Photo: DSasso. Investment Outlook for 5 Latam countries, by Global Evolution
In april 2015, Global Evolution attended the World Bank—IMF spring meetings with three objectives:
Country coverage: Conduct face-to-face meetings with IMF/World Bank Mission Chiefs as well as Government officials from emerging and frontier countries
Research collaboration: Discuss joint research with IMF Research Department; planning World Bank-Global Evolution ESG Research Seminar ahead of Annual Meetings 2015
IMF-World Bank relations: To maintain and extend our network with IMF and World Bank mission chiefs.
The firm draws these headline conclusions for five Latam countries:
Argentina: The prospects depend crucially on two themes: A solution with the holdouts on the bonds that (temporarily) are in technical default; and the economic policy management after the elections in the end of 2015. A solution before the elections is highly unlikely—as Kirchner states: “patri o muitres”. Either winner of the elections will likely seek a solution with the houldouts. Macri seems more “market-friendly” than Scioli.
Venezuela: Our view, backed by the dialogue in Washington, is that a default is not imminent since liquid assets to sell are around $70bn. Furthermore, Venezuela may give Jamaica a debt buyback deal similar to the one for Dominican Republic with early repayment—and they made March payments to debt holders indicating their willingness to service debt this year.
Panama: The Panama Canal Authority is extremely well managed. They have their own constitution and governance structure like a separate state. The economy is furthermore thriving with growth likely to reach 7% over the medium term.
Honduras: We are very positive on Honduras. IMF program progress is very convincing with quantitative targets being met with a wide margin. As an example, the fiscal deficit was 7.6% in 2014 with a target of 5.6% but the deficit ended up at 4.3%. The review in May will be very convincing. Honduras remains a positive credit story that seems to have slipped the attention of most other investors.
Nicaragua: The Chinese government is unlikely to support the private sector investor who has intended to finance the canal. Unoffical estimates reveal a 50:50 chance that the investor will pull the plug and drop the investment. This will reduce expectation to growth, employment, and FDI going forward— while boosting the relative expectations for the same in Panama.
Global Evolution, an asset management firm specialized in emerging and frontier markets debt, is represented by Capital Stragtegies in the Americas Region.
CC-BY-SA-2.0, FlickrPhoto: Soclega. An Early Upgrade in Bonds Will Prove Rewarding
Over the last few months we have been raising the quality of high yield bonds in the portfolio. At this stage in the credit cycle it seems sensible to avoid undue risk while at the same time acknowledging that unconventional monetary policy is elongating the cycle. While we do not see an imminent risk of defaults, we believe an early upgrade will prove rewarding and have been reducing our weight in CCC in favour of BB rated bonds.
What has prompted the rise in quality?
Energy sector: Deutsche Bank estimate that a third of US single B and CCC energy high yield bonds are at risk of restructuring or default if the current low oil price persists for a few quarters. While we see the energy sector as a special case, it is likely to have a knock-on effect on sentiment towards lower rated bonds as pressures among energy borrowers cause US default statistics to deteriorate.
Liquidity: Banks have stepped back somewhat from their traditional role as market makers. This role is a victim of well-intended regulation having the opposite desired effect as stricter requirements on bank capital and trader remuneration has led to a reduction in banks’ willingness to take risk onto their own books. We need to be mindful that liquid assets can become illiquid if everyone trades in the same direction. Premiums will be paid for better quality assets so it makes sense to own them early.
US monetary policy: The US Federal Reserve (Fed) is preparing the way for an interest rate rise. In March, the Fed scrapped its pledge to be “patient” before lifting rates, although this was tempered by rate projections being pushed out. The Fed has been good at providing guidance but we are wary of complacency. Rewind back to summer 2013 and investors may recall the taper tantrum when bonds sold off on suggestions the Fed would taper its asset purchasing program. Tightening still has the capacity to shock!
Recent weakness in some of the US economic data means expectations of a rate rise have drifted out somewhat, but we want to own the better quality bonds before investor concerns rise. A rise in interest rates in the US is likely to lead to tighter credit standards at banks and this may make it harder for some companies to refinance. There has been a close relationship historically between tightening credit standards and the default rate as shown in the chart below.
