CC-BY-SA-2.0, FlickrPhoto: Daniel Lobo. Greek Mattress Stash Up to 30% of GDP
The stock of banknotes put into circulation by the Bank of Greece rose by a further €5.3 billion in June to a record €50.5 billion – see chart. The central bank’s liability to the rest of the Eurosystem related to the supply of notes is now €22.8 billion, on top of a €107.7 billion TARGET2 deficit.
The stock of notes is equivalent to 30% of forecast GDP in 2015 and 37% of bank deposits of Eurozone residents in Greek banks at end-May. For comparison, the Eurozone-wide stock equals 10% of GDP and 9% of bank deposits.
The ECB has accommodated a huge shift in Greek liquidity preference caused by the confidence-wrecking manoeuvres of the former finance minister and associated “Grexit” fears. His claim of deliberate “liquidity asphyxiation” is surreal.
Kevin Choy, Portfolio Manager. Pioneer Investments Strengthens Alternative Fixed Income Team
Pioneer Investments announced the enhancement of its Alternative Fixed Income team with the appointment of Kevin Choy as Portfolio Manager. Based in Boston, Kevin will report directly to Thomas Swaney, Head of Alternative Fixed Income, U.S.
In his role, Kevin will work alongside Thomas to support the management of Pioneer Investments’ liquid alternative strategies, including the Long/Short Bond strategy and Long/Short Opportunistic Credit strategy.
Ken Taubes, Head of Investment Management U.S., commented: ‘’In an environment of lower expected returns from bonds, combined with a potential rise in volatility, we need to consider a different way of investing that targets new sources of returns, downside risk mitigation, and volatility management. Liquid alternative strategies aim to provide diversification, improve risk-adjusted returns, and act as shock absorbers during times of market stress,’’ he continued. “They’re potentially also a way to reduce correlations versus traditional asset classes.’’
Taubes added: ‘’We are pleased to welcome Kevin to the team and his appointment represents a further commitment to our capabilities in the growing alternative fixed income area.’’
Kevin joins Pioneer Investments from Hartford Investment Management, where he was a Senior Analyst covering a variety of sectors, including telecom, media and technology. Before joining Hartford he was a Senior Analyst at OFI Global Asset Management, where he generated long and short investment ideas for both retail and institutional investment mandates. Kevin also held positions at NEC Corp. in Tokyo, Japan and the U.S. Kevin has a B.S. in Business Administration with a concentration in Accounting from San Jose State University. Kevin also has an M.B.A. from the Massachusetts Institute of Technology. He is a CFA charterholder.
As a more unique insight to their Liquid Alts efforts, Thomas Swaney will be a key presenter speaking on Long / Short Opportunistic Credit when he visits Miami for a due diligence event Pioneer is hosting in early October. For more detail on this upcoming event, please post the contact: US.Offshore@pioneerinvestments.com.
Photo: Santi Villamarin. Where Are the Most Interesting Opportunities in Equity Markets?
There are several reasons why we think upward momentum on equity markets will continue. US growth is set to continue, Europe is recovering, both the ECB and BoJ are deploying ultra accommodating policy, large groups are once again looking to do deals and European company margins are expected to continue improving.
But index gains are likely to be slower than at the beginning of 2015 and the road ahead will be rocky due to persistent volatility over events like the Greek talks, Fed policy and the crisis between Russia and Ukraine. We are maintaining our preference for developed country equities, especially in Europe and Japan, as earnings upgrades are set to continue and likely to underpin equity market advances.
Absolute European valuations may look testing but they are not excessive in cyclically adjusted terms. And compared to bond markets, equities still look attractive. We prefer the Eurozone, cyclical and banks. Japanese equity valuations are not yet in expensive territory and recent regulatory developments and the resulting boost to ROE should provide additional support for equity prices.
In the US, however, valuations and historically high profit margins suggest we should be more cautious. We prefer financials and cyclicals. Financials are trading at attractive valuations and should gain from any Fed action while cyclicals, especially in the consumer sector, stand to benefit from lower unemployment and future wage increases.
Finally, we remain selective in emerging markets which remain just as disparate as far as fundamentals and valuations are concerned.
