Investors flee from equities worldwide

Retail investors worldwide pulled over $28bn (€19bn) from equity funds last week, fleeing for the safety of fixed income and money market products as stock markets oscillated. The sell-off included $10.7bn from emerging markets funds, making it the worst week on record for the asset class.

EPFR Global, the funds tracker that produced the data, blamed the sell-off on mounting evidence the US will not sidestep a recession, creating fears for the global economy, as well as the European Central Bank's continued tough stance on interest rates.

Fears over European banks' exposure to US sub-prime debt, as well as concerns that companies such as Ambac or Security Capital, which insure institutions' bond investments, will not be able to meet their commitments, added to the problems.

EPFR said a "large chunk" of the cash withdrawn from equities found its way into money market funds, which are intended as safe but low-yielding investments. They absorbed $21.4bn for the week.

Funds that performed well included financial services-sector products, paradoxically, absorbing a net $898m. Year-to-date inflows have now hit $2.75bn, which EPFR put down to investors betting that the sector was undervalued.

Cameron Brandt, an analyst at the data provider, said the same thing could happen to emerging markets funds: "If the pattern we've seen in the flow data over the past 10 months holds up, it's likely that a sizable number of investors will see this as a buy signal."

Separately, December was the worst month in 15 years for UK-regulated open-ended funds and unit trusts as retail investors pulled out a net £377.4m, according to the Investment Management Association, the London-based industry body. Retail investors withdrew a net £332m in November, the first negative month for fund flows since 1992.

Including institutional outflows, investors pulled a net £858.3m from UK funds in December, after withdrawing a net £1.2bn in November.

At the end of the year UK investments funds under management totalled £439.2bn, a 7% increase from the previous year's figure of £410.5bn. The IMA added some institutional funds to its database at the beginning of 2007. Including those funds, the total assets under management figure for last year is £468bn, a 14% increase over the previous year's statistic.

Richard Saunders, chief executive of the IMA, said: "The first 10 months of 2007 saw a continuation of the strong performance of the previous year. In November and December however, as the impact of the credit crunch began to be felt, investors significantly reevaluated their portfolios and the industry experienced its first overall retail outflows in 15 years.

However, last year funds in the IMA's specialist sector outsold their rivals, primarily due to property funds which accounted for £2.1bn of net inflows, compared to £3.2bn into specialist funds as a whole. Specialist funds as defined by the IMA are those not accounted for by the mainstream sectors, so include regional and strategically-defined equities and fixed income funds such as UK equity income funds and global bond vehicles.

The IMA's Saunders said: "The year as a whole was satisfactory for the industry, but the prospect is clearly more uncertain going into 2008."

Citigroup revamps cash bonus packages

Citigroup is replacing up to 20% of the bonus package of its highest paid managing directors with a new restricted stock type that will vest over two years to make up for a reduced cash payout.


The US bank has followed its rivals by reducing the cash element of its bonuses and increasing stock payouts to its highest-paid bankers, who get most of the bonus pool. The banks are trying to ensure the limited cash pool is distributed most heavily to lower paid employees, and asking higher paid bankers to take additional restricted stock.

The cash bonus may be cut by 50% in the case of the highest-paid Citigroup executives, according to a source familiar with the situation.

Citigroup’s restricted stock will also have a shorter vesting period than the usual stock distributed through its capital accumulation plan, which vests over four years. The new stock vests over two years, which reflects its purpose as a replacement for cash.

Rivals such as UBS have issued restricted stock with a one-year vesting period. JP Morgan’s stock packages for its top bankers call for half to vest after two years and the remainder after three years.

JP Morgan has also changed its compensation package for its highest-paid bankers, according to sources familiar with the bank. It has increased by 5% the amount of stock in the pay packages of managing directors making more than $1m. Bankers earning more than $2m in total compensation will receive 10% more of their pay in stock this year.

A banker at JP Morgan earning $1.5m will receive 60% of his pay in cash and 40% in stock, compared with 65% in cash and 35% in stock last year. Merrill Lynch, which used to pay bonuses that were about 75% cash and 25% stock to investment bankers, will this year pay 60% cash and 40% stock, according to chief executive John Thain.

Citigroup and JP Morgan declined to comment. UBS said: “For staff with annual incentive awards above a certain threshold, UBS has always awarded a mandatory component of bonus in restricted shares .”

Union Budget 2008 | EAC wants indirect taxes adjusted on consumer goods

Economic Advisory Council also asks Finance Minister to increase public investment, change income tax slab to stimulate the economy


New Delhi: Expecting the economy to grow at around 8.5% during next fiscal, the PM’s Economic Advisory Council suggested to Finance Minister P Chidambaram on 16 January to adjust indirect taxes on consumers goods in the budget 2008-09 to give a push to manufacturing sector.
The council also advised the Finance Minister to increase public investment and make adjustments in income tax slab to stimulate the economy.
“Our own view is the economy will grow at 8.5% next year. But, there are some areas of concern where there are weaknesses. They are known like manufacturing,” Council Chairman C Rangarajan told reporters after a Pre-Budget with Finance Minister here.
However, the council did not give suggestion on any major reduction in the tax rates.

