CC-BY-SA-2.0, FlickrFoto: Kreg Steppe. La industria de los fondos UCITS alternativos crecerá entre un 20% y un 30% en los próximos dos o tres años
Since the election, 10-year U.S. Treasury yields have spiked more than 100 basis points from the 2016 low, and we have seen the most violent move in bonds since 2013’s “Taper Tantrum.” The MOVE Index, which measures volatility in bonds, is now back to the upper end of its recent range. For Kathleen C. Gaffney, CFA, Co-Director of Diversified Fixed Income at Eaton Vance, it is clear that volatility is returning to fixed-income markets.
“But with inflation expectations climbing and a focus on both future fiscal policy and tax reform, it is clear that bond investors should be prepared for a lot more volatility.” She states adding that “Markets, of course, do not like uncertainty. So while President-elect Donald Trump and his new administration represent the change the U.S. electorate wanted, this change is unprecedented and unorthodox. It is difficult to gauge what risk premiums should be, particularly since quantitative easing and the resulting reach for yield has sapped nearly all the value from the market. And to be sure, we do not know the specifics of any policy program yet.”
But this phenomenon isn’t isolated to the U.S. It’s truly a global change, as evidenced by Italy’s referendum vote. According to Gaffney, a lack of growth has led to an increase in populism around the world, and these two trends will be evident across the developed markets.
So how can investors prepare themselves now for more volatility? The specialist believes common sense would have investors moving money to sectors and securities that have historically displayed low volatility, such as U.S. Treasurys and high-quality corporate bonds. Since Trump’s win (a short time series, admittedly), U.S. Treasurys and high-grade bonds have slumped nearly 3%. Hiding in traditionally “safe” or “low-volatility” fixed-income asset classes has resulted in portfolio pain.
“We have been expecting and are positioned for a transition from an emphasis on monetary policy towards fiscal policy. I believe a flexible approach is called for, one that can avoid potentially volatile areas of the bond markets. That means staying diversified and selective as value opportunities arise. Bottom line: I believe we are headed for an environment of stronger growth and rising inflation. But uncertainty due to a shifting political environment will continue to spur volatility. I think investors would be wise to use this volatility to their advantage, keeping a focus on the long term in order to stay patient as they wait for opportunities to unfold. I think there has never been a better time to focus on active strategies in fixed income.” She concluded.
As Fabio Balboni, European Economist at HSBC expected, Matteo Renzi‘s resignation as Prime Minister following the rejection of the constitutional referendum on 4 December did not lead to a snap election. The Italian president appointed the former Foreign Affairs Minister, Paolo Gentiloni, as Prime Minister. He believes Gentiloni’s caretaker government, supported by broadly the same parliamentary majority as Renzi’s, will have a narrow mandate, focussing on three key issues, before taking Italy to elections (likely in Q2 2017, in their view):
Re-align the electoral laws for the lower and upper house. There are conflicting views among parties on what the optimal law should look like, and the Constitutional Court’s hearing on the current law for the lower house, on 24 January, will also dictate the timetable. He expects the electoral law(s) will end up being a slightly softer version of the Italicum, effectively favouring some form of coalition government after the election (which would make it harder for the populist Five Star Movement to form a government on its own).
Address the challenging situation of the banks, and in particular the imminent recapitalisation of Monte Dei Paschi di Siena. Balboni thinks this process will end up with some form of direct government intervention, with the bail-in of equity and bondholders (though retail investors will be refunded). A possible bigger injection of money, to provide a safety net for other banks facing a similar situation in the future, is also possible, though might present bigger legal issues, in their view.
Respond to a possible call by the European Commission for an additional 0.1-0.2% of GDP fiscal austerity in 2017. This could happen when the final 2016 deficit outturn is communicated by Eurostat early next year (likely, March). But with a caretaker government in place and the prospects for imminent elections, he thinks Brussels will have a light-touch approach.
However, at least for now, the HSBC team does not think Italy’s euro membership is at stake.
Manhattan West Asset Management has added an ESG focused Private Equity Fund to its offerings. Roberto Barragan, former CEO of VEDC (Valley Economic Development Center), joins as Shareholder and Senior Managing Director to oversee the Fund.
Manhattan West’s new Fund, Manhattan West ESG Fund I, will provide financing and credit solutions for minority owned businesses across the United States.
