Opinion archivos - Page 40 of 79

Are Dividends from Emerging Markets Worth The Risk?

¿Merece la pena asumir el riesgo propio de los dividendos de mercados emergentes? — CC-BY-SA-2.0, FlickrPhoto: Dennis Jarvis. Are Dividends from Emerging Markets Worth The Risk?

The latest Henderson Global Dividend Index (HGDI) report – a long-term study into global dividend trends based in US dollars– shows how dividends from Emerging Markets (EM) have declined in headline terms* during the last two years, in stark contrast to their significant growth between 2009 and 2013. The trend supports the view that taking a global approach to equity income, with the flexibility to access growth opportunities and seek out attractive yields, is important to help reduce an investor’s reliance on any one region or sector.

*Headline dividends reflect the total sum of payouts received within the HGDI in US dollar terms. Underlying dividends are adjusted for special dividends, changes in currencies, timing effects and index changes.

Dividends from the EM more than doubled in headline terms between 2009 and 2013 (+114.4%), which compares favourably to the 45.1% rise in dividends globally. Since the start of 2014, however, payouts from companies listed in the EM have fallen at a headline level by 17.9%, while global dividends have risen by 8.8%.

A heavy weighting of commodity companies, which have suffered from weak demand leading to many implementing dividend cuts, along with falling emerging market currencies are mainly responsible for the EM dividend decline since 2014. China is the largest EM dividend payer, making up more than a quarter of the HGDI EM total (27%), as shown in the chart below.

Enlarge

Dividends from Chinese companies have almost tripled since 2009 at a headline level, far outperforming the EM and global average. But growth stalled in mid-2014 and since then Chinese dividends have fallen in headline terms for the first time since the HGDI was introduced in 2009. A limited number of commodity companies, however, and a managed currency mean Chinese dividends have declined less than those from other EM countries.

Enlarge

Over the long term, exchange rate effects broadly even out but the impact in 2015 was exceptional and reflected the US dollar’s strength. Last year headline dividends from EM declined by 8.3% but underlying growth was strong at 12.7% (year-on-year). Exchange rate effects accounted for 18% of the difference, with the impact greatest in Russia and Brazil, while the remaining 3% was down to special dividends and index changes.

Henderson Global Equity Income strategy

The geographical allocation of the Henderson Global Equity Income strategy is a function of where the managers find attractive stocks with good fundamentals and appealing valuations rather than being based on an overarching macro view.

Currently, we are finding the most attractive stock opportunities for both capital and income growth in developed markets. The outlook for earnings and dividends remains uncertain in many EM markets whereas most developed markets offer the potential for dividend growth.

While the strategy has a low direct weighting to EM, exposure is also achieved through certain developed market companies with significant emerging market business streams.

Ben Lofthouse became a fund manager at Henderson in 2008 and since then has managed a range of Equity Income mandates.

Deferendum

| For Fórmate a Fondo | 0 Comentarios

La incertidumbre creada por el Brexit ya pasa factura a la economía de Reino Unido — CC-BY-SA-2.0, FlickrPhoto: Conservatives. Deferendum

The debate about the referendum on the UK’s membership of the EU is heating up. There is a lot of argument about the relative costs and benefits of staying in or leaving the EU, but that is all speculation about the future. But what about the impact on the UK economy today caused by simply asking the EU question?

Nobody in business or finance likes uncertainty, which is why people spend so much effort trying to predict the future. This is hard enough to do at the best of times. The referendum makes prediction very difficult, and the outcome is not even binary; a post-exit UK could have any of a number of potential relationships with the EU. Nobody really knows what economic policies would look like under those circumstances.

Thanks to some innovative work by Scott Baker, Nick Bloom and Steven Davis Kellog School of Management, Stanford University and Booth School of Business , we have a way of measuring economic policy uncertainty. They compile a news based index by finding references in newspapers to uncertainty about economic policy. The resulting economic policy uncertainty indices reveal a stark divergence between the UK and the Eurozone (chart 1). In the past, uncertainty in Europe and the UK tended to move together. This year policy uncertainty in the UK spiked, and this is almost certainly the referendum effect.

Ampliar

The first instinct when facing increased uncertainty is to defer whatever decisions we can until we have more information. For a household this will not be everyday spending on food or energy, but rather big ticket items like washing machines or a new car. For a business it will not be wages and running costs, but rather big investment plans or additional hiring. In the grand scheme of things, delaying a new factory or a new piece of equipment by a few months is not going to matter much.

Sure enough, we can see investment and employment intentions shifting in the UK. This is very clear in the Bank of England (BOE) agent scores (not as exciting as it sounds; these are surveys by BOE regional offices). Investment intentions and employment intentions have both softened for several months now (chart 2), suggesting a growing reluctance to commit to anything long-term.

Ampliar

The impact on manufacturing appears to have been more stark (although it is worth noting that manufacturing has slowed in the US as well). But manufacturing, which is involved in more international trade, may have more reason to be worried about the uncertain impacts on trade of a vote to leave.

The consequences for UK GDP in the first half of the year are likely to be strongly negative, and as such it makes it all the more likely that the BOE does not hike rates any time soon. The market has already pushed out the timing for the first rate hike until 2018 or even later.

We observed the same phenomenon in the USA a few years ago (see Domestic Disputes, 21 October 2013). At the time another government shutdown was looming. The US policy uncertainty index spiked and net business investment fell. Nobody wanted to expand capacity when there was so much uncertainty about the future. Once the uncertainty faded (the crisis was averted), investment spending returned.

