Turmoil and Hope -APAC, Japan & ASEAN Trends – Sept. 20th 2015

Turmoil and Hope -APAC, Japan & ASEAN Trends – Sept. 20th 2015

While the Asian financial storm is far from being over, the FED recently decided not to hike up the interest rates as the conditions in the global economy have changed dramatically since the last Federal Open Market Committee meeting.

 Federal Funds Rate vs. Bank of  England  Base RateRates

The Shanghai Stock Exchange Index (SSE) keeps maintaining its downward trend, losing up to 15% in the last 30 days, reaching the lowest value of 2927.25 in Aug 26. Following the strong financial measures adopted from the Chinese government along with a positive response from the US regarding the interest rates, analysts would have expected a slight upward change in the Chinese stock market that, however, did not happen, highlighting investors’ concerns about China slowdown and Yellen’s warnings about weaker global growth perspectives. A Fed interest rate hike would increase the attractiveness of US dollar denominated assets and thus generate capital outflows from the China and Emerging Markets towards Wall Street.

 Shanghai 1 M

Japanese counterparts seems to be reluctant to changes as Abe gets reelected and uncertainty regarding structural reforms (Abenomics’ third arrow) still persists. This position is shared by Standard & Poor’s who, on Sept 16, downgraded Japan from AA- to A+. The uncertainty is shown as well in the NIKKEI, where high volatility was registered  in the last weeks (+7,5% Sept 9). The USD/JPY pair, In the last month, traded in the ¥ 120-123 range and at the moment one dollar is worth  ¥ 120.07. The release of the Japanese National Consumption Index due the next week, might affect the exchange rate, and, if the preliminary results for inflation of 0,1% (against the 2,0% target) were to be confirmed, further stimulus from the BoJ might become reality. This scenario will involve a further weakening of the JPY.

 Tokyo, Nikkei  225 1Y PerformanceN225

Looking beyond those two giants, other Asian countries are on the rise. In fact, several experts strongly believe that the ASEAN (Association of Southeast Asian Nations) will be the new BRICS. While BRICS economies struggle, as Brazil was recently downgraded to junk bond (BB+) from S&P along with the Russian Ruble losing more than half of its value (USD/RUB +70% 1y), one of the most prominent ASEAN’s country, Malaysia, gained a + 6,02% (1M) in FTSE Bursa Malaysia KLCI Index. This negative correlation ( Shanghai Index 1 M -18.34%, KLCI Index 1 M +6%) shows how ASEAN economies are getting more and more independent from other emerging markets.

Kuala Lumpur, FTSE KLSE, 1Y PerformanceKLSE

Furthermore, recent political and economic reforms strongly support this view as well. In fact, ASEAN countries have recently established an “Asian Region Funds Passport” that will provide a multilaterally agreed framework to facilitate the cross border marketing of managed funds across participating economies in the Asia region. This partnership will enhance the expansion of the asset management industry in the region and further tighten the connections between these rising economies.

By

Ludovico Buffo, Master Student

FIG Coverage – Americas

FIG Coverage – Americas

With the quarterly earnings season already passed away, Financial Services companies have demonstrated to be the real winners in these turbulent times. The majority of the big banks, with some “excellent” exceptions, have outpaced analysts’ estimates. Cost-cutting and business optimization have been the main drivers for the rump-up in profitability.

Starting from Goldman Sachs, this bank is the main exception in the positive momentum banks earnings are experiencing. While major business lines have reported a solid growth pace, expenses have increased dramatically. Goldman Sachs earnings were deeply affected by litigation costs that the Company accounted in legal provisions, which amounted up to $2.77 per share, or $1.48bn. The Bank is in talks with authorities to settle the misconduct in the mortgage crisis. All the major business lines have shown solid growth. Investment Banking grew 13.4% YoY, with the Bank ranking in the top positions in all major Financial Advisors League Table, having topped, as of today, the $1 trillion threshold in Global announced M&A, according to Dealogic. Investment Management revenues increase reflect the effort of Management to focus in this business Area. The firm announced two acquisitions in asset management businesses since the start of the quarter, Imprint Capital, an impact investing firm, and Pacific Global Advisor Solutions from Pacific Life Insurance Company, a New-York based firm specialized in customized investment and risk Management solutions. Trading revenues have been mixed, with serious plunges in FICC, but good performances in Equity +24%. Overall, without legal charges accounted as provisions, the Bank outperformed market expectations.

