CC-BY-SA-2.0, FlickrPhoto: Wilson Hui. Global Divergence
No one talks about decoupling anymore. It is one of those pieces of vocabulary associated with 2008 and the hope that emerging market fundamentals would insulate those economies from what turned out to be the greatest recession since the Great Depression. That hope was not entirely misplaced, of course, says Alex Johnson, Head of Absolute Return Fixed Income at BNP Paribas IP.
Exhibit 1 below shows, first, Chinese GDP on a year-on-year basis (the green line). While during the Great Financial Crisis in 2008 -2009 Chinese GDP was nearly halved—and Chinese equities performed dismally—there was a sharp rebound on the back of enormous fiscal stimulus. Now BNP Paribas IP may be seeing its inverse, and that is best illustrated by the other line (the blue line) on the chart, the Shanghai Stock Exchange Composite Index, down 8.5% on Monday, July 27, alone.
Some commentators have suggested that this does not really matter. Exhibit 1 illustrates the rationale to their thinking: year-to-date, the index has gained 15.18% (to July 27), and the one-year gain is over 75%. While the highs were higher, the averages are looking good.
“There is a degree of merit to this argument. The Shanghai Composite has never been a bellwether of the Chinese economy in the sense that the S&P 500 might be said to be for the US. It exhibits no meaningful correlation with GDP, and it has not been a vehicle for significant retirement planning”, poin out Johnson. The A-share market is not easily available to overseas investors, and the price movements are driven almost entirely by domestic flows, limiting contagion.
Johnson believes there are serious flaws in this view. First, he says, the composition of the investor base has changed even this year, with more and more small retail investors participating in the market ‑ and thus suffering losses. Many of these investors blame the central government, which they have accused of encouraging them to invest in the first place. There is some truth to this, unfortunately. To pick one example, Bloomberg Business cited the Xinhua News Agency in September 2014, which ran eight articles in that week alone advocating buying equities, and the futures exchange cut margin requirements in that same week. Buying shares on margin is common: such financing exceeds CNY2 trillion (US$322 billion).
Recognising this, Chinese authorities have already put in place controls, including preventing shareholders holding more than 5% of a stock from selling for six months, and they have begun purchasing stock outright. The track record for controls such as this is unedifying. There are broader issues, too. The Chinese government maintains its legitimacy on the basis of improving living standards and good custodianship of the economy, and the suggestion that there are developments beyond its control could be damaging and lead to unpredictable outcomes. There is also a wealth effect, and we can expect a reduction in consumption commensurate with the shock.
“We are seeing some effects already. Oil has sunk to new recent lows of under US$48 per barrel. While that will be at least partly related to the lifting of Iranian sanctions, other commodities are reacting similarly. This puts direct pressure on many emerging market commodity exporters ‑ and some not-so-emerging-markets, such as Australia and Canada, and their currencies”, explains BNP Paribas IP expert.
However, says Johnson, in Europe and the US, the picture seems different. Germany released its monthly Ifo survey, with all three components—business climate, current assessment, and expectations—beating expectations. That is in line with the ZEW survey released two weeks ago and a raft of other data, including the stock market up over 13% year-to-date; France’s has gained almost 16%, and Spain’s 21%. Now that Greece is, temporarily at least, behind us, the world’s largest and wealthiest trade grouping has defied all of last year’s gloomy prognostications.
The US picture is less positive. The earnings season in particular has not hit the high notes of previous quarters, with IBM notably pointing to China. Data is generally strong: initial jobless claims were the lowest for 42 years, and housing data has also been particularly robust. “What remains elusive is evidence beyond the merely anecdotal of wage growth. In addition, a leak of confidential staff forecasts used during the June 17 Federal Open Market Committee (FOMC) meeting showed staffers had lower expectations for the path of federal funds than the Committee does itself. At the margin, this may lengthen the odds of a hike in September – and events in China are not helping either”, sumamarizes.
. Deutsche Asset & Wealth Management Hires Nick Angilletta to Lead Wealth Management Capital Markets Business
Deutsche Asset & Wealth Management (Deutsche AWM) announced that Nicholas Angilletta has joined the Bank as a Managing Director and the Head of Wealth Management Capital Markets in the Americas.
