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Public Funds Prefer Balance Sheet Improvements Over Stock Buybacks

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In the September 2018 SWFI Global Asset Owner Survey, which was taken during the month of August 2018, one question asked, “What would you like to see listed companies do with their cash flow?”

The majority of respondents (including sovereign wealth funds, pensions, and the like) wanted companies to improve their balance sheets structure, a sharp contrast of the option of increasing capital spending, which won out in the last four quarters. The question did not call out specifically U.S. companies, but all companies. One can infer that institutional investors are concerned about interest rates and their potential to put financial strains on corporate balance sheets. Public funds are concerned about the leverage of some listed companies.

The least favorite option was returning cash to shareholders which include stock buybacks. Given the recent news in a surge of stock buybacks, corporate CEOs are opting for shareholder returns versus fixing corporate balance sheets, which is the preferred path for public institutional investors. Public funds like sovereign funds are typically long-term holders of corporate stock, caring less about the quarter to quarter volatility in earnings. It can be argued that demand for share buybacks can be seen as a response from investors’ not total trusting corporate management to spend excess cash wisely. Stock buybacks essentially reduce real investments.

U.S. Companies

Before U.S. President Trump’s tax plan (Tax Cuts and Jobs Act) passed, U.S. multinational enterprises kept large amounts of capital overseas. The 2017-2018 repatriation of foreign earnings impacted U.S. stock markets. The recently passed tax reform act permitted a “one-time tax (payable over eight years) on the existing stock of offshore holdings regardless of whether the funds are repatriated, thus eliminating the tax incentive to keep cash abroad,” according to the September 4, 2018 Federal Reserve note called “U.S. Corporations’ Repatriation of Offshore Profits.”

Source: BEA Balance of Payments data. Credit: Federal Reserve created the graphic.

That U.S. Federal Reserve study showed multinational corporations brought home roughly over US$ 300 billion of the US$ 1 trillion held abroad. According to the study, some US$ 55 billion was used for equity share buybacks, which is more than the US$ 23 billion in the fourth quarter of 2017. For U.S. stocks, the share buyback began to again gain traction after 2008, slowly rising to its apex in the first quarter of 2018.

Cryptocurrencies Creep into the Middle East

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Banking behemoth J.P. Morgan Chase disclosed its own digital currency called JPM Coin. The digital token will be used to settle payments between clients. JPM Coin will be backed by physical U.S. dollars and be based off Quorum. Quorum is J.P. Morgan’s private Ethereum-based chain. JPM Coin plans to compete with Ripple, which created XRP, another digital currency that is used for settlements. Ripple’s main target market is cross-border payments and remittances.

The Central Bank of the United Arab Emirates and the Saudi Arabian Monetary Authority have unveiled their plans for Aber, an interbank digital currency. Both banks have indicated that Aber will be limited to financial settlements using distributed ledger technologies. It will be rolled out on a probational basis, and used by select banks within the two countries. A date for rollout has not yet been declared. A joint statement hinted at a broader application of the currency in the days ahead. If “no technical obstacles are encountered, economic and legal requirements for future uses will be considered.”‏ Blockchains and Distributed Ledgers technologies will be employed. The plan is for ‘Proof-of-Concept’ testing, which involves studying and fully comprehending the ways modern technologies can achieve practical applications. The digital currency has the potential to become a reserve system for central payments.

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CPPIB Inks Partnership Vehicle with La Française and its Shareholder CMNE

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La Française and Canada Pension Plan Investment Board (CPPIB) formed a strategic partnership for the launch of a real estate investment and development vehicle: Société Foncière et Immobilière du Grand Paris. The joint venture between CPPIB (80%) and Caisse Fédérale du Crédit Mutuel Nord Europe (CMNE) (20%), La Française’s shareholder, will invest in major real estate projects linked to the Grand Paris infrastructure in the Greater Paris area. The parties will initially allocate €387.5 million in equity to the venture. The partnership will target regeneration and infrastructure-led investments.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Norges Bank Governor Voices Opinion on Relaxing SWF Withdrawals over Specific Uses

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Øystein Olsen, the Governor of Norges Bank, which oversees the Norway Government Pension Fund Global (GPFG), voiced his opinion on the Norwegian government’s plans to alter the rules that regulates the country’s SWF withdrawal rules in certain circumstances. The coalition government led by Norwegian Prime Minister Erna Solberg wants to relax the limits on SWF withdrawals in specific cases. Norway’s government seeks to raid the fund to pay for the replacement of four major state buildings impacted by a terrorist attack and a crashed Royal Norwegian Navy frigate (KNM Helge Ingstad).

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