Global Divergence

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Las divergencias globales se hacen más patentes en los emergentes
CC-BY-SA-2.0, FlickrPhoto: Wilson Hui. Global Divergence

No one talks about decoupling anymore. It is one of those pieces of vocabulary associated with 2008 and the hope that emerging market fundamentals would insulate those economies from what turned out to be the greatest recession since the Great Depression. That hope was not entirely misplaced, of course, says Alex Johnson, Head of Absolute Return Fixed Income at BNP Paribas IP.

Exhibit 1 below shows, first, Chinese GDP on a year-on-year basis (the green line). While during the Great Financial Crisis in 2008 -2009 Chinese GDP was nearly halved—and Chinese equities performed dismally—there was a sharp rebound on the back of enormous fiscal stimulus. Now BNP Paribas IP may be seeing its inverse, and that is best illustrated by the other line (the blue line) on the chart, the Shanghai Stock Exchange Composite Index, down 8.5% on Monday, July 27, alone.

Some commentators have suggested that this does not really matter. Exhibit 1 illustrates the rationale to their thinking: year-to-date, the index has gained 15.18% (to July 27), and the one-year gain is over 75%. While the highs were higher, the averages are looking good.

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“There is a degree of merit to this argument. The Shanghai Composite has never been a bellwether of the Chinese economy in the sense that the S&P 500 might be said to be for the US. It exhibits no meaningful correlation with GDP, and it has not been a vehicle for significant retirement planning”, poin out Johnson. The A-share market is not easily available to overseas investors, and the price movements are driven almost entirely by domestic flows, limiting contagion.

Johnson believes there are serious flaws in this view. First, he says, the composition of the investor base has changed even this year, with more and more small retail investors participating in the market ‑ and thus suffering losses. Many of these investors blame the central government, which they have accused of encouraging them to invest in the first place. There is some truth to this, unfortunately. To pick one example, Bloomberg Business cited the Xinhua News Agency in September 2014, which ran eight articles in that week alone advocating buying equities, and the futures exchange cut margin requirements in that same week. Buying shares on margin is common: such financing exceeds CNY2 trillion (US$322 billion).

Recognising this, Chinese authorities have already put in place controls, including preventing shareholders holding more than 5% of a stock from selling for six months, and they have begun purchasing stock outright. The track record for controls such as this is unedifying. There are broader issues, too. The Chinese government maintains its legitimacy on the basis of improving living standards and good custodianship of the economy, and the suggestion that there are developments beyond its control could be damaging and lead to unpredictable outcomes. There is also a wealth effect, and we can expect a reduction in consumption commensurate with the shock.

“We are seeing some effects already. Oil has sunk to new recent lows of under US$48 per barrel. While that will be at least partly related to the lifting of Iranian sanctions, other commodities are reacting similarly. This puts direct pressure on many emerging market commodity exporters ‑ and some not-so-emerging-markets, such as Australia and Canada, and their currencies”, explains BNP Paribas IP expert.

However, says Johnson, in Europe and the US, the picture seems different. Germany released its monthly Ifo survey, with all three components—business climate, current assessment, and expectations—beating expectations. That is in line with the ZEW survey released two weeks ago and a raft of other data, including the stock market up over 13% year-to-date; France’s has gained almost 16%, and Spain’s 21%. Now that Greece is, temporarily at least, behind us, the world’s largest and wealthiest trade grouping has defied all of last year’s gloomy prognostications.

The US picture is less positive. The earnings season in particular has not hit the high notes of previous quarters, with IBM notably pointing to China. Data is generally strong: initial jobless claims were the lowest for 42 years, and housing data has also been particularly robust. “What remains elusive is evidence beyond the merely anecdotal of wage growth. In addition, a leak of confidential staff forecasts used during the June 17 Federal Open Market Committee (FOMC) meeting showed staffers had lower expectations for the path of federal funds than the Committee does itself. At the margin, this may lengthen the odds of a hike in September – and events in China are not helping either”, sumamarizes.

