Weakening Renminbi Puts More Oil on the EM Fire

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La debilidad del renminbi echa gasolina al incendio de los mercados emergentes
CC-BY-SA-2.0, FlickrPhoto: Begoña. Weakening Renminbi Puts More Oil on the EM Fire

2015 ended with falling commodity prices, weakening EM growth momentum and increasing concerns about EM capital outflows. Deepening political crises in Brazil, South Africa and Turkey caused additional market nervousness in the last weeks of the year. The combination of expectations of tighter US monetary policy on the one hand and concerns about EM deleveraging, financial risks and deepening political crises in the problem countries should keep the pressure on the emerging world high in 2016 as well. The most important issue remains the Chinese situation of declining growth, increasing leverage growth, less effective economic policies and accelerating capital outflows.

The most recent source of EM risk aversion has been the depreciation of the Chinese renminbi. Since the mini-devaluation of last August, the authorities in Beijing have been managing the renminbi exchange rate relative to a basket of currencies of main trading partners. After the nominal effective exchange rate had appreciated by some 30% since 2011 (when most EM currencies started to depreciate), it stabilized in the second half of 2015. From the recent sharp daily moves relative to the US dollar – something which the Chinese had always avoided – we can now deduct that Beijing is strongly committed to avoid appreciation against the basket of main trading partners.

This decision makes a lot of sense given the weakness in the Chinese export sector and the importance of this sector for Chinese employment. Even more so because of the capital outflows that to a large extent are driven by the perception that the renminbi remains overvalued.

The problem for financial markets, however, is that a rapidly weakening renminbi means that an important anchor for EM currencies has disappeared. With the renminbi allowed to weaken relative to the US dollar, it is likely to keep pace with the other EM currencies and the euro. The latter is particularly relevant given the efforts by the ECB to push the euro weaker. Europe is China’s largest trading partner.

Another reason why the recent large CNY moves have created new unrest in financial markets is that they suggest that the economic problems in China might have become too big for the old gradual policy approach.

M.J. Bakkum is Senior Emerging Market Strategist at NN Investment Partners.

 

UBS AM: Market Resolutions for 2016

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Los propósitos de año nuevo de UBS Asset Management
CC-BY-SA-2.0, FlickrPhoto: AlfonsoBenayas, Flickr, Creative Commons and I will treat emerging markets as emerging (yet again), among them. UBS AM: Market Resolutions for 2016

The latest edition of UBS Asset Management’s Economist Insights, authored by Joshua McCallum and Gianluca Moretti, speaks about market resolutions for 2016. Joshua has been Senior Economist with UBS Asset Management’s Fixed Income area since 2005, and prior to this he was a macroeconomist at the UK Treasury. Gianluca joined the firm in 2010 from the central bank of Italy. 

Based on the experiences of 2015, they once again suggest some New Year’s resolutions for the market. Among others:

  • I must behave like an adult if I want central banks to treat me like an adult;
  • I must acknowledge that lower potential growth mean searlier rate hikes;
  • I will start the year with more humble expectations of growth;
  • I will treat emerging markets as emerging (yet again);
  • I will think of Greece as a holiday destination, rather than as destroyer of the Euro;
  • I will recognize that the global economy is diverging.

You can download the full document in the following link.

Asia’s Long-Term Growth Prospects Still Look Good

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Los mercados asiáticos pintan muy bien de cara a 2016
CC-BY-SA-2.0, FlickrPhoto: Vicent_AF. Asia's Long-Term Growth Prospects Still Look Good

I think it is fair to say that sentiment toward China, and by extension, Asia, within the U.S. investment community, is quite polarized. Whereas some investors I have met recently see opportunity in the weakness of the second half of the year, doubts over the reality of recent growth rates and anxiety over a slower headline rate of growth has caused many others to be quite fearful of China as a deflationary force in the world economy. I think this caution is mirrored by investors around the world, albeit that the degree of discomfort with China and Asia is perhaps less acute in Europe. Whilst those in Asia appear to be much more optimistic about the region’s own long-term growth prospects (and less suspicious about the quality of China’s historic growth), most investors are still in a “wait-and-see” mode.

