2011 SECURITIES LENDING OUTLOOK

Transcription

1 2011 SECURITIES LENDING OUTLOOK February 8, 2011 Host Paul Wilson International Head of Client Management and Sales, Financing and Markets Products, J.P. Morgan Featured Guest Speaker David Mackie Head of Western European Economic Research, J.P. Morgan Speakers John Shellard Global Head Equities Lending, J.P. Morgan Robert Taub U.S. Fixed Income Desk Manager, J.P. Morgan Matthew Sarson Trading Manager, Securities Lending Investment Desk, J.P. Morgan

2 THE OUTLOOK FOR THE GLOBAL ECONOMY David Mackie Head of Western European Economic Research

3 Overview of global economy in should be a solid year for global growth, with good performance everywhere except the Euro area periphery. Divergent inflation pressure at the core level: upward in EM, steady to down in G3. Divergent central banks: modest tightening in EM, no tightening in the G3. 1

4 In the first year of recovery, in terms of growth the world was divided into: Those that have baggage (the need to repair household, bank and public sector balance sheets): U.S., U.K., Euro area periphery. Those that don t have baggage: EM, Germany, Scandinavia, Switzerland, Japan GDP growth 2Q09 3Q10 %q/q, saar U.S. 2.9 U.K. 1.9 Spain 0.0 EM 7.3 Germany 3.7 Sweden 5.4 Switzerland 3.0 Japan 3.7 2

5 Key themes for global growth in 2011 Ongoing strength in those economies without baggage. A change in the household deleveraging process eases the drag in economies with baggage. Non-financial corporates provide the engine for growth even in economies with baggage: boosting demand directly and generating income for households. Monetary policy easy everywhere and the traction builds over time; mild fiscal tightening in Western Europe; US policymakers go all in. 3

6 Ongoing growth in economies without baggage Euro area domestic final sales Germany Euro area ex. Germany *1Q08 = 100 4

7 The household deleveraging process: the flow adjustment is complete, the stock adjustment is ongoing U.S. household saving and the stock of debt outstanding 8 % of GDP % of GDP Financial position Debt

8 In general, nonfinancial corporates do not have any baggage: not only is corporate spending at a low level, but cashflow is very elevated U.K. business investment share in GDP 16 U.K. private non financial corporations net lending * 8 * * Nominal share, % * % of GDP, positive indicates net lending 6

9 Divergent resource utilization drives divergent core inflation outlook Resource utilization Global core inflation 3 EM 6 EM 1 DM excl US Global 1 * * DM US * Standard deviations from long-term average * %oya 7

10 To exit the current crisis, the region either needs sovereign debt restructuring or a long period of liquidity support at very low interest rates Gross debt under alternative interest rate subsidies relative to German borrowing rates % of GDP Scenario 1 Scenario 2 Scenario 3 Scenario 1 Scenario 2 Scenario 3 Esp Grc Ire Prt Note: Scenario 1 assumes borrowing rates are capped at 6% through 2012 but then move to market rates thereafter. Scenario 2 assumes market rates are capped at 350bp above the German borrowing cost from now through Scenario 3 assumes market rates are capped at 100bp above the German borrowing cost from now through See "A way out of the EMU fiscal crisis," Global Issues, December 16,

11 2011 SECURITIES LENDING OUTLOOK Speakers John Shellard Global Head Equities Lending, J.P. Morgan Robert Taub U.S. Fixed Income Desk Manager, J.P. Morgan Matthew Sarson Trading Manager, Securities Lending Investment Desk, J.P. Morgan

12 S E C U R I T I E S L E N D I N G O U T L O O K Securities Lending Equities Q4 Market Environment Another volatile quarter for equity markets. Uncertain environment contributed to risk aversion amongst investors. Hedge funds still lacking direction and conviction, having taken risk off the table. Year finished with a strong equity market rally in December, especially in the U.S. Securities lending balances came down in the run up to year end. Demand continued to come from directional and capital raising trades. Sectors in demand included financial, consumer and industrial. Active quarter for yield enhancement trading. Main revenue generating markets were France and Italy, with activity also in Netherlands and Spain. In general hedge funds had a good year, returning 7-9% on average. However wide variance between strategies and individual funds. Heavy lobbying from industry on the European Commission short selling regulatory proposals.

