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Is Europe heading for Japanese-style deflation? The differences, parallels and implications for markets by Martin Harvey, Fund Manager, Threadneedle International Limited In this white paper, Martin Harvey contends that the parallels between the current situation in Europe and Japan’s experience of deflation (a period involving a sustained and general fall in prices) are sufficient for policymakers and investors to be concerned. Martin believes that although there are many differences that should ensure that the eurozone does not follow Japan’s fate, policymakers will need to act forcefully if the risk of deflation intensifies. Highlights > There are many parallels between the euro area today and Japan in the 1990s The recent decline of headline and core (a measure that excludes price changes in more volatile components of an index) inflation measures across the eurozone has heightened fears of a spiral into deflation akin to that which has blighted the Japanese economy for the past 20 years. Indeed, the “Japanification” question is now a regular fixture at the monthly ECB press conference, leading ECB President Mario Draghi to point out the various differences between the two situations. In this note, we will assess these differences as well as the parallels in order to gauge the extent of the risk and potential implications for markets. > The euro area appears to be on track to avert deflation in the short term > However, many euro countries are “one crisis away from deflation” The Japanese experience > The European Central Bank (ECB) claims to be ahead of the game, but policy needs to be more proactive In order to find the ultimate source of the Japanese deflation spiral, one must go back to the asset bubble of the 1980s, which peaked at the end of 1989. Following a fall of more than 50% in the stock market over the next two years, stock prices remained subdued for the remainder of the decade. Land prices (Exhibit 1) fell in value from 1992 onward and have been in the doldrums ever since. > Longer term, demographic considerations and high debt levels will pose problems both in the euro area and elsewhere The real economy did not feel the most severe effects of the burst of the asset bubble immediately, despite a swift collapse in money supply growth. Indeed, nominal gross domestic product (GDP) continued to grow until 1997, unemployment did not exceed 3% until 1995 and Consumer Price Inflation (CPI) — one measure of the rate of change in prices based on a basket of goods purchased by consumers — excluding-food and energy remained above zero until September 1998 (Exhibit 2) before remaining below or close to zero until 2013 when the Bank of Japan (BoJ) began aggressive quantitative easing (QE).* Exhibit 1: Japanese land prices have not recovered from the collapse 20 2013 2010 2007 2004 2001 1998 1995 1992 1989 1986 -10 1983 0 1980 % 10 Japan land price Source: Reuters EcoWin, December 2013 * Central banks normally try to boost economic activity by cutting interest rates in the belief that this will encourage people to spend rather than save. But when interest rates are already very low, another option is to pump money into the economy directly, and this action is known as quantitative easing. IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Exhibit 2: Inflation in Japan remained negative from 1998 to 2013 6 4 CPI (%) 2 0 -2 Japan CPI % year over year 2014 2011 2008 2005 2002 1999 1996 1993 1990 -4 Japan CPI ex-food and energy % year over year Source: Bloomberg, February 2014 There are a number of reasons why this process was something of a slow death for the Japanese economy, and many of these reasons have been highlighted as differences with the current situation in the eurozone. The key question for the ECB to answer is whether the differences are sufficient to dismiss the possibility of deflation, as the Japanese experience proves that once the process is underway, it is difficult to reverse. Progress report for Europe In contrast to Japan, Europe’s asset price crash was part of an international phenomenon. Although there were property bubbles in some euro area countries, such as Spain and Ireland, this was generally not a concern. Initially, it was Europe’s exposure to global trade that caused a steep drop in economic activity in the wake of the Lehman collapse, while the onset of the sovereign debt (debt issued by governments) crisis later played a part. The scale of the initial drop in the EURO STOXX 50 Index (a stock index covering 50 stocks from 12 eurozone countries) was similar to that seen in Japan in the early 1990s (Exhibit 