The shift in credit quality improvement within the portfolio is primarily among US bonds because the credit cycle in Europe is younger and the monetary policy background is different. They say “don’t fight the Fed” but we don’t want to fight the European Central Bank (ECB) either.
The ECB’s quantitative easing (asset purchases) is pushing down yields on sovereign bonds, such that €1.7 trillion of Eurozone bonds were negative yielding in mid-April. This figure is several times larger than the entire euro high yield market, as shown in the chart below. With ECB quantitative easing set to remain in place until September 2016 this creates strong technical support for European high yield bonds. This is because a cascade effect takes place with investors moving down the credit spectrum in search of a positive yield, supporting our overweight position to the region.
Credit ratings are not static and as active managers we have the opportunity to benefit from identifying bonds with improving credit quality. During 2014 the fund profited from ratings upgrades to bonds issued by GKN, the automotive and aerospace group, and Grand City, the real estate investment trust.
We hold perpetual preferred stock in Ally Financial, formerly GMAC, the auto financing group. We expect an eventual move to investment grade status due to improvement in the auto business, growth of the bank and successful refinancing of the capital structure resulting in a lower cost of funds and improved net interest margins. We also look at valuation opportunities where industry or stock-specific shocks have led to excessive pessimism but where credit fundamentals remain sound. This explains our holdings in bonds issued by Tesco, the supermarket group, which is reinvigorating its business after losing market share to discounters, and Chesapeake, the energy company, which was caught up in the negative sentiment towards energy companies, despite its strong balance sheet.
Taken together, the adjustments to the credit quality of the portfolio strike a balance between reducing risk while retaining exposure to the returns potential of high yield. The portfolio now has a weighted average yield and spread that is slightly lower than the benchmark.
Kevin Loome is Head of US Credit at Henderson Global Investors.
The Board of Directors of BBVA named Carlos Torres Vila president & COO at a meeting held today in Madrid, replacing Ángel Cano. The Board also approved a new organizational structure that puts digital transformation at the center of the strategy to accelerate its execution, while creating a function with the sole mission of managing the country’s networks and operations to enhance results.
“Ángel has been a great president & COO during very complex years and now we start a new phase to advance toward our goal of becoming the best universal bank in the digital age,” said Francisco González, chairman & CEO of BBVA.
Amid the disruption underway in banking, with new consumer demands, digital entrants and new business models, BBVA has defined a structure to carry out digital transformation as the Group’s top priority. After the outstanding performance achieved by the team led by Ángel Cano through the most severe financial crisis in recent history, BBVA is now making the needed changes to start the new phase.
“It has been a challenging and intense period and today BBVA is in a position of strength,” Ángel Cano said. “Carlos the ideal person to keep advancing the transformation process.”
Carlos Torres Vila joined BBVA in 2008 as head of Strategy & Corporate Development, and later was named head of the global Digital Banking area. Previously, he was director of corporate strategy and CFO of Endesa. Prior to Endesa, he was partner at McKinsey & Company. Carlos Torres Vila graduated from the Massachusetts Institute of Technology (MIT) with a BS. in Electrical Engineering and a BS. in Management Science, and also holds a Law degree from the Universidad Nacional de Educación a Distancia. He earned an MBA from MIT.
With his appointment as president & COO, he will be able to accelerate the digital transformation process globally and in every geography, strengthening the efforts initiated at the Digital Banking area.
“Transformation is our responsibility, a responsibility for everybody who is part of BBVA, because it will allow us to lead the banking industry and to continue the success story of this great Group,” Carlos Torres Vila said.
The new structure will strengthen the results of the franchises through a function with the sole mission of managing the country’s networks and operations. To meet that goal the new model includes the following areas:
Country Networks: Vicente Rodero will lead this newly created area that will be fully dedicated to managing the networks and operations of all of the countries in order to boost the results of the franchises of the Group. The country managers will now report to the head of the area. Vicente Rodero will also stay on as head of BBVA Bancomer.
C&IB: Juan Asúa continues as head of the wholesale banking area at BBVA.
On the other hand, the new structure adds critical competencies and global talent to compete in the new landscape, with the following goals:
To globally boost the development of digital products and services, taking full advantage of design, technology and information to best meet client needs, retail and corporate alike.
