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November 2008 Sovereign & Supranational Update
November 2008
Sovereign & Supranational Update
HSBC Global Asset Management hosted its latest client training forum, “Building Best Practices,” for its Sovereign & Supranational clients the week of 20 October 2008 in London.
The conference was attended by delegates from the Middle East, Africa, Asia, Europe and Latin America. Also attending were a variety of public sector focussed colleagues from across the HSBC Group. With 15 speakers, each day was packed with information, education and networking opportunities.
Day 1 The delegates gathered for the first day, “Setting the Stage”, with a focus on world markets and equities. The day commenced
with a welcome and introductory remarks from Head of Sovereigns & Supranationals, Cynthia Sweeney Barnes. This was
followed by a macroeconomic overview by Richard Cookson, Global Head of HSBC Asset Allocation Research. Two outside
speakers: Marcel Zimmermann of the Swiss National Bank and Pierre Cailleteau, Moody’s Head of Sovereigns & Supranationals,
provided their perspectives on Reserve currencies and sovereign bond ratings respectively. Jane Davies, Head of HSBC Global
Investment Solutions, gave an introduction to the efficient frontier and asset allocation. After lunch, George Varino, a specialist
on emerging market debt, discussed the impact of the financial crisis on emerging markets. Chris Cheetham, CEO of HSBC’s
fundamentally driven asset management business, Halbis, provided insights and an outlook on global equity markets. Workshops
covered asset allocation and equity valuations in greater depth.
The day closed with a gala dinner and Thames river cruise on an Edwardian riverboat.
Day 2 Munir Dean, Head of Middle East Sovereigns & Supranationals, welcomed the delegates to the second day, “Essentials of Fixed
Income”. Speakers included a range of HSBC Global Asset Management colleagues such as Alan Yau, Xavier Baraton, Kimie
Sekine and Jean-Charles Bertrand. The presentations covered general topics such as key elements of fixed income management
to specialised subjects such as ABS markets, corporate and bank credit analysis and inflation linked bonds. Workshops gave to specialised subjects such as ABS markets, corporate and bank credit analysis and inflation linked bonds. Workshops gave
delegates an opportunity to put into practice some of the theories presented earlier in the day.
In the evening, delegates attended a jazz reception and dinner hosted at the Ritz Hotel by HSBC Global Asset Management CEO
Mark McCombe.
Day 3 Wayne Shum, Head of Asia-Pacific Sovereigns & Supranationals, began the session entitled “New Sources of Alpha”. Speakers
included Alasdair Prescott, Danny Goldblum, Charles Robinson, Simon Garfield, Nick Bruce and Tony McDonnell. A broad range of
topics were covered: getting the best from third party managers, understanding FX derivatives, demystifying alternative investments
and key issues in appointing and working with custodial banks. Afternoon Workshops covered FX products and pricing and the
selection of hedge funds and their managers in more detail. Cynthia Sweeney Barnes, Global Head of Sovereigns & Supranationals,
closed the conference by reinforcing HSBC Global Asset Management’s commitment to training and other value-added services to its
Sovereign clients and thanking delegates for their attendance.
Coming soon with HSBC Global Asset Management:December 2008: SINOPIA Research Seminar in Paris, France
May 2009: Global Emerging Markets Conference, Zurich, Switzerland
September 2009: Sibos, Hong Kong
ResearchWe will be launching a dedicated Sovereign & Supranational website soon. Once the
site goes live, we will send you a link so you can receive updates including research
selected specifically for our Sovereign customer base.
We will be launching a dedicated Sovereign & Supranational website soon. Once the
site goes live, we will send you a link so you can receive updates including research
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Obligations indexées sur l’inflation
Hit by the intensifying international financial crisis, inflation-linked bonds have
sharply underperformed nominal bonds. In a flight to safety movement, investors favour
exclusively nominal Treasury bonds, which are the most liquid instruments.
A substantial and steady fall in commodity prices over the third quarter
(oil -28%, petrol -32%, soybeans and corn -35%, wheat -24%, natural gas -45%, etc.)
