Has Royal Dutch Shell Overpaid?

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¿Ha pagado demasiado Shell por BG Group?
Photo: Hakon Thingstad. Has Royal Dutch Shell Overpaid?

The Royal Dutch Shell bid for BG Group (£47bn) represents the largest ever deal between two UK corporates, and the largest deal in the oil and gas sector since Exxon’s takeover of Mobil in 1998. Now that the dust is settling, the Commodities & Resources team in Investec AM shares some perspective on the deal.

“We were not surprised to see the UK’s third largest energy company, BG Group, being acquired, or to see Royal Dutch Shell making an opportunistic move”, says Tom Nelson, Head of Commodities & Resources at Investec AM.

BG Group has struggled since 2011 in its evolution from a highly successful exploration company to a senior developer and producer. Management changes, operational setbacks, and unrealistic targets had reduced investor confidence in the long-term story. The oil price crash of 2014 compounded the pain for shareholders and brought the stock price down to £8, almost 50% below the levels attained in 2011 and 2012. Despite these recent struggles, Investec felt its assets were of a materiality and quality that would be extremely attractive to a supermajor.

It was clear to the team from meetings with management that Royal Dutch Shell had a more progressive view on the oil price than some of its peers, notably Exxon Mobil and BP. They recognised that oilfield decline rates and the lack of exploration success had made reserve replacement increasingly unattainable for the Majors – and that was at prices of US$100 per barrel, with rising capex budgets.

The clearest – and cheapest – path to growth lay through acquisition. The BG deal gives Royal Dutch Shell a clear leadership in the global liquefied natural gas market (45m tonnes per year by 2018), the largest position in Brazilian deepwater oil fields apart from Petrobras, and significant growth assets in Australia and Tanzania. The combined company could outstrip Exxon Mobil by 2018 as the largest public oil and gas producer at 4.2m barrels of oil equivalent per day (boe/day) with an expected free cashflow yield of 7%. “Our analysis of costs and returns shows the Brazilian pre-salt to be the most attractive and prospective hydrocarbon basin in the Non-OPEC world”, points out Nelson.

Sceptics think that Royal Dutch Shell has overpaid. The deal valuation of BG Group’s 2P (proven and probable) barrels was US$10-US$12. The average finding and development cost for the European Majors over three years has been over US$30. “Royal Dutch Shell has increased its reserves by 28% by spending US$70bn, which equates to two years of capital expenditure at the current rate. Neither of these measures looks expensive to us. The 50% premium is not out of line with historic deals in the sector. Of course, the ultimate judge of the fair price will be the oil price over the next three years. Shell used US$67 for 2016, US$75 for 2017, and US$90 long term. We note that most of the sceptics are generalist investors who expect oil prices to stay lower for longer”.

Investec makes two final points: “we, alongside Royal Dutch Shell, believe that the oil price will recover meaningfully from current levels over the next three years and we are positioning our portfolios for that environment. We expect that this will not be the last M&A deal of this oil price depression: the three notable deals so far have been Repsol/Talisman (US$8bn), Halliburton/Baker Hughes (US$38bn) and Royal Dutch Shell/BG (US$70bn). We expect Exxon Mobil to make an acquisition(s) and would not be surprised if it was of equivalent size or larger. The Majors have tried and failed to grow organically; the market has now offered a gilt-edged chance for inorganic growth“.

Man Group Expands Man AHL’s Offering with Four New UCITS Funds

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Man Group amplía la oferta de Man AHL con cuatro nuevos fondos UCITS
Photo: SC Fiasco. Man Group Expands Man AHL’s Offering with Four New UCITS Funds

Man AHL, Man Group plc’s (“Man”) quantitative investment specialist, is pleased to unveil four new systematic strategies. These strategies have been developed using elements from Man AHL’s flagship programmes. Each one targets a specific return profile, and has been built from the ground up in UCITS compliance format.

The Man AHL Multi Strategy Alternative fund is managed by Philipp Kauer. It is a highly-diversified and cost-efficient multi-strategy product offering investors access to Man AHL’s high-conviction models. The core building blocks of the programme are systematic styles such as technical trading, systematic equity, systematic fundamental, volatility, and momentum. The programme has an annualised volatility target of 8%.

