Photo: Gabriela Da Costa. Will 2015 Finally Be the Year When the Global Economy Returns to Normal?
Throughout the global economic expansion that is now stretching into its sixth year, we have experienced periods of accelerating growth followed by brief pauses or setbacks. Even with extraordinary monetary policy stimulus and ultra-low interest rates, the world economy has struggled to maintain an above-trend rate of growth. As a result, excess capacity remains. Little wonder that global inflation continues to surprise to the downside. “In other words, this expansion has been anything but normal”, point out MFS experts, Robert Spector, Institutional portfolio manager, Sanjay Natarajan, Institutional Equity portfolio manager, and Robert M. Hall, Institutional Fixed Income portfolio manager.
Will 2015 finally be the year when the global economy returns to normal?, asked. After all, consensus growth estimates reported by Bloomberg show an accelerating pace this year versus last year. And these forecasts probably underestimate the constructive impact of the sharp plunge in energy prices, which is likely a net positive for the global expansion.
“In our view, a normal economy is characterized by being relatively synchronized across regions, maintaining a self-sustaining growth rate at or above its potential without hyper- accommodative monetary conditions and having a functioning credit system so that easy central bank policies can work effectively. Let’s look at each of these three characteristics in turn”, they explain.
Synchronized across regions
The global economy remains unsynchronized. The United States is the undisputed growth leader among the major economies, with third-quarter real GDP growth hitting 5% at an annual rate, the labor market improving at an impressive clip and prospects for consumer spending looking solid. Energy-related capital spending will likely take a hit from lower oil prices, yet overall we expect US growth to be around 3% in 2015.
By contrast, European growth may struggle to hit 1%, given ongoing deleveraging and the threat of deflation. Although Japan could receive a boost from lower energy prices and a weaker yen, real wages may continue to stagnate, and structural reforms remain a headwind until they become a reality. Emerging economies in general face a muted global trade cycle and structural issues related to productivity. The bottom line is that the global economy will continue to grow in 2015, but without the reinforcing vigor of a synchronized expansion.
Self-sustaining growth at or above potential rate
Given these divergent growth trends, it will be difficult for the world economy to grow above the long-run potential rate on a sustained basis. “As a result, we expect global monetary conditions to remain super easy in 2015. Though the US Federal Reserve (Fed) has ended quantitative easing and is guiding the market toward a midyear rate tightening cycle, the timing of the first hike could be pushed out if inflation keeps undershooting expectations on downward pressure from crude oil prices or if US labor market improvements fail to generate wage gains”, says MFS.
Functioning credit system
Blockages in credit continue to get in the way of monetary stimulus, as money multipliers and the velocity of money are still falling. To be sure, deleveraging has reached an advanced stage in the United States, yet debt levels remain high by historical standards. Globally, there has actually been no net deleveraging since the financial crisis, owing to the debt buildup among European governments and emerging markets (EM). “Without the powerful accelerant of credit expansion, easy monetary policy can provide a buffer against deflation pressures and boost asset prices but cannot be the savior of global growth as in normal cycles”, concludes the MFS analysis.
The bottom line is that growth in 2015 may surpass last year’s tally, thanks mainly to the strength of the US expansion and the sharp drop in oil prices. However, we expect the recovery to remain far from normal, so the environment of low inflation and long-term sovereign yields should persist. “That would be good for equity prices and the US dollar. As long as the global economy avoids recession, which is our base case, global equities should outperform global government bonds in 2015”, they explain.
Photo: epSos.de . More Than 50% of Asset Managers Received Requests for Responsible Investing
New research from global analytics firm Cerulli Associates finds that more than 50% of asset managers received requests for socially responsible investing (SRI) and environmental, social, governance (ESG) mandates from institutional clients.
“Many executives we spoke with during our research interviews told us that they are getting more client inquiries regarding responsible investing strategies,” states Susana Schroeder, senior analyst at Cerulli. “Most managers deal with requests that involve restrictions against holding securities, which are often tied to responsible investing.”
Responsible investment encompasses several areas: ESG, SRI, mission-related investing, impact investing, and program-related investing.
“There is increasing acceptance among investors and managers that ESG factors, such as hazardous waste disposal and predatory lending practices, can have a material impact on a company’s financial wellbeing,” Schroeder explains. “Public defined benefit plans and nonprofits are most likely to incorporate ESG factors into their investment process, because of pressure from donors, students, taxpayers, and other constituents.”
“Institutional sales teams report that clients and prospects are inquiring about this area as they seek to better understand the different aspects of sustainable investing,” Schroeder continues. “Even professionals working in the trenches have witnessed this shift, including request for proposal (RFP) teams, which have reported a rise in the number of RFPs with embedded ESG-related questions.”
