News > All

Daily Scan: Asian shares end mixed; China industrial output slumps
Capital Markets
<p>Updated throughout the day</p> <p>November 11</p> <p>Chinese shares climbed higher Wednesday after a mixed bag of economic data spurred bets on more stimulus measures from Beijing. The Shanghai Composite ended the day up 0.27%, while the Shenzhen Composite finished the session up 1.97%. Ever the contrarians, their Hong Kong-based H-share brethren tanked 0.67%. As for the rest, here’s how they did:</p> <p> Hang Seng Index: -0.22%<br /> Nikkei 225: +0.10%<br /> Straits Times Index: -0.22%</p> <p>Things are looking a whole lot better in Europe. The U.K.’s FTSE 100 has climbed 0.54%, while the German DAX and French CAC have surged 1.05% and 0.71% respectively. Draghi’s upcoming speech and the finalized megabrewer deal have no doubt aided in their lifting.</p> <p>Here’s what else you need to know:</p> <p>AB Inbev snaps up SABMiller for $105.5 billion. After weeks of backs and forths between the two companies, Anheuser-Busch InBev announced on Wednesday that it had formally agreed to purchase SABMiller for a whopping £69.78 billion ($105.5 billion). Cheers, people. Wall Street Journal</p> <p>Chinese industrial production misses estimates. China’s highly-anticipated industrial output figure came in at 5.6% for October, slightly weaker than the expected 5.8% reading and also below September’s 5.7% growth rate. The nation’s retail sales report however was slightly better, punching at 11% year on year versus a 10.9% expected climb. Still though, this should be enough to raise more than a few eyebrows over the country’s economic outlook. ForexLive</p> <p>Yuan hits near one-month low. China’s yuan was trading at 6.3617 against the dollar earlier this morning, slumping just a whisker shy of its one-month low after the PBOC fixed its midpoint rate 6.3614. This was the seventh time a row the bank has fixed the currency at a weaker level. SCMP (paywall)</p> <p>BOJ’s Harada defends stimulus program. In his first speech since he joined the Bank of Japan, policy board member Yatuka Harada defended the bank’s massive program by saying that it has boosted company earnings and lifted job growth by tanking the yen. He did however acknowledge that there were “worrying signs” in private consumption, and he did add that should the job market worsen, “it’s necessary to offer additional monetary easing without hesitation.” Reuters</p> <p>Consumer sentiment down under hits a new high. In a surprise score, the Westpac Melbourne Institute Index of Consumer Sentiment rose from 97.8 in October to 101.7 in November, leading Westpac’s Chief Economist, Bill Evans, to say: “This is a cracking result. Apart from the brief surge we saw following last May’s Budget this is the highest print for the Index since January 2014.” Melbourne Institute (pdf)</p> <p>Minneapolis Federal Reserve Bank names new president. Neel Kashkari, the man who led the controversial TARP program at the U.S. Treasury during the financial crisis, will replace Narayana Kocherlakota as president and CEO at the end of the year. The troubled asset relief program was used as a venue to bailout banks and major financial institutions. Kashkari, who is not an economist, worked at Goldman Sachs, making him the fourth of 12 presidents to join the Federal Reserve system. He also ran for Governor of California. Wall Street Journal (paywall)</p> <p>Three charged for massive financial hack. U.S. prosecutors charged one U.S. man and two Israeli men in relation to the cyber hack of JPMorgan, Fidelity, and other financial institutions between 2012 and 2015. The federal prosecutor called it “securities fraud on cyber-steroids.” Charges include hacking and identity theft. BBC</p> <p>Japan Inc. earnings have been pretty dog-eat-dog. Amid volatile commodity prices, automobile demand, and smartphone supplies, a serious zero-sum game has emerged in corporate Japan. Mitsubishi Corp – once the top dog among the big resource trading houses – has been knocked off the top spot by Itocho, while Sony emerged as the winner in its battle against Sharp. Nikkei Asian Review</p> <p>Died: Former West German Chancello
Avenue Capital shuts down original hedge fund
Hedge Funds
<p>2015 has not been kind to distressed asset funds. Oaktree for instance has been posting lackluster earnings, and many of them got creamed betting on troubled energy companies. For Avenue Capital however, the year marks one of the worse events in its 20-year history – well, symbolically at least:<br /> “Amid a negative performance and a shift to funds with longer-term investor commitments, the distressed-investing firm Avenue Capital Group is closing its original hedge fund, Avenue Investments, and returning money to the fund's investors.”<br /> CNBC does add that the fund composed just $350 million out of the firm’s $13 billion total AUM though, so it might not have any material effect on Avenue as a whole.<br /> Photo: Bryan Mills</p>