Global Dividends Fall in Q2 as The US Dollar Soars In Value, But Underlying Growth Is Strong

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Los dividendos mundiales caen en el segundo trimestre por la apreciación del dólar, aunque su crecimiento sigue mostrando solidez
. Global Dividends Fall in Q2 as The US Dollar Soars In Value, But Underlying Growth Is Strong

Global dividends fell 6.7% year on year in the second quarter to $404.9bn, a decline of $29.1bn according to the latest Henderson Global Dividend Index. This is the third consecutive quarter of declines, mainly owing to the strength of the US dollar against major world currencies.

The euro, yen and Australian dollar were all a fifth weaker year on year and sterling was down a tenth. The rising dollar knocked a record $52.2bn off the value of dividends paid during the quarter. The HGDI ended the second quarter at 155.1, down 4% from the 161.5 peak in September last year.

Underlying growth, however, which strips out exchange rate movements, special dividends, index changes and changes in the timing of payments, was an encouraging 8.9%.

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Q2 is dominated by Europe ex-UK, so trends in that region characterise the global results this quarter, and largely explain the weak headline global growth figure. Two thirds of Europe’s dividends are paid in the period and these fell 14.3% on a headline basis (to $133.7bn), a drop of $22.3bn, with most countries seeing double digit declines. This was almost entirely due to the sharply lower euro against the US dollar. The negative exchange rate effect was a record $29.5bn in the quarter.

Underlying growth was 8.6%, an impressive result for the region with Italy, the Netherlands and Belgium enjoying the highest underlying growth, boosted by a strong performance from financials. Indeed, the region’s financials as a whole significantly increased their payouts, led by Allianz in Germany, which is raising its payout ratio.

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This encouraging performance from the sector is part of a growing trend around the world. Danish shipping conglomerate Moller Maersk paid a very large special dividend, while France, the region’s largest payer, saw a slowdown (underlying growth was 2.3%, headline was -20.2%), with weakness at Orange and GDF Suez affecting growth there. German dividends fell 16.0% to $29.9bn, but were 6.6% higher on an underlying basis, with a similar result in Spain (-24.4% headline, +6.0% underlying). In Switzerland, headline dividends fell 2.4% to $17.0bn, owing to a weaker Swiss franc. They rose 5.9% on an underlying basis, with a large increase at UBS contributing to the improvement in European financial dividends.

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Once again, US companies grew their dividends rapidly, with almost every sector increasing payouts. Here too, financials showed rapid growth, with Bank of America and Citigroup quintupling their distribution. Overall headline growth was 10.0%, taking the total to $98.6bn, and the US HGDI to a record 186.0. This strong performance marked the sixth consecutive quarter of double digit increases. Underlying growth was a similarly strong 9.3%.

Q2 is also an important quarter for Japan, accounting for almost half the annual total. Headline dividends fell 7.1%, but underlying growth was very impressive, up 16.8% to $23.4bn, as rising profits combined with higher payout ratios to drive dividends higher. Japanese companies are responding to calls from investors and the government to increase the proportion of their profits they return to shareholders (from a very low base compared to other developed markets). South Korea is among other countries seeing the same pressures, and that helped push South Korean dividends higher by 37.4% on an underlying basis year on year, with large increases from Samsung Electronics among others.

Though technology dividends rose fastest, in line with a long running trend, financial dividends grew 0.3% at a headline level year on year, far outperforming the 6.7% global headline decline, and indicating rapid underlying growth. Financials account for roughly a quarter of annual global dividends, so improvements to dividend payments in this industry can make a real difference to income investors.

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With underlying growth so encouraging, Henderson has upgraded its forecast for 2015 by $29bn. It now expects global dividends of $1.16 trillion this year, which is down 1.2% at a headline level, but up 7.8% on an underlying basis. The strength of the US dollar against all major currencies explains the marginal headline decline.

Alex Crooke, Head of Global Equity Income at Henderson Global Investors said: “Though the headline decline seems disappointing, it is concealing very positive underlying increases in dividends. The strength of the US dollar had a significant impact again this quarter but our research shows that the effect of currency movements even out over time and investors adopting a longer term approach should largely disregard them. At the sector level, it is encouraging to see increases from financial companies as they start to slowly move towards higher payout levels. But this is less about a renewed boom to financial payouts and more about a gradual return to normality.

