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One Bright Spot in Equity Markets is Japan

Japón se perfila como un oasis frente al resto de mercados de renta variable — Photo: Oasis in Libya by Sfivat - Own work. One Bright Spot in Equity Markets is Japan

September was a challenging month for risk assets with the S&P 500 index posting a dollar total return of -1.4%. UK equities also declined as the short-term uncertainties relating to the Scottish independence referendum weighed on sentiment, with the FTSE All-Share registering a sterling total return of -2.8%. For the year, the All-Share is now up only 0.6% on a total return basis. Returns from European equity markets diverged in September, with the likes of Italy and Denmark ranking among the stronger European bourses when measured in local currency terms, while Greece and Portugal underperformed. Japanese equities outperformed strongly, which was very pleasing as we continue to favour Japan within our multi-asset portfolios. However, Asian equities struggled, as markets in Hong Kong and China were unsettled by pro-democracy demonstrations in Hong Kong after Beijing ruled out fully democratic elections in 2017. In fixed income, benchmark US 10-year yields moved higher to finish September at 2.48%. Towards the end of the month, there was some volatility in Treasury and credit markets as the departure of Bill Gross from PIMCO led to concerns that the world’s largest bond fund – the c.$220bn PIMCO Total Return Fund – could be forced to exit positions to meet client redemptions.

At the time of writing, risk assets are struggling to make any headway due to the combination of weak European economic data, the first confirmed cases of Ebola in Europe and the US, and ongoing geopolitical worries in Europe, the Middle East and Hong Kong/China.

As I have highlighted in our recent asset allocation update, we have decided to take some money out of high yield (with the proceeds going to cash) as a risk reduction measure; the asset class is widely owned and yet liquidity remains patchy. Core bond yields continue to look poor value versus historic averages, but the deteriorating economic growth outlook in Europe and some signs that the US is moving to a more moderate rate of growth should provide some support for core bond prices, even allowing for the concerns about flows mentioned above.

On the policy front, the market continues to speculate whether the ECB will implement some form of full- blown quantitative easing (QE), but it was interesting to note that Mario Draghi looked somewhat dejected at a recent ECB press conference; it is clear that he would like Europe’s politicians to implement some form of structural or fiscal boost (a ‘cash for clunkers’ scheme is one potential easy win for Europe, especially given Germany’s position as a leading producer of cars) but nothing has been forthcoming. As for QE, I would continue to question the efficacy of sovereign bond purchases when European core yields are already so low. Ever-lower bond yields are unlikely to encourage European banks to lend when demand for credit is subdued and regulatory constraints mean that banks are being forced to conserve capital. However, given the politicians’ inaction on structural reform and fiscal stimulus, Draghi may feel that he has to implement QE because it is the only lever that he can pull.

On balance, we remain constructive on equities versus bonds on a relative basis but, in absolute terms, equities are no longer cheap and on some measures they are expensive. One bright spot in equity markets is Japan, where companies have benefited from the yen’s decline against the dollar; upward earnings revisions continue to come through, and should continue to underpin the relative attractiveness of the asset class, although Japan is unlikely to be immune to any short-term weakness in global equities.

Perhaps the biggest question for investors at the moment is whether the US really can ‘go it alone’ given that much of the developed world remains moribund in economic terms. Certainly dollar strength has been one of the major themes in markets this year and it is telling that US QE is winding down just as Europe seems to be contemplating its own full-blown program of sovereign bond purchases. One thing that is clear is that the dollar is likely to remain healthy in the short term and this should to prove a headwind for asset classes that historically have had a strong negative correlation with the dollar, such as emerging markets.

Mark Burgess is Chief Investment Officer at Threadneedle

High Yield’s September Sell-Off Doesn’t Change the Story

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The recent sell-off in high-yield bonds has many investors wondering whether this is another big buying opportunity—like prior sell-offs have been—or the start of something more ominous.

As we see it, the decline in high-yield bonds was mostly due to technical influences: outflows from retail high-yield funds teamed up with record-setting issuance to soften markets. Add in a couple company-specific credit problems…and the high-yield market was down more than 2% in September. Of course, retail flows could continue to exit high yield, pressuring returns. But from our view, most of the selling has been by broker-dealer firms and hedge funds—not long-term investors.