S&P Dow Jones Indices rejects China A-share benchmark inclusion
Asset Management
<p>S&amp;P Dow Jones Indices continues to exclude Chinese A-shares from all of its standard global benchmark indices.</p> <p>“The consensus is to take a wait-and-see approach as significant uncertainty remains around what the eventual landscape will be for foreign investors,” according to a press release</p> <p>For now, international funds will have to benchmark against alternatives indexes such as the S&amp;P Emerging BMI + China A, S&amp;P Global BMI + China A, and S&amp;P Total China BMI.</p> <p>Despite already introducing measures to open up the China A-shares market, policy makers need to do more to reassure global investors. This includes improving the structure of qualified investor schemes, clarifying tax issues, resolving logistical problems caused by same-day settlement and reducing uncertainty about repatriating foreign exchange.</p> <p>“Advancement continues, but the current market environment supports a cautious approach on potential benchmark inclusion,” noted S&amp;P Dow Jones.<br /> Photo: Stanley Young</p>
Asia-Pac ETFs post fifth straight month of inflows
Asset Management
<p>With China’s economic outlook increasingly going from bad to worse, you’d almost think investors would want to hold off pumping money in the region. Nope.</p> <p>According to London-based research and consultancy firm ETFGI, Asia-Pacific ETFs and ETPs have just posted another month of strong inflows:<br /> “ETFs/ETPs listed in Asia Pacific ex Japan gathered 1.2 billion US dollars in net new assets in October 2015. This marks the 5th consecutive month of positive net inflows. The Asia Pacific ex-Japan ETF/ETP industry had 761 ETFs/ETPs, with 904 listings, assets of US$119.4 Bn, from 115 providers listed on 17 exchanges in 13 countries at the end of October 2015, according to ETFGI’s Global ETF and ETP insights report for October 2015.”<br /> Among the region’s biggest winners in October were Samsung AM, which gathered around $380 million, China AM, which raked in about $230 million, and CSOP/China Southern, which bagged $150 million. Year to date however HSBC/Hang Seng lords above them all with an impressive $5.8 billion in net inflows.</p> <p>Japan seems to be a lot better though, a sign that investors continue to be attracted to the region’s progressively changing business climate:<br /> “In Japan, YTD net inflows were up 121.9% on the record set last year, standing at US$35.0 Bn at the end of October 2015.”<br /> Photo: Charles LeBlanc</p>
No guarantee against hackers
<p>The alleged hacking scheme against 10 financial institutions and other US companies highlights the importance of cybersecurity for every firm.</p> <p>As Manhattan attorney Preet Bharara, who’s office has indicted three men, said, “[It is] a brave new world in hacking for profit…It is hacking as a business model.”</p> <p>So, a speech by Singapore’s former head of cybersecurity at FinanceAsia’s Annual Compliance Conference in Hong Kong on Tuesday was rather timely. (paywall)</p> <p>“We can never be 100% secure from cyberattacks. Never,” warned Alan Seow who was employed at Singapore’s Ministry of Communication and Information.</p> <p>Companies can put up some resistance by adopting a three-tiered approach: having effective defensive measures, rapid response processes and robust recovery systems.</p> <p>But, “even companies that spend a lot of money on experienced staff and put sensible measures in place have no guarantee of keeping ahead of hacking opponents,” reports FinanceAsia.<br /> Photo: Brian Klug</p>
China-focused hedge funds are back in the black
Hedge Funds
<p>The Shanghai Composite’s roller coaster performance may have obliterated hundreds of hedge funds, but according to eVestment’s latest Hedge Fund Performance report, those who managed to hold on are now firmly in the green:<br /> “China-focused funds’ 6.48% increase in October brought YTD returns firmly into positive territory for the year, 6.02%. The apparent defensive positioning which helped the universe avoid the severity of the country’s equity market losses in prior months caused the group to miss the majority of October’s large rally, however the universe still holds a significant edge YTD. The S&amp;P China BMI remains in negative territory in 2015, despite October’s 12.47% increase.”<br /> This is great news for Hong Kong, whose predominantly China-centric firms widely outgunned their North American, European, and even their mainland-domiciled peers year to date:<br /> “Products operating out of Hong Kong have outperformed all other regional and country specific fund domiciles in 2015, primarily due to the predominance of China-focused products. The universe has widely outperformed China domiciled products, which in turn have still outperformed Chinese equities.”