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Pictet Asset Management: No Time to Buy?

Expectations for tighter monetary policy are intensifying.

Central banks continue to lay the groundwork for a withdrawal of pandemic-era monetary stimulus in the face of rising inflation.

But higher interest rates are not the only concern for equity markets. Events in China are also worrying. Its strong recovery from the pandemic is now at risk as Beijing battles to avoid the collapse of its most indebted property company Evergrande.

We have reduced our forecasts for China’s economic growth by 1 percentage point for 2021-22 to 8.6 per cent as we expect the fallout from Evergrande debacle to spread throughout real estate sector. The country’s leading indicator is falling at a 5 per cent annualised rate, the same pace seen at the height of the Covid crisis in March 2020.

That shouldn’t come as a surprise considering real estate and related industries account for up to 30 per cent of Chinese GDP and property makes up more than two thirds of household wealth. Tighter monetary policy has led us to downgrade bonds to underweight while China’s troubles have convinced us to increase exposure to defensive equity sectors and upgrade cash to overweight.

Business cycle analysis shows world economic activity is cooling. Our global leading indicators contracted in August for the first time since the start of the post-pandemic recovery. We cut our global GDP growth estimates for the third month in a row to 6.2 per cent for 2021 from 6.4 per cent last month, led by downgrades of the US and China.

While slowing, growth in the US is still significantly above potential and we expect the world’s biggest economy to remain firm as job gains and wage increases boost consumer spending in the coming quarters.

Labour and raw material shortages and a spike in oil and gas prices are keeping inflationary pressures high, although the pace of consumer price rises has slowed in the most recent month.

Europe remains a bright spot as the region’s leading index rose for the fourth month in a row, supported by a weaker euro, the European Central Bank’s generous monetary stimulus and a successful vaccine rollout.

Our liquidity analysis shows central banks are still providing ample stimulus for now, but at a slower rate.

The world’s five major central banks are pumping in just USD500 billion of liquidity on a three-month basis, the lowest in 18 months and compared with USD1.5 trillion during the peak of the pandemic.

That said, our calculations show the US Federal Reserve’s monetary tightening trajectory remains well behind the curve. The central bank’s “shadow rate”, adjusted for the effect of asset purchases, is about 500 basis points below its equilibrium levels.

That is despite Fed officials having taken a clear hawkish turn in their communications, suggesting a faster withdrawal of the central bank’s USD120 billion monthly bond buying and a more aggressive interest rate hike campaign that could start as early as end-2022.

Liquidity conditions in the euro zone remain the loosest in the world and the European Central Bank should continue to provide stimulus in excess of GDP next year – the only monetary authority to do so among major economies.

China’s central bank has stepped up net cash injections in response to a funding squeeze among real estate developers. We expect liquidity conditions to gradually loosen across the country in the coming months; the People’s Bank of China may cut its reserve requirement ratio for banks for the second time this year when its medium-term loans mature.

Our valuation model supports our downgrade of bonds and neutral equity stance.

Despite a recent rise in yields, bonds remain below fair value and we expect a further correction in prices.

Equities have suffered their first weekly outflow of this year, of more than USD 24 billion (see Fig. 2).

Rising bond yields are likely to weigh on equity earnings multiples given the asset class’ expensive valuation. Another red flag is corporate profits.

Earnings momentum has peaked, with 12-month forward earning per share now rising at 20 per cent for MSCI All-Country World Index, compared with 60 per cent in June.

Our models suggest earnings growth will continue to decelerate significantly in the coming quarters as the pace of economic expansion slows.

Our technical indicators paint a positive picture for riskier assets, supported by seasonal factors as well as moderate investor sentiment.

Opinion written by Luca Paolini, Pictet Asset Management’s Chief Strategist.

Discover Pictet Asset Management’s macro and asset allocation views.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation.

The information and data presented in this document are not to be considered as an offer or sollicitation to buy, sell or subscribe to any securities or financial instruments or services.

Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management (Europe) SA, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management (USA) Corp (“Pictet AM USA Corp”) is responsible for effecting solicitation in the United States to promote the portfolio management services of Pictet Asset Management Limited (“Pictet AM Ltd”), Pictet Asset Management (Singapore) Pte Ltd (“PAM S”) and Pictet Asset Management SA (“Pictet AM SA”). Pictet AM (USA) Corp is registered as an SEC Investment Adviser and its activities are conducted in full compliance with SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref.17CFR275.206(4)-3.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in Canada to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In Canada Pictet AM Inc is registered as Portfolio Manager authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA.

Megatrends: How to invest in cybersecurity

| For Constanza Ramos | 0 Comentarios

Cybersecurity services are more relevant than ever due to the adoption of interconnected technologies. Jeff Spiegel, our megatrends expert, delves into the new long-term investment opportunities as digitization continues to expand.

