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The politics of NAFTA: we now see elections in Mexico and US first and NAFTA in 2019

La política del TLCAN: ahora vemos elecciones en México y Estados Unidos primero y el TLCAN en 2019 — Photo: U.S. Department of State. The politics of NAFTA: we now see elections in Mexico and US first and NAFTA in 2019

The slow pace of NAFTA negotiations so far, suggests that politics will come into play pushing negotiations to 2019. The sixth round of NAFTA negotiations ended in Canada with slight progress, but without addressing any of the controversial topics raised previously by the US delegation. Stands out also that the US has not changed a bit the metric it uses to evaluate the fairness of the trade deal: the goods trade deficit. Even though we don’t agree with such a metric as it puts trade deals as a zero sum game (and the US has an overall trade deficit with the world as a consequence of consuming more goods and services than the ones produced in the US), when the real benefits are in higher employment, lower prices, higher profits on both sides of the border. Nevertheless, the fact remains that the US has a trade deficit with Mexico.

The US cannot close a deal before its November elections that does not seem clearly advantageous to them, when Republican are expected to lose the House. Trump campaign on the premise that NAFTA is a bad deal to US workers and it has to be changed or terminated. By the same token, Mexico cannot accept a deal that seems at a disadvantage to Mexico, as the Government can be severely questioned and affect its candidate going into the presidential elections. We believed Trump doesn´t want to withdrawal from the agreement before the Mexican elections as several US studies suggest that it will favor the left party in the Mexican elections and it would be preferable for the US to deal with the right for other issues like immigration border security and drugs. We also believed that Trump has listened to the Republican states like Texas, the auto industry and agriculture organizations that favor NAFTA.

After the Mexican elections, the US might try to force a deal advantageous to the US with a real threat of withdrawal. In our view, the issues and the likelihood of democrats advancing in both houses will set the tone for the aggressiveness of the US stance regarding NAFTA. In any case, we believed that there will also be pressured from the president elect in Mexico to postpone the negotiations until he sits in office. In that case, the most likely scenario is that the deal will be negotiated in 2019, either with (or without) the US already withdrawn from the deal and coming back to the table before the six month notice expires.

The silver lining of the politics of NAFTA adds new risks to the equation as we don´t know who in Mexico will end up negotiating the deal and its priorities. Also, as now the elections of Mexico go before we have a NAFTA deal, the electorate will be actually choosing the President that will negotiate NAFTA and define the foreign policy of the next six years. In this scenario, the elections become even more important than before when the expectation was for a NAFTA deal before the elections. Also, we don’t know at this point what the mandate from the electorate the next Mexican president will have. It is important to consider at this point, that Trump won the election in the US as he was able to capture the anguish of the US population against the widening of the distribution of income by blaming the political class and promising to “drain the swamp”, and against lost and better jobs by halting immigration and an America first policy of nationalism. These concerns are global, as seen defining other elections like Brexit and Mexico certainly is no exception. The time has come for Mexico to define its future.

Column by Finamex, written by Guillermo Aboumrad

Why Should the Spanish Equity Stand Out in 2018?

| For Meritxell Sedo | 0 Comentarios

With the beginning of the year comes the process of scrutinising equities, one of the most common classes of assets. This scrutiny is a fundamental exercise for any analyst, manager, financial intermediary or investor. The analysis of the cycle, expected profits, dividend yields and the interpretation of multiples. In absolute and relative terms, these are some of the instruments we use to try to decipher the intrinsic value of a company or market.

So, while cautious of falling into what in 1991 was named “home bias” by French and Poterba (upon determining that share portfolios of American investors were comprised of 94% American companies despite the fact that the US represented just 48% of the global equities market at that time), if we analyse the Ibex for a moment, we can say that 2018 may be the year for looking out “from behind closed doors”.

The Ibex is beginning a new season after a relatively poor performance and in spite of market expectations, which paves the way for attractive valuations (12-month forward P/E relative to Eurostoxx 50 below 25 year average).
With ROEs on a par with European companies, the low yield on the Spanish market compared with the Eurostoxx does not respond to fundamentals. In other words, Spain offers the same level of ROE as the European market (approximately 8%) at a much lower price to book value.
The correlation between expected 12-month profits and the performance of the Ibex has been practically at an all-time low since the summer (when political uncertainty was more influential). This could cause an anticipated re-rating, which we may see with publication of business earnings in the fourth quarter.
Despite the good momentum of businesses and generalised deleveraging, profits per share on the Ibex remain below pre-crisis levels, which demonstrates the vast amount of ground still to be made up in terms of the valuations of Spanish companies.
The negative impact suffered by Spanish companies due to currency movements in 2017, which was an unquestionably strong year for the euro, is not expected to be repeated to such an extent in 2018.
Expected dividend yield for the current year is only exceeded by the FTSE100 (based on European indices, the S&P500 and the Nikkei225).