It is not hard to see why. Indeed, let us just list the headwinds that Asia faces in the near term: the prospect of further tightening by U.S. monetary policy—this time in the form of rising rates; slowing nominal growth; low margins and disappointing earnings growth; a strong dollar and weak local currencies; increasing credit spreads; and poor momentum in the equity markets. And all of this is happening at a time when valuations, whilst not expensive, cannot be regarded as cheap in absolute terms. It is understandable that people may be waiting for some event or some improvement in valuations before they turn more positive. And it is rational, and almost always your best first guess, to assume that current trends will persist when you are trying to forecast the near-term future.

Now, let me just suggest that we have some data that should allow us to be more confident over Asia’s ability to weather the world’s deflationary forces. First, current accounts in Asia are generally positive. That means Asia’s countries are saving more domestically than they invest domestically. And so, they are relatively less reliant on foreign capital. There are some exceptions—India and Indonesia. But even here, reliance on U.S.-dollar capital markets has reduced dramatically over recent years. Second, inflation rates are low across much of the region (again Indonesia and India are exceptions, even though they have been successful at moderate price rises). These low inflation rates mean that Asia’s policymakers have a lot of room to offset deflationary impulses by either monetary policy or even government spending or tax cuts. A return to a more inflationary environment would relieve some pressure on margins, earnings and valuations.

The question is: are we seeing any signs of such a response? I think we are. First, there are the natural responses of markets—prices adjust. Most obviously, in the face of deflationary U.S. pressures, Asia’s currencies have taken the strain. Acute declines have been limited to commodity-related currencies, such as the Malaysian ringgit and Indonesian rupiah. Elsewhere across the region, moderate currency declines (nowhere near as severe as what Latin America has suffered) have acted as a sort of pressure valve to protect domestic employment and maintain domestic demand. Although this is a drag on U.S. dollar returns and (to a lesser extent) Euro-based investors, the fact that currencies have been able to act as stabilizers of demand shows how far we have progressed in Asia since the late 1990s.

Then, we have the active response of policymakers. In India, we have seen the central bank successfully squeeze down core inflation rates without too severe an impact on industrial profits (perhaps helped by lower commodity prices). Now, India’s central bank seems ready to ease. In China, we are seeing authorities raise the growth rate of narrow money, continue to press with financial system reforms, and support the property market. Japan is continuing its policy of reflation and structural reform initiatives. So, in the face of a deflationary U.S. policy, the three Asia giants seem to be leaning in the other direction. The degree of offset is perhaps still small. But talking to clients and investors around the region leaves me to believe that there is no great liquidity crisis. Indeed, if the acutely bearish reaction to the Chinese currency re-pegging in the middle of 2015 taught us anything it is that, in the wake of a fall in equity prices, value was quick to emerge and buyers were quick to enter the markets.

Global Middle Class Spending

In this context, Asia’s long-term growth prospects still look good. High savings rates, large manufacturing bases, reformist governments pursuing financial, legal, and corporate reforms mean that Asia should continue to invest and potentially grow at higher rates than the rest of the world. Over time, this investment will continue to raise real wages across the region. This trend should not only support currencies and growth but also may lead to big changes in Asia’s households. We have noted before that on current trends, Asia stands to account for two-thirds of global middle class spending by 2050. We believe this is just the beginning of a sustained growth in the kinds of businesses that will help generate profits from facilitating this revolutionary change in lifestyles: consumer brands, restaurants, leisure, media, insurance, property, consumer banking and wealth management. In industry, automation equipment and IT software will help companies offset higher wages. Increased government and private spending on health care, the environment, and general welfare will open up new opportunities for companies to create competitive advantages and raise profits and shareholder returns.

In light of these trends, we should remember the monetary environment that dominates our discourse and the media headlines: By how much the Fed will raise rates? This environment, whilst important in the short-term, is to an extent just a veil that distracts our attention from the real economic changes that are evolving almost undetected before our eyes. With that said, nevertheless, we have to admit that 2016 is likely to be a landmark year in U.S. monetary policy—the first rise in rates in a decade.

