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.


Ludovico Buffo, Master Student

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.



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?

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The Chinese Turmoil: Intervention or Resurrection?

China, the leading country of the BRICS , seems to be experiencing a slowdown.  Despite many experts claim that China’s GDP will rise by $7 trillion in the next decade (the equivalent of “two more Chinas”), Chinese manufacturing was dragged down by a weaker demand for Chinese exports down to the 12 months lowest level of 49.2 in April 2015. However, the main questions remains: how does this correlate with the recent Chinese stock market crash? Economists say it does not.

Shanghai and Shenzhen, the two Chinese stock markets, strongly differs from their global counterparts in terms of investors. In fact, Individual investors account for the 80% of the stock markets, as there is a weak presence of institutional investors. The rising Chinese middle class preferred to invest its savings into the bullish Chinese stock markets as stocks prices have constantly appreciated in the last years. (CSI 300 Index + 84,12% 5 yr). These peculiarities of the market along with the spread use of margin trades (Borrowing money to invest in the stock exchange), makes it clear that the Bubble had to burst soon.

With the Chinese stock markets losing up to $4 Trillion (15 times Greece’s GDP) and going down by 34% from its peak in June, a strategy was needed. After blaming US Investment Banks for bearish recommendations on Chinese stocks, China’s government, central bank and regulators have closely worked upon measures to prop up the stock prices in a very rapid way. On the first place, an unexpected interest-rate cut took place in order to stimulate the liquidity as well as an order for national brokers to pump up government-backed funds in the markets. These financial measures along with a freeze on new IPOs and a stricter regulation on margin trades, although, had only a marginal effect in the CSI 300 index that caught up only by 3,5% from its lowest peak of July 8, while reporting, last week on July 27, the biggest day drop since 2007, -8.43%.


At the moment, the problem regards the stock market only but there is a huge risk that it might turn into a new financial crisis. In fact, so many investors took out loans with financial brokers using stocks as collateral (margin trading) and this trend could affect their capability to pay off their loans. For this reason, 1400 companies were given permission to suspend trading in their shares in order to preserve their value.

Signals of a weakening momentum in the Chinese real economy came in the weekend from the Purchasing Manager Index, which measures the manufacturing activity. The PMI settled July at 50.0 below the consensus at 50.2 and on top of the benchmark at 50.0 that distinguish expansion from contraction. All those signals are driving down all the major global commodities, Copper and Oil on top of the list, while all the commodity currencies are experiencing a brutal depreciation against the dollar, threatening global growth projections.

Chinese PMI


Ludovico Buffo, Master Student


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.


PBOC Interest Rate



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

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



Soukaïna Bouziri, Master Student

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.



Ludovico Buffo


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.



Tancredi Viale

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


Tancredi Viale @TanViale

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


Tancredi Viale

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.


Tancredi Viale