global markets and investor flow

8/7/2019 Global Markets and Investor Flow

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THURSDAY JANUARY 27, 2011

GLOBAL MARKETS & INVESTOR FLOW

SAMARJIT SHANKAR

Managing Director

BNY Mellon

Information Security Identification: Confidential

Global Markets & Investor FlowsRisks and Opportunities

27 January 2011Global Markets

Samarjit Shankar

Managing Director

BNY Mellon

[email protected]

BNY Mellon iFlowsm Research presented at:

Toronto CFA Society


2/14

Information Security Identification: Confidential3

Global economy delicately balancedRecession was synchronous, triggered by the US-led financial crisis

Decoupling in evidence; recovery has been multi-speed and uneven

Raising of global growth estimates for 2011 by IMF

Emerging economies are the new locomotives of growth

Advanced economies facing short-term pain amid fiscal consolidation,financial sector repair, subdued growth and still high unemployment

Deflationary and dis-inflationary pressures have been the focus of late

Extraordinary stimulus, both monetary and fiscal thus far

Central banks remain in cautious mode, maintaining unconventionalstimulus measures (more QE?)

Emerging market central banks grappling with inflation & capital inflows

Global imbalances: re-balancing acts required

Bi-polarity in investor sentiment and expectations

Core Inflation

Real GDP Growth

BI-POLARITY

Risk appetite

Risk aversion

Deflation

Inflation

Glass half-full

Glass half-empty

Developed Markets

Emerging markets Growth

Recession

Bonds

Equities

QE 3QE exit

DovesHawks


Bond Markets: fiscal stimuli, QE, but sovereign debt concerns aboundCredit markets have stabilized, but not fluid yet. Bank lending remains relatively tight

Fiscal policies weigh stimulus vs austerity needs amid ongoing concerns about sovereign debt sustainability

Developed equity markets have been recovering gradually

Emerging equity markets have bounced stronger as investors continue to make forays into select markets

Equity Markets: wealth destruction, but looking increasingly attractive now?

% move since 1 July 2008: -- DAX, -- SPX, -- NKY % MSCI move since 1 July 2008: -- LatAm, Asia -- EEurope

Bond 2yr-10yr yield spreadsTED spread: 3m LIBOR less 3m T-Bill yields 5yr CDS sovereign spreads


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About BNY Mellons iFlow total assets monitored worth ~ $33 trillionGlobal Custody Holdings: largest in the world at $25 trillion+ drawn from heritage Mellon & BNY Platforms

Market Penetration: Flows represent about 15-27% of tradable securities in most markets worldwide

Objective - based on tangible and concrete data, not surveys

Timely - investor flows: on a trade-date basis, updateddaily;

- investor positions: timely updates of monthly shifts (equity, bond and currency portfolios)

Level of Detail - adds invaluable insight into market activity with unparalleled granularity

Comprehensive and Relevant Multi-Asset Perspective - encompassing Equity, Fixed Income & FX markets activity globally

History Flows data extend back to 15-21 years history (Equities/Bonds to 1996, FX to 1990)

Performance & Risk Analytics Mellon Analytical Solutions (formerly Russell/Mellon) & BNY Global Risk Services

Client relationships represent $8.9 trillion in assets under measurement

Investor positions vs benchmark (e.g. MSCI EAFE, BarCap Global Agg etc); What are my competitors/peers doing?

IMF GFSR: Correlation between BNY Mellon iFlow and BoP FlowsBNY MELLON Equity Flows vs Japan MOF Flows

indexeddata, settlementb asis forMOF data

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iFlow: What are our investor flow data telling us? Bonds Bond yields have diverged within the Eurozone relative weakness in the periphery led to a spike in yields in

recent months but the pace of outflows is slowing

German bunds in favor as investors sought relative safety and liquidity

iFlow in IMF GFSR Report: Custodial Bond Flows 2007 J une 2010


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CHF and JPY risk aversion trades have begun to taper off

Risk aversion has not gone away entirely

Investors have looked towards relative safe havens in recentmonths

Lower-yielding Swiss franc and Japanese yen do well duringepisodes of risk aversion

