Monthly Shareholder Report - December 2014

RNS Number : 8080C

BH Macro Limited

21 January 2015

 



		BH MACRO LIMITED MONTHLY SHAREHOLDER REPORT: DECEMBER 2014 YOUR ATTENTION IS DRAWN TO THE DISCLAIMER AT THE END OF THIS DOCUMENT

BH Macro Limited	Overview
Manager: Brevan Howard Capital Management LP ("BHCM") Administrator: Northern Trust International Fund Administration Services (Guernsey) Limited ("Northern Trust") Corporate Broker: J.P. Morgan Cazenove Listings: London Stock Exchange (Premium Listing) NASDAQ Dubai - USD Class (Secondary listing) Bermuda Stock Exchange (Secondary listing)	BH Macro Limited ("BHM") is a closed-ended investment company, registered and incorporated in Guernsey on 17 January 2007 (Registration Number: 46235). BHM invests all of its assets (net of short-term working capital) in the ordinary shares of Brevan Howard Master Fund Limited (the "Fund"). BHM was admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 14 March 2007.
	Total Assets:	$1,762 mm¹
	1. Estimated as at 31 December 2014 by BHM's administrator, Northern Trust.
Summary Information	BH Macro Limited NAV per Share (estimated as at 31 December 2014)
	Share Class NAV (USD mm) NAV per Share USD Shares 377.9 $20.62 EUR Shares 128.8 €20.71 GBP Shares 1,255.5 £21.39
	BH Macro Limited NAV per Share % Monthly Change
	USD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2007 0.10 0.90 0.15 2.29 2.56 3.11 5.92 0.03 2.96 0.75 20.27 2008 9.89 6.70 -2.79 -2.48 0.77 2.75 1.13 0.75 -3.13 2.76 3.75 -0.68 20.32 2009 5.06 2.78 1.17 0.13 3.14 -0.86 1.36 0.71 1.55 1.07 0.37 0.37 18.04 2010 -0.27 -1.50 0.04 1.45 0.32 1.38 -2.01 1.21 1.50 -0.33 -0.33 -0.49 0.91 2011 0.65 0.53 0.75 0.49 0.55 -0.58 2.19 6.18 0.40 -0.76 1.68 -0.47 12.04 2012 0.90 0.25 -0.40 -0.43 -1.77 -2.23 2.36 1.02 1.99 -0.36 0.92 1.66 3.86 2013 1.01 2.32 0.34 3.45 -0.10 -3.05 -0.83 -1.55 0.03 -0.55 1.35 0.40 2.70 2014 -1.36 -1.10 -0.40 -0.81 -0.08 -0.06 0.85 0.01 3.96 -1.73 1.00 -0.08* 0.08*
	EUR Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2007 0.05 0.70 0.02 2.26 2.43 3.07 5.65 -0.08 2.85 0.69 18.95 2008 9.92 6.68 -2.62 -2.34 0.86 2.84 1.28 0.98 -3.30 2.79 3.91 -0.45 21.65 2009 5.38 2.67 1.32 0.14 3.12 -0.82 1.33 0.71 1.48 1.05 0.35 0.40 18.36 2010 -0.30 -1.52 0.03 1.48 0.37 1.39 -1.93 1.25 1.38 -0.35 -0.34 -0.46 0.93 2011 0.71 0.57 0.78 0.52 0.65 -0.49 2.31 6.29 0.42 -0.69 1.80 -0.54 12.84 2012 0.91 0.25 -0.39 -0.46 -1.89 -2.20 2.40 0.97 1.94 -0.38 0.90 1.63 3.63 2013 0.97 2.38 0.31 3.34 -0.10 -2.98 -0.82 -1.55 0.01 -0.53 1.34 0.37 2.62 2014 -1.40 -1.06 -0.44 -0.75 -0.16 -0.09 0.74 0.18 3.88 -1.80 0.94 -0.07* -0.14*
	GBP Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2007 0.11 0.83 0.17 2.28 2.55 3.26 5.92 0.04 3.08 0.89 20.67 2008 10.18 6.86 -2.61 -2.33 0.95 2.91 1.33 1.21 -2.99 2.84 4.23 -0.67 23.25 2009 5.19 2.86 1.18 0.05 3.03 -0.90 1.36 0.66 1.55 1.02 0.40 0.40 18.00 2010 -0.23 -1.54 0.06 1.45 0.36 1.39 -1.96 1.23 1.42 -0.35 -0.30 -0.45 1.03 2011 0.66 0.52 0.78 0.51 0.59 -0.56 2.22 6.24 0.39 -0.73 1.71 -0.46 12.34 2012 0.90 0.27 -0.37 -0.41 -1.80 -2.19 2.38 1.01 1.95 -0.35 0.94 1.66 3.94 2013 1.03 2.43 0.40 3.42 -0.08 -2.95 -0.80 -1.51 0.06 -0.55 1.36 0.41 3.09 2014 -1.35 -1.10 -0.34 -0.91 -0.18 -0.09 0.82 0.04 4.29 -1.70 0.96 -0.07* 0.23*
	Source: Fund NAV data is provided by the administrator of the Fund, International Fund Services (Ireland) Limited. BHM NAV and NAV per Share data is provided by BHM's administrator, Northern Trust. BHM NAV per Share % Monthly Change is calculated by BHCM.  BHM NAV data is unaudited and net of all investment management fees (2% annual management fee and 20% performance fee) and all other fees and expenses payable by BHM. In addition, the Fund is subject to an operational services fee of 50bps per annum. NAV performance is provided for information purposes only. Shares in BHM do not necessarily trade at a price equal to the prevailing NAV per Share. *Estimated as at 31 December 2014 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
ASC 820 Asset Valuation Categorisation*	Brevan Howard Master Fund Limited
	Unaudited estimates as at 31 December 2014
	% of Gross Market Value* Level 1 62.4 Level 2 37.1 Level 3 0.5
	Source: BHCM * These estimates are unaudited and have been calculated by BHCM using the same methodology as that used in the most recent audited financial statements of the Fund. These estimates are subject to change. Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets. Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.