Over the past year or more, a shift from the office to remote work drove digitalization more than any previous year. Companies underwent a digital evolution overnight, fighting to stay competitive in the face of the global disruption caused by the COVID-19 pandemic. Among the biggest challenges was ensuring the security of enterprise networks.

Today, hybrid work is here to stay, and cybersecurity is a big consideration for companies’ business plans. In 2020 alone, the demand for new digital products and services increased by 76% and is estimated to grow to 83% by the end of 2021_¹. Online security and digitization issues are already part of companies’ growth plans, opening the door to long-term opportunities for investors.

“The sector’s growth potential is driven by strong technology adoption globally. Global spending on information security and risk management technology is forecast to exceed $150 billion in 2021², up 12% from last year and 50 times more than four years ago“³ – Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs

The hidden face of technological progress

Digitized companies were more resilient during the pandemic globally, and technology is expected to continue to be a growth driver moving forward. It is estimated that companies using digital tools can expect their profit margins to increase, on average, by 12% to 20% globally⁴.

However, the adoption of digital technologies has also paved the way for the proliferation of cybercrime. In 2020 alone, malware attacks (malicious software) more than tripled as compared with 2019, and ransomware attacks (the virtual extortion of companies) more than quadrupled⁵.

Any company, large or small, that uses servers to store information is at risk of cyber-attacks. Thus, the growing demand for cybersecurity services has resulted in a boom of companies offering this type of services.

Fad or trend?

The world is making great leaps and bounds towards a connected reality in both the organizational nature of companies and the habits of their employees. As more systems move to the cloud and rely on global networks, the need to ensure data security and privacy will continue to increase.

“Evidence of the impact of megatrends is all around us, reflected in products, services and movements with profound transformative potential. They are expected to reshape our personal and professional routines for decades to come. Identifying transformative investment themes offers the potential for significant long-term growth.” – Jeff Spiegel, Head of iShares Megatrend and International ETFs for the United States.

Investing in cybersecurity

The struggle to create a safer cyberspace is a global priority. The rise of cybersecurity, cloud security and information technology services companies is an opportunity to take advantage of the changes already materializing over the past year and a half.

“Our megatrend Active and Index Funds are based on BlackRock’s conception of long-term trends that can change the trajectory of the global economy. These powerful transformative forces, from artificial intelligence to genomics to clean energy, are changing societal priorities, driving innovation and redefining business models.” – Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs

Investing in products nestled under the technological breakthrough megatrend functions as a portfolio diversifier that allows for greater resilience and exposure to long-term returns.

“Megatrend indexes are less constrained in their inclusion criteria than traditional sectors, potentially allowing them to better keep pace with the rapidly changing boundaries of the global economy. This investment approach allows earlier exposure to potentially disruptive companies than conventional indexes, as they are organized around business activities, not growth stages.” – Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs

iShares megatrends ETFs within the technological breakthrough category provide exposure to companies that are developing technologies in the fields of cybersecurity, as well as to additional components of the megatrend such as digitization, smart infrastructure, telecommuting, automation and robotics.

As a US Offshore Investor, you can access Megatrends through Active and Index Solutions with BlackRock. See our Funds that provide exposure to CyberSecurity:

iShares Digital Security UCITS ETF

iShares Digitalisation UCITS ETF

BBF FinTech Fund

BGF Next Generation Technology Fund

¹Gartner. (October 2020). “Encuesta de Gartner de casi 2.000 CIOs revela que las empresas con mejor rendimiento priorizan la innovación digital durante la pandemia”. https://www.gartner.mx/es/sala-de-prensa/comunicados-de-prensa/2020-10-20-encuesta-de-gartner-de-casi-2000-cio-revela-que-las-empresas-con-mejor-rendimiento-priorizan-la-innovacion-digital-durante-la-pandemia

² Gartner. (May 2021). “Gartner Forecasts Worldwide Security and Risk Management Spending to Exceed $150 Billion in 2021”. https://www.gartner.com/en/newsroom/press-releases/2021-05-17-gartner-forecasts-worldwide-security-and-risk-managem

³ Gartner. (August 2018). “Gartner Forecasts Worldwide Information Security Spending to Exceed $124 Billion in 2019”. https://www.gartner.com/en/newsroom/press-releases/2018-08-15-gartner-forecasts-worldwide-information-security-spending-to-exceed-124-billion-in-2019

⁴ Boston Consulting Group. “La transformación digital puede aumentar la rentabilidad de las empresas y construir resilencia”. https://www.bcg.com/en-cl/press/26july2020-digital-transformation-can-increase-business-profitability-and-build-resilience

⁵Deep Instinct, “Pandemic Chaos Releases Malware Disaster: 2020 Cyber Threat Landscape Report,” December 2020.