3). Even with the recent rebound, stock prices are currently around 30% below the peak of 2007. It is fair to use December 2007 as the starting point for the comparison, as this marks the moment when spare capacity began to build in the euro area economy. On the surface, it appears that the Europeans are adopting correct policies as the EURO STOXX 50 Index has surged over the past year and broken above the levels reached prior to the debt crisis. Some regional indices, such as the German DAX, have made new highs since 2008. This mirrors the divergence in economic fortunes across the eurozone, where so-called peripheral countries (this refers to countries on the geographic periphery of the eurozone) such as Greece remain in significant economic difficulty while Germany is in good shape. Of course, certain countries will have a higher deflation risk than others, adding another layer of complexity to the situation. The ECB will be primarily concerned with the average situation across the euro area. 2 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Exhibit 3: Relative experience of equity prices from the peak of the bubble Price 120 70 20 t-50 t-25 t t+23 t+48 EURO STOXX 50, 2002–present (Dec 07=100) t+73 t+98 Nikkei 225, 1985–2000 (Dec 1989=100) Source: Bloomberg, March 2014. Note: t represents months before and after peak. Exhibit 4: Relative experience of nominal GDP from the peak of the cycle Nominal GDP 160 110 60 t-10 t-8 t-6 t-4 t-2 t Eurozone annual nominal GDP (2007=100) t+2 t+4 t+6 t+8 t+10 t+12 t+14 Japan annual nominal GDP (1989=100) Source: Bloomberg, December 2013. Note: t represents years before and after peak. Comparing the macroeconomic experience, Europe’s economic correction was more abrupt than Japan’s. The level of nominal GDP has moved slowly higher since 2009 (see Exhibit 4), while the Japanese economy continued to expand at the beginning of the 1990s. Furthermore, unemployment increased much more quickly in the euro area than in Japan (Exhibit 5). Exhibit 5: Relative experience of unemployment from the peak of the cycle 6 14 12 4 10 2 8 0 t-60 t-40 t t-20 t+20 Japan unemployment rate, LHS (Dec 1989=t) t+40 t+60 t+80 t+100 t+120 6 Eurozone unemployment rate, RHS (Dec 2007=t) Source: Bloomberg, February 2014. Note: t represents months before and after peak. 3 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Exhibit 6: Relative experience of core inflation from the peak of the cycle 4 CPI (%) 3 2 1 Eurozone core CPI (t=Dec 2007) t+120 t+108 t+96 t+84 t+72 t+60 t+48 t+36 t+24 t+12 t t-24 -1 t-12 0 Japan core CPI (t=Dec 1989) Source: Bloomberg, March 2014. Note: t represents months before and after peak. The international nature of the 2008 crisis and subsequent slow global recovery goes some way to explaining the abruptness of Europe’s decline. Cultural factors also contributed to the gradual pace of Japan’s economic demise. Specifically, within the banking system, bad loans (loans that the borrower is unable to repay) were not realized in a timely fashion in Japan and were simply rolled over, leading to the build-up of so-called “zombie companies,” or firms commonly defined as loss-makers, which helped by low borrowing costs, can only service their debts, which continued to operate unprofitably. Consequently, as banks were not realizing losses in a timely fashion, the subsequent recapitalization, or refinancing of banks, that should have occurred was absent. Although this meant that unemployment did not rise as quickly as it might have if more companies were allowed to fail, it also reduced the probability of new companies being set up, new loans being granted and new jobs being created. In Europe, there have been repeated attempts to avoid the same situation, via stress tests (analysis designed to determine whether a bank has enough capital to withstand the affect of adverse developments) and forced recapitalizations, although the efficacy of such programs has sometimes been questionable. In the crisis countries, “bad banks” have been created to remove bad loans from bank balance sheets, and in the most part this has proved successful. Indeed, the formulation of the banking union, and the subsequent asset quality review (AQR), aim to solidify the situation further. Given that the European banking sector remains large relative to the economy, there is probably more work to do on this front. It is possible that such actions have had a detrimental effect on lending growth, as banks have been more concerned with getting their houses in order. Indeed, the headline data show that private sector lending continues to contract across the eurozone (Exhibit 7). A recovery in this metric will play a vital role in averting a situation similar to that experienced in Japan, where credit growth was non-existent or in contraction from 1995 to 2013 (Exhibit 8). This will be one of the key data points on the ECB’s radar, indeed it may even become a policy target. 