Positive real yields do not hurt

Cumulative Monthly Flows: G-10 FX as of 14 Sep 2010

3 M T - b i l l Y i e l d - H e a d l in e I n f l a t i o n ( C P I Y / Y )

J a p a n , Y i e l d , J P YU n i t e d S t a t e s , Y i e l d , U S D

E u r o Z o n e , E U RS w i t z e r la n d , C H F

U n i te d K i n g d o m , G B PC a n a d a , C A D

S o u r c e : R e u t e r s E c o W i n

9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0

Percent

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6 EUR/JPY since 1/1/10

EUR/CHF since 1/1/10


Currency Markets: US Dollar at a crossroadsThe US dollar saw a secular decline on a trade-weighted basis between 2003 and mid-2008

2008H2 witnessed strong risk-aversion high-yielding currencies sold off, low-yielders benefited

A strong dollar trend emerged since then (2008H2), faded (2009), re-emerged and faltered (2010), and will it begin firming again?

Re-coupling of US ec onomic recovery vis--vis Emerging Markets?

Federal Reserve concerned about low core inflation and unemployment

QE2 dismantling or will QE3 entail another round of monetary easing?

US Trade-Weighted Major Currency Index

ISM Mfg & Non-Mfg; Consumer Confidence

Home Sales: Existing and New

Non-farm payrolls & Unemployment Rate

Spread between 10-year US TIPS and nominal Treasuries

U n i t e d S t a t e s T r a d e W e i g h t e d E x c h a n g e I n d e x M a j o r C u r r e n c ie sS o u r c e : R e u t e r s E c o W i n

0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1

Index

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U S e x i s t i n g h o m e s a le s ( l hs ) U S n e w h o m e s a le s ( r h s )


J a n M a y S e p J a n M a y S e p J a n M a y S e p J a n M a y S e p J a n M a y S e p0 6 0 7 0 8 0 9 1 0

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iFlow Insights: Global Capital Flows and Investor Activity US Treasuries still sought; Cross-border investors prefer shorter duration

US equities favored especially by cross-border investors

USD lost steam as r isk appetite recovered (Apr-Nov 09); then benefited from policy outlook and Euro

woes (Dec 09 May 10) also, a realization vis--vis the USD: There is no alternative, yet! Recent slew of fi rmer data have supported USD despite QE2, but QE3 remains possible

US


EUR: nascent optimism what is that light at the end of the tunnel?

EUR had provided only credible alternative (sovereign debtmarkets that were deep enough) to USD for reserve managerslooking for an alternative home for their fresh funds.

Unfortunately, investors f orgot that not all E uropean economieswere as prudent as Germany. As a result intra European govt. bondspreads driven down to negligible levels by mid 2007.

EUR was being seen as new DEM?

Greek crisis was a sharp reminder that its the component of all itsparts (e.g., its also the new GRD, the new ITL, t he new ESP).

2010: considerable anguish vis--vis sovereign debt c risis

2011 thus far:

Enhancement of the European Financial Stability Facility (EFSF)

Progress toward a future permanent European Stability Mechanism(ESM)

Talk about an EFSF/ESM market intervention mechanism to replaceECBs back-stop

Spain: pro-active push for earlier stress tests and transparency inCajas and recapitalization

Greece: some kind of debt relief and/or renegotiation of the EU/IMFpackage?

Ireland: Determination to pass budget despite government coalitioncollapse

Softening of Germanys stance: st rong medicine without killing thepatient

Support for peripheral debt shown by China & other Asian nations

Since mid-2010, the EUR has benefited from oversold and undervalued asset markets

Eurozones two-speed economy: German indicators have been robust Policy-makers reduce discord and work together towards sustainable stability mechanisms


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Parallelism/Contagion: Other Sovereign Debt Concerns?

Since 10/1/2010: CDS (5 yr) percentage changes

Fresh inflows into Spain and Ireland lately

Concerns about Dubai and Greece have been paramount in recent years. Lingering risks in other countries -- contagion?

Fiscal accounts in focus: meaningful alternatives to holding sovereign debt as public debt burdens grow?