The Man AHL Directional Equities Alternative fund, managed by Paul Chambers, portfolio manager and co-head of equities at Man AHL, takes directional positions in equity sectors in all the developed markets of the world. The directional long/short fund uses a quantitative investment strategy to select holdings from a pool of around 3,000 companies globally, targeting a return of 10% per annum.

The Man AHL Volatility Alternative fund, run by portfolio manager Jean-François Bacmann, is a long/short multi-asset volatility portfolio investing into derivative markets across a wide range of asset classes. Jean- François and his team aim to take advantage of opportunities across volatility markets by using a variety of systematic trading strategies to generate medium term absolute returns. The team aims to keep the volatility of the Man AHL Volatility Alternative strategy within a 7% range.

Finally, Man AHL TargetRisk is a dynamic long-only fund seeking to achieve capital growth over the medium to long term by providing exposure to equities, bonds, inflation linked assets and credit. The strategy, managed by Russell Korgaonkar and Che Hang Yiu, aims to deliver a stable level of return volatility, regardless of market conditions, by adapting exposures using a quantitative approach.

Sandy Rattray, CEO of Man AHL, said: “We are delighted to expand our established quant trading offering with these UCITS funds. The strategies have been developed to meet specific investor needs, and showcase our strong research pipeline. Each one has a distinct return profile – from a global long-only beta portfolio in TargetRisk, to sector specific alternatives in the equity and volatility funds, to a broad multi-strategy offering harnessing the broadest arrange of Man AHL research.”

The Dublin-domiciled UCITS funds soft-launched in November 2014 and are available in a variety of regions across Europe and are planned to be passported further. In the UK we are gauging interest in these funds with potential for future registration.

Bonfire of the Vanities

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Hoguera de las vanidades
Photo: Begoña. Bonfire of the Vanities

It has been an extremely positive six years for asset owners: equities have experienced their strongest and longest run since the end of the Second World War and the credit bull market is not far off its best historical run. Yet a deep scepticism pervades capital markets that the recovery from the Global Financial Crisis is an illusion, with acolytes of secular stagnation seeing “lower for longer” interest rates as the new normal. Notably, private and institutional fund flows have overwhelmingly favoured bond funds since mid-2007. What if investors are wrong about their asset allocations?

An unusual cocktail

We are in the very unusual position of experiencing both liquidity support and economic recovery at the same time – and it is difficult to predict how long this overlap will last. What we do know is that the growth outlook is the best it has been since 2010, and that the recovery is broadening and deepening. A number of key factors have altered to favour continued expansion. Among them, global fiscal policy tightening as a percentage of gross domestic product (GDP) is diminishing, notably in the US and Europe. Additionally, oil prices have more than halved since mid-2014 and should be viewed as a global tax cut for consumer nations.Volatile headline inflation data masks steadier core figures – and oil’s decline should begin to wash through the former measure.

Inflationary forces

We see evidence in economic releases that conditions are improving and could, in due course, engender a rise in inflation. One key barometer is developed economies’ employment figures, as wage growth tends to accompany labour market tightening. Another area that we are following closely is the US housing market because it provides growth and jobs across multiple sectors.

A 2007 Jackson Hole paper entitled “Housing is the business cycle” posited that residential investment consistently and substantially contributes to weakness before the recessions and that, similarly, the recovery for residences begins earlier and is complete earlier in the cycle than other areas of spending investment. Looking at US housing starts, the numbers of new residential construction projects started each month are still around their 1990s lows: this suggests that the cycle has yet to fully kick in. If it does, investors could be potentially wrong-footed in their bearishness.

 

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The missing ingredient

For the recovery to gel, however, we do need to see the stronger resumption of corporate confidence. In the wake of the financial crisis, companies turned their attention to shoring up their balance sheets and driving down costs to help their bottom lines. The upshot was increased efficiency, and higher levels of profitability, but the overhang has been businesses’ desire to hoard cash. Companies have the ability to borrow at incredibly low rates of interest, so it is puzzling that we have not seen a more substantial pick-up in mergers and acquisitions activity. We would suggest that many investors are ill prepared if (or when) ‘animal spirits’ make their comeback.