“Access to capital severely limits the establishment and expansion of minority-owned businesses. By focusing on credit and debt structures with collateral ranging in size from $500,000 to $2,000,000, we will seek to eliminate those access barriers,” said Barragan. “My business lending experience and extensive relationships with financial institutions nationwide will allow our team at Manhattan West to deliver impactful CRA and ESG investments to our institutional clientele.”
Barragan led the VEDC to national prominence as a highly regarded and industry leading small business lender originating millions annually in small business loans to minority borrowers. Under his leadership and innovation, the VEDC increased its assets by over 700 percent in the last six years and lent millions to women and minority business owners. Additionally, he redefined how African American and Latino entrepreneurs can access capital through partnerships with financial institutions and corporations and launched numerous business programs including Business Opportunity Funds in Chicago and New York, the National African American Small Business Loan Fund, the Women’s Small Business Risk Mitigation program, the National Micro Finance Fund, and many others.
Barragan expanded VEDC’s portfolio to a national platform with loan funds in Los Angeles, Chicago, Las Vegas, Reno, Salt Lake City, Miami and the New York Tri-State area. Under his direction and leadership during a 21-year career, the VEDC helped thousands of businesses succeed.
“Roberto’s arrival at Manhattan West signifies our commitment to a strategic imperative of the firm,” said Lorenzo Esparza, Manhattan West Asset Management CEO. “One of our main objectives is to deploy investment capital for causes that will have a profoundly positive social impact. We are excited to welcome Roberto to Manhattan West where he will purposefully advocate the vision we set forth.”
Manhattan West is a Latino owned financial service firm, one of the few in the country providing full service investment management for private clients and institutions.
Foto: michaelmep. En 2017, el real estate de las Américas seguirá atrayendo flujos fuertes de inversión
Despite various sources of uncertainty and related bouts of financial marketvolatility weighing on the minds of investors over the course of 2016, commercial property proved to be a preferred destination for investment dollars in the third quarter in the Americas region, says Jonathan Geanakos, President, Americas Capital Markets, JLL. With record amounts of capital raised, driven by a search for higher-yielding investments in a low-yield world, and underpinned by solid performance in property market fundamentals, investment into Americas real estate increased in the third quarter.
According to the Americas Market Perspective, Q42016 recently published by JLL, total office, retail, industrial and hotel volumes grew to US$77 billion during the period, an increase of one percent from the third quarter of 2015. This reversed the year-on-year declines in the first two quarters of 2016 as investors had been displaying somewhat elevated caution amid more turbulent financial markets. Total volume in the Americas has declined 10 percent, to $207 billion year-to-date. Although in the United States, overall volume increased one percent year-over-year to US$71 billion in the third quarter, and for the year-to-date period has decreased a little more than 10 percent, to $193 billion.
Trading volumes increased in U.S. office markets during the third quarter, as private equity and overseas investors remain very active in pursuit of office product. Primary markets including Los Angeles and Boston have experienced notable increases in volume year-to-date, as fundamentals strengthen and investors anticipate further income gains over the next few years. It should be noted, though, that increases in activity were not consistent across geographies – in fact, in select markets, such as Chicago and Houston, office volume thus far in 2016 has notably been lower than in 2015.
Mexico saw an increase in sales activity in the third quarter, while volumes in Canada, for combined office, were down approximately five percent, retail, industrial and hotel transaction volume, year-over-year, reaching approximately US$4 billion. Still, total transaction activity in Canada has increased six percent for the year-to-date period. The hotel market was particularly active, and we continued to see an uptick in foreign investors actively buying in the Canadian market, notable for the nation’s traditionally strong domestic REIT and pension fund ownership landscape. Meanwhile, in Mexico, total transaction volume had a relative surge to over US$1 billion during the third quarter, which was more than triple that seen in the same period one year earlier. Activity was fairly diversified by sector. Year-to-date, volume in Mexico is up by approximately one-third. Investment volumes in Brazil continued to be historically light during the third quarter, as they have been for all of 2016 to date.
Given the significant weight of capital awaiting investment in real estate, the generally increasing institutional and private equity allocations to the asset class, as well as sturdy underlying property market fundamentals in most markets, the Americas is poised to continue to attract strong investment flows in 2017.