In this new role, he is responsible for managing the trading activities of Deutsche AWM’s Wealth Management Capital Markets business in the Americas. Based in New York, Angilletta reports directly to Yves Dermaux, the Head of the Solutions & Trading Group for Deutsche AWM, and regionally to Jerry Miller, Head of Deutsche AWM in the Americas.
“We are excited Nick has joined our team, as he has extensive experience leading capital markets teams, delivering product solutions, and deepening client relationships,” said Dermaux. “His experience will play a critical role as we look to evolve our wealth management capital markets business in the Americas.”
Angilletta is a 25-year veteran in the financial services industry, focusing his entire career in the wealth management capital markets space at Morgan Stanley. Most recently, as a Managing Director and the Director of Capital Markets and Consulting Group Sales Strategy. Previously, he held various positions at the firm including Head of Sales for Morgan Stanley Wealth Management’s Global Investment Solutions and Asset Management Business and Head of Smith Barney’s Private Client Sales and Trading desks.
“As we continue to expand Deutsche AWM’s presence in the Americas, we must further enhance our capital markets business on both the asset and wealth management sides of the business to anticipate the needs of our clients and capture greater market share in this important growth region,” said Miller.
. Global Dividends Fall in Q2 as The US Dollar Soars In Value, But Underlying Growth Is Strong
Global dividends fell 6.7% year on year in the second quarter to $404.9bn, a decline of $29.1bn according to the latest Henderson Global Dividend Index. This is the third consecutive quarter of declines, mainly owing to the strength of the US dollar against major world currencies.
The euro, yen and Australian dollar were all a fifth weaker year on year and sterling was down a tenth. The rising dollar knocked a record $52.2bn off the value of dividends paid during the quarter. The HGDI ended the second quarter at 155.1, down 4% from the 161.5 peak in September last year.
Underlying growth, however, which strips out exchange rate movements, special dividends, index changes and changes in the timing of payments, was an encouraging 8.9%.
Q2 is dominated by Europe ex-UK, so trends in that region characterise the global results this quarter, and largely explain the weak headline global growth figure. Two thirds of Europe’s dividends are paid in the period and these fell 14.3% on a headline basis (to $133.7bn), a drop of $22.3bn, with most countries seeing double digit declines. This was almost entirely due to the sharply lower euro against the US dollar. The negative exchange rate effect was a record $29.5bn in the quarter.
Underlying growth was 8.6%, an impressive result for the region with Italy, the Netherlands and Belgium enjoying the highest underlying growth, boosted by a strong performance from financials. Indeed, the region’s financials as a whole significantly increased their payouts, led by Allianz in Germany, which is raising its payout ratio.
This encouraging performance from the sector is part of a growing trend around the world. Danish shipping conglomerate Moller Maersk paid a very large special dividend, while France, the region’s largest payer, saw a slowdown (underlying growth was 2.3%, headline was -20.2%), with weakness at Orange and GDF Suez affecting growth there. German dividends fell 16.0% to $29.9bn, but were 6.6% higher on an underlying basis, with a similar result in Spain (-24.4% headline, +6.0% underlying). In Switzerland, headline dividends fell 2.4% to $17.0bn, owing to a weaker Swiss franc. They rose 5.9% on an underlying basis, with a large increase at UBS contributing to the improvement in European financial dividends.
Once again, US companies grew their dividends rapidly, with almost every sector increasing payouts. Here too, financials showed rapid growth, with Bank of America and Citigroup quintupling their distribution. Overall headline growth was 10.0%, taking the total to $98.6bn, and the US HGDI to a record 186.0. This strong performance marked the sixth consecutive quarter of double digit increases. Underlying growth was a similarly strong 9.3%.
Q2 is also an important quarter for Japan, accounting for almost half the annual total. Headline dividends fell 7.1%, but underlying growth was very impressive, up 16.8% to $23.4bn, as rising profits combined with higher payout ratios to drive dividends higher. Japanese companies are responding to calls from investors and the government to increase the proportion of their profits they return to shareholders (from a very low base compared to other developed markets). South Korea is among other countries seeing the same pressures, and that helped push South Korean dividends higher by 37.4% on an underlying basis year on year, with large increases from Samsung Electronics among others.
Though technology dividends rose fastest, in line with a long running trend, financial dividends grew 0.3% at a headline level year on year, far outperforming the 6.7% global headline decline, and indicating rapid underlying growth. Financials account for roughly a quarter of annual global dividends, so improvements to dividend payments in this industry can make a real difference to income investors.
