BH MACRO LTD
BH MACRO LIMITED
MONTHLY SHAREHOLDER REPORT:
December 2015
YOUR ATTENTION IS DRAWN TO THE DISCLAIMER AT THE END OF THIS
DOCUMENT
BH Macro Overview
Limited
Manager: BH Macro Limited ("BHM") is a closed-ended investment company, registered and
Brevan Howard incorporated in Guernsey on 17 January 2007 (Registration Number: 46235).
Capital BHM invests all of its assets (net of short-term working capital) in the
Management LP ordinary shares of Brevan Howard Master Fund Limited (the "Fund").
("BHCM") BHM was admitted to the Official List of the UK Listing Authority and to
Administrator: trading on the Main Market of the London Stock Exchange on 14 March 2007.
Northern Trust
International
Fund
Administration
Services
(Guernsey)
Limited
("Northern
Trust") Total $1,495 mm¹
Corporate Assets:
Broker:
J.P. Morgan
Cazenove
Listings:
London Stock
Exchange
(Premium
Listing)
NASDAQ Dubai - 1. As at 31 December 2015 by BHM's administrator, Northern Trust.
USD Class
(Secondary
listing)
Bermuda Stock
Exchange
(Secondary
listing)
Summary BH Macro Limited NAV per Share (as at 31 December 2015)
Information
Share Class NAV (USD mm) NAV per Share
USD Shares 349.7 $20.33
EUR Shares 93.4 €20.56
GBP Shares 1,051.8 £21.21
BH Macro Limited NAV per Share % Monthly Change
USD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2007 0.10 0.90 0.15 2.29 2.56 3.11 5.92 0.03 2.96 0.75 20.27
2008 9.89 6.70 -2.79 -2.48 0.77 2.75 1.13 0.75 -3.13 2.76 3.75 -0.68 20.32
2009 5.06 2.78 1.17 0.13 3.14 -0.86 1.36 0.71 1.55 1.07 0.37 0.37 18.04
2010 -0.27 -1.50 0.04 1.45 0.32 1.38 -2.01 1.21 1.50 -0.33 -0.33 -0.49 0.91
2011 0.65 0.53 0.75 0.49 0.55 -0.58 2.19 6.18 0.40 -0.76 1.68 -0.47 12.04
2012 0.90 0.25 -0.40 -0.43 -1.77 -2.23 2.36 1.02 1.99 -0.36 0.92 1.66 3.86
2013 1.01 2.32 0.34 3.45 -0.10 -3.05 -0.83 -1.55 0.03 -0.55 1.35 0.40 2.70
2014 -1.36 -1.10 -0.40 -0.81 -0.08 -0.06 0.85 0.01 3.96 -1.73 1.00 -0.05 0.11
2015 3.14 -0.60 0.36 -1.28 0.93 -1.01 0.32 -0.78 -0.64 -0.59 2.36 -3.48 -1.42
EUR Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2007 0.05 0.70 0.02 2.26 2.43 3.07 5.65 -0.08 2.85 0.69 18.95
2008 9.92 6.68 -2.62 -2.34 0.86 2.84 1.28 0.98 -3.30 2.79 3.91 -0.45 21.65
2009 5.38 2.67 1.32 0.14 3.12 -0.82 1.33 0.71 1.48 1.05 0.35 0.40 18.36
2010 -0.30 -1.52 0.03 1.48 0.37 1.39 -1.93 1.25 1.38 -0.35 -0.34 -0.46 0.93
2011 0.71 0.57 0.78 0.52 0.65 -0.49 2.31 6.29 0.42 -0.69 1.80 -0.54 12.84
2012 0.91 0.25 -0.39 -0.46 -1.89 -2.20 2.40 0.97 1.94 -0.38 0.90 1.63 3.63
2013 0.97 2.38 0.31 3.34 -0.10 -2.98 -0.82 -1.55 0.01 -0.53 1.34 0.37 2.62
2014 -1.40 -1.06 -0.44 -0.75 -0.16 -0.09 0.74 0.18 3.88 -1.80 0.94 -0.04 -0.11
2015 3.34 -0.61 0.40 -1.25 0.94 -0.94 0.28 -0.84 -0.67 -0.60 2.56 -3.22 -0.77
GBP Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2007 0.11 0.83 0.17 2.28 2.55 3.26 5.92 0.04 3.08 0.89 20.67
2008 10.18 6.86 -2.61 -2.33 0.95 2.91 1.33 1.21 -2.99 2.84 4.23 -0.67 23.25
2009 5.19 2.86 1.18 0.05 3.03 -0.90 1.36 0.66 1.55 1.02 0.40 0.40 18.00
2010 -0.23 -1.54 0.06 1.45 0.36 1.39 -1.96 1.23 1.42 -0.35 -0.30 -0.45 1.03
2011 0.66 0.52 0.78 0.51 0.59 -0.56 2.22 6.24 0.39 -0.73 1.71 -0.46 12.34
2012 0.90 0.27 -0.37 -0.41 -1.80 -2.19 2.38 1.01 1.95 -0.35 0.94 1.66 3.94
2013 1.03 2.43 0.40 3.42 -0.08 -2.95 -0.80 -1.51 0.06 -0.55 1.36 0.41 3.09
2014 -1.35 -1.10 -0.34 -0.91 -0.18 -0.09 0.82 0.04 4.29 -1.70 0.96 -0.04 0.26
2015 3.26 -0.58 0.38 -1.20 0.97 -0.93 0.37 -0.74 -0.63 -0.49 2.27 -3.39 -0.86
Source: Fund NAV data is provided by the administrator of the Fund,
International Fund Services (Ireland) Limited. BHM NAV and NAV per Share data
is provided by BHM's administrator, Northern Trust. BHM NAV per Share % Monthly
