Wednesday, 17 December 2008

Investors wary after year of false dawns

Wall Street Journal and Financial News

By Jason Corcoran

15 December 2008

Fund managers have called the bottom too often

The investment horizon has experienced so many false dawns over the past 18 months that investors could be forgiven for regarding any rose-tinted outlook as a mirage.

Every time the stock market suffers another steep drop, fund managers and investment sages pronounce that the market bottom is in sight and now is the time to buy.

Fundamentals, technical signs and precedents may have backed up some of their theories but subsequent slumps in valuations have not borne out their views.

Ken Kinsey-Quick, head of multi-manager strategies at UK asset manager Thames River Capital, said: “The problem with predictions is that no one has a perfect crystal ball. Anyone making a prediction is taking a risk which gives them about a 30% chance of being right and looking like a superstar.”

Many potential superstars, however, have looked like chumps because their “unprecedented buying opportunities” have been so wide of the mark. Over the past year, asset managers have made the case for investing in financials, consumer cyclicals such as retailers, builders, media, industrials and Asian equities.

In the spring, several hedge funds and long-only investors jumped into banking debt believing it was cheap.

Funds such as Thames River Capital, Centaurus Capital and Union Bancaire Privée began buying leveraged loans and asset-backed securities that had been languishing on banks’ balance sheets since the credit crisis began in the summer of 2007. Kinsey-Quick said: “We bought into bank debt and got caught by the falling knife.

It looked cheap and the fundamentals were good but it’s even cheaper now because liquidity has dried up over the past three months since Lehman Brothers went bust. We lost about 4% on the investment this year. One advantage of experience is not to double down.”

London-based hedge fund Centaurus Capital started buying banking loans in April. A source close to the firm said it had not lost money on its investment until September when Lehman’s bankruptcy triggered a market meltdown.

The source said: “Everyone was thinking [in spring] that the worst was over when Bear Stearns nearly went under and that the banks would not be allowed to go under. I remember people saying you need to be long in debt financials but a succession of things happened after that you couldn’t legislate for.”

Centaurus, which had a restructuring plan for its flagship $1.2bn Alpha fund rejected last week, said credit was never more than 50% of its multi-strategy fund and usually between 20% and 30%.

Eric Debonnet, deputy chief investment officer at French fund of hedge funds HDF Finance, said he never believed the story about buying cheap debt. He said: “Our view then and now is that it’s too early because we still need many more bankruptcies before we reach distressed. The right time is when we are getting close to the highest default rate. S&P is forecasting 7% to 10% and today we are only at 1% to 2% depending on the country.”

Some asset managers have stressed that they have been investing in banks because of their long-term value. This was the reasoning expressed in June by Bill Gross, chief investment officer at Pimco, when he said he remained invested in the corporate debt of big investment banks, including Citigroup, Morgan Stanley and Goldman Sachs, holdings that have since fallen in value.

UK fund managers have been similarly burnt in the short term by the collapse of the banking industry. Listed manager Schroders held UK bank Lloyds TSB at the start of the year and bought into HBOS in the summer and more recently, Royal Bank of Scotland.

Nick Purves, Schroders UK value fund manager, said: “We accepted the outlook was bleak but the share prices were very low at the time. Banks are by their nature very risky but we feel they now have enough capital to survive and are worth investing in over the long term.”

Schroders believes the current valuations of UK banks and equities represent good long-term buys and it points to the dividend yield of stocks rising above the yield on 10-year bonds.

In the US, the dividend yield on the Standard & Poor’s 500-stock index is about the same as the yield on 10-year Treasury notes, about 3.5%, the first time such convergence has happened in about 50 years. In the UK, the FTSE 100 is trading on a price-earnings ratio of about 7.5 times, a figure that puts it in the lowest 20% of valuations for the FTSE since 1965.

Ian Lance, Schroders UK equity specialist manager, said capitalising on such valuations had historically generated returns of about 20%.

He said: “Over the past six months, the dividend yield on the highest yielding UK stocks has risen to its highest point in over 20 years – even if you exclude financials. The dividend yield on non-financial stocks now exceeds the yield on 10-year gilts.”

However, this correlation between equity and bond yields could be a false dawn as companies may be forced to slash dividends to conserve cash, making the sustainability of such payments impossible in a deep downturn.

Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania, claimed stocks had reached a “selling climax” on July 15, which he believed would be seen as the bottom for the market.

In September, Goldman Sachs’ chief US portfolio strategist David Kostin called the bottom for equity markets and forecast a 12% upside on the S&P 500 by year-end.

Anthony Bolton, who managed the £2.4bn Fidelity Special Situations fund for 28 years, said in October he was buying shares for the first time in two years because some valuations were the cheapest he had seen in a lifetime.

Jeremy Grantham, founder of investment management firm GMO and a long-term bear, said in October that stocks were then more attractively priced than at any time since 1987. He said: “If we look at values like this and fail to buy them, we will subsequently not only look like fools, we will be fools.”

Investor Warren Buffett also said in October he had begun to buy stocks although with the caveat that he was not predicting that the worst of the sell-off was over.

A sustained upturn has yet to materialise. Robin Griffiths, technical strategist at Cazenove Capital Management, has pinpointed times and dates when investors should enter and leave the market.

In August, Griffiths said October 14 at 3.30pm was the right time to invest because indices would rise by between 25% and 30%.

Griffiths, who predicts market movements after studying historical graphs, trends and data, told Financial News last week that his basic story remained intact. He said: “Our timing schedules are generally quite good but we have had monstrous volatility which has ruined the trend.”

Griffiths said historic data for dividend yields and price earnings ratios showed that current bargains had been equalled only in October 1987, October 1974 and in 1930. He said: “We have to accept the conditions that produce these bargains are really scary, and we need to steel ourselves to copy Buffett, and be greedy when others are in fear.”

Griffiths predicts the market will rally following Barack Obama’s inauguration as US President on January 25, but will run out of steam by May.

Sunday, 14 December 2008

Deutsche Bank cuts 30% of Russia global markets staff

Dow Jones Newswires and Financial News

Jason Corcoran in Moscow
08 December 2008

Deutsche Bank is cutting 30% of staff from its global markets division in Moscow where it has been the biggest and most successful bulge bracket bank during Russia's capital markets boom.

Up to 30% of its Moscow-based global markets staff are expected to lose their jobs, double the proportion of employees being cut across Deutsche Bank's global markets business as part of a worldwide redundancy programme.

Bankers working in sales, trading and research in Moscow were made redundant last week with more layoffs expected this week, according to two sources inside the bank.

One said: "We have been told 30% has been earmarked across the board." The second said: "Ten of the research guys have gone."

A Deutsche Bank spokesman in Moscow said the job losses represented 2% of its 950 workforce but declined to comment on potential job losses in other areas of the business.

A statement from Deutsche Bank said: "As part of a global restructuring programme in global markets, Deutsche Bank is making investments in several areas for 2009, including commodities, FX and cash equities. Also as part of the programme and based upon projected client activity, it is making redundancies in exotic structured products, credit origination and proprietary trading."

Last week, Deutsche Bank began cutting 900 jobs across its global markets division, representing 15% of the business's staff.

Moscow-based sources at the bank said the job losses last week were confined to the global markets division, which does not encompass capital markets or mergers and acquisitions.

Deutsche Bank has led the way in Moscow's capital markets since it bought a stake in the investment banking boutique United Financial Group in 2004 for $700m. It employs about 950 staff in Moscow.

The bank has consistently been in the top three for Russian debt and equity underwriting and merger and acquisition advisory work and has earned more investment banking fees from the country than any other bank since it defaulted on its domestic debt a decade ago.

More than 1,000 bankers have been cut in recent months by domestically-owned banks Troika Dialog, Renaissance Capital, Alfa-Bank and Uralsib.

Overseas banks have so far been slower to slash after many quit the Russian market following the 1998 financial crisis. UBS said it planned to increase staff. However, Goldman Sachs is cutting its Moscow-based employees by 10%.

Crisis and competition drive down Russian custody fees

Financial News

Jason Corcoran in Moscow
08 December 2008

Increasing competition from new entrants and sharp falls in equity prices are driving down the margins of Russia’s sub-custody banks.

The recent arrivals of Sweden’s SEB and France’s Société Générale, plus the increasing participation of Russian banks such as VTB and Gazprombank, are forcing fees downward but bringing greater segmentation and opportunities for niche providers.