No Case for Allocation Shifts

If longer-term investors start to sell, we could see a more meaningful correction. But issuance is slowing down—a few large issues are still interested but the groundswell of issuance we saw in September is gone. On the demand side, many retail and institutional investors see 6%-plus yields as a tactical opportunity to top up allocations and invest marginally, but they don’t necessarily view them as the time to make a big move back into high yield. Based on this more favorable supply/demand balance and fairly strong underlying fundamentals, our view is that the weakness is unlikely to continue.

That said, while this may be a tactical investment opportunity for some, we don’t see this as an opportunity for investors to get overly excited and shift assets toward high yield. Yes, overall yields and spreads—or the extra yield versus Treasury bonds—are higher than they were at the start of September, but they remain below long-term averages (Display). And while fundamentals are still relatively strong, we’re in the latter innings of the credit-market cycle and are seeing some deterioration. There are no great opportunities available and no massive dislocations to capitalize on. That’s why we think that a conservative, diversified approach to high yield makes the most sense.

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Stretching for Yield Can Be Risky

Our biggest concern: the lowest-rated credits. CCC-rated bonds have recently begun to underperform, but these are the most fragile companies with the most leverage. It doesn’t take much for these companies to fail—they often do so even before the broader market starts to see real deterioration. Investing in lower-rated credits requires extensive research—and a big expected-return hurdle to make it worthwhile. Since CCC yield spreads don’t compensate investors for average historical credit losses, defaults would have to be well below average over the next five years to make them profitable.

While near-term defaults don’t appear imminent, forecasting defaults beyond the next 18 months is tricky. Betting on a very different outcome than what we’ve seen historically doesn’t seem prudent. Also, returns on CCC bonds will fall long before actual defaults turn up. So, while the lower default rates expected in 2015 provided a great reason to buy CCCs in 2013, they provide far less comfort to us in terms of return expectations over the next 12 months.

A Balanced, Diversified Approach

On balance, the events of September don’t really change the long-term story for high-yield bonds, in our view. The good news is that the power pendulum has swung back to investors. They now have the upper hand in negotiating the yields and terms of new deals with issuers. In many respects, continued market turmoil may be an investor’s best friend: it extends the credit cycle, making companies more careful and thoughtful with their resources while at the same time increasing expected returns.

We think investors should continue to take a global, multi-sector approach when it comes to high yield—but maintain a cautious outlook in the months ahead.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Ivan Rudolph-Shabinsky is a Portfolio Manager of Credit and Gershon Distenfeld is Director of High-Yield Debt, both at AllianceBernstein.

#wealthplanning #privateclientslatam #actnow

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CFC rules, Anti elusive legislation and Automatic Exchange of Information are game changers for the wealth planning industry of private clients. This is notorious in Europe already. In Latin America, we are just starting to see the tip of a huge iceberg.

Only 2 years ago, most private bankers in Latin America did not believe that the OECD was serious. The majority claimed that this whole transparency movement was just for the press and that local authorities were not prepared to handle this. All of them have now realized that “something” has changed and are now keen to listening and gathering information. Some go even further and are taking actions (incorporating new platforms, new legal structures, hiring experts, being proactive in speaking to their clients about this, etc.).

What has changed?

Local authorities from Latin America´s most sophisticated countries started to pass comprehensive CFC rules combined with Anti Elusive legislation. To date, all the most
developed countries except Brazil* have abided to these rules (Mexico, Peru, Chile, Colombia, Ecuador Argentina, Venezuela…). Even in Brazil, local lawyers are convinced
that their country will include them soon.

In addition, early this year the OECD announced that in 2017 the world would have automatic exchange of information. Since that announcement, more than 70 countries pledge to this initiative. The OECD already prepared various reports on how this exchange will take place and in October more measures are expected to be implemented. Some claim that 2020 is more realistic than 2017…this could be, but it´s irrelevant. The point here is that it is coming and will be here very soon.

