With central bank week in full swing we look back to our daily last week where we mentioned that our most likely scenario was for the BoJ to move to steepen the JGB curve and the Fed to remain on hold. Yesterday all eyes were on the Fed, after hearing that the BoJ had launched “QQE with Yield Curve Control”, or Quantitative and Qualitative Monetary Easing with 10-year yield control at 0%; intended to steepen the curve. Also as expected, the Fed maintained status quo; leaving a hike in December on the table.
Today sees the end of the month and what a month it has been! Amongst the recent doom and gloom our portfolios have benefited from the risk-on bounce, with holdings in emerging market and “frontier” markets such as the Middle East enjoying the rally.
This week, we heard that Abu Dhabi is seeking to merge two of its strategically important sovereign wealth funds, the International Petroleum Investment Company (IPIC) and Mubadala Development Company. This deal swiftly follows last week's announcement of state-run bank tie-up as the emirate looks to streamline operations, cut costs, realise synergies and diversify the economy.
Hypothetically, what would be the official creditor position of someone who has a year’s salary in their bank but many years’ salary worth of valuable commodities buried in their backyard? Technically it would just be the one year’s salary - which is the equivalent to how we all traditionally measure countries’ government debts; but there’s an obvious omission in such accounting methods. For a number of governments with vast oil reserves who are facing moderate deficits concerns for their creditworthiness have grown to levels which perhaps have yet to fully account for the funds they could raise should they decide to privatise such assets or sell rights to such deposits.
In portfolio management, risk is a key element; too much risk and you end up with volatility which will concern clients and with too little risk, you tend to underperform which equally upsets investors. So where is the happy medium? We believe it is where you take adequate positions and balance a portfolio to smooth the risks whilst adding to performance over and above a given target or benchmark.
As regular readers are aware, we manage the portfolios with the Net Foreign Asset (NFA) as the first level of investment guidelines. For inclusion of any credit at first they must be domiciled in a ‘Wealthy Nation’ as defined by the NFA calculation; Saudi Arabia more than qualifies having a NFA to GDP of 178% (7 stars). Although there are concerns over the country’s forecast budget, we view the recent 2016 budget as credit positive; it is evident that policymakers have taken positive proactive steps in the face of further declining oil prices (of their own making).