Disclaimer
In Latin America: this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds may not have been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx

MKTGH0921L/S-1849254

New Global GPs Launch CERPIs in 2021

| For Gabriela Huerta | 0 Comentarios

Screenshot 2021-09-28 125329 — Wikimedia CommonsPhoto: Snapdragon66. Foto:

The new GPs that have come to Mexico to offer global private equity investments to institutional investors as of September 2021 have been: Stepstone Group (under the LOCK3PI ticker) and Oaktree Capital (OAKPI). Stepstone issued commitments for USD $400 million, while Oaktree for $224 million.

Among the recurring issuers for 2021 are: Walton Street Capital, General Atlantic, Thor Urbana and Lock. With these names, there are now 21 global and local GPs that have issued CERPIs.

Among the main issuers of CERPIs (listed by called capital) are: Harbourvest, Lock, Spruceview, General Atlantic, Blackrock and KKR.

At less than three months before the end of 2021, the committed capital of the 24 new CKDs (6) and CERPIs (18) is USD $2,543M of which USD $406M corresponds to investments in local private capital (CKDs) and USD $2,137M in global investments (CERPIs). The called capital is USD $120M for local investments vs USD $154M for global investments.

When comparing the issuances of the CKDs vs the CERPIs of 2021, it is worth highlighting:

In the CKDs, committed capital is less than one fifth of the amount of CERPIs (USD $406M vs USD $2,137M), showing the greater interest for global private capital investments versus local.
The initial capital call of CERPIS have been remarkably lower than that of the CKDs in 2021 (7% vs 30%). CERPIs have been shown to call the minimum necessary, while CKDs have not been so prudent.

In the CERPIs, the figures as of September show that the total committed capital is already higher than the previous year (USD $2,137M in September vs USD $1,924M in 2020). In 2019, CERPI issuances reached USD $2,668M, while in 2018 it was USD $5,017M which represents the maximum level reached by the CERPIs (and first year institutional LPs invested in the structures).

Highlights from the local and global GPs of 2021:

Local issuers of recurring CKDs (FINSA, Walton Street Capital, Infraestructura México and Grupo Renovables Agrícolas).
Global issuers of recurring CERPIs (General Atlantic and Lock).
Local issuers that open their existing portfolio to global private equity investments using CERPIs (Thor Urbana, Walton Street Capital).
New global issuers of CERPIs that bring their global strategy (Stepstone with ticker symbol LOCK3PI, as well as Oaktree Capital).

In the list of potential issuers, that are in application and process of issuance there are two new local issuers of CKDs seeking to issue (DD3 and Finpro), while the potential issuers of CERPIs are Walton Street and Lock.

Everything indicates that 2021 will be an important year in the structuring and fundraising of vehicles for global private equity investments, and that new global issuers will continue to arrive to Mexico.

Column by Arturo Hanono

The US Market Appears to Have Already Discounted a Cautionary Re-opening Scenario

| For Cecilia Prieto | 0 Comentarios

grand-central-station-690180_1920 — Pixabay CC0 Public DomainAutor: Free-Photos. Reapertura de EE. UU.

U.S. equities marched higher in August as the S&P 500 logged its seventh consecutive monthly gain. Markets responded favorably to a strong earnings season, stable central bank monetary policy, and robust infrastructure spending. Despite the positive headlines, investors remain cautious over inflation dampening profit margins and companies’ passing those higher prices to consumers.

Although 53% of Americans are fully vaccinated, concerns remain over the impact of the Delta variant on the unvaccinated portion of the population. Efforts to administer a booster shot have received FDA approval, which aim to bolster the efficacy of those vaccinated earlier this year. Additional shutdowns remain unlikely and the market appears to have already discounted a cautionary re-opening scenario with travel and leisure stocks shedding some of their gains.

Continued focus remains on the Fed and their stance on monetary policy in response to higher inflation rates. Although recent discussions of potential implementation of tapering have been non-material, the market remains cognizant of potential action being taken by the Fed should these concerns persist.

Although our approach to picking stocks always evolves – we still often video conference with management teams even though we are back in the office – we remain true to the founding fundamental research process and PMV with a Catalyst™ methodology of our firm. As Value Investors, we will continue to use the current market volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets and are trading at discounted prices.

Mergers and acquisitions activity remained vibrant in August with $480 billion in announced deals, an increase of 44% compared to 2020.

The global convertible market bounced back in August with positive returns and an uptick in issuance. Returns were mostly driven by positive underlying equity performance for the month. The return of issuance was also a positive development after a relatively slow July. Pricing improved and we anticipate the pace of issuance to accelerate through the fall. The fundamental reasons for increased convertible issuance are still quite intact with low interest rates, increasing equity prices, and favorable tax environments available to most potential issuers.

_________________________________________

To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:

GAMCO MERGER ARBITRAGE

GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.

Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.

Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.

Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.

Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476

GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155

GAMCO CONVERTIBLE SECURITIES

GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.

The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.

The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.

By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.

Class I USD LU2264533006

Class I EUR LU2264532966

Class A USD LU2264532701

Class A EUR LU2264532610

Class R USD LU2264533345

Class R EUR LU2264533261

Class F USD LU2264533691

Class F EUR LU2264533428

Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to ﬁnd out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reﬂect the manager’s current view of future events, economic developments and ﬁnancial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

The Trouble with Yields

| For Cecilia Prieto | 0 Comentarios

wallet-2292428_640 — Pixabay CC0 Public DomainBajos rendimientos de la renta fija. Bajos rendimientos de la renta fija

As investors look across the world for opportunity and challenges within the fixed income asset class, it’s important to note that real yields are at historic lows in high quality fixed income markets.

In addition, spreads are at some of the lowest levels that we’ve seen in history. This is not a time to take undue risk within fixed income. At the same time, it’s important to see that the role of fixed income in asset allocators’ portfolios is changing. Because those real yields are so low, and yet because the opportunity in markets from a volatility perspective is rising, an investor must be significantly nimbler these days than to merely clip a coupon.

In the current market environment, we’re generally positioning our fixed income portfolios to take less risk given low real yields and low spreads. There are still areas of opportunity. As is often true in investing, investors continually fight the last war. Consumer balance sheets, particularly in the United States, are overlooked by some. To the contrary, we believe consumer balance sheets in the United States are quite strong. The real challenges are consumer balance sheets outside the United States and the corporate and sovereign bonds that are exposed to that weakness.

Outside of the U.S., we have seen an incredible penchant for spending, most notably on the sovereign front where government expenditures rose precipitously with Covid-related social spending programs. Of course, this is coming at a time when government revenues are at record lows due to lack of tax revenues with subdued economic activity. As with corporates, the recipe of a higher debt load with a lower P&L is not a comfortable dynamic, especially if prolonged.

Investors gave governments the benefit of the doubt through 2020 with the hope that 2021 would bring some austerity. That has not been the case. We are now left with a larger public sector deficit and a higher debt load. Therefore, we are not surprised that we have seen the largest number of sovereign rating downgrades in the 21^st century by nearly 200% (captured below).

When Will the Fed Move?

One interesting development in markets over the course of the past quarter has been that rates have fallen, not just in the United States, but in many places across the globe. This is at odds with high inflation and high growth prints, as well as an improving labor market. A remarkable instance of the market trying to outguess the Federal Reserve.

Despite questions around the Fed’s commitment to keeping rates lower for longer, investors have seen that they have been very clear and resolute. The Fed’s plan to raise rates and taper bond purchases is on schedule for later this year.

Although the Fed is still active in markets, the economic bump in the road due to the Delta variant makes it apparent that rates cannot rise monotonically towards 2 or 3+ percent. However, as we look at the intermediate term, and we see incredible amounts of fiscal and monetary stimulus still in the system, growth should continue to be good and curves should continue to steepen. While the Fed and other central banks are anchoring rates at the front end, the long end can rise especially as that taper gets closer and closer.

No Global Lock-Step Market Movements Likely

As we look across the globe, there are a variety of different situations and potential opportunities. Emerging markets is a varied landscape: from China which has a significant virus lockdown and has seen an early cycle growth stage, earlier than other countries; to places like Brazil, where vaccination rates are much more challenging and resulting growth has been pushed into the future. At some point, we’re going to see vaccines continue to take hold, and that should be a boost for growth. But is there an opportunity today before we see restored domestic demand, particularly in a healthier local consumer?

Outside the U.S., we cannot apply a blanket policy to risk. Corporate bonds offer a glimmer of hope. There are many corporates in EM who benefit from the global cycle vs domestic demand. In other words, they are exposed to the aforementioned healthy consumer/corporates we have in the United States. Because of this, we have seen leverage, interest coverage, and cashflow generation improve with global reflation.

The key in EM is making sure there are built-in hedges to the business (input costs, currency, interest rate) that can help weather global economic swings or offer defensive narratives. With these, we can capture EM spread levels which have lagged both U.S. and the Euro area (see below) while limiting our exposure to typical EM dynamics like cyclicality, currency depreciation and earnings volatility.

With that in mind, we have continued to move our portfolios to a risk-off stance but with a focus on the strength of consumer and corporate balance sheets and the underwriting of fixed income in those sectors.

One last note is we need to look at the market every day, and do, because we never know what day volatility will rear its head. These are times when a nimble and wholistic approach to fixed income management really comes into its own.

Jason Brady, CFA, is President and CEO at Thornburg Investment Management.

Ayman Ahmed is a Senior Fixed Income Analyst at Thornburg Investment Management.