Unlike the risk of US government shutdown, which would have been temporary, the EU referendum could have longer- term consequences. In the event of a vote to remain in the

EU, the uncertainty would quickly fade. But if there is a vote to leave, the negotiations with the rest of the EU could take many years. Uncertainty could actually increase after the referendum, which could have prolonged consequences for the economy. Whatever the vote decides, the effect will create a short-term negative impact on the economy. In that event, the only certainty is that the Bank of England will consider deferring rate hikes even further into the future.

Joshua McCallum is Head of Fixed Income Economics UBS Asset Management.

The Europe Behind the Headlines

| For Gabriela Huerta | 0 Comentarios

Factors line up behind corporate Europe.

April was far from the cruelest month for investors. Most will have felt sentiment improve behind equities, high-yield bonds, emerging markets and commodities. But did they also notice how well European assets performed?

Followers of CIO Perspectives will be used to our “show-me-the-money” theme—the difficulty of building conviction on big market exposures until the fundamental picture clarifies. The global economy is in “two steps forward, one step back” mode, and no one region can establish clear leadership. The rising dollar made life tough for companies in the U.S. even as its data strengthened. Now that economic releases appear to be softening, it may be time to look more closely at Europe.

Time to Dig Below Europe’s Headlines
We’ll turn to performance later. For now, let’s acknowledge how easy it is to focus on headlines and imagine Europe is in permanent crisis, awash with geopolitical risk. Dig a little deeper, however, and you can find positives in its economies and favorable positioning among its companies.

Last week saw rare good news around Greece, for example. Its parliament approved reforms with little drama, triggering a bailout review that should release needed funds and potentially open up discussions on debt relief.

A week earlier, Eurozone GDP growth surprised on the upside just as the U.S. posted its slowest quarterly growth for two years. On Friday, Germany gave us a strong GDP print. Manufacturing data out of Europe has been mixed, as it has from the U.S., but it’s encouraging to see Italy and Spain exceeding expectations. Europe’s unemployment problem remains severe, but recent jobless claims, participation rates and non-farm payrolls data remind us it’s not all clear sailing in the U.S., either.

Of course, this is all relative. Europe’s 0.5% growth in Q1 was the same as the U.S.’s. The appetite to restructure Greek debt still isn’t there. Industrial production in Germany, France and the U.K. is weakening. Inflation is nonexistent.

But the European opportunity isn’t really a big macro call. It’s about a series of factors lining up behind the investment case for corporate Europe.

European Companies Appear Well Positioned

European companies tend to benefit from lower oil prices. They have more exposure to emerging markets, where sentiment may be improving. Eurozone money supply has been growing strongly, and there was further stimulus from the ECB this year.

That stimulus included a commitment to buy corporate bonds, which is creating a wave of new euro issuance: Almost €19 billion came to market last Wednesday alone. That leverage could be problematic in the long term, but in the meantime it sends a message that liquidity is abundant and profitable investments may be available.

That would be encouraging because European companies have much more room to improve earnings than their U.S. counterparts. Corporate profits are back where they were in 2010, having never regained pre-crisis levels. By contrast U.S. profits peaked in 2014 and have declined ever since.

Performance in April Was Encouraging

The turnaround isn’t underway yet: With the Q1 earnings season almost done, S&P 500 earnings per share are down just over 5% year-over-year; in Europe, the Stoxx 600 EPS is down 21%, and the consensus for 2016 EPS growth is weakening.

Nonetheless, my equity-focused colleagues are looking beyond the U.S. for good reason. Let’s look at those performance numbers.

Year-to-date, the worst-performing markets still include the Stoxx 600, European banks, and Italian and German equities (alongside China and Japan). But the story was very different in April, when Spain was up 4%, Italy 3%, and the S&P 500 was flat. For U.S. dollar investors, the results were even better—in fact, Spanish equities ended April in positive territory, year-to-date, against the greenback.

In a world where clear opportunities are few and far between, European stocks could well be a source of compelling long-term value—and markets may now be recognizing some of that value.

Neuberger Berman’s CIO insight column by Erik L. Knutzen

In the Wake of the “Panama Papers”, the CRS will Speed up Compliance

| For Gabriela Huerta | 0 Comentarios

The Common Reporting Standard (CRS) is a new international system for the automatic exchange of tax information promoted by the Organisation for Economic Cooperation and Development (OECD) and modelled on the United States’ Foreign Account Tax Compliance Act (FATCA). For some taxpayers the CRS is already “live”; for others it is imminent.

While FATCA focused, and continues to focus, only on US taxpayers, the CRS potentially involves reporting on residents of any country that has signed up to the CRS where those residents, or an entity deemed “controlled” by them, holds a “financial account” in another country that has also signed up to the CRS.

Approximately 100 countries have signed up so far. The full list can be seen on the OECD website. Approximately 56 of those who have signed up so far are so-called early adopters, which means that financial accounts held with financial institutions in those countries as of 31 December 2015, and new accounts opened after that date, will eventually be the subject of reporting. Although that reporting may only start happening in 2017 with reporting by later adopters starting a year later, residents of participating jurisdictions should already be taking steps to understand what the CRS will mean for them in concrete terms. Residents of countries that have not yet committed to apply the CRS should be considering the impact of their countries’ eventually doing so.

For example, it is noteworthy that despite Brazil not being in the group of Early Adopters, if a Brazilian has assets (bank accounts, investment funds, etc.) held in any jurisdiction of the Early Adopters group, their tax information will be reported in the first half of 2017.

