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HAS CENTRAL BANK WIZARDRY RUN ITS COURSE?

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HAS CENTRAL BANK WIZARDRY RUN ITS COURSE?

By David Absolon, Investment Director at Heartwood Investment Management

Financial markets are increasingly focussed on the diminishing effects of the ongoing attempts by central banks to restore growth and inflation. The focus most recently has been on the Bank of Japan (BoJ), which was one of the first major central banks to enter into negative interest rates in January this year. Yet the impact of this policy to date has been limited, and some may argue in fact counter-productive, given the continuing negligible levels of growth and inflation in Japan.

However, it is not just in Japan where central bankers appear flummoxed. Despite nearly eight years of near-zero levels of interest rates, the US economy has not seen a meaningful acceleration in growth in the post-crisis years. Similarly, in Europe and the UK rates of growth are far below historic norms. Investors are now questioning whether ultra-accommodative central bank policies – emergency measures implemented after the Financial Crisis in 2008 – are now exacerbating the problem rather than offering a remedy, a scenario that previous Federal Reserve Chairman Ben Bernanke called the ‘’benefit, cost and risk’. To highlight some of the challenges:

  • Abundant central bank liquidity seems to have had a marginal impact on the real economy. Critics will argue it has pumped up capital markets to unwarranted levels, thereby benefiting the rich who largely hold those assets and amplifying income inequality even further.
  • Actual inflation and inflation expectations remain low and are falling in some economies such as Japan. Ultra-low interest rates appear to discourage investment, leading to a ‘hoarding’ effect among consumers and companies. Cheap money is all well and good, but there has to be demand for it.
  • Aggressive quantitative easing (QE) – central bank asset purchase programmes – diminishes future returns across asset markets and leads to a likely long term misallocation of capital. ‘Zombie’ companies (those that might otherwise not survive were it not for ultra-low interest rates) were once talked about only in Japan but there are worries that this may be a more general phenomenon across developed economies, exacerbating oversupply and general lack of pricing power.
  • QE depresses longer term interest rates, presenting challenges for pension funds and insurers to meet future liabilities. This is a particular problem across developed economies grappling with ageing populations.
  • Negative interest rates have a damaging impact on commercial banks’ profitability, hindering their ability to raise short-term deposits. These funds would otherwise be used to seek profit by lending at a higher long-term rate. This constraint on bank lending effectively represents a tightening of financial conditions.
  • Currency volatility is being encouraged, but not always in a way reflecting a central bank’s specific objectives. This has most clearly been seen in Japan where negative interest rates have not had their desired effect. The yen has strengthened 15% on a trade-weighted basis since January and this has hurt large-cap exporters, contributing to weaker economic activity. In the eurozone too, the currency has been relatively stable on a trade-weighted basis, and now European Central Bank policymakers are more focussed on generating credit growth rather than boosting external demand.
  • Liquidity is likely becoming a bigger risk in bond markets. Bond prices have seen more price volatility over the past couple of years, albeit in isolated episodes. This has been particularly evident in Japan in the past few weeks, where longer-dated Japanese government bond (JGB) yields have seen sharp price swings relative to recent history. With the BoJ owning nearly 40% of the JGB market [Source: Japan Macro Advisors], there are worries that it is running out of bonds to buy due to the lack of sellers.

Monetary policy alone will not restore growth and inflation

Growing dissent among central bank policymakers attests to the stresses placed upon them in their efforts to move inflation rates nearer to target. The BoJ’s ‘yield curve control’ policy announced following the September meeting has been positioned as a more forceful approach to lifting inflation. However, this policy, which places a cap on 10-year JGB yields at or around zero to suppress yields at the short-end of the curve, did not met with unanimity. Some may view it as just another measure which prolongs and deepens the monetary policy experiment with unknowable consequences.

Moreover, the US Federal Reserve September policy meeting saw three dissenters who voted for an interest rate rise. The ‘hawks’ place more weight on the inflation outlook, believing that the transitory effects of lower energy prices and a stronger US dollar will diminish. However, others are more concerned about the strength of the overall economy, citing the levelling off of the US unemployment rate in recent months, due to a moderate increase in labour supply, as evidence that further employment gains are needed before the recovery is assured.

