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and compliance decision makers. The study by Dataminr found that only
Fixed interest
CPD Questions 7–9 7. What was the BOE’s policy decision at its February MPC meeting?
a) It cut interest rates to a fresh all-time low b) It raised interest rates by 10 bps c) It kept interest rates unchanged d) It reduced QE
8. What is/are the risk/s to the BOE’s optimistic outlook?
a) The evolution of the pandemic b) The transition to the Brexit trade arrangements between the UK and the EU c) Household and business response to developments on
COVID-19 and Brexit d) All of the above
9. The BOE declared that it would take interest rates below zero at its next meeting.
a) True b) False
Alternatives
CPD Questions 10–12 10. What is the International Energy Agency’s 2021 forecast for global oil demand?
a) Decrease by 8.8 mbd b) Decrease by 0.6 mbd c) Increase by 5.5 mbd d) Increase by 8.8 mbd
11. What is the International Energy Agency’s 2021 forecast for global oil supply?
a) Ddecrease by 6.6 mbd b) Decrease by 1.0 mbd c) Increase by 1.0 mbd d) Increase by 1.2 mbd
12. OPEC+ announced easing of oil production restrictions in January.
a) True b) False
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Fixed interest
Prepared by: FSIUPrepared by: Rainmaker Information Sources: FactsetSource: Rainmaker /
Figure 1: BOE Bank rate target
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PERCENT
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Figure 2: UK inflation
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Negative interest rates baked in forecasts
Ben Ong “Hoping for the best, prepared for the worst, and unsurprised by anything in between.” - Maya Angelou
The Bank of England (BOE) gave financial markets what they wanted and kept monetary policy settings unchanged – Bank Rate at a record low 0.1% and QE at £895 billion – at its first MPC meeting on February 4.
It was hoping for the best outcome.
In BOE governor Andrew Bailey’s words: “The monetary policy committee’s central forecast assumes that COVID-related restrictions and people’s health concerns weigh on activity in the near term, but that the vaccination programme leads to those easing, such that gross domestic product is projected to recover strongly from the second quarter of 2021, towards pre-COVID levels.”
The BOE forecasts GDP to contract by 4.2% in the March 2021 quarter before recovering in the following three quarters to end with a 5.0% expansion this year and return to pre-pandemic levels by the first quarter of 2022.
“CPI inflation is currently below the MPC’s 2% target, largely reflecting the direct and indirect effects of COVID-19. As temporary effects fade and the impact of spare capacity diminishes over 2021, inflation rises towards the target,” The BOE said.
However, the “Monetary Policy Report” stressed that: “The outlook for the economy remained unusually uncertain. It depended on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It would also depend on the responses of households, businesses and financial markets to these developments.”
Reasons behind the BOE’s preparation for the worst?
“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future. The MPC therefore agreed to request that the PRA [Prudential Regulation Authority] should engage with PRA-regulated firms to ensure they commence preparations in order to be ready to implement a negative Bank Rate at any point after six months,” it said.
No need to speculate whether the BOE will take the Bank Rate below zero or not, the Monetary Policy Report suggests it will.
“The MPC’s projections are conditioned on the market path for interest rates, which is close to zero over the forecast period.” fs
Alternatives
Prepared by: FSIUPrepared by: Rainmaker Information Sources: FactsetSource: IEA /
Figure 1: Crude oil prices
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Figure 2: World oil demand, supply & price
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Demand-supply equation lifts crude oil
Ben Ong
Crude oil prices jumped to one-year highs – WTI oil to US$58.46 per barrel; Brent oil to US$55.73 – this early in the New Year.
Well, they have to bounce some time especially given the battering they received in 2020 as the COVID-19 pandemic grounded planes, trains and automobiles and cruise liners and shuttered most factories and businesses on planet earth, driving down overall global demand and therefore, the price of oil.
Demand for oil had been boosted by the cold weather in the US and in Asia at the start of the year.
But this would go away when winter gives way to spring.
Likewise, demand for oil would be crimped by the renewed lockdowns (in Europe and parts of Asia) in efforts to contain the resurgence of infections and the mutated variant of the virus.
These prompted the International Energy Agency (IEA) to downgrade its global oil demand forecast by 0.6 million barrels per day for the first quarter of this year.
However, the agency expects a 5.5 mb/d increase in oil demand this year overall, a significant turnaround from the 8.8 mb/d drop recorded in 2020.
“This recovery mainly reflects the impact of fiscal and monetary support packages as well as the effectiveness of steps to resolve the pandemic,” IEA said.