Although the negative impact of political uncertainty in the Spanish market was undeniable in 2017 and even though these concerns have not dissipated, the current scenario of recovery for the Spanish economy is obvious and it is gaining traction. This should act to soften the blow in the event of renewed mistrust that may manifest itself as falls in the market:

1) Growth prospects for the coming years are the highest in the Eurozone. Furthermore, growth is now healthier and more balanced, as the construction sector is losing weight and tilting the commercial scales towards tourism and an increasingly thriving domestic demand.

2) The competitiveness of the Spanish economy is demonstrated by the harmonised growth of net exports since 2010. This has been possible thanks to the containment of unit labour costs and the normalisation of availability and credit cost at similar rates to Germany and France (Fitch indicated in October that credit to businesses had stopped falling for the first time in six years).

3) The positive dynamic in employment creation, which still has a long way to go, demonstrates the still considerable potential for growth in internal demand.

4) Catalonia, which represents over 20% of Spanish GDP, drops 4 decimals per quarter since the political uncertainty began. This represents a reduction of the national GDP of 20% of this 1.6% in annual loss. In spite of this not insignificant figure, the negative impact of the tension seems to be under control nationally.

Alongside all of these factors, if we also consider the tailwind from greater confidence in the recovery of the Eurozone – which we are now seeing in yields on bonds and the euro, the macroeconomic policies underpinning growth that are still clearly in place and expansion in step with global economic principles (let’s not forget that 36% of Ibex revenue comes from emerging countries) – the domestic market is satisfying many of the requirements to perform adequately in 2018.

Column by Pilar Arroyo, a manager of funds and multi-asset SICAVs at Banco Alcalá, Crèdit Andorrà Financial Group Research.

Why It’s Not Too Late To Embrace Risk

| For Gabriela Huerta | 0 Comentarios

We believe the synchronized global economic expansion has plenty of room to run in 2018 and beyond—more than many investors think. We like equities and see emerging markets (EM) at an earlier stage of expansion, boding well for EM assets.

The BlackRock Growth GPS (the green line in the chart below) shows that growth among G7 countries is cruising at above-trend rates. Yet consensus expectations have largely caught up with our GPS. That catch-up helped drive risk asset gains this year but now suggests less room for upside surprises to play such a role. Sustained growth amid low market volatility should underpin risk assets—especially if many investors, fearing a near-term downturn, start to embrace the upbeat outlook.

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We believe the broad global expansion is not as long in the tooth as many assume. See our 2018 Global Investment Outlook for more. Emerging markets are at an earlier stage of expansion and reinforcing the growth backdrop, benefiting from better trade activity and firmer commodity prices. We expect the EM world to weather any mild slowdown in China. The U.S. may soon receive a decent dose of fiscal stimulus from tax cuts. European economies are posting solid growth but have plenty of lingering spare capacity that could take years longer to absorb. The Federal Reserve is normalizing policy at a gradual pace, while other major central banks are still nurturing recoveries with stimulus.

Our conviction on the expansion’s durability, coupled with still subdued inflation and low interest rates, argues in favor of risk assets. And yet 2017 will be a tough act to follow. We believe returns in many asset classes will be more muted, even as structurally lower interest rates mean equity multiples can stay higher than in the past. We believe equities offer greater upside than credit as the cycle matures. And we see more earnings upgrades next year, though a higher base of comparison will make it harder to top expectations.

We prefer equities outside the U.S., where fuller valuations are less of a drag. We are positive on EM equities due to increasing profitability and relatively attractive valuations. In developed markets, we like tech and financials—with the latter poised to benefit from U.S. deregulation. We also see this environment as positive for the momentum style factor, albeit with potential for sharp reversals. Bottom line: We see the economic expansion—and the outperformance of risk assets—having more room to run. Read more market insights in my Weekly Commentary.

Build on Insight, by BlackRock written by Richard Turnill

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It’s That Time of Year…For Tax Loss Harvesting

| For Beatriz Zúñiga | 0 Comentarios

Es esa época del año… para la cosecha de pérdidas patrimoniales — Foto cedida. It’s That Time of Year…For Tax Loss Harvesting

December has historically been a very favorable month for the US equity markets. Whether this is due to the big institutional money managers being strongly incentivized to help the market end the year on a positive note, or just from the psychological boost that comes from the holidays, we may never truly know. What we do know is that the last couple of weeks of the year can bring some additional selling pressure on stocks that have had sharp declines during the year. Very simply, this is caused by tax-loss selling, a process where investors that are subject to U.S. tax laws will “harvest” (i.e. sell) positions that have a loss in order to reap a tax benefit. For those holding positions prone to tax loss selling, it can be like rubbing salt in your wounds as your positions that have not fared well this year get dumped right around Christmas time.

