Are Asian Equities in a “Sweet Spot”?

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¿Atraviesa Asia un momento dulce?
CC-BY-SA-2.0, FlickrPhoto: Day Donaldson. Are Asian Equities in a “Sweet Spot”?

With the Standard & Poor’s 500 and Nasdaq indices breaching all-time high levels pushing P/E multiples for the MSCI United States index to above the 5-year historic average, some investors are likely to re-think their portfolio in search of more attractively valued investments. Given the low growth expectations and concern over unresolved debt issues in some eurozone states, nor may Europe be considered a screaming “buy” by all investors at this juncture. Especially after the strong rally since the start of 2015. Meanwhile, the Latam, middle-east, Eastern Europe, and Africa regions — the darlings in the eyes of many investors in the not-so- distant past – are now plagued by a myriad of obstacles weighing on investors’ appetites.

While economies in Asia also confront a number of challenges, we believe relatively attractive valuations for the region coupled with internal domestic drivers put a floor under the market and position the region in a “sweet spot”. Additionally, a number of external factors provide a strong tailwind for Asian equities including: weak energy/commodity prices, an accommodative European Central Bank (ECB) ready to inject abundant liquidity into the financial system, and an expected sustained, albeit moderate US recovery propping up exports for Asia.
 

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Domestic catalysts

“It is undeniable that many Asian economies also face a growth soft patch as they undergo rebalancing to the “new normal” slower global growth trend. However, we believe much progress has been made in recent years, with key notable positive developments in 2014. What is most encouraging is the determination demonstrated by many Asian governments to drive reform across all facets of the economy, including what were once highly sensitive government-dominated areas. We see this trend as being especially evident in China, India, and Indonesia where new “reform-minded” political leaders have taken office. The leaders in Japan and Korea can also be commended for championing much-needed reform agendas”, point out Hue Lu, senior investment specialist covering Asia Pacific and Greater China equities at BNP Paribas Investment Partners.

“We should be mindful of the fact that despite the growth soft patch across many Asian economies, Asia ex-Japan countries continue to top the charts for global GDP growth”, said Lu. The International Monetary Fund (IMF) and consensus real GDP growth forecast for the Asia ex-Japan region averages around 5 to 6% — much stronger than the 2 to 3% growth estimate for the US, and the 1% for the Eurozone.

Also worth mentioning is the fact that Asian corporates are cash rich. Cash on the balance sheets of Asian companies is approaching US$1 trillion, leaving the door open to possible dividend increases, share buy-backs, and opportunities to increase shareholder value through accretive acquisitions – all positives for shareholders.

External Catalysts

A sustained cycle in the US economic recovery should help boost exports for many Asian economies, especially for Japan, Korea, Taiwan, China, Hong Kong and Singapore. Additionally, quantitative easing by the ECB should inject abundant liquidity into the financial system. This, in our view, bodes well for global equities. “We believe Emerging Asian markets will be key beneficiaries of the new flood of liquidity given the region’s inherent higher-beta market structure”, believe the senior investment specialist at BNP Paribas Investment Partners .

As a net importer of commodities and energy products, Asia significantly benefits positively from the recent weakness in commodity prices. Given the structural demand-supply forces in the global commodity market coupled with the “new normal” softer global growth trend, we expect commodity prices to remain suppressed for some time. Weak commodity price has been a significant positive for Asia in a number of ways. For one thing, lower input costs for Asian corporates has recently and will continue to boost margins.

The steep decline in commodity prices has been a powerful disinflationary force globally. The low inflation environment has paved the way for many economies (e.g. Indonesia, India, China) to push through price reforms for energy and resource-based utilities. As a result of recent energy price reform implemented in India and Indonesia, both economies are now benefiting from a much-improved fiscal position, making them less vulnerable to a future normalisation of US interest rates.

Furthermore, disinflationary pressure has enabled many Asian central banks to trim benchmark rates to support growth. In fact, with inflation easing significantly across the region, many Asian economies now have an easing-bias (Japan, China, India, Korea, Thailand, Indonesia, Singapore, and Australia). And while the central banks in Taiwan, Malaysia, and the Philippines have not yet moved to an easing stance, their monetary policies are not positioned to hike anytime soon. On the contrary, if disinflationary pressures persist (and BNP Paribas IP expect they will), these economies could very likely adopt a more dovish policy.