Natalia Sidorova, head of securities services at ING Wholesale Banking in Moscow, said: “Margins are decreasing, which is inevitable in a busy market like Russia driven by competition. Fees used to be about 20 basis points but have come down significantly in recent years.”

Serhiy Berezhny, head of trust and securities services at Deutsche Bank, agreed but said high fees could still be charged depending on the volume of client assets.

He said: “Different clients are charged differently depending on the level of assets under custody but overall margins have been decreased significantly over the past five years. A big client with $1bn (€800m) could be charged less than five basis points but we would still charge clients 20 basis points if they had assets of $200,000 as they couldn’t be charged at cost.”

With Russia’s main equity markets among the worst performers over the past two months – posting falls of more than 75% – custodians’ incomes generated from assets under custody have tumbled.

ING’s assets under custody fell from $155bn in August to $64bn last month but the Dutch bank’s custody operation remains Russia’s biggest player, serving more than 450 foreign and domestic clients.

Deutsche Bank, a top-three player along with ING and Citigroup, has seen its assets under custody decrease to $30bn from $100bn since the banking crisis in August. Other banks with custody operations in Russia include JSC Bank VTB; UniCredit; RZB and Sberbank.

Sidorova said: “We have seen a significant drop in our overall amount of assets under custody which has led to less safe-keeping fees as indices have gone down. But business is booming from new clients and the volume of transactions is high.”

Berezhny believes market entrants face a tough job to establish a network and contend with the financial crisis.

He said: “The arrival of new entrants this year has been the worst timing with the crisis occurring. It is very difficult to build a network and I don’t think some of them will establish a proper presence till next year.”

Société Générale hopes its capture this year of local bank Rosbank will make it a dominant player in domestic investor services, along with servicing in-bound and outbound assets.

The French bank paid $1.7bn for a 30% share of Rosbank, in addition to the 20% it already owns.
Ramy Bourgi, head of emerging markets development at Société Générale Securities Services, said the French bank would transfer assets to Rosbank once service standards had been met. Matthieu Moreau has been seconded from Société Générale Securities Services in South Africa to help with the transition.

Bourgi said: “We are marrying a strong local player, Rosbank, with a foreign and established player in SocGen.

“There is a good deal of competition and there will be some consolidation but there is also a good deal of segmentation in the market. We are very oriented towards the blue-chip clients in Russia and the international clients entering the country, whereas VTB and Gazprombank are very oriented towards the domestic client base.”

Sweden’s SEB launched custody services in August with a team of five in its St Petersburg office, offering international clients with Russian holdings custody, settlement, safe keeping and asset servicing.

Göran Fors, global head of custody services at SEB, said: “Initially, we are focusing on foreign broker-dealers and not the domestic client base. Russia is very important for our clients because historically the Nordic region has contributed 2% to 3% of overall investment in Russia. Being in Russia bolts it up with our network in the Nordics, the Baltics and Germany.”

Veronika Vasilieva is head of custody for UniCredit Group in Russia, which has a strong network of banks across Europe and is one of the leading sub-custodians in the Russian market through its ownership of International Moscow Bank – acquired by the Italian group’s Bank Austria Creditanstalt subsidiary in January 2007.

It also bought local broker Aton and has a large stake in Russian stock exchange Micex. Vasilieva said the market had fractured into large international providers offering full custodial services and those focusing on niche areas.

She said: “There is a good deal of competition and I expect some consolidation in the industry. The market has developed towards different segments.”

ING and Deutsche Bank are the two biggest custodians for Russian depositary programmes, with JP Morgan and Citigroup also serious participants.

The two market leaders acknowledged the inroads being made by Russia’s big domestic banks such as VTB and Gazprombank as they expand their offerings and diversify.

VTB Bank last month said it had received custodian status for Russian companies under a Bank of New York Mellon global depositary receipt programme while Gazprombank – which like VTB is building an investment banking team – plans to expand its American Depositary Receipt programmes.

However, Gazprombank vice-president and depositary centre head Vladimir Tatsy told news service Interfax that the launch had been delayed by the financial crisis.

Berezhny of Deutsche Bank said: “VTB and Sberbank have definitely managed to break into the realm of depositary receipts and their share of the market will grow but they can’t compete for standard custodial accounts because of their staff’s limited ability in English, a lack of a global relationship management and a lack of a global network.”