Big investors resist major stock sell off

By Jeremy Gaunt, Reuters European Investment Correspondent

LONDON (Reuters) - Institutional investors hung on to their equities exposure more than might have been thought in May, given extreme volatility on financial markets, but also put more money in safe-haven cash, Reuters polls showed on Thursday.

Demand for alternatives, which include gold, rose. But perhaps surprisingly in the face of regional crisis, investors increased exposure to euro zone equities. Surveys of 47 leading investment houses in the United States, Japan, Britain and continental Europe showed an average mixed portfolio holding 52.3 percent of its holdings in equities. This compares with 52.8 percent in April, but is a relatively small decline given that MSCI's all-country world stock index has fallen close to 12 percent in the period between polls.

At the same time, they cut back slightly more on bonds -- to 34.9 percent of a portfolio compared with April's 35.5 percent and put money into cash. Cash holdings rose to 5.1 percent from 4.7 percent. With the month dominated by the crisis in euro zone debt, managers in the polls, longer-term investors were not universally glum. "We expect the global economy to gradually move to a sustainable recovery path on improvements in employment and capital spending, centring on the United States. The world's share markets will likely return to an uptrend," said Kenichi Kubo, senior fund manager at Tokio Marine Asset Management.

The polls even showed relative faith in Europe, the centre of the current crisis. Allocations within equities to the euro zone rose to 23.2 percent from 22.2 percent a month earlier. Despite this, concern remained that the euro zone crisis and the government cost-cutting needed to solve it could harm future economic growth. "I do think what's happening will result in slower growth in Europe," said Steven Bleiberg, head of global asset allocation at Legg Mason Inc.

Regionally, U.S. fund managers held on to their high exposure to equities. Based on 11 U.S.-based management firms surveyed between May 18 and 26, the poll found an average of 65.2 percent of assets in equities, unchanged from April. Managers also cut bond holdings to an average of 28.8 percent in May, from 29.5 percent in April, while raising cash exposure to 2 percent, from 1.7 percent. Continental European investors lifted their cash holdings to its highest in at least a year in May and cut back on bonds.

The poll of 13 Europe-based asset management companies showed a typical mixed portfolio holding 47.9 percent of its assets in equities this month, up from 47.5 percent in April. The allocation to bonds -- which includes government bonds and corporate debt -- fell to 38.1 percent from 39.7 percent. Cash rose to 8.0 percent from 6.9 percent. Japanese fund managers slightly raised their weighting for stocks in May from the previous month's seven-year low. The average share weighting among 11 institutions edged up to 45.0 percent from 44.8 percent in April.

The average bond weighting dropped to 48.4 percent from a 10-month high of 49.1 percent in April. The weighting for cash rose slightly to 3.3 percent from 3.1 percent. British fund managers continued to reduce exposure to equities in favour of bonds. The survey of 12 fund managers showed allocations to equities dropped for the third month running, falling to 50.9 percent in the average global balanced portfolio in May, from 53.5 the previous month.

Why Europe Recovers Before the US

Here is a great article on why I like the Euro:

Jerry Bowyer CNBC 24 Sep 2009

“I will not let anyone tell me that we must spend more money." - German Chancellor Angela Merkel, March 29th, 2009

America works even when it's tried in Western Europe, and the old world fails even when it's tried in North America.

This past spring, United Kingdom Prime Minister Gordon Brown and United States President Barack Obama attempted to launch a "global new deal." They attempted to persuade other developed countries, especially in the European Union, to embark on a coordinated program of very high stimulus spending.

Angela Merkel led the opposition, issuing a resounding 'nein'. French President Nicholas Sarkozy added his 'non' to the chorus shortly thereafter. The rest is history. The Obama administration enacted a stupendously large spending program; the United Kingdom followed suit. The European Union resisted the clarion call of international Keynesianism and left the recovery largely to the private sector.

And then, something fascinating happened: They recovered, and we did not. Some of these numbers are a little close to the line and clearly other factors were involved too: The US has had the largest stimulus so far, Britain after that, Germany slightly less than Britain and France much less.