CC-BY-SA-2.0, FlickrFoto: Skeeze. La sostenibilidad: el dilema de los consejeros delegados (Parte I)
Robeco, in close cooperation with RobecoSAM, launched the Robeco QI Global Sustainable Conservative Equities fund, which builds upon the successful conservative equity strategy and aims to provide equity returns at lower risk by exploiting the low-risk anomaly. Additionally, it aims to offer a significantly better sustainability profile than the reference index, the MSCI World All Country.
The fund will be managed by the Robeco Conservative equities team based in Rotterdam who currently oversee €16.9 billion AUM, as per the end of October 2016, and have a proven track record of delivering enhanced returns with lower volatility. Robeco has a distinguished heritage in developing quantitative factor-based investment solutions for its clients, with the Robeco Global Conservative Equities fund recently enjoying its tenth anniversary.
RobecoSAM, the investment specialist focused exclusively on Sustainability Investing, co-developed the strategy and is responsible for factoring in “Smart ESG” scores, reducing the environmental footprint of the portfolio by 20% (vs. MSCI World All Country), and avoiding investments in companies with controversial business practices.
Pim van Vliet, PhD, founder and Portfolio Manager of the Robeco Global Conservative Equity funds, said: “I am delighted that ten years after the launch of our first conservative equity strategy, Robeco has developed a new offering that, while fully based on the philosophy and research of the original strategy, simultaneously offers clients a very strong sustainable profile. The strategy will apply strict criteria based on high ethical standards, high ESG scores and a low environmental footprint.”
Daniel Wild, PhD, Head of Sustainability Investing Research and Development & Member of the Executive Committee, RobecoSAM, said: “Marrying the low-risk anomaly with ‘Smart ESG’ scores makes perfect sense. The two concepts complement each other and we are proud to see the strategy being launched. Sophisticated investors can now benefit from Robeco’s decade-long expertise in the conservative equity strategy and RobecoSAM’s two-decade-long history of SI.”
The fund, which is domiciled in Luxembourg and will be available for investors in Robeco’s key markets, is aimed at both institutional investors and retail investors, who are interested in both low-volatility investing and sustainability.
Pixabay CC0 Public DomainPhoto: Unsplash. Increased Investor Demands And Powerful New Voices Spur Optimism For Women In Alternatives
Increasing interest from investors to allocate more capital into women owned and managed funds, coupled with public support from industry leaders, is spurring optimism for women in Alternative Investments, according to KPMG‘s 2016 Global Women in Alternative Investments Report: The Time is Now: Real Change, Real Impact, Seize the Moment.
KPMG surveyed and interviewed nearly 800 women professionals and industry leaders within the Alternative Investments sector, across hedge funds, private equity, venture capital and real estate in North America, U.K., Europe, Asia Pacific and Latin America. The majority of survey respondents believe North America offers the greatest opportunities for women in alternatives, with the UK and the remainder of Europe ranking second and third.
“This year’s report uncovered a number of positive trends as firms, investors and industry organizations are taking some bold new steps to help move the needle,” said Jim Suglia, Alternative Investments national practice leader for KPMG LLP. “We strongly believe that with continued attention to these issues, the industry will keep pushing the boundaries to secure the future success of women in alternatives.”
The survey found that many respondents remain optimistic, with 28 percent planning to launch or manage a new fund in the next five years. Twenty-six percent of women-owned and managed funds expect to grow their fund to over $1 billion in assets under management (AUM).
“With more women in investment-decision making roles, the industry will gain on a huge source of talent and insights in an area that is core to its success – returns,” said Camille Asaro, audit partner in KPMG’s Alternative Investments practice and co-author of this year’s report.
The majority of this year’s survey respondents (79 percent) also believe it is still more difficult for women fund managers to succeed in the alternative investments industry. The majority also believe that it is harder for women-owned and managed funds to attract capital.
You can download the report in the following link.
Pixabay CC0 Public DomainPhoto: LinkedIn. Vijay C. Advani Will Be Joining TIAA Global Asset Management as President and COO
Effective December 31, 2016, Co-President Vijay C. Advani will be leaving Franklin Templeton to join TIAA Global Asset Management as president and chief operating officer. As a result of this change, current Co-President Jennifer M. Johnson will continue as president. There are no current plans to replace Advani’s co-president position.