Philippe Uzan is CIO at Edmond de Rothschild Asset Management (France)
CC-BY-SA-2.0, FlickrFoto: José María Silveira Neto. El S&P 500 en 2.250 puntos, la apuesta de Fidelity para los próximos 12 meses
Bloomberg has introduced the first tool in the marketplace to help banks and other financial institutions identify covered funds under the provisions of the Volcker Rule. More than a dozen banks are using Bloomberg’s Covered Funds Identification (CFID) tool to automate the process of detecting and tagging covered funds ahead of an upcoming compliance deadline.
Beginning on July 21 of this year, most U.S. banks and foreign banks with U.S. operations must divest ownership interest in, and sponsorship of, covered funds, which include CLOs, CDOs, CMBS and other securitizations. Classifying which third-party instruments are considered covered funds is a challenging and often manual process. While the overarching rule is straightforward, there are many nuances and exceptions that must be considered. In most cases, making the right determination involves a review of prospectuses and deal documents, many of which are not readily available to individual institutions.
CFID uses nearly 30 data fields to automatically extract relevant details from offering documents to classify securities against the requirements of the Volcker Rule covered funds regulations. CFID also provides details about ownership structure, deal type, tranche type, and collateral, as well as an industry-defined decision tree that addresses the Volcker Rule covered fund requirements. When one of more than 200,000 securities incorporated in the tool is viewed on the Bloomberg Professional service, a tag appears indicating whether the security “is a covered fund,” “is not a covered fund” or “legal review required.”
The tool can also help buy-side firms discover market liquidity and price discrepancies for covered funds.
“Banks and other financial institutions are still struggling with the requirements to identify and monitor instruments affected by the Volcker Rule,” said Ilaria Vigano, Head of Regulatory and Accounting Products at Bloomberg. “Working directly with industry stakeholders, Bloomberg developed a way for traders and back office teams to eliminate the need to conduct lengthy manual reviews of portfolios. Now, more than a dozen banks are using our tool to verify which investments are covered and build a compliance program that helps ensure covered funds are not reacquired.”
. Allianz Global Investors Names Global Head of Fixed Income
Allianz Global Investors has recently promoted Franck Dixmier as global head of Fixed Income. He has also joined the global executive committee.
In addition to his new duties, Dixmier remains chief investment officer Fixed Income Europe and CEO of Allianz Global Investors France. Dixmier joined Allianz Group in 1995 as fixed income portfolio manager.
He became head of Fixed Income at AGF Asset Management (former AllianzGI France) in 1998. In 2008, Dixmier became a member of the executive committee and chief investment officer of Allianz Global Investors France.
He started his career at MACSF as fixed income manager.
Allianz Gl has €454bn of assets under management as at 31 March 2015.
The lack of hedge funds’ excess returns since the financial crisis put the industry under rising pressure. The 12th edition of the White Paper by Lyxor Research issued this month, “A New Era for Hedge Funds?”, reviews the causes and identifies the key hedge fund performance drivers. Lyxor puts to test these drivers under 3 long-term macro-economic scenarios. It is reasonable, in their view, to expect hedge funds to deliver an annual excess returns in the 5-6% range above the Libor 3M, with low volatility.
Criticism against the lack of hedge funds outperformance climaxed in 2014. Hedge funds have underperformed traditional asset classes since the financial crisis. Despite its outstanding track record over recent decades, the industry has come under rising pressure.
The collapse in volatility and yield might be the main culprits. Volatility neared the mid-90’s all time lows in 2014 as a result of a combination of factors. According to the White Paper the unprecedented global monetary reflation was undoubtedly the most powerful one. Subject to growing risks constraints and a positive correlation between equity and bonds, hedge funds only partially benefitted from the asset reflation which unfolded since the financial crisis. Meanwhile the plunge in volatility and asset dispersion shrunk the potential for alpha generation. Lyxor emphasizes that the Volatility / Correlation / Dispersion regimes are key hedge fund return factors. For instance, a low volatility environment is negative for alpha generation and this has hurt hedge fund performance during the time the Fed has tamed volatility with its QE programme. One response of the hedge fund industry was to significantly lower both management and performance fees.
A sustainable inflection in market regimes unfolded since mid-2014. Reflation policies, as highlighted by the study, have indeed inflated DM financial assets. Valuations are stretched in most classes. The economic cycle is maturing, and the Fed policy is about to normalize. As a result, the alpha environment has improved, while that of the traditional asset management is getting more challenging. As of end-May, the Lyxor Hedge Fund Index is up 4% year to date, while the S&P 500 in total return is up 3.2% and 10y sovereign bond prices are in negative territory both in Europe and in the US. It is no coincidence that hedge fund assets keep on breaking their highs, going north of $3tn.