Change is calculated by BHCM. BHM NAV data is unaudited and net of all
investment management fees (2% annual management fee and 20% performance fee)
and all other fees and expenses payable by BHM. In addition, the Fund is
subject to an operational services fee of 50bps per annum.
NAV performance is provided for information purposes only. Shares in BHM do not
necessarily trade at a price equal to the prevailing NAV per Share.
*Calculated by BHCM as at 31 December 2015
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
ASC 820 Asset Brevan Howard Master Fund Limited
Valuation
Categorisation* Unaudited estimates as at 31 December 2015
% of Gross Market Value*
Level 1 73.3
Level 2 26.2
Level 3 0.5
Source: BHCM
* These estimates are unaudited and have been calculated by BHCM using
the same methodology as that used in the most recent audited financial
statements of the Fund. These estimates are subject to change.
Level 1: This represents the level of assets in the portfolio which are
priced using unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level 2: This represents the level of assets in the portfolio which are
priced using either (i) quoted prices that are identical or similar in
markets that are not active or (ii) model-derived valuations for which
all significant inputs are observable, either directly or indirectly in
active markets.
Level 3: This represents the level of assets in the portfolio which are
priced or valued using inputs that are both significant to the fair
value measurement and are not observable directly or indirectly in an
active market.
Annual Manager The NAV per share of the USD share class of BH Macro Limited depreciated by
Review: 2015 1.42% in 2015, while the NAV per share of the Euro shares depreciated by 0.77%
and the NAV per share of the Sterling shares depreciated by 0.86% in 2015. In
aggregate, gains in FX trading were more than offset by losses in other areas.
BH Macro Limited invests all of its assets (net of short-term working capital)
in the ordinary shares of Brevan Howard Master Fund Limited (the "Fund").
Our largest exposures at the start of the year were short positions in both the
Swiss Franc and the Euro currencies, which were held in expectation of further
ECB easing. The Fund successfully avoided the debacle caused by the Swiss
National Bank unexpectedly de-pegging the Swiss Franc from the Euro in January,
whilst profiting from the ECB's subsequent quantitative easing ("QE")
announcement, to finish up approximately 3% at the end of Q1. Roughly half of
these gains were given back in the second quarter as positions held in
anticipation of an increase in market volatility due to the Greek crisis, which
in the end was resolved, led to losses.
During the second half of the year we became increasingly convinced that the
economic slowdown in Europe, and the likelihood that inflation expectations
would start to decline substantially, would lead the ECB to ease much more
aggressively than already elevated market expectations. We consequently took
large, highly convex positions to gain exposure to that view. In the event, the
ECB disappointed the market at its December meeting and the gains we had made
in November were negated by losses in December. Overall the view cost the Fund
a little more than 1% over the two months. We knew that the amount of risk we
took into the ECB December meeting was high, but our conviction was very strong
and the Fund's positions were structured in such a way that the potential gains
on a positive outcome would have been far greater than the amount that was
eventually lost in December.