Within Asia, our focus remains on the companies that will support the real economic growth trends, across all countries. However, it is true that some countries currently appear to be more fertile grounds for corporate research than others. On valuation grounds, India looks moderately expensive, with disappointing earnings growth and a lot of expectations over the still-unfulfilled reforms by the prime minister. In China, valuations are much more reasonable—parts of the Hong Kong market look cheap. And after a difficult time in 2015, the Association of Southeast Asian Nations once again looks to offer new opportunities, even as stock prices in some parts of the North Asian markets, particularly in Korea, seem to be quite advanced. Japan, at least, offers some value and some hope of better corporate returns, though one should be wary of hyping Abe’s third arrow too much.

Overall, I look forward to 2016. Although the headwinds are currently considerable, Asia’s businesses seem to be weathering the storm, and so long as we keep our eye on the long term, the investment environment should offer up some good opportunities.

Robert J. Horrocks is CIO and portfolio manager at Matthews Asia.

 

House Prices Continue a Slow Recovery, IMF Says

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Los precios de la vivienda mantienen una recuperación lenta, según el FMI
CC-BY-SA-2.0, FlickrPhoto: Chuck Coker . House Prices Continue a Slow Recovery, IMF Says

Globally, house prices continue a slow recovery, according to The Global House Price Index, released by IMF in December. The Index, an equally weighted average of real house prices in nearly 60 countries, inched up slowly during the past two years but has not yet returned to pre-crisis levels.

If prices went up in The United States, Colombia and Spain, in Brazil, Chile, Mexico, and Peru they decreased. The areas with the biggest growth were Qatar, Ireland and Hong Kong while the biggest decreases took place in Ucraine, Russia and Latvia.

As noted in previous quarterly reports, the overall index conceals divergent patterns: over the past year, house prices rose in two-thirds of the countries included in the index and fell in the other one-third.

Credit growth has been strong in many countries. As noted in July’s quarterly report, house prices and credit growth have gone hand-in-hand over the past five years. However, credit growth is not the only predictor for the extent of house price growth; several other factors appear to be at play. While in Brazil credit and prices went down, and in Colombia and The United States both grew, in Spain prices grew while credit decreased, and in Mexico priced did not while credit did.

For OECD countries, house prices have grown faster than incomes and rents in almost half of the countries.House price-to income and house price-to-rent ratios are highly correlated, as documented in the previous quarterly report.

 

 

Degroof Petercam Merges AM Branches

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Las gestoras de Degroof y Petercam se fusionan y nace así Degroof Petercam Asset Management
CC-BY-SA-2.0, FlickrPhoto: TrentStrohm, Flickr, Creative Commons. Degroof Petercam Merges AM Branches

Belgian companies Petercam Institutional Asset Management and Degroof Fund Management Company have merged on 4 January to form one entity called Degroof Petercam Asset Management (Degroof Petercam AM).

The merger comes in the aftermath of these between Belgian groups Bank Degroof and Petercam that has taken place in October 2015.

Degroof Petercam AM has €25bn of assets under management and tallies 140 employees.

Its management board is composed of president Hugo Lasat, Tomás Murillo, Thomas Palmblad, Guy Lerminiaux, Philippe Denef, Peter De Coensel and Vincent Planche.

Henderson: “Companies That Are Reliant Solely on A Cyclical Upturn to Grow Their Revenues Present an Elevated Level of Risk”

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"Las empresas que sólo esperan a la consabida subida cíclica para que crezcan sus ingresos presentan un elevado nivel de riesgo"
CC-BY-SA-2.0, FlickrPhoto: Scott Beale. Henderson: “Companies That Are Reliant Solely on A Cyclical Upturn to Grow Their Revenues Present an Elevated Level of Risk”

Ian Warmerdam and Ronan Kelleher, Managers of the Henderson Global Growth Strategy, believe that concentrating on secular growth in 2016, particularly within innovative themes, while maintaining a strict valuation discipline, is a prudent approach to generating attractive long-term returns.

What lessons have you learned from 2015?

2015 has again felt like a year of mediocre global economic growth, broadly speaking, and we believe that companies that are reliant solely on a cyclical upturn to grow their revenues present an elevated level of risk. This year has reinforced our belief that concentrating on truly secular growth, while maintaining a strict valuation discipline, is a prudent approach to generating attractive long-term returns.