13 S E C U R I T I E S L E N D I N G O U T L O O K Securities Lending Outlook for Equities Q Optimistic that 2011 will see an increase in hedge fund activity as they look to put money to work and generate returns for investors. Expect continued strong investment inflows into hedge funds. Increased M&A activity as cash rich companies look to grow through acquisitions. Expect continued strength in equity markets as EU works towards a more robust solution to the Euro Sovereign debt crisis, and continued improvement in the global economy. However, balances likely to struggle in Q1. Strong equity markets resulting in greater long bias from hedge funds and lack of appetite to go short. Initial yield enhancement indications are mixed. Tax changes and lower than expected demand, offset by higher dividend payments. Continued discussions with regulators and Governments on the regulatory environment. Continued focus on collateral, both by clients and borrowers.

14 S E C U R I T I E S L E N D I N G O U T L O O K The Change to Treasury Supply and the Impact on Treasury Repo Rates Treasury Issuance As the budget deficit narrowed, net issuance declined from its 2009 peak. J.P. Morgan is expecting the treasury to issue additional $1.1 trillion Treasuries in CY 2011 as opposed to $1.5trillion in CY2010. The Debt Ceiling On 1/27 th Treasury announced their plan to decrease the issuance of US treasury bills in the Supplementary Funding Program from $200bn to $5bn. The decrease may lead to downward pressure on repo rates temporarily and lower yields on UST bills and discount notes. The Federal Reserve Bank s Large Scale Asset Purchase (LSAP) program, also known as quantitative easing (QE2) At the last FOMC meeting, The Fed announced their commitment to continue to buy back $600bn in treasuries from the market by June FDIC changes to fee calculations

15 S E C U R I T I E S L E N D I N G O U T L O O K The Storm Has Passed, But Headwinds Prevail Challenges remain on the Distribution side of the Securities Lending business Balance sheet constraints Treasury supply Short-end Investor demand continues to exceed available supply- Favorable market conditions for issuers Collateralized Commercial Paper/non-traditional repo balances Concerns remain around the Euro-zone Spain/Italy Regulatory impact current market environment Strong Floater demand Step-up putable structures Collateralized CP

16 S E C U R I T I E S L E N D I N G O U T L O O K The Storm Has Passed, But Headwinds Prevail Early rumblings of the Fed Exit plan Market generally believes no Fed action for 2011 Beginnings of differences in opinion J.P. Morgan believes no Fed move until Q Short-end participant behavior-recap

17 Analysts Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors and overall firm revenues. The firm s overall revenues include revenues from its investment banking and fixed income business units. Principal Trading: JPMorgan and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in this report. Legal Entities: J.P. Morgan is the global brand name for J.P. Morgan Securities LLC (JPMS) and its non-us affiliates worldwide. J.P. Morgan Cazenove is a brand name for equity research produced by J.P. Morgan Securities Ltd.; J.P. Morgan Equities Limited; JPMorgan Chase Bank, N.A., Dubai Branch; and J.P. Morgan Bank International LLC. J.P.Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. J.P. Morgan Futures Inc., is a member of the NFA. J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority. JPMorgan Chase Bank, Singapore branch is regulated by the Monetary Authority of Singapore. J.P. Morgan Securities Asia Private Limited is regulated by the MAS and the Financial Services Agency in Japan. J.P. Morgan Australia Limited (ABN /AFS License No: ) (JPMSAL) is a licensed securities dealer. J.P.Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA), license number General: Information has been obtained from sources believed to be reliable but JPMorgan does not warrant its completeness or accuracy except with respect to disclosures relative to JPMS and/or its affiliates and the analyst s involvement with the issuer. Opinions and estimates constitute our judgment at the date of this material and are subject to change without notice. Past performance is not indicative of future results. The investments and strategies discussed may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. JPMorgan and/or its affiliates and employees may act as placement agent, advisor or lender with respect to securities or issuers referenced in this report.. Clients should contact analysts at and execute transactions through a JPMorgan entity in their home jurisdiction unless governing law permits otherwise. This report should not be distributed to others or replicated in any form without prior consent of JPMorgan. U.K. and European Economic Area (EEA): Investment research issued by JPMSL has been prepared in accordance with JPMSL s Policies for Managing Conflicts of Interest in Connection with Investment Research. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (all such persons being referred to as relevant persons ). This document must not be acted on or relied on by persons who are not relevant. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with these persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to wholesale clients only. JPMSAL does not issue or distribute this material to retail clients. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms wholesale client and retail client have the meanings given to them in section 761G of the Corporations Act Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offense. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Revised September 1, Copyright 2010 JPMorgan Chase Co. All rights reserved. Additional information available upon request.