“In EM Corporate Debt, We Continue to See Opportunities across Various Sectors Especially in LatAm”

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"En deuda corporativa emergente, vemos oportunidades especialmente en Latinoamérica"
CC-BY-SA-2.0, FlickrNish Popat, co-lead Portfolio Manager, Emerging Markets Corporate Debt team, Neuberger Berman.. "In EM Corporate Debt, We Continue to See Opportunities across Various Sectors Especially in LatAm"

Nish Popat, co-lead Portfolio Manager, Emerging Markets Corporate Debt team, at Neuberger Berman, explains in this interview with Funds Society why is a good moment to invest in emerging debt and why he is looking at opportunities in corporate debt in Latin America, as well as in Government debt in countries like like Azerbaijan, Ecuador, Hungary, Ivory Coast and Indonesia. In currencies, they currently have a long bias with overweight positions in the Indian rupee, Turkish lira and some Latin-American currencies, such as the Mexican, Chilean and Colombian peso.

Emerging markets have been almost reviled by investors in recent years. Is this situation changing, especially in the debt market?

Many investors have, over the past couple of years, been under-allocating their exposure to EM funds as several concerns about China/Brazil/ global slowdown/ commodities and oil & gas and the FED raising rates have all contributed to concerns about Emerging Markets, especially currencies. Over the past two months, as many of these factors have stabilised, we have begun to see strong inflows into Emerging Market Debt, mostly in hard currency but also positive flows in local currency.  

What kind of investor is beginning to reinvest in emerging markets?

In the past few years most of the outflows from the asset class seemed to be coming from retail investors. This year, however, we are seeing inflows into EMD from both institutional and retail investors.

Are we currently seeing a good entry point at present?

Pressures on EMD fundamentals are starting to ease amidst a stabilisation in commodity prices and supportive monetary policies globally, while the sharp EM FX depreciation has resulted in current account adjustments in several EM countries. Sufficient FX reserves and low external debt levels continue to support Sovereign structural fundamentals, while elevated spread levels are now more than adequate to compensate for cyclical risks. Finally we see supportive technical at present as well, as investor demand is returning from generally underweight positions, while supply of new issues is relatively light. We believe that overall these factors justify an allocation to the asset class and we have increased risk across our blended EMD portfolios this year as we believe that those positive developments counterbalance the fundamental challenges that some EM countries are still facing.

How will EMD be affected by any Fed rate hikes? What do you expect from Janet Yellen?

The market was certainly impacted when the initial fears of a Fed hike emerged in 2013. Since then, we have seen how cautious the Fed has been in managing the markets fears to the speed and extent of that rise, that when it occurred the market virtually discounted the whole event and so it had virtually no impact on the EM asset class. We continue to believe that the Fed will be very cautious in their approach and at present see the impact on the EMD asset class as having been already priced in.

Is this a reason to favour short durations? What are the advantages of shorter duration in the portfolio?

The main advantage of a short duration approach is the more conservative risk profile with lower volatility and drawdowns, coupled with protection in case interest rates surge at some point. While we believe that this approach can be attractive for investors who are looking for a more conservative, absolute return approach to EMD, we acknowledge that such a strategy typically doesn’t fully capture the upside that the longer duration strategy offers in a rallying market.

Are you now taking increased credit risk or it is not necessary?

We have, over the past few weeks increased our overall risk appetite in the EM universe as we continue to believe that many investors remain under-weight and the stability of the various concerns suggests that the premiums offered by EM issuers were too high in light of the falling risk. We continue to be positive and expect the momentum to continue as the message from developed market central banks remains supportive to risk assets.

Is it possible to find quality investments (IG) in public and corporate debt in EM with good profitability?

Many IG companies in the EM world have continued to make profits, however these are lower than they were in the past as the slowdown in their economies or sectors has an overall impact on their bottom line. We have seen many companies actively manage the situation and expect that while profitability will be lower than 2015, many companies are dealing with the changing global environment better than many investors had anticipated.

What countries (government bonds) and sectors and enterprises (private debt) do you favour?

In EM corporate debt, we continue to see opportunities across various sectors especially in LatAm where many issuers suffered dramatically in 2015 as valuations reached levels which we believe were excessive even though many corporates are going through a difficult period at present. Going forward, we continue to believe that demand for yield will be key in investors’ minds as the Fed and the ECB continue to provide dovish comments and we believe that the momentum for EM corporates remains strong.

