$1 trillion wiped from Asian markets as Chinese economic slowdown verges on meltdown

BY Fraser Tennant

In a major drop in stocks verging on a meltdown, more than $1 trillion has been wiped from Asian markets following a sharp drop in the value of Chinese shares.

Yesterday saw the biggest one-day drop since 2007 with the Shanghai Composite, the mainland benchmark index, down 8.5 percent at 3,209.91 points (erasing all the gains made this year), the Hong Kong Seng index closed at 5.2 percent (21,251.57 points), and Japan's Nikkei 225 (the region's biggest stock market), closed 4.6 percent lower (18,540.68 points) - its lowest point in almost five months.

Markets were also dragged down elsewhere in the region with the Australian S&P/ASX 200 finished 4.1 percent lower (5,001.30 points), while South Korea's Kospi index ended yesterday 2.5 percent lower (1,829.81 points).

As Chinese shares continue their fall this week, the country's slowing growth and volatile markets sparked panic among global traders, with stock markets in London, Paris and Frankfurt reacting with alarm to the crisis engulfing the world's second largest economy.

"It is a China driven macro panic," said Didier Duret, chief investment officer at ABN Amro. "Volatility will persist until we see better data there or strong policy action through forceful monetary easing."

In a frenzied attempt to reassure investors, the Beijing government has made use of its cash reserves to shore up the market (a figure of at least $1 trillion as been quoted) and has given the go-ahead for its main state pension fund to invest in the stock market. 

Under the government’s plans, the fund will be allowed to invest up to 30 percent of its net assets in domestically-listed shares. By increasing demand for them, the government hopes prices will rise. So far though, this intervention appears to have done little to calm the fears of traders both within China and overseas. 

"China could be forced to devalue the yuan even more, should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy," said Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo.

If the yuan is devalued further and Chinese citizens end up losing their life savings in the stock market, widespread social unrest may follow: a true nightmare scenario for a an under-fire Beijing government. 

News: Great fall of China sinks world stocks, dollar tumbles

‘Abenomics’ under fire once more as Q2 GDP data confirms weak Japanese economy

BY Fraser Tennant

Second-quarter GDP figures have confirmed that the Japanese economy,  the world’s third-largest, shrank at an annualised pace of 1.6 percent – a contraction that keeps up the pressure on prime minister Shinzo Abe and his economic policy package, Abenomics.

According to data released this week by the Cabinet Office, on a quarter-on-quarter basis, Japan’s gross domestic product contracted 0.4 percent in the April to June 2015 period. Economists surveyed by The Wall Street Journal forecast a 0.5 percent contraction (1.9 percent annualised).

Despite the weak economic growth, the Japanese economy actually expanded over the previous two quarters, although that expansion followed two quarters of contraction.

A slump in overseas demand for Japanese goods and more frugal attitudes toward household expenditure have been cited as the major reasons for the stagnating Japanese economy.

As well as essentially confirming that its economy is at standstill, the austere Japanese GDP data also steps up the pressure on senior policymakers to devise a fresh monetary/fiscal stimulus to bolster the economy and reverse decades of deflation.

Since taking office in December 2012, prime minister Abe has struggled to bolster economic growth, with his audacious Abenomics revival program so far failing to turn the Japanese economy around.

Commenting on the Cabinet Office figures, economics minister Akira Amari stated that the government did not have any concrete plans as yet to introduce a new stimulus package but would concentrate for the moment on pressuring companies to direct their profits toward raising wages and capital expenditure.

Responding to Mr Amari’s view, Hiromichi Shirakawa, chief Japan economist at Credit Suisse, said: “If weak private consumption persists, that would be a further blow to Abe's administration, which is facing falling support rates ahead of next year's Upper House election. This could raise chances of additional fiscal stimulus."

Although economists do expect economic growth to pick up in Japan in the second half of 2015, for now there is considerable pressure mounting on prime minister Abe and his government to take steps to boost the economy, sooner rather than later.

News: Japan economy shrinks in second quarter in setback for 'Abenomics'

Banks in latest $2bn FOREX settlement

BY Richard Summerfield

Nine major world banks have agreed to pay a $2bn settlement to conclude a class action brought in a New York court over the recent foreign exchange rigging (FOREX) scandal.

For the banks involved, the ramifications of rigging the market in their favour continue to mount up, with fines already exceeding the $10bn mark. However, almost as harmful as the fines and settlements has been the damaging effect of the scandal on the reputations of the banks involved.

The firms involved in the FOREX fixing conspiracy, including HSBC, Barclays, BNP Paribas, Bank of America, JP Morgan, Citibank, Goldman Sachs, RBS and UBS, have been pilloried, and heavily sanctioned in recent years for their roles in the scheme. As a result of the FOREX controversy – amid other notable financial scandals – confidence in the wider financial services sector appears to be almost at rock bottom.

In May, five of the banks - Barclays, Citicorp, JPMorgan Chase, Royal Bank of Scotland and UBS - pleaded guilty to felony charges relating to rigging foreign exchange rates. In 2014, the Financial Conduct Authority in the UK fined four of the five firms a total of £1.1bn. The fifth bank, Barclays, is still under investigation.

According to Michael D. Hausfeld, chairman of Hausfeld, a global claims firm acting on behalf of US investors, the most recent settlements are a key victory for those wronged investors. “As a result of lengthy, hard-fought negotiations, we have obtained historic recoveries on behalf of US investors,” wrote Mr Hausfeld. “Apart from the monetary component, each defendant has agreed to provide substantial cooperation, which will assist investors in their continued litigation against the non-settling defendants. While the recoveries here are tremendous, they are just the beginning. Investors around the world should take note of the significant recoveries secured in the United States and recognise that these settlements cover a fraction of the world’s largest financial market," he added.