With underlying growth so encouraging, Henderson has upgraded its forecast for 2015 by $29bn. It now expects global dividends of $1.16 trillion this year, which is down 1.2% at a headline level, but up 7.8% on an underlying basis. The strength of the US dollar against all major currencies explains the marginal headline decline.
Alex Crooke, Head of Global Equity Income at Henderson Global Investors said: “Though the headline decline seems disappointing, it is concealing very positive underlying increases in dividends. The strength of the US dollar had a significant impact again this quarter but our research shows that the effect of currency movements even out over time and investors adopting a longer term approach should largely disregard them. At the sector level, it is encouraging to see increases from financial companies as they start to slowly move towards higher payout levels. But this is less about a renewed boom to financial payouts and more about a gradual return to normality.
“This means a dividend paying culture is extending into new markets, beyond those where paying an income to equity investors is already deeply entrenched, highlighting the increasing income opportunities available to investors who adopt a global approach”, said.
China’s desperate efforts to enhance its competitiveness are putting a lot of pressure on its Asian neighbours. This is why currencies in the region are tumbling: the South Korean won, the Australian dollar, the Thai baht and the Taiwanese dollar have all, amongst others, fallen sharply against the greenback, said Patrice Gautry, Chief Economist at UBP.
“Once again we find ourselves facing a deflationary shock. China is a heavyweight in international trade and, whilst we do not expect a repeat of the 1997 crisis, the rest of the global economy was much more vibrant back then, and the only country not to devalue its currency was China itself. Nowadays, in a world where demand is already sluggish, these beggar-thy-neighbour policies could have a lasting impact on growth and earnings”, says UBP.
“For the last two years we have not recommended holding or buying bonds in local EM currencies; this has also been true for yuan-denominated securities. We recommend continuing to have no exposure to these securities”, the experts add.
They remain highly cautious on EM equities, as what they have outlined above is going to have a negative impact on margins, earnings and cash flows. “EM equities will continue to underperform, so we recommend staying markedly underweight, as it is too early to go back into them”.
And the impact in DM?
“We have to assess the impact on developed equity markets of this reversal of policy in China. Might it shift when the Fed starts to normalise its monetary policy? For now, we do not know, although it will undoubtedly weigh on import prices and consequently on inflation figures. Central banks are on alert, ready to provide more liquidity should the markets and risk assets come under too much pressure. Nevertheless we recommend maintaining equity and risk-asset allocations at the levels recommended by the Investment Committee, but no higher than that”. Developed equity markets are still on an upward trend, but their momentum is weakening.
Context
China’s move to weaken its currency on Tuesday morning came as a surprise. The size of this first devaluation may appear insignificant, but it represents a u-turn in the country’s currency policy. The dollar peg was seen as a tool to attract foreign investment – luring it in with a stable currency – but it also helped the yuan to gain the status of a reserve currency; it went on to form part of central banks’ forex reserves around the world.
“Growth is slowing down quickly in China”, according to Gautry “The Chinese government was hoping to kick-start domestic consumption thanks to a vibrant stock market, which translated into wealth effects for Chinese households. With the recent crash and the panicked official reaction to counter it, these hopes have been dashed. The fall in commodity prices around the world (these are currently at their lowest levels in twelve years) is undoubtedly linked to recent events in China, where much slower economic growth has meant lower demand for commodities in general”.
The only option left was to boost exports – which fell sharply recently – by devaluing its currency. Recently, the yuan has been under pressure and, in order to maintain its peg, the PBoC had to sell dollars, which explains why its domestic reserves have fallen significantly since the beginning of the year. Weakening the currency could be seen as a cheap way to boost exports, but that signal will push many investors and corporations to sell even more yuan, making it harder for the PBoC to oversee a steady depreciation of the yuan.
Bolsa de París. Foto: Francisco J.González, Flickr, Creative Commons. Una consolidación temporal que no afecta al potencial alcista de las acciones europeas
China’s Central Bank has taken steps to devalue the renminbi. The initial direct impact on eurozone equities is fairly limited but certain sectors and companies have more pronounced exposure.According to Martin Skanberg, European Equities Fund Manager at Schroders, debate has raged surrounding the rationale behind China’s currency devaluation. One interpretation puts this week’s moves down to political considerations, with China seeking to create a more market-driven exchange rate that would allow its currency to gain admission to the IMF’s Special Drawing Rights basket -an international reserve asset, created by the IMF, which member countries can use to supplement their official reserves-.