Last, in order to comply with FATCA, Latin American countries have started to sign intergovernmental agreements (IGA) with the EEUU to exchange information automatically.

What do clients need?

First, to become aware, they need to stop believing that nothing has changed. Second, they need quality advice. Many family offices in Latin America are including local and international experts as key players in their business, to provide them with the most adequate tax and succession planning in order to provide the best advice to
their private clients.

Third, act in consequence. Clients need to sit with their Family Office and experts to evaluate if the current legal structure (companies, trusts, foundations, private funds, etc.) that they have in place is still good enough to obtain the objectives they want. “Why do it now if you can do it later…”

As a Latin American I am fully aware that most of us wait until the last minute to solve various issues. All of us do. The truth is that in this particular aspect, the changes have been so big and will continue to be, that the last available moment is already here. Later is now. The good news is that there is good and serious planning available, fully compliant with the new world.

Pedro Vargas Head of Wealth Planning Aiva – A member of the Old Mutual Group

The Evolution of the Secondary Market for Private Company Stock

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Ever since secondary market trading of Facebook shares began, various industry participants have debated whether the market would continue and how it would (or if it should) evolve. Three years later, the debate continues in the press, but investors continue to vote with their investment dollars for its growth. NYPPEX, a private equity advisor and research firm, has projected that the secondary market will facilitate $17.7 billion worth of transactions this year, up 43% from 2013.

The nature of the secondary market has also changed with an increasing number of investment company giants actively participating in an increasing number of transactions. Second Markets, once an active marketplace for individual investors, has changed its business model to execute these institutional transactions and reported a few weeks back that they had executed nearly $1 billion in private company stock transactions in the first half of the year.

While this has led some to think that individual investors are being shut out of this attractive market place, the truth is that as the market has grown, so have the alternative entry ways to participate. Clearly, the markets for Angel investing and crowdsourcing are well known and easy to find, but access to the growth and late stage companies with well-known names such as Palantir, DropBox and Uber can be found in a number of instruments for a range of investors:

Interval funds, mutual funds that offer daily purchase for investment but typically only quarterly liquidity, have been increasing in number as part of the Liquid Alternative movement. The SharesPost 100 Fund is perhaps the most familiar of this mutual fund type, which is open to all investors.
A large number of Closed-End Funds (CEFs) have also entered the marketplace in recent years, offering clients a variety of private company portfolios in which to invest. The investment stage of the underlying companies ranges from fund to fund, with some CEFs focusing on later-stage private companies and some investing across the entire venture capital range. Several have had good deal flow and have demonstrated a repeat ability to include marquee names within their portfolio.
Private Custom Portfolios are another option, although usually open only to Qualified Purchasers. These structures allow investors and their Advisors to select each investment in their portfolio at a specific price. These offerings, however, are more difficult to find as they typically cannot market themselves under the general solicitation guidelines of Rule 506(b) of Regulation D. NASDAQ Private Market, offers a similar investment opportunity into individual companies to Qualified Purchasers through their member Broker / Dealers.
Forward Purchase Contracts are also still used by many to invest in private companies, but are not for the faint of heart. In these contracts, the investor provides cash (typically to an existing or former employee of a private company) in exchange for the forward purchase contract. The contract obliges the seller to deliver a specific amount of their private shares after the company executes its initial public offering. The legal risk (usually spelled out clearly in the contract) is that the contract may be in direct violation to the seller’s employment contract with the company and the transaction itself is still subject to the company’s right of first refusal, which may not occur for several years out.