“This means a dividend paying culture is extending into new markets, beyond those where paying an income to equity investors is already deeply entrenched, highlighting the increasing income opportunities available to investors who adopt a global approach”, said.

 

 

 

Legg Mason to Acquire Australian Infrastructure Firm

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Legg Mason adquiere en Australia una firma de asset management especializada en inversiones en infraestructuras
CC-BY-SA-2.0, FlickrPhoto: Travis Simon. Legg Mason to Acquire Australian Infrastructure Firm

US asset manager Legg Mason announced that it has agreed to acquire a majority equity interest in Rare Infrastructure, Ltd., (Rare) a global infrastructure asset manager headquartered in Sydney, Australia.

Rare has offices in Sydney, Melbourne, London and Chicago and specialises in global listed infrastructure investments, managing $7.6bn (€6.8bn) for institutional and retail clients.

Under the terms of the transaction, Legg Mason will acquire a 75% ownership stake, the Rare’s management team will retain a 15% equity stake and The Treasury Group, a previous minority owner, will retain 10%.

Joseph Sullivan, chairman and CEO of Legg Mason, said, “Rare’s investment expertise has strong relevance for many clients today, meeting important investment objectives including income, growth, diversification and capital preservation.  The market for infrastructure investing has grown significantly over the past few years and RARE has participated in this growth, particularly in early adopter markets like Australia and Canada.”

Rare will operate as a core independent investment affiliate along with Brandywine Global, ClearBridge Investments, Martin Currie, the Permal Group, QS Investors, Royce and Associates, and Western Asset Management.

A Quick Look at Possible Implications of China’s Record Weakening of the Renminbi

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Cinco implicaciones a medio plazo de la devaluación del renminbi
CC-BY-SA-2.0, FlickrPhoto: Shizhao. A Quick Look at Possible Implications of China’s Record Weakening of the Renminbi

The People’s Bank of China (PBoC) has announced yesterday that it is improving the pricing mechanism of the daily fixing rate of the renminbi. It will do this by referencing the previous day’s closing rate and by taking into account “demand and supply conditions in the foreign exchange markets” as well as exchange rate movements of other major currencies. As a result, the USDCNY (US dollar to Chinese Yuan Renminbi rate) was fixed higher by 1.9% as a one-off adjustment and represents a record weakening of the Chinese currency. It is the first weakening in the exchange rate by the PBoC since 1994.

The announcement of the PBoC that it will increase yuan flexibility suggests the daily fixing of the currency will be much more dependent on the market. As a result, it is unlikely that the yuan will continue to exhibit relatively low volatility and may continue to depreciate over the medium term as the authorities grapple with a slowdown in economic growth.

For Anthony Doyle, investment director within the M&G Fixed Interest team, there are a number of implications of a weakening yuan over the medium term:

  • Firstly, any move to weaken the yuan against the USD is likely to be bullish for US treasuries at the margin, resulting in lower yields. If the yuan depreciates in value, then China will have more USD to invest in US treasuries through foreign reserve accumulation, suggesting a strengthening in demand. However, unless we see a sustained weakening in the yuan in the weeks ahead then this move is unlikely to have a large impact in the demand for US treasuries in the short-term.
  • Secondly, this move will put downward pressure on already low inflation rates in the developed economies. Import prices for developed economies are likely to fall, suggesting lower producer and consumer prices. A substantial amount of Chinese manufactured goods consumed in the developed world are now cheaper and could cheapen further, resulting in lower costs for inputs which could lead to lower consumer prices.
  • Thirdly, the fall in the yuan will mean the purchasing power of Chinese businesses and households will deteriorate. It will also make raw material prices, which are largely denominated in USD, more expensive. The suggests further downward pressure on commodity prices and further pressure on commodity-rich export nations like Australia, New Zealand and Brazil. A weakening yuan suggests weakening demand and could result in lower growth for economies that export to China and weaker growth for the Asian region.

Any move to liberalise the determination of exchange rates should be viewed positively for the global economy. Given China’s level of importance as a key manufacturer of goods and its huge cache of foreign reserves, it is unsurprising that large moves in the exchange rate can have significant spillover effects for other economies and financial assets. Any further evolution of the determination of the daily fixing rate of the renminbi will continue to be closely watched, especially in an environment where the Chinese economic growth profile continues to be questioned.