To transform the business model of each geography to offer the best solutions to our customers, deploying and adapting the global solutions to each market.
To accelerate cultural change at the Group toward a more flexible and agile organization and to obtain and develop intellectual capital in key disciplines for digital transformation such as digital marketing, design of customer experience, software development and big data.
To fulfill the goals, the structure has the following areas:
Talent & Culture: Donna DeAngelis, with extensive experience in transforming large global organizations such as Publicis Groupe as well as executive management roles in digital companies such as Digitas, will lead the area, responsible for managing talent and driving cultural change.
Customer Solutions: Mark Jamison will lead the creation and promotion of global products and solutions, including Global Payments. The area includes customer experience, design, quality and big data. Before joining BBVA, Mark Jamison was chief digital officer of Capital One Bank, and prior to that he held key positions at companies such as Charles Schwab and Fidelity.
Marketing & Digital Sales: Javier Escobedo will lead e-commerce, marketing and brand management. Prior to BBVA, Javier Escobedo worked for Expedia, responsible for Hotels.com in Latin America. During his career he has held relevant roles in the development of renowned brands, such as Procter & Gamble, Microsoft and Univision.
Engineering: Ricardo Moreno, currently country manager of BBVA in Argentina and with ample experience in the area of Technology and Operations, and of Transformation at BBVA, will be the head of software development and of the management of technology and operations. Martín Zarich, currently head of Business Development in Argentina, will replace Ricardo Moreno as country manager.
The Business Development (BD): the function will be responsible in each country for retail and commercial offerings and for the deployment of global developments. BD Spain, with David Puente, and BD U.S., led by Jeff Dennes, will now report to the president & COO. The rest of the countries (Turkey, Mexico and countries in South America) will be included in BD Growth Markets, led by Ricardo Forcano, who will also report to Carlos Torres Vila. Ricardo Forcano is currently head of strategy and finance at Digital Banking.
New Digital Businesses: Teppo Paavola, reporting to the president & COO, continues as head of the area responsible for investing and launching new digital businesses, including BBVA Ventures, as well as promoting the collaboration with the ecosystem of startups and developers. Before joining BBVA, Teppo Paavola was head of development of global businesses and M&A at PayPal.
Regarding other areas, relevant changes include:
Global Risk Management: Rafael Salinas, head of risk management at C&IB with global responsibilities for large corporates’ credit portfolio and markets and counterparty risks, and with more than 10 years in risk management, takes over as head of Global Risk Management.
Strategy & M&A: Javier Rodríguez Soler, reporting directly to the chairman & CEO, will be responsible for defining the digital transformation strategy, as well as carrying out the M&A operations and alliances of the Group.
The area of global retail lines of business (LOBS) & South America is reorganized. The region’s country managers, as the rest of country managers, will report directly to Vicente Rodero. Asset Management is included in Country Networks. Consumer Finance moves to Strategy & M&A to focus on the execution of alliances and joint ventures to help the franchises boost results.
Communications: Paul G. Tobin will head Communications.
Regarding the rest of areas of support and control there are no changes, and Jaime Sáenz de Tejada continues as the Group’s chief financial officer.
“Based on the three pillars of the Group –principles, people and innovation- and with this new phase that starts today, BBVA takes a significant step forward in its ambition to become the best universal bank of the digital age,” Francisco González said.
Photo: Ian Sane. A Rate-Rise in the U.S. is Barely Priced In by the Markets for This Year
The broad-based stock market rally that characterised much of the first quarter of 2015 ran out of steam in March. During the month, investors focused on weaker US economic data, renewed geopolitical tensions in the Middle East and a corresponding bounce in the oil price. In bond markets, benchmark 10-year government yields remained extremely low, with German Bund yields finishing the month at just 0.18%. In the US and UK, 10-year yields also moved lower, reflecting the softer tone of US data and the ‘gravitational pull’ of the ECB’s QE programme. In credit markets, there were some signs of indigestion following heavy new issuance, but these concerns have eased somewhat following the seasonal lull in activity over Easter.