The potential for a central bank policy error and the notable rise of dissenting political voices across Europe arguably pose a threat for risk assets, but we are inclined to be more sanguine about economic growth strengthening to take the baton from stimulus as the markets’ driver. The upshot in this scenario is that equities are, for the meantime, the best place for us to be.

Bill McQuaker is Co-Head of Multi-Asset at Henderson GI.

A Spring in the Step for European Equities

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"Es importante utilizar la gestión activa para obtener exposición a renta variable europea"
. A Spring in the Step for European Equities

Optimism on European equities is growing. A recent Merrill Lynch fund manager survey showed that 63% of respondents expect to be overweight Europe this year, up from only 18% a month ago, and a record in the history of the survey.

Several factors have helped to propel European equities this year. Economic data has improved, the ECB has launched sovereign QE, helping to weaken the euro, and flows into European equities have been very strong; one estimate suggests that as much as $40bn flowed into European equities in Q1 2015.

“Our belief is that much of this flow has been fairly indiscriminate, typically using passive instruments. This presents a danger for markets if, as seen in 2014, expectations for better growth and earnings are not ultimately met. We therefore believe that it is extremely important to utilise active management to gain exposure to European equities”, point out Dan Ison, Senior Portfolio Manager at Columbia Threadneedle Investments.

Moreover, an active approach allows 
investors to be selective and focus on
the beneficiaries of QE and a weaker 
currency, such as dollar earners. “In
 our portfolios we have been emphasising areas such as aerospace, auto original equipment manufacturers and auto supply stocks, and pharmaceuticals, all of which have benefited from FX tailwinds”, said.

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Healthy economic indicators

Looking forward, Columbia Threadneedle Investments expect to see earnings and economic growth expectations firming during the year. Many economic indicators are showing healthy signs, such as purchasing managers’ indices, retail sales and car sales. Meanwhile unemployment is falling and real wages are starting to rise.

On the corporate front, European earnings revisions have just turned positive. This is first time this has happened since January 2011.

The consensus GDP forecast for the eurozone has been upgraded from 1.0% to 1.3%. While there is little room for disappointment, this could be the first year of upgrades since 2010.

Encouragingly deflation fears appear to have peaked and we are starting to see signs of structural reforms in two of the laggard countries in the eurozone, Italy and France.

Current credit growth, if annualised (€120bn) would produce a 1.2% boost to the eurozone economy. Such is the level of operational gearing in European corporates that this could quite easily take our earnings growth numbers up to 15-20%.

Attractive equity valuations

While the strong move in markets so far this year suggests a lot has already been discounted, said Ison, European equity valuations are not unattractive, particularly when they are com- pared to fixed income and cash.

The European market is still yielding more than 3%, compared with zero or negative rates for some investments, such as short-dated government bonds. Additionally,
 should we start to see nominal growth rates improve in
the domestic economies of Europe, there will be further operating leverage which should drive European profits much higher in the next few years, against a backdrop of static or falling earnings in many other regions of the world”, believes the Threadneedle´s expert.

“The main risk to our positive outlook (apart from the possibility of higher interest rates in the US and UK)
is if energy prices recover and put upward pressure 
on European inflation. This would begin to remove the justification for QE in Europe and so raise the spectre of policy tightening by the ECB. That would cause a rise in European bond yields and a fall in equity prices but such an outcome does not look likely any time soon”, concluded.

An Investment Trip Around the World with Templeton’s Global Equity Group

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La vuelta al mundo de la mano del Grupo de Renta Variable Global de Templeton
Heather Arnold, Templeton’s Global Equity Group Director of Research - Courtesy photo. An Investment Trip Around the World with Templeton’s Global Equity Group

Heather Arnold, Director of Research of Templeton’s Global Equity Group guides us on a journey through the world’s major equity markets. Her vision is value-oriented, in order to obtain the best ideas for a complete business cycle, which has an average life of five years. Templeton is part of the Franklin Templeton Group.

Beware. All that Glitters is not Gold

According to Heather Arnold, there is a valuation problem in the price of money. Currently, banks and governments of many countries have negative yields. She argues that we are paying for lending money to governments, which in no way reflects the risk assumed by investors, as the rates are artificially low due to QE programs. “In fact, interest rates should be much higher because the global debt has grown. What has changed is the geographical location of debt. Investors need to realize that there is something odd about fixed income markets. They are pursuing the safest option, which in reality is the most dangerous and risky, “Arnold says.