Investing Lessons from Baseball’s Active Managers

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Lecciones del béisbol para gestores activos
Photo: Mauro Sartori . Investing Lessons from Baseball’s Active Managers

As the popularity of passive investing continues to gain momentum, AB has taken a pause to think about a lesson from baseball. The question is: what kind of equity lineup creates a winning team?

Nobody can deny the increasing shift of equity investors toward index strategies. Net flows to passive US equity funds have reached $21.7 billion this year through June, while investors have pulled $83.7 billion out of actively managed portfolios, according to Morningstar. In this environment, active managers are increasingly challenged to prove their worth and justify their fees.

Building a Winning Lineup

Baseball provides an interesting analogy for the active equity manager. “Across all players in Major League Baseball, the batting average this season is .253, as of August 6. Yet even in today’s statistics-driven environment, you won’t find a single team manager who would choose to put together a lineup of nine players who all bat .253—even if it were possible”, explained James T. Tierney, Chief Investment Officer, Concentrated US Growth.

The reason is clear and intuitive. For a baseball team to be successful, it need to have at least a few hitters who are likely to get hits more often than their peers. And to create a really robust lineup, a manager wants a couple of power hitters who pose a more potent threat. “Of course, some hitters will trend toward the average and slumping players will hit well below the pack. That’s why you need a diverse bunch. A team comprised solely of .253 hitters is unlikely to have the energy or the momentum needed to win those crucial games and make the playoffs”, said Tierney.

False Security in Average Performance

So what does this have to do with investing? “When an investor allocates funds exclusively to passive portfolios, it’s like putting together an equity lineup that is uniformly composed of .253 hitters. This lineup might provide a sense of security because returns will always be in synch with the benchmark. But it’s little consolation if the benchmark slumps. A passive equity lineup won’t be able to rely on any higher-octane performers to pull it through challenging periods of lower, or negative, returns”, point out the CIO.

Still, many investors fear getting stuck with a lineup of .200 hitting active managers. AB believes the best strategy to combat that risk is to focus on investing with high conviction managers, who have a strong track record of beating the market, according to a research.

Passive and Active: The Best of Both Worlds

Passive investing has its merits. Investors have legitimate concerns about fees as well as the ability of active managers to deliver consistent outperformance. The appeal of passive is understandable.

Yet AB believes that putting an entire equity allocation in passive vehicles is flawed. It leaves investors exposed to potential concentration risks and bubbles that often infect the broader equity market. And with equity returns likely to be subdued in the coming years, beating the benchmark by even a percentage point or two will be increasingly important for investors seeking to benefit from compounding returns and meet their long-term goals

“There is another way. By combining passive strategies with high-conviction equity portfolios, investors can enjoy the benefits of an index along with the diversity of performance from an active approach, in our view. Baseball managers don’t settle for average performance. Why should you?”, summarized Tierney.

CTAs Outperform as Commodities Slump in July

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Julio ha sido un buen mes para los hedge funds
CC-BY-SA-2.0, FlickrPhoto: SuperCheeli. CTAs Outperform as Commodities Slump in July

Hedge funds are on track to deliver solid returns in July, up 1.4% month to date (0.4% last week). In line with our overweight recommendation, CTAs and Global Macro managers outperformed other hedge fund strategies.

Meanwhile, Event-Driven managers underperformed both last week and on a month-to-date basis, in line with our downgrade of the strategy from overweight to neutral early June. The event-driven strategy was negatively impacted recently due to its exposure to gold and energy related stocks. Asian event-driven managers have, on the contrary, delivered solid returns for a second week in a row, and contributed partly to compensate losses.