Miguel Salinero Barbolla, client service associate at Capital Group. Capital Group Expands Client Service Team
Investment management company Capital Group has announced the appointment of Miguel Salinero Barbolla as client service associate.
Based in London, Salinero is responsible for facilitating client servicing for Capital Group’s financial institutions and intermediaries in Europe.
He joins from BNY Mellon, where he worked most recently as head of international client services and prior to that as client service executive for Spain and Portugal.
Grant Leon, head of Sales for Capital’s Financial Institutions and Intermediaries business, comments on the appointment: “Miguel’s appointment is important as we continue to establish new – and deepen our existing – relationships with intermediaries and our distribution partners across Europe.”
Photo: José Luis Cernadas Iglesias. Riccardo Dallolio Joins H.I.G. Capital as Co-Head of European Real Estate
H.I.G. Capital, a global private equity investment firm with more than €13 billion of capital under management, is pleased to announce the appointment of Riccardo Dallolio as Managing Director and Co-Head of European Real Estate. Based in London, he will share these leadership responsibilities with Ahmed Hamdani, who has been a Managing Director in London since 2012.
With over 16 years in the real estate industry, Riccardo has extensive investment and transactional experience across a number of jurisdictions in Europe. Prior to H.I.G., he was at AXA RE where he was Head of Alternatives and Special Situations. During his time at AXA RE, he also held the positions of Head of Transactions in Europe and Head of Asset Management and Transactions in France. Prior to AXA, Riccardo was a Partner at Grove International Partners, and worked in the J.P. Morgan Real Estate Group in London.
H.I.G. Capital’s real estate platform targets opportunistic real estate investments, with a focus on adding value, improving performance, and achieving attractive risk adjusted returns. With offices in London, Madrid, and Milan, the H.I.G. European real estate team is active across a wide spectrum of real estate asset classes. It has completed 13 transactions across multiple jurisdictions in Europe in the last two years including the U.K., Spain, Italy, the Netherlands, and Finland. With the ability to invest in all parts of the capital structure, H.I.G. Capital is able to develop creative financing solutions and consummate transactions on an expedited basis. Typical investment size ranges from €10 million to €100 million.
In commenting on the appointment, Sami Mnaymneh, Co-Founder and Co-CEO of H.I.G., noted, “I am delighted to welcome Riccardo to the firm. He is a very experienced and successful real estate investor who significantly augments the expertise and capabilities of our team. I am confident he will play an instrumental role in H.I.G. Capital’s development and growth in the real estate asset class.”
Photo: LinkedIn. Jean Pierre Mustier Joins Tikehau Capital for Expansion
Jean Pierre Mustier, formerly head of corporate and investment banking at UniCredit, has joined Tikehau Capital as a partner to help the fund manager’s international expansion.
Mustier joined in early January and is based in London. He stepped down from UniCredit at the end of 2014 after a tenure of almost four years at the bank. He is, however, still a member of UniCredit’s international advisory board.
As well as overseeing Tikehau’s international expansion, Mustier will contribute to the fund manager’s existing business.
Tikehau Capital Group manages $5bn for institutional and private investors in various asset classes – listed and private equity, credit, private debt, and real estate – through its asset management subsidiary, Tikehau IM.
Photo: Scott Beale. Recovery Moves Up a Gear as Consumers Step on the Gas
Nadia Grant, Fund Manager at Threadneedle Investments, addresses some of the questions currently on the minds of US equity investors. Overall, she believes that US stocks are very attractively valued in relation to other markets and will gain support from a broad-based economic recovery.
Last year we saw relatively strong economic growth in the US, but a slowdown elsewhere, while oil prices have now halved and the US dollar has surged. Given those developments, how sustainable is the US recovery and will the shape of that growth be affected?
We think the US economic recovery is broadly based and are forecasting GDP growth in 2015 of around 3%, which should provide a very supportive backdrop for equities. We expect the consumer to account for around two-thirds of this growth, at about two percentage points, up from 1.6 percentage points in 2014. The collapse in the oil price is benefitting US consumers enormously. They are now paying an average US$2.14 a gallon, and just US$1.80 in some states, rather than US$3.50 before the oil price drop. These extra dollars provide a considerable boost to lower-income workers, who have a significant propensity to spend. Thus, the lower gasoline price is highly stimulative for the economy.
We expect investment to contribute about one percentage point to overall growth, a level which is also higher than last year.
Interest rates have not risen in the US for nearly nine years but the Federal Reserve has been guiding investors to expect a rise at some point this year. Do you think that this is a reason for US equity investors to be fearful?