The international political climate has been significantly affected by the revelations arising from the leak of the “Panama Papers”. In this environment, the reality is that every individual who has any international investment in any form and direct or indirect, needs to get to grips with whether or not they may be the subject of reporting and what the consequences would be.

One of the side-effects of the CRS has been the introduction by a number of countries of an amnesty or voluntary disclosure programme so as to enable their taxpayers to regularise their tax or exchange control position in relation to assets in foreign accounts. A number of people have embarked on such a regularisation process in advance of the inevitable flow of tax-related information to their tax authorities. One might be tempted to take the view that, having gone through such a process, or at least having committed to do so, the eventual reporting of financial information to one’s tax authority becomes of secondary importance. Taking such a view would be unwise as the level of reporting may well go beyond what is strictly necessary for purposes of tax compliance and have other consequences for the individuals concerned.

The trigger is the existence of “financial accounts”
As the existence of a “financial account” is the starting point for potential reporting, the critical thing each resident of a CRS jurisdiction must understand is whether one is the holder of, or a person deemed to be controlling, a “financial account”. The term “financial account” is a much wider concept than perhaps one might imagine. Up until now, only US taxpayers have been obliged to get to grips with the full meaning of the term.

Even if a taxpayer successfully completes a particular regularisation process or even if their tax affairs always were entirely compliant, that does not mean that the impact of the CRS ceases to be of further concern. It will not be uncommon for information reported under the CRS to be surprising and irrelevant to a person’s tax affairs.
Thus, in all cases it will be important to understand whether one will be treated as the holder or controller of a “financial account”.

“Financial accounts” in trust structures

It will come as no surprise for individuals holding a bank account or an interest in an investment fund in their own name that they hold a financial account. But individuals with some sort of involvement with a trust may find themselves subject to reporting as, believe it or not, a trust in many cases will be a financial institution and the following people will be regarded as a having a financial account with a trust:
Settlors, even if the trust is irrevocable – and, while we consider the position being taken by the OECD to be incorrect, the value of that account reported against the name of the settlor may be the entire value of the trust. In addition, the OECD has even indicated that it is considering whether a settlor who is dead should continue to be the subject of reporting!
Protectors, where their powers are such as to give them ultimate effective control over the trust, a not uncommon situation. Again, the value of the account reported may be the entire value of the trust, even where the protector is excluded from benefit. Let us consider the case of a person who, while living in the UK, was appointed as protector, and then takes retirement in France while remaining the protector. It is likely that the French tax administration will be very interested in someone who is considered to be in control of a trust that holds significant assets and whose value would give rise to a significant French net wealth tax charge.
Vested beneficiaries and, in the years in which a discretionary award is made, also discretionary beneficiaries. In the latter case, only the value of the award would be reported as the account value.

Underlying companies of trusts – another layer of reporting

The position is more complex where a financial account, such as a bank or investment account, is held by an underlying company of a trust. The existence of this additional financial account may result in another layer of reporting, in addition to the reporting on the trust. This is because the bank or investment fund may well need to identify the controlling persons of the underlying company and that in turn may require an examination of the controlling persons of the trust that is the sole shareholder of the company. The controlling persons are not the same as the financial account holders in the trust. The following are potentially affected:

Settlors – this time the reported amount will be limited to the value of the account of the underlying company in question; but it will mean that both the trust and the bank or fund will be reporting on the same person.
Protectors – this time it is irrelevant what powers of control are given to the protector in question as protectors are, by definition, controlling persons even if they do not exercise control.
Trustees – and if the trustee is a corporate trustee, this will involve a further enquiry as to who the controlling person of the trustee is, which may in turn result in the disclosure of its senior managing official.
Vested beneficiaries and discretionary beneficiaries – but in this case the latter may be treated as controlling persons even if they do not receive an award.
Potentially anybody else that the bank or fund might consider to be the beneficial owner for anti-money laundering purposes.

Bear in mind that the complexities of reporting will increase as the complexity of the structure increases, including where there are multiple trusts involved, as well as trusts with individuals or private trust companies as trustees.

The key for holders of financial accounts, and persons who may be regarded as “controlling persons” of a company, is to recognise well in advance where they may be subject to reporting. Based on that assessment, consideration can be given in good time to dealing with the consequences.

Column by Andrew Knight and Anthony Markham. If you have any queries about this column, please contact Benjamin Reid

Misperceptions of Thailand

| For Fórmate a Fondo | 0 Comentarios

Ideas erróneas sobre Tailandia — CC-BY-SA-2.0, FlickrPhoto: Heribert pohl. Misperceptions of Thailand

On a recent research trip to Thailand, I had the chance to evaluate some commonly held misperceptions about the long-term outlook for the country’s economy.

One common misperception about Thailand, for example, is that its rapidly greying population makes its markets and companies relatively unattractive for investments compared to neighboring countries like the Philippines, Vietnam, Myanmar and Indonesia. We believe that this generalization discounts the dynamism of several Thai companies. The opportunity set for many companies extends beyond the country’s population of about 68 million. Thai companies have made progress, branching out to nearby countries to participate in their growth and to take advantage of more youthful populations. Similarities in culture and business practices have made it easier for companies to expand profitably in the surrounding region.

Another misperception is that Thailand, with its GDP per capita at approximately US$6,000, is stuck in a middle-income trap. The fear is that Thailand might not be able to graduate from an economy based on manufacturing and agriculture to one more specialized in services. The Thai economy does indeed need to restructure its workforce since roughly 42% of the population works in the agriculture sector, contributing less than 11% to GDP.

