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MARKET OUTLOOK – JANUARY

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MARKET OUTLOOK – JANUARY

David Absolon, Investment Director at Heartwood Investment Management

 The year has started on a positive note, which has not just been driven by revised expectations of US growth but also broader improvements in global manufacturing surveys and confidence indicators. In developed economies, labour markets remain supportive of future consumption and we expect corporate profitability to improve in a slightly more reflationary environment. Rising confidence has been reflected in positive financial market performance since the US election. However, fundamental change, if any, takes time and as expectations have raced ahead of reality there is the potential for disappointment in the short term. We expect any pullback to be a pause rather than anything more serious. Policy uncertainty – whether driven by Trump, Brexit or national elections in Europe – will continue to aggravate markets and may potentially be a source of disruption.

Overall, we believe that global growth will be stronger in 2017 and this should support investor appetite. However, acknowledging that underlying risks do not suddenly disappear, we are also retaining reasonable levels of liquidity to take advantage of periods of volatility as they inevitably occur. Although sterling has seen meaningful weakness, we are not yet ready to bring money back into the UK and retain our preference for other developed economies. We continue to believe in the longer term investment case for emerging markets, but expect in the near term it will remain vulnerable to US policy risks. We are becoming more positive on specific hedge fund opportunities, given the greater likelihood of increased stock dispersion (i.e. between winners and losers), as well as credit long/short strategies.

Equities: Having gone overweight overall post the Trump win, there is no desire to add further to equity positioning at present. Markets have given back some gains recently, but we expect this to be a pause rather than anything more serious. The improved growth picture is supportive, and the start of earnings season has so far been encouraging. We are holding a greater exposure to US equities than we have had for some time. We maintain overweight positions in the cyclical markets of Europe and Japan, which represent attractive value on a relative basis and are expected to benefit from a corporate earnings recovery. We continue to underweight the UK, but expect to be rebuilding exposure in the medium term. We are not yet ready to add to our emerging markets exposure, given vulnerability to headwinds in the near term. However, we remain optimistic on a longer term view and would use any weakness as an opportunity to add.

Bonds: We are maintaining our long-standing short duration position to reflect gradual reflation and the shifting bias of some central banks towards a more balanced tone. The US Federal Reserve is very slowly normalising interest rates and the European Central Bank will scale back its asset purchase programme this year. If yields rise to a meaningful degree, we may take the opportunity to extend duration as our shorter-dated bonds mature. We have also sold our US High Yield energy position following strong performance and expect to recycle assets into the broader high yield market to take advantage of potentially higher US growth. We are maintaining our modest allocation to emerging market sovereign debt (hard currency), given our expectations that the asset class should benefit from cyclical and structural economic improvements.

Property: We remain underweight in UK commercial property on concerns around supply, especially in the South East, and uncertainties around Brexit. Our portfolios are invested in diversified and select parts of the market. Across sectors, we continue to seek income opportunities in the industrials and offices. On a regional basis, we are invested in cities outside of London, which are less exposed to the ‘Brexit’ fallout. Outside of the UK, we are also looking at opportunities in the US REIT (real estate investment trust) market, where valuations have cheapened but are not yet compelling.

Commodities: An improving global economic environment, reflation and a tighter supply/demand balance leads us to hold a more positive view on commodities in 2017, particularly for oil and base metals. Direct access to this market is through owning futures contracts rather than the physical assets and while the risk/return profiles are looking more attractive across some parts of the complex, they are not yet at levels where we are ready to invest. We have also bought gold in some strategies as a portfolio diversifier.

Hedge funds: While we have held a limited allocation to hedge funds in recent years on concerns around performance, we believe that a shifting economic climate should create more opportunities in this sector in 2017. Our preference remains for macro/CTA strategies, but we are also taking a more positive view on equity hedge strategies, given the greater likelihood of increased stock dispersion (i.e. between winners and losers), as well as credit long/short strategies.

Cash: We have reasonable levels of liquidity across our portfolios both in cash and short-dated bonds, which we are ready to invest as and when we see specific opportunities.

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Current cryptocurrencies unlikely to last, Bank of England governor says

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Current cryptocurrencies unlikely to last, Bank of England governor says 1

By David Milliken

LONDON (Reuters) – No existing cryptocurrency has a structure that is likely to allow it to work as a means of payment over the long term, Bank of England Governor Andrew Bailey told an online forum hosted by the Davos-based World Economic Forum on Monday.

“Have we landed on what I would call the design, governance and arrangements for what I might call a lasting digital currency? No, I don’t think we’re there yet, honestly. I don’t think cryptocurrencies as originally formulated are it,” he said.

Bitcoin, the best-known cryptocurrency, hit a record high of $42,000 on Jan. 8 and sank as low as $28,800 last week, far greater volatility than is found with normal currencies.