Inflation peaked earlier than expected and inflation forecasts have been lowered
because of the commodity price slump. The volatile components of the price index that had
been responsible for higher inflation – food and energy – started to weaken in August. Some
economists forecast a recession worsen by the current financial crisis, that could induce low
inflation rates.
Inflation breakevens have dropped sharply worldwide:
- the fall in oil and natural gas prices has lowered inflation expectations
- inflation rates peaked in the USA, euro zone and Japan in July, earlier than expected
- inflation-linked bonds appear less liquid than nominal bonds
- deleveraging by hedge funds and banks.
In the current crisis context, volatility is particularly severe and there are evident distortions
relative to the fundamentals (particularly in Japan and the USA). Some spreads have
become exceptionally high, bid-offer spreads on inflation-linked bonds have widened by far
more than those on nominal bonds, there are massive disparities between breakevens in the
inflation swaps market and those implied in ILB prices, and real yield spreads have widened
between OATi and OATei issues.
Highlights
Contribution of food and oil prices to inflation
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Inflationary trends Inflation is likely to decelerate in the next few months because the global economy is slowing
and commodity prices have come down from their summer highs (the Commodity Research
Bureau index is off 16% since end-June and Brent crude is down 38% since mid-July). The
decline in inflation rates that started in the USA, Japan and the euro zone will spread
gradually to all developed countries in 2009. Even so, according to Consensus forecasts,
inflation rates will not drop below central bank targets before 2010. The short-term factors
preventing a rapid fall in headline inflation include exchange rate effects, the still muted impact
of slower growth on the labour market, a lag in transmitting commodity price movements and
the inertia of inflation expectations.
In the USA, inflation remains high in historical terms (5.4% yoy in August), with dollar
depreciation raising the prices of imported goods. The currency’s trade-weighted exchange
rate declined 10% between January and September. But the dollar’s recent appreciation and
faltering demand will cause inflation to slow rapidly at year-end.
In the UK, the pound’s depreciation is generating upward pressure on the prices of imported
goods. At the same time, increases in gas and electricity prices decided by Scottish & South
Energy and E.ON will contribute to a further acceleration in inflation in the short term. But this
trend will reverse in 2009, when the inflation rate declines to 3.3% yoy, its 2007 level.
In Canada, brisk domestic demand – attributable to countercyclical measures like tax cuts
and monetary easing – helped inflation accelerate to 3.5% yoy in August. But at an average
2.4% yoy since the start of the year, inflation remains low compared with other developed
countries. Consensus forecasts are showing 2.3% yoy in 2009, similar to the 2007 level.
In Australia, inflation expectations have declined from 5.9% yoy in June to 4.4% in October
but remain above the 2000-2007 average (3.4% yoy). The inflation rate is expected to be 3.3%
in 2009, compared with 2.3% in 2007.
In Sweden, the limited deceleration in activity in the first half, a persistently tight labour
market and increases in electricity prices in September caused inflation to accelerate further,
from 4.3% yoy in August to 4.4% in September. Inflation has averaged 3.8% yoy since the
start of 2008, but analysts expect a marked decline to 2.7% in 2009.
In the euro zone, price surveys (purchasing manager index and European Commission)
show that inflation expectations have declined recently. The inflation rate will fall increasingly
quickly over the next 12 months as and when a more pronounced deterioration in demand
affects the labour market, a lagging indicator of the economic cycle. The inflation rate was
3.6% in September but will fall to an average 2.4% in 2009.
In Japan, the economic fundamentals started to worsen earlier than they did in Europe and
Australia. The unemployment rate has increased steadily since March, and reduced pressure
on the labour market has recently produced a drop in wages. Core inflation indices are
relatively stable (0.2% yoy in July, zero in August) and the yen’s trade-weighted exchange rate
has appreciated (an average 7% yoy since January). These factors suggest a rapid drop in the
inflation rate from 2.1% in September to an average 1.2% in 2009.