Philippe Ferreira, Senior Cross Asset Strategist Lyxor Asset Management enumerates the recent market developments have been supportive for hedge funds:

  1. The sharp fall in commodity prices in July has supported CTA managers. They have increased their short precious metals/short energy positions since end-May. CTAs also have no EM currency exposure. The slump in several EM currencies since mid- July is not having any meaningful implication for hedge funds (some Global Macro managers are long MXN/USD but this is compensated by short EUR/USD).
  2. CTAs are long GBP/USD and are thus capturing the hawkish tone of the Bank of England, which has expressed concerns over wage growth at its latest MPC meeting early July.
  3. Finally, the earnings season in the US has been a tailwind for L/S Equity managers for the time being. Technology, industrials and commodity related industries (oil, gas and materials) have disappointed, but the aggregate exposure of L/S Equity managers to these sectors has been significantly reduced since end-May (see chart below). Meanwhile, consumer cyclicals, financials and health care have all reported earnings in line with or above expectations and these are precisely the sectors where the bulk of the exposures are concentrated.

Overall, the hedge fund industry has recently demonstrated its nimbleness. It has been protected against falling equity and bond markets in May/June by adjusting exposures downwards quite rapidly. But it has also captured the rebound that took place in July. The beta exposure of equity strategies has recently been increased in line with the improving risk sentiment.

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Henderson: Waiting in The Wings

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Henderson: Esperando para salir a escena
CC-BY-SA-2.0, FlickrPhoto: Hernán Piñera, Flickr, Creative Commons. Henderson: Waiting in The Wings

With Greece’s theatrics dominating the world stage, investors may have missed some compelling stories unfolding in the wings. Bill McQuaker, Co-Head of Multi-Asset at Henderson, spotlights three of his favourites: oil, emerging markets and job creation.

Oil: a new script

If investors thought oil’s slump was over, they were wrong. Rising US demand for petrol (gas) has been met by unfettered global supply, with prices heading south of US$60 again. Credible explanations include: an urgent need for foreign currency (Russia/Venezuela); the desire to re-assert control over the market (Saudi Arabia); and new supply (Iran). We also suspect innovations in horizontal drilling and re-fracking are only beginning to drive US oil field economics, pointing to over-supply in the immediate future.

Implications? We see three. First, the renewed sell-off may finally persuade consumers that low prices are here to stay. Expect the contributions to GDP growth from (particularly US) consumption to strengthen. Second, some oil producing countries may suffer further currency weakness, heaping pressure on their central banks to tighten policy; a financial shock to accompany an oil price collapse is a possibility, particularly if US rates rise soon. Third, price weakness is evident across the whole commodity complex. Investors who made a strategic allocation to commodities at their height may capitulate – posing opportunities for those who steered clear.

Wages: enter NAIRU

You know the world is a strange place when Conservatives announce “Britain needs a pay rise”, while an unpopular Chancellor is congratulated for announcing a new “National Living Wage”. Clearly, mounting political pressure to share the spoils of recovery is having an effect. And it is not just a UK phenomenon. US politicians are pushing for higher minimum wage levels, and state legislators and corporates are showing signs of responding. Walmart, which has a legendary reputation for cost control, is leading the way in raising wages for 500,000 of its lowest paid staff.

Calls for higher wages are not just the result of political processes. Rapid rates of job creation have seen unemployment rates collapse in the UK and US. Many economists believe we are very close to, or at, NAIRU: the rate at which falling unemployment begins to exert upwards pressure on inflation. Tight labour markets are leading to similar dynamics in Germany and Japan.

None of this is lost on policymakers, with central banks in the US and UK preparing the way for rate rises soon. Will a bull market built on generous liquidity conditions crumble if central banks are forced to raise rates? We suspect not, but do anticipate a pick-up in market volatility: good for those investors with some cash to invest.

EM: curtain call?

The outperformance of developed markets (DM) over emerging markets (EM) in recent years has been immense. The S&P 500 has roughly doubled since the US debt-ceiling debacle (August 2011), alongside MSCI EM’s c5% rise (USD terms). The explanatory narrative cited is: slow EM growth, weak commodity prices, and a desperate need for structural change. The fact that many of these points could just as easily be applied to DM is often ignored.

This cannot last: disenchantment with all things ’emerging’ looks to be approaching fever pitch, reminding us of the haste to be rid of ‘old economy’ stocks in H2 1999 and early 2000. We are not inclined to stick our heads above the parapet just yet, but when the liquidity-driven bull market gives way to a downturn, the best buys may well be found in EM, and in the unloved companies listed in the West that service them.