However, we believe that policy frameworks to enable the country to graduate to a knowledge-based economy are in place. For example, the government’s continued investment in education, which accounted for over 21% of the national budget in 2012, has resulted in a tertiary education enrollment rate amongst the highest in ASEAN.

A common mistake amongst foreign investors in recent years is to divide Thailand regionally along “Bangkok” and “Upcountry.” The inference is that the “Upcountry” is significantly under-developed and heavily dependent on agriculture. But based on our research, we believe that this division is, perhaps, too simplistic. For instance, our analysis of shopping mall operators has uncovered “rural” malls that are, in fact, in large towns thriving due to tourism and cross-border trade.

Economic Restructuring

We have also discovered that locals, especially bureaucrats, still believe Thailand to be quite resilient to various internal and external shocks. They call it “Teflon Thailand,” to suggest nothing can stick to it. But they may be overestimating that level of resiliency. Thailand still has not recovered from the 2014 national coup d’état. The replacement of the democratically elected government and appointment of a junta-led government has led to a period of both uncertainty and policy inaction. A consequence of this has been the loss of foreign direct investment market share to countries such as Vietnam, the Philippines and Indonesia.

We believe a restructuring of the economy is necessitated by Thailand’s aging population, slower global growth and competition from neighbouring countries. The government seems to understand the urgency of the situation and has unveiled a series of policies to improve the country’s basic infrastructure. Over the short to medium term, this should help. Over the longer term, we would like to see an environment that accommodates a more sustainable governance system that inspires confidence from local and foreign investors to commit long-term capital to the country.

Tarik Jaleel is research analyst at Matthews Asia.

Abenomics is Alive and Well

| For Fórmate a Fondo | 0 Comentarios

Abenomics está vivo y en buena forma — CC-BY-SA-2.0, FlickrPhoto: Glenn Waters. Abenomics is Alive and Well

Despite the disappointment that the Bank of Japan (BOJ) did not act this week, one should not listen to those proclaiming the death of Abenomics. Indeed, it is alive and well.

Many people somehow suggest that Abenomics has so far been a failure, but this is only partially true if you were expecting miracles. The truth is:

Even after its recent rise, the current level of the Yen compares favorably with the 78:USD level before Abenomics;
TPP (the Trans Pacific Partnership) was successfully negotiated, which requires substantial economic reforms, especially in the heretofore heavily protected agricultural sector.
The 2% CPI target was ambitious, but CPI ex food and energy is now near 1% compared to flat or negative prior to Abenomics
Japan now believes in shareholder value, share buybacks and improved pretax profit margins, which have soared to record high, especially in the non-Yen sensitive service sectors
Corporate taxes were lowered by a massive amount, so recurring net profit margins are improving even faster than pre-tax margins
When looking at the overall economic picture, not the macro-economic statistics, which likely do not accurately reflect the new economy and often get revised, one sees full employment, stable or rising property values (after decades of wealth-sapping declines), and solid international competitiveness in advanced industries
Political stability reigns whereas previously the prime minister was an annually revolving door; and lastly (although there are many more examples)
Women are increasing their share of the labor force and over 200,000 kindergarten slots have been created in the last two years.

As for the BOJ, the likely reason why it decided to wait this week was to make certain that its next step was perfectly organized logistically, compared to its negative-rate decision in January. Certainly, the logistics for an ECB-style TLTRO (Targeted Longer Term Refinancing Operations)-like program is much more complicated than simply increasing QE purchases, and requires much more planning and transparency. But delay does not mean surrender, and if anyone thinks that Governor Kuroda is not fully dedicated to achieving positive inflation expectations, they are gravely mistaken and will likely be unhappily surprised when the BOJ takes its next large action, likely in June.

TLTROs, which provide negative-rate funding to banks if they can prove that it is going towards increased lending, are necessary, as in January, negative rates on excessive reserves led analysts to cut banks’ earnings estimates, which led to a broader equity sell off. Since price (including asset prices like real estate and equities, in order create the “wealth effect”) inflation is a key part of Abenomics, banks must not be penalized too much, or else lending and equity prices will not rise steadily.

Besides TLTROs, the next BOJ move will also likely increase the amount of bank reserves that are not subject to negative interest rates. We also expect an increase in ETF purchases to a level that will start to have monetary policy implications instead of just being symbolic of the BOJ’s desire to increase risk appetite by the Japanese people.

As for the fiscal “arrow,” “Helicopter money” is a vague and controversial term. If it means a hazard and extraordinary surge in fiscal spending financed by monetary injection, then such is not likely. However, Japan is soon going to increase fiscal spending substantially, especially due to the earthquake, and the BOJ will indirectly finance much of this.

Thus, the monetary and fiscal “arrows” will accelerate soon, while the economy is likely to continue growing at a moderate rate. It would be helpful if the US would pass TPP, but even if it does not, Japan will likely implement most of the reforms anyway, as such are obviously necessary, especially in the demographically challenged agricultural sectors. Other reforms, including in the labor markets, will also help prove that Abenomics is alive and well. It is critically important, however, that Japanese corporations are pro-active in this effort. They need to invest more locally, rather than abroad, and to be more creative, along with entrepreneurs, in creating new ventures, especially in green technologies. Abenomics is not just about the Prime Minister and his team, it is about Japan’s future as a whole.

John Vail is Chief Global Strategist at Nikko AM.

Time To Take A Step Back?

| For Fórmate a Fondo | 0 Comentarios

¿Es hora de dar un paso atrás en los mercados? — CC-BY-SA-2.0, FlickrPhoto: Neal Fowler. Time To Take A Step Back?

