With GDP growth significantly lower in the United States, slightly better economic figures in Europe, no clear trend in Japan and continuing weakness in emerging markets: as has been the case in recent years, hopes of an upturn in economic growth may well be disappointed again this year. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team in their monthly analysis, ‘Highlights’.
Despite In the United States, GDP growth came in significantly below expectations in the first quarter, mainly due to difficult weather conditions during the winter and strikes at the country’s west-coast ports. In Europe, economic statistics improved slightly thanks to the weakness of the euro, despite fewer positive economic surprises since the beginning of April. In Japan, economic activity is still not displaying any clear trend, while in emerging markets it is continuing to slacken. “As has been the case in recent years, hopes of an upturn in economic growth may well be disappointed again this year,” says Guy Wagner, Chief Investment Officer at Banque de Luxembourg and Managing Director of BLI – Banque de Luxembourg Investments.
Stable oil prices have stemmed a further drop in inflation rates
With the stabilisation of oil prices, inflation rates have consolidated at low levels. In the United States, inflation dipped from 0% in February to –0.1% in March, while in the eurozone, the inflation rate rose from –0.1% in March to 0% in April. The Chinese central bank has reduced the commercial banks’ required reserve ratio. The US Federal Reserve has not given any further indications about a timetable for a first interest rate rise. As a result, analysts are not expecting the Federal Reserve’s first rate hike until September at the earliest. In Europe, the ECB is continuing to buy up government bonds at the rate of EUR 60 billion per month. In China, the central bank reduced the commercial banks’ required reserve ratio from 19.5% to 18.5% and is preparing to accept debt issued by regional governments as collateral.
Government bond yields are rising in Europe and the United States
In April, eurozone government bond yields rose. The upturn in yields in Germany, Italy and Spain seems to have been triggered by short positions adopted by hedge funds in view of the paltry level of almost all bond yields in the eurozone. Bond yields also rose in the United States. “Despite the rise, European long rates still lack appeal. US government bonds are the only viable alternative in industrialised countries given that they still have potential to appreciate if economic activity slows further,” asserts the Luxembourg economist.
Equities remain the default investment
US and European stock markets held their high levels in April, while Japanese and Asian stock markets even continued to rise. According to Guy Wagner: “Given the good performance of most shares since the start of the year, a stock market correction at the beginning of the May to October period – a time historically less favourable for stock markets than November to April – would not be particularly surprising.” Unless there is an external shock, equities should maintain their status of investment by default due to the ongoing prospect of a zero interest rate environment for the coming months.
The European Fund and Asset Management Association (EFAMA) has today published its latest Investment Funds Industry Fact Sheet, which provides net sales of UCITS and non-UCITS for March 2015.
27 associations representing more than 99.6 percent of total UCITS and non-UCITS assets at end March 2015 provided us with net sales and/or net assets data.
Net assets of UCITS break through the EUR 9 trillion mark for the first time in March 2015, while Net sales of UCITS remained strong in March attracting EUR 69 billion in net new money, albeit down from EUR 87 billion in February. This reduction in net sales can be attributed to a turnaround in net flows of equity funds and money market funds during the month.
Long-term UCITS (UCITS excluding money market funds) registered a second consecutive month of net inflows of EUR 71 billion in March: Bond funds posted net sales of EUR 26 billion, being the same level as February; Equity funds experienced net outflows of EUR 3 billion, against net inflows of EUR 14 billion in February; And Balanced funds registered a jump in net inflows to EUR 39 billion, up from EUR 22 billion in February.
Money market funds registered a turnaround in net sales in March to post net outflows of EUR 2 billion, compared to net inflows of EUR 16 billion in February.
Total non-UCITS net sales amounted to EUR 18 billion, compared to EUR 21 billion in February. Net sales of special funds (funds reserved to institutional investors) decreased to EUR 12 billion during the month from EUR 16 billion in February.
Total net assets of UCITS stood at EUR 9,004 billion at end March 2015, representing a 2.5 percent increase during the month.Total net assets of non-UCITS increased 2.3 percent to stand at EUR 3,547 billion at month end. Overall, total net assets of the European investment fund industry stood at EUR 12,551 billion at end March 2015.
Bernard Delbecque, Director of Economics and Research commented: “Long-term UCITS continued to attract strong net inflows in March thanks to a leap in net sales of balanced funds, which continued to attract investors by providing broad market, asset class and sector diversification.”