Are you more or less positive than you were this time last year, and why?

We claim no ability to predict the short-term direction of the markets so our strategy remains unchanged. We continue to operate with our five-year investment horizon at a stock level and have confidence that our philosophy and process will continue to deliver strong absolute and relative returns over this longer-term timeframe.

What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?

Our strategy remains to avoid making major macroeconomic calls, and to instead focus on using our bottom-up approach to find companies that are benefitting from underappreciated secular growth and high barriers to entry, at attractive valuations. As we look into 2016, we continue to see compelling investment opportunities within our five existing themes: Healthcare Innovation, Internet Transformation, Emerging Markets Growth, Paperless Payment and Energy Efficiency.

Within Healthcare Innovation, for example, we are attracted by the demographic changes at play as an ageing global population struggles to contain ever rising healthcare costs. Increases in life expectancy mean that the global 60+ age group is expected to double by 2050 to two billion people. CVS Health, the US pharmacy chain, provides an integrated healthcare service for its customers and looks set to benefit from these demographic shifts.

Rightmove is a leading online UK property listings company that sits within our Internet Transformation theme and should continue to benefit from the structural shift in advertising spend from offline to online. Within Energy Efficiency investments include companies that increase vehicle efficiency such as Continental, a Germany-based automotive supplier, Valeo, a multi-national automotive supplier based in France, along with Delphi, a US auto component manufacturer.

 

 

Monaco and China Pressure the US to Apply FATCA

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China y Mónaco firman acuerdos para el intercambio automático de información financiera en 2018 y aumentan la presión para aplicar FATCA
Photo: AndyCastro, Flickr, Creative Commons. Monaco and China Pressure the US to Apply FATCA

On December 15 and 16, Monaco and China signed the multilateral OECD MAP agreement on automatic exchange of information, therefore, raising the number of jurisdictions that will automatically exchange information to 77.

Both countries will exchange information in 2018 about data of 2017.

According to the law firm Broseta, “the signing of the Multilateral MAP by a country such as China will probably increase the pressure on the US to bilaterally apply FATCA and, therefore, to exchange automatic information with countries with which the US has FATCA agreements”.

Markets’ Addiction to Central Bank Support Leaves Investors Stunned

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Se impone la cautela ante la adicción de los mercados al respaldo de los bancos centrales
CC-BY-SA-2.0, FlickrPhoto: BCE Offcial. Markets’ Addiction to Central Bank Support Leaves Investors Stunned

Markets have become increasingly volatile this year and seem to be much more driven by investor sentiment rather than economic fundamentals. In the past years, markets have developed an addiction to central bank support and their reaction to changes in monetary policy stances has become unpredictable and often dramatic.

This year we saw a couple of good examples. On August 24, or “Black Monday”, Chinese equity markets dropped nearly 9% in one day followed by the news that China’s central bank was not quickly planning to bail out markets again after already pledging hundreds of billions of dollars for this purpose earlier. Naturally this sent ripples throughout global markets, including Europe and the US. On Black Monday, the Dow Jones dropped 1,000 points at opening, the largest drop ever.

The latest example is from December 3, the day that ECB President Mario Draghi announced additional stimulus measures in order to boost the Eurozone economy and inflation. However, markets had created the image of “Super Mario”, the central banker who has proven to be able to overachieve the market’s already high expectations. In September and October, Draghi had hinted at “QE2”, an extension of the ECB’s bond buying program, partly as an answer to China’s woes potentially threatening the Eurozone economy. Markets had therefore been anticipating a substantial additional stimulus package at the central bank’s December meeting, Draghi’s status in mind. Super Mario however managed to underachieve this time and delivered less than the market consensus had expected. The market reaction therefore was one of declining stock markets, a spike in the euro exchange rate and, most notably, a sharp rise in government bond yields. The yield on the German 10-year Bund rose by as much as 20 basis points in a matter of hours, a rise of almost 50%!