This year we may experience an exaggerated version of this effect for several reasons. The main one is that investors are expecting tax reform to be signed, sealed and delivered for 2018. All else being equal, investors would rather sell a losing position now in December where it gives them the most benefit rather than selling a few months later for a lesser reward. The most obvious impact from tax reform is the reduction of the rate for the highest tax bracket. This incentivizes investors to harvest their losses in 2017 while the highest marginal tax rate is still 39.6%. Short term capital gains (those of less than 1 year) in the US are taxed at your personal rate and not the 20% used for long tern gains. The Senate version of tax reform will give the wealthy a bit of a bonus by shaving that maximum personal rate to 38.5%.

Furthermore, one of the features of the proposed tax reform is the elimination of an investor’s ability to select which lot to sell. Currently, if an investor has purchased a stock at several different points in time (creating multiple “lots”), and he wants to then sell a portion of his position he can select which lot is most advantageous from a tax perspective. This usually means selling the lot with the largest loss. The proposed tax reform includes a provision that would disallow that practice and force investors to sell the oldest lot first in a FIFO manner (First In First Out) regardless of the gain or loss which amounts to a backdoor capital gains tax increase. Although we do not yet know if this will make it to the final version of tax reform, investors are very likely to be taking action and selling affected positions before 2018.

With the S&P 500 up 18% this year, most investors are sitting on some hefty gains and to the extent that profits are being taken, the pressure to offset the tax impact increases. However, the selling may not be limited to this year’s losers either. The tech sector has had a massive gain this year and could cause some institutional funds to do a bit of portfolio rebalancing before yearend. This may even lead to a bit of a vicious cycle as investors trying to align their portfolios to benefit from tax reform (specifically the lowering of the corporate tax rate), which would entail selling off stocks within sectors that have low tax rates such as technology and rotating to sectors that typically pay high tax rates (financials, consumer and telecom). The more technology stocks with large gains that are sold, the more demand there will be to harvest some of those losers.

Many of the big losers that can see additional selling are clustered within the consumer discretionary and the energy sectors. Within consumer discretionary, the traditional brick and mortar department stores have been one of the worst groups in the market as their businesses struggle against the move towards ecommerce. Even with the recent rally these stocks have had in November, many of them remain far below their 2016 levels. For example, JC Penney is down 61%, Sears Holding is down 54% and Signet Jewelers is down 43%. Even bellwether retailer, Macy’s, is down 27% this year. Outside of direct brick and mortar retail, athletic apparel distributor Under Armour is down 53%. In the energy sector, quite a few service companies were bid up after President Trump’s election in the last 2 months of 2016. However, 2017 has been a different story as US Silica is down 41% and Hi-Crush Partners has been well crushed for 46%. Retail and energy are not only groups where potential tax loss selling candidates can be found, as generic drug maker Teva Pharmaceuticals is down 55%.

Column by Charles Castillo, senior portfolio manager at Beta Capital Wealth Management. Crèdit Andorrà Financial Group Research.

Banxico’s New Governor First Order of Business: Hike with the Fed

| For Gabriela Huerta | 0 Comentarios

Primer orden del día para el nuevo gobernador de Banxico: subir con la Fed — Photo: CarlosHPG. Banxico’s New Governor First Order of Business: Hike with the Fed

The minutes from the last Banxico monetary policy meeting showed in the discussion that the majority of its members believe adequate to maintain the spread with the Fed, specially, in light of the
heightened risks to inflation.

The new Governor may tilt the balance in either direction but its commitment to inflation will be highly scrutinized. The market is already pricing-in a hike for the month of December with 50% probability and a full 25bps by the February meeting. In light of recent inflation print way above the market consensus and Banxico’s reassurance that headline inflation was already on a downward trend towards the goal, we prefer to hike as soon as the next meeting.

Banxico was very concerned with inflation expectations commencing to increase due to the resilience of inflation to converge to the 3.0% goal. In the minutes even one member was very hesitant to believe the goal could be reached as soon as next year. Right now, our forecast for next year 12-month headline inflation stands at 4.6%.

According with our monetary policy rule, we now see the theoretical reference rate at 7.25% by end of January of next year once headline inflation drops to 5.3% due to base effects. In this case, we could be indifferent between hiking in December or February like the market is debating right now. But following the Fed is the least risky proposition, especially considering the still uncertain NAFTA, US fiscal reform and presidential elections outcomes. All three, could potentially depreciate the Mexican peso in addition to not follow the Fed, in an already deteriorating inflation environment.

On August 2nd we recommended getting into the short-term breakeven inflation, specially buying UDI 19 or 20 and paying the corresponding TIIE on inflation keeping surprising on the upside, and we still do. We still see value in this trade, even though it has paid good return and we are leaving it open preferring the UDI 20. We see the market adjusting its implicit inflation forecast to the upside towards our own forecasts.

