A bubble about to burst? – APAC Overview

A bubble about to burst? – APAC Overview

The monetary expansion policy of the People’s Bank of China fueled the Shanghai, Shenzhen, and ChiNext indices of 95%, 198%, and 383%, respectively, since January 2013. Chinese stock-market capitalization grew from 44% of GDP at the end 2012 to 94% of GDP earlier this month[1], but at the same time the Chinese GDP growth, equal to 7,4%, has slightly slowed at the lowest level since the 1990 and the average ratio price to earnings is 26.

It seems clear that there are enough evidences that prove the presence of financial factors that are threatening the economical rebalance of Chinese economy: from export oriented economy to consumptions. This is the issue. At the beginning of financial crisis, the Chinese political establishment chose to fuel the economy by increasing the public spending and making easier to borrow money.

Therefore, the private debt raised from 100% in 2002 to 200% in 2014[2] and the PBOC tried to stop it by raising the refinancing interest rate until started the first bankruptcies and the slowdown of Chinese economy. The PBOC knows that the economy needs a monetary stimulus but the more the money supply increase the more grows the probability to create a financial bubble.

In order to minimize the possible negative effects of a hard slowdown, the Government is trying to boost the economy by cutting the refinancing interest rate (from 6.5% to 5.0%), deregulating the financial markets (e.g. exchange rate fluctuating) and privatizing most of public companies. The issue is that the more the money supply increase the more the financial bubble grow.

It is sure that the Government will have to face the dichotomy between autocracy and capitalist markets, but how it will face the issue will determine the feature of the Chinese economy slowdown[3]. Anybody should not underestimate the huge challenge to change the Chinese economy into a fully capitalist system, as the MSCI index committee decision to do not list the Shenzhen A shares (for some regulatory framework) show.

Last but not least, the main market mover it will be the dual listing between Shenzhen and Hong Kong stock exchange.

ChiNext

PBOC Interest Rate

By:

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Roberto Vacca, Master Student

[1] Cf. “Channeling China’s Animal Spirits”, by Xiao Geng and Andrew Sheng 26/05/2015, available on http://www.project-syndicate.org/commentary/china-economic-growth-by-andrew-sheng-and-geng-xiao-2015-05
[2] See “China’s debt-to-GDP level”, by S.R. 16/07/2014, available on http://www.economist.com/blogs/freeexchange/2014/07/china-s-debt-gdp-level
[3] See “Nouriel Roubini: China Slowdown May Be Sharp”, by Bloomberg 04/02/2015, available on http://www.bloomberg.com/news/videos/2015-02-04/china-slowdown-may-be-sharp-nouriel-roubini

An insight into the CAC40 – Index Expert

An insight into the CAC40 – Index Expert

The « CAC40 » (cotation assistée en continu) is the French stock market index. The market open at 9.00am till 17.35, following the pre-market hours from 7.15-9.00am. The CAC40 is undoubtedly and by a long chalk, the most followed up index of Paris Stock market.  So, let’s analyze what’s behind all this financial boiling and give a critical vision of this thermometer of the French economy as a whole.

As a matter of fact, the CAC40 progression reverberates investors’ expectations about the global performance of the French economy. The explanation is pretty simple: the CAC40 tracks the 40 listed French enterprises with the highest market capitalization. Some of the CAC40 companies are listed also in other stock exchanges like Amsterdam, or Italy (LVMH). Every companies’ stocks influence the Index proportionally to their weight over the market capitalization.

This principle enhances the height of the « BIG VALUES » of the CAC40. Thus, a variation of Total’s shares is way more impactful than another. In order to shrink from this pitfall, the biggest capitalizations aren’t allowed to weight more than 15% of the CAC 40. Nevertheless, several criticisms target the very composition of this index.  The CAC40 is said to be too concentrated, sector-specific and not so typical of the French economy. But another threat loom ahead. In 2009, the French economic magazine Alternatives Economiques denounced the fact that all of the CAC40 companies had ties with tax haven activities and that 16% of their subsidiaries were located in these same territories.

The CAC40 index underlies many financial products and in particular: SICAV, mutual fund trust, derivatives (warrants & options) and of course equity index funds (trackers). The very performance of these financial products goes along with the performance of the CAC 40.

The CAC40 doesn’t embed dividends, unlike the DAX.  At its current level, the CAC40 caps at 4815 points. Its all-time high was reached in the wake of the dotcom bubble, on September 2000 topping 6900 points. The CAC40 Total Return, which incorporates dividends reinvested, caps at 11368, above the actual level of German DAX30, 11040. French companies seem in great shape then.

The Index Value is calculated through this formula:

1000*(CAC40 Mkt Capt/(K*CAC40 Mkt Cap31 December 1987))

K is a coefficient of adjustment.

CAC40 Performance

CAC Composition

By:

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Soukaïna Bouziri, Master Student

Is Japan economy really catching up? – APAC Overview

Is Japan economy really catching up? – APAC Overview

While Europe is still at the center of the financial news as Grexit slowly becomes more probable, many strong positive signals are coming from the third biggest world economy, Japan.  Following the great crisis, Japanese economy did face a period of deflation due to steady prices and shortage of investments.

In order to improve the economic outlook, Shinzo Abe, Japan’s Prime Minister, elaborated an economic plan to face deflation. The so-called “Abenomics” is based upon three arrows: fiscal stimulus, monetary easing and structural reforms. An increase in taxation along with a massive monetary QE followed by important reforms are the way in which Japan is trying to comes out from the internal economic crisis. While there is a consensus for the modus operandi chosen for the first two “arrows”, very few information are known about how Abe would like to proceed with the structural reforms.