<br /> Aggregate hedge fund performance however has been pretty dismal compared to the S&amp;P, with the former returning just 1.94% in October while the latter posted an impressive 8.44% return. In fact, not even a single strategy, market, or region focus came close to it, and it only becomes worse if you factor in the SHCOMP’s staggering 10.54% rise in the same time period.</p> <p>Nevertheless, China, Japan, and Russia funds beat the SPX quite handily YTD, returning 6.02%, 5.98%, and 15.27% respectively, so it wasn’t all that bad for the industry.<br /> Photo: Jim Winstead</p>
A step in China's economic journey
Capital Markets
<p>We emerge from the recent Chinese Communist Party Plenum with sketches of a new “five-year-plan.” Hurrah! There is always much fanfare around these events—not least in the investment community. We will no doubt hear the sentiment that China is a policy-driven stock market and so all the short-term traders are keen to see which sectors and industries are in favor. Then begins the game of who might get a subsidy, a contract or beneficial regulation.</p> <p>Fair enough, if that is your game.</p> <p>But I would argue that much of what has come out of the plenum is hardly a surprise. And you don’t need to think of China in terms of a policy-driven market. What guides the policymakers, after all, are the hopes and aspirations of over 1 billion people. That happens to be what drives corporate profits, too. So, China is a market that is driven by the population at large and you are likely to give your chances of investment success a boost by focusing on what matters to them.</p> <p>There were a couple of big non-surprises during the recent Plenum—growth remains a priority. Well, that is hardly new news. But it is good to be reminded that China is still growing—6.5% annual growth will probably be the target. This might seem a tragedy to those who became accustomed to 10% annual growth. But given that academic economists in the U.S. and Europe are publicly discussing “secular stagnation” these days, 6.5% seems pretty good.</p> <p>The end of the single-child policy is not exactly a well-kept secret. The Communist Party had been hinting at this and loosening such regulations for some time, in response to an aging and, ultimately, shrinking workforce. What effect will it have? Well, the birth rate might increase. But China is also getting to the point where it is fairly wealthy and birth rates are going to be presumably pretty low, and comparable to the rest of North Asia. The workforce can be “made younger” and increased by immigration or by overseas investment, both of which are already taking place.</p> <p>But we anticipated a couple of the initiatives in some of our recent commentaries on the region. In October, I wrote about “Asia’s Political Divide” and our October issue of Asia Insight discussed the “Asia Lens on Global ESG.” We see an increased focus on the welfare state, on the one hand, and environmental protection on the other. On welfare, the five-year plan intends to lift 70 million people out of poverty by 2020, through an improved social safety net: expanded pension coverage and accident and illness insurance protection. In addition, the rhetoric of environmental protection should see changes in taxation, more investment into non-fossil fuel energy, and more time and money spent cleaning up China’s air and water. Funding for such programs tied to social welfare was also highlighted with the decision to transfer more State assets currently, held at the government level, to its existing social security fund. China has also agreed to reduce emissions per unit of GDP by 40% to 45% by 2020, compared to 2005 levels and also to increase the share of non-fossil fuel energy to 15% within the same time frame. China has also committed to peak its carbon dioxide emissions by approximately 2030 and strive to hopefully reach that even earlier.</p> <p>China’s push for further economic integration and its efforts to address income equality continues in its new communiqué, with specific reference to access to nationwide education and vocational training. An initiative first proposed in 2013, known as “One Belt; One Road” will support this national push for equality, and attempt to address the geographical inequalities between central and western provinces from their counterparts along the eastern seaboard. In addition to the communiqué, China has also released a document highlighting reforms in its rural areas, specifically looking at the ability of farmers to monetize land rights. This has long been a sticking point, and should promote further urbanization.</p> <p>Why is this not a surprise? Well, China has been very successful at
