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Survey Reveals Global Asset Owners Still View Trade Wars as the Largest Tail Risk

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According to the quarterly SWFI Global Asset Owner Survey conducted in May 2018, sovereign funds, endowments and pensions take the observation that trade wars and increased protectionism is currently the biggest tail risk, a similar response from the March 2018 survey results. The survey was conducted before the June G-7 conference in Quebec in which U.S. President Donald Trump considered pulling the U.S. out of the group. Trump also accused Canadian Prime Minister Justin Trudeau, the host nation of the G-7 conference, of “false statements,” after the Canadian Prime Minister had remarks at a news conference. Trump tweeted after the G-7 meeting, “”PM Justin Trudeau of Canada acted so meek and mild during our @G7 meetings only to give a news conference after I left saying that, ‘US Tariffs were kind of insulting’ and he ‘will not be pushed around,'” Trump added. “Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy!”

German Foreign Minister Heiko Maas countered Trump’s remarks asking European nations to stick together, saying in a statement to reporters in Berlin, “It’s actually not a real surprise. We have seen this with the climate agreement or the Iran deal. In a matter of seconds, you can destroy trust with 280 Twitter characters. To build that up again will take much longer.”

The G-7 (Group of Seven) is a group of countries that include U.S., Japan, Canada, United Kingdom, Germany, France and Italy. The survey revealed that geopolitical risk and interest rate risk were key risks toward global financial stability.

Asset owners in the survey indicated an overweight in geographic asset allocation to Japan, India and Europe ex-UK in the next 12 months. Asset owners were bearish on allocations to listed infrastructure, gold and commodities, while bullish on credit strategies, active emerging market equities, active U.S. equities, active international equities, private real estate and cash.

Earnings Growth

Reaching a new level, 50% of respondents voted for seeing better earnings expectations for listed companies.

The quarterly survey targets sovereign funds, pensions, endowments, superannuation funds, foundations, government funds and other asset owners. Totaled estimated survey sample size was over US$ 1.14 trillion of assets under management.

According to Michael Maduell, president of SWFI, “Clearly, trade disputes among Western nations and interest rate risks are key concerns for global asset owners. Sovereign funds and pensions continue to seek out conviction managers in emerging market and international equities that can outperform. Last, Japan and India continue to attract institutional investor allocations.”

More About the Global Asset Owner Survey

This is SWFI’s fourth quarterly survey for asset owners. To participate in the next quarterly survey, CONTACT research@swfinstitute.org.

Maiden Lane I Ends, Federal Reserve Aims to Shrink Balance Sheet

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The U.S. Federal Reserve’s balance sheet has been set to decline automatically since 2017, as the central bank has been liquidating funds from its US$ 4 trillion in Treasury bonds and mortgage-backed securities. As holdings matured, the Fed refrained from reinvesting them. This amounts to US$ 40 billion in monetary tightening monthly. Meanwhile, interest rates have slowly, and continuously, risen. The maturation of these Fed assets could exert upward pressure on long-term yields.

Mortgage rates, applications, and home sales have been falling, likely due to the rising rates. While rates are still historically low, U.S. President Trump has criticized the rate hikes. However, the Fed has no interest in changing course, and rates are set to continue to rise. According to Fed meeting minutes, “The Chairman suggested that the Committee would likely resume a discussion of operating frameworks in the fall.”

The size and content of the Fed balance sheet going forward will be a point of discussion for Chairman Jerome Powell. While there is no end in sight for the Fed’s plans to tighten economic policy, changing conditions may warrant further examination. With the U.S. stock market thriving, there is no indication that tightening has had a material impact on the economy. However, conventional wisdom asserts that the Fed will raise rates “until something breaks.” Market commentators have also suggested that, in the event of an emergency, the Fed will have a harder time stepping in due to the size of its balance sheet. A large part of the Fed’s monetary strategy is based around communications, and Fed-watchers have made a habit of hanging on every word. The Fed announced a shrinking balance sheet well in advance, and made gradual moves in that direction. The process has been smooth thus far. The Fed’s tightening will reach its peak, US$ 50 billion, in October. It is unclear exactly how much stimulus is still needed in the economy to reach the Fed’s 2% inflation target. The Fed’s easing policies have been criticized for the lopsided benefits they provided, more for Wall Street than Main Street. However, the easing will reduce their role in the market.

The End of Maiden Lane I

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QIA Gets a New CEO

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Sheikh Abdullah Bin Mohammed Al-Thani exited as CEO of the Qatar Investment Authority (QIA). He has been appointed as minister of state by Amiri Order No. (4) of 2018.

Mansoor bin Ebrahim Al-Mahmoud is appointed as the new CEO of QIA. He held positions in various organizations such as CEO of Qatar Development Bank and worked at Qatar Museums.

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SWFI First Read, September 19, 2018

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QIA Eyes Investment in Chinese Lender Lufax

The Qatar Investment Authority (QIA) is in talks about a possible investment into Shanghai-based Lufax, one of China’s largest online lenders. The seller of the possible stake is China’s Ping An Insurance (Group) Co. Ltd. Lufax’s official name is Shanghai Lujiazui International Financial Asset Exchange Co. Ltd.

Wealth Funds Back Hotpot Giant

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