“Nonetheless, markets have focused on the possibility of further steep declines in the renminbi, and we are mindful that the change in Chinese monetary policy may also be indicative of weaker fundamentals and the deteriorating health of the economy. Slowing GDP growth is backed up by anecdotal company feedback which points to a considerable contraction in Chinese trade data, with export and import levels both meaningfully lower. As a result, global risk premia may need to adjust higher to reflect lower global growth. This could see an acceleration of emerging market stress which is likely to continue to have a negative impact on commodities and energy prices”.
Risk of deflationary pressure
One consequence is that we may see deflationary pressures re-emerge. These are also in evidence from lower factory gate prices (producer price index) in China which are currently at -5% year on year. Emerging market contagion, currency wars and the potential for spill over into the Asia Pacific basin represent a wider risk to European equities. A more pronounced period of competitive devaluations cannot be entirely ruled out as the renminbi is generally regarded to be some 5-10% overvalued against the dollar, but the gap is much more considerable against other emerging market currencies, says the expert.
On the other hand, another scenario is that imported deflationary pressure into the eurozone and adjacent economies such as the UK could lead the European Central Bank to extend its quantitative easing policy. This would likely be supportive for sentiment towards eurozone equities. Additionally, the risk of an extreme devaluation would be nullified if the authorities’ intention is simply to create a more flexible exchange rate.
Eurozone exposure to China is moderate
Around 6% of total eurozone exports go to China, with some 10% of the region’s imports coming from China (source: Citibank). While this is not immaterial, the overall level is fairly moderate and highlights the fact that domestic intra-eurozone trade is far more important to eurozone GDP. Further currency devaluations would act as a headwind to export pricing, but cheaper imports may offset this and support domestic consumption in the eurozone.
“Moreover, we need to ensure that perspective is retained over the Chinese devaluation. Given the euro’s weakness against the dollar over the past year, the euro has in fact depreciated by c.2% against the renminbi over the last 12 months and is nearly 9% weaker over the past two years. Consequently, eurozone exporters are still enjoying currency tailwinds at current levels”.
“In terms of eurozone equity exposure, detailed data is limited. It is estimated that c.12% of market cap weighted sales (for Eurostoxx 50 companies) go to the Asia Pacific region, with only 2% going directly to China. We should note that these figures capture only direct sales, and do not fully reflect value added domestic sales that may ultimately become China exports. However we would estimate the exposure to earnings to be slightly higher, approximately 6%. Once again, this demonstrates the reliance on domestic European trade (c.59%). Hence we anticipate only a moderate impact from the foreign exchange move on the wider eurozone markets”.
Luxury goods and autos among the most affected sectors
That said, within this there are sectors and companies that have significant exposure. These include sectors such as luxury goods, technology, automotive, capital goods and materials (mining and chemicals in particular). “For these, translated profits will be impacted but it is also possible that competitive transactional disadvantages may emerge due to revitalised competition (for example, this could impact some industrial and chemical companies which face strong Chinese competition)”.
According to the fund manager, whilst the dispersion is wide across the eurozone, there are many domestic industries that have by definition limited or no direct exposure including banks, insurance, travel, media, utilities and telecom services to name but a few.
Domestic eurozone exposure is preferred
“In terms of our positioning, we have a clear preference for stocks with eurozone exposure, including banks, which have improving momentum amidst the domestic recovery. Meanwhile, consumer resilience in the eurozone is well underpinned thanks to the stimulus offered by low or negative interest rates, cheap oil, rising bank credit impulse and pent-up demand from the recovery of peripheral Europe. By contrast, we have limited exposure to luxury goods and automotives which should prove beneficial if these sectors continue to lag the wider market.
As ever, we remain on the lookout for mispriced opportunities, and future foreign exchange induced stockmarket volatility may well lead to exaggerated movements which can be exploited by active managers”.
Foto: Jonathan, Flickr, Creative Commons. Julius Baer nombra a Jimmy Lee nuevo responsable para Asia Pacífico
Jimmy Lee will join Julius Baer on 1 October 2015 to become Head Asia Pacific and a member of Bank Julius Baer’s Executive Board with effect from 1 January 2016. In the past 25 years, Jimmy Lee has had a proven track record in the private banking industry in Asia and thus brings a wealth of expertise to Julius Baer.