What is becoming clear from the various September central bank policy meetings is that central banks are struggling on their own to restore economic growth to a sustainable trend. Hopes were high ahead of the BoJ meeting that the resulting actions would potentially be a game changer. However, in our view, the decisions to place monetary controls on the yield curve and implement a more flexible approach to expand the amount of money in the economy are more evidence that policymakers are running out of productive ideas. Their ability to impact the real economy and to restore inflation is dwindling. Central bank commentary continues to strike a cautious tone. The BoJ has left the door open for additional easing. It is also significant that a data dependent Federal Reserve has revised lower its ‘neutral’ interest rate – the level of interest rates where the economy is at trend rate.

Ultimately, though, the burden has to fall to governments to administer policies and foster meaningful structural economic change. This will entail piling more debt on already highly indebted government balance sheets. Critics will say that history shows debt on debt rarely works and that governments have a very poor track record of allocating resources efficiently. However, even they would accept that direct government spending has a better chance of ending up in the real economy than current monetary tools. While the baton needs to be passed to governments, this seems only a long-term prospect.

How should investors position their portfolios?

In the meantime, investors are caught between an environment littered with macro uncertainties and one in which asset prices continue to benefit from the slosh of central-bank-induced liquidity. We believe the most prudent strategy is to stay close to neutral in equities, have a bias towards shorter-dated bonds, and to look to other asset classes for alternative sources of returns. At the same time, we are holding ample liquidity to take advantage of further periods of volatility as they inevitably occur.

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A practical guide to the UCITS KIIDs annual update

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A practical guide to the UCITS KIIDs annual update 1

By  Ulf Herbig at Kneip

We take a practical look at the UCITS KIID

What is a UCITS KIID and what is it used for?

The Key Investor Information Document (KIID) is a 2- or 3-page summary document detailing a fund’s charges, risk & reward profile, past performance and the overall objectives and investment policy.

What does the regulation say about the annual update?

In terms of annual updates, according to EU Regulation 583/2010, Fund Managers have 35 business days (excluding weekends) from December 31 to issue a revised version of the KIIDs including the performance of the calendar year that just ended.

The Regulation says that the documents must not only be produced but also made available to investors before the 35-business-day-delay is elapsed. This means that Fund Managers must compute the past performances for the year 2020, update the documents that are currently made public, in all applicable languages, proceed with filing to regulators and ensure that these documents are published on websites.

When is the deadline this year?

In the absence of any legal holiday in January and February, the deadline is set to 35 business days from January 1st, which leads to Friday 19 February 2021.

If there is a legal holiday between January 1st and February 19th, then the deadline can be extended accordingly to the next business day. However, we always recommend sticking to the deadline without taking any legal holiday in January or February into account.

What can be challenging with the annual update?

The annual update production cycle can be challenging in many areas:

Scope management. Overall, the scope of the annual update must be the first and foremost task to be done, early in January. The annual update must be done on all share classes for which performances for at least on full calendar year (real or simulated) can be shown. This means that share classes launched in 2020, where the Fund Manager does not want to show simulated performances, may be excluded from the scope of the annual update of 2021. The monitoring of the KIIDs for these share classes launched in 2020 shall continue its normal life but will not be affected by an update of performance as long as there is not a full calendar year of performances to be shown.

Computation of 2020 past performance. this is the main task to be done in relation to the annual update and is a mechanical computation of the net performance of the share class or the fund from 31 Dec 2019 to 31 Dec 2020, with an assumption of the dividends paid during the year being reinvested into the fund.

Consideration of inactivity periods during 2020. When the share class of the fund had one or more periods of inactivity during the year, then the following question is to be considered: Do we, as a manufacturer, show either a) no performance for 2020 in the KIID and provide a written explanation instead, or b) show the 2020 performance in the KIID and simulate the performance during the dormancy period based on a benchmark?

Material changes other than past performance to be incorporated in the KIID. Very often the annual update is also a time where other changes may be incorporated, being driven by changes in the regulation or changes triggered by a modification of the prospectus. We would tend to consider the implementation of these changes at the same time as the KIID annual update production, to make sure the filing to home and host regulators is being done once and for all.

Is this year’s annual update any different?

In terms of document production, the processing remains the same as the previous years, even though the year that just ended may have been tough for many organizations and might have impacted the net performance of the funds.

Should you already start to think about the move from KIID to KID?

As of today, the grandfathering for Asset Managers allowing them to produce and issue a UCITS KIID in lieu of a PRIIPs KID will come to an end on Dec 31, 2021. This means that this year should be the last year of having to handle an annual update of the KIIDs and that a PRIIPs KID will have to be produced from Jan 1, 2022. Therefore, the time to start thinking about the move to the PRIIPs is now.