Looking to the second quarter, there are three important issues which investors will have to consider – the trajectories of interest rates, currencies and economic growth. On the interest rate front, much was made of the Fed’s decision to drop the word ‘patient’ from its March policy statement but the bottom line is that, seven years on from the financial crisis, we are still living in extraordinary times. Consumers and governments in the developed world remain overlevered and overindebted and companies across a number of sectors are struggling to maintain pricing power. In my opinion, it is not obvious that there is a need for any aggressive rise in interest rates, particularly given the deflationary impact of lower energy prices. At the time of writing, barely one US rate rise is priced in by markets for this year, and in the UK markets have pushed the timing of the first rise all the way out to August 2016. The eurozone and Japan, meanwhile, are expected to keep policy extremely accommodative.
Interest rates provide a neat segue to currencies. The combination of European and Japanese QE and the expectation that the US should raise rates this year has driven a very strong rally in the dollar index over the past six months. We do not expect the dollar to maintain its very robust rate of appreciation but the greenback remains the global reserve currency by default. Moreover, further short-term volatility in the euro/dollar exchange rate cannot be ruled out as Greece appears to be heading towards a ‘day of reckoning’. In the long run, a Greek exit from the euro could be a positive for the country but the period of adjustment in the short term would be extremely painful. But, by itself, a ‘Grexit’ would not be a disaster; the real issue is what happens elsewhere in the eurozone, particularly if Greece does succeed, over time, in going it alone.
The global economic growth outlook appears to be deteriorating at the margin. The recent weaker US data is almost certainly linked to weather-related disruptions and other one-offs such as the West Coast ports strike, but it was probably unreasonable to expect the US to keep outpacing the rest of the developed world by such a wide margin. At the corporate level, US companies are undoubtedly feeling the pinch of the reduction of capex in the energy sector and the stronger dollar. Our own view is that the US economy is in a soft patch, and this is likely to be reflected in Q1 US GDP and probably Q1 reported earnings. Nonetheless, for risk assets, and indeed the global economy in general, it is important that the recent ‘blip’ in US data is nothing more than that.
CC-BY-SA-2.0, FlickrVictor Rodriguez is Senior Portfolio Manager of emerging market debt for NN Investment Partners (formerly ING Investment Management) - Courtesy Photo. EMD: "There Is No Better Market to Invest in Corporates"
Victor Rodriguez is Senior Portfolio Manager of Emerging Market Debt for NN Investment Partners (formerly ING IM) and confesses that there are so many changes in emerging economies that some of his answers may vary over the short term. What remains unchanged is the attractiveness of these markets, which for the same rating and duration allow greater yield. “There is no better market” he declares, although he is aware of the problem that volatility and any small lack of liquidity may involve. As this market works almost entirely in USD, some companies who are not exporters are also at risk from fluctuations in exchange rates. “When the value of the dollar is rising, it is better to stick with exporters. You can only pick the best of the best.”
Korea’s stability can make it attractive at certain times, yet it currently doesn’t play in its favor. However, when it comes to China’s growth forecasts, the Atlanta based expert estimates GDP growth at 6.8% or more by the end of this year, and 6.5% for 2016, making that country his major option, as he believes that even if there are changes, the real estate sector can bring long-term value, and economic development in the country will improve in the second half of this year. His vision for Indonesia is also positive thanks to the improving economy and growth-forecasts, likewise for some banks in Hong Kong and Singapore; he sets India aside however, as he considers that, although it will continue to grow, the opportunities it offers are no longer as attractive.
In Latin America, he stresses his preference for Peru, which he justifies by his opinion that there are good opportunities for finding value in specific companies within the banking and mining sectors, although the country’s growth is slowing down; as regards Chile and Colombia, the portfolio manager believes that there are only isolated opportunities in some companies, for example in the Utilities industry, while insisting that there are no attractive sectors, but specific companies which are. Another country that is growing and will continue to grow, albeit more slowly, is Mexico, where you can also find value in certain corporations, although, being a country which has been affected by falling crude oil prices, it previously offered some very good potential investments and now those opportunities have been reduced.
We must remain alert to new opportunities that will come from frontier markets, as the expert expects Mozambique, Vietnam, and Sri Lanka to follow the path of growth.