Furthermore, as part of the settlement, the rebuked firms have agreed to help investors continue their legal action against a further 12 banks - Credit Suisse Group AG, Credit Suisse AG, Credit Suisse Securities, Deutsche Bank AG, Deutsche Bank Securities Inc., Morgan Stanley, Morgan Stanley and Co, Morgan Stanley and Co. International, Bank of Tokyo-Mitsubishi, RBC Capital Markets, Société Générale, and Standard Chartered.

Undoubtedly, the increase in fines and settlements reflects the increasing regulatory scrutiny banking groups have found themselves subject to in recent years. For those targeted banks, the enforcement actions – and settlements - will likely continue for some time.

News: Currency rigging lawsuit settlements rise past $2bn - lawyer

Google to become Alphabet following reorganisation

BY Richard Summerfield

Over the course of the last decade or so, Google has played a pivotal role in the lives of billions of people. Though the company began as a mere search engine, today Google has become a global conglomerate offering everything from video hosting to high speed fibre broadband, restaurant reviews to ‘smart’ home heating systems, and self driving cars to venture capital investments.

However, going forward this is all going to change, as Google will soon become a wholly owned subsidiary of a new holding company, Alphabet. “Our company is operating well today, but we think we can make it cleaner and more accountable. So we are creating a new company called Alphabet,” said Google chief executive Larry Page in a blog post on the company’s website.

In creating Alphabet, the company caught many analysts and investors off guard. But it is important to note that there will be no material change for consumers or investors going forward. Google’s fundamental businesses – and its experimental ‘Google X’ division – will remain the same under the Alphabet banner.

Indeed, Google's core units – search, YouTube, Android and maps – which account for almost all of the company’s annual revenue of around $66bn and its $460bn stock market capitalisation – will remain within the Google subsidiary. However, Google itself will have a new chief executive, Sundar Pichai, who had been senior vice president in charge of products. Mr Page and Google co-founder Sergey Brin will run Alphabet, Google’s new parent company. Other subsidiary  companies including Nest and Calico will sit alongside Google.

Though the move was unexpected, it has been heralded as a positive step. The reorganisation of the sprawling and diffuse Google business marks the first time that any of the major Silicon Valley powerhouses has attempted to streamline their units. Companies such as Amazon and Facebook, which themselves have acquired a litany of tech start ups in recent years, will surely watch Google's reorganisation with interest.

Investors have almost universally supported the realignment of Google's business. Shares of Google Class C stock rose more than 4 percent on Tuesday morning, the day after the announcement was made. The move is expected to bring greater balance-sheet accountability and reduce Google's spending on speculative endeavours. As Mr Page noted, “We plan to implement segment reporting for our Q4 results, where Google financials will be provided separately than those for the rest of Alphabet businesses as a whole.”

How the reorganisation will affect Google’s antitrust battles in Europe remains to be seen, however.

News: Google morphs into Alphabet; investors cheer clarity

Analysing the trillion-dollar alternative assets arena

BY Fraser Tennant

A comprehensive analysis of the alternative assets industry, including an examination of performance, routes to market and consultant recommendations, is to be found within the pages of a new report by data and intelligence provider Preqin.

Aimed exclusively at institutional investors, the ‘2015 Preqin Investor Network Global Alternatives Report’ features a wide range of topics underpinned by the latest alternatives data and expert analysis.

“The very term ‘alternative assets’ is questionable today," states Mark O’Hare, founder and CEO of Preqin. “With AUM of $7 trillion worldwide and projected to reach $12 trillion by 2020, alternatives have become core for investors.”

The report contains in-depth analysis of: (i) the evolution of alternative assets and the importance of alternatives in investors' portfolios; (ii) methods of accessing alternatives, including separate accounts, co-investments, direct investments, secondaries and funds of funds; (iii) investment consultant recommendations for the year ahead; (iv) investor fund searches, including strategic and geographic preferences; (v) performance across alternative assets; (vi) fund terms and alignment of interests; and (vii) investor attitudes toward alternatives and plans for 2015.

The reasons behind the upsurge in alternatives as a core investment are simple and powerful, claims Mr O’Hare. He says: “Private equity-style investments have demonstrably delivered superior returns to investors over the long term; and hedge fund investments occupy an attractive position on the risk-return frontier (even if the headline returns have disappointed recently).

“Add in infrastructure, private debt, real estate and natural resources opportunities – all with their distinct growth dynamics – and you have a fundamental trend of growth”, he believes.

Elsewhere in the report, Preqin analysts highlight a notable shift in the proportion of investors targeting unlisted infrastructure funds in favour of direct investments in assets. As of December 2014, 65 percent now target funds and 56 percent target direct investments.

Additionally, the report reveals that hedge funds fared worst when examining overall investor sentiment: 35 percent felt that their hedge fund investments fell short of expectations throughout 2014. In terms of private equity, Preqin found that 50 percent of investment consultants are now recommending that their clients invest more capital in small to mid-market buyout funds in 2015 compared to last year.

Mr O’Hare concludes: “As investors come to place greater reliance on alternatives to meet their investment objectives, so their need for reliable information grows. Alternatives are now simply too important to delegate solely to external advisors.”

Report: ‘2015 Preqin Investor Network Global Alternatives Report’