On the business side, the Fund's team of investment professionals remained
largely unchanged from the previous year with few arrivals and departures.
Outside of the investment team, we rationalised the mid and back office
functions at the end of the summer. This adjustment reflected the reduced
number of Brevan Howard funds, consistent with a decision taken nearly two
years ago to focus on our core macro strategies.
Looking forward, the central bank policy divergence that we have been
anticipating for over a year has now finally arrived and I am confident that
this will materially improve the opportunity set for us.
After 6 years at zero rates the Fed has started a hiking cycle, which means
that every future FOMC policy decision will have some element of uncertainty.
This is an important development for us as, for the first time in several
years, there are two way trading opportunities on Federal Reserve decisions. At
the same time, the zero bound for rates has been well and truly broken which
means that the ECB, and the BOJ, amongst others, have room to further cut
interest rates if they deem it necessary. In addition, the low volatility
environment prevailing since the end of 2011 appears to have come to an end.
The slowdown of global growth seems to be accelerating and disinflationary
pressures appear to be intensifying. Should these trends continue, major
central banks may in the future find it increasingly difficult to offer the
level of support to capital markets that investors have come to expect.
The Fed took the crucial decision to begin the 'exit' from its policy of zero
rates by enacting a first rate hike of 25bps at the end of 2015 with the
declared intention to follow up with more increases in 2016. It would require
Annual the risk of a true crisis for them to reverse course quickly.
Performance
Review: 2015 In the meantime the ECB, by deciding to disappoint market expectations at their
December meeting, only to follow up with a rather more dovish press conference
at the subsequent January meeting, seems to have fallen into a reactive mode.
With price developments in the Eurozone continuing to undershoot both ECB and
market expectations, the risks of fully fledged deflation have not gone away.
Finally, the PBoC is in the difficult position of having to balance a policy of
smoothing an exchange rate depreciation, at the cost of a rapid erosion of
foreign exchange reserves and a tight monetary policy stance, against the need
to provide the monetary easing required by the economy and to allow for a
non-disruptive de-leveraging process. The PBoC's dilemma offers no comfort to
global markets.
Given this background, it is perhaps not surprising that capital markets have
got off to a rocky start to 2016.
While we begin the year with very low levels of risk, I believe that some
exceptional opportunities are likely to present themselves in this environment
of regime shift and dislocation. We look forward to exploiting a rich
opportunity set in the year ahead.
Performance Yours sincerely,
Review: Alan Howard
December 2015
Performance by Asset Class
Overall, the Fund's performance in interest rate
Rates trading was negative. The majority of the losses came
from directional and curve trading in USD interest rate
markets. The Fund made gains in EUR directional and
curve trading while trading in emerging market interest
rates was a small detractor. Volatility strategies were
also a small detractor overall.
The Fund's performance in FX trading was positive, with
FX most of the gains generated in the first quarter. The
majority of the gains came from a general long USD
theme against various currencies, in particular against
the Euro. Trading in China FX also contributed
positively in the third and fourth quarters. The Fund
had an average FX exposure of approximately 50% of NAV,
with more elevated levels of risk at the start and
towards the end of the year.
Overall, the Fund's performance in equity trading was
Equity negative. However, it started the year well with gains
in Q1 from longs in European equity indices following
the announcement of QE by the ECB.
The Fund's commodity risk in 2015 was low. The Fund
Commodity suffered losses in precious metals and energy.
The Fund made small losses in credit in 2015 mainly due
Credit to losses in corporate credit.
The information in this section has been provided to BHM by BHCM
The majority of losses in December resulted from positioning around the ECB
meeting which was the same theme that had driven the gains in November. The
bulk of the losses came from FX trading, but also from a combination of
interest rate and equity index trading in Europe. FX trading losses came from
short positions in the EUR; small offsetting gains came from China, SEK and CAD
trading. Interest rate trading generated negative returns, with long positions
in European interest rates being the main factor, only partially offset by
gains from US directional and curve and basis trades. Equity trading was also a
detractor; losses due to the weakness in European and Japanese equity indices
outweighed the very small gains from US equity index shorts. Tactical long
positions in energy incurred small losses.