No, we do not think investors should be concerned. The Federal Reserve’s guidance reflects the fact that interest rates are abnormally low by historical standards, and more importantly, that the US is on the path to a self- sustainable recovery and thus a normalisation of interest rates. A rise in interest rates would provide concrete evidence of the Federal Reserve’s confidence in the recovery and that view should also support equities. Historically, the market tends to anticipate the first rate hike six months in advance of it taking place and tends to be a lot more volatile during this period. However, historical evidence indicates that rising interest rates have no material impact on the market six months to a year after the first rate hike.
US equity market valuations were at the top of investors’ minds in 2014. Our view was that valuations were quite reasonable and that earnings growth would drive market gains and this proved largely correct. What is your view of valuations going into 2015?
The market has not re-rated but has simply grown in line with earnings and we expect this trend to continue in 2015. The consensus is that equities will be trading at about 15 times PE by the end of the year, which is in line with the market’s long-term historic average. Thus, we think that US equities are neither expensive nor cheap. Given that the US is the sole engine of global growth and given how sound the recovery is, we believe US stocks are very attractively valued in relation to other markets.
What about the inflation?
Low inflation means the rate at which equity cashflow is discounted is also low and historically this has been very supportive for the market. Economic fundamentals and earnings growth should underpin expectations for 2015. As mentioned, we are forecasting 3% GDP growth, which translates into 5-6% revenue growth, some profit margin expansion and buybacks of around 1%. Thus, we anticipate high single-digit earnings growth in 2015, which is high by historic standards.
How are you positioning the American Fund for 2015 and could you provide examples of stocks in which you have the highest conviction?
We focus on companies that are uniquely placed in terms of having secular growth drivers and pricing power. Consequently, in the American Fund we are overweight in the technology and healthcare sectors, which are home to companies that have disruptive new technologies as well as pricing power. Meanwhile, we are underweight in energy and telecoms. We believe energy prices have yet to find a floor, yet the stock price of companies within the sector does not reflect the fall that we have seen in the oil price, while the telecoms sector is subject to intense competition and price erosion, in other words the complete opposite of what we seek.
Photo: Daniel Chapman. Loomis Sayles Adds Investment Strategist to Emerging Markets Team
Loomis, Sayles & Company announced the addition of Esty Dwek as emerging markets global strategist. She is based in the company’s London office and reports to both Peter Marber, head of emerging markets and Christine Kenny, co-managing director of the Loomis Sayles London office.
In this newly created role, Esty is responsible for analyzing emerging market (EM) trends and formulating broad EM country and asset allocation recommendations. As a member of the EM team, Esty will liaise with sell-side analysts, consultants, prospects and existing clients.
“I’m very pleased Esty has joined our team – we worked together previously and I think she is a thoughtful, skilled investor and communicator,” said Peter Marber.
Loomis Sayles has been managing emerging markets assets for over 20 years. Total firm-wide emerging markets assets totaled $16.2 billion, with approximately $8.3 billion in hard currency and $7.9 billion in local currency, as of December 31, 2014.
In 2014, Loomis Sayles announced three new EM portfolio management additions; Joshua Demasi and Michael McDonough were named EM equity portfolio managers in July; Elisabeth Colleran joined the team as EM fixed income portfolio manager in April.
Before joining Loomis Sayles, Esty was an investment strategist in the private bank at HSBC for nearly six years in London. Previously, Esty attended HSBC Private Bank’s graduate program in London, Geneva, New York and Singapore. She earned a BA from Princeton University and holds the CISI accreditation.
Foto: BCE Official. ¿Ha cambiado el programa QE el comportamiento de los inversores?
A recent post noted that the oil price has fallen by more than 30% over six months on five previous occasions since World War Two. The global economy was stronger a year after these drops: the six-month increase in industrial output was higher than its starting level in all five cases, said Simon Ward, economist in financial markets at Henderson Global Investors.
Three of the five oil price falls (1991, 2001 and 2008) were associated with US/global recessions, he explains. A fourth (1998) reflected the Asian economic crisis. The 1986 decline bears the closest resemblance to today. It was partly the result of a mid-cycle global economic slowdown but the more important drivers were a large rise in non-OPEC supply and a structural reduction in demand due to energy conservation in response to a sustained high price in the early 1980s.
The first chart, writes Ward in his last article, overlays the path of spot Brent in the mid 1980s on its recent movement, with the 1980s price rescaled by multiplying it by four. Based on the earlier episode, Brent could bottom at below $40 during the first quarter before recovering to $70-80 by end-2015.