Having worked at Credit Suisse Group for a total of eleven years, he was most recently Market Group Head Hong Kong at Credit Suisse. Previously, he acted as Chief Executive Officer Asia of Clariden Leu from 2009 to 2012 and headed the integration of the bank into Credit Suisse in the Asia Pacific region in 2012/13. Prior to that, Jimmy Lee was Head Private Wealth Management Southeast Asia / South Asia at Deutsche Bank for five years and also held a number of other top management positions in the financial industry in Asia.
After successfully building up and leading Julius Baer’s business in Asia Pacific for ten years and managing the seamless integration of Merrill Lynch’s International Wealth Management business (IWM) into the Bank’s local operations, Dr Thomas R. Meier, current Region Head Asia Pacific, has expressed the wish to return to Switzerland to continue his distinguished career at the Group’s headquarters. As of 1 January 2016, he will be non-executive Vice Chairman Wealth Management, reporting to Chief Executive Officer Boris F.J. Collardi. As part of this new role, he will take over various key tasks at the Group level.
Boris F.J. Collardi, Chief Executive Officer of Julius Baer, commented: “I am very pleased that we have been able to win Jimmy Lee and warmly welcome him to Julius Baer. With Jimmy’s vast experience and his extensive network, we will launch the next phase of growth and take our presence in Asia to the next level.”
Boris F.J. Collardi added: “In the past ten years, Tom Meier has led our operations in Asia Pacific from modest beginnings to being one of the major players in this most important growth market today. I would like to thank him for this truly extraordinary achievement. In his new role as non-executive Vice Chairman, we can continue to draw on Tom’s vast and valuable private banking knowledge.”
Today, Asia is Julius Baer’s second home market with nearly a quarter of the Group’s assets under management globally. After the successful integration of the IWM business in 2014, Julius Baer is now one of the leading international wealth managers in the region.
Foto cedidaDe izquierda a derecha, Ánbel Buñesch e Íñigo Iturriaga.. credit suisse
Credit Suisse has announced that Pedro Jorge Villarreal will become the Chief Executive Officer of Mexico, effective immediately. Mr. Villarreal, a 15-year veteran of Credit Suisse, will be taking over the country CEO role from Hector Grisi who is leaving the bank. Mr. Villarreal will continue to hold his current role as the co-head of the Investment Banking Department for Latin America, excluding Brazil. Previously, he led the Investment Banking Department in Mexico for five years.
This appointment marks a natural progression for Mr. Villarreal and for Credit Suisse in Mexico, where the bank has grown significantly over the past half-century into a fully integrated Investment Bank, Private Bank and Asset Management business.
Robert Shafir, CEO of Credit Suisse Americas Region, said: “I am thrilled that Pedro Jorge Villarreal, an established and recognized leader in our Latin America franchise, will be taking on this leadership role as country CEO for Mexico. Mexico’s growing economy brings with it a need for increased financial intermediation, wealth creation and deeper capital markets – and Credit Suisse is uniquely positioned to meet these needs. I expect our success in Mexico to continue under the leadership of Mr. Villarreal. I would also like to thank Mr. Grisi for his considerable contributions during his many years at the bank.”
CC-BY-SA-2.0, FlickrPhoto: Travis Simon. Legg Mason to Acquire Australian Infrastructure Firm
US asset manager Legg Mason announced that it has agreed to acquire a majority equity interest in Rare Infrastructure, Ltd., (Rare) a global infrastructure asset manager headquartered in Sydney, Australia.
Rare has offices in Sydney, Melbourne, London and Chicago and specialises in global listed infrastructure investments, managing $7.6bn (€6.8bn) for institutional and retail clients.
Under the terms of the transaction, Legg Mason will acquire a 75% ownership stake, the Rare’s management team will retain a 15% equity stake and The Treasury Group, a previous minority owner, will retain 10%.
Joseph Sullivan, chairman and CEO of Legg Mason, said, “Rare’s investment expertise has strong relevance for many clients today, meeting important investment objectives including income, growth, diversification and capital preservation. The market for infrastructure investing has grown significantly over the past few years and RARE has participated in this growth, particularly in early adopter markets like Australia and Canada.”
Rare will operate as a core independent investment affiliate along with Brandywine Global, ClearBridge Investments, Martin Currie, the Permal Group, QS Investors, Royce and Associates, and Western Asset Management.