The secondary market is very likely to continue to grow, mature in its formal nature and increasingly win the favor of private companies themselves for a number of reasons:

Employee Recruitment and Retention are both improved by clarity in remuneration at private companies, just as they are in public ones. Companies that create liquidity plans to meet the internal demand to convert their paper wealth after an appropriate vesting period are likely to have more engaged employees and higher ratings in glassdoor.
Structured programs also lower legal and management expenses as they reduce the time and energy (and billable hours) of considering one-off secondary market sale requests.
Management control of insider liquidity also allows for control of the secondary market prices at which these trades are taking place, retaining the control of valuation communication to the management team and their VC-backers.
Another benefit to the company and its financial backers is that less money needs be raised if a greater percentage of the funding at the official rounds is funding company growth rather than meeting employee needs.
Reduction in the percentage of capital funding employee liquidity also reduces the perceived lack of commitment to the firm, which can be a significant depressant to a newly IPO’d stock price. Furthermore, Fenwick & West just released a report showing that VC-backed technology companies that went public in 2013 experienced a 24% reduction in stock price in the two weeks after the expiration of their waiting period compared with two weeks prior to the 180-day mark.
Finally, individual investors are increasingly driving market demand for access to alpha in their portfolios, which Family Offices, Pension Funds and Foundations have enjoyed for years. Not only is the desire for alpha driving this demand, but often a personal interest in a private company’s business model motivates the investment. After all, not only is an equity-interest in ZocDoc a good investment, it’s also fun.

Regardless of how an investor chooses to invest in secondary market shares of private companies, there is no doubt that demand will keep the market growing. And while the lion’s share of the market may continue to be the domain of large funds and endowments, Advisors and their investors, both accredited and not, are being given opportunity to invest alongside the behemoths. Where the jury is still out is how Private Companies themselves will choose to participate in these markets, despite the evidence that a structured approach is a win-win situation for all involved.

Michael Goering is a Managing Director at Buttonwood Group Advisors

What the Fund?

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The most challenging projects that have come across my desk this year involve domiciling Emerging and Offshore funds and finding custodian partners in established trustworthy jurisdictions for the funds’ daily operations. It may seem an easy task, but most banks in the US, UK or Ireland will not be as friendly to your Argentina Fixed Income Portfolio or your BVI Small Cap Strategy fund as you’d like.

I started this year working with several Latam investment funds that needed a custodian bank or a clearing agent, tasks that could easily be accomplished within 30 days for any fund structured in the US, UK or Ireland.

But why are custodians so cautious of any jurisdiction not a top 10 global financial hub? It is true that new regulatory changes worldwide are playing a significant role in banks being more selective regarding the clients they want to service. After working directly with banks in the selection and onboarding process, I have learned that in this case the biggest deal breaker is the fear of the unknown. Custody and trust bankers are simply not fully aware of rules, regulations and restrictions that govern funds based in emerging markets or other offshore jurisdictions.

As a fund manager or leader of your investment firm, is your job to educate them. Here are some ice-breaking topics I discuss with custodian banks when onboarding my clients:

Speak the same language

If you are working with a bank outside your jurisdiction, learn the terms, rules and regulations of the jurisdiction that will be doing your safekeeping. Make sure your banker knows what your needs are by identifying them clearly. A custodian account for example, might not have the same functionalities in the UK than it does in the US.

Explain your Investment Strategy and your Growth Potential

Custodial banking is fee-based, so any banker will be more inclined to help you if they can easily determine the number of assets they will be doing custody for, the number of annual trades to be executed and the risks involved within the investment strategy.

Draw a map of your jurisdiction

You should not assume that banks are fully aware of how funds in Uruguay are regulated, or the rules and restrictions faced by broker-dealers in Argentina, or the reporting requirements for a fund in New Zealand. Similar to a business plan, you should explain in writing the rules and regulations that you are supervised under, the similarities between your jurisdiction and a major investment hub, the risks and the rewards of working with a client from your jurisdiction. Most importantly tell the bank why you can be such a great future client and partner.

Show your compliance cards

Make sure to have ready and available to share all the policies and procedures you will be following. Some of the main ones should be: client onboarding policy, AML policy, privacy and reporting policy. You should consider adding policies required in other jurisdictions as this may help you form a new relationship with a bank without affecting your core business strategy.

Form Relationships

Chances are that if you are not managing a minimum of US $50 million in your fund, top-tier Banks will not be fighting over your business. The best relationships I have in banking are with mid-sized banks. These banks are big enough to have recognizable brands and can give you peace of mind about safekeeping, while at the same time are small enough to understand new business means growing together and finding solutions that work for both the client and the bank.