The opportunities

BNP Paribas IP outlook on Asian equities remains very constructive. In fact, there may be a high probability, in our opinion, that Asia equities will outperform many global equity markets in 2015. Within Asia, we highlight the following opportunities:

  • Japan remains one of our preferred markets. Given the Bank of Japan’s easing monetary policy, the weak yen should continue to benefit Japanese exporters. We see many technology-related opportunities, especially in the healthcare equipment and industrial automation and robotics area. We are also encouraged by the early signs of corporate restructuring plans. It will be a slow process to change decades of ingrained cultural behavior and norms, but the early signposts are encouraging with Prime Minister Shinzo Abe at the helm.
  • India is also a preferred market and we expect a re-rating over the medium-term. The two recent rate cuts by the Reserve Bank of India are a huge positive to help boost growth. The long-term consumption growth story remains very much intact, and we believe increased household wealth will drive consumption for many low-penetrated areas across the economy. Meanwhile, the Modi government continues to accelerate structural reforms and improve the policy environment.
  • China offers the benefit of being one of the cheapest markets in Asia-Pacific. The urbanisation and increasing wealth trend in this country provide good support for consumption over the medium term. With the People’s Bank of China clearly signaling an easing posture, equities should be supported despite the weak growth trend. Excessive government debt and a weak property market, however, continue to be areas of concern.
  • Australia continues to face headwinds from weak commodity prices, but the economy is healthier than some may expect. We favor the consumption-related areas such as transportation (airport/toll road), healthcare, telecommunications and utilities. Risk remains high in energy and materials except for large diversified miners who continue to generate strong cash flows despite weak commodity prices. We also like a number of the banks as they offer very attractive yields, and operate in an oligopoly structure, which allows them to command strong pricing power.

“Valuations remain attractive for the region. Despite the recent multi-year strong market performance for many of the Asian countries, with a number of markets breaching all-time high levels, valuations remain reasonable with both the MSCI Asia ex-Japan index and the MSCI Asia Pacific index still trading near its 5-year historic average P/E multiple (based on 12-months forward consensus estimates). Not to mention, Asian corporates offer one of the more attractive yields. Investors seem to be agreeing that Asia may be in a “sweet spot” if recent market performance is any indication”, conclude Hue Lu, senior investment specialist

Negative Interest Rates: New Strategies for a New World

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Estrategias para un mundo con tipos de interés negativos
CC-BY-SA-2.0, FlickrPhoto: Seier+Seier. Negative Interest Rates: New Strategies for a New World

Maurits Escher was the champion of enigma. This 20th century Dutch artist was a master of portraying strange or paradoxical situations. In Escher’s world, white birds transform into daytime landscapes while black birds become night-time landscapes, ribbons only have one side, motion is perpetual and so on.

Until recently, negative nominal interest rates would have never been considered a serious hypothesis. Outside of the imaginings of an “Escheresque” form of finance, financial theory and practice seemed to be based on the solid foundations of the time preference and making money “work”. As a result, the widespread and lasting establishment of negative interest rates in Europe directs us toward a new world where our thought patterns have been turned upside down, explained Nicolas Gaussel, Chief Investment Officer at Lyxor Asset Management.

A widespread reality that looks set to last

How do we explain why banks are still lending to one another while interbank rates are negative?, asked Gaussel. As of mid- April 2015, five-year sovereign yields were negative in nine European countries: Austria, Belgium, Denmark, Germany, Finland, the Netherlands, Sweden, Switzerland, and Slovakia. For shorter maturities (two-year), twelve countries are trading at negative yield (the above countries plus Czech Republic, France, and Portugal, see graph 1.

Lyxor AM estimate that 25% of bonds contained in the iBoxx euro sovereign all maturities index currently deliver negative yields (see graph 2). At the beginning of February 2015, certain corporate bonds also had negative yields. Since records began at the turn of the 19th century, interest rates have never been so low.

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Despite this, the flow of investment into European bonds is at record levels. According to Morningstar, European bond UCITS (sovereign and corporate) saw inflows of EUR 6 billion in February 2015, the highest monthly inflow in five years.

The bond rush is accelerating in Europe, while yields do not appear to offset the credit and duration risks taken by investors.
 

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Falling yields are certainly not a new phenomenon. Since the mid 1980s, there has been a marked decline in real interest rates. There are many reasons for this fall: an abundance of savings in emerging market countries, especially China, a widespread decline in investment in developed countries and increased demand for risk-free assets from emerging markets in the wake of the financial crises in the late 90s, said the Chief Investment Officer at Lyxor Asset Management.