CC-BY-SA-2.0, FlickrPhoto: King Simmy. Columbia Threadneedle Investments Strengthens European Equities Team
Columbia Threadneedle Investments has appointed Mark Nichols to Portfolio Manager in its European Equities team.
Led by Philip Dicken, the team comprises 11 investment professionals who together manage £17.8 billion (€24.5 billion) on behalf of retail and institutional investors.
Mark will be based in London and joins from F&C Investments where he was Director and Fund Manager in the European Equities team. He has 14 years of market experience and previously held European Equities roles at Lehman Brothers and Invesco.
Philip Dicken, Head of European Equities at Columbia Threadneedle Investments, said: “We are pleased to welcome Mark to the European Equities team and to expand our capabilities in this area. His strong track record and experience will further enhance our client proposition and help build on our success to date.
“The European economy is on a strong path to recovery. This has translated into positive momentum in the stock market – yesterday’s bears have become today’s bulls. We are expecting 10% corporate earnings growth in Europe this year and investors have a real opportunity to enjoy healthy returns”, point out Dicken.
CC-BY-SA-2.0, FlickrPhoto: Dennis Skley
. Is the Euro Heading for Parity with the US Dollar?
Since the European Central Bank’s (ECB) announcement in January 2015 that it planned to implement an expanded EUR1.1 trillion quantitative easing programme to stimulate the euro-zone economy the euro has fallen sharply against the US dollar and is currently trading around 1.06-1.10. The selloff in the euro has accelerated post the ECB press conference in the first week of March and the subsequent collapse in bond yields saw the euro trade below 1.06 against the dollar for the first time since March 2003. A further fall of about 6% will see it reach parity. At the same time, firm February US labour market data boosted bond yields there, favouring the US dollar over the euro. The chart below shows the historical trading between the euro since its launch in 1999 and the US dollar.
The question of parity is on many investors’ minds and in this viewpoint Investec AM will consider the likelihood of such an event.
How likely is a further fall?
When researching currencies Investec asks three questions: Do the underlying facts support the investment case? Is the investment cheap? And, are investors buying it?
“In answer to the three questions above, when we apply our research to the euro all our short-term indicators continue to suggest a reversal of the euro’s fortune and we can see the euro zone is beginning to recover. The ECB recently raised this year’s euro-zone growth forecast to 1.5%, up from 1% previously. Secondly the euro is cheap, currently trading at about 13% below its long-term moving average, and thirdly, investors have taken a short position and we believe oversold the currency in the short term”, explains Russell Silberston, Head of Reserve Management at Investec AM
Applying the same exercise to the US dollar, Investecs´ research suggests flat lining economic data, albeit at modestly positive levels. “Our data surprises indices, however, have turned sharply negative, suggesting data is genuinely weaker or that market participants are far too optimistic. Taking a short-term view, the US dollar is slightly expensive as the pro-US story has reached consensus, but it remains cheap on a longer-term view”, points out Silberston.
“Bringing this analysis together, our research suggests the possibility of a rally in the euro towards its moving long-term average against the US dollar and so a further fall of 6% to reach parity seems unlikely, he says.
Two economies at different stages
In the medium term, however, the picture is different and Investec believes the US dollar can continue to rally. “The reason for this longer-term pro-US dollar view is the same as it was when we first went long in 2012”, relates the Head of Reserve Management at Investec AM.
The US is in a much better cyclical position than the rest of the world having deleveraged post financial crisis. Her banks are well capitalised, her labour markets are very competitive, interest rates are likely to rise later this year and, despite the big fall in oil prices, industry still has a big energy cost advantage over other countries.
In contrast, the euro zone has yet to deleverage seriously and faces years of hard fought structural reforms to make economies more competitive. This could keep interest rates low and growth subdued. Also, the single currency is sub- optimal. Europe has achieved monetary union before achieving political union and there are no effective cross-border transfers to aid countries facing economic hardship. This means those currencies are effectively in an economic construct similar to the gold standard, where only internal devaluation through lower wages is the only real route back to prosperity. This raises the political risks in the medium term, and indeed, there has been a rise in populist political parties in recent months.
“It is certainly possible, therefore, that the euro could fall further and hit parity, but only if our medium term pro-US dollar view is correct”, concludes Silberston.
Photo: Mark Fischer. EM’s Diverging Universe: Opportunities and Risks
The Fed has made it clear it will start raising interest rates as soon as stronger data allows it to. “As a result, we should expect the Fed to begin its rate hike cycle before year-end”, explained Brigitte Le Bris, Head of Emerging Markets & Currency at Natixis Asset Management.