Inflation-Linked Bonds
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inflation-linked bonds have
In a flight to safety movement, investors favour
al gas -45%, etc.)
d inflation forecasts have been lowered
he price index that had
energy – started to weaken in August. Some
current financial crisis, that could induce low
in July, earlier than expected
ility is particularly severe and there are evident distortions
). Some spreads have
on inflation-linked bonds have widened by far
ssive disparities between breakevens in the
ILB prices, and real yield spreads have widened
oil prices to inflation
Inflationary trends Inflation is likely to decelerate in the next
and commodity prices have come down from
Bureau index is off 16% since end-June and Brent
decline in inflation rates that started in the
gradually to all developed countries in 2009. Ev
inflation rates will not drop below central bank targets before 2010. The short-term factors
preventing a rapid fall in headli
of slower growth on the labour market, a l
the inertia of inflation expectations.
In the USA, inflation remains high in historical
depreciation raising the prices of import
rate declined 10% between January and September
faltering demand will cause inflati
In the UK, the pound’s depreciation is generating upwar
goods. At the same time, increases in gas and el
Energy and E.ON will contribute to a further accele
trend will reverse in 2009, when the inflation
In Canada, brisk domestic demand – attributable to
and monetary easing – helped inflation accelerate to 3.5% yoy in August. But at an average
2.4% yoy since the start of the year, infl
countries. Consensus forecasts are showing 2.3% yoy in 2009, sim
In Australia, inflation expectations have declined from
but remain above the 2000-2007 average (3.4% yoy).
in 2009, compared with 2.3% in 2007.
In Sweden, the limited deceleration in activity in the first half, a persistently tight labour
market and increases in electricity prices in S
from 4.3% yoy in August to 4.4% in September. Inflation
start of 2008, but analysts expect a marked decline to 2.7% in 2009.
In the euro zone, price surveys (purchasing
show that inflation expectations have declined rec
quickly over the next 12 months as and when a more pronounced deterioration in demand
affects the labour market, a lagging indicator of the economic
3.6% in September but will fall to an average 2.4% in 2009.
In Japan, the economic fundamentals started to wo
Australia. The unemployment rate has increased steadily since March, and reduced pressure
on the labour market has recently produced a drop in wages. Core inflation indices are
relatively stable (0.2% yoy in July, zero in August) and the yen’s trade-weighted exchange rate
has appreciated (an average 7% yoy since January). These factors suggest a rapid drop in the
inflation rate from 2.1% in September to an average 1.2% in 2009.
Inflation-Linked Bonds
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Inflation-Linked Bonds
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“The conference was outstanding and superbly organised.”
Delegate
Wayne Shum with two clients.
Mark McCombe, HSBC Global Asset Management CEO, and Cynthia Sweeney Barnes, Head of Global Sovereigns & Supranationals, with clients in the Music Room at the Ritz Hotel.
“Our role is to deliver what Sovereign customers value: flawless asset management delivery, customised training, research and networking opportunities.”
Cynthia Sweeney Barnes
Alan Yau with two clients.
“I found the presentations useful for my daily work.”
Delegate
“This Forum is one of the best which I have attended so far.”
Delegate
Martin Arthur with a client.
For more information, please contact the Sovereign & Supranationals Team
Munir Dean, Head,
Middle East Sovereigns & Supranationals
+44 (0) 20 7024 0107
Stéphane Huber, Head,
Europe Sovereigns & Supranationals
+ 33 (0) 1 41 02 65 62
Cynthia Sweeney Barnes,
Global Head, Sovereigns & Supranationals
+ 44 (0) 20 7991 3433
Wayne Shum, Head,
Asia Sovereigns & Supranationals
+ (852) 2284 1230
Regional Heads
Martin Arthur
EMEA
+44 (0) 20 7024 0316
Alan Yau
EMEA
+44 (0) 20 7024 0798
Client Service Directors
Lois Gallagher
Americas
+1 (1) 212 525 7402
Winnie Hau
Asia Pacific
+852 2284 1386
The material contained in this document is for information only and does not constitute investment advice or a recommendation to any reader of this material to buy or sell investments. It is intended for investment professionals only and not for distribution to Retail Clients. This document is issued in the UK by HSBC Global Asset Management (UK) Limited authorised and regulated by the Financial Services Authority. 15711/FP08-1726.www.assetmanagement.hsbc.com/uk
