The other WPP protest
So, the CEO of the world’s biggest advertising firm failed to pitch his own pay deal to WPP’s investors.
Wednesday’s vote against the remuneration report which grants Martin Sorrell a 6.8 million pound pay award means shareholders can claim another victory in their (non-binding) efforts to wean executives off pay deals they consider excessive.
Sorrell has resigned himself to some horse-trading between the Board and shareholders in the wake of a vote which was notable for his robust defence of his worth. But of course, it isn’t Sorrell that’s the problem; it’s the possibility of his absence that really worries investors.
Evidence of that can be seen in the largely unnoticed votes against re-election of WPP directors. Nils Pratley in the Guardian did pick up on the numbers as Jeffrey Rosen, the head of the remuneration committee, and non-execs Ruigang Li and Koichiro Naganuma all saw protest votes of 20-30%. Pratley speculates that this is evidence that investors doubt whether the Board really has a handle on how to cope with a post-Sorrell world. WPP’s AGM was always about more than pay, and it serves as an indication of wider disquiet around compliant Boards at companies dominated by a single personality.
There may be a more prosaic reason in the case of Naganuma (22% protest in 2011, 30% in 2012), chairman of Japan’s third largest advertising and communications company, ADK. The answer, one major shareholder tells me, lies deep in the annual report.
It turns out Naganuma has attended a whopping 3 of WPP’s last 13 Board meetings, and only one in the last year (Ruigang Li has better, but still lacklustre attendance); just the kind of record that can get right up investors’ noses. Naganuma is also one of two non-execs which WPP concedes should not be considered independent, as his seat on the Board is the result of a joint venture deal signed by WPP back in 1998. A WPP spokesman says there was never a particular requirement for Naganuma to attend meetings.
Of course, shareholders aren’t bound the terms of such decade-old deals, and can vote him off if they can’t see the value in his position.
Behind the headline-grabbing pay vote, WPP faced a quieter protest from investors yesterday. Join DiscussionPicking your moment
Watching how the mildly positive market reaction to this weekend’s 100 billion euro Spanish bank bailout evaporated within a morning’s trading, it’s curious to look at the timing of the move and what policymakers thought might happen. On one hand, it showed they’d learned something from the previous three sovereign rescues in Greece, Ireland and Portugal by pre-emptively seeking backstop funds for Spain’s banks rather than waiting for the sovereign to be pushed completely out of bond markets before grudgingly seeking help.
But getting a positive market reaction to any euro bailout just six days before the Greek election of June 17 was always going to be nigh-on impossible. If the problem for private creditors is certainty and visibility, then how on earth was that supposed to happen in a week like this? In view of that, it was surprising there was even 6 hours of upside in the first place. In the end, Spanish and broad market prices remain broadly where they were before the bailout was mooted last Thursday — and that probably makes sense given what’s in the diary for the remainder of the month.
So, ok, there was likely a precautionary element to the timing in that the proposed funds for Spanish bank recapitalisation are made available before any threat of post-election chaos in Greece forces their hand anyhow. It may also be that there were oblique political signals being sent by Berlin and Brussels to the Greek electorate that the rest of Europe is prepared for any outcome from Sunday’s vote and won’t be forced into concessions on its existing bailout programme. On the other hand, Greeks may well read the novel structure of the bailout – in that it explicitly targets the banking sector without broader budgetary conditions on the government – as a sign that everything euro is flexible and negotiable.
However, if the answer to the two-year-old euro sovereign crisis lies in convincing long-term private creditors to lend to euro governments again at sustainable rates for 5-10 years, then nothing was ever likely to change on that score until after Sunday’s vote across Greece anyway. And, even if there is a result in favour of the bailout, the shape of the euro zone and its future is still in the mix until we see outcome of the June 28-29 EU summit. It’s not that the Spanish bank rescue is not a good move for Spain, it’s just that we won’t really know for another three weeks or so.
At some point, it seems, there has to be a credible plan and agreement that removes the threat of a euro unravelling, an outcome that every creditor now fears could leave sovereign borrowers with the hopeless task of paying back euro debts in new pesetas, drachmas, escudos, punts and lire. As Barclays economists said on Sunday, the Spanish plan in itself doesn’t remove that risk:
So long as the euro area does not remove the tail risk of potential FX redenomination for periphery countries, medium- and long-term investment commitments by foreign capital (or even domestic) are unlikely and that creates a growth disadvantage in the periphery. And without growth prospects, there is little hope to emerge out of the crisis.
"Without growth prospects, there is little hope to emerge out of the crisis" Join Discussion
The ETF ‘Death List’
Our colleagues at Lipper have put together some eye-catching data on developments in the ETF industry. You can read the slides here.