The supply side of crude oil’s demand/supply equation is also constructive.
This from the IEA’s January 2021Oil Market Repor: “Anticipating weaker demand, OPEC+ decided in January to delay a further easing of cuts and Saudi Arabia surprised with an additional 1 mb/d supply reduction in February and March.”
The group’s more proactive production restraint looks set to hasten a drawdown in the global stock surplus that got underway in earnest during 3Q20.
“Assuming OPEC+ achieves 100% compliance with the latest agreement, global oil stocks could draw by 1.1 mb/d, or 100 mb, in 1Q21, with the potential for much steeper declines during the second half of the year as demand strengthens,” it said.
As such, the IEA expects world oil supply to increase by 1.2 mb/d this year, up from the 6.6mb/d decline recorded in 2020, but that: “Much more oil is likely to be required, given our forecast for a substantial improvement in demand in the second half of the year.”
But 2020’s mantra remains in play, crude oil prices remain hostage to COVID-19. fs
Property
Prepared by: Rainmaker Information Source: Quarterly Property Sentiment Report, ME Bank
Housing market sentiment lifts to three-year high
Jamie Williamson
Arise in positive sentiment was recorded across all states and territories of Australia at the beginning of the year on the back of expectations that residential property prices will increase while interest rates stay low.
According to ME Bank’s latest Quarterly Property Sentiment Report, positive sentiment is the highest it has been since 2019 while negative sentiment is the lowest it has been in the same period.
Investors and owner-occupiers were considerably more positive in January 2021 than in October 2020, with positive sentiment among the cohorts increasing by 15 and 17 percentage points, respectively. However, first home buyers were slightly less positive, with sentiment falling four percentage points to 27%.
On a state-by-state basis, Queenslanders are the most positive in the nation, recording 56% positivity for metro areas and 58% for regional property markets (43%).
Overall, of those looking to buy, 72% said stimulus measures such as HomeBuilder, incentives for first-time buyers and stamp duty relief in some states made the idea of buying or investing in property more attractive. A further 79% cited the record low interest rate environment as a driver for their interest.
“While there are still many challenges such as unemployment and job insecurity, it’s promising to see how sentiment and market activity have rebounded,” ME Bank head of home loans and personal banking, Claudio Mazzarella said.
About 77% of those surveyed by ME Bank said they expect property prices will “bounce back” this year. In line with this, less property owners are worried COVID-19 will impact the value of their property.
Fifty-four percent of those surveyed said property prices will go up over the next 12 months, while only 7% said they think they will go down. Owner-occupiers are the most confident, with 57% expecting them to rise.
However, the obvious issue the data presents is that higher house prices exacerbate the housing affordability issue that has plagued Australia for some time. Of those surveyed, 95% said affordability is a “big issue”.
“…it will make it harder for first home buyers to get their foot in the door. It will be important for new entrants in the property market to do their research,” Mazzarella said.
ME Bank said the data indicates people are keen to jump into the market after a year of uncertainty, with 78% of respondents saying residential real estate market activity in 2021 will be greater, almost as if to make up for 2020.
For those looking to buy or sell over the coming 12 months, 47% said they are hoping to do so as soon as possible while 53% are in no rush.
“A busy spring property season has overflowed into the start of this year and all signs point to raised levels of activity continuing for the coming months,” Mazzarella said.
“This will be especially beneficial on the supply side, offering prospective buyers more choice, ultimately helping the economy.” fs
Property
CPD Questions 13–15 13. ME Bank reported that positive propertymarket sentiment has:
a) Equalled its 2019 highs b) Plateaued since October 2020 c) Decreased slightly since
January 2021 d) Eclipsed its 2019 levels
14. Based on its survey, ME Bank found that:
a) Property investors were expected to remain cautious b) Around 50% of participants expected property prices to rebound c) First home buyers remained at a disadvantage d) Around three-quarters of sellers were keen to list their property
15. According to ME Bank’s survey, owneroccupiers were the most confident propertymarket cohort.
a) True b) False
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A MIND FOR MERGER
As chief executive of Cbus, Justin Arter heads a superannuation fund well positioned to survive the current wave of regulatory change. With just over six months under his belt, he shares his plans for the fund with Kanika Sood.
When Justin Arter left his hometown in Mornington Peninsula for university in the 1980s, it was a big deal.
Fifty-odd years later, he heads the country’s sixth-largest superannuation fund, overseeing $57 billion in retirement savings.
“It was literally a country town. Of course to an impressionable 17 or 18 year old... to even go to the city of Melbourne was, you know, a big deal,” Arter says.