Annual Manager Review: 2014	Manager Update - Brevan Howard Capital Management LP Brevan Howard Capital Management Limited, as general partner of Brevan Howard Capital Management LP (the "Manager"), is the parent of the Brevan Howard group and is responsible for overseeing its investment management activities globally. The Manager's key focus in 2014 remained unchanged - developing and maintaining a robust institutional operating platform capable of supporting our global trading activities and servicing the needs of our clients. In 2014, the Manager's development over recent years of a centralised global governance, risk and control framework headquartered in Jersey helped facilitate the smooth implementation of the new requirements of the European Alternative Investment Fund Managers Directive. The Manager registered as the central Alternative Investment Fund Manager ("AIFM") of the Brevan Howard group in July and was required to make very few changes to its day-to-day operations in order to satisfy the provisions of this Directive. This reinforces our belief that Brevan Howard has developed a "best of breed" operational framework. As detailed further in the Investment Manager Review below, DW Partners LP ("DW") took over the management of the Brevan Howard Credit Catalysts Funds and the Brevan Howard Credit Value Funds on 1 January 2015. DW was already the investment manager of those funds and will continue to have a close operating relationship with Brevan Howard. Brevan Howard holds an economic interest in DW and DW will remain an investment manager of Brevan Howard Master Fund Limited, so we remain strongly interested in the on-going success of DW's business. Looking forward to 2015, the Manager will continue to develop its global trading business to facilitate efficient deployment of fund capital and resources to where they are most effectively utilised by our trading talent. We will also seek to ensure that the business remains in a position to respond to on-going market and regulatory change without compromising our core trading strengths or service to clients. We thank you for your continued support. James Vernon, Group COO
Annual Investment Manager Review: 2014	The USD shares of BH Macro Limited ended 2014 up an estimated 0.08%. BH Macro Limited invests all of its assets (net of short-term working capital) in the ordinary shares of Brevan Howard Master Fund Limited (the "Fund"). Over the course of the year the Fund lost 3.1% in equities with almost all of that loss occurring in the first quarter as we entered 2014 long the Nikkei which fell almost 15% in the early part of the year. We lost a further 4.4% in US rates as we continued to hold short positions along the curve throughout much of 2014 in anticipation of a more hawkish Fed stance. Offsetting these losses we made 1.8% in European rates as the ECB finally cut deposit rates to negative, as we had been anticipating for over a year. We made the bulk of our FX gains following the ECB's rate cut by being long the USD vs European currencies and to a lesser extent the JPY bringing us to positive 3.5% in FX for the year.  Credit trading contributed a further 0.9% for the year. Despite the Fund's performance last year, I am encouraged by two things; firstly, that although our two biggest risk exposures at the start of the year, in the form of long Nikkei and short the US curve, went violently against us, we contained our losses while continuing to carry sufficient risk so as to benefit substantially when market conditions finally turned in our favour in September. Secondly, while it took us almost 8 months to lose 5%, we were able to make that loss back in just over a month without particularly large market dislocations and starting from a very modest level of risk. Indeed, by the end of August our VaR was near historic lows but September's return was the Fund's 6th best monthly return since inception. Both these observations reinforce my belief that our ability to manage our risks, create asymmetry of returns and make significant profits remains undiminished. On the business side, the Fund's trading team remains largely unchanged from last year. We have been far less active than in previous recent years in hiring, mainly because we're happy with the trading talent we already have. Notwithstanding the small overall loss suffered by the Fund, most of our traders ended the year comfortably up and none hit their annual stop loss levels in spite of a very difficult environment for macro trading. Having said that, we have hired a small number of new traders in specific areas such as FX and US rates, in order to take advantage of the attractive trading opportunities I expect to develop in those markets. There may be some further minor tweaks to the trading team, but we have no plans for any major recruitment initiatives. As has been widely reported, on 1 January 2015 we transferred management of the Brevan Howard Credit Catalysts Fund and the Brevan Howard Credit Value Fund to DW Partners LP ("DW"). The growth of these funds and the DW