Daily Agenda: Draghi Under the Microscope

HSBC and China Railway Corp. earnings disappoint; AIG among U.S. large-caps reporting today.


Martin Leissl

In light of the recent surprise moves by the Bank of Japan and the Riksbank, Sweden’s central bank, market watchers are wondering whether or not the European Central Bank will announce more policy adjustments during its monthly rate announcement this week. For now, many strategists appear to doubt that ECB president Mario Draghi will move the needle any further despite low activity and inflation levels as European leadership continues to quibble over growth-oriented structural and budgetary shifts. Société Générale’s economic research group wrote, in a note released this morning, “The ECB is set to maintain the status quo and the comprehensive assessment of bank balance sheets will be welcomed by President Draghi, but it will not fix the weakness in credit demand nor prevent the ECB from easing further in due course.”

Mixed data comes out of China. Final October HSBC/Markit purchasing managers’ index (PMI) data moved up slightly to 50.4, up from 50.2 in September, for a three-month high. Official October nonindustrial purchasing managers’ index (PMI) contracted to 53.8 from 54.0 in September, however, a nine-month low, according to the National Bureau of Statistics. Separately China Railway Corporation, the nation’s primary railway operator, posted a total after-tax loss of 3.44 billion yuan ($560 million) for the first nine months of the year, roughly double the loss reported for the same period in 2013. Despite the losses the company plans to continue aggressive investment as the central government continues to allocate subsidies toward railway expansion.

U.K. factory data surprises up; euro zone to the downside. U.K. Markit manufacturing PMI data released today registered an unexpected jump for October with the headline index at 53.2, compared to 51.5 in September. Final October manufacturing PMI for the euro zone came in below forecasts at 50.6 with primary economies including France and Italy facing contractions in activity. According to the most recent notes released by the Bank of England, the challenge facing the U.K. economy is slack demand from continental Europe.

HSBC earnings report reveals stumbles. In an earnings release statement this morning, HSBC, the largest European bank by assets, posted lower-than-forecast third-quarter profits and announced in excess of $1 billion in reserves to settle currency price manipulation fines and claims. Company management also highlighted the increasing cost of meeting regulatory compliance in the various markets where the bank operates.

U.S. earnings announcements continue on. American International Group is among the large-cap U.S. equities releasing quarterly earnings after the market close. Analysts’ consensus forecasts show the insurer reporting strong earnings. Yet investors are still distracted by the ongoing $40 billion lawsuit brought by former CEO Hank Greenberg’s Starr International against the federal government.

Drop forecast for U.S. manufacturing; auto sales data predicted to show uptick. October manufacturing ISM data will be released this morning with consensus forecasts for a marginal drop after a large contraction in September. Total October U.S. vehicle sales from research firm Autodata will also be released, with forecasts for an increase from September’s slide to an annual pace of 16.4 million, despite expanding automotive credit levels.

Portfolio Perspective: Investing in Business Development Companies as a Proxy for Private Equity and Venture Capital Grier Eliasek, Prospect Capital Corp.

The longer the stock market bull run continues, the more worried investors will get about preserving capital in anticipation of the next bear market — and the more they’ll want to find for other investments outside of traditional stock and bonds. High-net-worth investors and institutions can diversify their portfolios into noncorrelated alternative assets such as private equity funds, hedge funds, venture capital and infrastructure. But those are off limits to retail investors who typically cannot meet the large investment minimums. Non-accredited investors may want to consider investing in publicly traded business development companies (BDCs) as a proxy for private equity and venture capital.

Like venture capital and private equity funds, BDCs invest in small, private companies by lending money and/or buying a stake in their business in hopes of nurturing their growth and then selling for a profit. The major advantage of investing in BDCs over venture capital and private equity funds is that they are fully transparent, liquid and use leverage limited to 1.0x debt to equity. Unlike venture capital that invests in startups, BDCs typically lend to stable companies across a wide range of industries that survived the 2008–’09 financial crisis. Even better, BDCs have no lock-up periods or investment minimums because their shares trade on the open market.

Grier Eliasek is the president and chief operating officer at New York–based Prospect Capital Corp., a firm that provides private debt and equity capital.