This fall in interest rates, which has accelerated since the financial crisis of 2007-2008, has now reached its peak. In 2015, leading central banks around the world have adopted a zero interest rate policy. In order to tackle deflation risks in several European countries, some of these have even introduced negative interest rates (ECB, Swiss National Bank, Danish National Bank and Bank of Sweden).

This negative interest rate phenomenon looks set to last, believe Gaussel. Indeed, it is acting as a catalyst for the decline of the eurozone’s growth potential. The latest forecasts by the European Commission signal that the growth potential of the euro area has fallen from 2% at the start of the last decade to 0.7% today. The eurozone has been experiencing deflation for several months, and while this phenomenon should be temporary, long-term inflation expectations have fallen. The ECB survey among professional forecasters at the beginning of 2015 also points to long-term inflation expectations largely below the ECB target: we will have to learn to live with negative interest rates.

Financial players will have to adapt to this new environment

It is too soon to size up the implications of such a situation, should it last. In an environment of negative interest rates, the future value of financial assets is less than their current value. This favours debtors and penalises creditors, who now have to pay the equivalent of an insurance premium to put their money in a safe place.

Not only individual investors, but also major financial institutions including banks, insurance companies and pension funds are experiencing far-reaching implications. For banks, for example, imposing negative interest rates on deposits would have political consequences that are difficult to assess. Life insurers and pension funds will have to totally rethink how they operate: what is the point of investing in the markets if they perform less well than a safe deposit box?

However, we are still left with some very tangible issues facing investors: how do you generate a minimum return without taking too much risk?

Are negative yields inevitable if you do not want to reduce a portfolio’s credit quality, or take on too much duration risk for fear of being caught out by an unexpected rise in interest rates? Innovative and dedicated investment solutions offer a response to new constraints on investment. Designed and operated by Lyxor, two new, actively managed funds address the matter of negative yields and the control of market risks.

New solutions

The Lyxor EuroGovies Risk Balanced strategy offers a solution for investors wishing to maintain their exposure to European sovereign bonds, said Nicolas Gaussel. Originally designed for banks seeking to invest their HQLA(2) portfolio linked to the Basel III liquidity coverage ratio, this solution is also of interest to investors who have to manage bond portfolios in order to comply with the regulations, manage liabilities or synchronise durations.

This strategy offers a response to a major challenge for investors: how to maintain optimum exposure to European sovereign bonds when yields are so low, while keeping a close eye on risks? Treasurers are facing a similar challenge in the light of historically low money market rates. Once again, a turnkey solution involving short-term secured investments can offer real investment opportunities.

In this way, Lyxor Smart Cash invests in short-term bank securities, collateralised by shares. Actually, new regulatory constraints encourage banks to offload shares from their balance sheets, with a commitment to take them back in the future, via repo transactions(4). This new paradigm is putting pressure on equity repo rates, which are turning negative across the board. Combined with a negative Eonia, this gives rise to a situation in which short-term bank debt securities collateralised by shares offer a higher return than non-collateralised securities, even though objectively speaking they are less risky.

Lyxor Smart Cash strategy offers the possibility to achieve a return higher than the yield generated by traditional unsecured short-term money market investments, while minimising counterparty, liquidity and interest-rate risk.

In addition to its advantages in terms of yield and risk management, the Lyxor Smart Cash fund also allows investors to gain this exposure without having to deal with the administrative and financial complexities associated with investing directly in the repo market.

Lyxor’s two active management strategies can be seen as a new source of performance in a universe hampered by low returns. An effective response to the current situation.

 

BNY Mellon IM: “Insofar as the Market and Regulations Allow, Our Aim is to Triple Assets in Latin America”

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BNY Mellon IM: “En la medida en que el mercado y la regulación acompañen, la ambición es triplicar los activos en Latinoamérica”
CC-BY-SA-2.0, FlickrFernando Bonardi heads the Latin American business of BNY Mellon IM. Courtesy Photo. BNY Mellon IM: "Insofar as the Market and Regulations Allow, Our Aim is to Triple Assets in Latin America"

The conservative and prudent character which defines BNY Mellon Investment Management (IM) also applies to the asset management company’s business development in Latin America, a region in which the company has about 3.5 billion dollars under management in cross-border international business (excluding on-shore business in Brazil through its subsidiary ARX). Its Managing Director, Fernando Bonardi, is cautious, but also aware of the huge growth potential that exists in the coming years. Therefore, he explains in this interview with Funds Society that his aim, “insofar as the market and regulations allow,” and working with the team he now has, is to triple these assets over the medium term.