In sovereign (government) debt we like Azerbaijan and Ecuador which we think sold off excessively on the oil price move, and we like countries that have been and continue to be on an improving credit quality path which we currently see in Hungary, Ivory Coast and Indonesia.

Is now a good time to take on currency risk or not?

We have become more constructive on EM FX exposure based on improving export growth and current accounts, while valuations and technicals are supportive as well. We currently have a long bias with overweight positions in the Indian rupee, Turkish lira and some Latin-American currencies, such as the Mexican, Chilean and Colombian peso.

Volatility has been strong in recent months, also due to the Chinese theme and commodities. Will this persist? Does that present a need for caution or a chance to seize the opportunity?

The “fear” factor at the end of 2015/ beginning of 2016 has certainly been one of the key reasons why many investors were nervous about investing in the EM asset class over the past year, combined with the increase in volatility as many countries were being downgraded and the China slowdown was certainly a major factor. Over the last 3 months, we have seen how this fear has, for now, diminished dramatically and returns in the asset class have been very strong. Certainly in the short term we see the positive momentum continuing, however the EM world is made up of many countries and companies and accordingly, while there may be issues in one region, the diversity of the asset class enables another part of the world to benefit and accordingly we have seen how resilient the asset class has been over the past years in light of the various issues that have arisen. It is important that investors look at EM on a longer term horizon and while in the short term there may be some headline risks, if we look at the asset class over the past 10 years, we have seen it return a very solid positive annualised return.

Are Dividends from Emerging Markets Worth The Risk?

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

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

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

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

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

Enlarge

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

Enlarge

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

Henderson Global Equity Income strategy

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

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

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

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

 

 

Columbia Threadneedle Investments Appoints Kath Cates as Non-Executive Director

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Columbia Threadneedle Investments nombra a Kath Cates como directora no ejecutiva
CC-BY-SA-2.0, FlickrPhoto: Kath Cates. Columbia Threadneedle Investments Appoints Kath Cates as Non-Executive Director

Columbia Threadneedle Investments announces the appointment of Kath Cates to the Board of Threadneedle Asset Management Holdings Sarl (effective 10 May) and the Board of Threadneedle Investment Services Limited (effective 29 March), as a Non- Executive Director.

Ms Cates is also a Non-Executive Director of RSA Insurance Group Plc, where she Chairs the Board Risk Committee and is a member of the Group Audit Committee and the Remuneration Committee. In addition, she is a Non-Executive Director of Brewin Dolphin, where she chairs the Board Risk Committee and is a member of the Group Audit Committee.

Ms Cates’ most recent executive role was Global Chief Operating Officer for Standard Chartered Bank, a position based in Singapore which she held until 2013. In this role she led the Risk, IT, Operations, Legal and Compliance, Human Resources, Strategy, Corporate Affairs, Brand and Marketing functions across 60 countries. Prior to joining Standard Chartered Bank, Ms Cates spent over 20 years at UBS, most recently in the Zurich-based role of Global Head of Compliance. For the previous 10 years she was based in Hong Kong, as APAC General Counsel and then as Regional Operating Officer.

Ms Cates earned a First Class Honours degree in Jurisprudence from Oxford University and qualified as a Solicitor in England & Wales before specialising in financial services.

Tim Gillbanks, Interim Regional Head, EMEA at Columbia Threadneedle Investments said: “I’m pleased to welcome Kath to Columbia Threadneedle. She brings valuable financial services experience particularly in the areas of risk management, governance and regulation and operational excellence. We look forward to working with Kath and to the benefit of her contribution to our business.”

Deferendum

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

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

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

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

Ampliar

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

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

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

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

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

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

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

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

Christian Theulot, New Chief Retail and Digital Officer at Lyxor AM

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Lyxor AM nombra a Christian Theulot como nuevo responsable de mercado minorista y desarrollo digital
CC-BY-SA-2.0, FlickrPhoto: Christian Theulot . Christian Theulot, New Chief Retail and Digital Officer at Lyxor AM

Lyxor AM announces the appointment of Christian Theulot as Chief Retail and Digital Officer. The appointment took effect on 15 March 2016.

In this newly created position, Christian Theulot will be responsible for accelerating Lyxor’s digital transformation, supporting its commercial development and fostering excellence in its business processes. He is also tasked with strengthening Lyxor’s presence in distribution, where it is already well established, especially among private banks.