team had made it increasingly obvious that it no longer made sense for a large, complex US-based business to have its support and risk oversight functions mainly undertaken in Jersey and London. We therefore came to the conclusion with DW that streamlining the operational support platform and decision-making process by transferring the management of these funds to DW was in the best interests of all stakeholders, including of course those of the funds' investors. Our working relationship with David Warren and his team as regards furthering investor interests and maximising returns for all Brevan Howard and DW mandates remains unchanged. Brevan Howard retains its economic stake in DW and DW will continue to manage money for certain Brevan Howard Funds. I am very excited about this development which will allow DW and Brevan Howard to each focus on their core strengths while continuing to collaborate closely. Looking forward, the opportunity set for macro trading appears to be improving markedly. The US economy turned the corner last year. Although there are cross-currents that may affect the exact timing of the lift-off in interest rates, the Fed appears committed to begin to normalize policy this year. In stark contrast, the Euro area has slipped into deflation and suffers from a chronic lack of demand. The economic differences between the US and Euro area should continue to put pressure on the exchange value of the Euro. Policy actions only add to the pressure as the ECB seems on the precipice of large-scale sovereign bond purchases. European elections add an additional dimension of uncertainty to the policy backdrop. In Greece and Spain, populist political parties are running strong on calls to relax fiscal austerity, and, in the case of Greece, debt renegotiation. Similarly, populist sentiment in the UK could exacerbate tensions with Europe on a range of issues that may spill over into asset pricing. In Japan the scale of commitment to QE is quite extraordinary.  As we enter 2015, Japanese five-year yields have fallen to zero and it's hard to imagine that such dramatic policy-led moves will not have further significant impacts on other markets. Reforms in government pension plans and corporate governance could be additional positives for Japanese equities. The collapse in oil prices appears to be a net benefit to global growth that creates many winners and losers. Oil importers like China and Japan benefit. The net benefit in the US is smaller because of its large energy sector, whereas the oil exporters in the Middle East, Russia, Nigeria and Venezuela will likely suffer. Perhaps just as important as the direct impact of lower oil prices is how central banks are responding. The Fed appears to a large extent to be looking through the oil price shock, maintaining a relatively hawkish reaction function. However, the ECB and Bank of Japan are doing the opposite, easing further because actual inflation and inflation expectations are falling too much. These different reaction functions could cause large moves in asset prices. Indeed, the increasing divergence between the major global economies and their respective central bank policies is a significant change in the status quo seen over the last few years. When the major economies were all performing poorly and policy everywhere was stuck at the zero lower bound, the opportunity set for trading was fairly limited. The new environment we see in 2015 should lead to increased levels of volatility across multiple asset classes and geographies and paves the way for large moves in FX markets, as we are already starting to see. We intend to take full advantage of these developments. In the meantime, as always, I would like to thank our investors for their continued support and confidence and I look forward to a successful 2015. Yours sincerely,       Alan Howard
Annual Performance Review: 2014	The information in this section has been provided to BHM by BHCM Performance by Asset Class 2014 performance comments by asset class for the Fund Rates Overall, the Fund's performance in interest rate trading was negative. The majority of the losses came from directional and curve trading in USD interest rate markets. The Fund made gains in EUR directional and curve trading mainly in the second and third quarters, as well as smaller gains in GBP directional trading as well as volatility strategies. FX The Fund's performance in FX trading was positive, with most of the gains generated in the third quarter. The Fund had an average exposure of approximately 50% of NAV, with more risk being deployed in the second half of the year. The majority of the gains came from macro FX trading, mostly from being long the USD vs. a basket of other currencies, in particular the Swiss Franc, the Euro