In order to achieve this, Bonardi heads a team of five professionals from Chile (himself included), with which he covers mainly Chile, Peru, Colombia, and Mexico. This team is supported by its parent company, BNY Mellon Investment Management International, based in the UK, as well as by independent management companies which make up the multi-boutique structure which characterizes BNY Mellon IM. For now, Bonardi rules out that his office will grow this year, while acknowledging that if growth allows, their efforts in Mexico and Brazil could increase in the coming years, with teams specifically focused on international investment segments. This would be a boost to the representative offices with which the Latin American team at BNY Mellon IM currently interacts.

Future Objectives

BNY Mellon IM, which focuses mainly in the institutional profile business, adopts a prudent and patient, although active, vision in regard of the relevant regulatory developments for the different markets covered.

In Mexico, for example, pension funds are beginning to gradually diversify international portfolios through so-called “segregated portfolios.” However, from a regulatory standpoint, the development has been slow and complex. This is creating obstacles in the activity of the major players within the Afores segment when it’s time to summon or to nourish their portfolios with funds. As one of the active agents in the sector, BNY Mellon IM, has adapted to the circumstances offering diversified portfolios and applying current regulations, but being aware that there is still much to be covered. In any case, it is true that regulatory developments in Mexico have been very positive and on path toward a more permissive practice as the different players gain experience.

In Brazil, however, the wait could be longer: “It’s the big question in the region, although it is a matter of time until its regulated offshore diversification is real and efficient. The key is, rather, when it will occur, and how it will adapt its format,” Bonardi explains, “without necessarily mixing international investment with local format vehicles, which complicate and increase the cost of the ultimate goal, even more so for institutional segments and pensions, as is still happening in this market,” he adds.

BNY Mellon IM has been working in the country for several years through its subsidiary ARX, offering regional asset management services for local and international investors interested in gaining exposure in Brazil and Latin America. Likewise, BNY Mellon, the company’s corporate branch, has a strong local presence with its Asset Servicing business unit. BNY Mellon Investment Management works closely with this other division, supporting each other to gradually approach the offshore diversification project with local regulated investors; an incipient, yet already visible, plan.

The Andean Region

Historically, efforts by Bonardi and his team have focused on institutional investors in the Andean region, i.e. pension funds in Chile, Peru, and Colombia. The main reason is that regulatory evolution in these countries has been the most dynamic and efficient on their international opening. Other regulated segments in these countries, such as local mutual funds or life insurance portfolios, have also followed a similar process.

“Chile is a large market with 170 billion in assets in their AFPs, 50 billion in mutual funds, and another 50 billion in insurance firms,” explains Bonardi. In the country, the need to diversify outside the local market is clear, due to limitations in terms of volume and liquidity of the local market and what legislation allows, which clears the way for the AFPs to allocate up to 80% of their assets outside Chile, while also within a regulated framework as regards various sub-limits and eligible assets.

“That said, we also know that it’s an ultra competitive market when it comes to participating. Firstly, it’s not much use to have good products if they currently don’t match the asset allocation requirements of the AFPs or their own regulatory and internal requirements.” Secondly, the part that they allocate to active management (as opposed to passive funds or ETFs) is concentrated in about 20 or 30 funds which are often the best in their class. “Getting into the AFPs portfolios is somewhat complicated since you must have winning products, whose size is above 300/400 million dollars, they must be inexpensive in their costs and have a good support structure,” says Bonardi.

Thirdly, time and resources should be dedicated to the dynamics of the regulatory framework and its preferences in order to plan for the development of future proposals. Examples of such dynamics could occur in the gradual incorporation into such private equity type portfolios, which until now have required complex and inefficient local structures, but which will surely follow a renewed evolution which is more in line with international standards. The same could happen with the regulation on use of derivatives within the UCITS portfolios, explains Bonardi, “giving greater accessibility to some absolute return type of portfolios, which have shown such evolution and international growth in recent years (Liquid Alternatives), or even an incursion into segregated portfolios, insofar that the operational and administrative requirements on them could be eased “.