Johnson, who has been with the firm for 28 years, has a proven track record of managing all major aspects of the business. She has worked in senior leadership positions since 1995 and was named co-president of Franklin Resources in 2015. Prior to that, Johnson served as executive vice president and chief operating officer since 2010, and has also previously served as the company’s chief information officer.
As president, Johnson’s responsibilities will include overseeing all divisions of the business with the exception of Finance, Human Resources, Legal, Corporate Communications and Templeton Global Macro, which will report to the CEO and Chairman, Greg Johnson. Johnson will work closely with her fellow Executive Committee members, including Greg Johnson, Ken Lewis, chief financial officer, Craig Tyle, general counsel, and the company’s three investment heads: Michael Hasenstab, chief investment officer of Templeton Global Macro, Chris Molumphy, chief investment officer of Franklin Templeton Fixed Income Group, and Ed Perks, chief investment officer of Franklin Templeton Equity. The Executive Committee is comprised of seasoned individuals, each with over two decades of industry experience and more than a decade with the firm.
According to a press release, Franklin Templeton, “as a firm, we are committed to ensuring continuity of our services and remain focused on our goal of delivering competitive and consistent results for our shareholders and clients around the world.” And promises to communicate any additional updates regarding this matter in a timely manner.
Will this be the year when China exceeds growth expectations, Brexit turns into Bremain, the Mexican peso soars and Italian banks turn out to the best performing equity asset class?
Saxo Bank, the online multi-asset trading and investment specialist, has today released its annual set of ‘Outrageous Predictions‘ for the year ahead.
Continuing in the tradition of making a selection of calls aimed at provoking conversation on what might surprise or shock the investment returns in the year ahead this year’s predictions cover a range of scenarios, including a Chinese growth rebound, an Italian bank rally, Brexit giving way to Bremain and the EU’s willingness to change in the face of populist backlash, among others. The Outrageous Predictions should not be considered Saxo’s official market outlook, it is instead the events and market moves deemed outliers with huge potentials for upsetting consensus views.
Steen Jakobsen, Chief Economist at Saxo Bank, commented: “After a year in which reality has managed to surpass even seemingly unlikely calls – with the Brexit surprise and the US election outcome – the common theme for our Outrageous Predictions for 2017 is that desperate times call for desperate actions.
“With change always happening in times of crisis, 2017 may be a wakeup call which sees a real departure from the ‘business as usual’, both in central bank expansionism and government austerity policies which have characterized the post-2009 crisis.
“As some of our past outrageous predictions have turned out to be far less outrageous that at first thought, it is important that investors are aware of the range of possibilities outside of the market consensus so that they can make informed decisions, even in seemingly unlikely market scenarios.”
It is in this spirit that we release Saxo Bank’s Outrageous Predictions for 2017:
China GDP swells to 8% and the SHCOMP hits 5,000
China understands that it has reached the end of the road of its manufacturing and infrastructure growth phase and, through a massive stimulus from fiscal and monetary policies, opens up capital markets to successfully steer a transition to consumption-led growth. This results in 8% growth in 2017, with the resurgence owing to the growth in the services sector. Euphoria over private consumption-driven growth sees the Shanghai Composite Index double from its 2016 level, surpassing 5,000.
Desperate Fed follows BoJ lead to fix 10-year Treasuries at 1.5%
As US dollar and US interest rates rise in increasingly painful fashion in 2017, the testosterone driven fiscal policy of the new US President leads US 10-year yields to reach 3%, causing market panic. On the verge of disaster, the Federal Reserve copies the Bank of Japan’s Yield Curve Control, by fixing the 10-year Government yield at 1.5%, but from a different angle, effectively introducing QE4 or QE Endless. This in turn promptly stops the selloff in global equity and bond markets, leading to the biggest gain for bond markets in seven years. Critical voices are lost in the roar of yet another central bank-infused rally.
High-yield default rate exceeds 25%
With the long-term average default rate for high yield bonds being 3.77%, jumping during the US recessions of 1990, 2000 and 2009 to 16%, 10% and 12% respectively, 2017 sees default rates as high as 25%. As we reach the limits of central bank intervention, governments around the world move towards fiscal stimulus, leading to a rise in interest rates (ex Japan), thus steepening the yield curve dramatically. As trillions of corporate bonds face the world of hurt, the problem is exacerbated by a rotation away from bond funds, widening spreads and making refinancing of low grade debt impossible. With default rates reaching 25%, inefficient corporate actors are no longer viable allowing for a more efficient allocation of capital.