Rupee gains as exporters sell dollars; bonds rise

The rupee had the first gain in five days on speculation exporters took advantage of the currency’s decline to convert their foreign-exchange earnings.

The currency gained the most since December 24 after its drop to a seven-week low earlier today prompted Companies that sell goods overseas to increase dollar sales, said LV Prasad, chief currency trader at IndusInd Bank Ltd in Mumbai. A weaker local currency boosts the profit of Companies from overseas sales. The rupee also rose on speculation the central bank bought it to curb market volatility.

“There was some talk about the central bank intervening to limit the rupee's losses, which triggered widespread dollar selling,” Prasad said. “Exporters converted their foreign- exchange earnings as the rates were attractive.”

The rupee rose 0.2% to 39.465 per dollar in Mumbai, according to data compiled by Bloomberg. It earlier dropped to 39.775, the lowest intraday level since November 29. The rupee lost 0.6% on Monday, the most since August 16.

India’s central bank will buy or sell foreign exchange to curb volatility in the currency market, based on the nature of capital inflows, Reserve Bank of India governor Yaga Venugopal Reddy said January 3.

The rupee fell earlier on speculation the plunge in global stocks is spurring overseas investors to take money out of the country.

The bonds gained, pushing yields to the lowest in 13 months, after a plunge in shares forced the nation’s stock market to halt trading, stoking speculation the central bank will begin cutting interest rates.

The yield on the security due 2017 declined the most in more than a week on bets a plunge in global stocks will prompt the US Federal Reserve to increase the pace of rate cuts, spurring local policy makers to ease borrowing costs for the first time since August 2003. Bonds climbed as inflation near a five-year low may give the Reserve Bank of India scope to reduce rates.

“The global financial Markets situation has heightened expectations that rates will have to be lowered,” said S Srikumar, chief of fixed-income at state-owned Corporation Bank in Mumbai.

ICICI Securities to divest 15 per cent equity

Mumbai, January 19: ICICI Securities, the brokerage arm of the country's biggest private bank, decided to offload 15 per cent of its equity by way of an initial public offer and private placement of shares.

The shares of ICICI Securities will be listed on stock exchanges in about six months, Chhanda Kochhar, Joint Managing Director and CFO of ICICI Bank, said.

The Board of Directors of ICICI Securities approved the proposal at a meeting today. The company's equity capital is Rs 61 crore. Besides ICICI Securities, the bank also plans to list three other subsidiaries, including the insurance arms to unlock shareholder value, CEO K V Kamath had said recently.

Without indicating the size of the IPO, she said it is not necessary that the bank will sell the shares out of the present holding. There may be a fresh issuance of shares and 15 per cent of the post-issue capital will be with public.

ICICI Securities is a major player in retail broking and posted revenues of Rs 527 crore during the first nine months of the current fiscal while profits were Rs 108 crore in the same period.

Asian Markets End Higher as Banks Gain

Asian markets ended mostly higher Thursday, lifted by banks and financials. Japan and South Korea both closed 2 percent higher with Australia finishing almost 3 percent higher, buoyed by a Wall Street rebound on optimism that a rescue for U.S. bond insurers may be in the making.

The yen [JPY-TN 106.65 -0.13 (-0.12%)] pulled back from 30-month high against the U.S. dollar as appetite for higher yielding assets and currencies returned. Growing expectations that another swinging interest rate cut from the Federal Reserve next week -- coming on top of this week's emergency 75 basis-point slash -- to stabilize the U.S. economy also lent support to markets. The mood remained wary, however, as investors still chewed over the prospect of a U.S. recession.

New York's insurance regulator pressed major banks on Wednesday to put up billions of dollars to support ailing bond insurers. The news pushed the Dow and S&P up more than 2 percent by the close of New York trade.

Banks across the region rose on hopes of this bond bailout, as fears over further credit-related writedowns receded. Japan's Mitsubishi UFJ Financial Group, Australia's Macquarie Group, Hong Kong's HSBC Holdings and Singapore's DBS Group were all moving higher.

In Tokyo, the Nikkei 225 Average [JP;N225 13092.78 263.72 (+2.06%)] closed up 2.1 percent. Rises in other Asian stock markets also helped the Nikkei gain, with battered property shares such as Mitsui Fudosan, surging on a wave of short-covering and banks up in the wake of their U.S. cohorts.

South Korea's KOSPI closed 2.1 percent higher, as investors cheered possible U.S. measures to assist mortgage insurers, while strong earnings results boosted market heavyweights LGElectronics and Hyundai Motor. Hyundai, South Korea's top auto maker, gained 2.61 percent after reporting quarterly operating profit more than doubled, beating forecasts. The numbers were fueled by higher sales and a softer won.

