Good news and bad in the latest  investor confidence sounding from State Street. The overall index took a dive again — third month in a row — and is now barely above neutral. That’s the bad news if you are keen to see risk assets do well.

The good news is that despite three months of falling the index is still above 100, showing that risk appetite remains present among the U.S. financial services firm’s institutional investor cllients, albeit only just.

But add to that State Street’s findings that the fall in its global index was almost entirely due to Asian investors. The regional indices for North America and Europe both rose.

So heading into the last month of the year, with questions lingering about the state of the world economy and a strong desire among many to lock in this year’s profits, investors are still relatively bullish.

Will it last?

Equities may be the poster child for this year’s market recovery, but corporate bonds have been the runaway outperformer.

As the graphic below shows, corporate debt was less volatile and moer profitable over the past nearly three years of crisis and recovery — even “junk” bonds.

This year’s performance for corporate bonds has been stunning. In December last year, the spread between global large cap company debt and U.S. Treasuries was 155 basis points, according to Bank of America Merrill Lynch. It has now narrowed to around 52 basis points.

The performance of high-yield, or “junk” bonds, has been even better. From a spread of 2,193 basis points in December, the BoA-ML global high-yield index now registers 773.

And what now? Investors still like the asset class, but there is evidence that the degree of passion may be cooling.

(Graphic: Scott Barber)

Britain’s pound has long been the whipping boy of notoriously fickle currency markets, but there are worrying signs that it’s not just hedge funds and speculators who have lost faith in sterling. Reuters FX columnist Neal Kimberley neatly illustrated yesterday just how poor sentiment toward sterling in the dealing rooms has become and the graphic below (on the sharp buildup of speculative ’short’ positsions seen in U.S. Commodity Futures Trading Commission data) shows how deeply that negative view has become entrenched.              

 While the pound’s inexorable grind down to parity with the euro captures the popular headlines, the Bank of England’s index of sterling against a trade-weighted basket of world currencies shows that weakness is pervasive. The index has lost more than a quarter of its value in little over two years — by far the worst of the G4 (dollar, euro, sterling and yen) currencies over the financial crisis. The dollar’s equivalent index has shed only about a third of the pound’s losses since mid-2007, while the euro’s has jumped about 10% and the yen’s approximately 20% over that period.

There’s no shortage of negatives — Britain’s deep recession, recent housing bust, near zero interest rates and money printing, soaring government budget deficit (forecast at more than 12% pf GDP next year, it’s the highest of the G20) and looming general election in early 2010. In the relative world of currency traders, not all of these are necessarily bad for the pound — the country is emerging tentatively from recession, the dominant financial services sector is recovering rapidly and  short-term interest rates (3-month Libor at least) do offer better returns than the dollar, yen, Swiss franc or Canadian dollar. 

But recent data from the IMF on global hard currency reserves shows there may be a more disturbing exit of central bank reserve managers from the pound (no stranger to process of losing reserve currency status, as its pole position was ceded to the dollar after WWI).  Sterling’s share of the almost $7 trln of world central bank reserves — which are rising sharply again after a brief hiatus due to the credit crunch — is being steadily eroded. 

Although nominal reserve holdings of sterling (the rise of which prior to the crisis was seen as a powerful supporter of both the currency and gilt market) did rise by more than $10 bln in the second quarter, they remain about $24 billion below the peaks of Q2 2008. What’s more, Citi economist Michael Saunders estimates that once you adjust for revaluation effects of currency rate swings, central bank holdings of sterling actually fell in Q2 this year.  He reckons that, accounting for these adjustments, Q2 was the second consecutive quarter of net sterling sales by central banks and that the 4 billion pound drop in nominal sterling holdings was the biggest on record. Saunders concludes:

The huge inflows of global FX reserves into sterling and gilts have played a big role in financing the fiscal deficit in recent years. At present, the fiscal deficit is being wholly funded by the BoE, but sterling remains vulnerable and gilts seem highly vulnerable as and when QE ends.

(Graphs by Scott Barber and IMF/Citi)

They may be placing smaller bets, but sovereign wealth funds were back with a vengeance in the third quarter.

Global corporate mergers and acquisitions activity involving sovereign wealth funds jumped sixfold to nearly $22 billion in the quarter, with 37 deals completed. Global announced M&A volumes involving state investment vehicles stood at $21.8 billion, up from $3.6 billion in the second quarter, according to our data.

