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Michael Baxter

Bull and bear: Carney: leading central banker of his generation or just plain lucky

Written by: Michael Baxter on July 1st 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Carney: leading central banker of his generation or just plain lucky. A month of sharp losses. Responsible businesses perform better. More green shoots?

Mark Carney starts his first day at Threadneedle Street today, and to say expectations are high is like saying Mount Everest is high. We are good at pouring high expectations on people, and indeed teams in the UK. Take Andy Murray for example, or, this time next year, the English football team. And so often, such expectations prove to be unbearable.

Mr Carney has been described by George Osborne as the outstanding central banker of his generation. He is head of the Basel based Financial Stability Board, meaning he is a little like the central banker of the world’s central bank.

He presided over Canada’s Central Bank at a time when Canada proved to be the most stable economy of the G7.

But don’t forget that right now the Canadian economy does not look quite so strong. Household debt is much higher today than in 2007, and houses look significantly overpriced. Canadian household debt to gross disposable income is now higher in Canada than in the UK, but household gross financial assets to gross disposable income is much lower.

In fact there are similarities between Canada today and say the UK in 2007.

For many years Gordon Brown had seemed like a brilliant chancellor, steering the UK to its longest ever run of uninterrupted growth. But the UK’s growth was paid for by unsustainable debt. Have we seen something similar in Canada?

As for Mr Carney and UK monetary policy, he joins the UK at an interesting time, maybe even at the start of a new phase in the economic cycle. Mervyn King voted with the minority at the MPC for an increase in QE at every meeting since February. It is hard to know whether other MPC members were just waiting for the new governor before they opt for the dovish route or whether they will stay firmly set on the no more QE route for the foreseeable future.

One of Mr Carney’s first duties will be to a submit a proposal to the government on whether the Bank of England targets need modifying, perhaps to include targeting of unemployment, as is the case in the US.

Another one of his first tasks may well be to write a letter to the Chancellor explaining why inflation is more than a full percentage point over target, because inflation is expected to rise over the next few months.

Some say that Mr Carney is above all else a dove; a man chosen by George Osborne because the chancellor reasoned he was more likely to loosen monetary policy.

Some go further, and say Carney at the Bank of England while the Fed slowly begins to tighten monetary policy will be a disaster for sterling. From one point of view, the UK may need an even cheaper pound to give exporters a lift. From another point of view, the experience of 2008 and 2009 seems to suggest that a falling pound does not seem to help exporters by that much, but does lead to a rise in inflation.

But maybe what the UK really needs is a central bank that shows more imagination with QE, buying bonds in a public bank, for example, charged with funding investment into infrastructure and entrepreneurs.

A month of sharp losses

The FTSE 100 lost 367 points last month, or 5.5 per cent. There were losses pretty much across the board, but the really big falls occurred in Asia, with the Nikkei 225 losing 7 per cent and China’s CSI 300 losing 15.5 per cent.

The yields on US ten year bonds rose from 2.13 per cent to 2.49 per cent and on UK ten year government bonds from 2.0 per cent to 2.44 per cent. Gold lost another 12 per cent, but oil was flat(ish).

Actually, if you really want to read a tale of sharp falls, you would be better off comparing prices from around May 22 to June – during this period the FTSE 100 lost 12 per cent.

As for the first half of 2013, the FTSE 100 ended the period 317 points or 5 per cent up. The Dow is up 14 per cent; in Germany the DAX has risen 13 per cent, and the Nikkei 225, despite recent falls, has risen a remarkable 32 per cent.

Goldman Sachs has analysed flow of funds data and says that investors withdrew $93.3 billion from the money markets – that is to say from cash, and injected no less than $216.1 billion into equities and $249.4 billion into bonds.

There is no mystery behind this. With interest rates seeming so incredibly low, 2013 saw investors opt for more risk in exchange for higher returns.

June saw a partial reversal of the flows.

According to the ‘FT’, Goldman Sachs sees the June reversal as more of a blip and expects the trend we saw during the first few months of 2013 to continue, arguing that the markets have overreacted to comments from the Fed relating to tightening of monetary policy.

Presumably if investors continue to move out of cash, then one consequence will be a rise in long term interest rates.

Responsible businesses perform better

Responsible companies offer great long term value, and less volatility, suggests new research, and yet neither investors nor CEOs seem to have cottoned on to this – yet.

So what does this really mean?

The research was conducted by Ipsos MORI on behalf of Business in the Community and Legal & General. It took FTSE-listed businesses, and classified them as responsible based on participation in Business in the Community’s annual CR Index. It found that ‘responsible’ businesses outperformed the FTSE’s average total shareholder return in seven out of eleven years from 2002-12. The research also shows that between 2009 and 2012, FTSE-listed responsible businesses were less volatile than their peers, by an average -0.02 against the FTSE All-Share.

However, to use the words stated by Legal & General: “Interviews with investors, CEOs and investment experts conducted as part of the research reveal that investors and companies are failing to link the centrality and materiality of environmental, social and governance (ESG) issues to a business’ long-term prospects as part of their discussions.”

Sacha Sadan, director of Corporate Governance, Legal & General Investment Management, said: “At LGIM we believe good governance creates long-term company value…We are acutely aware that individual shareholders lack the influence to ask difficult questions on how companies are impacting society, the economy and the environment. Therefore the responsibility of institutional shareholders is to take this challenge to companies on behalf of the individuals and clients they represent.”

So there you have it, the report seems to imply that responsible companies may be undervalued by the markets.

It is possible the causal link is the other way around, however, and that successful companies offer shareholders better returns, and can also afford to implement more responsible governance.

More green shoots?

According to the ONS, the UK services sector grew by 0.2 per cent in April on the month before and by 2.0 per cent on April 2012 compared to annual growth of 1.2 per cent in March. The largest contributions came from government & other services, distribution, hotels & catering, and business services & finance. Each of these components contributed 0.6 percentage points of growth to the index.

So we already knew that industrial production grew by 0.1 per cent in April, after rising by 0.7 per cent in March and by 0.9 per cent in February. Okay, UK manufacturing is not exactly booming with annual growth running at minus 0.6 per cent in April, but it is improving. But put the data on industrial production and services together and it does appear that April saw an improvement on the previous month.

Chris Williamson from Markit said: “The data, from the Office for National Statistics, therefore add to signs that momentum has picked up compared to the first quarter, with the quarterly rate of growth rising to 0.8 per cent in the three months for April from the 0.5 per cent expansion seen in the three months to March and a flat picture in the fourth quarter.

“The encouraging performance looks to have persisted into May. More up to date information on the sector has been provided by the PMI, which showed growth hitting a 14-month high in May and suggesting that the sector has seen the strongest quarterly expansion since the first quarter of last year so far. The surveys have also indicated that the manufacturing sector saw the best growth since the start of 2012, and that even the beleaguered construction sector saw a welcome stabilization of activity. Combining the official data available to date with the surveys points to GDP expanding by approximately 0.5 per cent in the second quarter, assuming growth momentum is maintained in June.

“Providing the dataflow holds up well in June, it seems increasingly unlikely that the Bank of England’s policymakers will opt for further asset purchases at its meeting next week, which takes place after the PMI data are published and is the first with new governor Mark Carney.”

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Canadian economy, FTSE 100 Dow Nikkei in June 2013, Mark Carney, Responsible companies and investment, UK economy April 2013, UK services

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