Australia's S&P/ASX 200 Index rose 3.1 percent, extending their rebound to a second day, as hopes that U.S. bond insurers would be bailed out helped restore confidence in banks, and bargain hunters looked for cheap deals. Tracking gains in Wall Street banks, the top local banks led the market higher, with National Australia Bank climbing 4.1 percent.

Hong Kong stocks rose in volatile trade as gains on Wall Street boosted investor confidence, prompting buying across the board, with mainland financials outperforming after falling sharply this week. Hong Kong Exchanges and Clearing, which was also knocked down in this week's selloff, rallied 9.8 percent in heavy trade. The market fell shortly after a strong open, and swung in and out of positive territory before closing 2.3 percent lower in reaction to news of huge losses at French bank Societe Generale.

China's Shanghai Composite Index ended 0.3 percent higher, continuing a rebound that began on Wednesday, as coal miners surged but policy worries hit banking stocks. Traders cited China's severe coal shortage, which investors believe will help big coal producers even though the government has been ordering them not to raise prices.

Banks are down, but not yet out

Multibillion-dollar writedowns have become scarily common, but that doesn't mean that a major bank will go under.

NEW YORK -- With bank after bank posting multibillion-dollar writedowns and other impairments, are we going to see in the near future the failure of one or more major banks?

Maybe, but not very likely.

Of course, there's plenty of bad news: Banks are facing ugly times ahead, according to nearly every consumer and corporate credit metric available. Independent research shop CreditSights argued recently that regional banks in particular face enhanced risks, as the percentage of construction loans that are at least 90 days past due are spiking. Cherry Hill, N.J.-based Commerce Bancorp's (CBH) past due figure amounted to 3.88 percent of its construction loans in the third quarter, up from .70 percent in the second. Eight other (primarily Midwestern) banks fell in close behind, with percentages of construction loans 90 days past due that have at least doubled since the middle of last year.

That's why - aside from U.S. Bancorp (USB, Fortune 500), which is actually increasing its dividend - most banks are aggressively trying to preserve capital, cutting or reducing previously announced stock buybacks and dividend payouts.

Other lending businesses - which were supposed to help spread banks' risk - look troubled, too. For example, Bank of America chief financial officer Joe Price told analysts Tuesday that its credit card holders in four states - California, Nevada, Arizona, Florida, amounting to a quarter of BoA's credit card book - posted 30-day payment delinquencies at a rate five times faster than the rest of its portfolio. It seems likely that this pattern will haunt other credit card issuers as well.

Now the (semi) good news: For all the eye-popping charge-off news in the headlines, bank failures have become exceedingly rare, with only one substantial failure last year in the U.S: Internet start-up NetBank, which was shut down by the Federal Deposit Insurance Corporation over a combination of mortgage problems and capital shortfalls.

Another factor: being small might be a virtue in this era. The devastation wrought from the securitized product market's excesses - the sub-prime and collateralized debt obligation contagions - are almost entirely a product of the money center banks. So Detroit-based Comerica (CMA, Fortune 500), while heavily leveraged to the stalled Midwestern corporate and real estate lending markets, was not big enough to join the league of institutional traders and underwriters of sub-prime mortgage assets of all stripes, including CDOs. Given Citigroup's (C, Fortune 500) nearly $20 billion in writedowns in this area, Comerica's shareholders might be thankful that the bank's managers were forced to stick to their proverbial knitting.

One portfolio manager and 25-year veteran of bank analysis at a multibillion dollar hedge fund told Fortune that the issue of bank bankruptcy is miscast. "The largest banks aren't going to be allowed to collapse like an auto parts maker would," the money manager said. "They would probably be forced into some sort of merger, given the globe's inter-connected markets now."

Of course, that doesn't mean that the market won't see some significant stresses among previously high-flying banks. Consider Washington Mutual (WM, Fortune 500), which is mentioned almost hourly on Wall Street trading desks as the next obvious takeover candidate. Wamu's financials are scary - and getting scarier. In the fourth quarter, it showed a 77 percent increase in net chargeoffs and a spike in non-performing assets of more than 34 percent.

But it is in the realm of cash inflows in the form of deposits and borrowings that Wamu's woes become most apparent. In its most recent 10-Q, the bank revealed that its interest-bearing deposit base shrank to $27.2 billion from $32.7 billion. Total checking deposits also declined by $4.6 billion to just under $51 billion.

More importantly, however, the bank was forced to increase its borrowing from the Federal Home Loan banking system to $52.5 billion, a $31 billion increase from the pervious quarter. Thus, the bank was unable to obtain the necessary amounts of liquidity from the standard secondary market channels.

Can WaMu find a savior among other ailing banks? The company didn't return call seeking comment. But at least in the near term, Wamu's fate may tell us a great deal about where the entire banking sector is headed this year.