The number of deals more than doubled from 17 in the April-June period. Only two weeks into the fourth quarter, there were five pending or completed deals with a combined value of $164.7 million. At the height of the boom in the first quarter of 2006, sovereign wealth funds sealed 35 deals worth $45.7 billion.

Managers at sovereign wealth funds -- those who have kept their jobs -- probably feel they have a lot to make up for, having lost most of some $80 billion they poured into banking shares before the peak of the crisis.

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.

The world's leading sovereign wealth funds are gathering in Baku, capital of Azerbaijan, for a two-day inaugural meeting which ends on Friday.

A year after adopting the Santiago Principles of best practice guidelines, they are meeting next to the Caspian sea to review investment activities and assess how regulation and efforts to open up are helping them gain wider acceptance in a still-sceptical world.

The participants include SWFs from China, Kuwait, Azerbaijan, Australia, Libya, Ireland, Singapore and New Zealand. The meeting is hosted by the State Oil Fund of Azerbaijan - which made a record (and rare for SWFs) profit last year thanks to a conservative investment strategy.  The $11-billion fund, which made a record profit of around $300 million, or 3.7-3.8 percent in 2008, has said it wants to add riskier assets back onto the portfolio gradually.

The meeting comes as a report to be published this week shows a sharp fall in investment activity in Q2. According to global consultancy Monitor Group, SWfs made 11 investments totalling $3.5 billion in Q2, the lowest spending since the final three months of 2004.

Nineteen deals have been either announced or pending completion during the three months ending June, suggesting that activity might improve later this year. Monitor says the funds returned to investing in real estate after they had steered well clear over the previous two quarters.

"SWFs are cautiously returning to the market with a long-term approach to their investments, putting their losses behind them and resuming the business of investing abroad," it says.

(Photo by Natsuko Waki)

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

Are equities risky assets, or return assets? Watch Mark Tinker, Fund manager of the AXA Framlington Global Opportunities Fund, who talks about how the market has more room for an upside now that distressed sellers are gone.

Government-owned institutions are becoming big drivers of sustainable investing — or buying firms which are socially and environmentally responsible, or sectors which tackle climate change or resource scarcity.

Norway’s $400-billion-plus sovereign wealth fund, which is the world’s second largest, is a big advocate of “green” investing, naming and shaming companies which do not fit the investment guidelines set by the government.

The guidelines rule out holding investments in certain firms,  for instance those that produce nuclear arms or cluster munitions, or that damage the environment or abuse human rights.

It has just expelled Israel’s Elbit Systems for supplying surveillance equipment for the West Bank separation barrier.

RCM, equity-management arm of Allianz Global Investors, says that sustainable investment is gaining momentum and offers investors a unique diversifier.

RCM’s sustainability investment fund, which has the French public pension scheme ERAFP among its clients, likes firms which manage Environmental, Social and Governance (ESG) risks or sectors which are engaged in trends such as demographic trends, climate change (eg solar power) or resource scarcity.

Water is one of RCM’s themes – also for Norway’s SWF and other investors – given the limited supply of water and unsustainable global water usage.

The ethical investment policies of Norway’s SWF is closely studied by researchers from Oxford University (who runs Oxford SWF Project) in a new paper just published.

Click here to see the performance of sustainability investing and world stocks.

It’s good to drink it, but it seems good to sit on it too.

Fine wine, yielding double-digit returns, is low risk and good diversifier given its weak correlation to the return of asset classes — according to a fund which invests in fine wine.

The Wine Investment Fund says investors are receiving returns (after all fees and expenses) equivalent to 13.01% per annum over the last 5 years.

“This year’s payout represents a real return in excess of 70% or 10% per annum when allowing for inflation.  By comparison, over the same period the FTSE’s real return is -3.5% and a typical savings account would have generated a real return of less than 10%.  Fine wine has produced positive and consistent returns for decades now.  It really is proving its worth and we see more professional investors using it as a valuable diversification tool within a properly managed investment portfolio,” says Andrew della Casa, director of the fund.

The fund invests predominantly in wines from Bordeaux, which is housed in a “UK government bonded” warehouse and is insured at replacement value.

Minimum investment in the fund, which says fine wine maybe the only asset class with a perfect inverse supply curve, is 10,000 pounds and avoids buying fashionable or trophy wines.

(Photo: Natsuko Waki)