Important Information

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

This is not a solicitation or offer for any product or service. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein.

Investments carry risks, including possible loss of principal.

Outside the United States

This is directed to INVESTMENT PROFESSIONALS AND INSTITUTIONAL INVESTORS ONLY and is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to the laws or regulations applicable to their place of citizenship, domicile or residence.

Thornburg is regulated by the U.S. Securities and Exchange Commission under U.S. laws which may differ materially from laws in other jurisdictions. Any entity or person forwarding this to other parties takes full responsibility for ensuring compliance with applicable securities laws in connection with its distribution.

Please see our glossary for a definition of terms.

Why It Pays To Stay Agile in an Age of Low Interest Rates

| For Beatriz Zúñiga | 0 Comentarios

ballet-2042851_1920 — Pixabay CC0 Public Domain. A medida que los mercados vuelven a la normalidad, las opciones de la Fed podrían ser claves

Last year, during the most acute phase of the Covid-19 crisis, the world’s major central banks intervened on an unprecedented scale – cutting interest rates, buying government bonds and providing massive liquidity. Sovereign bond yields reacted by sinking to historic lows: -0.9% on the 10-year German Bund and 0.5% on 10-year US Treasuries.

With a brisk – albeit uneven – economic recovery underway across much of the world, and yields well above their recent low point, some commentators believe global rates have turned a corner. The argument goes that the four-decade bond bull market, which has pushed yields steadily lower, is now over. A resurgence of growth and inflation means that materially higher rates are inevitable.

Though it is tempting to think that the recent climb in bond yields heralds a change of regime, we think this view is mistaken. While rates may rise somewhat from here, there is ample evidence that they will remain extremely low against all historical measures. Indeed, multiple factors suggest interest rates will stay “lower for even longer,” based on both long-term economic trends and more recent developments. Rethinking portfolios to account for this outlook should be an urgent priority for investors.

Slower growth is suppressing interest rates

To take the longer-term factors first, the forces that have propelled a 40-year bull market in government bonds – and the accompanying decline in developed-world interest rates (see Chart) – seem far from exhausted. Until they are, it is premature to call a decisive turn.

Two key factors have helped drive rates lower: a decades-long deceleration in economic growth and inflation, as well as falling long-term inflation expectations. Nominal bond yields track nominal GDP closely. As growth slows, interest rates and bond yields tend to moderate. In this context, a given rate of interest represents an equilibrium that balances demand for capital to invest and the supply of savings available to meet that demand. Slower growth tends to suppress investment demand for investment capital and therefore puts downward pressure on interest rates.

Demographics mean the world is “drowning” in savings

Increased longevity across the developed world has tipped the demographic balance, reducing the size of working populations relative to older generations, helping create a worldwide glut of savings that is seeking a home in safe assets, notably bond markets.

There are also fewer places to put these savings to work. This is because of a long-term transition in developed economies from capital-intensive industry and manufacturing towards capital-light, services-oriented businesses, which have lower investment needs.

Slowing productivity growth has reinforced this trend by reducing long-term rates of economic expansion, again suppressing demand for investment capital. The result is an abundance of capital and a relative shortage of opportunities to invest it, leading to downward pressure on interest rates. All these factors are long-term in nature and firmly entrenched – none of them is likely to reverse imminently.

Debt is at record levels

The world has accumulated a vast amount of debt – public and private – in the years since the global financial crisis, and especially since the Covid-19 crisis. Massive debt burdens, albeit easily financeable at very low interest rates, tend to suppress future growth by diverting cash from productive investment to servicing debt. They also make borrowers more vulnerable to unexpected increase in interest rates.

With debt levels in major developed economies at record levels, central banks face a daunting challenge. Any significant rise in interest rates could render huge swathes of existing debt unsustainable and destabilize governments and financial markets. As a result, financial repression – where inflation is consistently higher than interest rates – becomes a necessary tool of monetary policy to ensure borrowers’ debt burdens remain sustainable. But it creates challenges for investors who are hunting for yield to protect their savings.

In effect, the center of gravity in central banking has shifted. Policies such as quantitative easing (QE), experimental a decade ago, are now routine. Far from seeking an exit from current policies as soon as possible, central banks are now more likely to stress the dangers of providing too little support to the economy, rather than providing too much.

So, it is not surprising that even though a powerful rebound in economic activity is likely, this year and next, all indications are that monetary policy will remain loose. The US Federal Reserve is expected to taper its bond purchase program very gradually, with no rate increase likely before 2023. In the euro area, monetary policy will remain extremely loose. All this strongly suggests that the most likely outlook in developed economies is for many more years of historically low interest rates that will keep returns from safe assets close to zero.

Portfolio implications

How should investors react? It has rarely been harder to generate reliable income. Equally, preserving the purchasing power of money in an age of financial repression is a constant headache. And if investors venture beyond traditional assets in search of extra yield, how should they diversify and manage risk?