4 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Exhibit 7: Euro area credit growth has been in contraction since 2012 15 % year over year 10 5 0 -5 05 06 07 08 09 10 11 12 13 14 Euro area lending to the private sector Sources: ECB, Bloomberg, February 2014 20 15 10 5 0 2005 2003 2001 1999 1997 1995 1993 1991 1989 -10 1987 -5 1985 Annual percent change (year over year) Exhibit 8: Japanese credit growth remained positive until the late 1990s Japan credit to the private sector Sources: ECB, BoJ, Japanese cabinet office to 2005. The Asian crisis of the late 1990s increased the stress in the Japanese financial system and led to corporate failures and a surge in unemployment from an already vulnerable position. This, alongside the ill-fated increase in the consumption tax rate, was the final straw that sparked the descent into 15 years of deflation. Despite the current relative economic optimism in Europe, given the euro area’s current weak position, an exogenous shock (a shock emanating from outside an economy or economic area) could push the economy into a similar deflationary abyss. One could argue that the sovereign debt crisis has already provided that shock and the recent trend in inflation would support this theory, particularly in stressed countries such as Greece. The speed and durability of the nascent recovery should help the situation in the near term, but any shocks to growth would be very damaging, especially considering the additional debt burdened upon Europe since the beginning of the crisis. The potential consequences of slowing growth in China should also be considered, as this development has the potential to exert an added disinflationary (a slowing in the rate of inflation) impulse. 5 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Policy response Monetary policy:1 (see page 8 for definition): When he is quizzed about the similarities between the current eurozone situation and Japan’s lost decade, Mario Draghi is quick to point out that the ECB reacted much more quickly than the BoJ in the early 1990s. Given that inflation was running higher in Japan at that time, the policy, or key interest rate, was not cut to below 1% until 1995 when headline CPI was first flirting with zero. As Exhibit 9 shows, the policy rate remained higher than CPI throughout the 1990s, leaving real rates too high during the period. Conversely, on this measure at least, real rates have remained negative in the euro area since 2009 (Exhibit 10). It is, however, now getting too close for comfort, and the ECB will be keen to avoid a situation where CPI is entrenched below the level of interest rates, the so-called liquidity trap where policy is rendered impotent. This analysis does not account for the transmission mechanism (the way in which interest rate changes affect economic activity and inflation) to the real economy, which is more challenging in Europe due to the lack of fiscal union. Undoubtedly, real rates (interest rates taking account of inflation) in the periphery have remained too high in recent years, although the ECB is hoping that the recent improvement in financial markets and in economic sentiment should help to ease this situation. Exhibit 9: Japanese interest rates remained above the inflation rate throughout the 1990s 8 6 % 4 2 CPI 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 -2 1990 0 Policy rate Source: Bloomberg, December 2003 Exhibit 10: Euro area interest rates have been below inflation until now 5 4 % 3 2 1 Headline CPI 2013 2012 2011 2010 2009 2008 -1 2007 0 Policy rate Source: Bloomberg, March 2014 6 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? QE was eventually introduced in Japan in 2001 and was judged in hindsight as half-hearted due to its limited impact. Given that deflation had been embedded in the system for many years, it took an extremely aggressive QE policy from the BoJ in 2013 to give the Japanese economy a chance of redemption. The ECB stands ready to ramp up policy initiatives if inflation undershoots expectations from here, and early reports suggest that it is prepared to be aggressive. However, the ECB faces many institutional impediments that could hinder the process. It is likely that any QE attempt will be aimed toward the aforementioned transmission mechanism, in order to target policy in the places where it is most required. The preferred option is