Most intriguing is the idea of a slumbering cohort of 241 exchange-traded funds forming what Lipper calls a ‘Death List’; ETFs which are more than three years old, but which have failed to drive assets up to the 100 million euro-mark.
Detlef Glow, Lipper’s head of Research for EMEA, notes these funds might well be thought to be under review by their promoters, but he hasn’t spotted any particular trend towards consolidation. Why?
Well, Glow reckons the question of whether an ETF is proving profitable doesn’t quite come down to a simple volume/management fee play; creation fees and redemption fees play their part too. And promoters like a full stable. Even if an ETF isn’t pulling in punters by the cart-load, they see value in presenting clients with an impressively exhaustive product suite.
All that means Glow isn’t convinced this group is as ripe for consolidation as it might seem. Maybe ‘Death List’ starts to look a bit melodramatic, but successfully marketing ETF data takes some creative gumption. And it’s in the headline to this post, so who am I to judge?
Perhaps more interesting is evidence of a major switch round in asset gathering by ETF product launches in the first part of this year. Take a look at the following pie charts. The first shows assets gathered by new product launches in 2011; the second AuM reaching funds launched in Q1 2012.
What will the ETF industry do with its own 'zombie' funds? Join Discussion
Argentine CDS spiral on “peso-fication” fear
Investors with exposure to Argentina will have been dismayed in recent weeks by the surging cost of insuring that investment — Argentine 5-year credit default swaps have risen more than 300 basis points since mid-May to the highest levels since 2009. That means one must stump up close to $1.5 million to insure $10 million worth of Argentine debt against default for a five year period, data from Markit shows.
The rise coincides with growing fears that President Cristina Fernandez Kirchner is getting ready to crack down on people’s dollar holdings. Fears of forcible de-dollarisation have sent Argentine savers scurrying to the banks to withdraw their hard currency and stash it under mattresses. That has widened the gap between the official and the “black market” exchange rate. (see the graphic below from Capital Economics)
While government officials have denied there is such a move afoot, Fernandez has not helped matters by exhorting people to “think in pesos”. That will be hard for Argentines, most of whom have vivid memories of hyperinflation, default and devaluation. Unsurprisingly, most prefer to save in dollars.
So how worried should holders of Argentine bonds be? Not very, say analysts (unless one holds peso securities).
First of all, dollar debt payments due this year amount to just over $5 billion (a $2.3 billion Boden issue maturing in August and a $3 billion payout on GDP warrants in December). But central bank reserves (which the government is free to dip into) stand at $47 billion.
Second, fears that Argentina may try to repay maturing dollar debt in pesos at the official exchange rate, are misplaced, JP Morgan says, noting that outstanding dollar bonds that are held by foreigners and governed by domestic law, amount to only $19 billion, or 11 percent of sovereign debt.
Argentines, fearing the government will forcibly try to de-dollarise the economy, are rushing to withdraw their hard currency from banks. Investors are bidding up the cost of insuring exposure to Argentina. But dollar debt holders need not worry yet. Join DiscussionMs Rao,
Thank you for a fine article. I have read that the default Argentina used some years ago still causes international currency problems for the country. Is that true? I assume that it is, and yet there appears to be acceptance of this in populatioon. Is there no free market voice, such as the libertarians or “chicago school”/supply side economists that you find in America?no s
Lipper: Active vs. Passive, Round 3,462
(Ed Moisson is Head of UK and Cross-Border Research at Lipper. The views expressed are his own.)
By Ed Moisson
Our team at Lipper spent much of the first quarter handing out awards to fund managers round the world who have delivered exceptional performance to their investors. Since then, I’ve had time to take a step back and assess just how good the wider European industry has been at outperforming over the longer term.
Active fund managers’ ability to out-perform their benchmarks sits near the heart of any discussion on the relative merits of active versus passive. In broad terms the argument against investing in an actively-managed fund is that one takes on the additional risk that the fund will significantly under-perform the index, a risk that is exacerbated over time by the additional costs associated with such a fund.
The argument against passive is that one not only misses out on the possibility of superior, but also that, in principle, one is guaranteed to under-perform the index.
Clearly the case for active fund management goes hand-in-hand with the case for prudent fund selection. Indeed an industry has grown up trying to deliver the latter for investors, with professional fund selectors choosing funds to invest in and packaging this up as a product of itself: funds of funds. Assets invested in funds of funds in Europe stand at around 360 billion euros – noticeably greater than the assets invested in passively managed funds.
Lipper's Ed Moisson looks at some intriguing numbers which shed light on the battle between active and passive investment. Join DiscussionThank you for the offer to send me your report. I’ll definitely contact Joel.
Some information for other readers. This is probably no news to you:
Carhart (1997) has split ‘survivorship bias’ into ‘survivor bias’ and ‘look-ahead bias’.
‘Survivor bias’ = Dead portfolios are excluded from the sample.