Lionel Paquin, Lyxor AM CEO, said: “The digital transformation presents many opportunities for asset management, whether for enhancing investor experience or for developing digital tools to optimise management processes. Christian Theulot’s appointment will allow us to fully seize them, while enhancing our ties to distribution and delivering Lyxor’s proven expertise and innovation capabilities to this segment.”

Based in Paris, Christian Theulot will report to Guilhem Tosi, Head of Products, Solutions and Legal and a member of Lyxor’s executive board.

Before joining Lyxor, Christian Theulot was Head of Marketing and Development for the Retail Partners & Investment Solutions business line at the Amundi Group for four years. Christian began his career at the Paribas Group, where he spent some ten years in various Marketing/Partnerships managerial roles (Cardif, Cortal-Consors, Compagnie Bancaire). At the beginning of the 2000s, Christian joined AXA’s holding as Senior Vice-President e-business. In 2004 Christian was recruited by the Société Générale group, where he spent seven years as Head of Savings Products for the French network.

Christian Theulot is a graduate of Kedge Business School and holds an MBA in Marketing from HEC.

Is the Turnaround of China’s Economy Real?

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¿Cómo sortear la volatilidad en China?
CC-BY-SA-2.0, FlickrPhoto: Carlos ZGZ. Surviving Chinese Volatility

Despite strong concerns at the start of the year, at Pioneer Investments, they believe that overall economic conditions are stabilizing, backed by a more aggressive policy stance, better fiscal supports, recovery of the real estate sector and credit growth, while consumers and the private sector have remained relatively resilient. Tail risks of a hard-landing in the near term are easing meaningfully.

Policy stance: 6.5% GDP Growth is the Floor

Following China’s annual National People’s Congress meeting (NPC) in March, policymakers sent relatively strong messages regarding their stance this year, which is likely biased towards the easing side.

The GDP growth target for the year was announced as the 6.5-7.0% range. According to Monica Defend, Head of Global Asset Allocation Research with Pioneer, the floor of 6.5% is probably a harder target than others. In other words, if growth risked breaching the 6.5% floor, policy support would turn stronger than planned, while support could ease if growth reached 7.0%.

Better Fiscal Support

“China’s overall fiscal and quasi-fiscal position is complicated, including the budget deficit, out-of-budget funds to local governments, net revenues from land sales, and changes of fiscal deposits in PBOC accounts,” says Defend.

The latest information allows us to have a more complete picture of the underlying fiscal & quasi-fiscal position, and suggests that fiscal policy is becoming more supportive and perhaps more effective.

The overall fiscal stance, including all budgetary and quasi-fiscal measures, became less supportive or even tightened beginning in late 2014 and through most of 2015, largely due to strengthening of regulations on local government out-of-budget financing and weak land sales.  Defend believes that the increase of central government spending was not sufficient to offset such weakness. But this seems to have changed since late 2015. And so she estimates that the overall fiscal and quasi-fiscal deficit will rise by around 1.5% of GDP in 2016 vs 2015. This is mainly due to:

  • The fiscal deficit has increased since late 2015 and the plan is for it to continue to rise.
  • Land sales are likely to at least stop acting as a drag in 2016, with further positive signs in real estate markets.
  • The creation of Special Construction Funds (SCFs) in late 2015, which policy banks use to inject capital into specific projects, mainly infrastructure-related. This new quasi-fiscal channel appears, relative to traditional out-of-budget local government borrowing, easier to regulate and manage, and thus more flexible and efficient.
Ampliar

Positive Signs in Real Estate

Easing of policy over the past year or so appears to have stabilized the real estate sector, with a visible rebound early this year.  Relatively strong sales have been pushing acceleration of existing projects and new starts have finally picked up.

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Although property activity is still fairly weak for the country as a whole and price increases have been subdued, momentum in some large cities has been relatively strong. This has triggered a recent tightening of property purchase policy in a few large cities. But this is largely designed to prevent potential price bubbles in individual regions, rather than reflecting a reversal of a generally supportive policy stance.

“The latest data suggest that sales in Tier 1 cities have cooled somewhat, while overall sales have been relatively stable. While we expect only stabilization or a moderate recovery for the whole year, this scenario should be relatively sustainable.”

Conclusions

“Despite strong concerns about China’s economy at the start of the year, there is increasing evidence suggesting that the underlying situation has been stabilizing, with tail risks easing. This is buying more time for China to push structural reforms. We are conscious that the process is still long and not straightforward. A failure in reform implementation would add to medium-term risks. So far, we believe that the reforms are progressing nicely and that the transition of China toward a more balanced economic model is underway. For this reason, we are moderately positive on China, that is one of our favorite countries among emerging market universe,” she concludes.