Article by Jonathan Rivas, Managing Parter dcdb Group

No Shooting Stars

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Top portfolio managers often make the headlines — whether their strategies perform well, or as we’ve seen recently, when they leave their firms. Their departures can be disruptive — whether it’s perception or reality. Fostering “star managers” is a cultural decision — but it’s not one that often works over the long term. The best investment cultures are built on humility, collaboration and mutual respect. There are no stars — only teams, equality and a healthy exchange of ideas.

A strong culture matters a lot — particularly for an investment firm, where people and judgment are your greatest assets. The way teams interact and collaborate to make investment decisions not only impacts how well a strategy performs, but also how the firm does as a whole. Those teams have to function well and create value together if they want to achieve differentiated performance.

Great minds don’t think alike

A collaborative culture doesn’t mean everyone has to think the same way. In fact, diverse views can actually lead to better decisions because they allow you to benefit from multiple perspectives and different analytics to get to a better outcome. But the process of sharing different views must be respectful, not combative. Instead of challenging each other as individuals, it’s important to challenge each other’s ideas. Encouraging team members to offer different views helps a team sift through increasingly large amounts of industry information, filter out the noise and focus on good research. By debating the information together rather than acting on it alone, you can avoid individual biases — which can cause trouble. Ultimately what you get is an environment of constructive challenge aimed at providing better results for clients.

To share different views, however, you need common cultural values. It’s tough to debate investment ideas successfully unless you have a common understanding of the end goal. For instance, if one side believes in a long-term perspective while the other side focuses on short-term market sentiment, that creates a headwind to achieving better outcomes. In fact, research on team building shows that common cultural values form the bedrock for cognitive diversity that leads to differentiated performance.

Culture supports investment beliefs

An investment firm’s beliefs and philosophies should be ingrained in its culture. For example, if you believe that a longer-term investment horizon results in greater opportunity for differentiated performance, your culture must support it. You must reward longer-term performance, tolerate short-term underperformance and follow both an investment process and team orientation that supports these objectives.

Increasing globalization and complexity calls for collaboration and teamwork, not just around the globe but also across capital structures. Consider an equity analyst who can look at company valuations, macroeconomic factors and competitors but typically wouldn’t have a lot of debt experience. Now combine that equity analyst’s view with a fixed-income perspective that looks at more complex credit issues central to the company’s capital structure, such as its financing facilities and debt covenants. Bringing these views across capital structures together provides a much more powerful perspective on a company’s intrinsic value.

Culture also creates a sense of shared responsibility, which is important to good risk management. In a risk-aware culture, shared values and consistent behavior can lead to stronger risk management — yet another case where strong culture benefits the client.

Don’t set it and forget it

It’s not enough to hire talented people. They also need the capacity to work in teams, share information and fit well into the firm’s culture. Infusing cultural values in the management of the firm — each and every day — is just as important as hiring the right people. If you want a collaborative culture to work, you need your employees to live and breathe it so it’s part of the fabric of the firm. Keeping employees connected to the firm’s culture helps them stay invested in the firm. It also reduces staff turnover — which is critical to limiting disruption to portfolio management and reducing hiring and training costs for the firm.

Culture isn’t a skill or a talent. Competitors can’t recreate culture the way they can mimic an investment or business strategy. Firms own their culture, and it’s up to the entire organization to keep it alive.

Article by Michael Roberge, President and Chief Investment Officer, MFS

Smell the Coffee

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For many of us in the West, waking up to the aroma of a pot of fresh-brewed coffee is one of life’s little pleasures. In fact, over the course of a year, the average American consumes the equivalent of roughly 9 lbs. (~4.5 kg.) of coffee beans. In Finland, that average is nearly three times higher!

But could this morning ritual catch on throughout Asia? In recent years, China’s annual per capita coffee consumption has been less than a negligible half an ounce (~0.01 kg.). This may help explain a statement I heard recently: “China will never be a coffee drinking nation due to their love of tea.” But is this view really correct?