The recovery could be stronger if non-OPEC supply is more price elastic than in the 1980s, as some analysts contend.
The oil price bottomed in July 1986. G7 industrial output growth embarked on a strong recovery soon after, reaching a boom level by late 1987, highlights Ward.
G7 consumer price inflation fell sharply in 1986 but retraced most of this decline in 1987.
Falling US inflation contributed to the Federal Reserve cutting its target Fed funds rate by 2.125 percentage points between December 1985 and August 1986. The Fed, however, reversed course in December 1986 and was forced to tighten aggressively in 1987 as the economy boomed. Longer-term Treasury yields bottomed in April 1986 ahead of the oil price, moving sideways over the remainder of the year before rising sharply from March 1987.
The relevant comparison today may be with the Eurozone. “ECB President Draghi is using a temporary fall in headline consumer prices to push through further easing despite monetary trends and leading indicators suggesting improving economic prospects, with Germany already at full employment. In 1986, the Fed started to raise rates only four months after its final cut. The QE could find ECB opponents that may have strong grounds for calling for a suspension later in 2015″, concludes Henderson’s economist.
Photo: Moyan Brenn. Azimut Pruchases 70% of Largest Independent Asset Manager in Turkey
Italy’s independent asset manager Azimut and Turkish Bosphorus Capital Portfoy Yonetimi have signed an investment and shareholders agreement to start a partnership in Turkey.
According to the deal, which is subject to regulatory approval, Azimut, through AZ International Holdings S.A., will purchase 70% of Bosphorus equity capital for €7.4m.
Bosphorus was established as an independent asset manager in 2011 by four partners with an average 20 years investment experience.
Currently Bosphorus is the largest independent asset management company in Turkey thanks to its consistent and positive track record in excess of the local risk-free rate, its direct funds raising capability and the implementation of a successful distribution model via the banking channel.
Furthermore, 20% of Bosphorus’ AUM are linked to institutional clients, mainly insurance companies. On the product side, the range of 10 managed funds span fixed income, equity and balanced strategies.
As of December 2014, Bosphorus had AUM of some TL1bn (equivalent to €390m), of which almost 70% in Turkish domiciled mutual funds and 30% in discretionary portfolios.
The Turkish asset management industry has €22bn in AUM as of December 2014 (of which more than 90% is invested in short term fixed income strategies) with around 40 asset management companies (of which 29 are independent) registered with the Turkish Capital Market Board.
The commercial and industrial integration of Azimut Portföy, AZ Notus Portföy and Azimut Bosphorus Capital Portföy creates Turkish largest independent player with a diversified product range and a distribution network with both proprietary financial advisors and third party distributors.
Capital Strategies Partners, a third party mutual fund distribution firm, holds the distribution of AZ Fund Management products in Latin America
CC-BY-SA-2.0, FlickrFoto: Fut und Beidl. ¿Aciertan las estrategias 'top-down'?
A new global survey commissioned by State Street amongst 235 hedge fund professionals reveals strong optimism within the industry. The findings show that respondents (55 percent) expect pension funds to increase their exposure to hedge fund strategies over the next five years. This figure increased to 63 percent when the question was asked more broadly about institutional investors increasing their exposure to hedge funds in the next five years.
Of the 55 percent of hedge fund professionals who expect pension funds to increase their allocation, 53 percent believe the main driver of this is the performance challenges facing investors’ portfolios. 35 percent believe it will be a growing focus on portfolio diversification and 13 percent who think it will be improved terms offered by hedge funds.
However, to really capitalise on the growing appetite for hedge fund strategies, nine out of ten industry professionals interviewed believe hedge funds will be required to more clearly demonstrate their value to prospective investors.
Maria Cantillon, global head alternative investment solutions sales at State Street said, “Despite the challenges facing the hedge fund industry, our findings show that many working in the sector are optimistic about its future prospects. This is being fuelled by challenges facing asset owners as they search for better returns and greater diversification. The hedge fund industry is maturing and becoming more transparent and competitive.”
In terms of how hedge fund professionals see their own firms changing over the next five years, 60 percent expect to broaden the range of investment strategies they manage; 37 percent anticipate that they will expand abroad and one in ten expects to acquire another company.
According to the survey, regulation will continue to have a significant impact on hedge fund managers. However, the full impact of Basel III is yet to be determined, with 29 percent of respondents believing that it will significantly increase their firm’s cost of financing, compared to 42 percent saying it wouldn’t and the remainder (29 percent) saying they don’t know. The findings also suggest growing competition from alternative mutual funds. Half of those interviewed believe that over the next five years, they will seize market share from traditional hedge fund strategies.