So far,the GDP data shown below indicates that the second quarter (that is, roughly the spring season) growth numbers showed expansion in the two countries that most conspicuously failed to used Keynesian tools. The data also shows that the two countries which most stubbornly hewed to the Keynesian line continued to contract.

Famed French economist Guy Sorman recently told me, "We invented the word 'entrepreneur', exported it to you, and then forgot it. Now, you are sending it back to us."

He's right. At precisely the moment when the United States is shifting toward discarded European solutions such as nationalization, inflation, and fiscal manipulation, a number of European countries are liberalizing their markets.

Angela Merkel has been described by many observers as the German version of Margaret Thatcher. The entrepreneurial Sarkozy ran on a platform of creating a France that "wakes up early."

Not all of this is a matter of electoral shift. The European Union has some structural factors which have helped it resist bad policies. For example, the Union itself imposes certain spending and debt limits on member countries. These limits emboldened European politicians who resisted Anglo-American policy bullying.

Furthermore, the European experience with hyperinflation earlier in the twentieth century persuaded them to focus their central bank exclusively on matters of price stability. The United States, on the other hand, has given our own central bank a "dual mandate" for inflation control to be balanced by low unemployment. In other words, the fiscal phrenology of the Philips curve was hard-wired into the very structure of the Fed.

It's not over yet; there are promising signs that perhaps last year's electoral swing to the left was a summer/fall fling rather than a serious relationship. Time will tell.

But for now, we see played out across the Atlantic a dictum uttered by Someone who was neither a European nor an American: The last shall be first, and the first shall be last.

And it has resulted in debt that the children of the children being born today will be paying off.

It also means the USD must weaken against the Euro in the long term.

It is now just a matter of time - KT.

A weaker greenback?

I totally agree with this article from Reuters. The USD will continue to weaken in a big way!

Neal Kimberley (Reuters 28 September)
Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy.

Now, as another effort at rebalancing looms, the dollar will again bear the brunt - though officials will try to ensure its fall is less dramatic this time.

That's the implication of President Barack Obama's announcement this week that he will push world leaders for a new global "framework" in which the United States would cut its huge trade and budget deficits.

Agreeing on this framework would be politically difficult, since it would require policy changes by many countries - China, for example, would probably have to rein in its explosive export-led growth.

But as the euro's climb to a new one-year high versus the dollar this morning shows, markets are starting to think the rebalancing process may start as soon as this week's Pittsburgh summit of leaders from the Group of 20 nations.

The Plaza Accord of 1985 called for "orderly appreciation of the main non-dollar currencies against the dollar"; it was followed by central banks' coordinated intervention to ensure that happened.

This time, with the world shakily emerging from a financial crisis, policymakers are likely to try to manage the dollar's drop in a more low-key fashion.

They are unlikely to issue an explicit call for the dollar to fall. In fact, the U.S. Treasury may continue proclaiming its "strong dollar policy" in an attempt to keep the markets calm.

No one in the G20 wants to risk a freefall of the dollar that could disrupt global trade as it recovers from recession. And in contrast to the 1980s, developing nations such as China are now challenging the dollar's long-term role as the world's top reserve currency.

The dollar's premier status helps the United States to obtain foreign capital and in order to keep that access, Washington is likely to encourage central banks around the world to continue holding dollars. This would require slow depreciation of the currency rather than a panicky slide.

So unless policymakers completely lose control of the forex markets - which cannot entirely be ruled out - the dollar's slide is likely to be slower and smaller than it was after the Plaza Accord, when the currency sank about 50 percent versus the yen between Sept. 22, 1985 and the end of 1987.

The overall direction of the dollar does not look in doubt, however. Top presidential adviser Lawrence Summers has said he wants a U.S. economy that is "more export-oriented and less consumption-oriented".

A lower dollar is a logical tool to achieve that goal, and letting the currency weaken would probably be faster and easier than most other big policy steps to reshape the U.S. economy, such as tax changes and health reform.

The International Monetary Fund, which is advising G20 nations on economy policy, is hinting heavily at the need for currency realignment.