As a disappointing first quarter earnings season rolls on, I am beginning to feel more cautious about the markets in the months ahead. We’re in the midst of a third consecutive quarter of poor profits and cash flows, and what’s most troubling is the weakness that’s spreading beyond energy and exporters to a broader swath of companies in the index. To me, this is a signal to reduce risk in many portfolios.

Why the increasing level of concern? The three previous earnings recessions of the last 50 years that were caused by a combination of tumbling oil prices and a strong dollar tended to last two quarters. But this pronounced downturn in earnings has now stretched into a third quarter. By now, I would have expected sales and profits to have rebounded, with consumers responding to the “energy dividend” that has accompanied the tumble in oil prices. And the pass-through from lower input costs should have driven an increase in overall economic activity, fueled by higher real consumer incomes. That has not yet happened. I find it both discouraging and an ominous sign for risk assets.

Reevaluate your asset mix

With new money, investors may want to contemplate standing aside for now. An appropriate response for existing diversified portfolios could be to reevaluate their quality mix, and to consider favoring a tilt toward shares in companies with sustainable dividend yields and toward high-quality bonds, perhaps US corporate credits.

Although I don’t believe the present backdrop signals the beginning of a US recession, it does mean that we are now experiencing a protracted earnings recession. To resume favoring risk, I’d need to see the following:

A recovery in capital expenditures
An improved revenue line for US-based multinationals
A sustained improvement in emerging markets
Improved pricing power on the back of an increase in global inflation

Additional concerns

Aside from the concerns expressed above, there are a number of other issues that the market needs to confront. In particular, because of the growing weakness in earnings, the current price-earnings ratio for the S&P 500 is too high, at 16.3x.

Seasonal trends are not particularly favorable in the months ahead. The May–October period is historically characterized by sideways market movements, delivering indifferent returns to investors when viewed over many decades. As the popular saying goes, “Sell in May and go away.” This year, in particular, investors can afford to wait for more clarity from the data flow.

Generally, market participants tend to be cautious in the months leading up to major elections. And with this year’s US election likely to be contentious, that caution may be justified. Further risks that may warrant caution are the Brexit referendum on 23 June and a Spanish general election days after, as well as concerns about Greece’s ability to meet its financial obligations over the coming months.

The macroeconomic environment has proven less dynamic than expected in recent months. US government income tax receipts have slowed despite still-robust employment data. New single family home sales, though solid, have not met my expectations. Auto sales are losing momentum after a very strong 2015. And most importantly, the profit share of gross domestic product, one of the most important forward indicators I follow, has started to slide.

While the current US business cycle remains strong by many measures, like job and wage growth and corporate profit margins, the equity markets are laboring to produce the earnings and margins that we’ve come to expect in recent years.

Our job will be to follow the shifts in the markets and the economy, and it’s our hope that our current concerns will be temporary.

But for now, it might make sense to take a step back.

James Swanson is Chief Investment Strategist at MFS Investment Management.

Mirage or opportunity in the ‘beta desert’?

| For Fórmate a Fondo | 0 Comentarios

¿Oportunidad o espejismo en el desierto de la ‘beta’? — CC-BY-SA-2.0, FlickrPhoto: Frontriver. Mirage or opportunity in the ‘beta desert’?

High yield bonds were one of the principal beneficiaries of the adoption of quantitative easing (QE) by the US’ and other central banks in response to the global financial crisis. This new wave of monetary policy provided little incentive for savers to deposit cash as long-term interest rates were forced down to unprecedented low levels, unleashing powerful ‘reach for yield’ dynamics as investors searched far and wide for higher returns. This pushed global high yield credit spreads down to lows of 3.6% and absolute yields to 4.9%, in June 2014 (source Bloomberg).

The fallout from the orgy of credit that characterised the run-up to the global financial crisis was mitigated by aggressive central bank policy, which ensured a surprisingly orderly refinancing of the banks’ highly indebted balance sheets. As such, the level of distress was actually quite low compared to earlier cycles and given the scale of the 2008 crisis. In the end, the market reached absurd valuation levels and, with the winding down of the QE programme (‘taper tantrum’), a bear market cycle began to unfold. This was unusual and due to the disconnection between the market and underlying cyclical fundamentals, a direct result of central bank intervention.

The mispricing of an asset normally creates the conditions that lead to a reversal in its fortune, which allows a move back towards its long-term fair value. The post financial crisis bull market in high yield bonds is a particularly good example. Lower quality companies were able to refinance too easily, and, in many cases, took on too much cheap debt, leaving themselves vulnerable to a sustained low growth, low pricing power environment or to material changes in pricing. An example is the shale oil and gas sector which was able to access a seemingly inexhaustible amount of cheap debt at rates wholly incommensurate with the risks. The energy sector made up 9% of the US high yield bond market 10 years ago and rose to become 15% of the market before the oil price began its freefall.

The sell-off in the high yield bond market, partly triggered by the decline in oil prices, undermined confidence in credit markets, and, by extension, growth assets generally. This, in turn, culminated in the cathartic sell-off in January and February 2016 and propelled high yield bonds, formerly so expensive, to what we considered end-of-cycle levels and relatively cheap. Nominal bond yields reached levels in excess of 10% (in the US) and spreads had gone from lows of 335 to 890 basis points (source Bloomberg).