Column by Finamex’ Guillermo Aboumrad

Inflation Is Unusually Dormant… For The Moment

| For Beatriz Zúñiga | 0 Comentarios

La inflación está inusualmente apagada… de momento — Pixabay CC0 Public DomainCourtesy photo. Inflation Is Unusually Dormant… For The Moment

Data continues to point to the broadest synchronised expansion the world has experienced in more than a decade as advanced and emerging markets continue to gain momentum. Labour markets are recovering at a rapid pace and, although the unemployment rate in Europe is still above pre-crisis lows, in the US, it has reached a low of 4.1% and in Japan, it sits at just 2.8%. And yet, inflation is oddly muted. Indeed, the average inflation rate in the OECD countries is 1.5%, down from 2.2% in 2012 and well below central banks’ official target of 2%. How is this possible, also considering that the balance sheets of the four largest central banks have exploded to USD 14 trillion in assets?

The first explanation could be that the recovery has been slow. Growth rates are still below pre-crisis levels as investment, trade and, to a lesser extent, consumption have lagged. As for labour markets, in the US for example, one reason why the tight labour market has not led to a sharp acceleration in wage growth is that the fall in the unemployment rate is the result of a change in labour supply as a large number of baby boomers have retired, thereby reducing the participation rate. This has also impacted wage growth because the pay checks of retirees are likely to have been higher than those of entrant workers. Moreover, what really impacts inflation is unit labour costs and not nominal or real wage growth and the recent improvement in productivity has allowed unit labour costs to fall over the past year. Finally, although quantitative easing and ultra-low interest rates have succeeded to boost financial asset prices, they have failed to lift inflation. This is due to the extreme slack the financial crisis caused in the economy. Slack which today is far lower as economies have recovered.

An undeniable cap on inflation also comes from exchange rate variations. The dollar, for example, impacts headline inflation through its direct impact on commodities but it also affects core inflation which excludes energy and food. A rise in the dollar makes foreign imported goods cheaper, thus increasing competition for domestic producers which pressurises them to reduce prices. The 26% rise in the dollar from mid-2014 to end 2016 and the 60% drop in oil prices during that same period were therefore much to blame for the low level of prices.

More structural factors such as disruptive technologies and globalization have also played a role in capping prices. E-commerce companies, Airbnb and Uber have enabled more price transparency as well as an additional supply of goods and services for clients, thus leading to slower inflation. Worldwide integration has given firms the possibility to move their production facilities across borders at lower costs. However, does this benefit consumers or the firms’ profit margins? And although all these topics seem reasonable, research has shown only a reduced impact on inflation.

Surprisingly, the most important driver for inflation are inflation expectations. Surprisingly also, they are backward looking as they seem to be correlated with recent or coincident inflation. The most likely outcome therefore continues to be low levels in inflation. But let’s not forget that inflation is a lagging indicator. While the correlation between core CPI and GDP growth over the last twenty years is only around 5%, when GDP growth is lagged by six quarters, the correlation jumps to 80%. The stronger growth which started in the second half of 2016 should therefore start to impact inflation soon. Moreover, a further depreciation of the dollar or a persistent spike in oil prices are possible risks. Even though inflation has continued to fall below expectations, we could be reaching an inflection point and we may see inflation trend higher. Hopefully it will be at a controlled pace!

Column by Jadwiga Kitovitz eis head of Equity and Institutional Clients at Crèdit Andorrà Asset Management – Crèdit Andorrà Financial Group Research.

Is it Possible for Value Investors to Find Opportunities in the Banking Sector?

| For Alicia Miguel | 0 Comentarios

¿Es posible encontrar empresas con ventajas competitivas en el sector bancario siendo un inversor value? — Pixabay CC0 Public Domain. Is it Possible for Value Investors to Find Opportunities in the Banking Sector?

A lot of fund value investors tend to avoid the banking sector altogether due to a number of reasons: a difficulty in understanding it’s business, the prolonged low interest rate environment, the lack of growth seen in credit, a poor market capitalization and a bad operating earnings trend. Despite these perceptions we are going to prove how an investment idea is possible to find in this sector with some banks that do have clear and sustainable competitive advantages or ‘moats’; especially strengthened in an increasing interest rate environment in the U.S.

Investment idea – Bank of the Ozarks

What would you say if I told you there was a commercial bank that has increased their earnings per share and its total assets by more than 2,000% in the last 20 years? It also boasts the highest quality of assets in the US and we managed to buy its shares below 15x its last twelve month earnings in September 2017?

I discovered Bank of the Ozarks 5 years ago, on a business trip to London while reading the American Bankers Association magazine in J.P. Morgan’s reception. I was so impressed by what I read about the bank that I began doing additional research and also came across its success story in other magazines, like Bank Director. In August this year, Ozarks was awarded for a 5th time in a row and for the 7th time running the number 1 bank in the US.

