Three snapshots for Friday
Although the focus has been on Spanish debt auctions this week as this chart shows Italy has much further to go in meeting this year’s funding needs.
German business sentiment rose unexpectedly for the fifth month in a row in March, moving in the opposite direction to the composite PMI:
Greg Harrison points out 82% of S&P 500 companies have beaten their Q1 earnings estimates so far. It is early days but it it continues that would be the highest for at least five years. Is this a sign that the strength in corporate earnings in continuing? The chart below suggests as least part may be due to falling expectations coming into earnings season.
Credit rally: Bubble or not?
Corporate bonds are back in vogue this year but how sustainable is it?
Just to highlight how bullish people have become, see following comments from fund managers:
“We do see scope for 2012 to deliver narrower corporate credit spreads and that will be the major positive contributor to fixed income returns this year.” – Chris Iggo, CIO Fixed Income, AXA Investment Managers)
“Corporate bonds should be a major source of performance for the bond component of Carmignac Patrimoine (fund) in 2012.” – French asset manager Carmignac Gestion
Bank of America Merrill Lynch’s performance data as of end-Jan shows high-yield bonds are the second best performing in the bond group with YTD gains of 2.9%, ahead of 10-year Treasuries at 0.8 percent. The best performing is “preferreds”, a sort of hybrid bond/equity instrument which returned 4% this year already.
BofA’s investment team thinks equities will catch up and outpace bonds over the medium term however, because equities have had secular underperformance, pension funds and other clients are structurally under-positioned in stocks, and relative valuations favourequities.
The bank also warns: “Recent inflows into high-yield funds have been bubble like, with record-setting inflows into HY bonds.”
Iggo from AXA is also cautious.
Deutsche’s investment themes for 2012
We just finished our three-day Reuters 2012 Global Investment Outlook summit in London, New York and Hong Kong, where prominent money managers have discussed their outlook for next year. (For more click here)
Deutsche Bank Private Wealth Management (whose official was also a guest at the summit) is telling its clients the following 10 investment themes for next year.
1. Safe may not be safe Don’t react to uncertainty by automatically taking refuge in traditional safe havens such as cash, sovereign bonds, real estate or precious metals as they may prove less safe than they appear.
2. Walk before you run Build up holdings gradually, first focusing on “equity lite” type holdings
3. Ready, steady… go? When we get some clarity on euro zone resolution, not only equities and bond markets will start to have a different momentum.
4. Be nimble, but with a safety net Consider resorting to regular, dynamic portfolio rebalancing to adjust to economicand market developments.
5. Reason should dominate emotion Avoid an emotion-driven response that is likely to result in wrong investment decisions, andwrong timing, and make sure that reason always dominates the decision-making process.
Healthy flows into money market funds
Despite concerns about contagion from the euro zone, investors injected fresh funds into U.S. mutual funds, including money market funds, latest weekly flow data from Lipper shows.
The week ended Nov 16 saw a net $10 billion inflow into mutual funds, including ETFs, while investors were net buyers of equity funds with flows at $2.8 billion. Equity funds, including ETFs, witnessed their fifth consecutive week of net inflows.
Reflecting jitters over the debt crisis however, investors injected $2.8 billion into taxable fixed income funds and for the second week in a row bought into money market funds to the tune of $2.9 billion.
Despite tensions in the funding market (LIBOR dollar rates were up again and 3-month euro/dollar cross-currency basis swaps hit their widest since December 2008 at 134bps yesterday), money market funds especially in the United States are attracting safe-haven flows. According to flow data from the Investment Company Institute, total U.S. money market mutual funds increased by $6.41 billion to $2.645 trillion for the week ended Wednesday.
So it seems no “breaking the buck” fears are resurfacing just yet.
Money market funds are a very safe investment vehicle, and in fact are often looked at as simply high yield bank accounts. Of course, they don’t offer nearly the ROE as a typical stock might.
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Equities — an ‘even years’ curse?
Are global equity markets under an ‘Even Years Curse’ that sees them underperform bonds in even-numbered years but beat fixed-income returns in odd-numbered ones? After some number-crunching, Fidelity International’s’ director of asset allocation Trevor Greetham suspects so.
“It’s not just hocus-pocus but to do with global inventory levels,” he explained at a forum organised by the London-based investment house.
The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.
Looking at the MSCI All World Equity Index, Greetham found equities generating a 69-percent return over the 12-year period starting from 1998. Breaking this down into odd and even years, equities went down by 30 percent in even years, and up by 143 percent in odd years.
On an annualised basis, growth was 4.5 percent, down three percent in even years and up 7.7 percent in odd-numbered years.
Compared against the JPMorgan Government Bond Dollar Index, equity returns beat bonds by 13 percent per annum on an average compound basis during odd-numbered years. In the even-numbered years, global stocks underperformed bonds by 15 percent.
from DealZone:
R.I.P. Salomon Brothers
It's official: Salomon Brothers has been completely picked apart.
Citigroup's agreement to sell Phibro, its profitable but controversial commodity trading business, to Occidental Petroleum today puts the finishing touches on a slow erosion of a once-dominant bond trading and investment banking firm.
When Sandy Weill (pictured left) staged his 1998 coup -- combining Citicorp and Travelers, Salomon Brothers was a strong albeit humbled investment banking and trading force. Yet little by little, a succession of financial crises, Wall Street fashion and regulatory intervention has whittled away at the once-dominant firm.
Not long after the Citigroup was formed, proprietary fixed income trading -- once the domain of John Meriwether, was shut down after the Asian debt crisis fueled losses that Weill could not stomach.
The Salomon name disappeared long ago as investment bankers and underwriters were rebranded Citigroup Global Markets.
Now Phibro, the former Philips Brothers that merged with Salomon in the early 1980s, is to be cast off because its energy traders made too much money when the rest of the bank suffered losses and required a $45 billion of taxpayer bailout.