private asset purchases, but the problems of “one-size-fits-all” monetary policy will remain a challenge. Striking a balance where policy is accommodative enough for the periphery and not too accommodative for Germany is a very tough proposition. The ECB has some way to go if it plans to rival the aggressive policies of other nations since 2008 (Exhibit 11). To rival the scope of the UK QE policy for example, up to €1 trillion will be required. Exhibit 11: Central banks’ balance sheets have been inflated by QE programs (Jan 08 = 100) 550 Index level 450 350 250 2014 BoE 2013 Fed 2012 2011 ECB 2010 2009 50 2008 150 BoJ SNB Sources: Reuters EcoWin, Bloomberg, February 2014 Exhibit 12: Relative experience of fiscal balances from the peak of the cycle 5 % GDP 0 -5 -10 t-9 t-7 t-5 t-3 t-1 Japan govt balance t+1 t+3 t+5 t+7 t+9 Euro area govt balance t+11 t+13 Source: Bloomberg, IMF, December 2014. Note: t represents years before and after peak. 7 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Comparing inflation rates to other developed markets > Given the influence of global factors such as food and energy prices, inflation rates have been subsiding across the major developed markets, including the U.S. and U.K., where economic recovery has been uninterrupted for some time. > The ECB has highlighted these similarities to justify inaction. > Core CPI in Europe has undershot the U.S. and U.K. in the past couple of years as growth has diverged. > Curiously, the International Monetary Fund’s (IMF) estimate of the output gap (the difference between the actual output of an economy and the output it could achieve when operating at full capacity.is currently larger in the U.S. than in the eurozone, although price trends suggest otherwise. > High unemployment makes deflation a more legitimate concern in the euro area. Figure 1: Core CPI in the U.S., U.K. and eurozone Figure 2: The output gap in the U.S., U.K and eurozone 6 4 4 3 2 0 % % 2 -2 1 -4 0 -6 U.K. Eurozone 2% target Source: Bloomberg, February 2014 2013 2011 2009 2007 2005 2003 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 U.S. 2012 2013 2014 -8 -1 Eurozone output gap, % GDP U.S. output gap, % GDP U.K. output gap, % GDP Sources: Bloomberg, IMF, December 2013 Fiscal policy:1 Although monetary policy was arguably too tight in Japan, fiscal policy was being used to boost demand throughout the 1990s (Exhibit 12). Over many years of nominal (without taking inflation into account) GDP stagnation, this drove the government debt stock to unsustainable levels, and although some commentators claim that this was a necessary policy, the full consequences remain to be borne. This is a classic case of crowding out, whereby bank balance sheets are devoted increasingly to government debt at the expense of the real economy, and the additional government spending eventually becomes a negative influence on growth. In Europe, by contrast, a strong effort has been made to limit the build-up of government debt following the early years of the crisis. However, this determination has ebbed of late, and the sharp drop in economic activity caused by aggressive fiscal consolidation has meant that debt ratios have risen sharply in some countries. European policymakers should continue to prioritize fiscal consolidation to avoid a situation where deficits are maintained but with no discernable positive impact on the economy. Southern European banks have been investing heavily into government debt in recent years (Exhibit 14), which is reminiscent of the Japanese experience. As yields (the income from an investment) decline, the incentive for this trade should be reduced, but this will continue to be a key trend to monitor. 1 Monetary policy is one of the ways, along with fiscal policy, in which a government attempts to control an economy. It involves measures such as increasing or decreasing the level of interest rates, which affects the cost of borrowing, or changing the amount of money banks need to keep in their vaults, which influences their ability to lend. Fiscal policy, by contrast, refers to government spending and tax policies. 