AdviserVoiceAegon Asset Management Archives - AdviserVoice https://www.adviservoice.com.au/source/aegon-asset-management/ Financial planner information & financial planner education/CPD - AdviserVoice Thu, 04 Jun 2026 21:30:42 +0000 en-US hourly 1 https://wordpress.org/?v=7.0 Strategy Monthly: Euro confusion https://www.adviservoice.com.au/2011/05/strategy-monthly-euro-confusion/ https://www.adviservoice.com.au/2011/05/strategy-monthly-euro-confusion/#respond Fri, 06 May 2011 04:48:00 +0000 https://adviservoice.com.au/?p=8209 Equities appear to have recovered their poise after the four-week correction from mid February to the lows around the time of the terrible events in Japan mid March. Markets have taken the ECB raising interest rates in their stride, perhaps because expectations for rate hikes in the UK and US have been pushed further out into the future. One consequence of those moves has been to make the euro a strong currency in recent weeks.

First-quarter earnings have given more evidence of the rude health of corporations around the world ― profit margins are high, reported earnings are high and balance sheets strong.

Equities and credit remain attractive against government bonds and cash. Gold remains more attractive against cash than at any time in its history. Gold costs money to store and secure but cash basically yields zero (3-month US Treasury bills yield 0.025% to be precise). We have never had interest rates this low (data goes back to 1694 in the UK) so gold is as attractive as it has ever been on a relative basis.

Given this backdrop, it is justifiable for ‘risk assets’ to have performed reasonably well. That suits our core positioning. However, we remain concerned that there are too many structural hangovers from the Great Recession to make unalloyed bullishness the appropriate strategy.

One of those hangovers is the unresolved matter of dealing with the debt of Greece, Portugal, Ireland and potentially others in the eurozone periphery. Portugal has now agreed a €78bn three-year financial bailout involving the EU and the IMF.
x
Currency traders are looking through these issues and declaring that the ECB moving its refinancing rate to 1.25% is enough to make the euro the ‘bees-knees’ when it comes to global currencies.
x
In the short-term, we have some sympathy with the notion of looking through the periphery problems. That is exactly what policymakers in Europe want. We need to remind ourselves that there is a plan for dealing with the situation. That plan is simple.
x
The EU is trying to buy time to allow its banks to be in healthier shape before asking them to deal with the implications of a debt restructuring in Greece or any other periphery country. Hence, the ECB feels it can raise interest rates because it can focus on its inflation mandate and let the politicians deal with the periphery.
x
The context for that view is completely consistent with the longer-term thematic backdrop that must always be borne in mind when thinking about the EU and the single-currency. That is, to paraphrase Dr Friedman, the euro is always and everywhere a political phenomenon.
x
On the face of it, therefore, the threat to the euro comes if there is a loss of political will to support it. There is no indication that the ruling class has lost that commitment. Indeed, the setting up of the EFSF and ultimately the ESM are indications that the commitment remains wide and deep.
x
However, there is a lot of concern that the electorate in northern Europe in particular will do a Roberto Duran and declare “no mas”.
x