Impact on currencies worldwide
Higher U.S. interest rates should positively impact the U.S. dollar and negatively affect currencies with weak fundamentals or very low yields. Given the yield differentials caused by monetary policy divergence of the U.S. and other developed nations, the euro and the yen would be the first candidates to witness further depreciation.
The impact on emerging market (EM) currencies, however, is not so clear. After a short-term broad sell-off in EM currencies in early 2015, we should see some differentiation. For example, the Indian rupee and Indonesian rupiah are in a much better situation than they were in the summer of 2013. That’s because India’s current account deficit is now expected to be 0% in 2015 while it was -5% in 2012. These two currencies should be resilient, as opposed to the Turkish lira which is suffering from political jitters and structural high inflation. The South African rand may also get hit harder due to weak growth and an absence of structural reforms. I also expect Eastern European currencies to benefit from the nascent recovery in Europe, and expect the upward trend versus the euro to continue.
Emerging market debt implications
Within the EM sovereign debt universe, the low level of yields in major developed countries has pushed global investors to buy investment-grade issues. So far in 2015, this portion of the J.P. Morgan Emerging Bond Index (EMBI) has largely outperformed the high-yield portion, which has also been suffering from geopolitical risks in Russia and Venezuela, as well as oil price declines (the high-yield portion includes a lot of oil exporters).
That said, the high-yield universe is beginning to look more attractive. I think most of the underlying risks in the highyield area appear to be fading, while a higher spread should act as a buffer to any rise of U.S. government yields.
Some local markets, including the foreign exchange market (FX), offer value – including India and Indonesia. These two countries are going through a large set of reforms and their economies look quite promising. Another example is Brazil. This country is going through a severe economic adjustment but the high carry, proactive behavior of the Brazilian central bank and fiscal consolidation under way is reinsuring investors and “I am inclined to buy this market”, point out Le Bris.
Overall, despite lower growth prospects for EM countries and risks associated with rising U.S. interest rates, EM debt markets are still offering attractive opportunities. “This market has just begun to mature. Investors just need to be very selective in today’s environment”, said the Head of Emerging Markets & Currency at Natixis Asset Management.
CC-BY-SA-2.0, FlickrFoto: Omar. The Mexican Stock Exchange and S&P DJI Announce Agreement for Index Licensing, Distribution, and Management of BMV Indices
The Mexican Stock Exchange (BMV) and S&P Dow Jones Indices (S&P DJI) announced that they have signed an agreement to license all of the BMV indices including their flagship index, IPC (Indice de Precios y Cotizaciones) – the broadest indicator of the BMV’s overall performance.
This agreement aims to achieve an integration of operational processes between the institutions, a business strategy which allows for the expansion of clients globally, and the development and licensing, distribution and administration of new indices. In addition, the indices will be governed by an index committee composed of employees from both S&P DJI and BMV, which will sponsor the adoption of international practices.
According to the agreement, the BMV will transition the index calculation of its indices to S&P DJI over time ensuring a smooth transition that will have minimal impact to existing and new clients. S&P DJI will be responsible for the commercial licensing of the indices and the end-of-day data while the BMV will continue to commercialize real-time index data. As part of the agreement, all current BMV indices will be co-branded S&P/BMV.
A signing ceremony took place last week at the Exchange and was attended by Jose-Oriol Bosch Par, the General Director (CEO) of the Grupo BMV and Alex Matturri, the CEO of S&P Dow Jones Indices.
“Today is a very exciting day for S&P Dow Jones Indices as we officially embark on our joint strategic initiative with the BMV to bring a deeper lineup of index choices to the Mexican financial markets,” says Alex Matturri, CEO of S&P Dow Jones Indices. “Combining the BMV’s internationally recognized benchmarks with the global marketing, commercial licensing, and calculation prowess of S&P Dow Jones Indices will result in a new era of index based measurement and investing in Mexico.”
Moreover, Jose-Oriol Bosch commented, “We are very pleased to execute this agreement, associating the BMV with a global company with extensive experience in the creation and administration of financial market indices. We already have a similar agreement for fixed income indices through Valmer, and now via this agreement, will be able to leverage the distribution, capacity, and reach of S&P Dow Jones Indices’ internationally recognized brand and indexing capabilities.”
Global investors have less appetite for higher risk exposures, particularly in the U.S., according to the BofA Merrill Lynch Fund Manager Survey for May.