Brexit never happens as the UK Bremains
The global populist uprising, seen across both sides of the Atlantic, disciplines the EU leadership into a more cooperative stance towards the UK. As negotiations progress, the EU makes key concessions on immigration and on passporting rights for UK-based financial services firms, and by the time Article 50 is triggered and put before Parliament, it is turned down in favour of the new deal. The UK is kept within the EU’s orbit, the Bank of England hikes the rate to 0.5% and EURGBP plummets to 0.7300 – invoking the symbolism of 1973, the year of UK’s entry into the EEC.
Doctor copper catches a cold
Copper was one of the clear commodity winners following the US election; however in 2017 the market begins to realise that the new president will struggle to deliver the promised investments and the expected increase in copper demand fails to materialise. Faced with growing discontent at home, President Trump turns up the volume on protectionism, introducing trade barriers that will spell trouble for emerging markets as well as Europe. Global growth starts weakening while China’s demand for industrial metals slows as it move towards a consumption-led growth. Once HG Copper breaches a trend-line support, going back all the way to 2002 at $2/lb, the floodgates open and a wave of speculative selling helps send copper down to the 2009 financial-crisis low at $1.25/lb.
Huge gains for Bitcoin as cryptocurrencies rise
Under President Trump the US fiscal spending increases the US budget deficit from $600 billion to $1.2-1.8 trillion. This causes US growth and inflation to sky rocket, forcing the Federal Reserve to accelerate the hike and the US dollar reaches new highs. This creates a domino effect in emerging markets, and particularly China, who start looking for alternatives to the fiat money system dominated by the US dollar and its over-reliance on US monetary policy. This leads to an increased popularity of cryptocurrency alternatives, with Bitcoin benefiting the most. As the banking systems and the sovereigns of Russia and China move to accept Bitcoin as a partial alternative to the USD, Bitcoin triples in value, from the current $700 level to $2,100.
US healthcare reform triggers sector panic
Healthcare expenditure is around 17% of GDP compared to the world average of 10% and an increasing share of US population cannot pay for their medical bills. The initial relief rally in healthcare stocks after Trump’s victory quickly fades into 2017 as investors realise that the administration will not go easy on healthcare but instead launches sweeping reforms of the unproductive and expensive US healthcare system. The Health Care Sector SPDF Fund ETF plunges 50% to $35, ending the most spectacular bull market in US equities since the financial crisis.
Despite Trump, Mexican peso soars especially against CAD
The market has drastically overestimated Donald Trump’s true intention or even ability to crack down on trade with Mexico, allowing the beaten-down peso to surge. Meanwhile Canada suffers as higher interest rates initiate a credit crunch in the housing market. Canadian banks buckle under, forcing the Bank of Canada into quantitative easing mode and injecting capital into the financial system. Additionally, CAD underperforms as Canada enjoys far less of the US’ growth resurgence than it would have in the past because of the longstanding hollowing out of Canada’s manufacturing base transformed from globalisation and years of an excessively strong currency. CADMXN corrects as much as 30% from 2016 highs.
Italian banks are the best performing equity asset
German banks are caught up in the spiral of negative interest rates and flat yield curves and can’t access the capital markets. In the EU framework, a German bank bailout inevitably means an EU bank bailout, and this comes not a moment too soon for the Italian banks which are saddled with non-performing loans and a stagnant local economy. The new guarantee allows the banking system to recapitalise and a European Bad Debt Bank is established to clean up the balance sheet of the eurozone and get the bank credit mechanism to work again. Italian bank stocks rally more than 100%.
EU stimulates growth through mutual euro bonds
Faced with the success of populist parties in Europe, and with the dramatic victory of Geert Wilders far-right party in the Netherlands, traditional political parties begin moving away from austerity policies and favouring instead Keynesian-style policies launched by President Roosevelt post the 1929 crisis. The EU launches a stimulus six-year plan of EUR 630 billion backed by EU Commission President Jean-Claude Juncker, however to avoid dilution resulting from an increase in imports, the EU leaders announce the issuance of EU bonds, at first geared towards €1 trillion of infrastructure investment, reinforcing the integration of the region and prompting capital inflows into the EU.