However, there is currently no approved regulatory technical standards (RTS) available at the level of European Supervisory Authorities, which means that product manufacturers do not have any guidelines as to how to produce the PRIIPs KIDs by Jan 1, 2022. We expect to have draft RTS issued by the ESAs by end of January, with a final version to be ratified by the EU Commission one of two months later, as the earliest.

This means that the implementation timeframe, if the deadline is maintained, will be very limited and will put significant pressure on product manufacturers to get this implementation over the line within deadline.

There is also a possibility that a further extension of the grandfathering period is granted, which would extend the use of the UCITS KIID for a longer period. This, if applied, would be a welcomed relief for market participants in the fund managers who are already under huge regulatory pressure.

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How to Take Control of Retirement Planning in 2021 and Beyond

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How to Take Control of Retirement Planning in 2021 and Beyond 2

What does your dream retirement look like? What kind of lifestyle do you imagine? Maybe you’re planning to travel more, or perhaps you’re thinking of going back to school. Maybe that passion for photography could become a new business, or perhaps you’re simply looking forward to taking a break and enjoy spending more precious time with those you love.

Whether retirement will see you bungee jumping in South Africa, or trampoline jumping with the grandkids, Steve Pennington, Head of Wealth Planning at Private and Commercial Bank Arbuthnot Latham discusses how planning your retirement now will help bring those dreams the chance of becoming reality.

There are so many “what if’s” and unknowns to take into consideration that retirement planning can feel daunting.  What kind of retirement lifestyle can you actually expect? What if I want to (or need) retire early? What if I or my partner needs care in older age? What if my children or grandchildren need financial support? What if I want to buy a Jaguar E Type? What if my investments fall?

2020 has only added to these concerns, so what can you do to feel more in control?

Understanding what you want to achieve is the first step. Is the key goal to maintain your lifestyle in retirement, or do you have different priorities? By looking at your cash flow today and modelling a range of anticipated cash flow scenarios in retirement, you can immediately visualise your future financial position. Through building in key personal milestones such as a change in lifestyle, travel, downsizing, buying that car, or selling a business, you can build a clearer of picture of what you’ll need and when.

More than 10 years until retirement

Look at your current later life provisions. How do you intend to use your non pension assets in retirement? How and when do you actually intend to use your pensions? Are you planning to stop working before you’re eligible to access your formal pensions? Do you have a personal or company pension? If you’ve worked for a number of companies, you may have several. Have you considered consolidating your pension arrangements? Have you checked how your retirement funds are performing, and if your circumstances and ambitions have changed since you last reviewed them?

If you are earning more than you spend, it’s also worth thinking about what you’re doing with your excess income. Inflation erodes the value of savings over time, meaning your purchasing power in the future is reduced. Of course, everyone needs cash reserves, but could you invest more now, using tax advantages, so that your retirement ambition has a more certain outcome?

Less than 10 years until retirement

If you’re approaching retirement, you probably already have a rough idea of your retirement plan. It’s also likely that you’ve experienced some investment turmoil over the years which may have caused unease and uncertainty. When you have financial plans in place it can be tempting to just stick with your current investment arrangements, whether they are performing or not, or perhaps you have been thinking about making some changes but need guidance and advice. Professional advice at this time can help you feel in control of your finances and your future.

If you’re feeling unsure about the state of your investments, or how your finances are arranged, it’s important to find an adviser who can review your circumstances and discuss suitable options in order to address your objectives. As you near retirement, it’s even more important to review your appetite for risk, capacity for loss and complete a financial health check to assess whether you are on track.  Often Investors are happier to take fewer risks as retirement approaches, but this is not always the best course of action. Consider that pensions may need to provide you with income for the rest of your life.

Already retired

If you’re already retired, you’ll already be using your assets to fund your lifestyle. It’s certainly worth reviewing how you are using your assets to provide income. At this stage of life, many people’s financial goals change from investing for growth to investing for income. However, as people live longer, retirement is often broken into different stages, allowing you more control over how you structure your finances and access your wealth at a future date to deliver different benefits at different times.

To find out if your retirement dream is achievable take this short quiz here:  https://www.arbuthnotlatham.co.uk/insights/retirement-quiz

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Not company earnings, not data but vaccines now steering investor sentiment

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Not company earnings, not data but vaccines now steering investor sentiment 3

By Marc Jones and Dhara Ranasinghe

LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.

Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.

Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.

“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.

“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”

The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.

Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.

But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.

(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)

SHOT IN THE ARM

Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.

Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.

Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.

“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.

The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.

Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.

“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”

The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.

Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.

Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.

Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.

“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”

(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)

(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)

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