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Bank of the Ozarks is a regional American bank founded in 1903 in Jasper, Arkansas with a market cap of USD 5269 million and 251 offices spread across 9 States in the U.S. Its main business is in loans servicing commercial real-estate development, office construction and other similar projects under the RESG unit or Real Estate Specialty Group. This division represents 80% of its total loan book of $15 billion dollars and is financed entirely from capturing deposits. Until this point it may seem like any other mortgage lending bank but what really makes Bank of the Ozarks an extraordinary bank?

1) Ultraconservative mortgage awarding policies.

The Real Estate Specialty Group (RESG) is made up of an experienced team of 107 employees of which 40 of them are in charge of origination. RESG works in the nonrecourse loans with a higher risk. In case of default, the bank only has collateral on the value of the property and the yield it generates to recover the loan. In exchange, these non-recourse loans are priced at a higher rate than the market.

So what does make Bank of the Ozarks different from other commercial banks?

It’s team of bankers in charge of origination are probably one of the main reasons with George Gleason, CEO since 1979, also heading the team and signing off each of the loans for the past 14 years. The bank is also very selective financing only certain properties and constructions in prime locations catering only to experienced customers with strong a solvency record. They even have the ability to almost transform a nonrecourse loan into one with recourse with their bad-boy carve-outs T&Cs in the event of default. Their experience and track record serve as testament to all these attributes. In the last 14 years, for example, they’ve only experienced losses on 2 loans (in 2009 and 2011) worth up to $ 10 million dollars from a total loan book of $15 billion! On top of this, the bank is always the only borrower in the senior trench of the deal, meaning they’re the least exposed in the capital structure of the loan and the borrower must ALWAYS put forward 50% of capital in advance. Another interesting fact working to the bank’s advantage can be seen in their average Loan to Value and Loan to Cost ratios. In the last few years, Loan to Value has declined to 42% and Loan to Cost to 49% after seeing highs of almost 70% around the time of the credit crunch. In today’s landscape, this could well be the most conservative loan book across the country. In June this year, George Gleason announced that he would dedicate approximately 75% of his time to the RESG division for the next two years, shortly before announcing the departure of Dan Thomas, longstanding RESG Chief Lending Officer.

Lastly, the conservative credit provision policy is clearly reflected in the quality ratios of their assets not only in their most recent filing but also consistently across their recent reporting history. As of 30th September 2017:

Allowance for LLS as % T.Loans = 0,55%
Non-performing loans as % T.Loans = 0,11%
Allowance for LLS as % NPLs = 650%
Loans and Leases past due 30days = 0,12%
Net charge-off = 0,09%

2) Seeking opportunity in its loan provision strategy for Commercial Real Estate and Construction – The Arkansas-based bank has only gone after niche markets that have experimented recent problems or difficulties where supply and demand is unbalanced. They therefore come against very few competitors in real estate lending projects ranging from condos, offices and hotels. Their most notable success can be seen in New York City where the bank has been capable of growing their volume of transactions very quickly from 2012, making it account for roughly 20% of the bank’s total loan book. This strategy has lead Ozarks to see a higher than market credit yield, as their interest margin increases at a faster pace than competition. Even the CEO himself defines their strategy the following way:

“What we have tried to do is sort of ignore the headlines to a great extent, I mean certainly you to have to take larger macroeconomic and market themes into account. But we have really tried to not let that drive our decisions, but instead to look at the supply demand metrics of each sub-market market and macro market and the relative competitive position of each product in the market and do a much deeper level of analysis on projects”.

3) Strong growth in Real Estate lending volumes.

Gleason expects to double the RESG business in the next 3 to 4 years and twofold in the following 7 to 8 years. It’s ambitions cover not only commercial real estate but also the expansion of other sectors including marine, SMEs and leasing. Their ambition is supported by their strong organic growth in a sector that is unlikely to grow organically.

In addition to this, there is also a strong inorganic component behind it’s success, after completing over 15 transactions from 2010. Each transaction has been accretive during the 1st year not only in terms of tangible value per share but also in their earnings per share.

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The most interesting aspect of their organic and inorganic growth has been their unbeatable efficiency margin close to 30%, unseen in any other competitor, neither in the U.S. nor in Europe.