Think of allocations as a barbell

Investors should view their choices as a “barbell” that spans two groups of assets: those suited to preserving capital (including sovereign bonds, credit and cash alternatives) and those designed to generate capital growth and income (including emerging-markets bonds, equities and private-markets assets such as infrastructure equity and debt and private credit.) They can then choose from a range of multi-asset solutions that combine elements from each group to target a range of outcomes.

Staying agile is key

The past few years have illustrated a key feature of today’s investment markets: how rapidly conditions can shift. Accordingly, the optimum mix of assets will naturally need to shift in response. This calls for a highly dynamic approach to positioning that rapidly switches asset allocations within the portfolio as the economic conditions evolve to preserve the benefits of diversification and ensure agile risk management.

Consider permanent portfolio changes

Some changes in portfolios could be more permanent. This points to a future in which the balance of traditional equity/fixed income portfolios will shift decisively towards equities: a conventional balanced portfolio of 70% bonds and 30% equities may move towards a 50:50 position, for example. A more aggressive 60:40 portfolio might shift to 80% equity and 20% fixed income, or even 100% equities with an equity-risk hedge overlaid. It also suggests that allocations to private-market assets intended to generate capital growth and additional yield will increase substantially. They may reach 20% in a typical institutional multi-asset portfolio.

The forces that have driven interest rates steadily towards zero over the past four decades are still at work and will remain dominant for the foreseeable future. Against this background, the way investors approach asset allocation must change, and their approach to risk management and diversification must become far more agile to navigate an era when market conditions can be changeable.

A column by Franck Dixmier, Global Chief Investment Officer for Fixed Income at Allianz Global Investors; and Ingo Mainert, Chief Investment Officer of Multi Asset for Europe

ESG Sovereign Engagement

| For Cecilia Prieto | 0 Comentarios

environmental-protection-326923_640 — Pixabay CC0 Public DomainCriterios ASG. Criterios ASG

Despite its size and importance, the sovereign debt market has been the subject of less systematic environmental, social and governance (ESG) consideration than other investment asset classes. However, appetite for ESG integration is growing among investors, with a rising number appreciating that ESG factors can and do affect sovereign debt valuations[1]. At Colchester we believe that traditional sovereign balance sheet analysis should be supplemented with a systematic integration of ESG factors to allow us to fully assess the financial stability of those developed and developing markets in which we may invest.

We assign countries a proprietary Financial Stability Score that combines an assessment of their overall balance sheet strength and ESG factors. We have separate bond and currency scores for each market which range from +4 to –8. A country may be excluded from the investment universe, where it has an inappropriate level of financial stability for the relevant asset class, or there are some other factors that suggest it is inappropriate for us to put our client’s money at risk there. We believe that countries with stronger governance, healthier and more educated workforces, and higher environmental standards tend to produce better economic outcomes. Typically, this leads to more stable debt and currency paths and ultimately better risk-adjusted returns.

There are clear differences when it comes to engagement as a sovereign investor compared to other asset classes such as equities. Unlike those asset classes where shareholders can use annual general meetings and their voting rights to engage and challenge corporate management, sovereign bond investors do not have “votes” and can only make an impact through engagement or, at an extreme, by withholding capital. The latter is only effective if there is collective commitment to do so. Accordingly, Colchester puts great emphasis on engaging with sovereign issuers in an effort to encourage best practices.

While a sovereign investor may wield less direct influence, we believe we can still play an important role in driving change through encouraging more targeted action to progress the country’s ESG agenda, discussing funding needs for ESG-related reforms, and offering our opinions on how issuers can address balance sheet and ESG concerns.

Integrating the E, S, G

Governance

As sovereign investors, we have long recognised the importance of how markets are governed and the impact this has for financial stability. Unlike a company, where governance can be considered by the actions of a board of directors, sovereign governance is broad reaching, and the economic management is often undertaken by several institutions. The assessment of sovereign governance therefore requires a broad assessment of factors to build the overall picture of how a market is being managed.

The quality of governance is indicated by factors such as government effectiveness, credibility of institutions, the rule of law and control of corruption, and has a direct bearing on the government’s ability and willingness to repay its financial obligations. Strong governance also promotes stronger economic and social outcomes. The corollary to good governance is fiscal transparency and ultimately how decisions relate back to the financial balance sheet of a market. Fiscal transparency helps to foster better overall economic governance by providing legislatures, markets and citizens with the information they need to hold governments accountable.

Governance factors differ between markets. They take on additional importance in countries with considerable resources that may generate significant wealth, such as fossil fuel, minerals, etc. Resource governance, for example, can be an important consideration for countries such as Norway, Mexico and Russia.