Peru and Colombia are also two centers of attention: greater flexibility and openness is expected from the first of those markets, along with a revitalization of eligible portfolios, on which they have already been working on for several months and on several fronts, and good news is definitely expected, says the expert. Colombia maintains its international commitments, predominantly on indexed portfolios and “at times its an uphill struggle to provide products that can meet the AFP preferences as well as regulatory requirements, even more so for fixed income, where the issues of underlying credit limits are particularly difficult to overcome.”

Other Important Segments

In addition to its usual dedication to the Andean institutional market, BNY Mellon IM, also works actively with sovereign type funds in Latin America, traditionally focused on fixed income, but which are gradually diversifying positions and also incorporating equity in some cases. This dedication is mostly concentrated in the central banks, sovereign reserve funds, and quasi-sovereign companies operating throughout the region, and with which a relationship from the corporation’s other business units is also maintained.

Reaching the Retail Client

With offshore wealth management segments (private banks) there is a “private placement” type of regime, which indirectly reaches more retail investors with access to diversifying their savings internationally via international brokers, depending on the relevant regulatory conditions in their region. At this point, the management company is also supported by the Pershing platform, which is bank owned and the best-known in Latin America, while maintaining total independence from it given its open structure regarding any possible recommendations.

László Krasznahorkai Wins the Man Booker International Prize 2015

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László Krasznahorkai gana el Premio Internacional Man Booker 2015
CC-BY-SA-2.0, Flickr. László Krasznahorkai Wins the Man Booker International Prize 2015

Innovative Hungarian writer László Krasznahorkai is announced as the winner of the sixth Man Booker International Prize at an award ceremony at the Victoria and Albert Museum in London. Krasznahorkai was chosen from a list of ten eminent contenders from around the world.

The Man Booker International Prize, worth £60,000, is awarded for an achievement in fiction on the world stage. It is presented once every two years to a living author for a body of work published either originally in English or available in translation in the English language. It has previously been awarded to Ismail Kadaré in 2005, Chinua Achebe in 2007, Alice Munro in 2009, Philip Roth in 2011, and Lydia Davis in 2013.

Born in 1954, László Krasznahorkai gained considerable recognition in 1985 when he published Satantango, which he later adapted for the cinema in collaboration with the filmmaker Bela Tarr. In 1993, he received the German Bestenliste Prize for the best literary work of the year for The Melancholy of Resistance and has since been honoured with numerous literary prizes, amongst them the highest award of the Hungarian state, the Kossuth Prize.

The judging panel for the 2015 Man Booker International Prize was chaired by celebrated writer and academic Marina Warner. The panel also comprised Wen-chin Ouyang, Professor of Arabic and Comparative Literature at SOAS, University of London; acclaimed author Nadeem Aslam; novelist and critic Elleke Boehmer, who is currently Professor of World Literature in English at Oxford University; and Edwin Frank, editorial director of the New York Review Books Classics.

The judges said of Krasznahorkai’s work:

‘In László Krasznahorkai’s The Melancholy of Resistance, a sinister circus has put a massive taxidermic specimen, a whole whale, Leviathan itself, on display in a country town. Violence soon erupts, and the book as a whole could be described as a vision, satirical and prophetic, of the dark historical province that goes by the name of Western Civilisation. Here, however, as throughout Krasznahorkai’s work, what strikes the reader above all are the extraordinary sentences, sentences of incredible length that go to incredible lengths, their tone switching from solemn to madcap to quizzical to desolate as they go their wayward way; epic sentences that, like a lint roll, pick up all sorts of odd and unexpected things as they accumulate inexorably into paragraphs that are as monumental as they are scabrous and musical.’

The Man Booker International Prize is sponsored by Man Group plc, which also sponsors the Man Booker Prize for Fiction. The prize is significantly different from the annual Man Booker Prize in that it highlights one writer’s continued creativity, development and overall contribution to fiction on the world stage. Both prizes strive to recognise and reward the finest modern literature.

Manny Roman, CEO of Man Group, comments: ‘I would like to congratulate László Krasznahorkai and all the finalists from ten countries around the world. We are very proud to sponsor the Man Booker International Prize, recognising the hard work and creativity of these talented authors and translators. The prize also underscores Man Group’s charitable focus on literacy and education, as well as our commitment to excellence and entrepreneurship.

Columbia Threadneedle Investments Strengthens European Equities Team

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Columbia Threadneedle refuerza su equipo de renta variable europea
CC-BY-SA-2.0, FlickrPhoto: King Simmy. Columbia Threadneedle Investments Strengthens European Equities Team

Columbia Threadneedle Investments has appointed Mark Nichols to Portfolio Manager in its European Equities team.