The whole publication “Outrageous Predictions for 2017” and more details can be found here.
Kristi Kuechler - Photo: LinkedIn. Family Office Exchange launches the FOX Private Investor Center
Family Office Exchange (FOX) announced the launch of the FOX Private Investor Center.Kristi Kuechler, former President of the Institute for Private Investors (IPI), was named President of the new FOX Private Investor Center. She will be based in San Francisco where she will open and run a new FOX office.
“Over the last few years, FOX has expanded its programs for private investors to include two annual FOX Global Investment Forums, two member Investment Networks and two Peer Councils. This is in addition to our long-running annual FOX Global Investment Survey,” said Sara Hamilton, Founder and CEO of FOX. “With this level of activity, it made sense to organize the programs into a Center and bring in an experienced leader who can develop it to its fullest potential.”
Kristi Kuechler joins FOX after five years as Partner and Managing Director of Lattice Strategies, an investment firm based in San Francisco. Prior to her work at Lattice, Ms. Kuechler served as President of the Institute for Private Investors, where she was responsible for content and curriculum development and oversaw all issues relating to IPI membership.
“As FOX continues its focus on serving ultra-wealthy families around the world, we are excited to enhance our delivery of world-class networking and investment education to support self-directed investors and family offices in their investment decisions,” said Alexandre Monnier, President of Family Office Exchange. “Kristi is a proven, respected leader in this market who is perfectly suited to oversee this initiative.”
Kuechler will report to Sara Hamilton, Founder and CEO, and Alexandre Monnier, President of FOX.
“I am delighted to join the team at Family Office Exchange and extend their three decades of work serving affluent families,” said Kristi Kuechler. “I look forward to leading this new initiative in support of active investors, built upon the industry-leading resources of Family Office Exchange.”
The offerings from the new FOX Private Investor Center include:
The Spring and Autumn FOX Global Investment Forums, where members meet to network with their peers and hear from industry experts in a non-commercial setting; The FOX Private Investor Council for family principals responsible for their family’s investing; The by-invitation-only FOX Strategic CIO Council, comprised of family office CEOs and CIOs; The annual FOX Global Investment Survey, The FOX Direct Investor Network; The FOX Investment Strategy Network.
Foto cedidaPhoto: Mark Mobius, Executive Chairman of Templeton Emerging Markets Group / Courtesy photo. Mark Mobius: Emerging Markets Take-Off Again, and the Main Reason is the Internet
Franklin Templeton began investing in emerging markets in 1987 with a USD 100 million fund. Today, it manages over USD 26 billion in emerging market strategies. Mark Mobius, Executive Chairman of Templeton Emerging Markets Group and architect of this expansion, talks to Funds Society in an interview from which a fundamental idea emerges: technology, especially if it’s internet-related, is transforming emerging countries by pushing them to a new Era of growth that is revolutionizing the way we invest in these markets.
The average growth of the economy in emerging markets is 4.5%, as compared to 2% in developed countries. According to Mobius, this gap will continue to expand, and to understand why, we must look beyond mere demographic reasons, and the key is in technology.
“The Internet’s massive penetration in emerging markets has caused these countries to take a technological leap, maximizing productivity and overtaking the developed ones. For example, in China, the importance of online shopping is such, that they have devised an online payment system far superior to all traditional payment systems used by banks. Even in Africa, we see similar examples, like M-Pesa, created by Vodafone in Kenya, a pioneer in money transfers using mobile phones. “
M-Pesa (M for mobile, and Pesa, for the word money in Swahili) is a means of payment by cell phone that includes transfers and microfinance, and which has extended from Kenya and Tanzania, where it was launched in 2007, to South Africa, India, Egypt, Lesotho, Ghana, Mozambique and several countries in Eastern Europe.
China can be just as innovative, or even more so, than the United States
Alibaba, the Chinese “Amazon”, in its last “Singles Day” had revenues of USD 17.8 billion, compared to the USD 5 billion spent in the United States on Black Friday plus Cyber Monday. The Chinese market is huge, and Internet activity is the norm. “China accounts for 10% of the global internet traffic, as compared to 4% for the United States,” says Mobius, “and it’s not just about applying the law of large numbers, technological innovation is cutting edge.”