Turkey is a prime example of governance concerns overriding macroeconomic considerations. It may be surprising to some investors that the government financial position for Turkey is in a relatively good standing for an emerging market country, albeit certain metrics are now also weakening. The healthy domestic balance sheet position is marked with a relatively low level of debt compared to the size of the economy (in April 2021 the IMF estimated that net government debt to GDP is likely to be 34% at the end of this year). Fiscal spending has increased over the last few years, with the aim of aiding economic growth. Our external balance sheet assessment for the country has been more negative over recent years given the negative current account position is largely supported by portfolio investment flows, which creates a vulnerability for the currency. However, the rise of power from incumbent President Erdogan over the last several years has brought significant governance and other policy concerns. We have witnessed the slow but steady unwinding of the independence of many Turkish official institutions, including the Judicial System, the imposition of emergency measures, limits placed on reporting, and the influence over the central bank. This led to progressively negative Financial Stability Scores over the last several years for Turkey.

Environmental

Colchester recognises that climate change will have a profound impact on the global economy. As average temperatures around the globe continue to rise, the consensus across the scientific community is that human activity is the cause of long-term changes to temperatures and weather patterns – largely due to greenhouse gas emissions. In our view, climate-related risks are significant, as are the costs to transition to a low-carbon or more sustainable future. As sovereign bond investors, we need to be cognisant of these risks and seek to incorporate them into our investment analysis, recognising that different economies are likely to be impacted in different ways, and that policymakers can influence and mitigate the negative impacts through well-considered policy choices today. Some of the environmental factors we look at in our assessment include both transition factors such as CO2 emissions, energy intensity of GDP and renewable energy generation and physical factors such as those measured by the World Risk Index[1], Yale Environmental Performance[2], and Resource Governance.

Green bond issuance has been one of the themes of our issuer engagements this year. For example, we discussed in our interaction with the New Zealand Local Government Funding Agency (LGFA) the challenges they faced in building a sustainable bond framework given that LGFA is a conduit for local council funding (and proceeds are unlikely to be earmarked specifically for one project). We shared our insights on some of the frameworks we have seen with Nordic LGFA green bonds and green bond issuance from the European Bank for Reconstruction and Development (EBRD).

Social

Social factors and the quality of human capital are key determinants of a country’s long-term economic growth. Measures of a country’s demographic, education, income inequality and social cohesion can inform its potential for economic progress. In particular, education is a core feature of any country’s ability to progress. Education provides knowledge and skills to the population; it is also an effective tool for reducing poverty and fostering broad socio-economic development.

The quality of education has been a constant issue discussed in our engagements with the sovereign, multilateral organisations and local institutions. In a recent meeting with a large multilateral organisation, we discussed the structural constraint the quality of education was placing on an economy. Consistent with our thinking and efforts, the organisation noted their concerns and discussed their own direct engagement with the sovereign on this matter. Examples of other social factors we look at in our assessment include indicators such as the Gini income inequality, labour standards, quality of education, life expectancy and demographics.

To sum up, Colchester strongly believes engagement can help drive positive outcomes and we take this responsibility seriously on behalf of our investors. Furthermore, we holistically integrate ESG factors into our valuations and hence into portfolio construction through the Financial Stability Score.

As a government bond investor, our engagement necessarily differs from that with a company. We recognise the “sovereignty” of the issuers we are engaging with and are sensitive to the different cultural and economic conditions of each country. The focus therefore is often on having a dialogue with a country to better understand their national priorities and to seek greater transparency in their sustainability efforts.

This article should not be relied on as a recommendation or investment advice. Colchester Global Investors Limited is regulated by the UK Financial Conduct Authority, and only deals with professional clients. https://www.colchesterglobal.com for more information and disclaimers.

[1] The World Risk Index is the product of a close cooperation between scientists and practitioners, it was developed by Birkmann and Welle for the Bündnis Entwicklung Hilft (The Alliance Development Works). For further informatiom, please see https://www.ireus.uni-stuttgart.de/en/institute/world_risk_index/

[2] The Environmental Performance Index (EPI) is constructed through the calculation and aggregation of 20 indicators reflecting national-level environmental data. For further information, please see https://epi.envirocenter.yale.edu/

[1] Please see PRI – A Practical Guide to ESG Integration in Sovereign Debt. A practical guide to ESG integration in sovereign debt | Technical guide | PRI (unpri.org)

ESG in Practice Series: Mayssa Al Midani on Engagement in the Nutrition Strategy

| For Meritxell Sedo | 0 Comentarios

As active managers, Pictet Asset Management can collaborate with portfolio companies to trigger positive change. Mayssa Al Midani, Senior Investment Manager in the Thematic Equities team, shares her perspective on environmental and social engagement with food companies.

Can you tell us about your active engagement in nutrition?