Performance by Asset Class
Monthly, quarterly and annual contribution (%) to the performance of BHM USD
Shares (net of fees and expenses) by asset class
2015 Rates FX Commodity Credit Equity Discount Total
Management
January 0.22 2.27 -0.01 0.00 0.62 0.04 3.14
2015
February -0.09 -0.69 -0.10 0.01 0.28 0.00 -0.60
2015
March 2015 -0.47 0.63 -0.05 0.14 0.11 0.00 0.36
April 2015 0.09 -1.31 -0.06 -0.02 0.02 0.00 -1.28
May 2015 0.41 0.61 0.01 -0.05 -0.05 0.00 0.93
June 2015 -0.01 -0.45 0.00 -0.11 -0.44 0.00 -1.01
July 2015 0.18 0.50 0.07 -0.05 -0.39 0.01 0.32
August -0.38 -0.08 -0.02 -0.05 -0.30 0.05 -0.78
2015
September -0.03 -0.43 -0.05 -0.07 -0.11 0.05 -0.64
2015
October 0.08 -0.43 -0.08 -0.03 -0.21 0.08 -0.59
2015
November 0.30 2.09 -0.06 -0.03 -0.01 0.09 2.36
2015
December -0.90 -2.15 -0.05 -0.04 -0.53 0.19 -3.48
2015
Q1 2015 -0.34 2.21 -0.16 0.15 1.01 0.04 2.90
Q2 2015 0.48 -1.16 -0.05 -0.18 -0.46 0.00 -1.37
Q3 2015 -0.23 -0.02 -0.01 -0.17 -0.79 0.11 -1.10
Q4 2015 -0.53 -0.53 -0.19 -0.10 -0.75 0.35 -1.78
YTD 2015 -0.62 0.47 -0.40 -0.30 -1.01 0.50 -1.42
Monthly, quarter-to-date and year-to-date figures are calculated by BHCM as at
31 December 2015, based on total performance data for each period provided by
the Fund's administrator, International Fund Services (Ireland) Limited.
Figures rounded to two decimal places.
The performance attribution above is derived from data calculated by BHCM,
based on total performance data provided by the Fund's administrator,
International Fund Services (Ireland) Limited and risk data, as at 31 December
2015.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Monthly VaR of the Fund by asset class as a % of total VaR*
Rates Vega FX Equity Commodity Credit Total
January 14 15 38 25 5 4 100
2015
February 16 12 26 39 1 5 100
2015
March 2015 20 14 23 37 2 4 100
April 2015 21 12 29 29 2 7 100
May 2015 21 10 36 27 2 4 100
June 2015 30 16 26 20 2 5 100
July 2015 12 16 38 26 3 3 100
August 37 16 31 9 3 4 100
2015
September 35 16 33 9 2 4 100
2015
October 34 11 41 7 4 3 100
2015
November 14 13 57 13 1 2 100
2015
December 39 11 25 14 4 7 100
2015
Source: BHCM. Data as at 31 December 2015.
* Calculated using historical simulation based on 1 day, 95% confidence
interval.