As regards the options in other regions of the world, Rodriguez believes that, although there is still value in Russia, it is no longer as attractive as it was a few months ago, even though it seems that the country begins to improve, with the Ukrainian crisis taking a turn for the better, and the rising oil prices; he is more optimistic about Kazakhstan, as he believes that it currently already has an interesting valuation, and shall present good opportunities towards the end of the year. He also confirms that it is possible to find some good options in South Africa, which does not happen with the Middle East region, as local investors themselves have placed their own assets there, pushing spreads down.
The flow of capital into fixed income is increasing and Victor Rodriguez expects the trend to continue. “Everyone is looking for spread products because you cannot concentrate the entire portfolio on equities. In addition, the wealth of emerging markets has grown, as has its investment in debt. Insurance companies continue to invest more, and more in fixed income, and are aware that they must continue to increase their commitment, and pension plans should definitely increase their placement in emerging fixed income. “
With regard to oil, the Lead Portfolio Manager of Corporate Debt for IP NN Emerging Markets Debt team believes that a deficit situation will be reached by the fourth quarter, since OPEC is stable in its production, and will remain roughly at current levels unless Libya starts to produce, and US production will peak in April-May, and then go down. According to the expert, the end of this quarter will still be good time to invest in companies involved in oil, with price estimated at US$65 a barrel for WTI by the end of 2015 and US$70 by the end of 2016. “There is no doubt that oil will rise, although not excessively. We will not see the barrel at US$100, because if prices started climbing very quickly, greater supplies would be released into the market. “
“The FED will not raise rates as early as people expect. If oil stays along the aforementioned lines and there is no inflation, the other central banks will increase liquidity and the dollar will rise, and exports and job creation in America will both fall,” says Rodriguez, who concludes by predicting that “the FED will not raise rates. If it does so, it will be by 25 basis points, and not before September.”
Victor Rodriguez is Head for NN IP’s Emerging Markets Corporate Debt strategy. The team has offices and analysts in The Hague, Atlanta, and Singapore. EMD Group’s Total assets (sovereign, local, and corporate included) stand at 7 billion dollars. Rodriguez has over 25 years’ experience in emerging markets, corporate bonds, and investment banking. Before joining ING in 2003, he worked in GMA Partners, Wachovia Securities, and Prudential Capital. He holds a Cornell University A.B. degree, and an Emory University MBA.
Photo: youtube. Pioneer Investments Launches Global GDP-Weighted Government Bond Strategy
Pioneer Investments has launched a Global GDP-weighted Government Bond strategy as an approach to sovereign debt management – shifting from a market-cap weighted approach to a Gross Domestic Product (GDP)-weighted approach, with the aim of delivering more yield without increasing credit risk.
Today’s complex macro environment presents a number of challenges for Global Government bond investors. The current investment landscape of record low yields is demanding a new approach from investment managers to Government Bond investing which provides more yield, more diversification and greater alignment to long-term economic growth.
“The biggest issuers of government debt have also compressed bond yields through their monetary policy and quantitative easing,” said Tanguy Le Saout, Head of European Fixed Income. “’Investors are not being sufficiently compensated for increased sovereign indebtedness by the current level of sovereign bond yields”, he added.
“We believe the solution is to move from a market cap based approach to sovereign bond investing to a new innovative approach based on the GDP weights of the G20 nations, raising yield and creditworthiness”, point out Le Saout.
The typical global government bond index uses a market capitalisation approach to index construction, meaning that a country’s weight in the index is dependent on the amount of debt that country has outstanding. However, that means that countries with very high amounts of debt outstanding receive a higher weighting in the index. With a GDP-weighted approach those countries exhibiting the largest GDP and fastest growth make up a proportionally bigger part of the index. We believe this new approach will prove appealing to institutional investors who are concerned about the indebtedness of sovereign entities worldwide.
‘’We believe that a Global Government Bond strategy investing in future growth instead of past debt is a viable solution for fixed income investors seeking higher yields and more diversification,’’ said Le Saout.
For those countries where investing in cash bonds is not an option (such as China, South Korea and India), Pioneer Investments’ unique innovative approach will aim to synthetically replicate the index exposures of these key countries, using derivatives. Our long-established derivative expertise and experience in investing in these markets will help us in this optimization process. The strategy will focus only on high quality investment-grade government bonds.
Today, the People’s Bank of China has announced the granting of a 50 bn RMB RQFII quota to Luxembourg.