Photo: Francis Bijl . iShares Is Preparing a New ETF Tracking the Barclays Global Aggregate Index, Expanding its Fixed Income Strategies
iShares has filed for a fund that will be the international answer to its iShares Core U.S. Aggregate Bond ETF, as well as the main competitor of the Vanguard Total International Bond ETF.
The iShares International Aggregate Bond ETF will track the Barclays Global Aggregate ex USD 10% Issuer Capped (Hedged) Index, a currency-hedged index of nearly 8,000 non-USD investment-grade fixed-income securities issued in 55 developed and emerging countries.
The Vanguard Total International Bond ETF is the only fund of its kind at the moment; it also provides broad exposure to the non-U.S. investment-grade bond space with a currency hedge. It was launched in 2013 and has accumulated nearly US$ 3.5 billion in assets under management. When Vanguard launched the ETF along with an emerging markets bond ETF, there was a great deal of investor interest, as it was the first time that the fund provider had delved into the international fixed-income universe.
Since bond exchange traded funds were first launched in 2002, US-listed bond ETFs have grown to approximately US$ 320 billion in assets, becoming an increasingly important part of financial advisors’ portfolios due to their low cost, tax efficiency, and competitive performance.
Alexander Darwall, gestor del fondo Jupiter European Growth. Foto cedida. Jupiter: “Las compañías de éxito con catalizadores de crecimiento seculares se verán recompensadas”
Alexander Darwall, fund manager of the Jupiter European Growth Fund, explains in this interview with Funds Society that he does not invest depending on the macro evironment: he looks for successful companies that, tapping into secular rather than simply macro growth drivers, will be well rewarded. And he follows this 3 long term trends: global growth; application of digital technology; and change in regulations.
How optimistic are you regarding Europe’s growth, and what about European companies?
We are optimistic about European companies that put their expertise to use to develop world-leading products and services. Our aim is to build a portfolio of such world-class companies that tap into long term structural trends such as the impact of technology, globalisation and changes in regulation rather than taking a view on the macroeconomic cycle.
Will the credit boost be the main driver of the economy recovery? Which other factors?
Improving credit conditions in Europe are welcome news. However, we believe that the liberalisation of markets, ongoing globalisation and structural reforms are required to sustain economic growth. Our focus is to try to find companies with the entrepreneurial drive to bring new products and services to market that consumers willingly pay for.
How could the growth picture affect equity markets in the next months? Do you expect a rally in European equities?
We do not take a view about where equities will trade in the next few months. We look for strong, proven business models whose success is determined to a large extent by their own efforts rather than by the general macro environment. These companies tend to tap into multi-year structural drivers, such as the rising incidence of diabetes or the application of new digital technologies, such as digital payments. By way of example, 7 holdings with an average weight of 29% have been in the portfolio for over 7 years (as at 31 July 2015), demonstrating that we do not sell a sensible business model when market sentiment turns negative, which it periodically does. This is where our focus on meeting corporates rather than the sell-side is crucial – as a team we meet 200 or so corporates a year – as the stock market is prone to panic at the top and bottom of the market. In summary we are confident that with a good degree of patience, successful companies tapping into secular rather than simply macro growth drivers will be well rewarded.
There is much consensus about the attractiveness of European equity at the moment… Could this be dangerous?
We look for market leaders with a favourable market structure, focussing on the fundamentals, and do not spend our time worrying about the macro picture and short term market volatility. Valuation is intrinsically difficult and we approach the subject with due humility. Our view is to try to identify companies that have the ingredients for success that we look for and to subsequently decide what we are willing to pay for them. This is the key difference between an investor and a speculator; an investor invests in a business imagining it to be unlisted and with a view to never selling it, while a speculator’s focus is to find someone to buy the asset off you at a higher price and to forecast changes in market sentiment. Deciding on price before choosing what it is we want to buy is not an approach we favour.
Our starting point for an investment is to ensure that a company is managed for the benefit of minority shareholders. We then look for the right ingredients, which are summarised in the following 4 sequential steps: The ‘right’ company (the company offers a core competence that differentiates it from competitors and which it can monetise. Typically, we are drawn to companies that are less capital intensive and have more intellectual property); The right management (the business is presided over by an excellent management team and has a strong corporate governance and company culture); Structural trend (the company has a number of growth options and taps into clearly identifiable multi-year structural trends); Valuation (we are of the belief that where we are right about the first three steps, we tend to have positive surprises, which is the inverse of the ‘value trap’, where we are wrong about the inputs).