Such levels discounted a rise in default rates to well above 8%, the equivalent of pricing in a recession. Market price behaviour in this episode was typical of how, over the short term, investors can become detached from fundamental reality. This prompted us to re-establish a position from a zero weight across our multi-asset total return strategies, believing as we did that the current low growth, low interest rate cycle has considerably further to run. Having arguably been among the least attractive growth assets, high yield bonds had become the most attractive in the short space of two years.

We re-allocated to high yield bonds sooner than we had originally anticipated. Circumstances presented an opportunity to buy assets at a risk premium, which arguably offered investors the prospect of very attractive risk-adjusted returns over the medium term, even if this featured a relatively severe recession. Furthermore, through careful ‘bottom-up’ selection of individual securities, we were able to lower the prospective default risk of the position, compared with simply owning a passive exposure to the asset class. As long-term investors became aware of the attractiveness of high yield valuations, markets rallied powerfully. High yield spreads have now fallen sharply from 890 to 700 basis points, rendering the case for high yield less compelling, but given the cyclical dynamics, we still regard it as an attractive asset class over the medium term.

Market dislocations and irrational investor behaviour can present excellent opportunities for medium to longer-term investors who focus on fundamentals and valuations. Of course it is not just about recognising the opportunity, but being able to act rapidly and decisively, because windows of opportunity can, as in this case, close rapidly.

Philip Saunders is Co-Head of Multi-assets at Investec.

Politics May ‘Trump’ Fundamentals This Year

| For Gabriela Huerta | 0 Comentarios

As we approach the end of the first-quarter earnings season, the state of health of the corporate sector is that much clearer: An earnings recession is in full swing. Earnings for the S&P 500 have seen their third consecutive quarter of declines, and will likely be down by approximately 6% year-over-year. While things look better if you adjust for the severe decline in the energy sector, it’s still nothing to write home about.

In previous CIO Perspectives, we have talked about how this lackluster earnings season could give way to better results in the second half of the year, now that oil and dollar headwinds have eased off. At the same time, I have urged caution against chasing the recent market rally because we still feel a more significant earnings breakout is necessary for the market to move above its current trading range.

There is now clarity on another front, too: We finally know who will contest this year’s U.S. presidential race.

Unfortunately, that may be the only thing that is clear in a campaign which has set new standards for unpredictability. Donald Trump’s candidacy was met with derision a year ago. Until his rivals threw in the towel last week, many were sure that we were headed for a contested Republican convention. Why should the unpredictability stop now? Trump could lose by a landslide or win by a landslide—your guess is as good as mine.

This Campaign Could Distract From Fundamentals
The distraction of a Clinton-Trump matchup could subdue sentiment over the next few months, but it may also direct market attention away from the more important questions about what sort of fiscal policies we should expect from this political transition.

At the moment, our concern is that we will not get what would be helpful in supporting a fundamental earnings recovery—regardless of who wins the election.

An Unpopular President Will Lack a Real Mandate
Hillary Clinton’s average “strongly unfavorable” rating in recent polls has been around 37%, while Trump’s has been a staggering 53%. No one else in recent history has managed to alienate more than 32% of the electorate at this stage of a presidential campaign.

This matters because we believe that when the president lacks a real mandate it reduces the likelihood of meaningful policy progress on a number of vital issues for the corporate sector: corporate tax reform, infrastructure spending, and more rational regulatory and trade policy.

On corporate taxation alone, the U.S. remains weighed down by a needlessly complex code, higher rates of taxation than those of similar economies, and a problem with tax repatriation that constrains potential investment in our economy. On trade, even the starting position isn’t pretty. Trump is the first anti-trade Republican nominee in decades, and Clinton has tacked a long way to the left to hold off Bernie Sanders for the Democratic candidacy.

Fiscal gridlock and trade uncertainty could leave the Federal Reserve still doing all the heavy lifting to keep our economic recovery on track.

Populist Policies Threaten Long-Term Damage
Moreover, these are not just U.S. issues. The economic nationalism and populism evident in presidential campaign rhetoric are increasingly heard around the referendum on the U.K.’s membership in the European Union, for example, and in trade, currency, industrial and immigration policy debates worldwide.

Even as fundamentals improve, it could be these concerns that determine market sentiment for the rest of 2016.

Neuberger Berman’s CIO insight column by Joseph V. Amato

Thoughts from a “Gringo” on his Brazil Trip

| For Fórmate a Fondo | 0 Comentarios

As a Uruguayan and American that has been working in Brazil or with Brazilians since 1995, I have never seen the country in this way. In 2012, while I was visiting Brazil, I went for a jog early one beautiful morning in Vitória, the capital city of Espirito Santo. Espírito Santo state is Brazil’s largest producer of petroleum and Vitória is an important port for exporting iron and steel from companies like Vale or CST.

As I stopped to hydrate, I realized that the coconut water I bought from a street vendor in this secondary city, was more expensive than a Vita Coco coconut water in New York City or arguably Tokyo! There were clear fundamental reasons BigSur became bearish on the economic growth of the country, on the Brazilian Real and on all Brazilian asset markets. A decade of prosperity fueled by the commodity boom, allowed Brazil to hide problems in its legal and political framework rather than build stronger institutions during its good years.

For the Brazilian families that were clients of ours at that time, we strongly recommended that they diversify outside of Brazil. Fast forward four years later to current day, and the country is arguably in its deepest crisis ever! I have just returned from a trip with a colleague from Intermediate Capital Group, a USD 23 billion in AUM specialized credit manager, with over 26 years of history investing in private debt across the globe. I wanted to share some thoughts about what’s going on in Brazil – while we believe this is a very idiosyncratic Brazilian crisis, we think we can shed some light from our admittedly “gringo” perspective.