“The whole question of people having assurance that their payments will be made in something with stable value … ultimately links bank to what we call fiat currency, which has a link to the state,” Bailey said.

The BoE, like the European Central Bank, is looking at the feasibility of issuing its own digital currency. This would allow people to make sterling electronic payments without involving banks, as is currently possible with banknotes, and would in theory help avoid the volatility that renders bitcoin impractical for commerce.

Bailey said the appropriate level of privacy for digital currencies was likely to be hotly debated and was potentially underrated as a challenge in setting one up.

“This is a big one that is coming on to the landscape, the whole question of a privacy standard for transactions made in any form of digital currency, and where the public interest lies,” he said.

(Reporting by David Milliken, editing by Tom Wilson and Alistair Smout)

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EU sustainable investment rules need better corporate data – banking report

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EU sustainable investment rules need better corporate data - banking report 2

By Simon Jessop and Kate Abnett

LONDON (Reuters) – European Union rules aimed at defining sustainable investments should help reduce “greenwashing” by businesses, but better quality corporate data is needed to ensure they work effectively, a banking report said on Tuesday.

The sustainable finance rules will classify investments that can be marketed as sustainable, a move aimed at steering much-needed cash into low-carbon projects to deliver the bloc’s climate goals.

From January to August 2020, 26 of the region’s biggest lenders tested the EU framework across a range of core banking processes, including retail banking, trade finance and lending to smaller companies.

As the main providers of finance to companies across the EU, the ability of the banking system to track and report on whether corporate activities are sustainable or not could prove crucial in assessing the rules’ success or otherwise.

The lenders broadly welcomed the regulations as they seek to align their businesses with the transition to a low-carbon economy, the report by the United Nations Environment Programme Finance Initiative and the European Banking Federation found.

However, they also raised a number of issues, many of which were data-related and could require a phasing in of reporting requirements.

While many large companies are already required to disclose certain environmental and social information by law, the bulk of smaller and mid-sized banking clients are not, hampering banks’ assessment of their alignment with the rules.

Concerns over the quality, detail and standardisation of data is also an issue when looking at banks’ lending overseas, something that would be made more complex as other regions launch their own regulations.

The banks who tested the EU rules called on regulators to seek global alignment of regulations, and for better tools to manage data from clients, such as a centralised EU database.

While under no compulsion to lend to activities that can be classed as sustainable, banks see sustainable finance as a growth area that is likely to take on more importance in coming years should policymakers tighten environmental legislation.

With more investors globally looking to become shareholders of companies with a good record on managing environmental risk, banks are also likely to look to reduce their exposure to environmentally or socially harmful activities over time.

The European Commission is expected to finish the section of the rules covering climate change in the coming months, before they take effect in 2022.

(Reporting by Simon Jessop and Kate Abnett; Editing by Pravin Char)

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Bitcoin, crypto inflows hit record last week – CoinShares

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Bitcoin, crypto inflows hit record last week - CoinShares 3

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Investment flows into cryptocurrency funds and products hit a record $1.31 billion last week after a few weeks of small outflows, as investors took advantage of the decline in bitcoin and other digital asset prices, according to the latest data on Monday from asset manager CoinShares.

Total assets under management (AUM) in the industry slipped to $29.7 billion as of Jan. 22, from an all-time peak of $34.4 billion on Jan. 8. At the end of 2019, the total AUM was just $2 billion.

Grayscale, the world’s largest digital currency manager, posted assets under management of $24 billion last week, down from $28.2 billion on Jan. 8. CoinShares, the second largest crypto fund, managed assets of $2.9 billion in the latest week, also down from $3.4 billion on Jan. 8.

“We believe investors have been very price conscious this year due to the speed at which prices in bitcoin achieved new highs,” said James Butterfill, investment strategist, at CoinShares.

“The recent price weakness, prompted by recent comments from Secretary of the U.S. Treasury Janet Yellen and the unfounded concerns of a double spend, now look to have been a buying opportunity with inflows breaking all-time weekly inflows,” he added.

Bitcoin dropped to a low of $28,800 on Friday, after scaling an all-time peak of $42,000 on Jan.8. It was last down 0.5% at $32,124.

About 97% of inflows went to bitcoin, the data showed, with Ethereum, the second largest cryptocurrency, posting inflows of $34 million last week.

So far this year, volumes in bitcoin have been considerably higher, trading an average of $12.3 billion per day, compared to $2.2 billion in 2020.

Glassnode, which provides insight on blockchain data, said in a report on Monday that bitcoin’s net unrealized profit/loss (NUPL) was getting close to exceeding the “belief” range and moving into the “euphoria” range.

Previously, when NUPL entered this range, it signaled a global top in bitcoin’s price.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard Chang)

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