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ECONOMIC OUTLOOK

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https://www.globalbankingandfinance.com/high-chance-of-inflation-falling-below-one-per-cent-in-2015/

The importance of monetary policy

The most recent data indicate that the environment for the European economies has been mixed over the last months; GDP growth in the European Union and Euro Zone has slowed with year-on-year growth in the second quarter of 2014 standing at 1.2% and 0.7% respectively, down from the previous quarter (1.4% and 1.0%, respectively). There has also been a downward trend in the indicators measuring confidence and economic sentiment in both the Euro Zone and European Union.

It is the decline in the contribution from investment and net external demand that stands out particularly in the Euro Zone’s GDP in 2Q14, though this is partially offset by an improvement in private and public consumption.

CaixaThe most recent trend is a setback for expectations of a more significant economic recovery in the short/mid-term; this was confirmed when the ECB forecasts for GDP growth in the Euro Zone for 2014 and 2015 were revised down at the meeting held in September to analyze monetary policy.

Specifically, the ECB’s latest forecasts for GDP in the Euro Zone are for 0.9% growth in 2014, down 0.2% from June’s projections. The forecast for GDP growth in 2015 is 1.6% (0.1% down from June), going up to 1.9% in 2016 (0.1% up from June).

In 2014, the ECB has lowered its reference rates twice, although was less than in previous years. After cutting reference rates by 0.50% to 0.25% in 2013 (taking the rate on the main refinancing operations as reference), at the meeting of June 2014 the European Central Bank made a further cut of 0.10% in intervention rates (at the time to record lows of 0.15% for the main refinancing operations). At the September meeting, the European monetary authorities again lowered their key interest rates, setting the rate for the main refinancing operations at 0.05% (a further cut of 0.1%), a new record low for this reference rate.

The rate on the marginal lending facility, which was at 0.75% in the end of 2013, went down to 0.3%, while the rate for the deposit facility fell from 0.0% at the end of 2013 to -0.2%. This is of the utmost importance insofar as the absorption rate of funds moves into negative territory, which means the ECB wants banks to be more available to grant financing to the economy.

In addition to changes to the intervention rates, the Central Bank confirmed other unconventional monetary policy measures aimed at a better transmission of these changes to the economic activity. Under these measures, the ECB gives banks the option to take funds maturing in September 2018 corresponding to the amount of credit granted to the non-financial private sector, excluding loans to households for the purchase of houses, but which could be increased in the future through operations of a similar nature. The first targeted longer-term refinancing operation (T-LTRO) came in September, and a second is planned for December. The ECB also announced the purchase of some assets that the financial institutions have in their portfolios.

As for the United States, the latest indicators point to a more robust growth in economic activity in the second and third quarters following the unexpected fall in GDP registered in the first three months of the year. The improvement is on the back of a more positive performance of investment and private consumption, reflecting the gradual improvement in the labour market. Thus, after going down 2.1% in the first quarter, the GDP growth rate rose to 4.6% in the second quarter and is expected to be around 3.0% in the third quarter.

As a result of this momentum in the US economy, the FED is continuing the process of reducing the monetary policy incentives for economic growth through a steady cutback in the purchase program of assets on the banks’ balance sheets (initially set at USD 85b/month to USD 15b/month at the mid-September meeting).

However, the Fed Chair-woman has already acknowledged the possibility of bringing forward an increase of intervention rates; meanwhile, at the last meeting she again stated that the key interest rates would remain at quite low levels for a long period of time, even after the asset purchase program is withdrawn.

It is again stressed that monetary policy has been the preferred instrument to stimulate the economy since the start of the financial crisis. With the substantial decline in inflationary pressure, monetary policy has become even more accommodating, not only through the lowering of the reference rates to record lows, often to near zero, but also through the use of unconventional measures that inject liquidity into the financial system.

The US Federal Reserve and the Bank of England have kept their reference rates at low levels over the last year (between 0.0% and 0.25% in the United States and at 0.5% in the United Kingdom). These central banks have also undertaken asset purchase programs designed to influence the long-term interest rates, which in the case of the US are now coming to an end.

The ECB has lowered its intervention rates to historic lows (0.05% since the September 2014 meeting) and in mid-2013 started giving the market a perspective on the future evolution of monetary policy, stating that it will remain accommodative for as long as necessary as a way of anchoring long term interest rates.

It should be noted that over recent months there has been a considerable decline in yields on the public debt securities of most European countries; this reflects the expectation that monetary policy will remain accommodative in a context of low GDP growth rates and low inflation rates, particularly in the Euro Zone where reference has been made to the risk of deflation on several occasions. It is also stressed that the neutrality levels of interest rates are perceived to be lower now than in other economic contexts due to the fact that inflation is anchored at record low levels.

There has also been a marked decrease in the credit spreads associated to the more peripheral Euro Zone countries in relation to the German public debt securities with the same maturity, reflecting a reduction in the respective risk premiums. However, this decline was not linear over the whole year and at times of greater instability in the financial markets, the credit spreads associated to the more peripheral Euro Zone countries widened.

CaixaBI, Best Investment Bank in Portugal

Intervention Rate of main Central Banks (%)

chart credit Bloomberg

evolution of oil prices

evolution of oil prices – chart credit bloomberg

Evolution of the 10 years Yields for Germany, Portugal, Spain and Greece (%)

chart credit Bloomberg

 

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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