A Long Road Ahead to Improve the Economy

Brazil’s economy is facing its worst recession since the 1930s. Its economy is expected to contract by 4-5% this year, after shrinking 3.8% in 2015 (which was its fastest deterioration in 35 years). This could translate into a loss of about 8-9% of GDP in two years, which some economists constitute as a depression.

Many factors led to Brazil’s current situation. There were a series of ill-founded policies, including an excessive increase in consumption through lines of credit, cheap interest rates below the break-even point and an artificially valued exchange rate to control inflation. Brazil also has a lack of trade agreements with the main global economic blocks, and many public entities use “creative” accounting methods. These types of policies enabled the country to achieve a few years of growth above its potential, buoyed by the boom in commodities, and also helped by artificially low inflation, unemployment and fuel prices. In addition to economic decline, many expect an unemployment rate around 12%, a sharp fall in family income and decreases in investment and consumption. Government debt is now rising quickly to a level where reversal becomes extremely difficult and painful to administer. Brazil was downgraded by all rating agencies to junk status, both in terms of local debt and foreign debt.

We believe it’s going to be a long road for the economy to come out of its paralyzed state, and the process will not be quick or easy. Why? This is a highly rigid economy, with a heavy use of indexing. With strong unions, regressive labor laws and a cumbersome judicial system together with poor infrastructure there are many “bottle-necks” in the economy – inadequate roads, a dearth of rail lines, and strapped ports, all hampering the flow of products to market. The cost of moving soy, the number 1 export product in the country, from the grain belt in Brazil’s the interior state of Mato Grosso to the port of Santos in São Paulo state, is close to four times what it costs a farmer in Illinois to get his soy crop to New Orleans

All of this also leads to an incredibly high cost of doing business. The famous “custo Brazil” has many components, including high taxes (36% of GDP, way out of line with the 21% average for upper-middle-income countries), rocking import duties and rigid labor laws that make it hard to use workers efficiently. High interest rates mean firms must spend a packet on financing; high crime adds heavy security costs to their overheads. A terrible education system makes Brazil the world’s second-hardest place for firms to find the skills they need, according to Manpower Group

In the 2016 World Bank’s Cost of Doing Business, Brazil comes 116th in the world (down from 111th in 2015). Some of the high “cost of doing business” factors where Brazil compares unfavorably with OECD countries and even other Latin-American countries include:

Number of procedures and Number of days to start a business;
Number of hours per year of time to pay taxes – Brazil is the ranked the number 1 most time consuming tax system in the world!;
Cost to export; Cost to import; Time to resolve insolvency; and Time to resolve litigation

By analyzing Brazil’s economic prospects for the next few years, we have come to the conclusion that the country will need low real interest rates to recover its ability to grow, and that inflation should remain controlled. We do not see either of those conditions present anytime soon.

A Paralyzed Political Situation with No Clear Solution

While the country is completely paralyzed, it is clear that a political catalyst is needed. However, with or without impeachment we see no deep political change foreseen any time before, and probably during, the 2018 elections. Most likely, we will see one set of crooks is being replaced by another. With or without impeachment of President Dilma Rousseff, Brazil is confronting a host of challenges that would complicate a new government’s ability to revive a sinking economy and ease unrest inflamed by months of bitter political jousting. Any alternative government will be led by politicians that are corrupt and involved in the scandals, especially the centrist PMDB, considered a “party for hire”. Thus, with or without the Senate’s impeachment, we view the political situation as fragile and unstable.

Vice President Michel Temer from the PMDB party, (which shared power with the president’s Workers’ Party before splitting off in March) stepped down as leader of the PMDB this month. This happened after a Supreme Court justice made a preliminary ruling that any impeachment of Ms. Rousseff may extend to Temer, as he’s also being investigated for funding Ms. Rousseff’s 2014 campaign with bribes. The scandal doesn’t end there: on the other side of the coin, the legislator overseeing impeachment, Mr. Eduardo Cunha, is also facing charges and indictment alleging that in 2006, he helped orchestrate a USD 40 million bribe in exchange for two contracts to build floating oil platforms for Petrobras. This illustrates just how difficult it will be for the country to turnaround, as the roots of corruption are deep. Mr. Cunha’s first political patron, ex-President Collor, returned to government 15 years after his impeachment. He was elected to the Senate, put in charge of an ethics committee and will be among those voting on Ms. Rousseff’s impeachment. Does it get more ironic than this?

According to non-profit Transparência Brasil, 60% of Brazil’s federal legislators have been convicted or are under investigation, for crimes ranging from corruption to electoral fraud to assault. The PMDB party could form a new government, but it’s riddled by internal rivalries. The most pressing challenge for Mr. Temer and any new government would be to mollify Ms. Rousseff’s enraged hard-core base. The country will be overrun by social mobilizations, strikes, and workers’ occupations by the homeless and landless. After months of uncertainty and hardship, this frazzled country is inevitably headed for more of the same.

The problem in Brazil is that legislators have immunity. The lead prosecutor in the Petrobras case calls for an overhaul of these rules; saying corruption runs so deep that even the dozens of convictions in the Petrobras investigation won’t be enough to root it out. For a country to get rid of corruption and impunity and change its culture, they will have to alter the institutions. And this is not even on any table at the moment. The other complicating factors that add to instability are that no other political party or leadership has capitalized yet from the population’s distrust and the complicated political system with 35 parties. While it’s not our base scenario, the danger of Brazil following Venezuela’s path is latent.