Europe: So Bad, that it’s Actually Good

This also applies to equity markets overall. The US has been regarded as the safest option, because of its better corporate earnings, and that is why it has risen so much, but for a value investor, Europe offers better opportunities. “It is true that corporate profits in Europe have not yet regained their 2007 levels, but there is enough gap for margins and valuations to recover,” said Arnold. She also raises concerns on the valuation of the US stocks. In a historical Shiller P/E ratio analysis of the US market, there are only two occasions when it has been more expensive than now, in 1929 and 2000. Additionally, since 1940, US stocks accumulate the longest relative rally to the rest of the world.According to Arnold, this data is far more disturbing than a strong dollar, which is already a problem for US companies.

In Europe, however, there is a quantitative easing program (QE) in place which will gradually help banks to wake up and give credit. Although timidly, governments may also spend a little more; but above all, the greatest tailwind pushing European stocks is a weaker euro, which is also a consequence of QE. Arnold notes that we must also add the positive effect on consumption that will result from weaker oil prices. Therefore, the foundations are laid for the expected recovery in European business profits. Since market valuation is reasonable, everything which is bad in Europe is actually “good”.

Russia and Greece: The Potential Risks in Europe

There are two breeding grounds for instability in Europe, or at least in their region, which can be the source of many problems. On one side there is Russia, which may not remain impassive in the face of deployment of NATO troops in Ukraine, and this may be a “serious problem” for Europe, especially for Germany. The other difficult country is Greece. Its situation is not good, whether it stays in the euro zone or leaves it. In the second case, its exit will be accompanied by a default on its debt, which “once again complicates European credibility.”

The Japanese Experiment is no Guarantee for Success

When speaking of the increase in global debt since 2008, Arnold refers mainly to Japan. The government is trying to get out of debt by creating inflation. “This did not work in Germany during the first half of the twentieth century, we will see if it works for Japan,” says the Templeton expert. For now, what can be seen in Japan is an asset loop, “the Bank of Japan (BoJ) is buying all the new debt issued by the government and also the debt which is held by pension funds, which, in turn, are buying equities. However, despite the depreciation of the yen, neither consumption nor exports have improved substantially”. Corporate profits have improved somewhat but in order to continue doing so, “great reforms in the corporate world are needed.”

Arnold explains that exports have not improved as much as expected after the decline of the yen, because it was so grossly overvalued that most exporters had already left to produce abroad, mainly to China, but also to the US.

Furthermore, the country’s demographic problem cannot be ignored, a problem which will be further aggravated if Japan really becomes an inflationary country, because the savings of a very aged population will tend to wane. “Another problem which inflation could bring is a decrease in productivity due to increased wages,” Arnold says. To address this issue, the country would have to open to immigration, something which is extremely unpopular in the country even though companies are now silently hiring more foreigners.

Arnold concludes that even though valuations are reasonable in relation to the ROE of Japanese companies, this profitability cannot improve much without further corporate reforms.

There Are Select Bargains in Emerging Markets

The Templeton Global Equity Group is beginning to see some value returning to emerging markets, which they have underweighted for quite some time. “A more attractive valuation is awakening some interest within the region, but as yet there are no great bargains because the money has continued to flow into these markets, mainly as foreign direct investment.”

Now that China’s economic growth has begun to slow down, the Templeton Global Equity Group notes that companies with more reasonable capital allocation and greater profitability are starting to emerge. This is positive.

As regards to companies linked to commodities, Arnold recommends waiting. “We should not get excited yet. At a P/BV of 1.5, the sector is still expensive in relation to the current point of the cycle, with the exception of companies in the energy sector”.

Energy: The Great Opportunity

The fall in oil prices has wiped out the valuations for the energy sector. Templeton’s Global Equity Group sees this as a great opportunity, both in Europe and in the US.