It may be obvious that such a highly volatile environment presents major challenges for investors. We have seen quite some examples now of central banks having difficulties communicating their intentions to the markets. And it is clearly not unlikely that more examples will follow. From a portfolio risk management perspective, these kind of occasions emphasize the importance of a well-informed, unbiased and active asset allocation. Given the substantial volatility spikes as mentioned above, more and more investors choose to delegate their allocation decisions to specialised multi-asset teams.

As we saw ECB easing expectations being priced into the government bond market, we decided to underweight German Bunds in our multi-asset portfolios already in the first part of November. In the weeks that followed, we also took some risk off the table by neutralising our equity and fixed income spread positions. Divergence between ECB and Fed policy is – although well telegraphed to the markets – coming to the surface more clearly now. The announcements from both central banks hitting the markets in December, combined with lower-than-usual market liquidity, was for us reason enough to opt for a relatively light asset allocation stance as we move towards year-end.

Valentijn van Nieuwenhuijzen is Head of Multi-Asset at NN Investment Partners.

 

Henderson: “Still Fundamental Value in Euroland Equities”

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Henderson: "Aún hay valor fundamental en los títulos en euros"
CC-BY-SA-2.0, FlickrNick Sheridan is european equities manager at Henderson. Henderson: “Still Fundamental Value in Euroland Equities”

Henderson european equities manager Nick Sheridan explains why he tries to set aside the sentiment of short-term uncertainty when looking for value, and why he believes that the eurozone remains a prime area to seek out investment opportunities at the start of 2016.

What lessons have you learned from 2015?

Probably the most important lesson from 2015 is the importance of trying to look beyond the emotional impact of short-term news flow, when it comes to valuing stocks. Investors have had to deal with a bewildering series of ‘big news’ events, from the optimism surrounding the European Central Bank’s QE programme to unexpected shocks (the Greek debt crisis; uncertainty over Chinese growth, Volkswagen’s emissions bombshell). As ever these short-term sell-offs provided good buying opportunities for those discerning investors willing to focus on what matters: value.

Are you more or less positive than you were this time last year, and why?

While it is true that the recovery in Europe has been slower and more erratic than hoped, recent news has been reasonably upbeat. Eurozone PMIs are a 54-month high, German industrial output is improving and regional consumer prices are up – all signs that suggest solid growth in the region over the next few months. Although recent earnings in Europe have on the whole been a touch disappointing, many companies have upgraded their expectations for 2016. The question now is whether investors will be patient enough to wait for this earnings recovery to come through.

What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?

Our bottom-up strategy is designed to set aside the sentiment and incorporate in-depth analysis of meaningful measures to help identify those stocks that are best placed to outperform. Market volatility, short-term news flow and unexpected events can contribute to a degree of change, but we tend to focus on measurable factors, such as earnings/cash flow, dividends and the balance sheet.

At the heart of the process is very much a focus on value. What price you pay at the beginning of a holding period ultimately dictates your returns. Should market volatility continue to increase, this will create pricing disparities, offering a potentially rich vein of opportunities to invest in quality companies at attractive valuations.

 

 

Safra Sarasin expands Total Return team

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Safra Sarasin potencia su equipo de Total Return
CC-BY-SA-2.0, FlickrPhoto: Rosanna Galvani . Safra Sarasin expands Total Return team

Swiss private banking group Safra Sarasin has announced the appointment of Stéphane Decrauzat, and Vincent Rossier to head its Total Return team as of Janaury 2016.

Decrauzat joins from RAM Active Investments, where he spent the last eight years as fixed income manager. Rossier joins from Pictet Wealth Management, where he held a number of positions in the fixed income asset mamangement team.

In addition, the group also confirmed the hire of Yann Schorderet as quantitative strategist to the CIO office. He joins from Mirabaud & Cie, where he was also responsible for investment strategy.

Serge Ledermann, member of the Bank’s Executive Committee and head of Asset Management Switzerland, comments on the appointments: ”We are very pleased to welcome these managerial appointments and new skill sets, which not only will enable us to strengthen our existing teams but above all will allow us to provide new asset management expertise. The current financial market environment, with the virtual disappearance of positive yield curves, in fact calls on us to adapt our product range both within the fixed income space and in multi-asset management.”