To read Defend’s complete macroeconomic update, follow this link.

Columbia Threadneedle Investments to Acquire Emerging Global Advisors

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Columbia Threadneedle Investments adquiere una firma boutique centrada en smart beta
CC-BY-SA-2.0, FlickrPhoto: Glyn Lowe. Columbia Threadneedle Investments to Acquire Emerging Global Advisors

Columbia Threadneedle Investments announced on Wednesday an agreement for Columbia Management Investment Advisers, LLC to acquire Emerging Global Advisors, LLC (EGA), a New York-based registered investment adviser and a leading provider of smart beta portfolios focused on emerging markets. The acquisition will significantly expand the smart beta capabilities of Columbia Threadneedle Investments. Terms of the EGA acquisition were not disclosed. The transaction is expected to close later this year. 

With $892 million in assets, EGA has an established presence in the smart beta marketplace. It is the investment adviser to the EGShares suite of nine emerging markets equity exchange-traded funds (ETFs) that track custom-designed indices:

  • Beyond BRICs (BBRC)
  • EM Core ex-China (XCEM)
  • EM Quality Dividend (HILO)
  • EM Strategic Opportunities (EMSO)
  • Emerging Markets Consumer (ECON)
  • Emerging Markets Core (EMCR)
  • India Consumer (INCO)
  • India Infrastructure (INXX)
  • India Small Cap (SCIN)

 “The experience and knowledge of the EGA team and strong emerging markets ETF products will complement our existing actively managed product lineup,” said Ted Truscott, chief executive officer of Columbia Threadneedle Investments. “The EGA acquisition will allow us to reach even more investors and accelerates our efforts as we build our smart beta capabilities.”

Since launching its first ETF in 2009, EGA has had a dedicated focus on providing rules-based, smart beta strategies designed to provide investors with diversification and growth opportunities in emerging markets.

“The team is excited about joining Columbia Threadneedle Investments and building on our complementary strengths to deliver smart beta strategies across asset classes to investors,” said Marten Hoekstra, Chief Executive Officer of EGA. “Now our clients gain access to Columbia Threadneedle’s rich investment expertise, while continuing to benefit from EGA’s experience converting investment insights into rules-based, smart beta strategies.”

“Columbia Threadneedle Investment’s expansive footprint across global markets provides an opportunity to accelerate the growth of our smart beta platform,” said Robert Holderith, President and Founder of EGA.

As part of their efforts to enter the smart beta marketplace, in the first quarter of 2016 Columbia Threadneedle Investments filed with the SEC a preliminary registration statement relating to multiple equity smart beta ETFs, including Columbia Sustainable Global Equity Income ETF, Columbia Sustainable International Equity Income ETF and Columbia Sustainable U.S. Equity Income ETF (referred to as the Columbia Beta AdvantageSM ETFs).

 

Credit Markets: Confidence Returns, but is it Sustainable?

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La confianza ha vuelto a los mercados de crédito, pero ¿es sostenible?
CC-BY-SA-2.0, Flickr. Credit Markets: Confidence Returns, but is it Sustainable?

Stephen Thariyan, Global Head of Credit at Henderson, reviews the credit markets in Q1 highlighting the ‘two-thirds—one-third’ nature of the markets. Financials came under particular pressure over the quarter exemplified by Deutsche Bank’s ordeal. While investors are happy to be back in the markets for now, as central banks have acted effectively to bring confidence back, challenges lie ahead in 2016. Thus, Stephen believes investors should be prepared for volatility to resurface.

Can you give a brief summary of corporate bond markets in Q1 2016?

It was a tough start to the year. It seems that in the first two months, particularly in February, the markets were discounting all the possible bumps in the road for 2016: concerns about central bank policy, illiquidity, Brexit, the oil price, China and growth in general. This led to quite a major sell-off across all capital markets, both debt and equity.

The end of February and March then saw a strong recovery, essentially based on the oil price, rallying from a low of US$26 upwards. That resulted in good returns, especially in high yield and emerging markets; total returns being positive across most currencies, across most credit markets, and excess returns again being broadly flat across most credit markets. So, a quarter of two thirds/one third: a very poor start and a strong recovery that continued into Q2.