4) George Gleason, Bank of the Ozarks’ Chief Executive Officer (CEO). Management’s commitment and aligned interest to the company’s performance is exemplified in it’s CEO history. He bought a controlling stake in the bank in 1979 at a time when the total number of employees was 12, assets were $28 million and he was only 25 years of age. In 2003, he set up the RESG division with Dan Thomas commanding the team. Since 2010, Ozarks has completed 15 acquisitions becoming the largest bank in Arkansas and never allocate more than 50% of total purchase price to goodwill. Any investor, who would have co-invested with Gleason in the 1979 IPO, would have obtained a compound annual return of 22% including dividends when the average competitor has only seen a 4% return and the S&P 400 Mid Cap, a 10%. George harnessed his parents experience and began working at the early age of 5, when he was already in charge of set tasks within his father different businesses. Once he joined the bank, he founded and fostered a culture to motivate employees on a continual path of year-on-year performance, making sure they always felt were part of the company and also carried a sense of holding a stake in it. During this time and until today, George has managed to grow the profit in compound interest towards 19%, with a total return over its own funds and efficiency at the top of the sector.

Then why has its share price dropped by almost 30% from March’s all-time highs? There are 2 reasons behind this:

1) Muddy Waters Capital’s Short Selling note and skepticism over it’s Commercial Real Estate line of business. Muddy expressed concerned over the banks provision for loan losses, assuming it did not have enough cash to cover itself in the event of rising non-performing loans. It also believed it’s total off-balance sheet liabilities were becoming unsustainably high.

Answer 1) the provisions calculated by any bank are based on the quality of its assets. In Ozarks’ case, we are talking about one of the most high quality loan books, made evident by only experiencing losses on 2 of their transactions during the recent credit crunch. It’s average LTC and LTV of are healthily positioned at around 45%. What this means is that if a borrower would like to apply for a $100 million dollar credit, Ozarks

Answer 2) Even though the off-balance sheet liabilities add up to $11 billion dollars, mainly from their RESG side of business, most of these loans are senior, meaning Ozarks would be the last to provide funding for credit but the first to receive any repayment. The bank also demands collateral against the loan worth up to 2x the value of the credit. Tim Hicks, Chief Administrative Officer, showed no qualms when openly admitting that 92% of loan applications it receives are surprisingly rejected!

2) Dan Thomas quits as Chief Lending Officer of Ozarks’ RESG division. On the 28th July, Dan Thomas suddenly announced his departure from the firm forcing the share price into a sharp 12% decline.

Answer 3) Even though the longstanding Chief didn’t reveal his true motives behind leaving the company and despite the fact he was one of the masterminds behind the growth and the bank’s spectacular track record during his tenure, it may seem that George Gleason’s earlier decision and public announcement to commit a larger part of his time to overseeing the day to day operations of the RESG unit was not well-received by Dan. Despite these changes in senior management, we still believe the RESG unit is staffed with experienced, independent and long-serving employees equally capable of continuing on with the business alongside the CEO. For us, it would be far more worrying if we were to see the CEO suddenly leave. And how much have we paid for this extraordinary franchise? The average price paid was $43 per share and approximately 14-15x it last twelve month earnings. We estimate its intrinsic value at $66 per share, after applying a 21x price to earnings multiple for the next twelve months against a 15,5x observed multiple for the sector in the US.

And how much have we paid for this extraordinary franchise?

The average price paid was $43 per share and approximately 14-15x it last twelve month earnings. We estimate its intrinsic value at $66 per share, after applying a 21x price to earnings multiple for the next twelve months against a 15,5x observed multiple for the sector in the US.

As of today, we see a low probability in there being a recession in the US economy (at least within the next quarters) but despite this we would still apply a conservative approach and calculate an intrinsic value assuming that scenario were to take place. The resulting intrinsic value would therefore be $35 per share, placing it 18% lower than our average price paid. If it does happen to reach these levels, we would seek to increase are holding in this company. As a reminder, it is important to not only buy extraordinary companies but also not making a mistake in overpaying for them. Coca-Cola’s case in 1998 should serve as a reminder.

Appendix: Ratio definitions and quality of assets chart.

Allowance for LLS as % T.Loans are the provisions made to face any future losses.
Non-performing loans as % T.Loans are the unpaid loans with more than 90 overdue, where neither capital nor interest is paid off.
Allowance for LLS as % NPLs is the coverage ratio.
Net charge-off is the total unpaid debt by the company minus any recovered payments.

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Argentina: 116/583

| For Beatriz Zúñiga | 0 Comentarios

Regularization / situation correction / normalization / tax pardon / repatriation / externalization of assets / fiscal disclosure / amnesty. Different names that mean essentially the same thing.

This is not an issue relating solely to Latin America. In the past, countries like Australia, Belgium, Colombia, Ecuador, Spain, the Philippines, France, Honduras, India, Ireland, Italy and Panama have implemented some kind of tax pardon/ amnesty program. Other countries, such as Denmark, Finland, Greece, Mexico, New Zealand, Norway, Peru, Portugal and Sweden, at one time or another, have also instituted relief schemes to normalize fiscal conditions.

Argentina concluded its own asset amnesty program in late 2016. Of a GDP of $583 billion, $116 billion worth of assets have been disclosed. The amnesty means an increase of approximately 12% of GDP to the economy’s tax base.

