 
February 2012
Securities lending market updateQ4 2011   (8 votes, average: 3.25 out of 5) Loading ...
Global investors paid close attention to the VIX volatility index and to the CDS quotes as concerns over the European crisis persisted until the end of the year. Investors are concerned about capital preservation which has commonly resulted in a flight to quality from risk-based assets to safe havens of government debt and cash. Demand for US government bonds was strong despite the loss of triple-A status from Standard & Poor’s. The rating agency cited unprecedented debt levels for its decision but the risk-adverse investment community were comfortable with historically low yields. Europe continues to be a focal point of concern. Discussions about the regulation of short-selling took place between European Union governments and the European Commission but were inconclusive. Then in December, French president Nicolas Sarkozy announced Eurozone members would move forward with an inter-governmental treaty detailing new budgetary rules to end the crisis. A unanimous agreement was not possible following a UK veto, so they will try again in March 2012. Earlier in 2011, the EU proposed a “Financial Transactions Tax” to be enacted in 2014. The tax would include securities lending and repo transactions and is being watched closely as further details emerge. It is believed the proposal will be vigorously opposed by many market participants and RBC Dexia will monitor and communicate on these developments. Early indications suggest lower levels of seasonal demand in some primary and secondary markets in 2012. There was strong demand for global high quality government debt instruments which became expensive to borrow throughout 2011, and we expect this to continue. While hard to borrow “special” securities were limited in 2011, there was an uptick in the later half of the year with a trickle of lucrative names, mostly because of directional interest. Demand for Scrip and Drip trade activity was strong in North America and Europe, while Chinese companies trading in Hong Kong were in high demand as investors sought exposure to China. While there is directional demand, the capital required to support these balances and short-selling bans on stocks in France, Italy, Spain, Belgium and Korea did not allow an upward trend.
North American markets
Economic indicators & trends Canada: Market optimism and some positive news out of the US helped push the North American indexes from their lows and claw back some of the losses from the third quarter. The TSX gained a total of 6% in the fourth quarter reducing the year’s losses to 11%. The Bank of Canada announced on 6th December 2011 that it is maintaining its target for the overnight rate at 1%. The Bank will continue to monitor economic and financial developments in the Canadian and global economies and set monetary policy consistent with achieving the domestic 2% inflation target. Foreign investors continue to purchase Canadian Bonds and T-Bills. Statistics Canada noted that foreigners have bought $12.7bn worth of Canadian money market instruments since Q2, 2011, assisting a strong Canadian Dollar. Canada’s conservative, measured and prudent approach to risk management, funding, credit and balance sheet management has served it well through the crisis. US: The S&P 500 closed the year almost in positive territory, posting 1257.60 and just .04 of a point below where it started 2011. The Dow Jones posted a yearly gain of 5.5%. The US Federal Reserve maintained the Fed funds target in Q4 with a range of 0% to 0.25%. The Federal Open Market Committee also stated that a subdued outlook for inflation is likely to warrant an “exceptionally low” Fed funds rate at least through mid-2013. Recent economic data suggests that growth in the US has been slightly more robust than anticipated, largely as a result of continued vigour in consumer spending and business investment. Securities lending insights With the vast amount of market volatility in Q4, US special activity picked up. Three of the top five earning securities in the quarter were directional names where supply in the lending market was limited and premium rates were achieved. There were a few IPOs (Initial Purchasing Offer) in the US with secondary offerings that generated significant revenue. The Canadian market remained consistent in Q4 with the dividend re-investment trade realizing the most returns. Canadian borrowers continue to push for higher allocations on this trade which have increasingly become a significant component of the Canadian equity revenue stream. There is still a lack of stocks that trade special in Canada. In-demand securities:
* Does not constitute investment advice European markets
Economic indicators & trends The French CAC index did not recover from the July dip created by market concern over France’s exposure to Greece, and whether the Greeks would leave the Eurozone. The index closed down 19% from the beginning of the year. Securities lending insights The top European specials were solar panel companies that produce polysilicon. A kilogram of polysilicon, the basic material in solar panels, dropped from USD 475 in February 2008 to less that USD 35 in October 2011. As a result, not every manufacturer can stay profitable with prices so low, hence the short interest in these European solar companies. Scrip trading proved to be very lucrative in 2011 having executed trades strategically with a wider number of borrowers. With increased market volatility, Royal Dutch Shell A, B and UK line representing our highest earning Scrip stock. In-demand securities:
* Does not constitute investment advice Asia Pacific markets
Economic indicators & trends Asian markets continued to drift lower between 5% and 10% during Q4. The major contributors were the European sovereign debt crisis, the impact of a weakening global economy on China’s economic growth and the pull back in commodities and resources. Notably, the JPY Yen having weakened after the earthquake, tsunami and nuclear disaster, started strengthening relative to the USD to finish the year up 5%. At the end of October, the Japanese government sold Yen to stop the currency appreciating further. Not withstanding this intervention, the Yen still hit record levels. In Australia, the Reserve Bank of Australia cut the official cash rate twice this quarter from 4.75% to 4.25%. Stocks continue to fall with the ASX down 15% in 2011. In 2011, Asian markets were among the worst performers globally. Australia was down 14.5%, China (27.1%), Hong Kong, (20.0%), Japan (17.3%) and Singapore (17.0%). Securities lending insights In Japan, loan balances outside dividend related trades have been on the decline. Japanese exporters have been hit by the stronger Yen but this has still not increased directional demand. Arbitrage opportunities off the back of secondary offerings or convertible bond issuance have been scarce. In mid-October, Olympus parted company with its CEO after questionable transactions were brought to light and the stock has traded special at levels over 10%. The share price has been extremely volatile and at one stage it was nearly de-listed. Canon was also in demand at the end of the year related to its final dividend. In Australia, BHP, RIO, and Woodside all attracted directional interest as crude oil, precious metals and commodities continued to fall. At various stages this quarter, all the major banks were in play because of directional demand. Australia and New Zealand bank and National Australia Bank attracted additional demand when they announced a 1.5% dividend re-investment discounts. The retail stocks, not withstanding an increase in retail sales for Christmas, and lower interest rates were still in demand. JB HI-FI, Harvey Norman and David Jones all continue to trade special as the market expects these shares to suffer as consumers spend less. Fosters saw demand off the back of the SABMiller takeover which concluded in December 2011. Demand was strong for off-shore stock particularly over the dividend period. Hong Kong continues to be a strong revenue generating market in Asia. However, loan balances declined in line with the drop in the index. There was also market-wide selling in two of the top earning specials, China Yurun and Huabao International which resulted in some tough recalls. China Evergrande Real Estate Group continues to trade special as the Chinese real estate remains under pressure from declining housing prices. HSBC Holdings was in demand for directional interest. There is also demand for this quarterly dividend payer for the scrip arbitrage. In-demand securities:
* Does not constitute investment advice For additional information on RBC Dexia’s securities lending capabilities, please contact: Mary Jane Schuessler Stephen Rudland Trevor Amoils
Related publications
Latest publications
Follow us
Find us
|