Central banks balancing acts; Currency tensions? Central banks in advanced economies dealing with growth moderation, low inflation

Policy rates had converged at historic lows; some central banks started the processof normalization but stopped short in their tracks

Keeping options open for now:

Keeping interest rates low, Further rounds of monetary easing, Allowing localcurrencies to weaken or stemming their strength

US: May consider QE3 if core inflation remains low & labor market worsens

UK: BoE may refrain from raising rates despite up-tick in inflation

Japan: Battling deflationary forces, lowered rates & raised asset purchases

Switzerland: Mindful of deflationary pressures resurfacing

Currency weakness either a consequence of monetary policy choices (such as QE)or a deliberate policy in and of itself currency as a policy weapon

Investors erosion of faith in currencies as stores of value

Ongoing tensions about potential spate of competitive currency devaluations?

Policy Benchmark Rates

US: Treasury Secretary Geithner: "We are concerned, as are many of China's trading partners, that the pace of appreciation has been too slow and theextent of appreciation too limited.

House Ways and Means Committee chairman, Sander Levin describes Japans intervention as deeply disturbing.

Japan: Finance Minister Noda : There is something unnatural about the fact that China can buy Japanese government bonds while Japan cannot(purchase Chinese bonds). .I do not know what their true objectives are, but we would like to clarify their objectives. Prime Minister Kan: "We could say the Eurozone is almost trying to guide the EUR to weaken, while the United States wants to double itsexports as President Obama has said. So it is difficult to get them to cooperate (in multilateral i ntervention)."

China: Yao Jian, Commerce Ministry spokesman: its unreasonable for the US to level criticism at China's exchange rate policy simply because of itstrade surplus, and points to Chinas trade deficits with Japan & Australia as evidence that the CNY was not the root cause of the US imbalance.

Europe: Jean-Claude Juncker: "The recent unilateral intervention at the initiative of the Japanese political and monetary authorities is not to bewelcomed. We do think that the JPY in relation to the EUR is not overvalued but is still undervalued. We didn't like the way the Japanese authoritieswere dealing with that matter. We were discussing this yesterday and the day before with the Japanese, making it perfectly clear that we don't like thebehaviour of the Japanese authorities."

UnitedKingdomUnitedStatesNewZealand

AustraliaEuroZoneCanada,PolicyRates,OvernightTarget Rate,CAD

Source:ReutersEcoWin

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There are other engines of growth! Emerging markets are the new locomotives

China and India venturing overseas to garner future energy andbasic materials supplies to fuel growth

Other Asian and Latin American economies also gro wing

Commodity/Energy prices looking to recover, es pecially metals Evidence of renewed investor buying in commodity-linked markets

Growth differentials and policy maneuverability remain in focus

Significant capital on sidelines now being deployed selectively asinvestors look for yield

Commodity Index Comparisons

G-10 FX Returns 2010 full-year

JOCIMETL (Journal of Commerce): Steel, Copper, Aluminum, Zinc, Lead, Tin, Nickel

SPGSCI & CRY: Grains, Soft Commodities, Livestock, Energy, PreciousMetals, Industrials

as of Dec 2009

Advanced Economies 2.5 2.5US 3.0 2.7Euro Area 1.5 1.7Japan 1.6 1.8

Emerging & Developing Economies 6.5 6.5China 9.6 9.5India 8.4 8.0ASEAN-5 5.5 5.7Brazil 4.5 4.1

IMF: WORLD OUTPUT 2011 2012

S&P GSCI Agriculture, Industrial & Precious Metals sub-indices


China: poised for growth

China is a key locomotive of global growth

2010Q4 GDP rose 9.8% vs consensus for a slowdownto 9.4%

Full-year 2010 GDP grew 10.3%, up from 9.2% in 2009

Currency flexibility since June 19, 2010 has encouragedinvestors who have been monitoring policy maker efforts torein in overheating pressures such as in bank loans andproperty

Pick-up in equity buying: Shanghai and ShenzhenComposite indices gained 18% and 39% respectivelyduring 2010H2 after losing significant ground during H1.Thus far, 2011 has seen a small retreat in these indicesamid concerns that more stringent measures will berequired to battle inflation and overheating

Regulatory change: Renminbi settlement in Hong KongSeptember 27, 2010 onward

deluge of issuance expected as institutions tap themarket in renminbi

Gradual liberalization of Chinas capital account could see

the CNY emerge as a viable longer term alternative incurrency portfolios

Chinas changing growth model

Premier Wen says the main cause of the US tradedeficit is not the exchange rate of the Chinesecurrency, but the structure of investment and savings