Cultural Change and Structural Reforms are still Far Away

The crony capitalistic economic model introduced by the Workers Party (PT) generated an explosive growth in debt and huge distortions in the assignment of resources and credit in the economy. Some analysts estimate that around 50% of all corporate loans were subsidized. To reverse the explosive growth of debt, several structural economic reforms will need to be implemented. On the government budget, the main focus must be on reducing compulsory expenditures guaranteed by the constitution, so as to give the government higher flexibility when tax revenues drop. This must include a social security reform, a change in the calculation of the adjustment of the minimum wage and pensions, greater decoupling of budgetary revenue, and greater flexibility in labor laws, to name just a few. But it’s yet very soon to guess what the new economic model will look like.

We do not believe there are any real political alternatives and there is no focus on structural nor institutional change. The economic model and the culture will change once new processes are in place, not just because Judge Moro is going after corrupt politicians and entrepreneurs. We consider this a good first step and a necessary one. However, we do not view it as a sufficient reason for a change in the way Brazil operates. In a Harvard Business Review paper called “Culture Is Not the Culprit” by Jay W. Lorsch and Emily McTague, the authors conclude that culture isn’t something you “fix.” Rather, in their experience, cultural change is what you get after you’ve put new processes or structures in place to tackle tough business and economic challenges (like reworking an outdated strategy or business model). The culture evolves as you do that important work. We are far away from this in the Brazilian model. In the meantime, the corruption scandal is keeping the “Animal Spirits” depressed, as net investment is negative and there is no investment in infrastructure or intensive capital goods industries. There’s yet no catalyst for a change, as there’s no deadline for the persecution of entrepreneurs. However, similar to the dynamic we are seeing in US and Europe, the Brazil M&A space has benefitted from interest of multi-national companies making strategic acquisitions. These are companies looking to buy developed and performing assets with a strong foothold in the country – they can avoid the risks of building businesses or infrastructure assets from scratch this way.

M&A (Mergers & Acquisitions) activity is strong

One theme we’re paying attention to is the serious uptick in M&A activity in Brazil. The fourth quarter of 2015 was the third best quarter for M&A since 1995, with deal volume reaching USD 22.6 billion. This has continued into the first quarter of this year, and bankers are optimistic that the trend will remain for the short term. The near 45% depreciation in the Brazilian real against the dollar since mid-2014 has made Brazilian assets more affordable for foreign investors, attracting buyers from Europe, the US and increasingly Asia. The Brazilian market, with an overall population of 200 million and a large youth demographic (25% of population) is important for many long-term strategic investors, who this point in the cycle, believe they are getting access to a market they need to be in for a cheap price. We’re seeing this especially in infrastructure, consumer goods and consumer discretionary companies.

Farming is Brazil’s one Bright Industry

Brazil’s farmers look set to produce record crops of soy, coffee and sugar cane this year, while cattle ranchers and chicken and hog farmers foresee reaching new heights for exports. Agriculture was the only sector of Brazil’s economy to expand last year, by 1.8%, while overall GDP shrank 3.8%.

The whole world has to eat, and Brazil makes its living from agriculture. Brazilian farming continues to undercut its counterparts in the U.S. and Europe as it is the most efficient producer in the world. This is for two reasons: 1) Brazil became a lot more competitive last year because of the weaker real; and 2) agriculture offers a rare example of a Brazilian sector that is globally competitive. The

country’s largely inefficient manufacturers are still heavily protected by tariffs and import taxes, but the government took the opposite approach with agriculture. Starting in the 1990s, it reduced subsidies and eliminated export taxes while increasing investment in agricultural research. Farmers responded with a rapid expansion of the area under cultivation and a burst of investment that made them among the most productive and efficient producers in the world. Soy products and coffee are the locomotive of Brazil’s agricultural sector. Only the value of soybean and soybean-product exports went from USD 23.9 billion in 2011 to USD 31.3 billion in 2014. Even as sales retreated to USD 27.9 billion last year, soybeans still dethroned iron ore as the country’s most valuable export.

Conclusion

While good economic times do not necessarily make for smooth politics, bad politics generally go hand in hand with an underperforming economy. Certainly, Brazil needs to resolve its political crises before it can tackle its economic woes. The problem is that a successful impeachment vote may simply lead to another equally unstable government — with an administration led by vice-president Michel Temer, also dogged by corruption accusations and questions of legitimacy, it would be near impossible to pass necessary (but unpopular) fiscal reforms.

A question we have is whether Brazil could turn into the next Venezuela, or can it follow Argentina’s path? If Brazil does not “do their homework” and institute structural reform and cultural change, the country can go into a collapse similar to Venezuela. We view this as a low probability scenario, but it cannot be discarded. If Brazil can “clean house” and rid itself of the same old types of politicians, and bring in a leader without ties to corrupt institutions, like Argentina has done with Macri, there may be a chance at a turnaround. It’s still unclear which path Brazil will follow.

It’s also important to note that transitions, even peaceful ones, are messy and take time: Argentina’s economy is likely to shrink this year before the new government produces a turnaround. In Brazil (as ironically in Venezuela), even if there is political change tomorrow, it will take a long time for their economies to regain balance. Markets have been trading Brazil in a binary fashion lately — any development suggesting a rising chance of impeachment leads equities and the currency to rally and vice versa. Caution and patience are warranted. Nibbling for (distressed) opportunities seems the right approach.

Opinion by Ignacio Pakciarz, CEO and co-founder at BigSur Partners.