Japan, which has the highest rate of coffee consumption in the region, was introduced to the brew at the end of the 18th century, with bulk imports starting in 1877. However, only in the 1960s did Japanese demand for java soar, notwithstanding its famous tea culture. Between 1965 and 1980 demand grew six-fold and these days Japanese consumers drink almost as much as Americans. Similarly, in South Korea, consumption grew considerably between 1982 and 1992.

Annual Coffee Consumption Per Capita (lbs. of beans), 2011

Finland	26.8 lb. (12.2 kg.)
U.S.	9.3 lb. (4.2 kg.)
Japan	7.3 lb. (3.3 kg.)
South Korea	4.8 lb. (2.2 kg.)
Vietnam	2.4 lb. (1.1 kg.)
Taiwan	2.3 lb. (1.0 kg.)
China	0.02 lb. (0.01 kg.)

While the region’s new coffee drinkers may be paving the way, it is unlikely demand in China will climb immediately. There are many challenges to growth—complexities surrounding the import of beans and coffee powder, material import duties and taxes, just to name a few. These factors have pushed the cost of coffee well above the reach of the average consumer. Currently, only the well-off lounge in the overstuffed sofas of Chinese coffee shops. But we know that times do change. And we may well see a sharp rise in demand over the next decade as global players and locals all enter this underpenetrated market.

Between 2012 and 2013, Starbucks opened 500 stores in China—more than it opened in the previous 12 years and the company has set a target of 1,500 stores by 2015. And they are not alone. Taiwanese, Korean, Singaporean and Australian chains, too, are all planning rapid expansions of their own chains. And this is even before the usual army of ubiquitous local competitors sets up shop. All these efforts combined could raise exposure, spread the taste for coffee and ignite demand.

Should Chinese demand build, global supply of the commodity could be strained. If China’s coffee demand approaches annual consumption even just below Taiwan’s relatively low 1 kg. per capita, then China would be consuming the equivalent to over 22 million bags (60 kg.) of coffee—accounting for around 24% of total exports, up from less than 1%. This kind of growth could have a big impact in a market where it took global exports a decade to increase only 4.4% while prices rose by 69%/lb. (ending in 2010).

We could see Chinese demand (not to mention demand from other emerging markets) impacting prices sharply. Once coffee culture in India starts brewing, let’s hope we can all still afford our favorite cup of joe. In a world of fairly static supply growth, it seems we might need to wake up and smell the coffee.

Opinion column by Robert Harvey, CFA; Portfolio Manager, Matthews Asia

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.

Stakes are Rising for Investors in Brazil

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The first round of Brazil’s presidential election is just days away and the stakes are rising for investors. With incumbent President Dilma Rousseff gaining ground on her key rival, business-friendly Marina Silva, global investors have lost much of the confidence originally gained when Silva first burst upon the scene in August following the death of her running mate and original presidential candidate, Eduardo Campos, in an air crash.

Marina Silva has proposed sweeping changes for Brazil, including a cracking down on corruption, tax reform, budget restraint, and promoting productivity gains at notoriously mismanaged state-owned companies. After an initial surge in the polls, Marina Silva has lost ground to Dilma as the President has used all the powers of her office and an enormous structural advantage in allocated media time to close the gap.

Two very divisive candidates

Opinion polls indicate that the first round of the election will result in a second round run-off between these two very popular and clearly divisive candidates. The polls indicate that the outcome of a Dilma-Silva election is too close to call. Investors have overwhelmingly endorsed Marina Silva’s progressive reform agenda and at the same time made it clear that four more years of Dilma spells trouble for Brazil’s sagging economy. What can investors expect after the26 October final vote, and is the recent volatility of the Brazilian financial markets a good indicator of just how good things might be under Silva, or how bad they might get under a renewed Dilma administration?

Lessons from other continents

The recent May 2014 national elections in South Africa and India offer investors insight into post-election returns and positioning. In the case of South Africa, very few investors relished the thought of incumbent President Jacob Zuma’s near certain re-election. He surprised his critics by bringing businessman Cyril Ramaphosa back into government and despite South Africa’s crippling unemployment, high inflation, staggering current account deficit and seemingly endless cycle of labor violence, the stock market has remained relatively resilient.