and the Yen. Equity Overall, the Fund's performance in equity trading was negative particularly in January and February. During this period the losses mainly came from long positions in Japanese equity indices and to lesser extent from short positions in the S&P 500. Overall in the second half of the year, equity trading detracted a small amount from Fund performance: small gains mainly through long positions in Japanese equity indices were more than offset by small losses from long positions in European equity indices and shorts in the S&P 500. Commodity The Fund's commodity risk in 2014 was very low. The Fund suffered very small losses in precious metals. Credit The Fund made small gains in credit in 2014 mainly from trading US asset-backed securities and mortgage-backed securities, in particular agencies. Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by asset class 2014 Rates FX Commodity Credit Equity Discount Management Total January 2014 -0.72 0.62 0.06 0.12 -1.44 0.00 -1.36 February 2014 -0.05 -0.69 -0.07 0.36 -0.68 0.03 -1.10 March 2014 0.07 -0.36 -0.06 0.07 -0.15 0.03 -0.40 April 2014 -0.41 -0.32 0.01 0.09 -0.44 0.25 -0.81 May 2014 -0.25 -0.06 -0.04 0.16 -0.07 0.18 -0.08 June 2014 0.37 -0.61 -0.01 0.09 -0.14 0.23 -0.06 July 2014 0.24 0.51 -0.02 -0.06 0.00 0.18 0.85 August 2014 -0.57 0.49 -0.02 0.10 -0.14 0.14 0.01 September 2014 1.00 2.69 0.00 -0.15 0.38 0.04 3.96 October 2014 -1.22 -0.32 0.01 0.05 -0.37 0.14 -1.73 November 2014 -0.06 0.74 -0.01 0.08 0.16 0.10 1.00 December 2014 -0.29 0.41 -0.03 0.02 -0.27 0.08 -0.08 Q1 2014 -0.70 -0.43 -0.07 0.54 -2.26 0.07 -2.83 Q2 2014 -0.29 -0.99 -0.04 0.35 -0.64 0.66 -0.95 Q3 2014 0.67 3.72 -0.03 -0.11 0.24 0.36 4.85 Q4 2014 -1.58 0.83 -0.04 0.15 -0.49 0.32 -0.82 2014 -1.89 3.10 -0.17 0.93 -3.12 1.41 0.08 Monthly, quarter-to-date and annual figures are estimated by BHCM as at 31 December 2014, based on total performance data for each period provided by the Fund's administrator, International Fund Services (Ireland) Limited. Figures rounded to two decimal places. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Monthly VaR of the Fund by asset class as a % of total VaR* Rates Vega FX Equity Commodity Credit Total January 2014 20 10 27 35 2 5 100 February 2014 24 15 34 14 5 7 100 March 2014 28 16 37 12 3 5 100 April 2014 42 17 18 13 5 5 100 May 2014 33 20 21 18 4 4 100 June 2014 42 20 15 14 5 5 100 July 2014 34 18 35 5 3 5 100 August 2014 29 14 43 9 3 4 100 September 2014 18 15 45 18 1 2 100 October 2014 12 13 37 33 1 3 100 November 2014 14 11 34 36 1 3 100 December 2014 20 13 46 17 1 3 100 Source: BHCM. Data as at 31 December 2014. * Calculated using historical simulation based on 1 day, 95% confidence interval. Performance by Strategy Group Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group Macro Rates FX EMG Equity Commodity Credit Systematic Discount Management Total January 2014 -1.16 -0.04 0.04 -0.23 -0.07 0.01 0.13 -0.03 0.00 -1.36 February 2014 -1.47 -0.01 -0.06 0.10 -0.03 0.03 0.31 0.00 0.03 -1.10 March 2014 -0.63 -0.02 -0.02 0.12 0.04 -0.02 0.11 -0.02 0.03 -0.40 April 2014 -1.03 -0.13 -0.00 0.02 -0.07 0.00 0.16 -0.01 0.25 -0.81 May 2014 -0.44 0.08 0.03 0.03 -0.02 0.01 0.04 0.01 0.18 -0.08 June 2014 -0.38 0.18 -0.06 -0.04 0.00 0.00 0.01 -0.00 0.23 -0.06 July 2014 0.45 0.05 0.04 0.08 0.04 -0.03 0.04 -0.00 0.18 0.85 August 2014 -0.43 0.07 0.03 0.07 0.07 0.00 0.04 0.01 0.14 0.01 September 2014 3.05 0.50 0.18 0.11 0.11 -0.09 0.05 0.00 0.04 3.96 October 2014 -1.52 -0.09 0.09 -0.02 -0.35 0.03 0.00 -0.01 0.14 -1.73 November 2014 0.51 0.29 0.04 -0.00 -0.01 -0.01 0.07 0.02 0.10 1.00 December 2014 -0.18 0.02 0.06 -0.11 0.02 -0.02 0.05 0.00 0.08 -0.08 Q1 2014 -3.23 -0.08 -0.03 -0.01 -0.06 0.02 0.55 -0.05 0.07 -2.83 Q2 2014 -1.84 0.13 -0.04 0.02 -0.09 0.02 0.20 -0.00 0.66 -0.95 Q3 2014 3.07 0.63 0.25 0.26 0.21 -0.12 0.13 0.01 0.36 4.85 Q4 2014 -1.20 0.22 0.18 -0.14 -0.34 0.01 0.12 0.01 0.32 -0.82 2014 -3.26 0.90 0.36 0.13 -0.27 -0.07 1.01 -0.02 1.41 0.08 Monthly, quarter-to-date and annual figures are estimated by BHCM as at 31 December 2014, based on total performance data for each period provided by the Fund's administrator, International Fund Services (Ireland) Limited. Figures rounded to two decimal places. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Methodology and Definition of Monthly Contribution to Performance: Attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected. The above strategies are categorised as follows: "Macro": multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates) "Rates": developed interest rates markets "FX": global FX forwards and options "EMG": global emerging markets "Equity": global equity markets including indices and other derivatives "Commodity": liquid commodity futures and options "Credit": corporate and asset-backed indices, bonds and CDS "Systematic": rules-based futures trading