An example of local technology is WeChat, owned by TenCent Holdings, one of the companies held by Templeton’s Emerging Global Strategy. This app is the Chinese answer to Whatsapp and Snapchat and has more than 700 million users, mostly in China, although it is also used in India or even in Latin America. In the big cities in China, it has a penetration of over 90% and its uses go far beyond those in Whatsapp, as it is used to close business appointments, order food in restaurants, call a taxi, transfer money, etc. WeChat’s estimated ARPU, or average revenue per user is USD 7, seven times that of Whatsapp, which, as we may recall, was acquired by Facebook in 2014 for USD 22 billion.
China has its own Silicon Valley in Shenzen, a city in the south of the country. “A lot of talent based in Silicon Valley comes from China and India. If Trump applies very stringent immigration regulations, some of this talent will have to return to their countries of origin,” says Mobius,” something that would be very damaging to the tech industry in the United States.”
Chinese technology is being exported to other emerging markets
China’s telecommunications equipment industry, for example, has achieved very sophisticated but cheaper technology than its European competitors, Ericsson and Alstom. China is also willing to provide financing to emerging markets that need to invest heavily in infrastructures. Mobius describes how its team noticed an unexpected decline in capex in telecommunications equipment in Argentina. When analyzing the situation, they saw that the investment in infrastructures had fallen because the acquired telecommunications equipment was cheaper, and Chinese. “Although the price was lower, the service was excellent, as the Chinese company had transferred 100 engineers to Argentina to implement the equipment.”
Smaller companies offer the greatest opportunities
According to Mobius, China is a more liquid market, and the opportunities are huge, especially now with the connection between the Hong Kong and Shanghai markets, which has provided access to smaller companies, whereas before you could only invest in large caps. That said, India has a higher rate of growth. “The potential in India is higher since it starts from a lower base. There are 4,000 listed companies, and even though there is more research now than when I started investing in emerging markets, not many more than 100 are covered. There are still a lot of opportunities that can be exploited if you have an investment team in the ground, especially in the field of small caps, and also in private equity. “
The advantage of having local teams extends to all the markets in which Mobius invests. Franklin Templeton has a strategy that invests in smaller companies in emerging markets, that has had particularly strong performance this year. The asset management firm is also present in the field of private equity in emerging markets through specialized vehicles. In this area, Mobius noted, “We focus on companies that are close to going public, preferably within a three to five year time frame”.
The other force for change mentioned by Mobius is political: emerging markets are veering politically towards more orthodox governments, promoting pro-market reforms. “Greater freedom in these countries leads to an increase in social movements and demonstrations, which are sometimes violent, but which also promote change,” adds Mobius.
Does the FED rate rise pose a risk to emerging markets?
In addition to the reservations caused by Trump’s rise to power, which, to a certain extent, have slowed down the flow towards emerging markets, there are a number of factors that worry investors. The behavior of these markets in a raising rates environment is number one on the wall of worries for many investment professionals. Mobius believes in the case of emerging market equities, history shows all kinds of behavior in periods of rate hikes by the FED, “there is no correlation,” Mobius points out. In fact, in his opinion, it may be positive for the markets because US savers will feel more secure seeing their pensions are yielding something, and will be less reluctant to invest in more risky assets such as emerging markets equities.
Argentina and Brazil, a winning tandem
Templeton is a value-based asset manager, and this year, this approach has benefited the emerging market strategies managed by Mobius, obtaining returns that generally beat their benchmarks comfortably. But there are also other factors that explain this good behavior.
The main one is the overweight of the technology sector, including internet-related stocks, the cornerstone of development in emerging markets. “We were late to the internet because, as value investors, we found it difficult to find companies with good earnings, but now we do find them, especially in China.”
Investing in a couple of heavily undervalued Brazilian banks has also had a positive impact on Templeton’s equity strategies. Brazil, along with Thailand, are positions that Mobius has been overweighed for a long time. This year, both markets have worked very well. In addition Argentina is one of the countries whose change is more plausible, according to Mobius, who is very positive about its prospects. “We would like to see more privatizations of state-owned companies and more issues, but on the whole, Argentina has a terrific profile for investing.”