Market Opportunities Related to the Water Sector Are Expected to Reach USD 1 Trillion by 2025

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RobecoSAM prevé un tirón al alza del mercado mundial del agua, que podría alcanzar el billón de dólares en 2025
CC-BY-SA-2.0, FlickrPhoto: Steve Gatto. Market Opportunities Related to the Water Sector Are Expected to Reach USD 1 Trillion by 2025

Water is essential for life. But for years some parts of the world have taken their water supply for granted. And it’s easy to understand why. Crystal clear drinking water flows in abundance from the taps in our homes, schools, and workplaces. Many of us don’t give a second’s thought to the challenges that lie behind getting clean water to our taps or indeed how much of this finite resource we consume on a daily basis.

But for most of the world, clean drinking water is a precious commodity. Although water covers about 70% of the Earth’s surface, we must rely on annual precipitation for our actual water supply. About two-thirds of annual precipitation evaporates into the atmosphere, and another 20-25% flows into waterways and is not fit for human use. This leaves only 10% of all rainfall available for personal, agricultural and industrial use.

Moreover, precipitation is not evenly distributed: 1.2 billion people are living in areas of water scarcity. What’s more, pollution has made much of that water undrinkable and unsafe for use. Meeting the world’s increasing water needs has fast become one of the biggest challenges facing society.

But there is reason for optimism: in the past, a short- age of vital resources has driven the need to innovate, discover new materials and generate new technologies. The water challenge is no exception, and companies across the globe are seeking to find solutions to tackle the problem.

The RobecoSAM study ‘Water: the market of the future’ examines the key megatrends that are shaping the water market, and explores the investment opportunities that are arising from these trends:

  • Population growth
  • Aging infrastructure
  • Water quality improvements are necessary in many places
  • Climate change is altering the availability of water resources

Such trends generate risks and opportunities for companies and investors alike. Market opportunities related to the water sector are expected to reach USD 1 trillion by 2025. Companies that are early to respond and take steps to exploit the market opportunities associated with these water-related challenges are more likely to gain a competitive advantage and achieve commercial success.

 

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GGM Capital Launches GGM Multistrategy, an IT-Centric Alternative Fund

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GGM Capital lanza GGM Multistrategy, un fondo alternativo centrado en tecnologías de la información
Photo: JImmyReu, Flickr, Creative Commons. GGM Capital Launches GGM Multistrategy, an IT-Centric Alternative Fund

GGM Capital, the investment banking IT focused boutique, is launching its new Technology-centric, open-ended fund under the umbrella of a Luxembourg SICAV-SIF. This new fund will have a target size above €50.0m and will invest in a diversified portfolio of equities, private equity/venture capital funds and corporate debt.

The objective is to achieve strong capital appreciation by investing in a diversified set of asset classes with various maturity levels, yields and risk profiles.

The asset allocation is outlined as follows: the equity portfolio, representing a majority of the invested assets at all times, will be composed of equities of technology companies listed in key financial markets such as NASDAQ, NYSE, LSE, Euronext and Xetra. For this purpose, GGM Capital will leverage on its extensive proprietary trading experience and in particular its strong track record developing successful intraday trading and short term swing strategies.

GGM Multistrategy will invest a smaller part of its assets under management in less liquid instruments, be it either investment funds or corporate debt, with generally a hold to maturity strategy. The objective of this part of the portfolio is to provide foreseeable returns with are not correlated with the equity portion of the portfolio.

GGM Capital will leverage of the combined 40+ years experience in capital markets of David Moix, Gabriel Padilla and Guillermo G. Morales as well as its positive track record achieved by GGM Capital managing venture capital investments in the technology space.

Guillermo G. Morales Lopez, Executive Chairman of GGM Capital said: “I’m excited to offer our investors a new innovative instrument leveraging on our experience and track record. We had been working hard in building up this amazing strategy during the last years and now we are pleased to offer this one of a kind investment opportunity to the market”.

Gabriel Padilla, Partner of GGM Capital added: “Our investors have asked us to develop an open-ended, diversified product to deepen their investment relationship with us. I believe we now have the right product for this purpose.”