Arter’s parents worked as teachers but fortunately, not at the school where he studied, he jokes. When he finished, he signed up for an undergraduate degree in law and commerce at University of Melbourne.
The law part, he loved. The commerce part, not so much.
“That concept of equity and reading and coming to a reasoned conclusion really fascinated me…But as the years have gone on, I found those [commerce degree] skills – understanding monetary policy and so forth – to be of course, very, very helpful to me also, as my career has sort of unfolded,” he says.
As a fresh graduate, Arter went to work at a CBD law firm as a part of his article clerkship. He loved it and aspired to be a barrister, until he thought of the money he would make.
“The economics of being a ‘baby barrister’, as they were called, were not very good. In fact, it was virtually hand-to-mouth living. So, I thought, ‘Well, this is kind of inefficient in the sense that you have to spend all this time here making no money at all’,” he says.
Barrister aspirations abandoned, Arter now pivoted to research analyst roles at stockbroking firms. He found a role at a small Melbourne firm but left after the 1987 crash. He worked at an ANZ-owned brokerage for a few years, before JBWere came calling with an analyst role.
He ended up staying for 18 years, eventually rising to the board and the management committee. During his time, the 164-year-old, home-grown firm decided to merge with Goldman Sachs’ Australian operations.
JBWere had a partnership model at the time. Arter says, while it was satisfying professionally and culturally, it just wasn’t going to work going forward.
“The age of the major US investment bank was upon us and we had two choices, one was either join up with an entity like that which meant loss of some identity or the second was shrink your way to glory,” he says.
Just as the JBWere merger was done, Arter was approached for the role of chief executive of Victoria Funds Management Corporation when he would serve for three years between 2009 and 2012.
“I thought, ‘Wow this actually looks very interesting to go from investment banking/broking to the world of pensions’…[while]…bypassing the world of funds management, which is usually the intermediary between those two organisations,” Arter says.
At VFMC, he was answerable to the state government and the organisation managed the money of different government bodies. The role added something new to his skill set too: liaising with public servants.
“I had to sort of recalibrate the way I approached this. And in majority of my experience, public servants are intellectually very, very curious. That’s a delight to deal with,” he says.
In 2005, Arter studied an advanced management program at the Wharton School of the University of Pennsylvania. Seven years later, and after nearly three years at VFMC, a contact made while studying would offer Arter his next role.
The contact, Mark McCombe, was BlackRock’s chair for Asia and asked Arter if he would be interested in BlackRock’s country head role, as Damien Frawley left for QIC and BlackRock looked to implement its US$13.5 billion acquisition of Barclay’s BGI business.
“While that thematically made great sense and has proved to be a company maker for BlackRock, the merger led to difficulties and morale and culture issues,” he says.
He says he put his JBWere/Goldman merger learnings to work and set about gluing the culture together. Employees were given a straight line to him instead of “pussyfooting around”, the process was quickened and lastly, the business reconciled to the fact that it was best the employees who were more “backward than forward” leave the firm.
When the process was complete, BlackRock asked Arter to go across to the United Kingdom and lead its EMEA group.
“It was fascinating to go from a defined contribution market…back into the heartland of defined benefit, which is kind of like learning the classical piano, if I could call it that, rather than learning the jazz piano,” he says.
“I’ve never been involved in a business ever in my life that has too many clients. Most of the businesses I’ve been involved in don’t have enough
Justin Arter clients…There was so much that it’s quite extraordinary.”
BlackRock would later offer him a new role in Hong Kong, but this time he passed, wanting to be close to his family in Australia.
Upon return, he consulted with ANZ on how it could work with industry funds after offloading its wealth business, before the Cbus offer catapulted him back into the world of Australian pensions.
“As I looked around the landscape of industry funds and contemplated this job I am in now, I thought, ‘Gee, I think in many ways, many of those industry super funds are at that point where they do have to seriously contemplate life going forward, because it’s not getting any easier’,” Arter says.
He is keen for the fund to scope out new merger partners, he says, as its merger with Media Super heads for completion later this year. And he wants to retain Cbus’ brand equity and performance; it currently has the thirdbest performing MySuper fund, according to Rainmaker Information.
Arter says he learned to live with a business that is subject to constant regulatory change, while working at BlackRock in the UK.
“It’s not something where every six months or every 12 months, we have a little working group and attend to these things and we implement and off we go,” he says.
“No, it’s a constant process…And I think that’s the way we’re going to develop in Australia, it’s going to become a constant process.” fs