Well managed companies such as regional mobile telecom and data firm MTN and banking group FirstRand have seen their shares extend their long term outperformance. This could very well be the model for Brazil should President Dilma get re-elected; uncompetitive and mismanaged firms will probably suffer (in South Africa, for example, many mining firms have lost a third of their value since the election) while competitive companies thrive in an ecosystem devoid of real competition.

In India, investors were initially less certain of the outcome of the election between the Congress Party and the BJP but were well aware of India’s substantial macroeconomic challenges in the run-up to the election. In 2013 and into much of 2014, India’s once powerful economy was slowing, business confidence was waning, and the public had become tired of the mismanagement of the economy. Ultimately, the pro-reform BJP party led by Narendra Modi was swept into office, ushering in a substantial bull market in Indian equities.

Despite Modi not having transformed India much in his first 100 plus days in power, business and public confidence remain high. Companies have regained access to international financial markets and foreign investors have flocked back to the stock market. While weak companies have been given a new lease of life, India’s strongest and most competitive companies in technology, pharmaceuticals, and banking have soared. Given the reform agenda of Brazil’s Marina Silva, there can be little doubt that many investors see her as the best chance for Brazil’s financial markets to repeat the recent success of India.

Post-election market fortunes

In South Africa’s case, the wobbling post-election environment has favored the strong well-capitalized companies, which have regional African ambitions. Political and economic matters can best be categorized as ‘muddling through’, although the far left has made dangerous inroads with a potentially ruinous land reform program. The overall market, however, has treaded water in local terms and has underperformed the MSCI World Index by about 8 percent in euro terms, largely as a result of a weaker South African rand.

In India’s case the general election of 12 May 2014 has ushered in a rise of 20 percent in euro terms and India has outperformed the MSCI World Index by over 10 percent in euro terms. Despite early rallies in deeply depressed stocks in distressed sectors such as property and infrastructure, the real winners thus far have proven to be India’s highly competitive and well run companies, such as Tech Mahindra and Tata Motors, which were already doing well before the election.

The bottom line

Ours is an increasingly global economy — whether one is investing in India, South Africa or Brazil, investing in companies whose growth strategy, execution, and balance sheet can help ride out the discomfort of a disagreeable local election is vital. In both South Africa and India, these bottom-up factors have trumped the macro.

Given that Brazil’s election is very close and the two possible outcomes might be South Africa’s 8 percent underperformance or India’s 10 percent outperformance, we would argue that there is limited value in taking positions based on elections. Yet statistically there is arguably a slight advantage to taking a bullish position in Brazil based on this analysis!

Opinion column by Christopher Palmer, Global Head of Emerging Markets, Henderson Global Investors

To Reduce the Cost of Air Travel… Eliminate the Pilot?

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There has been much talk of the future of flight, with drones one day delivering packages to your house the latest example to generate headlines.

Now I don’t know about you, but I’m OK if the drone fails to deliver a package. However, I’m not so sure I want the drone failing to deliver me to my intended destination.

I prefer to have a pilot up front who has the same interest as me in having our plane arrive safely. As fabulous as technology is, I like the comfort of a professional being in control, just in case the technology does not work as planned. A malfunction or technical problem has never happened to any of us, right? So why worry? Wink-wink, nudge-nudge.

So, call me Mr. Belt and Suspenders. I like the security. And so do most investors who own passive funds. According to our survey, they buy for security, thinking passive funds are less risky.

Unfortunately, the pilotless passive portfolio is not less risky. Sure it costs a little less because it is entirely dependent on technology. But, contrary to popular opinion, a passive investment attempts to have the same risk as the index it is tracking. It can be just as vulnerable to risk as all technology can be.

For example, in the two most recent market crises, as with most bubbles, the index became overweight with the highest demanded securities, in this case, technology and financial services stocks. So passive funds tracking the S&P 500 Index also experienced the bubble. They were, on average, no safer than active funds. In fact, the average actively managed large-cap blend fund does a better job protecting clients than the passive large-cap blend fund when analyzing rolling 10-year periods.

Why? Because a pilot can make adjustments that a computer may not always be programmed to understand.