We completely agree that a political backlash in northern Europe is a critical risk for the euro. Political instability would undermine the single currency and, rather annoyingly for those ruling classes, the electorate get to vote now and again.
x
The Finnish election on April 17 was one such annoyance. It was an unusual Finnish election because it made the front pages of newspapers across the world. The rise of the populist True Finns party (which opposes EU bailouts) to a third place finish, stoked concerns that the northern European populace are indeed now revolting against the bailouts of the south.
x
The leader of the True Finns put it rather more colourfully: “The Finnish cow should be milked in Finland and the milk shouldn’t be sent abroad in charity.” Timo Soini deserves to be recognised for his wisdom.
x
However, in the remainder of 2011 there are few opportunities for European electorates to voice their concerns. There is a Portuguese election in June but nothing significant in northern Europe. We take the growing populist opposition to the bailouts in the euro area very seriously. However we suspect that its impact in 2011 will be limited.
x
But surely Greece has to restructure its debts given its 2-year government bond trades at a yield of 23%? At some point yes, and there are risks in the next month or so that events will push the story back onto the front page. On May 15, the Greek government presents its budget. In June, the IMF will report on the progress Greece has made since the original bailout.
x
We suspect there are three possibilities for ultimately resolving the problem. We see the probabilities of each to be rather different today than they may be in two or three years time.
x
  1. More assistance from the EU/IMF to avoid any restructuring. This is the most likely outcome in the near-term. There is no indication that the French or German ruling political class have any interest in jeopardising the euro project by forcing any debt restructuring on a member state until the broader financial sector, including French and German banks, are in better shape to deal with it. Probability of  happening this year: 60%. Probability of still being a tenable policy in 2013: 5%.
  2. Debt maturity is extended but no haircuts on principal. By not haircutting, financial institutions do not have to recognise any capital losses on their Greek debt. The question is whether this can be done without the market immediately thinking that it is just a stepping-stone to option three below. Probability of happening this year: 30%. Probability of being a tenable policy in 2013: 15%.
  3. Debt restructuring with haircuts for creditors. It would most likely be a soft version, along the lines of the Brady bonds issued in the 1980s to end the Latin American debt crisis. They involve some recognition of losses but give creditors a higher-grade bond to hold in place of the restructured original debt. This will likely be done on a voluntary basis by EU financial institutions. Probability of happening 10% this year; 80% by the end of 2013.
The critical thing to think about though is that the endgame for Greece will likely be some form of debt restructuring. It will involve losses for a lot of financial institutions in Europe. When this happens, it will almost certainly lead to renewed fears of contagion to the other ‘PIIGS” too. It is only a matter of time before this dominates the front pages again. Whether the euro will be quite such a strong currency when it is happening remains to be seen. But one suspects not. Has selling the euro become a plausible hedge against a core pro-risk portfolio?

