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Aon Retirement and Investment Blog

Weekly Update - 1 December 2014 (UK/Europe)


  • UK Risk Settlement Q3 Flash Report. 2014 has already been a record year for both the bulk annuity and longevity markets in the UK. This report outlines the business completed thus far this year, a change in the landscape regarding providers and explains several of our new services, which fit very well with a busier market.
  • Private Market Real Estate Investment Options for Defined Contribution Plans: New and Improved Solutions. Investment vehicles using private real estate have, historically, been largely unavailable to defined contribution (DC) plan participants, but that is now changing. The maturation of daily-valued private real estate funds, along with a shift in DC plans toward the use of multi-asset portfolios such as custom target-date and objective-based funds, has introduced a new investment environment that is now well positioned to incorporate private market investment vehicles into a DC investment plan.
  • Operational Risks and your Custodian: A Perfect Match?  This paper identifies the operational risks that institutional investors face—specifically those risks that come with safekeeping, monitoring, and reporting on a plan’s assets—and discusses the implications for evaluating custodians. Whether a plan utilizes separate accounts, requires consolidated reporting, or needs assistance with benefit payments, cash movement, or private asset reporting, most institutional investors rely heavily on the custodian bank to provide operational support for the investment program. Therefore, institutional investors should evaluate a custodian’s capabilities through an operational risk lens.
  • Radar.  A summary of regulatory and industry events in Canada affecting talent, retirement, and health for the two weeks ending November 20, 2014.
  • December Investment Strategy Webinar.  Please join us on December 10th to discuss recent research. Sign up for the webinar here


  • Global equity markets provided modest but positive returns over the week as investors reacted to the People's Bank of China's interest rate cut and economic data was good on the whole despite some pockets of slowing momentum. The MSCI AC World Index returned 0.3% in sterling terms. The most notable market move of the week was the sharp slump in oil prices as OPEC, the international oil cartel, announced that they would not cut output to prop up oil prices. This weighed on UK equities, due to their resource sector tilt, which were the worst performing in local currency terms (-0.5%). The best performing region in local currency terms (1.5%) was Asia Pacific ex. Japan, which includes emerging markets. The best performing region in sterling terms was developed Europe ex. UK (1.8%) whilst the worst performing in sterling terms was developed Asia Pacific ex Japan (-0.5%).
  • UK government bond yields were again lower at all maturities. The 10 year UK gilt yield was 12 bps lower at 1.93% whilst the 20 year gilt yield fell by 16 bps to 2.49%. The 10 year US Treasury yield fell by 12 to 2.20%.
  • UK real yields fell over the week. The UK 20 year real yield fell by 12 bps to           -0.66% and the Over 5 year real yield fell by 11 bps to -0.67%. 20 year breakeven inflation was 4 bps lower to finish the week at 3.15%.
  • Credit spreads widened over the week across both developed and emerging markets. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was 2 bps higher at 120 bps. US high yield bond spreads over Treasuries rose by 10 bps to 464 bps. The Emerging Market ($) bond spread over Treasuries rose by 4 bps to 310 bps.
  • The S&P GSCI Commodity Index fell by 8.2% in USD terms over the week, driven by OPEC's decision not to curtail oil production. The Energy sector was down by 11.5% as the price of Brent crude oil fell by 9.2% to $72/BBL. Industrial Metals were 3.8% lower over the week with the copper price sinking to $6,412/MT. Agricultural prices were up by 0.7%. Gold was 1.9% lower over the week at $1,182/ounce.
  • Currency returns were mixed over the week. The US dollar appreciated by 0.1% over the week versus sterling, ending the week at $1.57/£ and the euro finished the week 0.5% higher at €1.26/£. The Japanese yen was again lower on the week against the US dollar depreciating by 0.9% to ¥118.7/$.

  • The headline-grabbing US data last week was on the strong side of expectations but there were a couple of areas of moderate disappointment.  On the positive side, the third quarter GDP growth estimate was revised up to a quarterly annualised 3.9% from 3.5%, beating consensus expectations of a 3.3% growth rate. In the detail, consumer spending growth was revised up to 2.2% from 1.8%, also beating expectations. Furthermore, the closely watched durable goods orders data revealed an increase of 0.4% in October, following a 0.9% fall. This consensus beating figure came mainly from aircraft and defence orders, however. Stripping these very volatile sectors out, orders actually fell by 0.4%, in contrast to expectations of a 0.5% increase. Elsewhere, house price increases, as measured by the S&P/Case Shiller 20 city composite index, eased off a touch to 4.9% year-on-year in September from 5.7%, but this was still ahead of market expectations of a slowdown to 4.6%. Clearer disappointment came from the consumer confidence index, which fell unexpectedly to 88.7 in November from 94.1 previously. This indicator normally responds well to labour market figures, which have been quite strong in recent months, so the latest fall must be based on factors such as the end of quantitative easing. Finally, the November Chicago Purchasing Managers’ Index fell to 60.8 from 66.2, contrary to expectations of a smaller fall to 63. Overall, the indicators paint a picture of ongoing growth in the US economy, but with indications of slowing momentum in places.
  • In the UK, third quarter GDP growth was left unrevised at 0.7% quarter-on-quarter or 3% year-on-year. However, the detail revealed an upward revision to consumer spending growth by 0.2 percentage points to 0.8%. Meanwhile, the Nationwide house price index increased at a slower 0.3% pace in November compared with October’s 0.5% increase. The UK economy is also growing healthily albeit with slowing momentum.
  • In Europe, the main news was ECB President Mario Draghi’s heavy hints at further monetary easing policies in the coming months, which boosted the equity markets. In terms of the data, consumer price inflation fell back again to a cycle low of 0.3% in November from 0.4%. Core inflation, which strips out volatile food and energy prices, was a little stronger at 0.7%. Similarly, German inflation fell to a very low 0.5% from 0.7%, implying that the ECB will have to work hard to get inflation back to its target of 2%. However, there was some brighter news from the IFO business climate survey for November. The index rose to 104.7 from 103.2, contrary to expectations of a small decline, with both the current conditions and future expectations components indicating better conditions and optimism.
  • In Japan, economic data was mixed on the whole. Small business confidence experienced a small uptick in October, rising to 47.7 from September’s 47.4 and narrowly beating consensus expectations (47.5). Industrial production for October also surprised on the upside, rising 0.2% month-on-month over September’s level whilst analysts had expected a contraction of 0.6%. However, retail trade shrank over October by 1.4% against expectations of a smaller decline of 0.5%. Finally, CPI inflation continued to edge lower, with October’s headline inflation dipping to 2.9%. It’s worth noting, however, that the effect of April’s sales tax hike has artificially boosted the inflation numbers and the underlying rate is much less impressive. The timelier Tokyo data show that core inflation in the capital decreased from 2.1% in October to 1.8% in November.
  • Finally, in China, there was little of note in terms of economic data releases but the markets were boosted by a surprise interest rate cut by the central bank.

The information contained above is intended for general information purposes only and should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.

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