8 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Eur (LHS) 2014 2013 2012 2011 2010 % 1.5 2009 10 2008 2.0 2007 15 2006 2.5 2005 20 2004 3.0 2003 25 2002 3.5 2001 30 2000 Eur trillion Exhibit 13: Bank balance sheets are shrinking in Europe % of nominal GDP (RHS) Source: Reuters EcoWin, February 2014 Exhibit 14: Banks have increased holdings of government bonds 12 % of bank assets 10 8 6 4 Spain 2014 2012 2010 2008 2006 2004 2002 0 2000 2 Italy Source: Reuters EcoWin, February 2014 Structural reform: European policymakers are right to emphasize supply-side reforms as vital to improving the long-run growth potential of the economy. Indeed, some of the disinflationary pressure already evident in countries such as Spain is a direct result of these policies bringing down cost pressures in an attempt to boost productivity (a measure of the efficiency of an economy). One must bear in mind, however, that the growth benefits of such policies are only felt in the long term and are in many cases relatively small. In an ideal world, inflation would pick up in Germany, allowing Spain to continue to gain competitiveness without outright deflation. This reiterates the challenge of a one-size-fits-all monetary policy. A key component that will define the success of Japan’s new push to leave deflation is structural reform, or those that improve the underlying performance of an economy, the so-called third pillar of Abenomics (named after Japanese Prime Minister Shinzo Abe). Although progress on this front is much slower than monetary expansion, the determination is there to move forward. Euro area policymakers have been emphasising the importance of supply-side policies (policies designed to make markets and industries operate more efficiently and contribute to faster growth) throughout the crisis and will continue to try to improve the overall growth potential of the economy. Once the added benefit of monetary stimulus ceases, this is what will matter. 9 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Effect of low inflation on government debt > Peripheral governments, particularly in Spain, are specifically targeting so-called “good deflation” to improve competitiveness. > How do you separate good deflation from bad? > The scenarios below assume a swift move to fiscal surplus and solid GDP growth, alongside an average interest cost of 3%. > The exhibits show how difficult it becomes to stabilize debt in a deflationary scenario. > Against this backdrop in Japan, domestic banks loaded their balance sheets with government debt, a process that has already begun in Spain and Italy. Good scenario Inflation = 0 Inflation = -2 Sources: Threadneedle, IMF, December 2013 Good scenario Inflation = 0 2027 2025 2023 2021 2019 2017 2015 2027 40 2025 40 2023 90 2021 90 2019 140 2017 140 2015 190 2013 190 2013 > This “crowding out”2 added to the drain of funds from the private sector. Figure 1: Italy government debt/GDP scenarios Figure 2: Spain government debt/GDP scenarios Inflation = -2 Sources: Threadneedle, IMF, December 2013 The demographic consideration: The lack of population growth contributed in no small way to the demise of Japan’s growth potential and consequent stagnation. Exhibit 15 shows a striking correlation between the growth in the labor force and core CPI. Europe faces some of the same problems as Japan, in particular in Germany where the working age population peaked in 1998. France shows up favorably on this scale due to a high birth rate, but the rest of the euro area is more in line with Germany (Exhibit 16). As populations subside, spare capacity naturally rises as aggregate demand (the overall demand in an economy) is reduced, leaving a heavy deflationary influence. Projections for the growth of the labor force remain positive across the major eurozone countries in the coming years, so this is not an obvious concern, but should remain on the radar. Indeed, this is a concern for all developed nations over the coming years, as an ever-smaller percentage of the population will be expected to provide for the remainder. The challenge for governments is enacting policies that encourage more of the working age population to work, which is something that has been a struggle for Japan and which Abenomics is attempting to address. Germany has been much more successful in this area and the focus on structural reforms in the euro area should be generally positive. However, the headwind that this trend produces in the medium term should not be ignored. 2 Crowding out refers to the theory that high levels of public spending affect the ability of the private sector to raise funds. 