Our asset allocation is overweight equities and fixed income; underweight property and cash.

x
This communication is directed only at investment professionals, and should not be distributed to, or relied upon by private investors. This document is not intended for retail distribution. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority. The information in this report is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments may fall as well as rise and is not guaranteed.
]]> Equities appear to have recovered their poise after the four-week correction from mid February to the lows around the time of the terrible events in Japan mid March. Markets have taken the ECB raising interest rates in their stride, perhaps because expectations for rate hikes in the UK and US have been pushed further out into the future. One consequence of those moves has been to make the euro a strong currency in recent weeks.

First-quarter earnings have given more evidence of the rude health of corporations around the world ― profit margins are high, reported earnings are high and balance sheets strong.

Equities and credit remain attractive against government bonds and cash. Gold remains more attractive against cash than at any time in its history. Gold costs money to store and secure but cash basically yields zero (3-month US Treasury bills yield 0.025% to be precise). We have never had interest rates this low (data goes back to 1694 in the UK) so gold is as attractive as it has ever been on a relative basis.

Given this backdrop, it is justifiable for ‘risk assets’ to have performed reasonably well. That suits our core positioning. However, we remain concerned that there are too many structural hangovers from the Great Recession to make unalloyed bullishness the appropriate strategy.

One of those hangovers is the unresolved matter of dealing with the debt of Greece, Portugal, Ireland and potentially others in the eurozone periphery. Portugal has now agreed a €78bn three-year financial bailout involving the EU and the IMF.
x
Currency traders are looking through these issues and declaring that the ECB moving its refinancing rate to 1.25% is enough to make the euro the ‘bees-knees’ when it comes to global currencies.
x
In the short-term, we have some sympathy with the notion of looking through the periphery problems. That is exactly what policymakers in Europe want. We need to remind ourselves that there is a plan for dealing with the situation. That plan is simple.
x
The EU is trying to buy time to allow its banks to be in healthier shape before asking them to deal with the implications of a debt restructuring in Greece or any other periphery country. Hence, the ECB feels it can raise interest rates because it can focus on its inflation mandate and let the politicians deal with the periphery.
x
The context for that view is completely consistent with the longer-term thematic backdrop that must always be borne in mind when thinking about the EU and the single-currency. That is, to paraphrase Dr Friedman, the euro is always and everywhere a political phenomenon.
x
On the face of it, therefore, the threat to the euro comes if there is a loss of political will to support it. There is no indication that the ruling class has lost that commitment. Indeed, the setting up of the EFSF and ultimately the ESM are indications that the commitment remains wide and deep.
x
However, there is a lot of concern that the electorate in northern Europe in particular will do a Roberto Duran and declare “no mas”.
x
We completely agree that a political backlash in northern Europe is a critical risk for the euro. Political instability would undermine the single currency and, rather annoyingly for those ruling classes, the electorate get to vote now and again.
x
The Finnish election on April 17 was one such annoyance. It was an unusual Finnish election because it made the front pages of newspapers across the world. The rise of the populist True Finns party (which opposes EU bailouts) to a third place finish, stoked concerns that the northern European populace are indeed now revolting against the bailouts of the south.
x
The leader of the True Finns put it rather more colourfully: “The Finnish cow should be milked in Finland and the milk shouldn’t be sent abroad in charity.” Timo Soini deserves to be recognised for his wisdom.
x
However, in the remainder of 2011 there are few opportunities for European electorates to voice their concerns. There is a Portuguese election in June but nothing significant in northern Europe. We take the growing populist opposition to the bailouts in the euro area very seriously. However we suspect that its impact in 2011 will be limited.
x
But surely Greece has to restructure its debts given its 2-year government bond trades at a yield of 23%? At some point yes, and there are risks in the next month or so that events will push the story back onto the front page. On May 15, the Greek government presents its budget. In June, the IMF will report on the progress Greece has made since the original bailout.
x
We suspect there are three possibilities for ultimately resolving the problem. We see the probabilities of each to be rather different today than they may be in two or three years time.
x
  1. More assistance from the EU/IMF to avoid any restructuring. This is the most likely outcome in the near-term. There is no indication that the French or German ruling political class have any interest in jeopardising the euro project by forcing any debt restructuring on a member state until the broader financial sector, including French and German banks, are in better shape to deal with it. Probability of  happening this year: 60%. Probability of still being a tenable policy in 2013: 5%.
  2. Debt maturity is extended but no haircuts on principal. By not haircutting, financial institutions do not have to recognise any capital losses on their Greek debt. The question is whether this can be done without the market immediately thinking that it is just a stepping-stone to option three below. Probability of happening this year: 30%. Probability of being a tenable policy in 2013: 15%.
  3. Debt restructuring with haircuts for creditors. It would most likely be a soft version, along the lines of the Brady bonds issued in the 1980s to end the Latin American debt crisis. They involve some recognition of losses but give creditors a higher-grade bond to hold in place of the restructured original debt. This will likely be done on a voluntary basis by EU financial institutions. Probability of happening 10% this year; 80% by the end of 2013.
The critical thing to think about though is that the endgame for Greece will likely be some form of debt restructuring. It will involve losses for a lot of financial institutions in Europe. When this happens, it will almost certainly lead to renewed fears of contagion to the other ‘PIIGS” too. It is only a matter of time before this dominates the front pages again. Whether the euro will be quite such a strong currency when it is happening remains to be seen. But one suspects not. Has selling the euro become a plausible hedge against a core pro-risk portfolio?

Our asset allocation is overweight equities and fixed income; underweight property and cash.

x
This communication is directed only at investment professionals, and should not be distributed to, or relied upon by private investors. This document is not intended for retail distribution. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority. The information in this report is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments may fall as well as rise and is not guaranteed.