While a net 47 percent of respondents remain overweight equities, this is down seven percentage points month-on-month. Appetite for U.S. stocks has declined to a net 19 percent underweight, in contrast to strong overweights across Q1. Confidence in corporate profitability has also fallen, with only 7 percent of investors viewing the U.S. as the region with the most favorable earnings outlook. Long U.S. dollar remains investment markets’ most crowded trade, in fund managers’ view. However, the survey’s 41 percent reading on this measure has fallen sharply from last month.
At the same time, overweight cash positions have risen sharply. This month’s reading of a net 23 percent is the survey’s highest since December 2014.
These shifts follow the recent aggressive sell-off in bond markets. The survey shows a strong rise in panelists’ assessment of bonds as the asset class most vulnerable to volatility in 2015 – up to 56 percent. Bond underweights have also increased.
Investors’ macroeconomic views have changed little since last month. A net 59 percent still expect the global economy to strengthen this year, though forecasts of corporate profitability have fallen a little. Seventy percent of respondents see both growth and inflation remaining below historical trends over the next 12 months.
They are increasingly divided over the timing of a U.S. rate rise, however. Almost as many now see this in 4Q as in 3Q – 36 percent versus 45 percent, respectively.
“There is no loss of faith in economic recovery, and positioning still assumes that the U.S. dollar goes up, but doubts are creeping in – hence this jump in allocation to cash,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Investors are keeping faith with European stocks for now, but this remains biased towards currency plays,” said James Barty, head of European equity strategy.
Europe and Japan still preferred
In contrast to their reduced conviction towards U.S. equities, which a net 39 percent now intend to underweight over the next year, investors remain positive on both Europe and Japan – both economies where quantitative easing continues. A respective net 49 and 42 percent of fund managers are overweight the two markets.
Europe also remains the market most would like to overweight from a 12-month perspective. A net 33 percent still take this position, although this is now down as much as 30 percentage points from March’s very strong reading.
A net 18 percent make Japan their top pick for the coming year. This is a slight decline from last month.
At the same time, fund managers are less negative on emerging markets. Only a net 6 percent are now underweight, compared to April’s net 18 percent. Intention to own emerging markets stocks over the next year has risen similarly.
U.K. picks up
Britain’s recent decisive election result is reflected in investors’ more positive stance on U.K. assets. Global investors have halved their equity underweights month-on-month, while a net 3 percent of European fund managers now intend to overweight the U.K. market over the next 12 months. Last month, a net 50 percent said they would underweight it over this time period.
Similarly, views of sterling as overvalued have fallen notably. Only a net 8 percent of global fund managers now take this stance, compared to April’s net 15 percent.
Currency correlation
Investors’ stance on the major currencies correlates with their equity positioning. A net 69 percent expect the U.S. dollar to appreciate over the next 12 months. This is up slightly from April’s reading. In contrast, a net 32 and 35 percent expect the Euro and yen to decline. Yen bearishness has risen by 16 percentage points since March.
Bullishness on oil has fallen, meanwhile. Fewer than half of fund managers now expect the commodity to trade at a higher price in 12 months’ time. This is down significantly from April and March’s reading of 64 percent.
Photo: GEF TV-YouTube. Mirova Announces the Appointment of Léa Dunand-Chatellet as Head of Equities
Léa Dunand-Chatellet is appointed Head of Equities of Mirova. Reporting to Jens Peers, Chief Investment Officer for Equity, Fixed-Income & Impact Investing, she will be responsible for the team of 10 equity portfolio managers.
Previously Partner-Portfolio Manager and Head of ESG research at Sycomore Asset Management (2010-2015), Léa Dunand-Chatellet started her career at Oddo Securities in the extra-financial department research in 2006. Within the asset management industry, she developed a pioneer model of extra-financial ratings and processed the integration of sustainable issues in the portfolios. This approach has seen its practical application through a range of funds dedicated to Responsible Investments combining financial and extra-financial performances.
Lea Dunand-Chatellet is member of different committees and teach every year specific courses dedicated to Responsible Investment in leading Business Schools. Close to academic research, she co-wrote the last reference publication from Ellipse in 2014: “ISR and Finance Responsible”.
Léa Dunand-Chatellet is graduate from the French Ecole Normale Supérieure (ENS) and is Agrégée in Economy and Management.
Mirova is the Responsible Investment division of Natixis Asset Management.
Photo: José María Mateos
. Japanese Private Capital Interested in Investing in Peru
Mr. Carlos Herrera, Executive Director of Proinversion, the Peruvian Investment Authority concluded a successful investment roadshow in Tokyo on Friday, which also included Beijing and Seoul. The government delegation was joined by over 80 attendants at the Mitsubishi Bank Office and had more than 10 bilateral meetings with private investors and conglomerates, all of who were keen to discuss investment opportunities in Peru.