“The excess global oil supply can be adjusted very quickly,” says Arnold. In 1986, the excess of supply over demand for oil reached 15%, because the OPEC countries had increased their oil production to take advantage of the upturn in prices that occurred in the early eighties. “Now, this excess capacity is barely 4% and could be reduced to 2% with the current increase in demand. This oversupply could be absorbed very quickly because there are many exploration projects which have stopped and much Capex has been removed from the sector. On the demand side, more barrels are being consumed due to falling oil prices. “Arnold explains that the P/BV ratio of the sector has not been this cheap since 1986. “We’ve never seen so many bargains in this sector,” she concludes.

 

Chinese Tech Entrepreneurs Take a New Path

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Los nuevos emprendedores chinos transforman antiguos problemas en oportunidades
Photo: Gabriel Jorby. Chinese Tech Entrepreneurs Take a New Path

Since the first Internet companies from China began going public on the NASDAQ exchange about 15 years ago, investment bankers have typically been able to find comparable U.S. companies during IPO road shows in order to help investors better understand the business nature. However, these days when I visit companies in Asia or attend investor conferences, it takes a bit more time and effort to understand the basic business models for some new market entrants. These new start-ups are no longer just copycats of any U.S. counterparts, but are now more deeply rooted in unique economic fundamentals, and more evolved in their own ways. So what makes today’s technology entrepreneurs in China different from earlier pioneers?

First, new ventures need to be better aligned between technology and current lifestyles. China’s earlier Internet start-ups were mostly website portals, search engines or developers of instant messenger applications. One wired desktop was all people needed, whether they were in New York or the other side of the Pacific Ocean. Nowadays, however, things are different. Take ride-sharing companies, for example, which need to work with local taxi unions, city by city. As the Internet and technology have become well integrated into modern lives, a higher level of engagement is often needed in order for new ideas to succeed.

It took 30 years for the U.S. to grow its GDP from US$1 trillion to US$10 trillion (from 1970 to 2000). Meanwhile, China replicated this success in only 16 years, from 1998 to 2014. There, people live different lifestyles. While many don’t have landlines at home, cellphones are a “must have” to navigate the modern world, having leapfrogged the full household penetration of landlines. In addition, a much bigger proportion of Chinese household income is spent online as department stores never developed an efficient supply chain to lower costs. In terms of real estate, when Chinese buyers purchase condominiums, they tend to require additional work from construction companies to build them out as they are more like shells that need much outfitting. And, as an example, of an auto-related new business model, new firms are springing up to help China’s car shoppers verify mileage on pre-owned cars as odometers can often be tampered with in the country’s aftermarket sales.

Secondly, entrepreneurs are now more creative, and capital markets are more sophisticated these days. Earlier entrepreneurs are mostly “returnees”—people who grew up in a much less commercialized society, often obtained their bachelor degrees in China, went to the U.S. for graduate school, and secured jobs in places like Silicon Valley before returning back home to copy and implement U.S. business models. Over a decade ago in China, venture capital was still a foreign concept. When people with ideas in China wanted to start their own businesses, family and friends were often the first and only ones they could turn to for loans. Not surprisingly, many start-ups struggled with financial obligations from day one and struggled to get off the ground. Now, all one needs is simply an idea, a business proposal and a capable team. There are hundreds of experienced venture capitalists who have the money, market knowledge and most importantly, the ability to differentiate between the quality of various entrepreneurial teams. 

Although China’s economy has been slowing, I am excited by the new generation of entrepreneurs that is viewing some of the country’s earlier challenges as opportunities. 

Raymond Z. Deng is Research Analyst at Matthews Asia.

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change.  It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquid­ity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.

Old Mutual Global Investors Introduces Team Based Approach to Fixed Income Range

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Old Mutual Global Investors reorganiza su equipo de renta fija tras la entrada de Oxley y la salida de Stewart Cowley
Photo: Esparta Palma. Old Mutual Global Investors Introduces Team Based Approach to Fixed Income Range

Old Mutual Global Investors announces the introduction of a team based approach to managing its fixed income range of funds. This change mirrors the approach utilised by Russ Oxley and his team, who joined the company earlier this year.  This development has also resulted in promotion for some members of the team, which aligns to Old Mutual Global Investors’ desire to offer career growth opportunities.