Led by Philip Dicken, the team comprises 11 investment professionals who together manage £17.8 billion (€24.5 billion) on behalf of retail and institutional investors.

Mark will be based in London and joins from F&C Investments where he was Director and Fund Manager in the European Equities team. He has 14 years of market experience and previously held European Equities roles at Lehman Brothers and Invesco.

Philip Dicken, Head of European Equities at Columbia Threadneedle Investments, said: “We are pleased to welcome Mark to the European Equities team and to expand our capabilities in this area. His strong track record and experience will further enhance our client proposition and help build on our success to date.

“The European economy is on a strong path to recovery. This has translated into positive momentum in the stock market – yesterday’s bears have become today’s bulls. We are expecting 10% corporate earnings growth in Europe this year and investors have a real opportunity to enjoy healthy returns”, point out Dicken.

Is the Euro Heading for Parity with the US Dollar?

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¿Paridad euro/dólar?
CC-BY-SA-2.0, FlickrPhoto: Dennis Skley . Is the Euro Heading for Parity with the US Dollar?

Since the European Central Bank’s (ECB) announcement in January 2015 that it planned to implement an expanded EUR1.1 trillion quantitative easing programme to stimulate the euro-zone economy the euro has fallen sharply against the US dollar and is currently trading around 1.06-1.10. The selloff in the euro has accelerated post the ECB press conference in the first week of March and the subsequent collapse in bond yields saw the euro trade below 1.06 against the dollar for the first time since March 2003. A further fall of about 6% will see it reach parity. At the same time, firm February US labour market data boosted bond yields there, favouring the US dollar over the euro. The chart below shows the historical trading between the euro since its launch in 1999 and the US dollar.
 

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The question of parity is on many investors’ minds and in this viewpoint Investec AM will consider the likelihood of such an event.

How likely is a further fall?

When researching currencies Investec asks three questions: Do the underlying facts support the investment case? Is the investment cheap? And, are investors buying it?

“In answer to the three questions above, when we apply our research to the euro all our short-term indicators continue to suggest a reversal of the euro’s fortune and we can see the euro zone is beginning to recover. The ECB recently raised this year’s euro-zone growth forecast to 1.5%, up from 1% previously. Secondly the euro is cheap, currently trading at about 13% below its long-term moving average, and thirdly, investors have taken a short position and we believe oversold the currency in the short term”, explains Russell Silberston, Head of Reserve Management at Investec AM

Applying the same exercise to the US dollar, Investecs´ research suggests flat lining economic data, albeit at modestly positive levels. “Our data surprises indices, however, have turned sharply negative, suggesting data is genuinely weaker or that market participants are far too optimistic. Taking a short-term view, the US dollar is slightly expensive as the pro-US story has reached consensus, but it remains cheap on a longer-term view”, points out Silberston.

“Bringing this analysis together, our research suggests the possibility of a rally in the euro towards its moving long-term average against the US dollar and so a further fall of 6% to reach parity seems unlikely, he says.

Two economies at different stages

In the medium term, however, the picture is different and Investec believes the US dollar can continue to rally. “The reason for this longer-term pro-US dollar view is the same as it was when we first went long in 2012”, relates the Head of Reserve Management at Investec AM.

The US is in a much better cyclical position than the rest of the world having deleveraged post financial crisis. Her banks are well capitalised, her labour markets are very competitive, interest rates are likely to rise later this year and, despite the big fall in oil prices, industry still has a big energy cost advantage over other countries.

In contrast, the euro zone has yet to deleverage seriously and faces years of hard fought structural reforms to make economies more competitive. This could keep interest rates low and growth subdued. Also, the single currency is sub- optimal. Europe has achieved monetary union before achieving political union and there are no effective cross-border transfers to aid countries facing economic hardship. This means those currencies are effectively in an economic construct similar to the gold standard, where only internal devaluation through lower wages is the only real route back to prosperity. This raises the political risks in the medium term, and indeed, there has been a rise in populist political parties in recent months.

“It is certainly possible, therefore, that the euro could fall further and hit parity, but only if our medium term pro-US dollar view is correct”, concludes Silberston.