Daily Scan: JPMorgan hackers charged; Fidelity marks down Snapchat stake
Capital Markets
<p>Updated throughout the day</p> <p>November 10</p> <p>The Nasdaq fell 0.2%, bouncing back slightly after a warning on Apple iPhone sales sent investors skittering. Apple's shares fell 3.2% Tuesday to $116.73. The Dow gained 0.2%, as did the S&amp;P 500. Credit Suisse said supply chain orders were slowing, indicating a weakening in demand. On the earnings scene Tuesday: Homebuilders D.R. Horton rose 2.6% on strong earnings and Beazer Homes rallied 3.26% after it reported robust quarterly numbers. Financial information purveyor Markit was slightly lower after meeting profit expectations but the stock is up 26% in the last 12 months.</p> <p>Here’s what else you need to know:</p> <p>Three charged for massive financial hack. U.S. prosecutors charged one U.S. man and two Israeli men in relation to the cyber hack of JPMorgan, Fidelity, and other financial institutions between 2012 and 2015. The federal prosecutor called is "securities fraud on cyber-steroids." Charges include hacking and identity theft. BBC</p> <p>Fidelity marks down Snapchat investment. Fidelity, one of the most high-profile investors in the four-year-old company, wrote down the value of its stake by 25% in the third quarter. Each share had been valued at $30.72 at the end of June, but fell to $22.91 valuation at the end of September. Financial Times</p> <p>New York governor supports minimum wage demonstration. Gov. Andrew Cuomo plans to institute a $15 minimum wage for all state workers, making New York the first state to mandate a higher minimum wage for employees. Cuomo's actions came the day fast food workers across the country went on strike for a $15 hourly wage. New York Times (paywall)<br /> Minneapolis Federal Reserve Bank names new president. Neel Kashkari, the man who led the controversial TARP program at the U.S. Treasury during the financial crisis, will replace Narayana Kocherlakota as president and CEO at the end of the year. The troubled asset relief program was used as a venue to bailout banks and major financial institutions. Kashkari, who is not an economist, worked at Goldman Sachs, making him the fourth of 12 presidents to join the Federal Reserve system. He also ran for Governor of California.  Wall Street Journal (paywall)<br /> Ten-year notes going like hotcakes at $24 billion auction. The U.S. Treasury securities sold at a yield of 2.322%, the highest in five months. Foreign demand was robust at 60.5% and direct bidding rose to 14.3%, the highest in six months.   Wall Street Journal (paywall)</p> <p>Died: Former West German Chancellor. Helmut Schmidt helped make West Germany an economic leader between 1974 and 1982. He was 96. Schmidt was a popular German personality, and was even given exemption from Germany's public smoking ban. The Guardian</p> <p>Valeant call with investors, Take 2. The beleaguered pharmaceutical company held a call Tuesday morning, announcing that it will close specialty pharmacy Philidor by the end of January, which would hit sales of its dermatological drugs. The stock fell 7% after the call but is now marginally higher. Valeant's first call on October 26 didn't do much to help the stock either. Valeant has lost two-thirds of its value since August. CNBC</p> <p>Catalonia votes to break from Spain. Separatists in the Catalonia regional parliament voted 72 to 63 to form their own European country. Madrid says "no way," but Catalonia, which has its own language and culture, says this is the start of an 18-month process that will include forming a Catalan tax authority and social security. NPR</p> <p>Modigliani painting sells for $170.4 million. "Nu couché" fetched the second highest price ever paid for an artwork at an auction. The Christie's sale allayed worries that the art market might be getting soft. NBC News</p> <p>Facebook likely to release news app Notify this week. The new app will let users know when their favorite news outlets have published articles. Partners include Vogue,  Mashable, Washington Post, and CNN. The Verge</p> <p>&nbsp;</p> <p>Cameron warns EU over U.K. terms. Prime Minister David Camer
Deutsche Bank quants explain hedge fund underperformance
Hedge Funds