The post Strategy Monthly: Euro confusion appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2011/05/strategy-monthly-euro-confusion/feed/ 0 Snippet – To the edge and back again https://www.adviservoice.com.au/2011/04/snippet-%e2%80%93-to-the-edge-and-back-again/ https://www.adviservoice.com.au/2011/04/snippet-%e2%80%93-to-the-edge-and-back-again/#respond Fri, 08 Apr 2011 00:36:26 +0000 https://adviservoice.com.au/?p=7401 The Second Liberty Bond Act of 1917 placed a limit on the amount of public debt that the US Government can have outstanding. This Statutory Debt Limit, or debt ceiling, prevents new debt being issued once the limit has been reached. However, the debt limit can be, and has often been, raised with approval from the US Congress. Obtaining that approval is, at times, a more tortuous process than at others; this is one of those times.
x
During the 2009 financial crisis, Congress raised the debt ceiling to $12.4trn, an increase of $290bn and then, in February last year, the statutory ceiling was lifted by $1.9trn to $14.3trn. This was the single greatest increase in allowable debt outstanding both in absolute terms but also as a percentage of the economy (see Figure 1). Figure 1 also portrays a public sector balance sheet soaring out of control. Current projections suggest that the US will hit the debt ceiling no later than May 16 2011.
x

x
Figure 1: US Debt limit and debt outstanding as % of Nominal GDP
x
x
As total outstanding debt approaches 100% of GDP, investors naturally become concerned. Although outstanding Japanese government debt is nearly twice GDP, Japan is hardly a solid role model.
x
Negotiations are ongoing to resolve the impasse over the federal government budget for the current fiscal year, but the chances of a government shutdown have risen. To operate normally, federal agencies etc need funding from either a full-year or interim funding measure. The current continuing resolution, funding the government, expires today.
x
Preparations for an actual government shutdown, akin to that which occurred in 1995, are taking place in earnest. ‘Officialdom’ has started to identify those employees who will be placed in a temporary non-duty, non-pay status – and which employees will continue to work. Capital constraints, it seems, are not just a peripheral European phenomenon.
x
As the government nears the debt ceiling, the US Treasury does have authority to take extraordinary measures to postpone the date on which the United States would default on its obligations. These measures offer nothing more than a (short) stay of execution; they cannot be an answer in themselves. The operative word here is ‘default’.
x
Ex ante, the question of the US entering into a default situation is a matter of judgement and inevitably involves a debate surrounding long-term gain versus Short-term pain. It is inconceivable that US politicians will conclude that actual non-payment of liabilities is in the nation’s long-term interest and so – inevitably and at the ‘eleventh hour’ – a compromise in the political haggling will be found. [Note that ‘those that be’ have concluded that we can’t afford any of the little PIIGS to default and so a US default is likely to be judged as having unimaginable consequences]. However to focus on the prospect of actual default is to miss the point – there are other ways to default.
x
To your domestic creditors the best means of lessening your debt burden is by generating inflation. If you can safely engineer a lower currency then, in isolation, you lessen the value of your obligations to external creditors. We know that the Federal Reserve is currently actively pursuing a higher run rate for US inflation and, as Figure 2 highlights, the US dollar is weakening and no one – in the US at least – seems to be greatly bothered. While inflation remains benign, pursuit – by design or neglect – of a soft dollar is both safe and expedient. That will not always be the case.