Emerging Markets Debt Is Still Offering Attractive Opportunities

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Aprovechar las divergencias en los mercados emergentes
Photo: Mark Fischer. EM’s Diverging Universe: Opportunities and Risks

The Fed has made it clear it will start raising interest rates as soon as stronger data allows it to. “As a result, we should expect the Fed to begin its rate hike cycle before year-end”, explained Brigitte Le Bris, Head of Emerging Markets & Currency at Natixis Asset Management.

Impact on currencies worldwide

Higher U.S. interest rates should positively impact the U.S. dollar and negatively affect currencies with weak fundamentals or very low yields. Given the yield differentials caused by monetary policy divergence of the U.S. and other developed nations, the euro and the yen would be the first candidates to witness further depreciation.

The impact on emerging market (EM) currencies, however, is not so clear. After a short-term broad sell-off in EM currencies in early 2015, we should see some differentiation. For example, the Indian rupee and Indonesian rupiah are in a much better situation than they were in the summer of 2013. That’s because India’s current account deficit is now expected to be 0% in 2015 while it was -5% in 2012. These two currencies should be resilient, as opposed to the Turkish lira which is suffering from political jitters and structural high inflation. The South African rand may also get hit harder due to weak growth and an absence of structural reforms. I also expect Eastern European currencies to benefit from the nascent recovery in Europe, and expect the upward trend versus the euro to continue.

Emerging market debt implications

Within the EM sovereign debt universe, the low level of yields in major developed countries has pushed global investors to buy investment-grade issues. So far in 2015, this portion of the J.P. Morgan Emerging Bond Index (EMBI) has largely outperformed the high-yield portion, which has also been suffering from geopolitical risks in Russia and Venezuela, as well as oil price declines (the high-yield portion includes a lot of oil exporters).

That said, the high-yield universe is beginning to look more attractive. I think most of the underlying risks in the highyield area appear to be fading, while a higher spread should act as a buffer to any rise of U.S. government yields.

Some local markets, including the foreign exchange market (FX), offer value – including India and Indonesia. These two countries are going through a large set of reforms and their economies look quite promising. Another example is Brazil. This country is going through a severe economic adjustment but the high carry, proactive behavior of the Brazilian central bank and fiscal consolidation under way is reinsuring investors and “I am inclined to buy this market”, point out Le Bris.

Overall, despite lower growth prospects for EM countries and risks associated with rising U.S. interest rates, EM debt markets are still offering attractive opportunities. “This market has just begun to mature. Investors just need to be very selective in today’s environment”, said the Head of Emerging Markets & Currency at Natixis Asset Management.

Financial Times Ranks IESE Executive Education Programs 1st in the World

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El IESE lidera el ranking de Financial Times en programas de formación para directivos
CC-BY-SA-2.0, FlickrCourtesy photo. Financial Times Ranks IESE Executive Education Programs 1st in the World

IESE Business Schooltakes the top spot in this year’s overall Financial Times Executive Education ranking, published this week. IESE also ranks 1st in the world for its Custom programs, moving up two spots from last year mainly due to the school’s leading international clients, and 3rd in the world for its Open programs.

In this year’s survey, IESE received top marks for the diversity of its faculty and the international scope of its programs – both in terms of participants and faculty make-up, and geography.

Custom programs also earned top praise from clients for the highly interactive and collaborative approach of the school, enabling it to prepare sessions that are as aligned with clients´ needs as possible, as well as the flexible program design. IESE’s recent Custom program clients include Oracle, The European Network of Transmission System Operators, Airbus, L’Oreal, Santander, BBVA, Telefonica and Danone, among others.

The school’s Open programs were rated highly due to the international locations of it programs, taught from IESE´s five campuses in Barcelona, Madrid, New York, Munich and Sao Paulo; the quality of IESE’s alliances with partner schools such as CEIBS, Harvard and Wharton, and the long-term knowledge acquired on the programs.

According to Mireia Rius, Associate Dean of Executive Education,“These results reflect IESE’s global scope, not only among our faculty, participants and clients, but also geographically, as IESE have programs and strategic alliances with other business schools all over the world.This internationality gives us a cross-cultural vision of the environment in which executives work today.”

The Financial Times ranking is based on a mix of customer feedback and data provided by business schools on open and custom programs. It takes into consideration a variety of criteria including program preparation, course design, international participants and location, faculty, follow-up, and aims achieved among numerous others.

The other schools rounding out the top three are HEC Paris in 2nd and IMD in 3rd position.

