit-for-tat tariffs both sides imposed during the trade war remain in place.

“Despite the recent uptick in activity, we think it is premature to call the bottom of the current economic cycle,” Julian
Evans-Pritchard and Martin Rasmussen at Capital Economics said in a note.

“External headwinds should ease further in the coming quarters thanks to the ‘Phase One’ trade deal and a recovery in global growth. But we think this will be offset by a renewed slowdown in domestic demand, triggering further monetary easing by the People’s Bank.”

Among other key risks this year, infrastructure — a key part of Beijing’s stabilization strategy — has remained stubbornly weak.

Infrastructure investment grew just 3.8 percent in 2019, decelerating from 4 percent in January-November, despite sharply higher local government bond issuance and other policy measures.

“This shows that local governments continued to face funding constraints,” said Tommy Xie, China economist at OCBC Bank in Singapore.

Some analysts are also worried about signs of cooling in
the housing market, a key economic driver.

Property investment growth hit a two-year low in December even as it grew at a solid 9.9 percent pace in 2019. Property sales fell 0.1 percent, the first annual decline in five years.

Beijing has worked for years to keep speculation and home price rises in check, and officials vowed last year they would not use the property market as a form of short-term stimulus.

China will roll out more support measures this year as the economy faces further pressure, Ning Jizhe, head of the Statistical bureau told a news conference.

Ning noted that per capital GDP in China had surpassed $10,000 for the first time last year. But analysts believe more painful reforms are needed to generate additional growth.

Beijing has been relying on a mix of fiscal and monetary steps to weather the current downturn, cutting taxes and allowing local governments to sell huge amounts of bonds to fund infrastructure projects.

Banks also have been encouraged to lend more, especially to small firms, with new yuan loans hitting a record 16.81 trillion yuan ($2.44 trillion) in 2019.

The central bank has cut banks’ reserve requirement ratios (RRR) — the amount of cash that banks must hold as reserves — eight times since early 2018, most recently this month. China has also seen modest cuts in some lending rates.

Analysts polled by Reuters expect further cuts in both RRR and key interest rates this year.

But Chinese leaders have repeatedly pledged they will not embark on massive stimulus like that during the 2008-09 global crisis, which quickly juiced growth rates but left a mountain of debt.

Containing financial system risks will remain a high priority for policymakers this year. Corporate bond defaults hit a new record last year, while state-linked firms had to step in to rescue several troubled smaller banks.

Even with additional stimulus and assuming the trade truce holds, economists polled by Reuters expect China’s growth will cool this year to 5.9 percent.