The conference, organized with the support of the Peruvian Embassy in Japan and the prestigious Japanese Bank of Tokio-Mitsubishi UFJ, was inaugurated with an introduction by Peruvian ambassador Elard Escala, highlighted the more than 140 years of diplomatic relations and the fact that Japan is Peru’s fifth largest trade partner. He noted the favorable investment conditions for foreign capital such as the equal conditions for foreign and domestic investors and the solid legal framework to protect assets.
The Managing Director for the Lima branch of the Bank of Tokyo-Mitsubishi, Kohei Hoshide, gave a presentation on the general state of the Peruvian economy. He emphasized, “With their economic reforms, solid growth projections and political stability, Peru is one of the leading and most attractive investment destinations for Japanese businesses and private investors.”
Carlos Herrera, Executive Director of Proinversion, presented to Japanese businesses and investors some of the many projects available for private investment in the Agency’s portfolio of infrastructure projects and explained the way in which the private investment and tender process works in Peru. He exhibited several projects such as Lines 3 & 4 of the Lima – Callao metro, the Huancayo – Huancavelica railway and several regional roads. He included also the calls for tender that are open such as for the construction of electricity generation plants, correctional facilities, real estate and solid waste treatment plants. Mr. Herrera concluded: “the visit to Tokyo has been a great success, proving that there is an ever increasing interest from Japanese companies in doing business in Peru, due to a like-minded approach of transparency and public responsibility.”
CC-BY-SA-2.0, FlickrPhoto: Charles Clegg. Europe's "Great Rotation" Fails to Live Up to Expectations
The expected flight from bond funds to equities has not lived up to its “Great Rotation” billing, according to the latest issue of The Cerulli Edge – Europe Edition.
Cerulli Associates, the global analytics firm, says that where there has been movement, the outflow has largely ended up in other income classes such as property and multi-asset funds. That low interest rates and quantitative easing would help create the conditions for an exodus to equities made sense, yet a definitive shift, which would have left asset managers scrambling to stem bond fund outflows, has failed to materialize.
“While bond inflows are lower than they were, outflows haven’t happened to the extent that many expected,” says Barbara Wall, Europe research director at Cerulli Associates. “In the current climate, fixed-income managers are looking for new ways to deliver yield. Several have adopted an unconstrained, benchmark-free investment approach, which provides the flexibility to respond with greater decisiveness to macro developments, and to invest more broadly across regions, structures, and products.”
The marketing rationale behind unconstrained or strategic bond funds is that investors can access fixed income while enjoying some protection and also profiting from moving across asset classes. The advent of unconstrained emerging-market funds takes investors another step up the risk scale. Standard Life Investments launched one such vehicle in April, to sit alongside its emerging-market hard-currency and local-currency debt funds.
Also up the risk measure slightly from conventional bond funds is emerging-market debt, supporting the theory that rather than rotating away from fixed income entirely, investors are looking for yield in other areas of the market.
Angelos Gousios, an associate director at Cerulli, notes: “The macro environment is forcing managers to meet the needs of investors by providing both more alpha and greater protection. Product development, so long driven by supply, has become more demand led. The appetite for emerging-market debt has certainly grown, but to some extent investors have had little choice but to take more risk to get the yield they want from fixed income without leaving the asset class.”
Other Findings:
Europe’s alternatives managers may be on the cusp of some significant inflows, says Cerulli, as insurers look to non-mainstream strategies as a means of increasing yield. Insurers’ in-house investment skills typically stop at high -yield, or emerging-markets debt. The global analytics firm expects alternatives mandates to start trickling in from 2016. Until then business imperatives, including preliminary Solvency II reporting, will take precedent, it says.
Islamic funds are under pressure to ensure strict compliance with Shariah principles, which require investors to avoid interest and investments in businesses providing goods and services seen as contrary to the spirit of Islam. Cerulli believes the industry would benefit from a distinction being drawn between liquid and illiquid products. It expects that the challenge of raising assets will encourage asset managers to position funds as Shariah-compliant. However, these will need to be competitive relative to conventional products.
Socially responsible investing (SRI) is once again popular with retail investors in Europe, but nowadays managers must be able to explain stock selection, the research backing it, their engagement and divestment policies, and how the fund communicates and interacts with its investors. Cerulli notes that across Europe, impact investing – whereby investors seek to affect social or environmental change while also making money – is the fastest-growing area within SRI.