Can you explain why the financial sector underperformed, particularly Deutsche Bank and subordinated banks/insurers more broadly?

The financial sector came under particular pressure in the first quarter. This was based on a combination of issues. Deutsche Bank in a way personified this with a situation that led to a significant sell-off in its bond prices, CDS and equity price. In a negative interest rate world, the core way the banks make money is challenged (ie, use short-term borrowing to lend for longer periods). This means significantly reduced returns from investment banking, especially in trading, fixed income, commodity and currency.

Banks, such as Deutsche, reported their first major loss in around eight years and there is a huge degree of outstanding litigation surrounding these banks, totalling billions. The last point was, especially with respect to Deutsche, concerns about the AT1 securities, contingent capital notes, which are complex subordinated financial securities, in existence to increase the capital buffer. There was a rumour that Deutsche would not pay its coupon, and even though these securities are designed to protect the public, the potential triggering spooked investors. Deutsche did recover the situation, but for the first time it felt a bit like 2008.

So financials generally took an awkward situation largely on the chin, given that central banks, especially in Europe, are trying to make banks lend money. Banks, however, are deleveraging, carrying lots of liquidity and struggling to find borrowers to borrow that money.

What is the outlook for credit markets and what themes are likely to drive the markets?

We are at an interesting point. We have suffered from a difficult first few months in 2016. The central banks have come in and almost acted in unison, with the European Central Bank subtly talking about a movement in monetary policy, but more importantly, the purchase of corporate bonds in the next few months. They haven’t given any details but the sheer fact that they are prepared to do it has given the markets confidence that there is a bidder for bonds.

It is debatable how effective that would be but the markets have rallied as a result. That combined with the Fed being a little more dovish a week later gave the capital markets, debt and equity, a huge fillip. Equity markets strengthened, bond markets strengthened, new issuance has started and the oil price steadied. A combination of all those events and generally benign data means that the investor seems happy to be back in the market again.

There is a degree of suspicion about how long this will last, but I think as we have said ever since the back end of last year, given all the different events that could occur in 2016, we are in for a volatile time. Certainly central banks have acted effectively so far in giving investors the confidence that they should be back in the markets buying both debt and equity.

 

Time To Take A Step Back?

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

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

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

Reevaluate your asset mix

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

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

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

Additional concerns

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

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

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

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

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

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

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

James Swanson is Chief Investment Strategist at MFS Investment Management.

Roderick Munsters Appointed Global CEO Asset Management of the Edmond de Rothschild Group

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El grupo Edmond de Rothschild nombra a Roderick Munsters nuevo CEO de su firma de asset management
CC-BY-SA-2.0, FlickrPhoto: InvertmentEurope. Roderick Munsters Appointed Global CEO Asset Management of the Edmond de Rothschild Group

The Edmond de Rothschild Group has decided to entrust the management of all of its Asset Management business to Roderick Munsters from May 10, 2016. He replaces Laurent Tignard who leaves the Group to pursue new professional opportunities.

Edmond de Rothschild confirms its willingness to accelerate the development in France and abroad of one of the Group’s flagship business, representing over CHF 85 billion (€78 billion) in assets under management (at 31.12.2015).

Roderick Munsters (1963) has both a Dutch and a Canadian nationality. He was Chief Executive Officer of Robeco Group from 2009 to 2015 (EUR 273 billion AUM at end-2015). He also headed Robeco’s subsidiaries RobecoSAM (Sustainable Investing) in Zurich and Harbor Capital Advisors (US multi-manager) in Chicago. From 2005 to 2009 he was a member of the Executive Committee and Chief Investment Officer of ABP and APG All Pensions Group.

 Roderick Munsters will report to Ariane de Rothschild and is part of the Group Executive Committee as Global CEO Asset Management.

“We are very pleased to welcome Roderick Munsters. He will bring a wealth of experience, strong knowledge of international financial markets, entrepreneurial spirit and recognised ability to generate long-term performance” said Ariane de Rothschild, Chairwoman of the Edmond de Rothschild Group Executive Committee.

“I am very pleased and proud to join the Edmond de Rothschild Group and its teams in France and abroad” said Roderick Munsters. “Edmond de Rothschild is a leading reference in Asset Management. The Group is a forerunner of alternative multi-management since 1969, high-yield bonds in the 70s and currency overlay more recently. It is an honour to have the opportunity to take part in the Group’s European and international development and to support the further growth of its reputation”, adds.