Bejing, Politics, and the Institutional Investor

One of the largest and fastest growing economies on the planet is about to get new leaders – what will this mean for the rest of us – and our assets?

(November 14, 2012) — Political changes in one of the world’s largest economies could shake up the performance of some assets held in institutional portfolios, analysts at Societe Generale have warned.

This week, the Communist Party of China is set to confirm its new leadership – the outgoing President Hu Jintao has said the congress had “replaced older leaders with younger ones.” The process, which happens every ten years, will see new leaders face the relative slowdown in the country’s economy, which had become a point of concern in financial markets earlier this year.

Over the 10-year tenure of the previous leadership, China achieved GDP growth of over 10%, on average, each year while maintaining low interest rates. Analysts at Societe Generale said this environment had changed and the new leadership needed a new growth model.

Analysts said: “Reforms to rebalance the Chinese economy from an investment-led exporting model towards consumption should contribute to a moderate rise in commodity prices in the mid-term, in the absence of massive investment stimulus measures.”

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They added that as China has become the main importer for many commodities, the country remained the most significant pricing factor in numerous commodities markets.

A survey by Bank of America Merrill Lynch this week showed investors were concerned about this asset class and had slightly reduced their holding over the past month.

Outside of commodities and other exports and output, the Chinese consumer could also be a powerful stimulant to equities markets.

Societe Generale analysts said: “Provided that new Chinese leaders implement the necessary reforms to boost household consumption, the consumer discretionary sector should continue to catch up in China.”

However, the French bank’s team cautioned investors against Chinese banking stocks as the sector faced downside risk due its exposure to potential deterioration in property prices.

The team added that the outgoing Chinese president had said the nation should seek to double economic growth and per-capita income for both rural and urban populations by 2020, from where it had been in 2010.

A problem the new leadership is likely to have to face, according to the Societe Generale team, is a growing feeling of inequality and corruption in the country that has already led to significant unrest.

The new leadership is to be unveiled tomorrow.

US Labor Department Settlement Collects Millions for Madoff Victims

The Department of Labor has announced a $217 million settlement with four companies to resolve a string of lawsuits over Madoff losses.

(November 14, 2012) — The Department of Labor (DoL) has settled with four companies to resolve a string of lawsuits over losses from investments in Bernard L. Madoff Securities’ Ponzi scheme.

The amount of the settlement: $217 million. It is currently pending approval by the US District Court in New York.

According to a statement by the DoL, the settlement was reached with Ivy Asset Management, which is a unit of the Bank of New York Mellon, along with JP Jeanneret Associates, Beacon Associates Management, Andover Associates Management, and their former and current owners and executives. The suit alleged the four firms and their owners and principals “misrepresented and concealed doubts and suspicions” about investment in the Madoff trading strategy.

The DoL sued the firms for alleged violations of the Employee Retirement Income Security Act. The suit alleged that they “breached their fiduciary duties to a number of benefit plans by recommending, making and maintaining investments with Madoff, thus losing hundreds of millions of dollars in assets needed for the pension and health benefits of thousands of workers.”

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The statement notes that Ivy Asset Management and defendants Lawrence Simon, Howard Wohl, Adam Geiger and Larry Fred Sloan agreed to pay $210 million. Jeanneret and its owners, John P. Jeanneret and Paul Perry, agreed to pay $3 million, and Beacon owner Joel Danzinger and Harris Markoff, owner of Andover, agreed to pay $3.5 million and drop a claim of $3.3 million for management fees.

“The settlement agreement we’re announcing today provides a measure of justice for those Americans who worked hard to prepare for their retirement and then saw hoped-for stability disappear,” said Secretary of Labor Hilda L. Solis in the statement. “My department is committed to ensuring that workers and retirees receive the benefits they’ve earned and deserve. If approved by the court, this settlement, combined with expected payments from the Madoff bankruptcy estate, will allow worker benefit plans impacted by Bernard Madoff’s illegal and reprehensible scheme to recover all, or nearly all, of the money they invested with him.”

Ivy Asset Management’s Chief Restructuring Officer and Chief Investment Officer Douglas W. Squasoni said in a statement that “Ivy is pleased to have reached an agreement that allows it to put these matters behind it.”

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