With the arrival of Russ Oxley and the Rates and LDI Team (initially titled Fixed Income Absolute Return Team) Old Mutual Global Investors now has a powerful 20-strong fixed income capability in two distinct teams. The two teams (Absolute Return/Rates and LDI – headed by Russ Oxley and Total/Relative Return – headed by Christine Johnson) will harness the skill set of each other’s experience continually, there will be synergies but the end result will be independent.  These two teams will work collaboratively, sharing tools and discussing views.  However, as there is no fixed income house view, each team will manage funds in line with their own investment process.

Stewart Cowley will leave Old Mutual Global Investors at the end of June 2015. Until that time, Stewart will support the business in the transitioning of the funds he has actively managed to the newly named teams stated above.

Julian Ide, CEO at Old Mutual Global Investors comments: “I am grateful to Stewart for the guidance and stewardship he has given to Old Mutual over the last six years and for the commitment he invested in building our powerful fixed income capability.  He has made a vital contribution to our management teams over many years, and particularly since I joined the company.  Stewart leaves with our gratitude and best wishes.

“I believe that we now have one of the industry’s most powerful fixed income capabilities led by two highly experienced fixed income leaders, Christine and Russ. The changes we have made to our funds will benefit our clients in the future. I am also pleased that we have been able to offer further career growth opportunities to Bastian, Hinesh and Lloyd,” point out.

Stewart Cowley adds: “I am immensely proud of what we have achieved at OMAM and Old Mutual Global Investors over the past six years. Bringing this group of people together has been one of the most important things I have done in my career. Achieving this whilst guiding clients through some of the most difficult market conditions I have seen in my time as a fund manager gives me a real sense of achievement. I wish Julian Ide and all the Old MutuaI Global Investors’ family well in the future.”

CFA Institute celebrates its European 68th Annual Conference

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CFA celebra su Conferencia anual europea en Fráncfort
. CFA Institute celebrates its European 68th Annual Conference

CFA Institute and CFA Society Germany announce that the 68th CFA Institute Annual Conference will be held in Germany for the first time. The conference will take place from 26-29 April 2015 at the Congress Center Messe Frankfurt, bringing together more than 1000 eminent investment professionals to debate how to shape the future of the finance industry at a time of uncertain geopolitical, inflation and currency trends.

The conference will feature a line-up of more than 40 speakers including :

  • Jürgen Stark, former member of the executive board of the European Central Bank
  • Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich
  • Martin Wolf, chief economics commentator at the Financial Times
  • Ian Bremmer, founder and president at Eurasia Group
  • Moritz Kraemer, managing director and chief rating officer at Standard & Poor’s Rating Service’s Sovereign Ratings Group

In addition to the broader thematic discussions around the future of the finance industry in Europe and its impact on society, the conference agenda will feature:

  • A vision for the future of the investment management profession, by Paul Smith, CFA, the new president and CEO of CFA Institute.
  • Over 20 sessions examining market trends, new investment opportunities, and practical advice for investment professionals
  • The launch of a timely new paper, Shadow Banking: Policy Frameworks and Investor Perspectives on Markets-Based Finance

Natixis Global AM: Emerging Markets are No Longer a Homogenized Asset Class

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Natixis Global AM: Los emergentes han dejado de ser una clase de activos homogénea
CC-BY-SA-2.0, FlickrPhoto: Kevin. Natixis Global AM: Emerging Markets are No Longer a Homogenized Asset Class

Commodity and currency pressures, economic slowdowns and structural reforms have been creating a divergence in emerging markets in recent months. All of this punctuates the fact that not all emerging market investments are created equal.

The nature of investing in emerging markets has changed significantly since the Great Financial Crisis, explains David Lafferty, Chief Market Strategist Natixis Global Asset Management. Through much of the 2000s, EM performance across countries was driven by several common factors including double-digit or near- double-digit growth rates, strengthening local currencies and growing exports – often coinciding with commodity demand.

No longer “one-size-fits-all”

Today however, these factors no longer dominate the EM landscape, points out Lafferty. Forecast gross domestic product (GDP) growth for EMs in aggregate is now closer to 4%–5%. The strong demand for commodities has collapsed and most EM currencies are under pressure due to the expectation of tighter U.S. monetary policy. In the absence of these macro themes, each country now trades based on its own fundamentals, not as part of a homogenized asset class. So we can expect the fortunes of each country to diverge due to differences in interest and inflation rates, domestic savings rates, current account position, and commodity dependency. As performance diverges, security, country and currency selection will all take on greater importance.