Performance Review	The information in this section has been provided to BHM by BHCM
	During the month, the Fund suffered small losses in US interest rates trading and equity macro trading. These were partially offset by gains in FX and EUR interest rates.
Manager's Market Review and Outlook	The information in this section has been provided to BHM by BHCM
	US The US economy turned the corner last year. After a rocky start in the first quarter, real GDP growth averaged nearly 5% during the middle two quarters of the year with much of the momentum appearing to be maintained into the end of the year. A common misconception about the US business cycle is that the outturns have disappointed expectations. However, four out of the last five quarters have seen growth better than 3.5%, a solid performance marred by the weather-related disruptions to activity at the beginning of 2014. Forward-looking indicators point to robust consumption spending and modest expansions in business and residential investment. Government spending is expected to be a small positive after having been a big subtraction during the last few years of budget retrenchments at the federal, state and local levels. The external sector is a question-mark given the uncertainties about global growth and the impact of the appreciation in the exchange value of the US dollar. However, the negatives stemming from these forces should be outweighed by the positive impetus to real incomes from dramatically lower energy prices and easy financial conditions. Putting all the pieces together, real GDP growth in 2015 is expected to be approximately 3%. The labour market exceeded almost all expectations in 2014. The unemployment rate dropped 1.1 percentage points to close the year at 5.6%, just a few tenths above most economists' estimates of full employment. Job gains numbered nearly 3 million, the best performance since 1999. Broader measures of labour market slack improved noticeably as well. In 2015, the economy is anticipated to reach full employment by the middle of the year and the unemployment rate may drop below 5% by the end of the year. The evidence on wages has been mixed in the last few months so the incoming data will be monitored for signs that the labour market is tightening. Wages are anticipated to firm as the labour market operates closer to full employment. The downside of such impressive strides in the labour market is that productivity growth has languished. Slower productivity growth poses a long-term challenge to the economy. The 50% fall in oil prices is making inflation trends difficult to discern. Headline inflation is declining as the price-level shock is worked through. So long as oil prices stabilize, headline inflation is likely to eventually revert to its prior trend. At the same time, it is critical to monitor the stability of core inflation and inflation expectations. Market-based measures of inflation compensations have moved in lock-step with oil. However, surveys of inflation expectations have remained stable within historical ranges. Core inflation edged down to 1.4% in the latest release. Over the next couple of quarters core inflation may hover around 1.5%, balancing the countervailing impacts of a stronger economy and the pass-through of lower energy and import prices. By the end of 2015, it is expected headline inflation to be positive and core inflation to inch up. The tone in Washington will change with the Republicans controlling both houses of Congress. However, no significant progress on major legislation that President Obama opposes is expected. As a consequence, little change is expected and all eyes will turn to the Presidential election in two years to break the log-jam. By contrast, monetary policy will finally be in play in 2015. The Fed is committed to policy normalisation. There are some disagreements about the timing of the first rate increase, but almost everyone agrees that lift-off is within sight. Increasingly, the debate will turn to the appropriate pace of policy tightening, a contentious subject about which there is little agreement. EMU 2014 marked another disappointing year for the Eurozone economy. Indeed, both growth and inflation disappointed once again both ECB and consensus forecasts, as GDP growth expanded by approximately 0.8% while inflation fell to as low as 0.4% from 1.3% in 2013. Despite substantial additional monetary easing throughout the year that saw enhanced forward guidance, cuts in policy interest rates into negative territory and purchase programmes for private assets, the headline inflation rate in the euro area continued to decline: at year-end consumer prices were deflating at a rate of -0.2% y/y, implying rising risks of a deflationary spiral with rapidly falling inflation expectations recorded in financial markets. The achievement of the ECB definition of price stability of an inflation rate "close, but below 2%" looks as far away as ever.  