We invest in firms that help address global food challenges, ensure the sustainability of the food chain and provide access to quality food necessary for health and growth. A key feature of our investment process is engagement: we work closely with the firms we invest in to improve their performance across environmental, social and governance factors.

To help us maintain a constructive dialogue with the firms we have stakes in, in 2018 we established a partnership with the Access to Nutrition Initiative (ATNI), a body which evaluates the world’s 25 largest food and beverage companies based on their contribution to ending malnutrition in all of its forms. Companies are assessed on the nutritional value of their products, their commitment to providing affordable nutrition and the responsibility of their marketing practices.

This year we are taking part as active investors in a collaborative engagement with three companies in our portfolio.

With other investors, we are writing to these companies, bringing to their attention the specific improvements ATNI research suggests they need to make. We have set a deadline for them to respond. Once we receive their answers, we’ll hold calls with the companies to discuss their responses.

We are only able to engage with Nestlé, Danone and China Mengniu since all other companies in the ATNI index aren’t even in our portfolio because they don’t meet what we call our ‘purity’ threshold, or the percentage of their revenues exposed to nutritious foods. Our definition of nutritious foods is based on what leading health and environmental NGOs classify as foods that optimise both human and planetary health.

Partnering with other asset managers representing several trillions of assets under management gives much more weight to our actions

What are the themes of your engagement with companies in the Nutrition portfolio?

Our objective is to encourage companies to grow the share of healthy products in their portfolio, increase affordability and accessibility for all consumers regardless of income levels, adopt best practice when it comes to the responsible marketing of products to children and commit to front-of-pack nutritional labelling.

We single out the products that do not fit our definition of healthy nutrition and then urge companies to either reformulate them to make them healthier (reduce sugar, fat, salt content, or enrich them with micronutrients), or divest these categories.

We also look closely at how food is marketed. For example, when it comes to the marketing of breastmilk substitutes, we have been calling on companies to comply with the World Health Organisation code for healthy marketing of such products. They may be the only viable nutritional substitute when mothers are unable to breastfeed but they must not be marketed too aggressively so exclusive breastfeeding remains a priority.

We also request that companies link these nutritional objectives to management compensation, which is a powerful way of aligning management interests with positive nutritional impact and ensuring that companies are serious about making these changes.

Pictet AM

How did you choose this initiative ?

There is only so much we can achieve as a single entity.

Partnering with other asset managers representing several trillions of assets under management gives much more weight to our actions.

Within Pictet, what was initially an asset management initiative has broadened to our private banking arm, Pictet Wealth Management, making Pictet Group as a whole a signatory and supporter of this engagement.

Sustainable nutrition is an area of strategic importance for the Pictet Group – which is already active in the field of nutrition and water through the Pictet Group Foundation – that’s why we feel it makes sense to pursue a collaborative engagement at the group level and to partner with other investors to magnify our impact.

Have you noticed a change in how companies respond to engagement in the past few years?

Food and beverage manufacturers are paying greater attention to the topic of nutrition, for a number of reasons.

Minimising the impact of their activities on society and the environment has become a business imperative.

Public interest in health and sustainability has become so widespread it is something companies can no longer ignore. Millenials and Gen-z consumers are more health conscious and increasingly want to align their purchases with their values. They want healthy, nutritious food that is responsibly produced, and are willing to pay a price premium for this.

It has also become crucial to investors that the companies they invest in meet certain standards. More and more investment managers include ESG factors in their investment process. Regulation such as the EU’s SFDR mandating greater transparency on the sustainability profiles of investment funds will only accelerate that trend.

Public interest in health and sustainability has become so widespread it is something companies can no longer ignore

What has been the effect of Covid-19?

COVID-19 has shed light on the link between poor diets and vulnerability to infectious disease. In particular, studies have shown a strong link between obesity and COVID-19. Governments like the UK have started to implement policies targeting malnutrition as a response to the pandemic. This heightened awareness of the importance of healthy diets is fueling the growth of the functional foods markets (e.g. probiotics, supplements) and that of healthy alternatives such as plant-based foods.

Another effect of the pandemic has been to highlight the threat to food security caused by disruptions in complex global supply chains. In response, we are seeing the food industry investing heavily in a wide range of high-tech solutions, many of which are geared to strengthening supply chains, raising production standards and reducing food waste.

To help us better understand these trends, our portfolio managers draw on the support of a dedicated advisory board, whose members are experts from different areas of the food industry. Among them is a medical practitioner whose research activities focus on the link between non-communicable diseases such as obesity and diabetes and nutrition. Another is a food scientist, formerly the head of innovation, technology and R&D at Nestlé. They bring a different, science-based perspective and help ensure that our investment theme remains relevant.

To find out more about our collaborative initiatives and our corporate engagement, read our Responsible investment report.

Discover more about Pictet Asset Management’s long expertise in thematic investing.