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Assets under management at the world’s sovereign wealth funds are now nearly US$4trn, according to new research. The latest tally, released by Preqin, is up by 11% over 2010, which itself grew 11% over the year before.
Recent growth has come thanks to rising commodity prices and despite some significant withdrawals by host governments. Russia, for example, bolstered its fiscal position by tapping its sovereign fund for around US$35bn over the past 12 months. Despite the promise of an influx of petrodollars, the outlook for a host of funds in the Middle East and North Africa is cloudy, as the stewardship of funds faces potential changes in states experiencing unrest like Libya, Bahrain and Algeria.
Between 2008 and 2010, 72 financial institutions rated by Moody’s defaulted on bonds worth US$318bn. From 1983 to 2007, there were 96 financial defaults, affecting “only” US$46bn in debt.
Given the severity of the recent crisis, it follows that the prospects of recovery for creditors were dim. Indeed, loan holders recovered far less from defaulted debt during the recent crisis than over the previous 20+ years. On bonds, however, recovery rates were little changed from before. A larger than usual share of distressed exchanges—a discounted repurchase of bonds or substitution for a new set of securities—explains the boost to recoveries during the latest crisis (30% of 2008-10 defaults versus 10% in 1983-2007). In other words, creditors took what they could get from teetering banks before the borrowers went bust and potentially left them with nothing.
It’s all happening in the exchange industry. Within a matter of hours, announcements of two potential mega-mergers among large stock market operators got the, er, stock markets buzzing.
First, the London and Toronto bourses announced their intention to merge, creating an exchange with “greater scale, scope, reach and efficiencies.” Later, transatlantic giant NYSE Euronext announced that it was in advanced discussions with German operator Deutsche Börse. The deal, if consummated, would create a “true pacesetter across the spectrum of capital markets services,” boasted the press release.
The rationale behind the proposed tie-ups—including the ongoing discussions between the Australian and Singaporean exchanges—is a mixture of offense and defence. The deals bring both diversity and strength in key niches, such as natural resource companies for the London-Toronto group. The fear of upstart competitors is also a motivation, as former incumbents have steadily lost market share in rapidly commoditised, volume-dependent business lines like share trading. The scope for cost-cutting at merged exchanges is large—a purported €300m a year for the NYSE-Deutsche Börse combination. If strength/safety in numbers is the way forward, many are now asking: who’s next?
Global pension fund assets grew by 12% last year, to US$26trn, an all-time high, according to a new study from consultancy Towers Watson. Despite this performance, pension fund balance sheets improved only marginally. The asset/liability indicator constructed by the consultancy improved by 2% in 2010, but remains some 25% lower than it was in 1998. This is because liabilities have grown more than twice as fast as assets over the past 12 years, opening a hole that may take many more trillions of dollars to fill.
Our latest global forecast, published today (free registration required), features an upward revision. We now expect global GDP growth to reach 4% this year (at purchasing-power parity), up from 3.8% a month ago.
The forecast for US GDP growth in 2011 is now 2.7%, up from 2.2% last month. A second round of fiscal stimulus, rising retail sales and improving industrial production underlie the upgrade. The other major factor driving the global revision is more robust growth in the euro area, where we expect expansion of 1.5% this year, up from 0.9% last month. This is thanks largely to Germany, as its export-led recovery appears to be broadening out, with domestic demand playing a larger role.
China is expected to grow by 8.8% this year, a benign slowdown from an estimated 10.2% in 2010. This will feed through to growth of only 1.3% in Japan in 2011, down from an export-driven jump of 4.3% last year.
Despite the sunnier forecast, daunting risks remain. The fiscal outlook in America is dire and the stability of the euro area is as tenuous as ever. Meanwhile, rapid growth in emerging markets has given rise to fears of overheating, particularly in China and Brazil, with stubbornly high inflation threatening to trigger an abrupt tightening of policies.
Good news for job seekers, if the latest survey by the Association of Executive Search Consultants (AESC) is to be believed. Nearly 70% of executive recruiters have a positive outlook for the year ahead, up from 56% in a similar poll 12 months ago. What’s more, headhunters expect the financial services industry to be one of the three fastest growing sectors—particularly in the Americas—in 2011.
Given its home country’s troubles, it is not surprising that the National Bank of Greece tops the list of the worst-performing bank shares in 2010. But if a bank’s stock merely reflect its home economy’s performance, some of the other firms at the top and bottom of 2010’s performance charts are puzzling indeed.
After all, among the 150-odd shares in the Bloomberg World Banks Index, four of the ten worst performers in 2010 are Chinese and three of ten best performers are American, including second-ranked CIT, which filed for bankruptcy protection in late 2009. General economic prospects clearly play a part in a bank’s fortunes, but the factors driving an individual lender’s shares remain largely company-specific.
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For the last three years, global finance has been rocked by sub-prime mortgages, bank failures and sovereign-debt scares. But the world’s foreign exchange markets have nonetheless grown by leaps and bounds. That is the surprising conclusion of a survey of the market published on December 1st.
The study, the Triennial Central Bank Survey for the Bank for International Settlements (BIS), shows that the foreign exchange market expanded by 20% to average daily trading of US$3.98trn in April 2010 from three years before. It also documents the increasing role of non-traditional financial traders. Finally, it provides evidence of the continued domination of the market by traders in the UK, US and a handful of other established centres.
Read more at Financial Services Briefing: “Resilient forex” (December 1st)
A chart-heavy story over at the parent site sets the scene for what could be a brutal batch of quarterly earnings reports from banks. The indications are that a marked slowdown in trading activity will dent investment banks’ earnings, while patchy economic recoveries will dampen consumer-facing franchises, particularly in Europe.
The latest quarterly economic outlook from Barclays Capital includes a relatively upbeat chapter on commodities. As the strategists summarise:
Whilst the global economy still faces major uncertainties, the growth outlook for the remainder of 2010 looks reasonably benign, fundamentals are improving steadily in many individual commodity sectors and market participants may be underestimating the potential for significant price gains in Q4.
In highlighting the “nervous drivers” of demand among commodity investors, BarCap notes that August saw the first net outflow of funds from commodities since the bank started tracking these flows in 2009. Gold, however, bucked this trend; it has accounted for around a third of the US$29bn in commodity inflows so far this year. This, in itself, reflects the unease over the economic outlook that drove investors to trim exposure to other commodities. Although BarCap expects this anxiety to become less acute and overall commodity demand to recover in the fourth quarter, “the path ahead is likely to prove bumpy”.