The year ended on a turbulent note as the ECB Governing Council remained divided about the virtues of outright purchases of sovereign bonds while the Greek parliament was dissolved after it failed to elect a new president.  While the disinflationary tendencies were accelerated by the sharp drop in oil prices in the second half of the year, the core inflation rates have proven more resilient, and the decline in the measures of medium-term inflation expectations was a sign that economic agents and market participants had started to lose confidence in the ECB's ability to bring the headline inflation back to its target over the medium term.  Faced by the situation where the policy rates had reached the lower bound and the private asset purchase programmes were unlikely to generate sufficient balance sheet expansion in the short term, calls have intensified to expand the scope of the asset purchases to cover also government debt securities. While the legal and technical details of such purchases are still under discussion, the introduction of a programme seems a matter of time and could happen as early as in the 22 January ECB policy meeting.  In anticipation of such a move the euro exchange rate depreciated in 2014 and in early January 2015, when the move was further boosted by the renewed political concerns in Greece.  Apart from the likely launch of ECB sovereign bond purchases, the Greek election on 25 January and its repercussions is likely to be a dominant theme for the European markets in the first quarter of 2015. The likelihood of the opposition Syriza party coming to power in Greece is high, with promises to renegotiate the austerity programmes and to restructure the debt held by the foreign official sector. Such demands will face fierce resistance in other Member States and, if successful, could trigger similar calls of debt relief in Ireland, Portugal, Cyprus and Spain.  Greatly complicating the matter is the fact that the current Greek adjustment programme will expire on 28 February, after which date the country will not be able to cover its funding gaps without defaulting on some of its debt in the course of 2015. Beyond the political uncertainty and the prospective further loosening of monetary policy, the outlook for the economic growth in the euro area in 2015 remains grim, and is dependent on a global economy still showing no signs of a robust recovery and the depreciation of the euro exchange rate. The net impact of the dramatic fall in oil prices is not as positive as it may appear from a superficial glance As the undoubtedly positive impact on consumer's purchasing power will be offset at least partly by the declining pace of exports towards oil producers who are important partners, especially Russia - which is experiencing not only a steep recession, but also a sharp depreciation of the exchange rate. Amid the increasingly limited scope of further fiscal policy, this leaves the anti-cyclical effort to be performed by monetary policy to be significant and will depend crucially on the ECB's ability and determination policies of quantitative easing.   UK The UK started 2014 on a strong note, with growth momentum generally surprising on the upside and the unemployment rate falling rapidly. Three factors then caused a loss of momentum, which is still ongoing. First, the housing market lost steam as the combination of macro-prudential tightening and increased speculation about further increases in property taxes took its toll. Housing activity has been on an outright decline since the early part of the year, and house price inflation has been slowing. Second, wage inflation remained very weak despite the rapid falls in the unemployment rate, suggesting that there was more slack than anticipated. That put a question mark over the sustainability of consumption growth, which had been underpinned by a reduction in savings, which in turn had been underpinned by rising house prices. Third, the persistent weakness in the Eurozone continues to impose a speed limit on UK growth. Given strong trade, financial and confidence links, there is a limit to how far the UK can outperform the Eurozone. Looking ahead to 2015, the economy is poised to expand at a pace of around 2-2.5%, a little weaker than in 2014, with much lower inflation. The housing market is likely to stabilise at some point during the year as long as there is no additional drag from macro-prudential tightening, and the lower interest rates and the improvement in real incomes (from lower oil prices) provide