Because each country is now following its own path, the broad outlook for “emerging markets” is cloudy at best. U.S. dollar strength has brought back echoes of the currency crises of the 1980s–90s as dollar-denominated debt is harder to pay back. Local currency weakness creates inflation (i.e., imports become more expensive), and curbing that with higher rates hampers growth. Finally, falling commodity prices, particularly for oil, may severely weaken growth due to lower exports in major emerging markets like Russia, Brazil, Venezuela, the Middle East, and parts of Africa.

Long-term growth, short-term pain

Even so, on both the equity and debt sides, Natixis Global AM continues to view EM as an essential asset class for the long run. Cyclical growth rates have come down somewhat, but due to demographics and younger populations, most of the secular growth in the world today still resides in EM countries, explained the firm. Across equities, valuations may be deceiving. EM stocks have a lower relative Price-to-Earnings than other markets, but this is skewed by unique risk factors and state-owned enterprises. EM bonds still offer attractive yields, and credit quality has been steadily improving. While sovereign debt levels have grown, so has GDP, so debt remains manageable. Moreover, U.S. dollar strength isn’t the bogeyman many folks think, for several reasons:

  1. Many EM countries now have local currency debt, not just U.S. dollar debt.
  2. Weaker local currency boosts export growth.
  3. As the EM consumer base grows, they contribute to their own economies and are less dependent on trade and external funding.

Mexico and India among favorites

In terms of specific markets, Natixis Global AM likes Mexico and India. Mexico is becoming more competitive thanks to structural reforms in energy and education, and its cost of production is becoming more favorable when compared with rising labor costs in Asia. Mexico also benefits from its proximity to the gradually improving U.S. economy. India has been slow to reform, but new government under Prime Minister Modi is rooting out corruption, reducing agricultural subsidies, and opening up industries to competition.

In contrast, Russia looks far more dicey as its economy collapses under the weight of global sanctions and falling oil prices. In this environment of currency and commodity volatility, the insights by experienced portfolio managers may be particularly valuable to investors.

Allfunds Becomes Europe’s Largest Mutual Fund Platform

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Allfunds se convierte en la plataforma de fondos de inversión más grande de Europa
Photo: Deurimpoyu. Allfunds Becomes Europe’s Largest Mutual Fund Platform

Allfunds has become Europe’s largest mutual fund platform, overtaking UBS, according to the latest annual edition of The Platforum “European Platforms and Open Architecture 2015 Guide”.

Platforum also revealed today that Allfunds has been recognised by asset managers for having the best potential for supporting their distribution strategies.

Platforum also suggested that the winners from upcoming MiFID II European fund regulations will be those platforms who not only provide excellent technical services for fund administration but also help asset managers with fund selection; a wide range of supportive management information and offer support in commercial negotiations – three elements in which Allfunds has strength in depth.

As the largest provider of mutual funds Allfunds believes it has become the irrefutable leader in ‘open architecture’ – the industry model which offers asset managers the opportunity distribute their funds more widely while offering financial advisers and their end clients a far greater level of choice than from proprietary platforms.

Allfunds focus on open architecture is complemented by the provision of independent research of the mutual funds it has on its platform – an area Platforum suggests will become ever more important with MiFID II. Unlike some research providers, Allfunds does not operate the ‘pay to play’ research model – which allows the largest and most financially strong fund groups to dominate its research agenda. Rather Allfunds seeks to fund its research activities from its adviser clients who aim to provide the widest range of fund choices for their clients.

Commenting on the Platforum’s findings, Allfunds Bank CEO Juan Alcaraz said, “It has taken 15 years from the foundation of Allfunds to get to the leading position in Europe. That has only been achieved because we have relentlessly pursued our belief in consumer choice through our open architecture model and by focusing solely on providing a robust business to business service to institutional clients in the financial advisory sector. Our approach to open architecture is complemented by our desire to offer information and independent research to our clients with a view of offering as wide a range of choice as possible.”