Premier Wen says China has made increasingconsumption a long-term strategy

USD/CNY and Yuan NDFs for 1m and 1y


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iFlow: Where is the money going?iFlow featured in the International Monetary Funds Global Financial Stability Report, Oct 2010

For example, net equity flows to Brazil reported by BNY Mellon represent about 10percent of those recorded in the balance of payments, with a correlation coefficient of84%. Similarly, net bond flows to Korea represent about 5 percent of those recorded inthe balance of p ayments, with a correlation coefficient of 61%.


iFlow: What are our investor flow data telling us?Cumulative Monthly Flows:

Emerging Equities as of 21 Jan 2011 AUD: some profit-taking of late


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High Yielding Emerging Markets Currencies vsU SDHigh Yielding Emerging Markets Currencies: P olicy Rates

The thirst for yield: currency markets Low rates in mature markets have boosted emerging markets capital inflows


iFlow Insights: Commodity-linked markets generally in favor

Strong buying of ZAR, BRL & RUB as commodity prices rose from March 09 lows; some profit-taking of late

AUD, NZD have also seen strong inflows moderate in recent weeks, but CAD remains in favor


10/14


The thirst for yield: Asia is well-placed

Asia FX Reserves: strong growth; stop and re-start

Asia Currencies vs USD

Asia: price pressures

Domestic demand and regional trade key drivers

Growth prospects favorable; Strong equity inflows

Rising price pressures may see more currency upside

C h i n a ( r h s )India ( lhs)T h a i l a n d ( l h s )S o u t h K o r e a ( l h s )T a i w a n ( l h s )M a l a y s i a ( l h s )H o n g K o n g , R e s e r v e s , F o r e i g n c u r r e n c y r e s e r v e s , t o t a l, U S D


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T a iw a n T h a ila n d C h in a I n d ia S o u t h K o re aS o u r c e : R e u t e r s E c o W i n

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Emerging market bonds: select markets sought after Emerging East Asia local

currency bond market grew18.8% Jan - Jun 2010 with $4.8trillion bonds outstanding

Local-currency denominateddebt instruments

Large and liquid asset class

Relatively high yields

Central banks were expected toraise rates very gradually in 2010

Currency appreciation potential

Improved credit worthiness

Favorable growth differentials

Recent inflation pressures havedamped investor enthusiasm

Emerging markets debt issuance in localcurrencies & foreign currencies has beenrunning at record highs (~ 15% higher y/y)

Issuers taking advantage of record lowyields in US & other advanced economies

Big borrowers include both governmentsand companies

Vale SA (Brazil), Korea Electric Power(South Korea), OAO Gazprom (Russia),Rural Electrification Corp (India)

$521 bln worth emerging markets bondissuance YTD as of Sep 30, 2010; 37% byChinese & Indian issuers (Bloomberg)


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iFlow FX indicators: Asian currencies supported


Asian and other EM central banks: FX Interventions / Capital controls? Significant amount of portfolio capital inflows

China becoming more interested in neighbors asset markets:

More buying of Japanese government bonds

Stepping up purchases of South Korean debt

Added MYR to small group of currencies allowed to be traded directly vs CNY

Variety of measures to deter flood of inflows?

South Korea: Audit of lenders handling foreign currency derivatives

Brazil: tripled tax to 6% on foreigners investing in debt securities

FX interventions to smooth local currency appreciation (e.g. Chile, Colombia,Peru, most Asian countries)

iFlow: Cumulative Equity Flows in Japan & South Korea

1 Mar 09 30 Apr 101 Jul 08 28 Feb 09

iFlow featured in IMF GFSRReport Oct 2010: In responseto increased foreign inflows,policymakers in a number ofcountries have introduced avariety of measures. For instance,authorities in Brazil, Indonesia,and Korea introduced measures tomitigate the impact of strongcapital flows on domestic

macroeconomic a nd financialstability precisely in countrieswhere the BNY Mellon iFlowsm

data found foreign equity i nflowshad become especially persistent.The measures in these countriesmight have changed the overallcomposition of capital inflows, butthey have not as yet significantlyreduced the persistence of equityinflows.