So when you get that chance to fly for a little less, make sure the flight is equally safe. Take the piloted portfolio.

Article by William Finnegan, Senior Managing Director, Global Retail Marketing, MFS

Further Euro Weakness Should Help Europe’s Exporters and Many of the Stocks That We Invest In

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La depreciación del euro debería favorecer a los exportadores europeos y a muchas de las acciones en las que invertimos — Photo: Rupert Ganzer. Further Euro Weakness Should Help Europe's Exporters and Many of the Stocks That We Invest In

Global equities performed strongly in August, aided by the S&P 500 index which passed the 2,000 mark for the first time. In the US, sentiment was boosted by upwardly-revised GDP data, with the economy growing at an annualized rate of 4.2% in the second quarter of 2014. The US macroeconomic data contrasted with the data released in Europe, where preliminary Italian Q2 GDP was reported at -0.2% quarter on quarter and sentiment surveys also disappointed. In this environment, and perhaps counter- intuitively given the strength in equity markets, core government bonds also performed robustly as speculation grew that weaker economic news could encourage the European Central Bank to launch its own bond-buying program. In the event, the ECB cut its main interest rate by 10 basis points in early September and made a firm commitment to purchases of asset-backed securities (ABS), but stopped short of announcing purchases of government bonds.

In the US, benchmark 10-year bond yields rallied from 2.56% on 31 July to just 2.34% at the end of August. UK, French and German benchmark 10-year bond yields also declined during the month. Emerging market debt, as measured by the JP Morgan EMBI+, also registered gains, although the asset class could not keep pace with the rally in core debt markets as the geopolitical crisis in Ukraine continued, with Russia retaliating to Western sanctions by banning the import of a range of Western products. In commodity markets, the Bloomberg Commodity index registered a total return of -1.1% in US dollar terms in August.

Looking forward, investor attention is likely to remain focused on Europe and the macroeconomic challenges there. We certainly believe that the low bond yields seen in markets such as the US and UK reflect concerns of deflation and potential full-blown quantitative easing in Europe, rather than the generally positive US and UK domestic economic data. While we are encouraged that the ECB has committed to ABS purchases, we would question the potency of interest rate reductions. Interest rates have been low in Europe for a prolonged period but this has not stimulated the economy or inflation. What needs to be addressed is whether the transmission mechanism is in place to move the liquidity from the ECB to the real economy. Given that some action from the ECB had already been flagged, we do not expect the impact of the ECB’s measures to be revolutionary. Nonetheless, the policy moves should give investors more confidence in the ability of the ECB to meet its mandate, and the possibility of outright QE still remains. The immediate impact of the ECB’s moves has been to weaken the euro further, which should help Europe’s exporters and many of the stocks that we invest in.

In terms of our multi-asset portfolios, we have made one small change to our asset allocation in recent weeks, by moving US equities from neutral to overweight. Valuations for US stocks are broadly comparable to those observed before the Global Financial Crisis. If the Global Financial Crisis had occurred due to the overvaluation of equities rather than the faulty foundations upon which the global financial architecture was by then built, this measure of valuation would be of significant concern. As it is, the relative valuation of US equities compared to other regions appears somewhat unremarkable as the outperformance of US equities has moved more or less in step with the outperformance of US earnings – keeping the ratio of forward price/ earnings ratios relatively stable over recent years. Moreover, the US remains free of the macroeconomic concerns that continue to dog Europe, and a stronger dollar should help to keep inflation in check given that the consumer accounts for the bulk of the economy. We remain positive on the outlook for equities overall, with US companies alone having implemented $159 billion of buybacks in Q1 2014.

In fixed income, we remain cautious on core government bonds and continue to see better opportunities in corporate credit, including high yield. Against expectations, core government yields have remained very low this year and therefore high yield continues to stand out as offering relatively attractive levels of income in what is still a near-zero-interest-rate world. We are constructive on UK commercial property as capital values continue to improve, supply is constrained in a number of areas and the asset class continues to offer an attractive real yield.

Monthly economic and market commentary by Mark Burgess, CIO at Threadneedle