In the last 60 years, the country has sanctioned and carried out 20 of these amnesty programs with differing results. It is worth pointing out that they were all “for one time only”.

For many years, some citizens have sought a safe-haven for their capital abroad due to political, financial or security reasons. The results of this diversification, particularly in developing countries, could negatively impact the economy and increase the cost of private and sovereign financing. The effects of reduced tax collections are generally compensated by an increased tax burden with possible consequences for the country’s economic development.

I believe this repatriation of capital will have short, medium and long-term impacts. For now, the effects are unseen by most but they will become much more obvious in 2017 and beyond.

The immediate effects include: reduced debt cost, increased tax revenue, tax deficit reduction and possible credit risk improvements not only for the sovereign but also for private entities that need to access the local credit market and markets in stronger currencies than the peso. With this multitude of potential investments, building a capital market that allows financing in the local currency will be easier.

To be eligible for amnesty / repatriation, individuals must not only pay a special tax but they must also make payments on earnings from what they have declared so far. For example, 35% on earnings generated by their investments (excluding certain Argentinian assets, Brazilian and Bolivian sovereign debt). The way to avoid this cost is to have a portfolio invested in Argentinian bonds or sovereign bonds from the countries mentioned above or Argentinian provincial bonds that are also exempt.

In any case, there are side effects. For example, Argentinian bond portfolios are over exposed to local debt issuances making the portfolios undiversified.

In fairness, this success has been achieved in the midst of severe restrictions on non-declared assets abroad, with a local government managing to generate investor confidence, multiple business opportunities in Argentina and very low portfolio returns internationally (let’s recall that $8 trillion worth of bonds are operating at negative rates).

The challenge we are facing is to get these portfolios to a level of diversification and return that brings peace of mind to our clients and bankers.

Column by Raul Ponte, Senior Portfolio Manager Beta Capital Wealth Management Crèdit Andorrà Financial Group Research.

Spend Your Time Wisely

| For Gabriela Huerta | 0 Comentarios

Both professional fund investors and asset managers are wasting valuable time in fund due diligence. The processes fund investors use to collect, and asset managers use to provide, due diligence information on funds are outdated and long due an upgrade.

Fund investors would like to spend less time gathering and organising information and more time performing analysis. Asset managers have similar inefficiencies. They are spending too much time repetitively ‘cutting and pasting’ the same content to respond to similar fund investor requests. Asset managers want to provide high quality information, faster responses, greater transparency – and highlight the strengths of their offering.

At Door, we are reimagining the future of fund due diligence. Bringing asset managers and professional fund investors together, we have collaborated on a new industry-led platform – a digital solution to streamline the due diligence process and drive value to all participants.

Door is solving a common problem

The challenge for fund investors is that fund information is not always provided by managers quickly and in consistent and easily comparable formats. While DDQs are a primary source of critical information for undertaking fund research and ongoing monitoring, current industry practice involves exchanging Word or Excel documents over email. The process is slow and archaic. Changes to information through time are not easily captured or understood.

Today, we know professional fund investors are spending as much as two thirds of their time gathering and organising basic due diligence information on funds and only one third on analysis and decision-making. Door aims to put better, more efficient tools into the hands of fund investors and to make responding to information requests more it more efficient for asset managers to respond to information requests.

Receiving fund information quickly and in an easily comparable format is key. Door is making this possible. We have brought together principles of standardisation and digitisation. This combination creates far-reaching benefits for professional fund investors and asset management companies alike.

Creating industry best practice

There is a high level of overlap between the questions asked by professional investors in their DDQs. While differing in shape and size, the vast majority of questions asked by investors intend to elicit similar responses from asset managers. Our research shows that over 90% of all the questions asked by investors of asset managers’ products around the world are common!

Standardisation has played an important role in the development of many modern advancements. It provides the basis for consistency in measurement and technical development.

The benefits of applying best practice standards to the questionnaire process were recognized first by the professional fund investor community – within the membership of the Association of Professional Fund Investors (APFI). Door has worked alongside APFI to deliver an independent and industry-led solution that continues to evolve with the changing investment environment and due diligence requirements: The Standard Questionnaire.

The Standard Questionnaire was built through an intensive 12-month collaboration that explored a wide array of questionnaires, RFPs, RFIs and DDQs from around the world and across many categories of investors. Dozens of participants, including leading global fund investors and asset management firms, provided input and feedback. 500 hours of research, analysis and collaboration went into the development of The Standard Questionnaire. With the support of the firms collaborating on Door, The Standard Questionnaire is fast becoming the new industry best practice. Asset managers’ responses to The Standard Questionnaire are designed to sit at the ‘core’ of a fund investor’s due diligence information gathering process. One of the key benefits of The Standard Questionnaire is that asset managers can better understand the information requirements of their clients. The questions are clear and easily understood. The quality of responses and the level of transparency improves.