This piece of information ought to be important for investors who focus on the long term, including but not limited to pension funds. In fact, worldwide analysts from the major banks believes that the recent GDP growth has to be accounted mainly to the monetary policy instead than to a new economics cursus. In fact, at the moment, QE amounts to nearly 60% of Japan GDP and this situation seems not to be sustainable in the long term.

The NIKKEI, last week, touched its 15 years peak as the stock market is absorbing the huge amount of liquidity, but are we in front of a new financial bubble? What are the risks of such a spread use of monetary QE among the major economies? Nobody knows.

Nikkei

By

Ludovico Buffo

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Europe: A Turbulent Snatch? – European Citizen

Europe: A Turbulent Snatch? – European Citizen

In recent days, Europe has been a very dramatic battlefield. Talks between Greece and European officials are still going on, with Greek Ministers firmly stuck on their requests and European Officials unhappy and unsatisfied with Greece’s request. Tsipras does not want to change the pension system, contribution-based, still plenty of “baby retired”. Yesterday, Angela Merkel appeared as a Deus Ex Machina willing of peacefully solving the Greek Crisis. The main goal in Europe by now is to avoid the Euro Area break up, who can lead us into periods of unprecedented uncertainty and volatility, and can wreak havoc the entire Europe. Standard and Poor’s downgraded Greece Debt to triple CCC, following the postponement of the repayment to the IMF and the higher risk of default. Jeroen Dijsselbloem, the President of the Eurogroup, warned against the running out of time, and urged Athens and Europe to a peaceful resolution.

Many venerable European banks have been downgraded too because of the uncertainty over Europe’s financial health. Barclays Bank has been downgraded to A-, Deutsche Bank to BBB+ and RBS to A-, Commerzbank to BBB+ and Unicredit to BBB.

The bond market has been under severe attacks. 10-YR German Bund reached high yield of 1% yesterday. From the bottom in May at 0.05%, this means a 2000% increase. Bond traders are adjusting bond prices to looming spikes in inflation in the Eurozone.

EuroStoxx

By

Tancredi Viale

Earthquake in German Finance – Banking Insider

Earthquake in German Finance – Banking Insider

The Annual General Meeting of Deutsche Bank AG, which took place on the 20th May 2015, shook up the top Management. Angry shareholders have appointed the CO-CEOs Anshu Jain and Jürgen Fitschen as the main responsible of the Bank’s underperformance. In the past years, the bank has suffered plunges in profitability largely due to the vast amount of money expensed in fines and litigation after the mortgage crisis, and linked to Libor and Forex manipulations. During the meeting, Anshu Jain, a former trader and investment banker, emerged as the man who was going to be in charge of the new restructuring plan. The main driver of the plan was a strong cost-cutting campaign, which could boost profitability in all areas of business. In the last three years, Deutsche Bank’s stock has been one of the worst performing in the Banking sector. The plan, indeed, which is supposed to add billions to the bottom line, is very ambitious.

Few weeks later, yesterday, probably pushed by the board and the unhappy shareholders, the two CO-CEOs handed in their resignation note. Anshu Jain will be replaced by John Cryan, member from the supervisory board and former CFO of UBS, most likely at the end of June, while Jürgen Fitschen will probably step down after the next general meeting. The dual Management system is poised to end in one year. After the news, Deutsche Bank’s shares are rallying up, showing how investors are more confident on the classic single CEO management, and more reliant on the figure of the new CEO John Cryan. He will have a heavy burden to carry forward. Will he be able to implement the new restructuring plan and lead one of the most important European Bank to profitability again? Time will tell us.

Peer Analysis 8YR

Peer Analysis 30M

Deutsche Bank

By:

Tancredi Viale @TanViale

TMT Consolidation – M&A Specialist

TMT Consolidation – M&A Specialist

On the 26th of May, news reported that Time Warner Cable will be bought by Charter Communications for $55bn or $195 a share.  After the drop out of Comcast from the acquisition, Time Warner Cable have been approached  by Charter Communications, which is the third largest cable television provider. The deal shows how consolidation is becoming increasingly important in the Media Industry. The new giant will have to pass by the difficult waters of regulators, which have previously led the Comcast-TWC deal to a stalemate, and further to the drop out of Comcast. TWC’s share soared after the news considering the premium Charter is willing to pay to seal the deal. In Merger Arbitrage, normally the target company’s shares soar following the news, and adjust to the price proposed by the acquiror, while the acquiror’s shares tend to decline.

Nowadays, in TMT, the bigger the better.

Time Warner Cable

Charter Communications

By

Tancredi Viale

On the verge of a collapse? – Weekly Market Update

On the verge of a collapse? – Weekly Market Update

Today, Greece was supposed to pay back $335m to IMF. Unfortunately, due to apparent impasses in the discussions between Greece and creditors, the repayment had to be postponed to the end of the month. Only Zambia in the 80s postponed an IMF payment. Tsipras said that it will be attached to other three tranches, totaling approximately €1.6bn. The stalemate is caused by disagreement on the reforms to be backed to the financing line. Alexis Tsipras cannot disrupt his political line to seal the deal. Syriza, his political party, is looking grudgingly at its leader, scared that he could accept unfavorable conditions to secure the loan, which would undermine the party’s coherence with electorate. Markets are nervous in this moment, with tornados taking place in the bond market. ECB’s President, Mario Draghi warned about volatility yet to come.

Today, another important data will be the job report in USA. Job Market is a very important metrics for the definition of Monetary policies in US. The data will be published in early afternoon.

By

Tancredi Viale