1 May 10 to date


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Jan 19-20, 2011: The Bank of Israel joins other emergingmarkets central banks looking to stem local currencyappreciation set a 10% reserve requirement for foreign-exchange derivative transactions by non-residents effective Jan27 and requires reports on FX swaps and forwards of more than

$10 million a day after a marked increase in the volume of suchtransactions.

Official data that s how non-residents were responsible for 66% ofILS currency transactions and 80% of swaps during December.Interestingly, non-residents are also holders of as much as28.4% of all makams in circulation. Our iFlow bond indicatorsconfirm a sharp pick-up in Israeli debt buying by cross-borderinvestors, especially money-market instruments (see secondchart). The first chart shows our iFlow FX indicators confirmingvery heavy net inflows into the ILS in especially the past fourmonths, that has seen the Bank of Israels FX reserves rise to$70.9 bln as of end-December, a 10.6% increase since end-August 2010.

Real-money investors have also been raising their holdings ofIsraeli stocks especially since mid-2010 as confirmed by ouriFlow equity indicators this is consistent with price action thathas seen the benchmark index rise by about 26% since July 1,2010. Strong equity inflows have also buoyed the ILS.

Jan 24: central bank raises benchmark rate by 25 bps to 2.25%

2011 ILS measures: reserve requirements & rate hike

Growth in Israels Foreign Currency Balance: 2005 to date


iFlow Insights: Bond Allocations by Currency 2007-11 JPY-denomination shot up in Jul 2007, stayed at elevated levels, spiked in Jan 2008, and again Sep 2008 onward

Periods of risk aversion: Higher Allocation to USD-denominated bonds as riskier positions were liquidated during equitymarket sell-offs in Aug 07, Nov 07, Jan 08 and Sep 08 onward

Investors favored the shorter end of the curve amid search for safety and liquidity

Up-tick in EUR-denominated holdings in Jan/Feb 08 => EUR/USD broke above 1.50 and 1.55

Spike in EUR/USD in Dec 08/Jan 09 (1.25 to 1.45); JPY began losing its safe-haven allure during 2009Q1

Reverse direction for EUR/USD in Aug 07; also in Aug 08 (1.56 to 1.46) and Oct 08 (1.40 to 1.27)

UK gilt buying outpaced CAD bonds during 2010H1, but profit-taking on Gilts of late

Canadian bonds back in favor

USD-denominated bonds: steady appetite in recent months but asset allocation switches now?

BondAllocationby Currency

inUSGlobal FixedIncomePortfolios(Jan07=100)

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105.00

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155.00

Jan-0 7 Apr -07 Ju l-07 Oct -07 Jan-0 8 Ap r-08 Jul -0 8 Oct -08 Jan-0 9 Apr -09 Ju l-09 Oct- 09 Jan -10 Ap r-10 Jul -10 Oct -10 Jan -11

Source:BNYMellon iFlow

CAD EUR GBP JPY USD

Cumulative Monthly iFlow:

Developed Bonds as of 25 Jan 2011


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Interesting Juncture for Asset Allocations Relative valuations: bonds have had a good run, equities look attractive

Strange co-existence of risk aversion and risk appetite

Continued low rates & additional QE prospects have fueled global liquidity

Positive for asset markets while QE-related currency debasement fears arise

G-24 emerging markets face currency appreciation amid strong capital inflows

Equity upside as excess capital deployed; evidence of buying in select markets

Risks: another debt crisis? growth setback? spike in price pressures?

Emerging markets as an asset class attractive both equities and bonds

iFlow Daily E-Mail as of 25 January 2011


Equity/BondPositions

Strategic & TacticalAllocations/Trading

Ideas

QuantAnalysis

Fundamentals

Portfolio Flows

Deviationsfrom Benchmark

Strategic

Tactical

Strategic

Tactical

Key 2011 focus on whether investors1. raise or reduce risky exposure2. adjust asset allocations

3. become more selective

P&RA(formerly MAS/Russell Mellon)

ASSET MIX COUNTRY & SECTOR

ALLOCATIONS

iFlow:


14/14

THANK YOU

GLOBAL MARKETS & INVESTOR FLOW

SAMARJIT SHANKAR

Managing Director

BNY Mellon

global markets and investor flow

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