Leverage & Deleveraging

[winston]

We believe the process of de-leveraging has further to play out in developed economies.

This raises the possibility of below trend GDP growth for some time to come. Real growth in the coming years may be in line with levels we have previously associated with “lost decades”.

History shows that equity market returns during lost decades are not always as poor as we saw in Japan in the 1990s and again in the 2000s.

For equity markets to rally, even against a backdrop of weak GDP growth, we need to see inflation, cheap starting valuations and EPS growth.

If the developed world is in the early stages of a coming lost decade, we think the UK
equity market could be best placed.

Source: Citi

[winston]

Deleveraging by European Banks

Europe’s banks are preparing to ditch up to 3 trillion euros of loans in the next couple of years as they “deleverage” their balance sheets.

Some analysts estimate the number could be even higher at 8 trillion euros.

In the past six months the likes of BNP Paribas and Societe Generale have cancelled loans and funding arrangements, exacerbating the impact already felt by their European peers' shrinkage.

Source: Reuters

[winston]

Loans from European banks to clients in Hong Kong fell 6 percent in December from a month earlier, but it is still too early to say whether euro zone lenders are pulling back from Asia, the Hong Kong Monetary Authority said on Wednesday

Source: Reuters

[winston]

More capital outflows from S'pore over next 3 months By Linette Lim

SINGAPORE: Singapore may see more capital outflows over the next three months compared to a year ago.

Experts say withdrawals from troubled European banks will likely spur the outflow of funds from the region.

This is despite Singapore being an attractive investment destination since it is the only triple-A rated jurisdiction in Asia.

The on-going US Federal Reserve's policy board meeting has fuelled talk of further quantitative easing, or QE3.

QE3 is the process where the Fed stimulates the US economy through large-scale bond purchases.

In theory, the sellers of these bonds -- which include financial institutions such as banks -- can then use the funds from the Fed to spend on other investments, or lend to households or businesses.

Experts say quantitative easing measures may result in hot money flows into Asia.

The recent ratings downgrade of nine eurozone countries by ratings agency Standard and Poor's may further boost capital inflows into the region as well.

This has raised concerns over an influx of capital into Singapore, just like in the third quarter last year.

Sovereign and International Public Finance Ratings senior director Tan Kim Eng said: "There was a lot of uncertainties, both in the US and in Europe, because at that point, we lowered the triple-A rating on US to double-A plus.

"In the third quarter of last year, there was a US$1 billion dollar inflow into Singapore, probably into the government bond market."

Strong fund inflows can distort the financial system by making borrowing cheap, resulting in asset or credit bubbles.

But most analysts say these fears are overblown.

Instead, they are more concerned about potential capital outflows from Singapore in the short term.

Credit Suisse economist Wu Kun Lung said: "The biggest concern on most investors' minds is probably, whether the market stress in Europe will pick up again.

"If things get worse, we will likely see more outflows. A lot of banks -- they have to de-leverage now -- will have to pull back some of our loans in Asia."

Still, the impact of a large sell-down in Singapore bonds and other assets will likely be limited.

BNP Paribas senior currency strategist Thio Chin Loo said: "The Singapore market is very small -- so there is a lack of investible assets.

"If you were to compare, let's say, Korea, the investible assets are much larger, and therefore if there is a foreign fund withdrawal, the impact to the market will be greater."

Analysts added that capital flows are also less volatile here because the Singapore government actively manages its exchange rate policy and has a policy of non-internationalisation of the Singapore dollar.

Source: CNA/wk

http://www.channelnewsasia.com/stories/ ... 62/1/.html

[winston]

UPDATE 1-Asian firms to hurt as Europe banks cut lending -MAS

* Asian banks lack capacity to fill in gap left by Europeans
* Low global interest rates may create property bubble in Asia
* MAS takes steps to boost Sing dollar corp bond liquidity (Recasts on impact of reduced European bank lending)

By Kevin Lim

SINGAPORE, March 14 (Reuters) - European banks will continue to reduce their lending in Asia, posing problems for companies in the region as local financial institutions lack the capacity to make up the shortfall, Singapore's central bank chief warned on Wednesday.

Asian firms, other than the bluest of blue chips, have seen a jump in their dollar borrowing costs as European lenders retreat and some analysts say the shortage of dollars may result in a spike in emerging market defaults, as firms struggle to roll over maturing loans and bonds.

"Deleveraging by Eurozone banks is far from over (and) the capacity of Asian banks to fill the trade financing gap is limited," Monetary Authority of Singapore (MAS) managing director Ravi Menon said at an investment conference, but he added that the impact so far had been limited.

http://www.reuters.com/article/2012/03/ ... RL20120314

[winston]

Is Margin Debt Signalling a Top? By Barry Ritholtz

Helene Meisler discusses the role of margin debt in markets hitting a top:

“Margin Debt tends to rise as markets rise. While there is no magic number that rings a bell at the top, you can see from the chart below that in the last decade once Margin Debt gets over $300 billion we would have to consider we are no longer ‘early’ in a rally. It tends to put to bed the notion that folks are underinvested in the market.

We won’t have the March figures out for a few more weeks but February showed a rise so we should expect March’s reading might very well get over $300 billion.

In 2000 we did not quite get to $300 billion as we topped out at $278 million. However you can see it corresponded with the peak in that market as well.

For now I would note that we are not yet close to the level of investment we saw in the spring of 2011 but we are likely rapidly approaching it.”

http://www.ritholtz.com/blog/2012/03/77683/

[winston]

“The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels…”

Michael Pento, Chief Economist for Euro Pacific Capital.

[winston]

Need to constantly remind me of this risk while it's sunny ...

IMF Sees Banks Deleveraging by $2.6 Trillion
19 Apr 2012
By: Claire Jones and Brooke Masters

A drastic contraction of European bank balance sheets during the next 18 months could jeopardise financial stability and economic growth in Europe and beyond, according to forecasts from the International Monetary Fund.

In its Global Financial Stability Report, published on Wednesday, the fund warned that European banks looked set to shrink their balance sheets by $2.6 trillion (2 trillion euros) over that period.

Unless officials improved their policy response, the IMF said, European banks would dump almost 7 percent of their assets by the end of next year.

The IMF expects most of the deleveraging to come from sales of securities and non-core assets. However, it also sees credit supply shrinking by 1.7 percent as banks rein in lending to businesses and households hitting the broader economy.

http://www.cnbc.com/id/47096097/IMF_See ... 6_Trillion

[winston]

Who's worried about US Consumer Deleveraging ? it's the deleveraging by the European Banks that's a concern ...

DB projects US consumer deleveraging will be complete within two years

Deutsche Bank's latest research on US consumer leverage suggests that the deleveraging process may have another couple of years to run.

They determined the long-term trend line based on consumer debt to GDP ratio from 1953 to 2003, thus excluding the bubble years.

Then they compared the current leverage to this line and looked at the rate of convergence.

The intersection with the trend line is expected to take place in a year.

http://soberlook.com/2012/06/db-project ... -will.html

[winston]

According to a recent IMF report, European banks may need to sell off 4.5 trillion dollars in assets over the next 14 months , in order to meet strict new capital requirements.