In this white paper, Lyxor evaluates the drivers of hedge fund returns. It tests their structural exposures under 3 macro-economic scenarios over the next 5 years. Using conservative assumptions, the study estimates that hedge funds could deliver annual excess returns in the 5-6% range over the Libor 3M, with lower volatility than that of risky assets. In order to reach these expected returns, hedge funds would have to deliver alpha in the range of 3-4% per year, the rest being market beta. The research sets several scenarios for market developments and their influence on hedge fund return, finding that a scenario in which the Fed tightens faster than expected by the market would boost hedge fund returns. Meanwhile a scenario in which the US economy would face secular stagnation, leading to continued monetary easing would be the less supportive.
LyxorAM believes that diversifying portfolios with an increased allocation to alternatives is particularly attractive at this stage of the cycle. According to the firm, hedge funds have demonstrated their ability to protect portfolios against wide market fluctuations, a scenario that cannot be excluded when the Fed turns the screw.
CC-BY-SA-2.0, FlickrPhoto: Paul Falardeau. BofA Merrill Lynch Fund Manager Survey Finds Investors Hiking Cash Holdings in the Face of Lowered Confidence in China
Global investors have raised their holdings of cash significantly in response to a weaker global economic outlook, particularly in China, according to the BofA Merrill Lynch Fund Manager Survey for July. Overall, equity allocations are unaffected by the higher risk aversion, however.
Main findings:
Confidence in the global economy falls sharply: 42 percent of investors expect strengthening over next year, down from 55 percent a month ago.
China heads concerns: net 62 percent expect economy to weaken in next 12 months; eight out of 10 see GDP below 6 percent by 2018.
Cash levels soar to highest level since 2008 crisis – 5.5 percent of portfolios; gold judged undervalued for first time in five years.
Increased pessimism on China led further weakness in assets linked to China: Commodity allocation drops to six-month low, and Global Emerging Market equities stays as most unloved region with allocations at 16-month low.
Bonds still seen as much more overvalued than equities and more at risk of volatility-driven crash; equity overweights rise to net 42 percent.
U.S. dollar bullishness strengthens despite postponing of expected U.S. rate rise to Q4 2015 or later, replacing June consensus of Q3.
Appetite to overweight European stocks rises, although potential eurozone breakdown now biggest “tail risk.”
“Rising risk aversion and stretched cash levels provide a contrarian buy signal for risk assets in Q3,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“Despite the Greek newsflow, intention to own European assets is high and rising, though global growth remains vitally important for European stocks,” said Manish Kabra, European equity strategist.
. Aviva Investors Continues to Grow Global Equities Team
Aviva Investors, the global asset management business of Aviva plc (‘Aviva’) announces the appointment of Giles Parkinson as Global Equities Fund Manager. He is based in London and reports to Chris Murphy, Head of Global Income, Equities.
In this new role, Giles will work closely with Richard Saldanha on Aviva Investors’ Global Equity Income Fund and across global equity portfolios.
Giles has 10 years’ investment management experience. He joins from Artemis where he was Analyst and Fund Manager on the £1 billion Strategic Assets Fund which he worked on from launch in 2010. Prior to this, he was Global Research Analyst, Oil & Gas at Newton Investment Management.
Chris Murphy, Head of Global Income, Equities, said: “I am delighted to welcome Giles to Aviva Investors. He brings with him a strong pedigree in managing global equity mandates and a deep level of analytical skill across sectors. Giles’s experience will stand us in good stead as we continue to develop our equity proposition in response to changing client requirements.”
CC-BY-SA-2.0, FlickrFoto: Jason Bachman. Demasiado pronto para proclamar la defunción del mercado alcista
Global asset management industry assets under management (AUM) will reach US$106 trillion by 2019, with the non-US percentage share exceeding 50% at the close of 2015, according to the 14th iteration of Cerulli Associate’s flagship report–Global Markets 2015: Key Insights into a Dynamic Landscape. However, managers need to be realistic about the efforts required to win business in high-growth markets.