x
Figure 2: US$ Trade weighted index
x
US politicians will doubtless agree a package to take forward the working of government. There may need to be a period of shutdown before this happens and is probably for the good. Last year, the Administration was expected to introduce UK-style policies for fiscal recovery, in the end they cut taxes; short-term gain, long-term pain.
x
The current difficulties should ensure that they don’t similarly renege this time around. If not, then a sharp slump in the US dollar is likely in 2012. Default will be avoided but the cheques may not be worth much more than the paper on which they are written.
x
Important Notice – The Asset Allocation Service (AAS) This document relates to the AAS provided by AEGON Asset Management UK plc (AAM). The AAS is subject to the terms of an investment management agreement between AAM and a pension fund selecting the AAS and subject to such disclaimers, notices, warnings or separate agreements, including those set out below, as AAM may communicate to you or agree with you.THE CONTENT OF THIS DOCUMENT IS DESIGNED FOR THE PROFESSIONAL PENSION FUND MARKET. IF YOU ARE NOT AN INVESTMENT PROFESSIONAL OR A PERSON PROFESSIONALLY INVOLVED IN OR HAVING RESPONSIBILITIES RELATING TO PENSION FUND MANAGEMENT YOU SHOULD NOT ACT UPON IT. This document is directed only at persons having professional experience in matters relating to investments falling within article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and high value entities or trusts falling within article 49 of that Order. Consequently, AAM has not approved the content of this document for the purposes of section 21 of the Financial Services and Markets Act 2000. No other person should act upon this document or any information contained in it. AAM has procedures in place to ensure that no instrument or investment activity referred to in this document is available to any other person. The content of this document has been prepared solely for information purposes. Any statements, forecasts, past performance data, estimates or projections included in the document are for illustrative purposes only and may be provided by AAM or third parties. Any view, opinions or statements made in or in relation to this document should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments and the income from them may fall as well as rise and there is no guarantee that the AAS will achieve the objectives described in this document. No investment advice or tax advice is being given in this document. Nothing in this document should be regarded as an offer to provide investment services or products or as a comment on the merits of engaging in any investment transaction or activity or an inducement to do so. The content of this document is subject to change and correction without notice. AAM does not represent that (i) the content of this document; (ii) any investments or investment services referred to in this document; or (iii) any oral or written statements provided by or made by AAM or persons connected with it are suitable for or relevant to you. AEGON Asset Management UK plc provides segregated and retail funds and is the Authorised Corporate Director of AEGON ICVC, an Open Ended Investment Company. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority, (FSA reference no: 144267). AEGON Investment Management UK ltd provides investment management services to AEGON, which provides pooled funds life and pension contracts. AEGON Investment Management UK ltd is an appointed representative of Scottish Equitable plc, an AEGON company, whose Registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548).
]]> The Second Liberty Bond Act of 1917 placed a limit on the amount of public debt that the US Government can have outstanding. This Statutory Debt Limit, or debt ceiling, prevents new debt being issued once the limit has been reached. However, the debt limit can be, and has often been, raised with approval from the US Congress. Obtaining that approval is, at times, a more tortuous process than at others; this is one of those times.
x
During the 2009 financial crisis, Congress raised the debt ceiling to $12.4trn, an increase of $290bn and then, in February last year, the statutory ceiling was lifted by $1.9trn to $14.3trn. This was the single greatest increase in allowable debt outstanding both in absolute terms but also as a percentage of the economy (see Figure 1). Figure 1 also portrays a public sector balance sheet soaring out of control. Current projections suggest that the US will hit the debt ceiling no later than May 16 2011.
x