‘Look-ahead bias’ = methodology requires funds to exist for a specified period of time (in this blog: 1, 3 or 10 years).
In using rolling 1 year returns (to grasp ‘survivorship bias’) the effect of ‘look-ahead bias’ was reduced. ‘Survivor bias’ was already covered in using the closed/dead fund database.
Sell in May? Yes they did
Just how miserable a month May was for global equity markets is summed up by index provider S&P which notes that every one of the 46 markets included in its world index (BMI) fell last month, and of these 35 posted double-digit declines. Overall, the index slumped more than 9 percent.
With Greece’s anti-austerity May 6 election result responsible for much of the red ink, it was perhaps fitting that Athens was May’s worst performer, losing almost 30 percent (it’s down 65 percent so far this year). With euro zone growth steadily deteriorating, even German stocks fell almost 15 percent in May while Portugal, Spain and Italy were the worst performing developed markets (along with Finland).
The best of the bunch (at least in the developed world) was the United States which fell only 6.5 percent in May and is clinging to 2012 gains of around 5 percent. S&P analyst Howard Silverblatt writes:
The political and economic uncertainty resulted in another flight to safety – being to the U.S., where equity markets lost 6.47%, but were the best performing developed market.
Emerging markets fared poorly again in May, with losses of 11.4 percent. Hungary, with its own debt problems and tiffs with the IMF, lost 23 percent while Russia was hit hard by oil’s price falls in May, shedding 22 percent. Markets are likely to be on tenterhooks for the next couple of weeks as they wait for the second round of Greek elections on June 17:
No market in S&P's world index was spared losses last month. The United States was the best of the bunch falling only 6.5 percent while Greece shed almost 30 percent Join DiscussionWhile no one is writing off 2012, until the European situation clears up, it remains difficult for investors to commit. By the end of June, some of that uncertainty should be demystified.
India rate cut clamour misses rupee’s fall-JPM
Indian markets are rallying this week as they price in an interest rate cut at the Reserve Bank’s June 18 meeting. With the country still in shock after last week’s 5.3 percent first quarter GDP growth print, it is easy to understand the clamour for rate cuts. After all, first quarter growth just a year ago was 9.2 percent.
Yet, there may be little the RBI can do to kickstart growth and investment. Many would argue the growth slowdown is not caused by tight monetary conditions but is down to supply constraints and macroeconomic risks –the government’s inability to lift a raft of crippling subsidies has swollen the fiscal deficit to almost 6 percent while inhibitions on foreign investment in food processing and retail keep food prices volatile.
The other side of the problem is of course the rupee which has plunged to record lows amid the global turmoil. Lower interest rates could leave the currency vulnerable to further losses.
It is the currency factor that should rule out rate cuts at this points, economists at JP Morgan write. They calculate that the rupee’s 12 percent plunge since March against the dollar translates into 100 basis points worth of monetary easing.
With India’s export-import sector now accounting for almost 60 percent of GDP now (up from less than 30 percent in 2000 ) that has already resulted in new export orders and an easing of non-oil imports, the bank notes.
Based on an analysis of the monetary conditions index (MCI) JPM economists conclude in fact that Indian monetary conditions have eased to well below their 2002-2007 average, possibly accounting for the pickup in headline inflation over the past two months. (The MCI is calculated by taking the weighted average of changes in short-term interest rates and the exchange rate over a period). The economists write:
Indian rupee's recent falls equate to 100 basis points of monetary easing, JP Morgan says. Join DiscussionMonetary conditions have eased dramatically over the last three months, are at their lowest level in 20 months, and the sharp depreciation of the currency is equivalent to a 100 bps reduction in market rates since March. This needs to be taken into account for those who believe more monetary easing is warranted.
Indian risks eclipsing other BRICs
India’s first-quarter GDP growth report was a shocker this morning at +5.3 percent. Much as Western countries would dream of a print that good, it’s akin to a hard landing for a country only recently aspiring to double-digit expansions and, with little hope of any strong reform impetus from the current government, things might get worse if investment flows dry up. The rupee is at a new record low having fallen 7 percent in May alone against the dollar — bad news for companies with hard currency debt maturing this year (See here). So investors are likely to find themselves paying more and more to hedge exposure to India.
Credit default swaps for the State Bank of India (used as a proxy for the Indian sovereign) are trading at almost 400 basis points. More precisely, investors must pay $388,000 to insure $10 million of exposure for a five-year period, data from Markit shows. That is well above levels for the other countries in the BRIC quartet — Brazil, China and Russia. Check out the following graphic from Markit showing the contrast between Brazil and Indian risk perceptions.
At the end of 2010, investors paid a roughly 50 bps premium over Brazil to insure Indian risk via SBI CDS. That premium is now more than 200 bps.