Mirova Announces the Appointment of Léa Dunand-Chatellet as Head of Equities

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Mirova Announces the Appointment of Léa Dunand-Chatellet as Head of Equities
Photo: GEF TV-YouTube. Mirova Announces the Appointment of Léa Dunand-Chatellet as Head of Equities

Léa Dunand-Chatellet is appointed Head of Equities of Mirova. Reporting to Jens Peers, Chief Investment Officer for Equity, Fixed-Income & Impact Investing, she will be responsible for the team of 10 equity portfolio managers.

Previously Partner-Portfolio Manager and Head of ESG research at Sycomore Asset Management (2010-2015), Léa Dunand-Chatellet started her career at Oddo Securities in the extra-financial department research in 2006. Within the asset management industry, she developed a pioneer model of extra-financial ratings and processed the integration of sustainable issues in the portfolios. This approach has seen its practical application through a range of funds dedicated to Responsible Investments combining financial and extra-financial performances.

Lea Dunand-Chatellet is member of different committees and teach every year specific courses dedicated to Responsible Investment in leading Business Schools. Close to academic research, she co-wrote the last reference publication from Ellipse in 2014: “ISR and Finance Responsible”.

Léa Dunand-Chatellet is graduate from the French Ecole Normale Supérieure (ENS) and is Agrégée in Economy and Management.

Mirova is the Responsible Investment division of Natixis Asset Management.

Change of Trends Between Europe and US?

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¿Intercambio de tendencias entre EE.UU. y Europa?
CC-BY-SA-2.0, FlickrPhoto: Lauren Manning. Change of Trends Between Europe and US?

In Europe, economic data published since the start of the year has confirmed our view that economic recovery is taking place. We are confident that activity will accelerate further this year as there are several sources of growth. In the main Eurozone economies (Germany, France, Spain and Italy) which represent about ¾ of the region-wide GDP, exports are growing at a robust pace. Reforms implemented and the weaknesses of the single currency have all contributed to improve the competitiveness of these countries. More important in our view, domestic demand which was the major drag on growth is bottoming out. In all the main Eurozone economies, consumption is expanding on the back of a slightly better employment outlook and rising consumer confidence. Regarding investments, the GDP is by far the component the most hit by the crisis, particularly since its development is uneven. In Germany and Spain, capex is positive, while it continues to shrink in Italy and France. Recapitalized banks, declining interest rates and ample liquidity coupled with a better outlook should lead to a return of investment.

In line with the constructive flow of economic indicators, the European Central Bank (ECB) has revised upwards its growth forecast for the first time since the financial crisis. Deflation, which was a huge concern two months ago, has completely disappeared from investor radar screens once it became clear that the ECB would launch a large asset purchase program (QE) and once it appeared that growth was picking up. It is worth keeping in mind however that in March, inflation data was negative (-0.1%) and that core-inflation, while positive, has continued to slow down to +0.6%. Any activity slowdown will revive the specter of deflation.

On the other side, in the US, economic data published since the start of the year provides a more complex and less appealing picture. Virtually all economic data speaks for a slowdown in the first quarter of 2015. The key question is whether this is temporary or not and what are the implications of the Fed’s first rate hike. Several factors explain the American economic slowdown. The first factor is very temporary. In January, snowstorms hit central and Eastern States and in February the temperature was very cold, hindering construction works. As it was the case in the first quarter of 2014 as well, harsh winter impacts negatively the US economy. The second two factors are cyclical and probably cancelled each other. On the one hand, the strength of the USD weighs on exports, but on the other hand, the low oil price increases considerably the purchasing power of American consumers. Besides these factors that currently weigh on growth, we are confident that underlying growth remains robust. Consumption, representing about 70 % of the GDP, is supported by a robust labor market and slightly rising wages. In our view, the current episode of weak growth is a soft patch that would fade away in the coming months.

Against this background, we expect the Federal Reserve to raise rates for the first time since the Global Financial Crisis sometimes in the second half of the year. While a June rate hike is not completely ruled out, it appears unlikely today. As the Fed repeats, it depends on data, as we are. This adds uncertainty regarding the exact timing of the so called lift off. In our view, it is more important to focus on how fast the Fed will increase its fund rate rather to focus only on when the first rate hike will take place. We think that it will do it very gradually.

Analysis by Ethenea. Yves Longchamp is Head of Macroeconomic Research at ETHENEA Independent Investors AG. Capital Strategies is Ethenea  distributor in Spain and Portugal.