10 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Exhibit 15: Japanese population decline contributed to deflation 7 CPI ex-food and energy, % yoy 2013 2009 2005 2001 1997 1993 1989 1985 4 3 2 1 0 -1 -2 -3 1981 % 6 5 Japan labor force, 8q/8q % Sources: Bloomberg, OECD, December 2013 Exhibit 16: Japanese population declining much more quickly than in Europe Index=100 at peak year (next to country name) Working age population (14-65) 102 Index level 98 94 90 86 82 -20 -16 France 2077 -12 UK 2071 -8 -4 0 4 Years from peak EA ex-Germany and France 2011 8 12 Germany 1998 16 20 Japan 1995 Source: Barclays, UN, January 2014 What the market is saying The recent surge in equity prices suggests that investors are confident that the euro area economy, with a bit of help from the ECB, can avert deflation as the debt crisis of 2011–2012 becomes a distant memory. However, with inflation at low levels, equity investors will remain sensitive to any exogenous shocks that could put further pressure on the outlook for inflation and growth. German bond yields have remained low despite aggressive sell-offs in the other major developed bond markets over the past year. Partly this is justified by the divergence in policy stance, with the U.S. and U.K. moving toward rate hikes and the ECB still threatening rate cuts. However, the extreme suppression of the term premium (the amount by which the yield on a long-term bond exceeds that of a bond that will mature in a shorter time) suggests that some expectation of persistent low inflation is embedded, which again contrasts with the U.S. and U.K. where recent low inflation data is brushed off. 11 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? Compared with the experience in Japan (Exhibit 18), where yields did not fall below 2% until 1997, risk-free yields are very low in Europe, but this has been the case for much of the last few years. If low inflation persists, it is still hard to argue that bunds (bonds issued by the German government) offer much capital appreciation potential, although they may be attractive on a relative basis versus other assets. If the ECB can convince market participants that Europe is more like the U.S. than Japan, then yields could rise significantly, but this seems a distant prospect at present. Exhibit 17: European equity markets, regional indices rebased to 2007 140 120 Index level 100 80 60 40 20 2003 2005 Dax 2007 2009 Cac 2011 IBEX 2013 FTSE MIB Source: Bloomberg, March 2014 Exhibit 18: Relative experience of bond yields from the peak of the cycle 9 8 7 % 6 5 4 3 2 1 0 t-12 t t+12 t+24 t+36 t+48 Germany 10-year yield t+60 t+72 t+84 t+96 t+108 +120 Japan 10-year yield Source: Bloomberg, March 2014. Note: t represents months before and after peak. One curiosity that inspired the ECB to step up its rhetoric and mention the possibility of QE is the strength of the euro. There are a number of reasons why the euro has continued to strengthen in spite of the divergence in interest rates mentioned above, most notably the return of investment capital and the continued retrenchment of the European banking sector. There are some further parallels here with Japan, where years of currency strength undermined attempts to break away from deflation, even though exports were noticeably harmed. 12 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? However, when putting the two situations in parallel, the euro’s move pales into insignificance. Indeed, the appreciation over the past 12 months is in the region of 5%, compared with 15%-20% gains in the yen in 1999 (Exhibit 19). Exhibit 19: Relative experience of trade-weighted exchange rates from the peak of the cycle 180 160 % 140 120 100 80 t-36 t-12 t+12 t+36 Trade-weighted euro, Dec 2007=100 t+60 t+84 t+108 Trade-weighted yen, Dec 1989=100 Source: Bloomberg, March 2014. Note: t represents months before and after peak. Summary There are enough parallels between the current situation in Europe and Japan’s deflationary experience for policymakers and investors to be concerned. It seems, however, that at this point, the euro area economy’s fate is in the hands of those policymakers. Recent commentary suggests that the ECB, the only institution with enough firepower to act aggressively, is wary of these risks and ready to react to further downside as and when it emerges. Draghi has always been keen to warn investors not to question the ECB’s firepower, and until now they have not. If downside risks do emerge in the coming months and quarters, the fight against deflation could prove to be his toughest test yet. 13 IS EUROPE HEADING FOR JAPANESE-STYLE DEFLATION? The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. Columbia Management Investment Distributors, Inc. 225 Franklin Street Boston, MA 02110 -2804 columbiamanagement.com blog.columbiamanagement.com 800.426.3750 Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Management. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. Threadneedle International Limited is an FCA- and a U.S. Securities and Exchange Commission registered investment adviser based in the U.K. and an affiliate of Columbia Management Investment Advisers, LLC. 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