Moreover, at the end of 2010, SBI CDS traded on par with Russia. Now they are 130 bps higher. The premium over China is now about 250 bps, widening from less than 100 bps 18 months ago. (Markit quotes current 5-year Russian and Chinese CDS at 255 bps and 133 bps respectively)
Some of the premium is of course down to the fact that SBI is a quasi-sovereign with problems of its own. But that is insuffiicent to explain the widening gap. Clearly India’s underperformance even amid a general emerging markets rout shows this is payback time for poor policymaking.
Last year Goldman Sachs Asset Management head Jim O’Neill named India as the country that had disappointed him the most in the ten years since he coinced the BRIC investment concept.
Investors' cost of insuring exposure to India has risen far more than the other three BRICs in recent years. Join Discussionfrom Africa News blog:
Are African governments suppressing art?
By Cosmas Butunyi
The dust is finally settling on the storm that was kicked off in South Africa by a controversial painting of President Jacob Zuma with his genitals exposed.
The country that boasts one of the most liberal constitutions in the world and the only one on the African continent with a constitutional provision that protects and defends the rights of gays and lesbians , had its values put up to the test after an artist ruffled feathers by a painting that questioned the moral values of the ruling African National Congress .
For weeks, the storm ignited by the painting called ‘The Spear’, raged on, sucking in Goodman Gallery that displayed it and City Press, a weekly newspaper that had published it on its website. The matter eventually found its way into the corridors of justice, where the ruling ANC sought redress against the two institutions. The party also mobilised its supporters to stage protests outside the courtroom when the case it filed came up for hearing. They also matched to the gallery and called for a boycott of City Press , regarded as one of the country's most authoritative newspapers.
The controversy has cooled down now that the newspaper has removed the artwork from its website, the gallery pulled it down after it was defaced. The ANC has withdrawn its lawsuit.
Throughout this drama, one issue that came up frequently in the huge debate that it kicked off, was the issue of artistic licence, specifically in Africa.
The dust is finally settling on the storm that was kicked off in South Africa by a controversial painting of President Jacob Zuma with his genitals exposed. Join Discussion
Investors face a battle for clarity
How are we looking? Fluid, very fluid!
In a classic case of call and response, the latest twist of the euro saga has seen the crisis escalate sharply in Spain and Italy (with the attempted cleanup of Bankia the latest trigger for a surge in government borrowing rates in both) only to see the European Commission today invoke major policy responses including the proposed use of the new European Stability Mechanism (ESM) to directly recapitalize euro banks, a single banking union, a euro-wide deposit protection system and even pushing back Spanish budget deadlines by a year.
It seems clear from this that they see Spain and Italy – which seem to be trading in tandem regardless of their differences – as the battleground for the survival of the euro. The gauntlet is down for next month’s summit, though the absence of a roadmap to Eurobonds per se will disappoint and markets are not going to sit quietly for a month. Moreover, the Grexit vigil has another fortnight to run before any clarity and the latest polls are not going in the direction other euro governments had hoped, with anti-bailout parties still in the lead. And we can only assume Ireland votes in favour of the now notional fiscal pact tomorrow as per opinion polls, though there’s always an outside chance of an upset.
So, seeing ahead even a month seems like an impossible task. A week ahead, however, points the spotlight firmly at the ECBs meeting on Wednesday and the chance the central bank eases again in some form to try and buy time for other developments to work through. But it will also be a moment of potential conflict, with its role in the Spanish bank bailout fraught with disagreements to date. Despite a two-day London market holiday, the week will be dominated by central banks at large – the BoE meeting and Bernanke’s testimony on Thursday being the other highlights. Is there a chance they act together again? And Italian/Spanish/French bond auctions next week certainly look precarious in the current environment.
One interesting bit is that beyond economies on the front line, the wider markets have been relatively well behaved over the past week. Global stock markets and emerging markets are up to 1 percent higher since last Wednesday, broad European indices are flattish, the Vix is flat and oil is down a little (and arguably good news for everything else).
The real pressure points are the 50-75bp spikes in Italian and Spanish 10-yr yields, a near 3 percent loss in European bank stocks and the inexorable slide in bund and Treasury yields. Reflecting the heightened ECB easing talk, the euro is down another 1 percent.
On one level, the withering complexity of the euro story must be impossible for global investors to keep track of on a daily basis, never mind act on. And that is leading to both an inevitable drift away from risk and into cash for those with low risk thresholds but also a certain amount of inertia from thicker-skinned value investors who still hope that when the fog clears or policymakers crank back into action, there will be some juicy pickings.
Our internal planning note for investment coverage next week looks at how investors might get a handle on skittish markets. Join DiscussionItaly Spain and France can pay down debt, but they would rather renege and collapse their banking systems. I favor such a quick and dirty, nasty, brutish, and short conclusion. Jump.