Performance by Strategy Group
Monthly, quarterly and annual contribution (%) to the performance of BHM USD
Shares (net of fees and expenses) by strategy group
Macro Systematic Rates FX Equity Credit EMG Commodity Discount Total
Management
January 2.05 0.02 0.48 0.18 0.03 0.32 0.03 -0.01 0.04 3.14
2015
February -0.44 -0.00 -0.12 -0.06 -0.01 -0.02 0.05 -0.00 0.00 -0.60
2015
March 0.06 0.00 0.31 0.02 0.02 0.09 -0.12 -0.00 0.00 0.36
2015
April -0.75 -0.01 -0.39 -0.03 -0.01 -0.04 -0.04 -0.00 0.00 -1.28
2015
May 2015 0.41 -0.00 0.45 0.10 -0.00 -0.03 -0.01 -0.00 0.00 0.93
June 2015 -0.83 -0.01 -0.08 0.02 0.00 -0.04 -0.07 -0.00 0.00 -1.01
July 2015 -0.02 0.01 0.42 -0.02 -0.01 -0.09 0.02 -0.00 0.01 0.32
August -0.57 -0.01 -0.22 0.00 0.01 -0.05 0.01 -0.00 0.05 -0.78
2015
September -0.78 0.00 0.36 -0.06 0.00 -0.05 -0.17 -0.00 0.05 -0.64
2015
October -0.39 -0.02 -0.28 0.05 0.01 -0.08 0.04 -0.00 0.08 -0.59
2015
November 2.00 0.01 0.18 0.16 -0.01 -0.06 -0.01 -0.00 0.08 2.36
2015
December -2.94 -0.01 -0.32 -0.19 -0.00 -0.01 -0.19 -0.00 0.19 -3.48
2015
Q1 2015 1.66 0.03 0.66 0.13 0.03 0.39 -0.04 -0.01 0.04 2.90
Q2 2015 -1.17 -0.03 -0.02 0.10 -0.00 -0.12 -0.12 -0.00 0.00 -1.37
Q3 2015 -1.37 0.00 0.56 -0.08 -0.00 -0.19 -0.14 -0.00 0.11 -1.10
Q4 2015 -1.39 -0.02 -0.42 0.03 -0.00 -0.15 -0.16 -0.00 0.35 -1.78
YTD 2015 -2.28 -0.01 0.79 0.17 0.02 -0.07 -0.45 -0.01 0.50 -1.42
Monthly, quarter-to-date and year-to-date figures are calculated by BHCM as at
31 December 2015, based on total performance data for each period provided by
the Fund's administrator, International Fund Services (Ireland) Limited.
Figures rounded to two decimal places.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Methodology and Definition of Monthly Contribution to Performance:
Attribution is approximate and has been derived by allocating each trader book
in the Fund to a single category. In cases where a trader book has activity in
more than one category, the most relevant category has been selected.
The above strategies are categorised as follows:
"Macro": multi-asset global markets, mainly directional (for the Fund, the
majority of risk in this category is in rates)
"Rates": developed interest rates markets
"FX": global FX forwards and options
"EMG": global emerging markets
"Equity": global equity markets including indices and other derivatives
"Commodity": liquid commodity futures and options
"Credit": corporate and asset-backed indices, bonds and CDS
"Systematic": rules-based futures trading
"Discount Management": buyback activity for discount management purposes
Manager's The information in this section has been provided to BHM by BHCM
Market Review
and Outlook US
The year ended much as it began, with healthy gains in employment contrasting
with anaemic growth. The economy appears to have expanded by approximately
1.75% in 2015, paced by consumption spending and held back by the drags from
international trade and inventory destocking. The fundamentals in the household
sector are solid. Real income is expanding at a moderate pace, wealth as a
share of income is relatively high, balance sheets are in good shape on
average, and credit is readily available for most borrowers. As a consequence,
there is renewed vibrancy in the housing sector and brisk demand for consumer
durables like motor vehicles. The inventory destocking appears to be a largely
one-time adjustment that weighed on growth in the second half of the year, just
as the sharp decline in capital expenditures in the energy sector subtracted
from growth in the first half. Meanwhile, the headwinds from international
trade are likely to persist in 2016, both because such adjustments tend to take
longer and because the US dollar continues to appreciate. We anticipate 2016
mostly reflecting a repeat of the trends seen in 2015 without the drags from
inventories and energy-related investment. In terms of risks, consumption could
surprise to the upside if households spend more of the wealth accumulated over
the last few years; however, global growth could disappoint further and lead to
worse net exports, or the energy sector could suffer another round of cutbacks
if low prices persist.
The labour market was the highlight of the macro story in 2015. The US added
2.65 million jobs over the year and the unemployment rate fell from 5.7% to
5.0%, which is close to most estimates of full employment. If forecasts are
correct and growth is above 2% in 2016, then the unemployment rate should
continue to fall. The performance of the labour market is even more remarkable
given lacklustre real GDP growth. The data suggest that potential growth is
considerably slower than most estimates. If potential growth were 2%, then the
unemployment rate should have increased during a year of sub-2% growth. In
fact, since the unemployment rate dropped so much, the likelihood is potential
growth is closer to 1% than 2%, a sobering fact with negative long-term
consequences for economic performance and policymaking. To help appreciation of
that difference, the economy would double in size every 35 years at 2% growth
and only every 70 years at 1% growth. In other words, productivity growth looks
stagnant, which means that there's little room for real wage gains. In
addition, lower potential growth means the economy will flirt with the zero
lower bound on nominal interest rates whenever there's a downturn. All of these
implications-slow potential growth, weak productivity growth, and monetary
policy that's constrained by the zero lower bound-are negatives that will
probably continue in 2016.