 Goldman Sachs

Goldman Sachs

Morgan Stanley has been keeping a solid track record of economic performances. CEO James Gorman has been reshaping the Bank’s business focus and revitalized the Bank profitability. The Bank outpaced market consensus in Revenues reporting $9.8bn in Revenues vs. $9.1bn, and EPS excluding items at $0.79 vs. expectations at $0.74. Even if Investment Banking revenues fell almost 1%, Morgan Stanley, according to Thompson Reuters, ranked 2n globally in 1H 2015 in advising deals. MS Management is keeping on shifting from volatile businesses such as Bond Trading towards more stable and predictable ones such as Asset Management, which, as of today, accounts for 27% of its revenues. Trading Revenues shone, with great results in Equity, jumping 27% to $2.27bn. EPS on a YoY basis dropped almost 8% due to increased compensation costs. The Firm had a $609m tax benefit the year before.

Morgan Stanley

Morgan Stanley

Going forward to the biggest US banks by assets, J.P. Morgan beat profit analysts estimates, mainly due to reductions in litigation expenses, while other business lines remained flat. “Investment banking revenue was up 4% on higher advisory fees and higher debt underwriting fees, partially offset by lower equity underwriting fees compared to a strong quarter for equity underwriting in the prior year” (J.P. Morgan earnings release). J.P. Morgan continues to benefit from the prosperous M&A environment, being among the top three in the Financial Advisors League Tables. Corporate and Investment Banking unit instead reported a decline in Net Revenues of 6% from previous year, dragged by lower Lending revenues.Trading revenues are still mixed, while Equity trading soaring 27% and Fixed Income falling 21%. The Asset Management unit Net Revenues increased 6% up to $3.175bn, while “Assets under management were $1.8 trillion, an increase of 4% from the prior year, due to net inflows to long-term products and liquidity products.”

J.P. Morgan

JP Morgan

Bank of America Merrill Lynch surprised analysts reporting $0.45 EPS, vs. $0.36 consensus. “Solid core loan growth, higher mortgage originations and the lowest expenses since 2008 contributed to our strongest earnings in several years, as we continued to build broader and deeper relationships with our customers and clients. We also benefited from the improvement in the U.S. economy, where we are particularly well positioned,” CEO Brian Moynihan said. Bank of America has been one of the most affected banks in the mortgage crisis in terms of litigation expenses. Investment Banking fees amounted to $1.5bn, reporting slight decrease from the previous year, but still ranking 3rd globally, as of June 30, according to Dealogic. Trading Revenues were mixed as BofA’s peers, with uptrend in Equity S&T and downturn in FICC. Global Markets unit, on a YoY basis is down 7% from the previous year to $4.259bn. Asset Management fees increased 9% to $2.1bn, and Total Client Balances, which include Asset under Management, Asset under Custody, Client Brokerage Assets, and client deposits and loans totaled more than $2.5 trillion. The Bank efforts in expanding this particular area of business is reflected in the increased number of advisors, by 1077 workers. Litigation and operating expenses other than compensation and benefits dramatically decreased reflecting stronger effort in cost cutting and expense management.

Bank of America

Bank of America

Citigroup has been another bank who outperformed market consensus. Bank’s profits were hammered down last year by litigation expenses. The mortgage settlement with the US Department of Justice costs the bank more than $4bn. Quarterly profit saw a robust rebound. Institutional Client Group, the Corporate and Investment Banking arm of Citigroup, reported a 6% Increase in Revenues up to $8.9bn. “Investment Banking revenues of $1.3 billion decreased 4% versus the prior year period, as a 34% increase in advisory revenues to $258 million partially offset a 3% decrease in debt underwriting revenues to $729 million and a 25% decrease in equity underwriting revenues to $296 million”, Citigroup Press Release. Trading Revenue decreased mainly due to non recurring charge on the Equity segment for valuation adjustment. Fixed Income and Equity markets revenues totaled $3.7bn.

Citigroup

Citigroup

Some trends are identifiable. The majority of these Financial Institutions reported results that topped estimates due to improved conditions in the economic environment. Regarding the Investment Banking business the flat rate environment triggered an upticking volume in M&A, fueled by debt and equity financed transactions. Advisory business is experiencing a sprouting momentum. Most of the peers are investing in the Asset Management business, due to the safety and the predictability this business incorporates, and improved conditions in market confidence. Sales and Trading is experiencing weakness in the FICC, but strength in Equity. Overall, the sector was one of the most outperforming in this earning season. What the market will bring next?

For more references:

http://www.goldmansachs.com/media-relations/press-releases/current/pdfs/2015-q2-results.pdf

http://www.morganstanley.com/about-us-ir/shareholder/2q2015.pdf

http://files.shareholder.com/downloads/ONE/719160157x0x839055/B872628E-1708-4AA0-91C4-29D6B091EADA/2Q15_Earnings_Press_Release_FINAL.pdf

http://newsroom.bankofamerica.com/press-releases/corporate-and-financial-news/bank-america-reports-second-quarter-2015-net-income-53-b

http://www.citigroup.com/citi/investor/data/qer215s.pdf?ieNocache=610