x
Figure 1: US Debt limit and debt outstanding as % of Nominal GDP
x
x
As total outstanding debt approaches 100% of GDP, investors naturally become concerned. Although outstanding Japanese government debt is nearly twice GDP, Japan is hardly a solid role model.
x
Negotiations are ongoing to resolve the impasse over the federal government budget for the current fiscal year, but the chances of a government shutdown have risen. To operate normally, federal agencies etc need funding from either a full-year or interim funding measure. The current continuing resolution, funding the government, expires today.
x
Preparations for an actual government shutdown, akin to that which occurred in 1995, are taking place in earnest. ‘Officialdom’ has started to identify those employees who will be placed in a temporary non-duty, non-pay status – and which employees will continue to work. Capital constraints, it seems, are not just a peripheral European phenomenon.
x
As the government nears the debt ceiling, the US Treasury does have authority to take extraordinary measures to postpone the date on which the United States would default on its obligations. These measures offer nothing more than a (short) stay of execution; they cannot be an answer in themselves. The operative word here is ‘default’.
x
Ex ante, the question of the US entering into a default situation is a matter of judgement and inevitably involves a debate surrounding long-term gain versus Short-term pain. It is inconceivable that US politicians will conclude that actual non-payment of liabilities is in the nation’s long-term interest and so – inevitably and at the ‘eleventh hour’ – a compromise in the political haggling will be found. [Note that ‘those that be’ have concluded that we can’t afford any of the little PIIGS to default and so a US default is likely to be judged as having unimaginable consequences]. However to focus on the prospect of actual default is to miss the point – there are other ways to default.
x
To your domestic creditors the best means of lessening your debt burden is by generating inflation. If you can safely engineer a lower currency then, in isolation, you lessen the value of your obligations to external creditors. We know that the Federal Reserve is currently actively pursuing a higher run rate for US inflation and, as Figure 2 highlights, the US dollar is weakening and no one – in the US at least – seems to be greatly bothered. While inflation remains benign, pursuit – by design or neglect – of a soft dollar is both safe and expedient. That will not always be the case.

x
Figure 2: US$ Trade weighted index
x
US politicians will doubtless agree a package to take forward the working of government. There may need to be a period of shutdown before this happens and is probably for the good. Last year, the Administration was expected to introduce UK-style policies for fiscal recovery, in the end they cut taxes; short-term gain, long-term pain.
x
The current difficulties should ensure that they don’t similarly renege this time around. If not, then a sharp slump in the US dollar is likely in 2012. Default will be avoided but the cheques may not be worth much more than the paper on which they are written.
x
Important Notice – The Asset Allocation Service (AAS) This document relates to the AAS provided by AEGON Asset Management UK plc (AAM). The AAS is subject to the terms of an investment management agreement between AAM and a pension fund selecting the AAS and subject to such disclaimers, notices, warnings or separate agreements, including those set out below, as AAM may communicate to you or agree with you.THE CONTENT OF THIS DOCUMENT IS DESIGNED FOR THE PROFESSIONAL PENSION FUND MARKET. IF YOU ARE NOT AN INVESTMENT PROFESSIONAL OR A PERSON PROFESSIONALLY INVOLVED IN OR HAVING RESPONSIBILITIES RELATING TO PENSION FUND MANAGEMENT YOU SHOULD NOT ACT UPON IT. This document is directed only at persons having professional experience in matters relating to investments falling within article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and high value entities or trusts falling within article 49 of that Order. Consequently, AAM has not approved the content of this document for the purposes of section 21 of the Financial Services and Markets Act 2000. No other person should act upon this document or any information contained in it. AAM has procedures in place to ensure that no instrument or investment activity referred to in this document is available to any other person. The content of this document has been prepared solely for information purposes. Any statements, forecasts, past performance data, estimates or projections included in the document are for illustrative purposes only and may be provided by AAM or third parties. Any view, opinions or statements made in or in relation to this document should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments and the income from them may fall as well as rise and there is no guarantee that the AAS will achieve the objectives described in this document. No investment advice or tax advice is being given in this document. Nothing in this document should be regarded as an offer to provide investment services or products or as a comment on the merits of engaging in any investment transaction or activity or an inducement to do so. The content of this document is subject to change and correction without notice. AAM does not represent that (i) the content of this document; (ii) any investments or investment services referred to in this document; or (iii) any oral or written statements provided by or made by AAM or persons connected with it are suitable for or relevant to you. AEGON Asset Management UK plc provides segregated and retail funds and is the Authorised Corporate Director of AEGON ICVC, an Open Ended Investment Company. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority, (FSA reference no: 144267). AEGON Investment Management UK ltd provides investment management services to AEGON, which provides pooled funds life and pension contracts. AEGON Investment Management UK ltd is an appointed representative of Scottish Equitable plc, an AEGON company, whose Registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (FSA reference no: 165548).

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