If the labour market was the highlight of the macro story in 2015, then
inflation was the worst. For most of the year, total consumer price inflation
bounced around a little above zero and core inflation was stuck at 1.3%. The
reasons for low inflation are no mystery. Total inflation is being held down
primarily by the huge decline in consumer energy prices and core inflation is
weak because of the pass-through of lower prices for energy and imports. These
are shocks to the price level so inflation should eventually pick up, but this
is taking longer than expected because energy prices continue to fall and the
US dollar keeps appreciating, thereby lowering import prices. The outlook for
inflation in 2016 resembles the outlook for inflation at the beginning of 2015,
calling for a slow pick up in headline and core. However, that's contingent on
energy prices and the USD finding some equilibrium.
In terms of policy, the Federal Reserve raised rates in December, ending months
of speculation about the timing of lift-off. The debate immediately turned to
the pace of monetary policy normalisation, with the policymakers promising
"gradual increases" in rates while the market is sceptical that the economy can
withstand any further removal of accommodation. The gulf between a dovish Fed
and an even more dovish market will play out over the course of the year.
Fiscal policy has merited almost no attention in the last few years, apart from
the periodic scares about the debt ceiling and government shutdown. However, at
the end of the year Congress agreed on a budget that should add a few tenths to
real GDP over the next two years. Looking forward, the Presidential election
looms in November. Although the market's attention is focused elsewhere at the
moment, there will be a keen interest in the election by the summer when a more
liberal Democratic party faces off against a more conservative Republican
party. The country is deeply divided and there will be volatility no matter
the outcome of the election.
EMU
2015 started with the ECB announcement in January of a new €1.1 trillion bond
purchasing programme, known as "APP" (Asset Purchase Programme), a new monetary
policy instrument that had been partly anticipated by financial markets at the
end of 2014. The programme, consisting of both sovereign and sub-national debt
purchases, came as a complement to the private assets bought since the end of
2014, with a total volume of €60bn per month. Although the ECB Quantitative
Easing ("QE") programme was implemented successfully and real GDP growth
climbed to approximately 1.5% in 2015 from 0.9% in 2014, the economic recovery
continued to be fragile, as the impulse from QE diminished during the year,
resulting in inadequate stimulus to withstand the intensifying headwinds
stemming especially from the slowdown in global demand. Indeed, activity growth
slowed from an annualised rate of 2.2% q/q in Q1, to 1.6% q/q in Q2 and 1.2% q/
q in Q3. Although the labour market recovered further over the year, with the
unemployment rate declining by one percentage point to 10.5% at the end of
2015, the adjustment remains slow, very heterogeneous across countries and far
from enough to fill the still large output gap, as shown by the still very
subdued wage dynamics. At the same time, price developments continued to
undershoot both the ECB and market expectations, with HICP inflation averaging
a very low 0.0% in 2015, much lower than the ECB predicted at the beginning of
the year. This disappointing outcome, which risks structurally de-anchoring
inflation expectations, stemmed especially from lower commodity prices,
although core inflation also remained extremely tame, lower than 1%. As a
result, the ECB objective of returning to its target of "below but close to 2%"
in the medium term remains in jeopardy and the risks of fully-fledged deflation
have not gone. As such, the ECB policy decision to ease monetary conditions
only slightly in December and disappoint greatly financial markets expectations
which they had previously raised could prove very detrimental for the economic
prospects of the Eurozone. Indeed, following the decision, financial conditions
tightened, inflation and inflation expectations fell, and the economic data
disappointed.
Politically, the summer months proved highly volatile with Greece's
anti-austerity Prime Minister Alexis Tsipras calling a referendum as the
highly-indebted country came very close to exiting the Eurozone. While a third
bailout programme of €85bn was agreed in a last minute deal, the implementation
of reforms and debt-relief discussions are likely to remain difficult.
Moreover, political tensions are rising. The consequences of the immigration
crisis, which has hit even the otherwise rock solid leadership of Chancellor
Merkel, has seen increasing support for nationalist and populist parties in
various countries of the common area.