some tailwinds. But it is not expected for house prices to restart on a strong upward path, so any consumption growth will be limited to the pace of real income growth, with no further reduction in savings. Wage inflation has improved slightly in recent months, along with productivity growth. Unit labour cost growth therefore remains weak, but the fact that consumption can be supported by real income growth rather than a reduction in savings is a positive development. The speed limit from the Eurozone will continue to be an important factor. Business investment growth is unlikely to accelerate from the solid pace in 2014, and is more likely to ease off a little. Export growth is likely to remain subdued. Fiscal policy is likely to turn more contractionary again, after austerity has been more or less paused in the past two years. A lot will depend on the outcome of the May election, but it seems the first year spending plans will be maintained by the main opposition party. Inflation is expected to be much weaker than in 2014. Lower oil prices play a big role of course, but core inflation is subdued too. Headline inflation is anticipated to skate closer to zero, and is expected to spend the entire year well below the target. Against a background of only modest growth and weak inflationary pressure, there is no urgency at all for the Bank of England to hike rates. Rate hikes are likely to become a serious issue for discussion only towards the end of 2015, at the earliest. Japan 2014 started well in Japan with activity rising rapidly and inflation picking up.  All that turned in April with the VAT increase.  A temporary pothole was expected as some of the first-quarter gains were obviously due to activity and demand frontrunning the tax hike.  But, by the summer it was clear that the weakness was worse than expected.  With real GDP and industrial production down two consecutive quarters in the middle of the year, Japan fell into a "technical recession."  Meanwhile, progress on the inflation front stalled.  Even the so-called western core year-on-year inflation rate, which excludes all food and energy prices, flattened out in the summer and started slipping in the fourth quarter. Looking forward, demand should improve.  Fiscal policy will be a slight tailwind; at least there will not be a second tax hike this year as the Prime Minister's office have already announced that the second stage of tax increases will be delayed until the start of fiscal year 2017.  The yen's 15% depreciation versus the US dollar over 2014 will support exports and domestic production in 2015.  The plunge in oil prices, even in yen terms, is an unalloyed positive for the economy, supporting national income at the expense of oil producers.  The effects of these developments on the Bank of Japan's reinflationary project, however, are mixed.  In the near term, the drop in oil prices will push down core inflation rates to levels last seen in 2013.  It will be important to monitor prices elsewhere for second-round effects, as well as check on negotiated wage increases in the spring. As to more recent developments, Prime Minister Abe's coalition secured victory in the parliamentary elections as his coalition retained control of the lower House with little changes to the coalition's majority.  While the outcome is supportive of third-arrow reforms over time, significant near-term developments are unlikely.  Immediate attention switches over to the budget.  In addition, local elections scheduled for the spring are anticipated to absorb much of the Government's attention, and more difficult decisions are not expected to be made until after the local elections. However, there have been a few important proposals floated.  Abe announced his intention to cut the corporate tax rate by 2.5% in FY 2015 and with another smaller cut in the following year. Within the next three years, the Government also intends to end the centralised Japan Agricultural Cooperatives system, which supports a degree of monopoly power in production and distribution; the move will see local co-ops able to compete freely. High-frequency indicators at the end of the year suggest only modest increases in economic activity.  Industrial production has slipped a bit in October and November.  The economy watchers index also fell in November. The January Shoko-Chukin survey of small and medium-sized enterprises has essentially moved sideways at a level noticeably below that which prevailed before the VAT tax hike.  The diffusion index of reported conditions in the fourth quarter in the Tankan survey edged up but has not recovered from the drop after the tax increase. However the Tankan diffusion index of output prices slipped again in the fourth quarter. Core inflation fell again in November on a 12-month basis.  