Fund selectors point out that it takes far too long to receive responses to information requests: a turnaround time of three to five weeks. Asset managers are challenged with an ever-growing backlog of requests. Door enables asset managers to provide access to The Standard Questionnaire for their funds to fund investors on a real-time basis and investors are alerted to the most recent changes to information.

Fund selectors also struggle with the level of quality and depth of responses to questions asked. Because volumes are so high and asset managers receive many similarly worded questions, they often simply ‘cut/paste’ ready made responses. In many cases, these responses are a good fit for a question posed but too often, similar sounding questions don’t receive adequate attention. With a wider breadth of questions being asked, the depth and quality of responses suffer.

Tools for Humans

We believe that fund due diligence is a vital function. We believe that humans, not robots, are best equipped to make investment decisions on funds. In depth analysis and ongoing reviews of both robust qualitative and quantitative information is crucial. As both funds and asset management firms are ultimately managed by people, we think it takes solid human judgment and decision-making to invest in them. To make decisions, fund investors must have robust, up to date, easily comparable information. Changes to information need to be communicated more quickly.

Door’s aims are simple. We want to improve the due diligence information gathering process. We want professional fund investors to be able to apply their analysis to easily comparable, deep fund information. We want faster and more democratic communication of changes to information.

We want to give back the time to both fund investors and asset managers to focus on value.

About Door collaborators

Collaboration and mutual understanding are key facets of Door’s success. As Co-Founders of Door, we have brought together complementary, hands-on experience from both sides of the due diligence process.

The industry has been seeking innovation. So, Door brought the innovators together. The firms helping our drive for change include All Funds, Santander, Mediolanum, Pictet Wealth and EFG. Asset managers include Franklin Templeton, Columbia Threadneedle, Schroders, Aberdeen Asset Management, Robeco, M&G, Artisan Partners, Aviva Investors, Pictet Asset Management and Nordea Asset Management. Door is now working with 20 cross-border asset managers and over 50 fund investor firms. The number grows daily.

If you would like to join our community, please visit www.doorfunds.com

Column by Door

LatAm Fixed Income: “Despacito” [Slowly] Evolving Beyond a Passing Fad

| For Beatriz Zúñiga | 0 Comentarios

The times in which investing in bonds of Latin American issuers was something done only by managers of the most daring funds and/or those specialised in that region are behind us. In fact, these days practically everybody holds some LatAm fixed income investments in their portfolios.

There are several key factors typically pinpointed to justify international investors’ rising demand for bonds of Latin American issuers: the expansionary policies of the main central banks and the consequent search for returns under a global scenario of low/negative interest rates. However, we should also bear in mind other factors as well: the improvement of the region’s economies, adjustments to their trade and current account balances, a decline in inflationary pressures, company earnings growth, greater political stability, structural reforms, the rise in the number of issuers as well as the number of issuances in international markets, etc. These factors also underpin the rising presence of this region’s debt in a greater number of portfolios.

According to the Bank for International Settlements (BIS), in June 2016 the value of international debt outstanding by non-financial Latin American and Caribbean companies amounted to $406 Billion or triple the June 2010 figure. According to Dealogic’s data, in the first half of 2017 new international issues of LatAm bonds had already reached $93 Billion. With regards to LatAm’s presence in international debt markets, we would mention the stellar reappearance of Argentina in April of last year – after suffering a 15-year shutout from international debt markets – with its $16.5 Billion issue which was then followed by a $2.75 Billion centenary bond in June 2017 (initial yield of 7.9% and it was 3.5x oversubscribed). We would also highlight the fact that numerous corporate issues have been carried out in international primary markets, often (40% in 2016) accompanied by buybacks of outstanding issues: thus leading to healthier financial positions thanks to refinancing at lower rates and with longer-term maturities.

Clearly, this wave of primary issues has greatly improved the liquidity, diversity and size of the LatAm debt market. But, as some voices are saying, is this also a symptom of excessive leverage and a potential bubble? Well, based on June 2016 data compiled by Bank of America Merrill Lynch, LatAm issuers with investment grade ratings are 30% less leveraged than North American companies. As for liquidity levels, LatAm corporations are quite comparable to their North American peers.

Obviously, neither all Latin American countries nor all of their companies face similar situations and/or have identical outlooks. Opportunities arising in the region’s debt markets are certain to be diverse and changing, but can investors aiming to build solid medium-term portfolios opt to completely ignore LatAm debt? Investing in this region no longer seems to be a temporary fad. Its greater resilience may help prevent price upheavals such as we suffered in 2013 on the back of the taper tantrum caused by Bernanke. Moreover, this asset class is increasingly becoming a key element for well diversified portfolio construction.

Column by Crèdit Andorrà Financial Group Research, written by Meritxell Pons, Asset Management Director at Beta Capital Wealth Management.