Looking forward, the prospects for the Eurozone in 2016 look more challenging
than in 2015. Indeed, on the one hand, the above mentioned tightening of
financial conditions induced by the December ECB policy decision, albeit
moderate, came at a moment when renewed easing was needed so as to provide
fresh impulse to the quantitative easing manoeuvre, amid the challenges posed
by the risks of deflation, a slower and riskier global environment and a still
challenging and far from complete process of de-leveraging. Risks that the
December ECB macroeconomic projections of accelerating recovery and convergence
to price stability will be greatly disappointed look particularly elevated.
Should that be the case, pressure on the ECB to ease monetary conditions again,
making use of all its available instruments, will increase.
UK
Entering the seventh year of its expansion, the UK economy has lately been
marked by a dichotomy between developments on the real and nominal sides: while
indicators in real, or volume, terms have proved resilient - although not
completely immune to the global slowdown - indicators in nominal, or price,
terms have remained sluggish. For instance, while real GDP likely expanded by
about 2.2% in 2015, both headline and core inflation remained low, at 0.0% and
1.2% y/y, respectively. Similarly, while on-going strong job growth led to a
further drop in the unemployment rate, the tightening of the labour market
failed to translate into meaningful upward pressure on nominal wages. As
inflation keeps undershooting the Bank of England's 2% inflation target, the
Bank remains in no hurry to hike rates in the near future, especially as the
economic outlook in the short term has become more clouded. First, the past
appreciation of Sterling still poses a headwind to the economy, weighing on
exports. Second, fiscal policy should become slightly more contractionary this
year, compared to the last couple of years. Thirdly, the uncertainty
surrounding the EU referendum may result in companies putting investments on
hold until the uncertainty over the UK's future in the EU has been removed.
Thus, even in a scenario where the UK remains a member of the EU, confidence
may be adversely affected in the run-up to the referendum. In the alternative
scenario, where the UK votes to leave the EU, the economy would likely suffer
more, at least in the short term. Moreover, such a scenario would rekindle
fears over a break-up of the UK, as the question of Scotland's independence
could come back on the table.
In our base case, the UK economy will continue its expansion and make up for
any pre-referendum slowdown in the data once the referendum has been held,
driven by robust gains in incomes in real terms - due to inflation rates even
lower than nominal wages growth - over the past couple of years and an on-going
need for housing and infrastructure investment. The gradual erosion of spare
capacity and the further tightening in the labour market should eventually set
the scene for the first rate hike, but only once wages growth have shown
clearer signs of acceleration. However, the risks remain skewed towards a later
rate hike, due to a weak global backdrop, the sensitivity of the currency,
uncertainty about the new level of the non-accelerating inflation rate of
unemployment (NAIRU) and an elastic supply of labour to the UK from the EU.
Lastly, the Bank of England may well decide to implement macro-prudential
measures to tackle any signs of overheating, which could weigh on economic
activity and act as a substitute to monetary tightening.
Japan
While 2014 was marked by a large swing in activity due to the introduction of
the consumption tax hike, 2015 saw steadier, modest gains for the most part.
The output gap stepped down 1 percentage point at the start of the year and was
flat thereafter. The unemployment rate maintained its downward trend seen over
the previous five years and looks to end 2015 at its lowest level since 1997.
For the most part, survey measures like the Tankan and Shoko-Chukin survey of
small and medium-sized businesses moved sideways over the year, and industrial
production was flat on balance.
Looking to 2016, Japanese growth is likely to be tepid, averaging fairly close
to the slow rate of potential output growth. Solid momentum in private
domestic demand, supported by ongoing income gains, should be partially offset
by a difficult external outlook due to the recent strength in the yen, as well
as ongoing weakness in major Asian export markets. Government spending could
be a slight drag on the economy, and we see no reason to suppose that the
upcoming corporate tax rate cut will materially boost aggregate demand in the
near term.
The inflation performance was mixed over the year. Abstracting from the
effects of the consumption tax increase, the year-on-year change in core prices
was relatively flat in 2015, remaining within a thin band straddling 0%
throughout the year, as falling energy prices, which are included in Japan's
definition of core inflation, held down the aggregate. On the other hand, the
12-month change in consumer goods excluding food and energy steadily moved up.
Stable 0.1% seasonally adjusted month-on-month gains were added to the 12-month
change, while essentially flat readings in 2014 dropped out.