The RQFII (RMB Qualified Foreign Institutional Investor) scheme was launched in Hong Kong in 2011 and has been expanded to other jurisdictions since 2013 enabling offshore RMB to be reinvested into the Mainland securities market.
Luxembourg Minister of Finance, Pierre Gramegna, said: “The granting of the RQFII quota again demonstrates China¹s recognition of the Luxembourg financial centre as one of Europe¹s main hubs for international renminbi business. We are proud to play such a significant role in the process of the internationalisation of the renminbi.
Luxembourg has made the UCITS a globally recognized brand and more than 67% of UCITS funds distributed internationally are based in Luxembourg. Luxembourg is the largest investment fund centre in the world after the US.
The RQFII scheme is particularly useful for fund managers who use Luxembourg as a platform for cross-border distribution. Major international and Chinese fund promoters had already set up RQFII funds through Luxembourg domiciled vehicles, using other jurisdictions’ quotas. Luxembourg’s European and global investor base will now be able to use the RQFII scheme directly to invest up to 50 bn RMB on the Chinese capital market.
Together with the designation of ICBC as RMB clearing bank in Luxembourg, the RQFII quota consolidates Luxembourg¹s prominent position as a leading
Photo: Neil Kremer. UBS Investor Watch Report Examines What Drives Millionaires
UBS Wealth Management Americas (WMA) today released its quarterly UBS Investor Watch report, “When is enough…enough?” revealing the anxieties that underlie the successes millionaires have achieved. The survey of 2,215 U.S. investors with more than $1 million in net worth revealed that while millionaires recognize their good fortune, they feel compelled to strive for more, spurred on by their own ambition, their desire to protect their families’ lifestyle, and an ever-present fear of losing it all. As a result, many feel stuck on a treadmill, without a real sense of how much wealth would make them satisfied enough to get off.
Climbing the Socioeconomic Ladder
Investor Watch found that more than three-quarters of millionaires (77%) grew up middle class or below. Working their way up the socioeconomic ranks was a conscious aim, as 61% aspired to become millionaires and 65% felt it was an important milestone to reach the $1 million mark.
Nearly three-quarters of millionaires (74%) surveyed feel like they have “made it” and the vast majority (85%) attribute their success to hard work. Forty-four percent said hard work was the single most important factor in becoming a millionaire.
Overall satisfaction with life rises considerably and consistently as net worth increases. The survey revealed that 73% of those with $1 – 2 million reported being “highly satisfied” with their life compared to 78% of those with $2 – 5 million and 85% of those with $5+ million. Millionaires recognize that their wealth buys them more than what their family needs: 37% of those with $1 – 5 million responded that their wealth allows them to live a fairly luxurious lifestyle, compared to 62% of those with $5+ million.
The Treadmill
However, with increased wealth come increased expectations. Investor Watch found that the wealthier people become, the more likely they are to have increased expectations for their standard of living. Fifty-eight percent of millionaires report feeling increased expectations for their standard of living over the last 10 years. As a result, millionaires keep striving for more.
Higher expectations cause stress for millionaires about their ability to maintain the life they’ve built. Among working millionaires with children at home, 52% feel like they are stuck on a treadmill, unable to get off without sacrificing their family’s lifestyle.
“The majority of millionaires say they have worked hard to earn their wealth and appreciate the lifestyle it affords them and their families. But enough never seems to be enough—even the wealthiest continue on the treadmill to achieve a better life,” said Paula Polito, Client Strategy Officer, UBS Wealth Management Americas.
Investor Watch revealed that no matter how much wealth is accumulated, millionaires still fear they could lose it all with one wrong move. Half (50%) of those with $1 – 5 million are afraid that one major setback (e.g., job loss, market crash) would have a significant impact on their lifestyle, vs. 34% of those with $5+ million. For millionaire parents working full-time, the anxiety is even greater–63% feel that one major setback would have a significant impact on their lifestyle.
Success Comes at a Price
Reaching the millionaire milestone does come at a cost, as 64% of millionaires report that they have had to give up precious family time to achieve their dreams. Most millionaires (68%) admit to having regrets, most commonly around making mistakes in a relationship with their spouse or family and not spending more time with family.