In a report released this week, it said "current policies and the assumed constellation of exchange rates may not be sufficient for the needed rebalancing of demand."

It added that policy reforms by the world's big economies to restore growth "would be more effective if accompanied by a real effective renminbi appreciation, offset by euro and dollar depreciation".

An international understanding on dollar depreciation may well not be reached in Pittsburgh. A French official said last Friday that Pittsburgh would merely set the stage for future talks on foreign exchange rates.

"At this stage there will not be currency discussions, but the framework that we hope to put in place...is a way of discussing later the question of exchange rates," said the official, who declined to be named.

But giving China and other developing countries more power in the IMF and the World Bank could be part of an informal quid pro quo in which China quietly undertook to resume appreciating the yuan against the dollar.

The rise of the euro as high as $1.4821, breaking the December 2008 peak of $1.4719, is a technical signal that the market thinks the dollar is increasingly vulnerable.

For many traders, the break suggests a good chance of a rise to at least the psychologically important level of $1.50 in coming weeks or months. Yup

The European Central Bank might seek to limit speculation against the dollar by expressing concern about such a move. But the market does not appear to worry that the ECB could actually intervene to support the dollar.

When the European Union's Economic and Monetary Affairs Commissioner Joaquin Almunia said last week that excessive appreciation of the euro could hurt Europe's economy, the euro fell back only marginally and briefly.

The market knows that even at levels just above $1.5000, the euro would remain well below its all-time high against the dollar of $1.6038, hit in July 2008.

And any rise of the euro against the dollar in the current circumstances would probably be seen by policymakers as the result of general dollar weakness, not excessive euro strength. When euro/dollar reached its July 2008 peak, euro/yen hit a similar high; now, euro/yen is a full 35 yen lower.

The Japanese may also be willing to see their currency strengthen. Before new Finance Minister Hirohisa Fujii took office this month, he said a strong yen was generally good as it boosted the purchasing power of Japanese. He is keeping his head down now!

Fujii subsequently backed away from that comment, but speculation will remain that after sweeping to power last month, the Democratic Party of Japan may try to shift the country away from its reliance on exports and its opposition to yen strength.

In the context of a G20 drive to rebalance the global economy, this could easily cause the market to think the yen should be trading stronger than 90 to the dollar.

Do not be long USD's, as it will not be pretty in the long term!

More in-house financing next year, say CFOs at manufacturers

This is interesting data - KT

Recession? What recession?

Half of the CFOs at manufacturing companies recently surveyed said they expect their company’s revenues to go up in 2009, while nearly four in ten said they were predicting increased earnings.

Remarkably, over half of the finance chiefs said that the current state of the economy will have no impact on their growth plans. In fact, nearly seven in ten CFOs said they expect to boost the price of their products in 2009. That’s a fair jump from the 56% predicting price hikes last year.

The survey, conducted by Granite Research Consulting for Bank of America Business Capital, elicited responses from some 600 finance chiefs at mid-size and large manufacturers.

“Overall, these results reflect the severity of the current economic downturn and the uncertainty about how long it will take to work our way out of it,” said Mickey Levy, chief economist for Bank of America. “But, CFOs are taking necessary steps such as trimming inventories and operating costs in order to remain competitive, as they try to weather the storm.”

Indeed, only about a fifth of CFOs indicated that their capital expenditures for next year will be higher. Last year, about a third expected an increase in capex.

Meanwhile, 40% of finance chiefs expect to spend less or refrain from making capital expenditures altogether in 2009.

Nevertheless, about 80% of the CFOs surveyed said their company’s borrowing needs will either increase or stay about the same in 2009. While half of the finance chiefs indicated that credit availability has remained steady over the past twelve months, about a third said their lender has restricted credit availability. Last year, only 10% said they were expecting a shrinking of available credit.

And while nearly 60% of the respondents are considering financings next year, over half plan to use internal means to raise the cash. The most likely type of capital-raisings? Cash flow financing, asset-based financing, and leasing.

Given that response, it’s not overly surprising that CFOs said cash management (63%) and letters of credit (59%) remain the most commonly purchased services from banks.

John Goff, Financial Week, 11 December 2008.