After significantly boosting its bond buying in October 2014, monetary policy
was essentially on hold throughout the year. The Bank of Japan ("BoJ") tweaked
its policy at the December meeting by extending the maturity of the bonds it
will buy from ten to twelve years, and introducing a new program to buy
exchange-traded funds of stocks issued by companies actively investing in
physical and human capital. Markets initially rallied, thinking that it
represented a true increase in policy accommodation, but then they pulled back
once they realised their extremely limited nature. The Bank went on to
describe its actions as a technical adjustment. All told, it served to raise
questions as to whether the BoJ will revert back to incremental policy changes,
without actually moving the needle on accommodation. Governor Kuroda had said
a month earlier that the BoJ needs to lead markets in pushing up inflation
expectations; it cannot simply rely on wages to pick up on their own. With
Governor Kuroda's aide recently saying that the conditions are in place, more
accommodation looks to be under serious consideration.
Indeed, the need for further accommodation has increased of late as the
re-inflationary backdrop has deteriorated. In the second half of December,
the yen appreciated over 2% against the dollar and then opened the year
strengthening another 2%. Oil took another step down, and while the BoJ is
capable of separating the direct effects of oil on its definition of core
inflation from changes in the underlying trend, there are still some spillover
effects to non-energy prices. Consumer inflation expectations appear to have
stumbled in the last few months with a weighted average of household inflation
expectations falling 0.6% from its first-quarter average. Spring wage
negotiations appear to be disappointing. All told, while the 12-month change
in core prices should move up due to base effects as the previous sharp
declines in energy prices fall out of the calculation, in this environment
further inflation gains excluding food and energy are not in the offing.
China
2015 was a most challenging year for China, gripped by an extremely challenging
combination of high and still rising leverage, and slowing underlying growth,
both in real and nominal terms, as large overcapacity in a number of sectors
induced deflationary pressures. Attempts by policy makers to ease monetary
conditions in the form of cuts to the reserve requirement ratio ("RRR") and
official interest rates, showed diminishing returns in terms of their ability
to generate credit and boost economic activity. This is perhaps unsurprising as
the transmission mechanism tends to lose its effectiveness in a high leverage
environment. As a result, in 2015 GDP growth slowed from 7.7% to 6.9%, the
lowest in 30 years, although broadly in line with the government "about 7%"
target. Speculation on the accuracy of the China growth data has risen, as many
analysts believe that the actual growth rate is lower than the published
figure. Moreover, China's stock and foreign exchange markets witnessed great
turbulence. Indeed, on the one hand the Shanghai composite index after nearly
doubling from November 2014 to mid-June 2015, subsequently collapsed returning
to its January 2015 level. On the other hand, the Yuan depreciated by
approximately 3% from mid-August 2015 to year-end, despite massive intervention
by the People's Bank of China ("PBoC") aimed at stabilising the exchange rate
until it joined the IMF SDR basket on 30 November. Importantly, capital outflow
pressures persisted thereafter. Throughout the whole of 2015 foreign exchange
reserves contracted by more than US$500bn, to US$3.3tn.
Looking forward, 2016 looks as if it could be another turbulent year for China.
In particular, capital outflow pressures are likely to persist despite
tightened capital controls and a large current account surplus, along with the
rising demand from onshore corporates and households aimed at diversifying
their assets from RMB into USD. The on-going anti-corruption campaign could
also exacerbate capital flight. As such, the PBoC will likely encounter
increasing difficulties in smoothing out the pace of the depreciation, as the
costs in terms of reserves' depletion are likely to rise. The official GDP
growth target for 2016 is likely to be lowered to about 6.5%, a result which
may be a challenge to achieve given the increasing ineffectiveness of the
monetary transmission channel and the limited room to ease monetary policy
conditions amid rising outflows. Fiscal policy is likely to be expanded, but
not to an extent which can stabilise the economy, as only small-scale fiscal
easing measures are poised to be introduced after the March National People's
Congress. Last, but not least, elevated volatility in financial markets is
likely to persist, at least until such a time as the exchange rate is let freer
to adjust to market forces, thus damaging growth prospects.
Enquiries Northern Trust International Fund Administration Services (Guernsey) Limited
Harry Rouillard +44 (0) 1481 74 5315
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BH MACRO : Monthly Shareholder Report - December 2015
January 29, 2016 at 01:40 pm
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