Are Central Banks helping to generate a bubble in European equities?
Our view is that quantitative easing does not address Europe’s more fundamental structural problems. We are confident that companies offering a special product will be well rewarded, if we exercise the right degree of patience.
Do you think last corrections due to the Greek crisis could generate opportunities to buy?
Greece or its consequences for stock markets has no direct bearing on our portfolio, as we try to be invested in companies for whom the outcome is not a pressing concern.For all our investments, first we identify what assets we would like to own; then we decide on price. We have nothing against Greece, but we have not identified the ‘right’ companies there: world-beating companies offering differentiated products that consumers are willing to pay for. As such, we do not have any holdings listed in Greece. Most of the companies in the portfolio are global in nature. As at end of June 2015, approximately 80% of the portfolio is invested in global businesses that happen to be listed in Europe; the remaining 20% of the fund in invested in companies that operate in Europe. No single company in the portfolio has any significant exposure to Greece.
How do you see Greece agreement with Europe and what do you think it could mean to the markets?
Typical concerns for the companies in the portfolio are the impact of technology, regulations, consumer habits, as well as managing the lifecycle of their product, commoditisation, and motivating employees in the Research and Development department. Predicting the macro is extremely difficult, so our focus is to stick to our strengths: identifying successful business models, looking for patters of success across sectors from our investment experience.
How does the Euro contribute to the impulse of the markets and in which levels do you see it vs dollar?
As with the macro, we spend no time trying to predict foreign exchange, as we try to be invested in companies for whom the FX is not a pressing concern. Most of the companies in the portfolio sell their wares globally, so at any one time they are gaining and losing from FX; they tend to take translation risk rather than transaction risk. These companies do not rely on the exchange rate to succeed. Instead, their priority is bringing the best product or service to market. Many companies have been in the fund for many years, during which time they have benefited and suffered due to the FX, but that has not been the key determinant of their success.
In which companies or sectors do you have more convictions?
As investment specialists, we look for companies with similar characteristics across sectors, such as a differentiated product, free pricing, high barriers to entry, Intellectual Property over Capex and a proven track record. We do not tend to find companies with these characteristics in utilities (regulated pricing) or in commodities, real estate and mainstream financials (lack of differentiation). The areas in which we find many of my ideas are technology, healthcare, industrials and the media.
While we aim to put together a portfolio of unique, uncorrelated companies, the holdings can be loosely grouped under three structural long term trends: Global growth (companies tapping into global growth, such as healthcare); Application of Digital technology (for example, business benefiting from the growth in ecommerce); and change in regulations (for example, disruptive business models that are benefiting from the mainstream banks being capital constrained).
How positive are you on banks? Why?
Historically, the fund has been structurally underweight the financial sector. We have tended to be underweight the mainstream banks and insurance companies. To us, banks have an undifferentiated offer, they have a lack of pricing power and they rely on macro factors that are out of their control such as interest rates move, monetary policy, currencies etc. We favour ‘alternative financials’ that are benefiting from changes in regulation. There is an unmet demand for credit and while mainstream banks are rebuilding their balance sheets and retrenching from non-core areas. For example, Provident Financial offers financing to non-standard lenders in the UK which they would otherwise not receive from the mainstream banks.
Core Europe or peripheral? And what’s about Spain?
It is never for me a question of core Europe versus peripheral Europe but rather more whether my analysis of a company demonstrates that it has excellent long-term growth prospects, is exposed to growth in global trade and productivity and has a future, as far as is reasonably possible that depend on their own efforts and not on factors beyond their control.
Spanish-listed companies accounted for around 7.6% of our portfolio as at 30 June 2015. We have two companies with headquarters in Spain, Amadeus and Grifols. Amadeus is a global software leader offering a Global Distribution System to airlines and travel agents across the world. They derive less than 50% of their revenues in Europe. Grifols is another global pharma leader manufacturing plasma-derived (blood) products. More than 60% of the company’s revenue is generated in the US. These companies tend to operate globally which offers proof of concept for a company offering a differentiated product or service.
The above commentsrepresents the views of the fund manager at the time of preparation (August 2015) and may be subject to change. Readers should be aware that they should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided, but no assurances or warranties are given.