<p>The market environment for hedge funds in 2015 has been “marked by an acute and prolonged de-risking episode,” a recent quant piece from Deutsche Bank notes. In fact the bank’s “volatility factor,” a measure that approximates high risk and low risk equity performance, reveals the most recent 2015 episode of de-risking was “deeper than that during (second half of) 2014, and its impact on fundamental equity managers was severe,” with its model hedge fund portfolio underperforming the general market by -4.8 percent since June.<br /> Hedge fund underperformance is not a new issue, a commonality in the recent quantitative easing period<br /> Separate analysis highlights a negative gross average monthly negative performance of -0.96 for the Barclay Hedge Fund Index. During this same period, June to October, the S&amp;P 500 delivered an average negative monthly performance of -0.146. This leads to an average monthly divergence between stocks and a hedge fund index of -0.814.</p> <p>The level of underperformance highlighted by Deutsche Bank might not be as significant as one thinks. Using the period of quantitative easing as a benchmark, this is visible when comparing the performance of the S&amp;P 500 Total Return Index to that of the Barclay Hedge Fund Index where investors can witness what is a very different level of performance. In 2014 the S&amp;P was up 13.69 percent versus the hedge fund index, up only 2.88 percent. The return differential resulted in an annual -10.81 percent underperformance by hedge funds, which is actually close to the annualized underperformance by hedge funds in the June to October period cited in the Deutsche Bank study. In other words, the recent underperformance by hedge funds, which are typically correlated to stocks nearly ¾ of the time, exhibited a significant lack of correlation on a price appreciation basis in 2014. The same thing happened in 2013, when the S&amp;P 500 Total Return Index was up 32.39 percent yet hedge funds were up only 11.12 percent, for a massive underperformance of -21.27 percent.</p> <p>In other words, at least when measured during the last several years of what has been called market numbing quantitative easing, the vast average of hedge funds have been significantly underperforming a simple investment in a the S&amp;P 500 index. While the Deutsche Bank report only focused on the June through October period, what they were really touching on is a much wider performance gap issue. The question is, with most hedge funds long only – and long only hedge funds being among the worst performers on the HSBC Hedge Weekly performance ranking – why were hedge funds underperforming by so much?<br /> Deutsche Bank says hedge fund underperformance triggered by volatility factor, which is different than VIX volatility<br /> The significant recent underperformance by stocks since June was triggered, in large part, by exposure to volatility. Just over half the June to October underperformance of Deutsche Bank’s model hedge fund portfolio to stocks, 2.6 percent over five months, is attributable to Deutsche Bank’s volatility factor exposure, the report said.</p> <p>It was almost a year ago that the Deutsche Bank Quantitative Strategy Research department, headed by Allen Wang, created the volatility factor formula, a ratio of “long high risk stocks / short low risk stocks.” In regards to the thesis for hedge fund underperformance, the validity of the measure is, in part, dependent on its record as an indicator of how actual stock market volatility impacts hedge fund performance. This would require testing of the Deutsche Bank volatility measure relative to hedge fund performance and actual CBOE VIX measured volatility.</p> <p>From Deutsche Bank’s perspective it is this volatility factor that “has been a major driver of systematic factor returns during 2015.”<br /> …Standard quantitative factors (styles) have, on average, tilted towards low volatility throughout the year; contributing to a large portion of their returns. Notably, momentum has a strong low volatility exposure which has c
Foundations and endowments suffer in Q3
Asset Management
<p>Foundations and endowments returned -5.23% in the third quarter, the worst performing quarter in four years.</p> <p>Trusts in the 1,500 plan Wilshire Trust universe had a median -4.53% return in the third quarter, down from -0.04% in the second quarter, reports Pensions &amp; Investments. Foundations and endowments were hit the hardest, while Taft-Hartley health and welfare plans performed the best of the group, returning a median -2.79%.</p> <p>Corporate defined benefit plans returned -3.62% and public defined benefit plans returned -4.81%. Taft-Hartley DB plans suffered with -4.81% returns.</p> <p>The second and third quarter of 2015 are the first consecutive negative quarters since 2008 and 2009.</p> <p>The fall in global equities hit all the plans last quarter. Foundations and endowments had average domestic equity allocations of 32.23% and international equity of 12.96%. These investors have had a median return of -1.37%  for the 12 months ending in September.</p> <p>Taft-Hartley health and welfare funds though are notoriously conservative, holding a medium U.S. bond allocation of 56.28%. These funds have also performed the best in the 12 months ending in September, with a median return of 0.43%.</p> <p>&nbsp;<br /> Photo: Emery Way </p>