2015 could be a good year for managers wishing to target Brazil. Positive regulatory changes and the establishment of a truly independent distribution network will further open the market to cross-border managers and fuel demand for global products. Managers should not be deceived by seemingly sparse opportunities elsewhere in Latin America. Chile’s retail segment may look unappetizing because of its tiny asset base but it has great growth potential, while the fast-growing pension market in Mexico is looking increasingly attractive for cross-border managers.
As managers continue their distribution push into Europe, they would do well to keep the growth potential of some markets in perspective. In a Cerulli survey, Spain was cited by firms as a key target in 2015. “Cerulli believes that the market will continue to grow at a healthy pace, yet slower than the one seen over the past couple of years,” said Barbara Wall, Europe research director at Cerulli. “Fund-of-funds vehicles are the cross-border asset managers’ favorite point of entry and this segment is booming–total assets in 2014 grew more than 100% from €15 billion (US$18.2 billion) to €30.6 billion. What is also important is that the majority of these vehicles, 96%, are ex-house–they invest primarily in non-proprietary funds.”
“China may be the jewel in the crown from a growth perspective, but regulation continues to favor local managers,” said Ken F. Yap, director of global analytics at Cerulli. “With the local market firing on all cylinders appetite to invest overseas is minimal. There is also a wealth of private banking and insurance products that offer both liquidity and attractive returns. China is a long-term proposition, but one that cannot be ignored.”
Taiwan has long been held as the most accessible market in the region with offshore assets increasingly overshadowing those onshore. Last year, offshore fund AUM grew by 21.8% led by bond funds. But there is a fly in the ointment. Managers may soon find their distribution costs rising. The Taiwanese authorities plan to make it mandatory for foreign managers to boost onshore business to obtain fund approvals.
Photo: Eduardo Marquetti. Fitch: Europe Credit Investors See EM Risk Contagion via Brazil
European credit investors see more possibility of contagion from emerging market risks via Brazil than other major emerging markets (EMs), according to Fitch Ratings’ latest senior investor survey.
Seventy-six percent of respondents to the survey, which closed on 2 July, selected Brazil when asked to choose two countries from a list of five where they felt the wider contagion threat of EMs facing imbalances, political challenges, and rising US rates was most acute. This was twice as many as Russia (38%). Thirty-six percent selected China and 30% Turkey. Just 7% identified an acute risk of contagion via India.
EMs face various challenges heading into 2H15. Commodity prices have fallen, an approaching Fed rate rise points to a less favourable external financing environment, and some EMs face structural growth challenges.
Brazil (BBB/Negative) and India’s (BBB-/Stable) sovereign credit profiles are cushioned from external shocks by robust international reserves, and the authorities in both countries have taken policy measures aimed at reducing imbalances. Reliance on portfolio inflows to finance the current account deficit is not significant in either country.
The front-loaded macroeconomic adjustment programme adopted by Brazil’s Rousseff administration in its second term could gradually help improve policy credibility, confidence, and investment prospects. But weak political and economic backdrops (we forecast a GDP contraction of 1.5% this year) may hinder implementation.
Meanwhile, Latin American non-financial corporates, led by those in Brazil, have significantly increased their dollar borrowing while US rates have been low, increasing their exposure to a rising dollar. As the Central Bank of Brazil has tightened policy and allowed the real to depreciate, Brazilian issuers face rising internal and external interest rates during a recession.
Forty-six percent of our 2Q15 survey respondents think EM corporates will face the greatest refinancing challenge over the next 12 months – more than twice the next-highest category (EM sovereigns, with 20%).
“We think India has made more tangible progress in reducing its exposure to Fed-driven market volatility since the ‘Taper Tantrum’ two years ago. Foreign-exchange reserves have grown and are high in terms of current exchange payments relative to peers. The current account remains in deficit, but has narrowed, initially helped by temporary gold import curbs, but also due to the fall in international oil prices and lower inflation reducing investment demand for gold”, point out Fitch.
Structural reforms and the resulting pick-up in investment support India’s growth outlook, and we forecast growth to accelerate to 8.1% in FY17. But Fed tightening will not be risk-free for India, due to the possibility of large foreign outflows from its debt and equity markets
Fitch’s 2Q15 survey represents the views of managers of an estimated EUR7.8trn of fixed-income assets. We will publish the full results later in July.