Innovation and Demographics: Growth Opportunities From Global Themes

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Cinco ideas de Henderson para aprovechar distintas oportunidades en renta variable
CC-BY-SA-2.0, FlickrPhoto: Sasha Kohlmann. Innovation and Demographics: Growth Opportunities From Global Themes

Six years into a stock market recovery fuelled by coordinated and repeated bouts of quantitative easing, equities have arrived at a very interesting point in the road. The asset purchasing intervention by many of the developed world’s central banks drove bond yields to historic lows, forcing traditional yield-hungry fixed income investors to venture into the equity markets. While it is difficult to argue that, overall, valuations in equity markets are not now becoming somewhat stretched relative to historic levels, when compared to the meagre returns on offer from fixed income, the premium to historical averages looks easier to justify.

The Henderson Global Growth strategy applies a thematic overlay to identify areas of the market that are underpinned by a disruptive innovation or demographic trend, which is expected to drive long-term secular growth. Here, managers Ian Warmerdam and Ronan Kelleher analyse the themes of Energy Efficiency, Healthcare Innovation and Internet Transformation.

Higher growth has become overlooked

In recent years, there has been a keen focus and significant investment in high yielding equities, typically characterised by low growth and mature businesses, and this has led to a corresponding increase in relative valuations in this area versus the wider market. The knock on effect of this has been, in Henderson´s view, that parts of the higher growth areas of the stock market have become overlooked, resulting in attractive entry points for the longer term investor. This is precisely the area of the stock market in which we operate, scouring the globe for pockets of underappreciated long-term secular growth.

Thematic-based opportunities

On the Henderson Global Growth strategy Ian Warmerdam and Ronan Kelleher, managers at Henderson, apply a thematic overlay to identify areas of the market that may provide stock ideas that fulfil our long-term, fundamental investment criteria. Both maintain a focus on a small number of themes; each underpinned by a disruptive innovation or demographic trend that is expected to drive secular growth over the long term. Henderson current themes include: Energy Efficiency, Paperless Payment, Healthcare Innovation, Internet Transformation and Emerging Markets Growth. Here, we touch on three, but all provide a breadth and depth of investment opportunities.

Energy Efficiency: going Continental

“Energy Efficiency is a theme that has served us well in recent times”, said Warmerdam and Kelleher. The quest for greater energy efficiency is being driven by a combination of factors; environmental concerns, rationalisation of finite reserves of carbon-based fuels and governments’ pursuit of energy independence. Confronting these issues, governments in countries covering 80% of global passenger vehicle sales have set stringent targets for fuel economy or emissions.

In the US, for example, the National Highway Traffic Safety Administration (NHTSA) has mandated that the average passenger car’s fuel economy must increase from around 35 miles per gallon (mpg) today to 56mpg by 2025. Continental, the German listed manufacturer of auto components and tyres, benefits from these trends. The company enjoys strong market positions across its powertrain division, which integrates innovative and efficient vehicle system solutions with a broad portfolio of engine parts from turbochargers to start-stop technology, geared towards increasing fuel efficiency and reducing emissions.

Healthcare Innovation: ‘MinuteClinics’

“Another fruitful hunting ground for long-term growth has been Healthcare Innovation. Here we are attracted by the demographic changes at play as an ageing global population, as shown in the chart below, 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. We are attracted to companies such as CVS Health, the US pharmacy chain, which provides an integrated health care service for its customers”, point out both managers at Henderson. For example, they said, CVS now operates around 1,000 walk-in “MinuteClinics” across its 7,800 stores where patients can get a variety of everyday illnesses and injuries treated at a fraction of the time and cost of going to see a GP.

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Internet Transformation: moving online

Finally, Warmerdam y Kelleher explained that Rightmove, a long-term holding within our Internet Transformation theme, is a stock we continue to like. The leading online UK property listings company has had a turbulent 18 months following a period of uncertainty surrounding the impact of a third entrant into its market. “We believe the proficient founder-led management team at Rightmove has done an impressive job at the helm, and the company has rightfully emerged as a more dominant leader in a market that should continue to benefit from the structural shift in advertising spend from offline to online”, concluded.