Millionaire parents with children at home struggle to provide the best for their children without spoiling them. They worry that their children will grow up without the right values–two in three (67%) already feel that their children take things for granted and more than half (53%) are at least somewhat worried that their children act entitled. Millionaire parents expressed concern that their children do not understand the value of money (65%), lack motivation (54%), harbor unrealistic expectations (54%) and fear that they will embark on an unstable career path (50%).
CC-BY-SA-2.0, FlickrPhoto: Philip Taylor. Three ‘Uncorrelated’ Trade Ideas for Multi-Asset Portfolios
Michael Spinks, portfolio manager of the Investec Diversified Growth Fund, discusses three multi-asset portfolio ideas that the team classes as ‘uncorrelated’ – these trades have a variable relationship with economic growth dynamics and overall risk appetite, with performance that is generally unrelated to real economic and corporate earnings growth
“As we enter the seventh year of this equity bull market and near the end of the 30+ year bond bull market, some investors are prophesising the end of the investment return-making world as we know it. While it seems hard to disagree that the days of low-hanging investment fruit are behind us, we believe that if investors rummage deep enough and look around in different places, opportunities still exist“, point out Spinks.
‘Uncorrelated’ return sources are one area of particular focus for Investec. These are investment opportunities that have a variable relationship with economic growth dynamics and overall risk appetite, so that performance is generally unrelated to real economic and corporate earnings growth. Not reliant on a strong market direction to be successful, they generate a different type of return stream compared to long-only holdings in equities and government bonds, providing possible diversification benefits to a portfolio. Relative value positions play a role here, constructed across equities, government bonds and currencies.
Whilst not easy to find, a broad opportunity set helps, as does a repeatable and structured idea generation process. Below we outline three ‘uncorrelated’ portfolio ideas to illustrate this view.
1) Taiwanese vs Singaporean equities
Our internal analysis ranked the Taiwanese stock market highly, but was much less positive about Singapore. “Taiwan, we concluded, offered quality growth potential at a reasonable valuation with supportive investor positioning and earnings revisions. Singapore, on the other hand, had poor fundamentals and a lack of earnings revisions, which outweighed the attractive valuations on offer”, said Investec manager.
Additionally, the respective sector composition was attractive as the Taiwan overweight to technology provided exposure to a US recovery and was less exposed to potentially higher US interest rates than other emerging markets. Singapore was characterised by a heavy bias towards banks with relatively high exposure to Chinese loans and a weakening domestic property sector. Therefore, in aggregate, this position offered exposure to the US and European growth cycles while hedging against further China weakness.
2) Hungarian forint vs Polish zloty
Although Investec was positive about the prospects of the Polish economy over the medium term, it had shorter-term concerns due to falling levels of inflation and the prospect of interest rate cuts in reaction to weaker industrial activity. Exposure to Russia and Ukraine also put pressure on growth. Hungary, on the other hand, offered strong economic growth, inflation that was picking up from a low base, and a stable interest rate environment. This position was a way to take advantage of diverging monetary policy and growth outlooks between the two countries, with the added advantage of the Hungarian forint being relatively cheaper than the Polish zloty.
3) Long Australia 10 year government bonds vs US 10 year government bonds
This idea was based on the view that divergent monetary policy and economic fundamental data would drive interest rates in Australia and the US in opposing directions. This trend had already been occurring for some time but, in our view, would continue to become more apparent in the period ahead as the US starts to gradually remove policy accommodation and Australia looks to provide more easing as it adjusts downwards to a once in a life-time terms-of-trade boom.
French asset manager Carmignac has announced the opening of its Zurich subsidiary headed by Marco Fiorini.
While the group has been distributing its funds in Switzerland for 12 years, it has now appointed six-person strong team headed by Fiorini in order to strengthen relationships with Swiss retail and wholesale clients.
Fiorini has been country head for Switzerland at Carmignac for the past four years.
Edouard Carmignac, chairman of Carmignac Gestion, said: “We are ready and able to help Swiss investors tackle their main challenges, namely helping them achieve financial security in retirement by preserving wealth and drawing an income from savings. ”
Headquartered in Paris, Carmignac now operates in Luxembourg, Frankfurt, Milan, Madrid, London and Zurich.