Falling energy prices contributed to the weakness, but the year-on-year increase in consumer prices excluding food and energy also ticked down.  Looking forward, the collapse in crude oil prices will put further downward pressure on core prices. China 2014 was a challenging year for China to achieve its economic targets. With only 1.4% quarter-on-quarter growth and the Government's reluctance to ease policy in the first quarter, the market raised the question whether China would be able to achieve its 2014 growth target of "about 7.5%". As expectations of policy easing rose in the second quarter following continued weakness in industrial production, the Government attempted to calm markets by saying that China needs to adapt to a "new normal" level of growth. Many took it as another signal that the Chinese Government weighs financial stability over growth. Indeed, total social financing fell by 8.7% y/y in the first quarter, as the Government tightened regulation on shadow banking given rising default risks from that sector. However, as real activity showed no signs of meaningful pick up, the People's Bank of China stepped up its policy easing by cutting the interest rate in November, which was earlier than the market expected. Actual impact on growth is not yet clear, but it did manage to boost confidence. Amongst the other main tendencies shown by the Chinese economy in 2014 were: (i) slowed capital inflows; (ii) the two-way volatility of RMB; (iii) rising disinflationary pressures; (iv) better external demand for Chinese exports. For 2015, the following themes are expected to be important: (i) a lower growth target; (ii) continued disinflationary pressures; (iii) accelerated public investment; (iv) a more accommodative policy stance; (v) continued uncertainty over politics and structural reforms. Real activity data showed some signs of bottoming out in December, although details are mixed. Industrial production in December grew by 7.9% in y/y terms, above the consensus and its prior figure. This is in line with the stronger export growth in December, as well as recently eased credit conditions. In addition, retail sales growth rebounded to 11.9% y/y in December, suggesting continued improvement in consumption. On the other hand, fixed asset investment growth weakened further to 12.6% y/y in December, compared with its prior figure of 13.4%. However details are more encouraging as all the three core sectors (manufacturing, infrastructure, and real estate) saw tentative signs of bottoming out from their recent lows around the middle of 2014, thanks to improved credit conditions in the fourth quarter. Growth in 2014 was 7.4% with a better than expected fourth quarter growth of 7.3%. Some may view it as a small slippage of the 2014 Government's growth target of "about 7.5%" but the Government itself may not view it as missing their target. The official PMI fell by another 0.2 points and the HSBC PMI stayed in contraction territory in December, with the weakness being broadly based across most components. In addition, the ratio of new orders to inventories has declined further despite the still ongoing destocking process. Credit data was much stronger than expected in December due to a pickup in shadow banking financing. On the one hand, new RMB loans in December were lower than expected, with a figure of RMB 696 billion. This increasingly reflects rising risk aversion within the banks. On the other hand, after months of negative figures, trust loans recorded a net financing of RMB 210 bn, most likely driven by local-government financing vehicle ("LGFV") borrowing ahead of the China Banking Regulatory Commission's new regulation on LGFV financing. Corporate bond and equity financing recovered throughout 2014, but their share in the total social financing is still relatively small, suggesting the need to further deepen China's financial market. Despite a continued large trade balance, PBoC's net FX purchase is still low relative to its historical norm. This implies that capital outflow may have persisted throughout 2014, which have consequently tightened up domestic liquidity conditions. The PBoC has been using standing lending facility/margin lending facility to offset the impact of slower FX inflows, and the chance of a reserve requirement ratio cut could not be ruled out although such a cut - if it happens - would likely be neutral in its nature. In December, headline CPI increased slightly to 1.5% y/y, but core inflation fell further to 0.8%. PPI inflation also fell to -3.3% y/y, the lowest level since the third quarter of 2012.
Enquiries	Northern Trust International Fund Administration Services (Guernsey) Limited Harry Rouillard [phone]

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