Fixed Income Annual Conference 2014

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Fixed Income Investment Conference - 9th September 2014

TwentyFour's annual Fixed Income Conference took place on the 9th September 2014.

The two hour conference provided over 200 of our clients a unique insight and outlook into Fixed Income markets, with Neil McLeish (Global Head of Strategy at Morgan Stanley), David O’Loan (Head of Treasury Markets at RBS) and Douglas Renwick (Senior Director at Fitch Ratings) as keynote speakers.

Topics were as follows:

• Investing in an out-of-sync world
• How is best to be positioned in this current stage of the cycle?
• Bank funding and views on liquidity
• The potential rating implications for the UK and an independent Scotland

"Welcome and Business Update"

Graeme Anderson, Chairman, TwentyFour Asset Management

TwentyFour’s progress since last year:

• Performance across our funds continues to be strong
• Despite the challenging environment, TwentyFour has added significantly more new clients and £1.5bn in assets, which brings our total AUM to £3.5bn
• Launched our second Investment Trust, the Select Monthly Income Fund
• Continue to invest in the best talent - we welcome Chris Bowie as Partner and Portfolio Manager. Chris built up a superb performance track record during his time at Ignis and will oversee the launch of a Defined Outcome Strategy and a Corporate bond fund
• Honoured to receive a number of awards from IW, AICIO and What Investment

"Investing in an Out-of-Sync World"

Neil McLeish, Global Director of Fixed Income Research, Morgan Stanley




• The global economy remains very highly leveraged, despite partial attempts to de-lever post the financial crisis
• This reflects the interplay between the structural forces of globalisation (which depresses real wage growth in the developed world) and the cyclical management of the business cycle (via monetary policy)
• Asset market returns retain a strong cyclical component. US expansion is not yet secure and therefore the credit cycle still has a long way to run
• Global economy and markets are unsynchronised; idiosyncratic valuations and fundamental drivers will continue to play a significant role in the generation of returns
• Equity and credit markets are fully valued but not extreme and not bubble like. Government bonds are expensive
• The combination of structural and cyclical drivers is a recipe for financial instability but this varies from one cycle to the next. Credit growth gives clues
• Do not believe the current cyclical equity and credit bull markets are over. Concerned about the recent divergence between risky assets and Gov bond yields
• Maintain a tactical overweight position to cash in asset allocation


"How is best to be positioned in this current stage of the cycle"

Mark Holman, CEO, TwentyFour Asset Management






Last 12 months in Fixed Income:
• Bernake surprised all markets by mentioning tapering in May 2013. Further uncertainty with the change of the Fed chair (Yellen being a lot more dovish)
• Halt to the risk on mode in Q1 2014 due to tensions between Russia and the Ukraine (flared up later with the shooting down of MH17) and EM fears
• Collapse of Banco Espirito Santo (Portugal’s largest bank by assets) in July added to the risk off tone. The summer period saw a lot of fear in the market place – fears of fast money, ETF selling

What has this meant for markets?
• 10 yr UK Gilt curve shows the fear of tapering was greater than the reality
• 5 yr UK Gilt curve shows a different picture. Same tapering fear at the start of the year, but this has bounced back. 5 year curve reflects market IR expectations
• Portuguese 10 yr represents the rally in the EU government bond markets

Where are we today?
• Fed to finish tapering in Oct ’14, although first rate hike to be a while after
• Eurozone is on the brink of recession – no rate hikes for the foreseeable future
• BoE closest to a rate hike

Challenges and Opportunities ahead
• Transition from a market place driven by Central Bank liquidity, to one driven by fundamentals will not be smooth
• Yield curves are still positive sloping and steep, supporting roll down gains
• Certain markets (e.g. ABS / peripheral sov debt) to benefit from policy intervention

"Managing Through the Crisis"

David O'Loan, Head of Treasury Markets, RBS



What markets have had to deal with
• Coming into the crisis, banks had high leverage, low capital ratios and large amount of short term, wholesale debt
• Since 2007, weak economic recoveries and depressed collateral prices have led to higher loan losses
• The low rate environment has affected the profitability of banks

Response of RBS
• Balance sheet rationalisation
• Reduced risk and funding requirements by establishing ‘Non-Core’
• Enlarged and improved liquidity position – switch into high quality Gov bonds, full stress testing regime and high levels of cash

Incoming regulatory change
• The age of the ‘global mega-bank’ is under severe pressure, at the regulators behest
• Basel III and increased regulations have increased the cost of doing business
• Capital quality has increased, balance sheets now comprised of high quality, low yielding, liquid assets, larger compliance functions, no proprietary trading and more transparent, vanilla products
• The market wants well capitalised banks, liquid balance sheets and sound credit risk policies

"The UK, Scotland and Sovereign Ratings"

 Douglas Renwick, Senior Director, Fitch Ratings



Rating a Sovereign
• Macroeconomic performance, structural characteristics of a country, external finances and fiscal policy are the main drivers for sovereign ratings
• Macroeconomic performance: credibility of the policy framework and a track record of macroeconomic stability
• Structural characteristics: financial / economic factors and “soft factors” e.g. payment record
• External finances: competitiveness and the external balance sheet
• Fiscal policy looks at expected growth, inflation etc. along with the currency, structure and level of public debt
• Default events can include voluntary debt exchanges

Rating implications of Scottish independence
• Structural issues: Scotland has a very similar GDP per capita to UK as a whole, but no recent Scottish track record as an independent sovereign
• UK currency union? Euro membership not a near-term option
• External finances: Oil & gas would provide lower external receipts for the UK (higher for Scotland)
• Who gets the Gilts? UK Gov to honour existing stock of debt. UK have large exposure to Scotland












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